International Conference: Economic System of EU and Adjustment of BiH; Mostar, April 26-27, 2002
International Conference
“Economic System of European Union and Adjustment of Bosnia and Herzegovina”
University of Mostar – Faculty of Economics
Mostar, April 26-27, 2002
FAMILY BUSINESSES: THEIR CONTRIBUTION AND SPECIFIC BEHAVIOR IN COUNTRIES IN TRANSITION – CASE OF SLOVENIA
Miroslav Glas
University of Ljubljana, Faculty of Economics, Ljubljana, Slovenia
Kardeljeva ploščad 17. 1101 Ljubljana
Slovenia
Phone: +386 1 589 2400
e-mail:
Damjan Mirtič
University of Ljubljana, Faculty of Economics, Ljubljana, Slovenia
Kardeljeva ploščad 17. 1101 Ljubljana
Slovenia
Phone: +386 1 589 2400
e-mail:
Ljubljana, July 2002
FAMILY BUSINESSES: THEIR CONTRIBUTION AND SPECIFIC BEHAVIOR IN COUNTRIES IN TRANSITION – CASE OF SLOVENIA
Key words: Family Business, Transition in Family Firms, Succession, Family and Business Values
ABSTRACT
Family businesses in terms of their numbers represent the large majority of all businesses and they contribute substantially to the GDP, employment and the variety of goods/services supplied. In socialist countries, due to the virtual absence of private firms, the experience with family businesses and their behavior during the succession period disappeared and we can consider how new family businesses following the entrepreneurial wave in early 1990s struggle with the questions of whether and how to employ family members, how to reward them vs. non-family members and how to arrange the succession, the transition from the founding into the new generation.
The paper collects current research findings about the behavior of small Slovenian family businesses compared with the international research PRIMA Report (Birley, 2000) and it identifies some key challenges: in the attitude to financing and growth orientation among generations, in the choice of proper time and mode of the transition that is not really business-like, the management styles as practiced by new generation etc. This research has confirmed the need for expert counseling to family firms and, in particular to start planning of transition early in the history of the family firm.
POVZETEK
Družinska podjetja predstavljajo po svojem številu večino malih podjetij in znatno prispevajo k BDP, zaposlenosti in raznovrstni ponudbi blaga in storitev. V socialističnih državah, kjer skoraj ni bilo privatnih podjetij, so se porazgubile tudi izkušnje z družinskimi podjetji in njihovim ravnanjem v procesu nasledstva, zato lahko pri novih družinskih podjetjih, ki so nastala s “podjetniškim valom” v zgodnjih 1990-ih letih, ugotavljamo, kako se “borijo” z vprašanji, ali in kako naj zaposlijo družinske člane, kako naj jih nagradijo nasproti članom, ki ne pripadajo družini, in kako naj uredijo nasledstvo, proces prehoda od ustanoviteljske na novo generacijo.
Prispevek povzema izsledke raziskav o ravnanju slovenskih malih družinskih podjetij v primerjavi z mednarodno raziskavo PRIMA (Birley, 2000) in identificira njihove ključne izzive: odnos do financiranja in različno naravnanost k rasti med generacijami, izbiro pravega trenutka in načina za prehod, ki sedaj ni primeren za podjetja, managerske stile, ki jih prinaša nova generacija itd. Raziskava potrjuje potrebo po posebnih svetovalcih za družinska podjetja in zlasti po zgodnjem načrtovanju prehoda v življenjskem ciklu družinskih podjetij.
1. INTRODUCTION
Among small and medium-sized enterprises (SMEs), family businesses represent the majority of all entities; even 75-90 % of firms in the USA are counted to be family owned and operated (Holland, 1981) and Hershon (1975) suggested that half of the GNP is produced by family firms that also employed half of the workforce. However, a comprehensive family business theoretical background is yet to be developed.
In countries in transition, former socialist countries, the practice of family businesses only reappeared with the renewal of private firms during early 1990s. The socialist period has virtually annihilated the tradition of family firms and new family businesses if judged by some research do not properly manage specific questions of this type of businesses e.g. how to employ and compensate family members and how to arrange the transition.
In Slovenia, in the recent study (Glas, 2002), among 222 SMEs in the sample, 58,6 % considered themselves as family businesses. It is therefore interesting to evaluate the behaviour of family businesses in Slovenia, following two important studies of Vadnjal (1996) and Lovšin (2000) and our experience with the enterprise projects in the elective course on family businesses at the Faculty of Economics (1997-2002).
2. DEFINING FAMILY BUSINESSES
There are quite distinct definitions of family business and Wortman (1995) contends that more than 20 definitions are in use and researchers usually develop a definition that suits their needs. Handler (1989) notes a lack of definition consensus. Most definitions focus on family ownership, family involvement (as employees and/or managers), family control and/or the intention to transfer the family firm. Donnelly (1964) suggests that a family firm is one which has closely identified at least two generations of a family and company policy and family interests are related. While the majority of small businesses are family owned and managed, even some world’s most successful companies have roots as family firms, including Johnson & Johnson, Merck, DuPont, Wal-Mart, Procter & Gamble, Motorola, Walt Disney in the USA, Fiat, Olivetti, Benetton, Krupp and Mannesmann in Europe. In case of a crisis, family members strongly influence the decisions and sometimes they even retake managerial position (Ford, Hewlett-Packard, BMW).
The difficulty with the definition of a family firm is compounded with the finding that family-business relationship changes according to the structure and size of the business (Fletcher, 2000). The husband-wife business (sometimes identified as co-preneurs) is largely different from a large family company considering the participation of family members in ownership and day-to-day management. Gersick et al. (1997) propose a three-dimensional view of the family firm taking account of the position of a company in terms of family, ownership and business life-cycles. Litz (1995) has categorised family firms in three groups considering ownership and management, avoiding a static perspective, since successful family firms usually develop into larger firms with non-family ownership but with family managers involved in day-to-day management or even going public but with family members still in senior management positions (this is not yet the case in transition countries).
Dome authors stress only one dimension of the family involvement, e.g. ownership (Filion, 1991), management (Handler, 1989), employment (Vahčič, 1994), some bring forward the role of emotions (Leach, 1991), involvement of two generations (Syms, 1992), or a combination of these dimensions (Hahn, 1992). Hahn (1992; 75) defined family firm as a firm of any kind of legal status where family members influence its existence and development with their majority capital ownership and working in the firm. Family members belong to the management board and the firm is managed with the intention to stay in the family control although younger generations are quite inclined to “open” the firm to outsiders to do the harvesting.
Birley (2000) maintains that without family involvement in both the ownership and the management of the business we do not have a family business, but we then face the question of how much ownership and how many family members. However, she has also found from the research in 16 countries that the definition of what is a family business would vary by culture/country. And family cultures and structures vary significantly across the world, especially between the East and the West. Further, the behaviour of family firms is changing over time, with owner-managers becoming more educated and developing different expectations from the firm.
Neubauer and Lank (1998; 5-6) have collected some important features of family firms from different studies:
- large share of capital owned by the family;
- family members employed by the firm owned by the family – however, for the family members that do not join the firm, this is and important question of their role in the decision-making and control;
- some non-family employees, even among management;
- high degree of expectations for children to get involved with the firm in the future – this is gradually changing according to Birley (2000);
- the number of family generations involved with the business;
- the number of family members as managers and/or owners;
- non-family members feel the distinct values and decision-making process that rules the family firms;
- the family heirs share managerial positions and control even in case they do not possess appropriate skills and capabilities etc.
The distinct feature of family firms is their intertwining of two systems with contradicting values, the family and business system, leaving enough room for potential conflicts.
In Slovenia, the tradition of family firms mostly persisted within the crafts sector, but the legal restrictions imposed on private ownership have their impact even on their behaviour. Therefore, these businesses did not provide a proper basis for a “good practice” experience of family firms. With the wave of new small firms creation in early 1990s, most of them family businesses, their specific issues reappeared and became an important issue after 8-10 years, when the founding generation started to consider the transition, with children old enough to enter the firms and to expect to fill managerial ranks. Slovenian family firms are still small by their size but the first generation is already facing the transition.
Figure 1. Interrelated family and business systems in the family firm
Source: Benson et al. (1990; 6)
3. STRENGTHS AND WEAKNESSES OF FAMILY FIRMS
M. and S. Friedman (1994) point that successful operations of a family firm depends largely on the understanding of specifics and dynamics of family firms and on the planning of company development. A family that understands and openly discusses dilemmas they faced, that is capable of strategic planning greatly enhances the chances for development. However, it is the fact that the transition to the young generation is not an easy process and quite a number of family firms do not stand the test.
Family ownership and control could be a strength, especially because of the long-term orientation, traditionally good relationship with customers and suppliers, but the process of management and ownership transfer is their weakness.
Table 1. Strengths and weaknesses of family firms
STRENGTHS / WEAKNESSES- family members fully committed
- special knowhow, skills, and experience
- flexibility in work, time and resources
- long-term orientation
- stable culture (tradition)
- quick decision-making
- dependable and trustworthy / - rigidity
- business challenges:
- outdated business views
- transition management
- access to (outside) capital
- succession process
- emotional aspects
- leadership dilemma
Source: P. Leach (1991)
Weighting strengths and weaknesses brings us to the finding that family firms outperform non-family firms on a number of dimensions (Kirchhoff and Kirchhoff, 1987; Kleiman et al., 1995), also in international comparisons (Donckels and Frolich, 1991). Financially, this high performance is attributed to a unique economic vision and lower agency cost. Family firms are thought to be more concerned for the long-run. They also depend more on own equity capital, internal funding, and sacrifices families will make for their firms (Rosenblatt et al., 1985). However, they show lower capital intensity (Friedman and Friedman, 1994), also because they are not prepared to use external equity capital.
Family firms are thought to have a greater commitment to quality (Lyman, 1991), a higher emphasis on maintaining the value of the company’s name (Davis and Stern, 1980), which is usually their family’s name. They show a higher level of concern and caring for needs of employees and communities (Covin, 1994; Davis and Stern, 1980; Harris et al., 1994), higher loyalty earned by employees (Ward, 1988). However, there is certain psychological factor at work when family work together, since they have a complex emotional history. Some issues often go unspoken – some family members fulfilling individual agendas, such as power, individual interpretations of family values, maximising personal wealth at the expense of company health (Snedeker, 1995). Some family members enjoy the shared identity and common pursuit that a family firm offers, but some struggle to carve out their own identity, outside the family firms. Vadnjal (1996) studied these strengths and weaknesses on a sample of 26 family businesses in Slovenia and following ranking evolved.
Table 2. Strengths and weaknesses of Slovene family businesses, 1996
Rank / STRENGTHS / Points / WEAKNESSES / Points1 / Strong commitment to family and business / 80 / Emotions influence business decisions / 59
2 / Flexibility in time, effort, money / 72 / Authority not exactly defined / 59
3 / Quick decision making / 41 / Financial appetites of some family members / 43
4 / Long-term orientation / 40 / Conflicts among family members / 42
5 / Strong inter-generational transfer of knowledge and expertise / 39 / Relatives press for jobs / 41
6 / Economic safety for family / 37 / Fear from eroding family name by business failure / 38
7 / Dependability and pride / 26 / Succession to the next generation / 32
8 / Improved relations within family / 25 / Employing family members / 28
9 / Credibility of the brand name / 19 / Rigidity / 21
10 / Stable culture / 11 / Outdated management style and financial conservativism / 14
Note: Points mean the sum of grades given on the 1-5 Likert scale (1 – not important, 5 – most important feature)
Source: Vadnjal (1996; 71-73)
It is interesting, though, that family firms do not significantly differ from the “average” SME owner-managers in Slovenia in terms of formal education of their founders.
Table 3. Structure of formal education of owner-managers in Slovenia
Education / Family firms Vadnjal (1996) / SMEsGlas (2002) / SMEs (1998) / Self-employed Glas and Cerar (1997) / Dynamic firms Žižek and Liechtenstein (1994)
Primary
Vocational
Secondary
College
University / 4
15
46
8
27 / 21
37
15
26 / 1
19
47
19
14 / 7
28
41
12
12 / 1
2
38
26
32
In difficult times families use their business to provide for the family members. Glas and Cerar (1997) have found that among self-employed persons women are more inclined to employ their family members and to share ownership and control than male owner-managers.
4. MOTIVATION TO START A FAMILY BUSINESS
Family businesses in Slovenia are mostly founded by people that have some past family history of farming and artisans always using private resources for business. Usually, motives to start own business in Slovenia are autonomy (88 %), achievements not possible within large firms (84 %) and fulfilling objectives (72 %). Although the culture of “being ones own boss” is not so strong in Slovenia, the autonomy is strongly ranked first also in the recent survey of SMEs (Glas, 2002) with 148 firms out of 202 respondents, while 112 decided for the need for achievement, 74 for economic necessity, 59 for higher rewards and 54 for future career prospects. To enter family firms has quite a different list of motives.