As Time Goes By – FBR Summaries
This issue continues the executive summaries from FBR assistant editor Karen Vinton of the articles in the March FBR special issue on “Temporal Dimensions of Family Enterprise Research.” Authors Todd W. Moss, G.Tyge Payne and Curt B. Moore & Keith H. Brigham, G. Tyge Payne and Miles A. Zachary and G.T. Lumpkin respectively discuss strategic exploration and exploitation (Summary 3) and long term orientation (Summary 4) as the concepts apply to family firms in relationship to non-family firms.
How important is strategic consistency on firm performance over time? Is the effect of strategic continuity on performance different for family firms and non-family firms? To study these questions, the authors used data from 94 US family businesses operating in four high-tech industries over 12 years and 113 non-family businesses over the same period of time. All of the firms were publicly traded. They measured firm performance by return on assets (ROA) and by return on equity (ROE) and Tobin’s q, which can be roughly summarized as the ratio of the market value of a firm plus net debt divided by the book value of its assets.
Strategic efforts are characterized by resources spent on either exploration (search, risk taking, discovery, experimentation and flexibility) or exploitation (refinement, production, execution, implementation and efficiency). Exploration typically generates long-term gains; exploitation typically generates short-term gains. Resources spent on these two approaches can be weighted in favor of one or the other or balanced. The authors did not examine which mix of approaches is more advantageous for a firm, but rather how consistent is the commitment over time regarding the particular mix a firm may choose.
To determine strategic consistency in the firms studied, the authors used an interesting approach: LIWC (Linguistics Inquiry and Word Count) in which they measured the frequency of certain words in the management discussion and analysis sections of 10(k) reports filed by these firms. They also were interested in measuring: a) the size of the firms; b) the level of “environmental munificence”, described as the relative abundance of resources and growth opportunities available to a firm; and c) “environmental dynamism”, described as the rate of change in the environment, including such factors as change in market factors, customer preferences and technology factors.
The major findings of this study are as follows:
- Family firms that are consistent in their emphasis of particular Exploration/Exploitation strategies outperform firms that are less consistent. The authors speculate that the Long Term Orientation (LTO) of family businesses, including patient capital, multi-generational ownership goals, continuity, futurity and perseverance all tend to lead to strategic consistency.
- The relationship between strategic consistency and firm performance was found to be stronger in smaller firms than larger firms. For example, strategic consistency tends to generate competencies that may be very important for a competitive advantage for smaller firms; larger firms tend to have more slack resources to buffer counter strategic shifts.
- The positive relationship between strategic consistency and performance is stronger for family than non-family firms.
- The positive relationship between strategic consistency and performance is stronger when the industry in which firms operate is resource-rich and dynamic.
For both practitioners and family business owners, the importance of strategic planning is fundamental. Firms without a recurring emphasis on strategic planning will likely be adversely surprised by environmental factors. The challenge for family firms and their advisors is to retain the value that flows from consistency in strategic commitment, (such as the development of competitive advantages in systems, processes, structures and products) while remaining adaptive enough to respond to market and technological changes.
Summary 4: Researching Long-Term Orientation: A Validation Study and Recommendations for Future Research
Keith H. Brigham, G. Tyge Payne and Miles A. Zachary and G.T. Lumpkin
This article explores the question, “Can we validate a measure of Long-Term Orientation and do family firms differ in this measure from non-family firms?”
It is a widely accepted argument that family firms possess a greater long-range temporal perspective compared to non-family firms. Several characteristics of family firms tend to promote this long term perspective, such as having multiple family generations in management and ownership, longer tenures of CEOs and the willingness of family firm owners to provide “patient capital” for investments. However, this intuitive description of long-range time perspectives has not been directly measured or tested and, therefore, many open questions still remain.
The authors define long term orientation (LTO) as the “tendency to prioritize the long-range implications and impact of decisions and actions that come to fruition after an extended time period.” LTO is defined as a multidimensional construct composed of three dimensions:
- Continuity describes the bridging of the past, present, and future in a way that places importance on endurance and long-lasting tradition.
- Futurity describes a firm’s belief that the planning and assessment of long-run future goals are valuable.
- Perseverance suggests that long-term oriented firms work hard to create future value.
The importance of defining and measuring LTO lies in its practical implications since it is viewed as a dominant way of thinking/schema/reasoning held by the firm’s powerful actors and thus reflecting their collective mind-set regarding temporal perspectives. A valid measure of LTO could help researchers answer questions such as:
- Do family firms really have a greater LTO than other firms?
- Do all family firms have the same degree of LTO?
- Does LTO influence decision making in family firms?
- What are the advantages or disadvantages of LTO and how are they connected to firm performance?
The authors did a computer-aided content analysis of shareholder letters from 679 firms. The technique involves the listing of words that describe the three dimensions of continuity, futurity and perseverance and counting them in the letters. In this way, the three dimensions were validated, and shown to be the components of a combined measure for LTO. The comparison between family and non-family firms actually shows that family firms have a higher degree of each dimension and of the combined measure. Moreover, LTO was found to be higher in industries that rely on higher levels of research and development (R&D). This finding is used as a validation, as it confirms that industries that rely on technological growth and innovation and therefore on more R&D, also have a longer horizon into the future, demonstrated by a higher LTO.
This study verifies a common belief shared by consultants, practitioners and scholars regarding the longer time horizon of family firms. The authors believe that LTO is like a logic which provides rules of thumb that help simplify complex decisions. This means that for family firms, the perspective of future and long term are taken into their decision making much more often and in an easier way than non-family firms.
The paper gives a positive answer to the question of a greater LTO for family firms, and invites future studies to tackle the other open questions, using the device they have developed.
About the Contributor
Karen L. Vinton, Ph.D. is a 1999 Barbara Hollander Award winner and Professor Emeritus of Business at the College of Business at Montana State University, where she founded the University’s Family Business Program. An FFI Fellow, she has served on the FFI board of directors and chaired the Body of Knowledge committee. From 1997 through 2011, Vinton served on the editorial board of Family Business Review and is the current assistant editor. Karen can be reached at klvinton700@gmail.com.
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Yours in Practice,
The Practitioner
