1. Textbook: Family Business First Edition, by Ernesto J
Textbook: Family Business First Edition, by Ernesto J. Poza Copyright © 2004 South-Western/Thomson Learning

2. Chapter 1 Family Business What Makes It Unique?
Family Business, First Edition, by Ernesto J. Poza
Copyright © 2004 South-Western/Thomson Learning

4. Family Business: Working Definition
A family business is a synthesis of:
Ownership control by members of a family or consortium of families
Strategic influence of a family in the management of the firm
Concern for family relationships
The dream (possibility) of continuity across generations

5. Family Businesses . . .
Constitute 80–98% of businesses in U.S. and other free economies.
Generate 49% of GDP in U.S. and more than 75% in most other countries.
Employ 59% of private sector U.S. workforce and more than 85% of working population overseas.
Created about 80% of all new jobs in the 1980s and 1990s.

6. Other Statistics
Between 17 and 22 million family-owned businesses in U.S.
Annual revenues exceed $25 million for 35,000 family businesses
Family-controlled companies comprise
37% of all Fortune 500 companies
60% of all publicly held companies

7. Family business network
Adana Ticaret Odası

8. The Bad News
In their first 5 years of operation, 90% of family-owned companies disappear
Of remaining 10%, 67% die or change ownership after first generation
Only 12% survive under current ownership past the third generation.

9. What Makes the Difference
Presence of the family
Owner’s dream to keep the business in the family
Overlap of family, ownership, and management
Competitive advantage derived from interaction of family, management, and ownership

10. Systems Theory
Model shows overlapping subsystems of family, management, and ownership
Firm is dynamic system in which integration achieved by adjustments to subsystems
Individual perspectives of family and firm may differ, leading to overemphasis on one sub-system at expense of others

11. Systems Theory Model
Family
Management
Ownership

12. Blurred Boundaries
Boundaries among family, ownership, management systems may become blurred
Problems determining if decisions relate to family, ownership, or management issues
Family rules used in the business
Problem-solving ability diminished by blurred boundaries
Businesses may become family-first, ownership-first, or management-first

13. Family-First Businesses
Employment in business is membership right
Members of same generation paid equally
Extensive family perks from business
Secrecy often paramount and family members protect each other
Business becomes part of lifestyle
Commitment to continuity depends on agendas of individual family members

14. Business-First Firms
Employment on the basis of qualifications—family discouraged from working in business
Performance of employed family members reviewed as for nonfamily
Compensation based on responsibility and performance
Conversation between family members is all business

15. Business-First Firms, continued
Business growth, market share, profitability, return on assets, return on equity constitute the scorecard
Next generation viewed in terms of how they can manage and grow business
Family events often cancelled/delayed for business reasons
No automatic commitment to family business continuity

16. Joint Optimization Alternative
Family employment policy guides employ-ment of family
Some family members are employees; others responsible shareholders
Performance of employed family members reviewed as nonfamily

17. Joint Optimization, continued
Family members encouraged to work outside business to get experience
When family members meet, conversation is both family and business oriented
Commitment to family business continuity

18. Agency Cost Theory
Traditional theory: Alignment of owners and managers decreases need for agency costs
Recent research: altruism of owner-managers leads to increased agency costs
Agency costs can be controlled by managerial and governance practices
Board of directors important in monitoring managerial behavior and controlling costs

19. Challenges to Continuity
Shortening product life cycles
High transfer tax penalties
High market valuations of ongoing businesses by historical standards
Family businesses considered outdated
Family structure far from stable
Next generation family business leaders unable/unwilling to accommodate
CEOs living longer—obstacles to succession

20. Resource-Based Theory
Resource-based theory highlights unique capabilities or resources that family firms convert into competitive advantage
These resources referred to as organizational competencies

21. Competitive Advantages of Family Business
Speed to market
Strategic focus on market niches
Concentrated ownership structure
Lower overall costs
Quality of product/service
Agility and flexibility
Owner-manager and long-term view

22. Concentrated Ownership
Ownership structure impacts corporate productivity
Stock concentration positively correlated to
Related diversification
R & D expenses per employee
Training per employee
Overall corporate productivity
Source: Hill and Snell, Academy of Management Journal, 32#1.

23. Lower Overall Costs
Cost of capital is nearly 0% when owner controls stock
Financing for other businesses:
25–30% for venture capital
17–20% for mezzanine financing
Prime rate for bank financing
Administrative and control costs also reduced absent need for principal supervision

24. Agility and Flexibility
Flexibility of new manufacturing and distribution technology makes smaller runs economically attractive
Customization, changing consumer preferences, shorter product life cycles reward agility
EDI/Internet-based partnerships make agility possible across value chain

25. Owner-Manager
Focused on customers, family, employees, profitability, lifestyle
Experiences conflicts between family, management, and ownership and optimizes links
Average tenure of 18 years vs. 3 years for public company CEOs