Competitive Advantage of Family Businesses

 

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Impact of Family Businesses
 

In most countries around the world, family businesses are between 70 and 95% of all business entities (European Family Businesses, 2012). Specifically, an estimated 70%-90% of global GDP annually is created by family businesses. Moreover, between 50%-80% of jobs in the majority of countries worldwide are created by family businesses (European Family Businesses, 2012). To zoom in the region we belong, Family businesses comprise 65% of the total number of listed companies in Southeast Asia. This makes them the backbone of the region’s economy. Closer to home, in the Philippines, where the culture is a closely-knit family structure, it is estimated that 80% of businesses are family–run according to Cristino L. Panlilio Undersecretary of Department of Trade and Industry (Ateneo Leadership Summit Forum, 2012). This means that majority of the industries that power the Philippines and its economy are run by families in business. Indeed, Filipino families in business are vital to the development of the country. Therefore, from our country to Southeast Asia and around the world, Family Businesses prove to be a powerful economic driver.

 

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Family Business as an Opportunity
 

Studies have also shown that family business is not only an economic driver, it is also a good opportunity. A study by Anderson and Reeb (2003) showed that family businesses outperformed non-family businesses and had higher valuations in the S&P 500. Also, listed family businesses outperformed their listed non-family rivals by 40% from 1999 to 2005 in the London Stock Exchange (Poutziouris, 2004). Family – owned companies also perform better not just for the short term, but also over the long term. This is shown by a study by Credit Suisse where they found that family businesses performed better over the long term compared to non-family businesses (2007). Moreover, family businesses tend to experience higher employment and revenue growth over time and more profitable (Lee, 2006). These studies show how family businesses can be at their best and how they impact the world.

 

Many of the leading businesses today in the world are family businesses. Forbes provided a list of the largest family-owned companies. The top 10 largest family businesses are:

 

We begin to ask what drives this excellent performance of family businesses. Are there inherent and distinct qualities of family businesses that lead them to perform? What are the advantages of being a family business that drives performance over the long term. John Ward, identified these advantages and unique features of family businesses that make them perform better.

 

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The Advantage of Being a Family Business

 

The first advantage inherent to family businesses is its purpose of continuity which leads them to have the goal to preserve their assets, protect their businesses from downside risks and uphold the reputation of the owning family. This multi-generational mindset of passing on the business to the next generation makes the leaders of the family business more willing to sacrifice short term profit for long term gain. Compared to non-family businesses whose common goal is basically to meet the institutional investor expectations, family businesses are driven for stewardship of the family name. This motivates the family business to have a long term mindset, which makes them more sustainable.

 

The second advantage of family businesses that is common to them is a culture that is values-driven first, compared to non-family businesses whose culture may only be a strategic fit. In a family business, the culture is influenced by the values of the founders and the family. In a non-family business, values may be forced and artificial rather than voluntary. A culture of loyalty, service, stewardship, hard work and other life-enriching values are exemplified by the founders and family as leaders. The family values can naturally influence the business culture especially when the leaders are family members. This is seen to be a key advantage of family businesses.

 

The third advantage is that most family businesses consider their customers and employees as their most important stakeholders. It is not uncommon for family businesses for family members to have a set of loyal customers who they personally serve. More so, it is typical for family businesses to have long-term trusted employees who they treat like family members. This may make the family business have higher retention of employees and loyalty among its customer base. This is in comparison to non-family businesses whose most important stakeholders are the shareholders and management.

 

The fourth advantage is that family businesses see the business as a social institution rather than a disposable asset as is common in a non-family business. This is why family members are likely to be attached to the family business since they grew up there, they saw their children grow there and it has a become a center for interaction among the family. And thus, persevering and prospering the family business would also mean persevering and prospering the family.

 

The fifth advantage for family businesses is that leadership is a stewardship compared to leadership in a non-family business which is based on personal charisma. Leadership is more than personal gain. It is a responsibility to continue the legacy of the founders which is to perpetuate the family business by keeping the interests of employees, stakeholders and the community.

 

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Unique Features of a Family Business
 

Moreover, family businesses possess unique features that also become their competitive advantage. John Ward has identified and described unique features of a family in business shown below.

 

Optimism is predominant among family businesses. 86% of family-controlled companies believe that the same family will control the family business in 5 years. Studies show that optimism is an important factor when facing a crisis of any kind. (American Family Business Survey 2007).

 

Loyalty is also an inherent feature of a family business. Indeed, blood is thicker than water. The family members who are involved in the business have a natural deep sense of concern for the welfare of the business. Loyalty is also a common value among one can see among the key personnel of the business.

 

Another unique feature of family businesses is vigilance. Family members in the business are driven to protect the business from risks. In a family business, the saying “no one watches your money like you do” is true.

 

Family businesses also exude competitiveness. In the 2007/2008 PricewaterhouseCoopers study, they found that more than 86% of family businesses in the survey have their top investment priority in IT infrastructure. This shows how family businesses can be competitive in their investment. Family businesses scan the market to see what competitors are doing and investing in IT, sales, and marketing.

 

Innovativeness is another feature of family businesses. Although, they are financially conservative to protect the family business from risks, they have also shown the capacity to be creative and ingenious in creating new products and services. The reinvention of family businesses is often vital to their survival. Study shows that family-owned business have increased organizational innovativeness compared to their non-family competitors (Dibrell, Moeller, 2011).

 

Nimbleness allow family businesses to respond quickly and become more flexible. Families that have lived and worked together for years can move quickly and are adaptable in the many roles they play.

 

Finally, typical to family businesses is their sense of legacy and commitment. Families with names on the door report that their company is much more than just a job. It’s a legacy, a commitment to the community and to the employees and their families who work there.

 

No wonder family business is an economic powerhouse. These advantages and unique features when harnessed and maximized become the family business’ key competitive advantages propelling them to be the best in their industry and in the world.

 

References:

 

The impact of a service-dominant focus strategy and stewardship culture on organizational innovativeness in family-owned businesses

 

Clay Dibrell a, , , Miriam Moeller b VALIDHTML

 

School of Business Administration, The University of Mississippi, University, MS 38655, USA

 

UQ Business School, The University of Queensland, St Lucia 4072, Queensland,

 

Australia

 

Available online 28 January 2011
http://www.sciencedirect.com/science/article/pii/S1877858511000052

 

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Journal of Family Business Strategy Volume 2, Issue 1, March 2011, Pages 43–51