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It spread into capital-intensive industries - mostly chemicals, electrical products, transportation systems, petroleum refining, primary metals, some branches of the food and beverages industry, cigarette making, and several others (Chandler and Hikino 1997).
The dimensional growth and the complex activity connecting the production and the distribution activated an organizational revolution as well; by the moderately easy structures employed during the first industrial revolution progressed into a much more sophisticated U- and M forms of organization. According to the growing specialization of the founder's role, these management structures were crowded by salaried low, middle, and top managers, progressively autonomous from the property and from the founder's family. Alfred Chandler put it best:
Salaried managers' specialized knowledge and their firms' ability to generate the funds necessary for continued expansion mean that they soon controlled the destiny of the enterprises by which they were employed . . . In the large, multiunit enterprise, salaried middle managers, who have little or no share in its ownership, have come to be responsible for co-ordinating the flow of goods and supervising the operating units.
Similar to middle management, the owners soon lost their role at the top of the firm. As the expansion of the corporation required more investment and financial resources, a shift to financial capitalism from personal, family capitalism is a most, where top management decisions are shared by bankers and other financiers.
However, in the end, the activities undertaken by the modern enterprises are known by the growing complexity, were eventually the managers themselves are responsible for the most relevant strategic decisions and for resources allocation. Quoting Chandler again:
No family or financial institution was large enough to staff the managerial hierarchies required to administer modern multi-unit enterprises. Since the salaried managers enlarged specialized knowledge and as their enterprises were able to generate the resources necessary for growth, they eventually took over the top-level decision making from the financiers, who rarely had the time, the information or the power of knowledge to suggest alternatives; they could veto suggestions, but they could do little else . . ., Consequently, family members soon came to view their enterprise, as did other stockholders, from the point of view of leaseholders; that is, they aren't concerned no longer by the enterprise management but by the income derived from its profits. Therefore, firms in which representatives of the founding families or of financial interests no longer compose top-level management decisions . . . can be labeled as managerial enterprises.
Berle and Means (1932), at the beginning of the 1930s has presented in the well-known research that the changes in the ownership structure of the large corporations. Clear evidence was presented about the growing division between ownership and control, as well as of the disintegration of stock ownership which determined the birth of what can be called 'public company'.
The industrial enterprise dominates the whole world of business until the rise of the managerial corporation, which bring the revolution in nations' or what can be called a competitive advantage.
In this way, the modern business enterprise can be defined as an economic institution that relies on the administration of a multilevel managerial hierarchy in addition to an operating multiunit system.
Absolutely, this kind of organisation cannot be owned and managed by a family. When this definition is accepted, the study of the modern firm becomes a study of when, where, and why business hierarchies were established to manage functional and vertical integration, with a resulting increase in aggregate concentration of assets' (Daems 1980: 204).
In search of a definition: quality and quantity
Even from a residual perspective, it is so hard to outline the boundaries and features of the family business contrarily to the simple definition of big business and of the modern managerial corporation. Family firms were in the total majority during the first industrial revolution, in addition to the pre-industrial period. As for now, the family firm is the backbone of a significant number of recently industrialized economies. The presence of the family firm inside a certain economic system is mainly due to asymmetric information, and a legal system unable to secure and implement property privileges.
At least in advanced Western economies, the firm operates in a much less aggressive environment than in the past. Still, the 'classic' family firm - where family members are involved in both strategic and day by day decision-making- is a reality in almost all of the advanced economies.
From the perspective of managerial capitalism, it is theoretically possible to suggest a definition of the family firm based upon its size, whatever its measure. Following the start-up period and preceding the public company phase, the family firm is one of the initial stages in the enterprise life. Traditional economies suggested that family firms are characterised by 'flat' organisational structures and internal succession patterns; also known as small and medium-sized; slow growing.
However, a considerable amount of evidence demonstrate, that, it is possible to find many examples of dynamic, large, and profitable family firms which include the traditional characteristics of proprietary capitalism that can be simply illustrated as paternalism and internal succession patterns. In his contribution to Managerial Hierarchies, Leslie Hannah points out that it is very difficult to demonstrate that also in capital intensive industries, family firms were less efficient than managerial ones, knowing the need for a less deterministic perspective in evaluating the relationship between the ownership structure and the general performance of the enterprise.
It is also wrong to assume that family firms are in general less profitable and consequently less efficient than those run by managers. There has been a long debate on productivity because the field research on the subject provides variable results, differing from time to time, from country to country, and according to the industry. There is a growing amount of research trying to link business performance to ownership structure but, since it tends to concern well-defined sectors and/or countries in what is usually a relatively short span of time, it is almost impossible to find incontestable results.
In large corporations with institutionalized research and development one can found that research-intensive activities characterized by long-term investments exist , while in well-defined market niches with a limited innovative activity one can identify the existence of technology-intensive family firms . It is easy to maintain that with a decline in the role of family firms in unison with technology and capital-intensity. Still, we can found a few examples of family firms devoted to innovation and technological research among significant capital intensity at the same level as managerial corporations.
For instance, in some cases as finance and insurance, the family firm is still resilient and largely present.
In such cases the advantages brought by the family in terms of long-term commitment, know-how, and the cultivation of trust exceed or at least equal the disadvantages (Landes 1975).
Historically the family firm establishes to be conservative in its policies of development and investment and, consequently, unable to maintain growth and innovation, especially in capital and technology intensive industries.
At the micro level, the lack of commitment on the part of family firms toward modernization, combined with their short time horizons, is often associated with the decline of their dominance in capital intensive industries. At the macro level, the same trend is considered among the main weaknesses of a national economic system.
In a historical perspective, it is clearly wrong, to illustrate conclusions about the insufficiency of the family business in supporting the evolution of an industrial economy, during the initial stages of development and also after it. On the opposite, some authors, on the basis of empirical research, conclude that family-run companies are more profitable as well as generally much more profit oriented than managerial ones.
Endurance and continuity is another perspective on defining family business and implicitly related to the 'stages theory'. Implicitly, family business is considered, on average, to be not very long-lasting. Relatively, in two or three generations the impact of 'Buddenbrooks effect on the entrepreneurial and family firm assume a progress into a managerial, public company given the difficulties for the single family in managing a growing and complex activity.
Continued success over long periods of time is difficult even for successful family enterprises, due to the problem of continually finding and training new and capable top managers from within the family. The existence of the same problem can be present even less successful family enterprises. These two matters . . . strengthen the argument that family enterprises are inherently limited in their future prospects.
Even with indicating that family firms evolve generally into managerial structures, nothing proves that it is the single alternative to the decline and subsequent 'death' of the company. The main problem in continuing with an active presence of the family at the top management of the firm is without suspicion the issue of succession. As is well known, problems of leadership succession occurs where the family is not able to assign adequate leaders in the managerial role or, on the contrary, where too many of them are involved in the day-to-day management of the company.
According to very recent research, the effect of leadership succession pattern on the firm's survival and performance is linked to a several number of cultural, institutional, legal, and environmental factors that must be taken to avoid dangerous generalizations.
Alfred Chandler, agrees that family firms succeed in maintaining their leadership positions when transition is carefully managed. In some cases, effectively planned succession and training of new generations has showed to be a vital asset for the firm's growth and wealth.
When looking on what is supposed to be more 'precise' constraints, such as ownership and control, stock capital property, the task is not any easy one. Using a quantitative perspective is also difficult since the degree of dispersal of family business in an economic system during a given period is mostly affected by the characteristics of the family firm adopted. A research on the European small and medium-sized enterprises at the beginning of the 1990s where the describing family firms as the enterprises with a family shareholding exceeding 60% of the issued capital - found that on average two-thirds of the firms of the sample were family firms (Donckels and Frohlich 1991). At the end of the twentieth century 17% of the top 100 corporations, both in the USA and in Germany, were family firms, accounting for 8% and 12% of GNP respectively.In 1980, family firms held the absolute majority of assets in the Japanese economy (Yasuoka 1984a: 3), while at the end of the same decade 95% of US companies were family-owned, and there is no evidence of a decline in this figure recently, particularly where traditional sectors are considered (Dyer 1986: ix).
In fact, the definition of family firms is highly subjective and faraway from being standardized. For instance, the estimated number of family firms present in the US industrial system varies from more than 20 million (more than 90% of the total of the firms) if a 'broad' definition ('some degree of family control') is adopted, it could be changed to 4 million in case of a more restrictive definition (multiple generations involved; direct family involvement in strategic decisions; 'more than one family member having managerial responsibilities') is employed.
Yet it is mainly accepted as a subject of experience that, where a relatively large size requires various degree of partition between ownership and management, convincing the owner family to float a part of the stock capital, the 'proprietor' can maintain a control over the enterprise with a small minority shareholding. It is the case especially where this arrangement is accompanied by other strategies which increase the voting power (for instance, the issuing of shares with reduced voting rights). It is possible to conclude that in both the quantitative and the qualitative perspective, it is difficult to give an accurate and exact definition of what precisely a family business is, where this definition differ among countries regarding legal, social and economic aspects.
To define a family firm in the USA, is the fact where the family control less than 5% of the voting capital, while, thanks to the odd legal environment in Italy, where the same quota can be considered absolutely sufficient to exercise control over the firm. As well as the structure of the board of directors that can be relevant, since, in the English case the inside director's role and the outside one is legally and formally separated.
Given all these limitations, in a historical perspective it is possibly better to move into a flexible definition of the family firm that probably can cover various possible situations while facing the changing nature of the family itself.
Generally, therefore a family firm can be differentiated within a particular cultural outlines as the property where it is the ownership of a considerable portion of the enterprise's capital, control which represents the authority over the strategic management of the company.
Mark Casson suggests dividing the definition into two parts - family-owned and family-controlled firms which can be perceived in a matter where in case a firm is said to be family owned when family members own sufficient voting shares, or occupy sufficient places on the board of directors but the firm is said to be family controlled while the general manager is a member of this family. Since the key issue is not only ownership but control, therefore the definition of family ownership implies that the ownership of a significant minority stake by a single family does not necessarily qualify a firm to be a family firm, however it must be large enough to block any rival coalition of shareholders but it can refers to family members occupying key positions in management.
Hence, family business was implicitly considered as appropriate for traditional labor-intensive industries but unsuitable for scale-intensive ones.
The persistence of the family firm as an economic actor - not only in the early phases of industrialization and in small and medium-sized enterprises, but also in fields usually dominated by big managerial corporations - demonstrates that this institution maintains a considerable role and relevance in modern advanced economies. Even if the presence of managerial hierarchies has often been implicitly seen as an alternative to that of family ownership and control, there is plenty of evidence that entrepreneurial dominance inside the firm is not necessarily exclusive.
Changing perspectives on family firms
In fact, both the research on the transformation in the financial and ownership structure of big business, and the 'technocratic' approach - stressing the necessary separation of ownership and control - view the family firm as a 'step' toward more advanced organisational structures.