Critically Discuss the Role and Benefits of Long-Term Planning for Modern Family Businesses

Introduction

Family businesses have always existed since the conception of business itself (Sharma & Irving, 2005). Sirmon and Hitt (2003) suggest that there are a variety of factors that increase the chances of survival for new ventures, and aid it during times of economic hardship, such as human capital, financial capital, patience, and extended social networks. Aldrich and Langton (1998) suggest that whilst some individuals in family businesses may not have a natural aptitude or competence in the business world, their commitment and dedication to the venture’s success may aptly make up for this. Given that less than one third of family-owned businesses survive into the second generation, with between 10-15% actually being continued into the third generation (Miller, Steier & Le Breton-Miller, 2003), it is essential to understand which factors may increase the longevity of modern family businesses and enhance their success in the future.

This essay addresses the role of long-term planning for family businesses, and explores how this factor can be beneficial in enhancing the success and survival rates of family ventures. Firstly, the issue of longevity within family businesses is investigated, before the benefits of long-term planning are discussed within the context of agency and stewardship theories and transaction cost theory. Furthermore, the benefits of long-term planning within the business life-cycle and Maslow’s hierarchy of needs are also addressed, before the essay is concluded with a brief synopsis of the findings of this paper.

Defining Family Business

Klein, Astrachan and Smyrnios (2005) suggest that one of the main reasons why there is not more research on the topic of family business is due to the lack of adequate definitions concerning what a family business actually is. Different definitions exist in the literature (Astrachan et al., 2002), and Flören (2002) collated 50 definitions used in current literature, which means that results from various studies cannot be compared without encountering problems. Westhead, Cowling and Storey (1997: 16) for example found that in one sample alone, applying different definitions to the term ‘family business’ led the percentages of these ventures to alter between 15% and 81%.

A family, given that the nuclear family is no longer the commonest form of family (Carsrud, 2006), ‘family’ can relate to 1) sources of bonding (such as biological, legal or emotional); 2) degree of governance and control; and 3) shared values between kin (Carsrud, Perez & Sachs, 1996).

For the purposes of this essay, given that no statistical research is being carried out, the term ‘family business’ is operationalised in view of the content, purpose and form of a family business, as well as ownership and management by family members (Anderson & Reeb, 2003; Klein & Blondel, 2002; Littunen & Hyrsky, 2000), and general transfer and succession to family members (Ward, 1987). Furthermore, it takes into account the more recent focus on family business culture (Litz, 1995). Thus, family and nonfamily businesses are dichotomised in the sense that, ‘family and nonfamily businesses may simply represent the extremes of a continuum’ (Chua, Chrisman & Chang, 2004: 39). Having clarified what this essay takes to be the meaning of ‘family business’, the issue of longevity will now be discussed.

Longevity in Family Business

Juliette Johnson, the head of UK Family Business Coutts & Co., claims that family-owned businesses, whilst not being renown for their staying power and succession down the generations, can be highly successful, as they may have plentiful characteristics that differentiate them from public companies, enabling them to adopt a much more longer-term horizon their their nonfamily firm competitors (Johnson, 2007). Many of the largest UK businesses are family-owned, and have been successful across generations. Johnson (2007: 1) gives the reason why, claiming that, ‘long term planning is key’. In the Coutts Family Business Ranking Survey, participants listed one of their top priorities as being, ‘decisions are made for the long term’ when it comes to business strategy and financial planning. In the business governance department, the survey found that ‘having a 3-5 year vision’ ranked as the highest factor that contributed to their success (Johnson, 2007). The reasons why long term planning is a beneficial component of family businesses will be discussed presently.

Benefits of Long-Term Planning

Making decisions for the long-term is described by Johnson (2007) as ‘one of the key strengths underpinning family businesses and a major source of competitive advantage.’ The reasons for this include the fact that the short-term pressures that many nonfamily firms face are no longer applicable, such as the shorter duration that company CEOs stay in their jobs; the need to meet earnings on a quarterly basis to satisfy shareholders and investors; and shorter planning horizons. Rather, family firms can give ‘patient capital,’ and whilst they must communicate with shareholders, they have the freedom to make decisions that will benefit the business in the long- term. The benefits of long-term planning for family businesses will now be discussed within the context of agency and stewardship theory, transaction cost theory, Maslow’s (1954) hierarchy of needs, and life cycle theory.

Agency Costs

Agency theory is a useful tool when assessing family business. Daily, Dalton and Rajagopalan (2003: 152) claim that agency theory in a nutshell is when, ‘managers, as agents of shareholders (principals) can engage in decision-making and behaviours that may be inconsistent with maximising shareholder wealth.’ Whilst traditionally researchers have believed agency issues hold no significance with family firms (e.g. Fama & Jensen, 1983; Jensen & Meckling, 1976), most recent research suggests that there is a complex relationship between family businesses and agency issues (Gomez-Mejia, Larraza-Kintana, & Makri, 2003; Steier, 2003). This complexity arises from the fact that family businesses may have economic and non-economic goals, and a merging of ownership and altruism to the family (Gomez-Mejia, Nunez-Nickel, & Gutierrez, 2001; Schulze, Lubatkin, Dino, & Bucholtz, 2001; Schulze, Lubatkin, & Dino, 2003; Steier, 2003).

However, most findings suggest that there are higher agency costs in nonfamily firms, due to the fact that managers are not usually shareholders themselves, and often make decisions that conflict with those of investors (who desire to see short-term profits and goals being met). Chrisman, Chua and Litz (2004) found in their study of firms with between 5-100 employees that even if, statistically speaking, the short-term sales growth of both nonfamily and family firms were equal, strategic planning (a mechanism used to control agency costs) was a successful means by which nonfamily firms improved their performance. Thus, even if the total agency costs for family firms are not negative, they are still less than the agency costs in nonfamily firms, which not only coincides with the findings of current and traditional literature (e.g. Fama & Jensen, 1983; Jensen & Meckling, 1976; Pollak, 1985), but has positive implications for family firms. Chrisman et al. (2004) conclude that, given that nonfamily firms benefit more from strategic planning processes, this may be because of the greater pervasive agency problems that exist.

Johnson (2007) notes that family firms may be more ‘prudent’ and have less debt than nonfamily firms. This may mean that a focus on long-term success, such as ensuring that the next generation inherit the business, may lead to less risks being taken.

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