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Family-owned business is the most prevalent form of economic organization in the world, comprising up to 90% of companies in the United States; even higher abroad. It accounts for one-third of the Fortune 500, produces 50% of the Gross Domestic Product, and 60% of the nation's employment.
And yet the failure rate of family companies is still disastrously high. Every study since researchers started analyzing family businesses some 30 years ago has indicated that only one third of transitions from the founding generation to their successors are successful—the balance of businesses fail or are sold out of family hands. By the third generation, only 15% still exist as family companies.
What is it about owning and operating a family business that challenges even the most competent entrepreneur? Perplexes the otherwise capable expert professional advisor? Frustrates the non-family employee (even the non-family company president)? And creates tremendous stress among family members and across generations?
The answer is that the process improvement, organization development, strategic planning and leadership development needs of family-owned businesses are significantly different from those of other forms of commercial enterprise. At the risk of over-simplifying these distinctions, the Three-Circle Model of Family Business helps to highlight why being associated with a family-owned enterprise is a challenge for everyone — Family Members, Owners and Employees.
The Three-Circle Model of Family Business
The three-circle model describes the family business system as three independent but overlapping subsystems: business, ownership, and family. Any individual in a family business can be placed in one of the seven sectors that are formed by the overlapping circles of the subsystems. For example, all owners, and only owners, will be somewhere in the top circle (#2). Similarly, all family members are somewhere in the bottom left circle (#1) and all employees are somewhere in the bottom right circle (#3). A person who has only one connection to the firm will be in one of the outside sectors (e.g., a family member that is neither an owner nor an employee of the business will be in sector #1).
In reality, family business systems are often much more complex, with family members having multiple connections to the business: a family member who is also an employee, but not an owner, will be in sector #6; a family member who is both an owner and an employee will be in the center sector #7; etc. Every individual who is a member of the family business system has one location, and only one location, in this model.
The implications of this model are extremely important to the development of healthy (in all senses of the word) family enterprises. It provides a framework for assessing, understanding and developing behaviors that lead to success. For example, think about the governance structures that are appropriate for the three subsystems — Family, Ownership and Business. These structures are (or should be) different and non-overlapping. A Family Council, for example, is an appropriate way to address family-only matters (Family subsystem) but is a poor substitute for a Board of Directors and periodic Shareholder Meetings (Ownership subsystem). And neither of these formats is an appropriate substitute for an effective Executive Team process (Business subsystem). The lesson, here, is that family businesses ignore the implications of this seven-sector model at their own peril!
For additional information about the Three-Circle Model of Family Business, please read Generation to Generation, published by Harvard Business School Press. To explore how this "theory" can be operationalized for you, your family and your business, please contact Catalyst's family business specialists. We look forward to helping you improve the "health" of all three of these important subsystems.
Is Your Family Business Healthy?
Following is a list of attributes of healthy family business systems. How do you stack up against this simple diagnostic checkup?
Functioning of the Family
- Individuals can manage themselves and relationships with others;
- Family has the ability to resolve conflicts with mutual support and trust;
- Boundaries between work and family are appropriate and respected;
- Knowledge is used wisely and isn't blocked by unresolved relationship problems;
- Communications are open and clear;
- Individuals are flexible and able to use advisors wisely;
- Family has the ability to make decisions and move forward;
- Family is clear about goals and navigates toward the goals;
- Family has good direction and leadership;
- Transitions are managed and marked by rituals; and
- Intergenerational boundaries are appropriate and respected.
Management of the Business
- Knowledge is developed and mobilized as collective intelligence;
- Family members in the business are competent in their assignment ;
- Family members are compensated according to their contribution to the business;
- Organization and its members make use of knowledge to adapt to changing environment and produce a sustainable, competitive advantage for the business;
- Decision making is based on knowledge and expertise;
- Performance standards are the same for family and nonfamily employees;
- Organizational learning develops new competencies and effective behaviors,;
- Responsibility and authority are balanced, and nonfamily managers are not undermined;
- Leadership is spread throughout the company / family; and
- Succession is planned early.
Development of the Governance and Ownership System
- The mission and goals are clear;
- There is a functional board of directors with outsiders on it; and
- There is a sound plan for succession and transfer of ownership over the generations.
Effectiveness of the Boundaries Between the Family Business System
- Business uses family values in strategic planning;
- Boundaries are porous and allow appropriate exchange of information between systems;
- Each system uses goals and values to steer the course;
- Business issues are not acted out in the family and vice versa;
- Mutual learning exists between the systems (family's learning flows to the business and vice versa) and is put into action; and
- Individuals understand core competencies of one another and of the company.
From Generation to Generation by Kelin E. Gersick, John A. Davis, Marion McCollom Hampton and Ivan Lansderg (Harvard Business School Press, 1997)
