Continuing our series on Myths and Realities, HEC Montréal professor Danny Miller weighs in on “Family Firms and Entrepreneurship: A different point of view.”
Myth: Family firms are stodgy, conservative and hobbled in their efforts at entrepreneurship.
Reality: Due to their long-term focus and superior resources, many family firms actually have an advantage in their entrepreneurial pursuits, at the start-up, growth and “intrapreneurship” phases.
It has been said that family firms tend to be too conservative to be entrepreneurial – that they are hampered by a lack of resources and by family emotional sentiments that induce conservatism and get in the way of the ability to innovate and renew a business. This is argued to hobble a family’s ability to found, grow and revitalize an enterprise, and is one reason family firms are said not to survive for very long.
The reverse is generally true. Most business foundings do in fact have involvement from a family, either through direct owner and manager participation, or the provision of family-based resources. So family firms can grow every bit as fast as non-family firms, usually faster, and families often have an unusual capacity of intrapreneurship – that is, launching new products, broaching new markets or embracing new business initiatives.
Let us examine the evidence, as we go through each of three phases.
The Founding Phase:
In founding, it is argued that perceptions of family nepotism, conservatism, and sentimentality towards loved ones may alienate potential outside investors, and thereby deprive families of start-up capital. Yet the reality is that most start-up businesses are internally funded and outsiders have little if any role to play. Most small ventures are begun by family members working together. This is not surprising. One has only to consider who can better launch a new enterprise — a single individual, or a committed group of people who trust one another and know each other well, who have different talents, and who are willing to work economically and in a dedicated way to accomplish a vital collective objective? These conditions are more apt to apply to a family than to a group of unrelated associates (or, obviously, a lone entrepreneur). It is this supply of generous and forgiving family financial capital and motivated labor that can offset the so-called “liabilities of newness” which topple the majority of start-ups within the first few years of life. Indeed, family firms have been shown to outlive non-family companies by a factor of two or three.
The Growth Phase:
Family firms are said to be too concerned with family matters and family expenses and demands to be able to invest their resources in growing the business. And yet, many family firms have long-term orientations – they invest generously in the firm to ensure the financial well-being of current and even future generations. They feel that the family is a treasured asset, and they have patient capital and exert only modest personal demands on the business to ensure its future. They also behave with external stakeholders in a way that builds reputation with customers, suppliers and the community at large. All of these resources – modest cash drains, investment in the business and reputation – help to grow a business.
Innovation and Renewal:
Families are said to be conservative – averse to risk taking – and that can hamper their innovation efforts. However, it has been shown that many family firms excel, even in uncertain, high tech environments. Again, this is because of their profound investment in their business and its relationships. Innovation is especially demanding of human talent, initiative and motivation, and often teamwork as well. Family firms have been shown to invest more in training their people and, as a result, experience less turnover and less erosion of knowledge capital. As noted, they are also patient investors, and this is helpful as many innovations are slow to pay off. Here again family firms have an advantage.
Sometimes, families operating a firm in stable industries and wishing to include more adventurous young family members, decide not to renew a business, but to launch a new one. The old business is used as a source of financial, human, knowledge, relational and reputational resources supplied to younger members who want to start a new business. Separate ownership and board structures insulate the older business from the risks of the newer one, and at the same time the newer business allows the family to expand into more propitious industry sectors and markets, all the while benefiting from many of the family legacy resources supplied by older members of the clan.
Bottom line: Family firms not entrepreneurial? Hardly!
I should point out that it is true that some family firms are indeed limited in their entrepreneurial capacities. They may be beset by family conflicts, dysfunctional nepotism, cronyism, succession crises and sentiments that favor undeserved family altruism over business necessities. So my arguments apply mainly where there is a long- term orientation and where owners and managers hope to keep the business in the family and the family in the business. But that is very often the case among family members and family firms, and surely we must not let the doomsayers cast a shadow on what is still the most common, and the most successful type of organization in the world.
Astrachan, J. H., & Shanker, M. C. 2003. Family businesses’ contribution to the US economy: A closer look. Family business review, 16(3), 211-219.
Bellow, A. 2004. In praise of nepotism. NY: Anchor.
Le Breton-Miller, I. & Miller, D. in press. The arts and family business: A resource-based perspective, Entrepreneurship Theory & Practice.
Miller, D. & Le Breton-Miller, I. 2005. Managing for the Long Run, Boston: Harvard Business School Press.
Miller, D., Le Breton-Miller, I. & Scholnick, B. 2008. Stewardship vs. stagnation: An empirical comparison of small family and non-family businesses, Journal of Management Studies, 45 (1): 50-78.
Miller, D., Lee, J. Chang, S. & Le Breton-Miller, I. 2009. Filling the Institutional Void: The social behavior and performance of family versus non-family technology firms in emerging markets, Journal of International Business Studies, 40 (5): 802–817.
Sirmon, D. & Hitt, M. 2003. “Managing resources: Linking unique resources, management wealth and wealth creation in family firms. Entrepreneurship Theory and Practice, 27 (4): 339-358.
Ward, J. 2006. Unconventional wisdom: counterintuitive insights for family business success. NY: Wiley.
About the author:
Danny Miller received his Ph.D. from McGill University and is currently Research Professor of Strategic Management at HEC Montréal, and Chair in Strategy and Family Enterprise at the University of Alberta. He has published well over 100 articles in leading academic and practitioner journals and is a Fellow of the Academy of Management. His books include Organizations: A Quantum View (with Peter Friesen), The Neurotic Organization (with Kets de Vries), The Icarus Paradox, and Managing for the Long Run (with Isabelle Le Breton-Miller). He consults with international corporations and family businesses in the areas of strategy and organizational design. He can be reached at firstname.lastname@example.org.
Yours in Practice,