Excerpt
I. Table of Contents
I. Table of contents
II. List of Figures
III. Abbreviations
1. Introduction
1.1. Aims
1.2. Relevance
1.3. Structure
2. The Family Firm
2.1. The F-PEC scale
2.1.1. The power dimension
2.1.2. The experience dimension
2.1.3. The culture dimension
2.2. The F-PAC scale – resume
2.3. Usage
2.4. Theories used in family firm research
2.4.1. The agency theory
2.4.2. The stewardship theory
2.4.3. Resource based view
2.5. The family firm – resume
3. Organizational Culture
3.1. Organizational culture – according to Edgar H. Schein
3.1.1. Schein’s levels of culture
3.2. Organizational culture – according to Mats Alvesson
3.3. Organizational culture – according to Joanne Martin
4. Characteristics of a Family Firms’ Organizational Culture
4.1. The role of the founder
4.2. The strength of culture
4.3. Entrepreneurship and the family firm
4.3.1. Short- vs. long-term orientation
4.3.2. Individual vs. group cultural orientation
4.3.3. Internal vs. external cultural orientation
4.3.4. Coordination vs. control
4.4. Organizational culture and performance
4.5. Family systems’ influence on family firms
5. Hypotheses application
6. Conclusion
7. Limitations
8. Personal opinion
IV. Bibliography
II. List of Figures
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III. Abbreviations
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1. Introduction
1.1. Aims
The aim of this thesis is to provide the necessary theoretical background to conduct an empirical study on family businesses and their cultures.
In the following pages it will become clear that neither family firms nor culture are fields were empirical studies can be conducted after a static manual.
The definitions and explanations will rather be of use as tools for building up an analytical framework for an empirical study. A variety of hypotheses will be constructed including instructions on the usage combinations.
The aim of this thesis is not to find the one best solution, but to give a broad overview of the existing literature on family business and organizational culture.
This overview will include the necessary theoretical background, which can then be used and adapted by family firms to be analysed. Hypotheses and an idea on how to use them will then provide even more input in what way a family firm and its culture may be studied.
1.2. Relevance
The prominence of family businesses is unquestioned. Worldwide, most of the companies are family firms. E.g. 85% of all firms in the OECD countries and the majority of companies in Central Europe are family firms. (Kraus et al. 2011) In Austria, 80% of all firms are family companies employing 70% of all jobholders. (Frank et al. 2011)
Additionally, “most firms in the world are controlled by their founders, or by the founders’ families and heirs.” (Burkart et al. 2003, p.2167) The reason for this is that “many new ventures are created with family involvement and through the pooling of a family’s financial and human resources.” (Chrisman et al. 2003, p.441f.) Remarkably, family businesses have also been important hundreds of years ago.
On the one hand, they have served as the backbone of ancient civilizations and economies but on the other hand family businesses have already played a significant role in the development of Western civilizations. (Bird et al. 2002)
The introduction of the journal Family Business Review in 1988 and the foundation of the International Family Enterprise Research Academy, the IFERA, are indicators for a strong increase of the scientific research in this field. (Eder 2012)
Concerning the relevance of organizational culture, Mats Alvesson (2002) mentions, that culture is one of the major issues in academic research and education. Alvesson states that the reason for this lies in the fact, that the cultural dimension is central in all aspects of organizational life. Schein explains, that “Culture is an abstraction, yet the forces that are created in social and organizational situations deriving from culture are powerful.“ (Schein 2010, p.7) He describes that we need to understand the operation of these forces to avoid falling victim to them. “Cultural forces are powerful because they operate outside of awareness. We need to understand them not only because of their power but also because they help to explain many of our puzzling and frustrating experiences in social and organizational life. (Schein 2010, p.7)
Finally, he ends his introduction with the phrase the author of this thesis wants to start his work with:
“Most importantly, understanding cultural forces
enables us to understand ourselves better.”
(Schein 2010, p.7)
1.3. Structure
This work will first of all give an insight in the countless possibilities to define the term family business. Existing ways to study or examine family firms will be looked at. This will also include critical perspectives and contradictions of existing methods. Furthermore, organizational culture will be explained referring to the most prevalent literature. Besides many others, publications by Mats Alvesson, Joseph H. Astrachan, Andrew Pettigrew, Sonja Sackmann and Edgar H. Schein will be studied.
After providing this theoretical background, the most important question will be asked. “What are the characteristics of a family firms’ culture” or “Are there differences in a family firms’ culture versus the culture in a non-family firm?”
This will include the beforehand-prepared theory and create a base for a possible empirical study on family firms. Finally, hypotheses concerning the role of the founder, the strength of a firm’s culture and entrepreneurship will be constructed.
Those are of course only some of the relevant topics. However, they will provide the potential author of a study with ideas on what questions to ask.
2. The Family Firm
First of all, it is important to mention, that the term family firm will be interchangeably used with the term family business. These terms are compositions of a type of organization, the firm or business and the very strong notation of the family. This derives from the fact that these kinds of organizations are to some extend owned, influenced or managed by a family or members of a family. But how can a family firm be defined? Although family firms are so widely spread all around the world, there is still no definition researchers agree on. (Littunen & Hyrsky 2000)
Handler (1989) explains that the first and most obvious challenge family business researchers face is to actually define the family firm. In the following lines, some possible key points mentioned in widely used definitions are listed:
- Individual or entity with certain percentage of stock ownership
- Family members have to be in the management or on the board making major operating decisions and plans for leadership succession
- One major shareholder with a defined voting right of a specific percentage
- Influence of family/families in a substantial way
- The CEO, the owners or the directors are part of the founding family or are relatives of the founder
- Percentage of control of either cash flow or control rights
(Holderness & Sheehan 1988; Handler 1989; López de Silanes et al. 1999; Klein 2000b; Mishra et al. 2001; Faccio & Lang 2002)
Some definitions like the following one are highlighting very important key points. Still, the measurability of these points can be difficult. Chrisman et al. (2007) describes a family firm as an organization which is governed and/or managed with intention to shape or pursue the vision of the business controlled by family members in a way that is potentially sustainable across generations.
But to what extent is it possible to measure if and how much a firm has the characteristics of a family firm?
Below, one possible solution for the definition dilemma is explained. The F-PEC scale evaluates the extent and quality of family influence through the measurement of three dimensions. (Astrachan et al. 2008)
2.1. The F-PEC scale
Astrachan et al. (2002) state that there are three important dimensions of family influence to consider. Namely, power, experience and culture. The F-PEC allows comparisons across different businesses regarding the levels of family involvement and its effects on performance as well as business behaviours. A standardized instrument, like the F-PEC, enables clear comparisons across investigations and use of measures of family influence as either dependent, independent, moderating, or mediating variables. (Astrachan et al. 2002)
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Figure 1 - The F-PEC scale
(Adapted from Astrachan et al. 2002, p.52)
2.1.1. The power dimension
This subscale enables us to estimate the degree of influence or power either in the hand of family members or in those named by the family. The authors describe this level of influence via ownership, management, and governance as interchangeable as well as additive. (Astrachan et al. 2002)
Klein (2000a; 2000b) supports this view and integrates ownership, governance and management involvement of the family into a definition in which the level of influence in another could balance a lack of influence in one of these three domains. The Klein definition combines several criteria into one continuum and provides characteristics for the development of an index or scale. This means for example that, if the family does not own the complete stock, the lack of influence in ownership is balanced through either influence through corporate governance or influence through management. (Klein 2000a; Astrachan et al. 2002)
2.1.2. The experience dimension
Astrachan et al. (2002) state, that “It could be argued that the level of experiences gained from the succession process is greatest during the shift from first to second generations. During the first generation of ownership, many new rituals are installed. Thus, second and subsequent generations of ownership contribute proportionally less value to this process. (...) Family business experience of succession is regarded as involving an exponential continuum. Accordingly, dimensions involving a generation of family ownership and who is on the management and governance boards are weighted according to a nonlinear algorithm.
The number of family members associated with the business also contributes to the experience dimension.” (p.49)
Additionally, the number of family members dedicated to the business is an important indicator of how much experience the business receives from the family. (Astrachan et al. 2002)
2.1.3. The culture dimension
According to Gallo (2000), a firm can be considered a family firm when family and business share assumptions and values.
The F-PEC assesses the extent to which family and business values overlap, as well as the family’s commitment to the firm. Families, which are highly committed to the business, are highly likely to have a substantial impact on the firm. (Astrachan et al. 2002)
2.2. The F-PAC scale – resume
Summing up, the F-PEC is already well known and well acknowledged. Scholars describe it as an avenue to define the term family business more concisely, which in turn will help to advance the field of family business research towards a better understanding of its boundaries. (Chrisman et al. 2005; Koiranen 2002)
Although this tool may seem very promising, it has also some limitations. Referring to Zellweger (2006, p.42) the culture subscale is “difficult to quantify as it intends to measure the values predominant in family firms.” Zellweger (2006) continues that the measurement of those values can hardly be achieved via a one time assessment, since values and emotions would have to be considered together. Furthermore it is unclear to what extent one subscale is influenced or replaced by another.(Zellweger 2006)
Finally, Zellweger (2006) states that it is impossible for studies using secondary data to replicate especially the culture subscale, but also part of the experience subscale from an external perspective.
„One solution to the measurement problem is limiting family influence to the power subscale within F-PEC.“ (Zellweger et al. 2006, p.4)
Eder (2012) states that F-PEC was put into action in a variety of studies in the last years. This proves that it is operationally relevant. Nevertheless, he continues, the F-PEC was rarely used in the original format with all subscales. “As a consequence of the limitations of the practicability of the use of the full F-PEC scale, it is more recently and more often used in parts, with a strong focus of using just the power subscale to determine family influence.” (Eder 2012, pp.24–25)
2.3. Usage
When conducting a study on family firms, as explained above, it is less important whether a firm is a family firm or not. More important is the possibility to evaluate to what extent an organization holds the attributes of a family business.
The F-PAC scale enables such evaluation in terms of power, experience and culture. In order to make it even more conceivable, the author will very briefly explain how an F-PEC evaluation is conducted.
The whole F-PEC is based on a questionnaire. In the very beginning of each subsection, the terms family, ownership, management, the founding generation and active family members are defined to minimalize a possible bias through misinterpretation of these terms. It is also stated, that persons who are named through members of the family are representing the ideas, goals and values of the family.
In the next step, the questions concerning the power subscale are raised. These questions regard the proportion of share ownership held by family and non-family members. The next questions clarify, whether the company has a governance or management board and, if so, the composition of these boards. The next two sections are concerning the experience and the culture subscale. These 19 questions include the topics of the family generation and the activeness of the family members. Finally, the questions concerning values within the family, the strength and the commitment within the entity of the family and the firm are prompted. (Astrachan et al. 2002)
As it is not possible to compose a full manual to follow when conducting a study on family firms, the author of this study will have to decide whether to use the full F-PEC or just the power (PSSC) or culture (CSSC) subscale. Eder (2012) has composed a list of mainly European applications of the F-PEC. None of those authors has solely focused on the experience subscale.
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Figure 2 - F-PEC scale in use
(Adapted from Eder 2012, pp.25–26)
2.4. Theories used in family firm research
The following chapter will be dedicated to theories, which are extensively used in family business research. This will include the agency theory, the stewardship theory, and the resource based view. Before reconciling these to the theory of organizational culture, a conclusion of this chapter will be drawn.
2.4.1. The agency theory
This theory “is concerned with the conflicts of interest between an agent acting as a representative of a principal.“ (Chrisman et al. 2004, p.336)
It assumes an economic model that is grounded on an individualistic, opportunistic and self-serving behaviour. (Davis et al. 1997)
As Eder (2012) describes, the agency theory considers two problems that exist in the relationship between principals and agents. The “goal conflict”, where the goals of the agent and the principal differ and the principal has difficulties verifying the agent’s agents and the “risk sharing” problem which is caused by different affinities towards risk. Apart from that, there is always a valid contract between the principal and the agent. “Both emphasize the costs this contract (and the potential conflict) generates, like structuring, monitoring or bonding costs.” (Eder 2012, p.29)
Referring to Chrisman et al. (2004), there are four different types of agency costs. Below, these types will be introduced and explained:
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