Business Psychology - Latest Findings

Article No. 317
Business Practice Findings, by James Larsen, Ph.D.

Involving Family in the Business, or Not

New research reveals both opportunity and danger.

Do you have a cousin who needs a job? A brother-in-law recently laid off? Does your spouse pressure you to find a place for junior in the business? Is little Billy busing tables, learning the business from the bottom up with an expectation to eventually take your place? Does the Missus answer the phone, keep the books, and generally work her heart out without pay? All these may help keep peace in the family, but what is the cost? Are there hidden dangers? Is involving family members in the business good for business?

Many researchers have asked this question in the past, and their answer has usually been yes, but few have used rigorous research methodology. James Chrisman from Mississippi State University did. Chrisman accepted the previous findings that family businesses are more successful and focused his study to find out why. But his more rigorous research procedures produced findings that surprised him, and they give business owners something to think about.

Chrisman used data from a survey of 29,000 business owners conducted by the U.S. Small Business Development Center. Each of these owners had received at least 5 hours of consultation in the past year. Chrisman added items to the Center�s questionnaire to reflect his interests, and he narrowed his study to businesses with no fewer than 10 and no more than 100 employees. Of these, 385 were family businesses and 120 were not.

Chrisman�s questions asked the owners to assess the advantage or disadvantage of their firms compared to their competitors on three factors: their product, their internal relationships, and their relationships with outsiders, like customers.

Chrisman also asked for gross sales figures, and then he calculated the increase in sales over two years. He reasoned that more successful firms would have increasing sales and less successful firms would have falling sales. But when he compared family and non-family firms, he found no difference. The percentage increase in sales figures for family and non-family firms was virtually identical. Chrisman was forced to conclude that family firms in this sample were not more successful than non-family firms.

Suddenly, Chrisman�s study took a new turn. He had performance data and he had owner perceptions of advantage and disadvantage on three key business factors, so he threw out his original goals and explored the data to learn what it revealed, and he found two striking performance differences between family and non-family businesses. The first involved external relationships, and the second involved the firm�s product.

External relationships involve outsiders: customers, suppliers, bankers, and people who control critical resources. For owners, relationships with these people constitute the social network of the firm. Generally, strong social networks are associated with improved performance, so as owner perceptions of the strength of these relationships increased, one would expect measures of business performance, like sales, to increase, too. Chrisman�s data did not reflect this. As perceptions of social network strength improved, family firm sales did not improve, and non-family firm sales drastically fell.

Chrisman�s product questions involved the design, production, and marketing of a firm�s product and/or service, including efficient operations and innovations. Once again, strength in these areas is associated with business success, and both family and non-family firms whose owners perceived increasing strength in these areas did report improved sales, but the increase was only modest for family firms but spectacular for non-family firms.

Both differences set Chrisman to scratching his head. They were not at all what he was expecting, but armed with a thorough knowledge of family businesses, he did arrive at some logical, if disturbing, conclusions.

Non-family business owners are gullible in their social networks. They are sweet-talked into giving advantages to suppliers, customers, and other outsiders that strike hard at sales, and the more convinced they are of the strength of these networks, the more they are hurt. Family firms have an advantage, he says, because they aren�t going away, and they�ll have long memories. Outsiders are reluctant to take advantage of them.

Conversely, family firms are not able to capitalize on temporary advantages offered by a strong product. Imitators are always just one step behind, but family firms have such long time horizons that they fail to sense the urgency of the moment, and they are routinely overtaken by competitors. Non-family owners, with very short time horizons, waste no time in pressing advantages when they appear.

Family firms and non-family firms face many challenges. Now, thanks to Chrisman�s work, we know that non-family business owners must pay closer attention to being exploited by outsiders, and family firm owners must work harder to press advantages when they appear.

Reference: Chrisman, James, Jess Chua, and Franz Kellermanns, Priorities, Resource Stocks, and Performance in Family and Nonfamily Firms. Entrepreneurship: Theory and Practice, May, 2009, 739-760.

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