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These are quotations from famous entrepreneurs on entrepreneurship. These quotations emphasize that being an entrepreneur is "believing" and "the nerve to be different". My master thesis research will be looking at the family business and how the control in the family business will leads to better organizational performance. From the research of Nyenrode Center for Entrepreneurship 2010, has mentioned that family businesses are 53 percent responsible for the GNP (Gross National Products). Besides, it will also stimulate 49 percent job creation in the Dutch markets. Until now, there are 4.3 million people who are working in the family business. An example of the family business in the Netherlands are: Bavaria (beer), HEMA (department store) and Vroom & Dreesmann (department store). Flören (1993) will define the definition family business and explain the interaction within the family businesses. Flören and Wijers (1996) also define the key differences between the family businesses and non-family businesses. Tagiuri & Davis (1982) designed a circle model which explains the interaction between 1. The Family, 2. The Company, 3. The Property. Gadenne and Sharma (2009) explain the hard and soft quality management factors for the SMEs and the organizational performance.
1.1 Research Question
This master thesis contributes to the understanding of the relation between "hard control" and the "soft control" of the strategy making and the organizational performance in SME.
The study address the main research question:
"To what extent is "hard control" vs. "soft control" of influence on strategic decision making and
organizational performance of family business in the Netherlands?"
To support the research question the following sub questions will be answered:
1. What is a family business?
2. What is performance?
3. What are the "hard control" and "soft control" of the strategic decision making for the family business in the Netherlands?
4. Which of these strategies are significantly associated with organizational performance?
To answer the problem statement, this research will consist of qualitative research and quantitative research. The qualitative research would be research through articles and papers. The quantitative research consist of questionnaires. These questionnaires will consists of combination of direct and indirect questions. With the constant comparison method (Boeije, 2002), the interviews will be from different groups, because the aim of this research is besides the organizational performance, also to find out which strategy will be manage in which kind of enterprise.
The answer to the sub questions can be find in the chapter conclusion.
The academic relevance and the social relevance will be emphasize.
Nowadays, with the emergence of the internet it became easier to find information about the family business. Especially the criteria that are mentioned to be able to name a family business. Flören (2010) mentioned that family businesses are more successful than non-family businesses and that the family businesses are better prepared for the economic downturn than the non-family businesses. Besides, family business are an important contribution to the success of the economy, because it fuels the diversity of companies on the markets, which leads to developing innovations (Lankhuizen et al. 2003). Family business differs from large businesses, for example, management style, production processes, capital availability, purchasing practices and negotiation power (Ahire and Golhar, 1996). Ghobadian and Gallear (1997) also likes to add six characteristics that makes family business differ from the large enterprises, namely, structure, procedures, behavior/culture, processes, people and contacts. Family business are considered to be the "life blood of modern economies" (Ghobadian and Gallear, 1996). Further, the culture and the value of an owner/manager is widely spread throughout the organization. That is why the family business tends to have simple and informal control systems. There are two kinds of controls, namely "hard control" and "soft control". "Hard control" refers as a control that it is required for everyone that worked in the enterprise. The employer must comply what he/she is told to. There are no place for ideas or discussions. Everyone knows his or her position. The "soft control" refers as a control that everyone has the "room" to discuss ideas, morality and values to make the enterprise successful. Besides, several researchers from the book "Strategic Decisions" indicates that more knowledge is needed on decision making during specific events (R. Butler, 1997, Papadakis & Barwise, 1998, AC Amason, 1997).
Erns & Young (2010) announced that family businesses are an important contribution for the growth of the European economy. Family business is not a regular 9-to-5 mentality anymore. To start a family business is being ready to be your own boss. However, to start a family business, means that the family members should be prepared for the entrepreneurial path. Because, the entire family are involved in the business and the members are not always in a positive way (Article Brown). The important of the family business is that each of the members understand his or her position. Besides, it is also important to know who has the control of the whole business. That is why it is important that the owner should be very professional in handling business matters from the start
(Article Brown). However, there are not much information about the controls ("hard control" and "soft control") of the family business. This master thesis could be relevant for the government to know more about the controls of the different kinds of family businesses and to implement these controls for non-family businesses. As already mentioned, family businesses are an important contribution for the growth of the European economy.
Before answering the problem statement. The literature will be explained. In the first literature, the definition of family business will be defined with its characteristics and the approaches. Second literature, the strategic decision making process will be explained and after that the relation between the family business and the strategic decision making process will be defined. In the third literature, the organizational performance and the relation between the two literatures will be clarified, namely the strategic decision making process and the organizational performance; the family business and the organizational performance. The following chapter is the research methodology, hypotheses and analysis. After this chapter the results will be showed. In the last chapter there will be a conclusion and a recommendation.
The research model of this report is as follows:
2 Family business
This chapter will give an explanation of what is family business (2.1). After that the relationship between entrepreneurship and family business will be described (2.2). There are different theories which involve family business and with the help of these theories the state of affairs will be clarified (2.3). At the end of this chapter there will be a conclusion (2.4)
2.1 Definition of the family business
The name family business is actually an integration of "family" and "business" and are highly connected. Each family businesses are unique in his own way and hereby different from the non-family businesses. The reason why the family business is unique and different from the non-family business is due the family influence in a firm's vision, goals, interaction with other, and creation of unique responsibilities and capabilities (Chrisman et al, 2003b). The influences within the family business are at different level, namely at the individual, group and organizational level (Dyer, 2003). As already mentioned, each family businesses are unique, this means that family businesses are not a homogenous group, but more heterogeneous group. In the academic literature describes a variety about the family business. Zahra, Hayton & Salvato (2004) defined the family business as
"Businesses that report some identifiable share of ownership by at least one family member and having multiple generations in leadership positions within that firm" (p.369).
Morck & Yeung (2004) distinguish the family business as
1) The largest group of the shareholders are the family and
2) The stake of the family is greater than either 10% or 20% control of the voting shares.
Another definition of the family business is that of Astrachan et al (2002:46). Astrachan et al (2002:46) notes that "a business is a family business when it is an enterprise growing out of the family's need, built on the family's abilities, worked by its hands and minds, and guided by its moral and spiritual values; when it is sustained by the family's commitment, and passed down to its sons and daughters as a legacy as precious as the family's name."
All of these three definition are a way of view of the criteria that a family business should consist of. To combine these definitions into one definition, the definition of Flören (1998) will be applied in this research. Flören describes that a firm is a family business when it meets two of the following criteria:
More than 50% of the shares or certificate are owned by a single family;
A single family can exercise the considerable influence;
A significant proportion of the members of the board of directors are from one family.
It should be mentioned that the concept of the family business is not one family, but several families. In addition, the decisions are not made by one person but by several relatives.
It is really difficult to find one most complete definition of the family business. The problem is that each writer has his own view of which criteria a family business should consist of. The problem with Zahra, Hayton & Salvato (2004) is that they only look at the share ownership by at least one family member within that firm. However, it does not mean that this definition is incorrect, but there is a lack of clarity about who and how many of the member is in charge of the family business. In the case of Morck & Yeung (2004) is that they only mentioned about the shareholders and how many percent of the stake of the family has control of the voting shares. In this case it is not clear about the meaning of family, because it is not sure if there is one family or several families involved. Astrachan et al (2002:46) defined the family business more as a successful succession. Once again, it is does not mean that these three definitions are incorrect, but it seems that these definitions are not complete yet. That is why I choose the definition of Flören (1998). This is the most complete definition of the family business, because it does says about the percentage of the share that a family business should consist of, the influence of a single family and the proportion of the members of the board of directors of a family.
In general, all of these definitions seems to emphasize that family businesses are owned and managed by the family members from more than one generation. Besides, these definitions does tell that ownership, succession and management are important factors that makes the family business as family business and that family business differs from a non-family business.
2.2 Relationship between Entrepreneurship and Family Business
Before the relationship between entrepreneurship and family business can be clarified, the definition of entrepreneurship should be defined. The following is a short overview of definitions of entrepreneurship concerning the entrepreneur. First, "Entrepreneurship is [â€¦]a way of thinking that emphasizes opportunities over threats" (Krueger, Reilly, and Carsrud, 2000,p 411). The definition entrepreneurship is defined as quality. The definition has been constructed and is being used by Wennekers and Thurik (1999, p.46) that are inspired by scholars Hébert and Link, Bull and Willard, and Lumpkin and Dess. Second definition refers an entrepreneur as one with certain qualities: "Entrepreneurship is the manifest ability and willingness of individuals, on their own, in teams, within and outside existing organizations, to:
Perceive and create new economic opportunities (new products, new production methods, new organizational schemes and new product market combinations) and to
Introduce their ideas in the market, in the face of uncertainty and other obstacles, by making decisions on location, form and the use of resources and institutions."
This means that an entrepreneur can be an entrepreneur and a professor at the same time.
Third, entrepreneurship is the creation of organizations, the process by which new organizations come into existence (Vesper, 1982). The entrepreneur is part of the complex process of new venture creation (Gartner, 1985). The last definition of entrepreneurship is the definition of Schumpeter's which emphasize on innovation: New products, new production methods, new markets and new form of organization. Venkataraman (1997), emphasize that the problem with these researchers is that there is a link between the phenomena, namely the presence of lucrative opportunities and the presence of enterprising individuals. The link makes it difficult to create a complete definition of the individual entrepreneur, besides, it is also not in line with the researches in the field of entrepreneurship (Gartner, 1988).
That is why entrepreneurship is a special case of strategic management (Chrisman, Bauerschmidt & Hofer, 1988) and it can be seen as Rogoff (2003) described:
"Entrepreneurship is fed by the oxygen of financial resources, human resources, education, economic conditions, and family"
From the literatures and in the business world, the entrepreneurship is an important factor for growth and success of a firm (Wennekers and Thurik, 1999). To growth and to survive, the entrepreneur need to make the right strategic decisions. This will be explained in chapter 3 about the strategic decision making.
In the view of the families, the families are involved in a great share of business ventures. Anderson & Reeb (2003) did research of the Standard & Poor's 500, the result is that families are presented in one-third of the Standard & Poor's 500 and are holding 18 percent of the business shares. On top of this Chrisman et al. (2002) also study the new ventures and states that approximately 80 percent of these ventures have family characteristics. It can be concluded that nowadays research about entrepreneurship has family business involved.
2.3 Theories of the Family Business
From the empirical studies of the family business it is well known that the family business influence the entrepreneurial activities through values and aspirations. In the literature there are three theories which involve family business. These three theories are the three-circle model, the agency costs theory and the resource-based view. These three models explains the interaction of the family business, how the family business handle with problems and the organizational culture within the family business.
2.3.1 The Three-circle model
The three-circle model that is used in the article of Zahra et al. (2004), which is originally from Tagiuri and Davis (1996) is especially used in the family business literature. This three-circle model explains the interactions in the firm between the family and non-family members. This model contains three factors, namely, Family, Ownership and Business (Figure 1). These three factors can influence, stimulate or counteract each other. The circle Family, is about the harmony between the family members and sustaining an healthy environment where the family members have the chance to develop their skills. The circle Ownership, explained the value creation through shares of the firm. Which means, that the more shares you have, the more power you have in the business. The circle Business, the focus is on the profit. Hereby, the emphasis is on the strategy and sale of products and services. In the three-circle model, consist of seven different segments. These segments are consisting relationship dilemmas, conflicts and priorities that interact with each other when the family owner makes important decisions concerning the survival of the family business.
Figure 1: The Three-circle model
Source: Tagiuri & Davis (1996)
These three factors interact with each other, which each has his own relationships and goals that can result in contradict or conflict that will increase the agency costs. Now, the seven different segments will be explained:
1. The Family
In the circle of the family, each member of the family has an investment stake in the family business. Hereby, it is not important if the member is active in the business or not. The member could have an indirect influence and impact on the family business.
2. External investors
In the circle of the ownership, the people who belongs in that circle are people who do not work in the company and which are also not members of the family. The people in this circle are investors (banks and venture capitalist)who are only interested in their return on their investment.
In the circle of the business, are a group of people who are not blood related to the family business, but only work in the family business. This group (just like the external investors) is concerned about the altruism and nepotism. This phenomenon occurs when an important decision is going to made by the family, where the family members always comes first. This could result into emotional decisions and in an unsatisfied external and internal non-family members. The phenomenon will be discussed in the next paragraph "Agency cost theory".
4. Passive Owners
In this circle it means that when the family business survives the first generation, the family business will attract the family members who are not active in the company. There will be a mix of expectations of the external investors and family interest. This results that the inactive owners tend to struggle between maximizing share value or having a responsibility of passing the business to the next generation.
5. Owner managers
This circle consist of managers who have an ownership in the firm. It must be mentioned for the sake of the family business, that it is necessarily to give shares or other rewards to non-family managers to keep them in the firm.
6. Family employees
The meaning of this part of the circle is that family member who are active in the firm, but does not have a share in the company. It can be said that this part of the circle is the same as in number four, however, this circle contains more power to influence the business by using ties with the business owner. Besides, number four does not have the option to gain shares in the family business future while number six is able to. This model shows there will be a conflict between the active family members and the inactive members. The reason is that the active members might feel ingratitude for their hard work and determination to grow the business. At the end the rewards are being given to the inactive family members.
7. Owner (incumbent)
In this segments, the person owns and controls the business. The incumbent is during the business management and private life confronted by many conflicts (e.g. succession process). Besides, the incumbent has a big responsibility to meet the needs and interest of people from different segments.
2.3.2 The agency cost theory
Jensen & Meckling (1976) introduced the theory about the agency relationship between owners and managers . Jensen & Meckling (1976) mentioned about the business as a "black box". This means that internally there is not much information or was not known about the decision-making processes of individuals. The business goal was to maximize the profit. The agency theory of the two authors, act as a key to open the "black box".
Jensen & Meckling (1976) defined the agency relationship between the two actors as:
"A contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent".
This leads to the argument that the manager (agent) is able to engage in decision making on behalf of the firm, which could be inconsistent with the goal (maximizing shareholder profit) of the shareholders (principal). The problem is that the agency theory is concerned with the relationship of the agent and the principal. According to this theory is that the principal hires the agent to perform multiple tasks which will maximize the wealth of the principal. However, the agent might also have incentives of self-interested behavior. The relationship of these two parties could be problematic. This result that the agent will try to maximize his own value at the expense of the principal. If the interest of the agent is inconsistent with the principal, this will describe as an agency problem. The reason why the agency theory is created is to solve problems that occur due to the agent-principal relationship (Karra, Tracey & Phillips, 2006; Schulze, Lubatkin & Dino, 2003; Gomez-Mejia, Nunez-Nickel & Gutierrez, 2001 and Jensen & Meckling, 1976).
If the agency problem arise, there will be agency cost. Chrisman, Chua & Litz (2004) defined the agency cost according to the summary of Jensen & Meckling (1976):
"The costs of all activities and operating systems designed to align the interests and/or actions of managers (agents) with the interests of owners (principal)"
From this definition it can be concluded that the agency costs arise, because of the disinterest between the owner and the manager. With the three-circle model (see Chapter 2.3.1) the explanation of the family business (entrepreneurial firm) will be clarified. A family business (entrepreneurial firm) is owned and managed by one person. This means that there is no conflict of interest between the manager and the owner. Thus, there is no motive for agency costs. The three circle model (Figure 1), shows that the incumbent (owner) belongs to the segment 7. This refers to the incumbent (owner) acts as the owner and manager at the same time. However, when there is no family factor (family circle), but only the business factor (business circle) and the ownership factor (ownership circle), these two factors could arise the agency costs. The managers can behave self-interested at the expense of the shareholders. This means that the managers can buy products or services on the expense of the company. If this happens, it will reduce the value of the company and eventually hurt the shareholders.
But when there is a family factor (family circle) the agency costs are minimal, because there is no separation of ownership and control. However, Gomez-Mejia et al. (2001) mentioned that the agency cost may be higher than the non-family business. This is because the contract between the family business and the family members are more focused on trust and emotions than in non-family business. It can be said that the bond between the family business is special, each contract between the family members are different. This means on the one hand, the agent effort and the contribution may be based on kinship and blood related ties. On the other hand, the principal may be emotionally attached to the agent and has less incentive to monitor the agent, because of the positive beliefs of the agent's behavior. According to Jensen & Meckling (1976), the relationship between the agent and the principal minimized the agency costs. Also Gomez-Mejia et al. (2001) discovered that family firms that do internal monitoring will perform better than family firms that does not. However, some of the family firms are not able to do internal monitoring is because of the altruism (Karra et al., 2006; Schulze et al., 2003). According to Schulze et al. (2003) altruism is a double edged sword. This means that on the one hand it compels family members in the firm to respect each other and on the other hand is promoting loyalty and commitment to the firm. By having such kind of relationship, monitoring and formal agreements are excluded, which will reduces the costs. Besides cost reduction, also reduces information asymmetry by increasing communication and cooperation between family members. Further, altruism encourage the organizational culture in the family firm (Van den Berghe & Carchon, 2003). This will be explained in the next chapter 2.3.3.
Altruism does also have a negative impact on the family business. First, altruism reduces the ability of the owner (parent) to monitor his agents (children) due to biases of the owner's perception about the agents. Parents are too generous to their children, which will cause the children to be dependable on their parents. Secondly, the right skills for on the right place. This will not be the case in the family business, because the family agents are chosen based on their family status and not necessarily on their primary skills. Besides, Karra et al. (2006) mentioned that reducing agency costs is more in the early stage of the family business, but when the family business gets mature the agency costs increase. This is really an interesting founding, because the agency costs with respect to family and blood related, is characterized by moral hazard. The agency costs derived from non-blood related members of the firm is characterized by adverse selection.
2.3.3 Organizational culture
An organizational culture incorporates factors like beliefs, common values and norms within the business. Culture is very important factor for dealing with information issues within the company. Culture can be seen as a strong mechanism that can replace monitoring tools against asymmetric information. Besides, organizational culture can also be seen as an important resource that a family business possess and can be utilized to gain competitive advantage (Zahra et al., 2004) and according to Cabrera-Suárez et al. (2001) competitive advantage is what makes a family business different from non-family business.
The Resource based view (RBV) can made an association between dimensions of organizational culture in family business versus non-family business. Wernerfelt (1984) mentioned that using the strategic resources correctly it can provide the firm in the long run a competitive advantage over other firms. According to Hofstede, Neuijen, Ohayv & Sanders (1990) culture can be divided in many dimensions and it is important to define the proper dimensions at which culture should be assessed.
Zahra et al. (2004) mentioned four dimensions of organizational culture of the family business. The four dimensions are: 1) Individual versus group orientation, 2) Internal versus external cultural orientation, 3) Centralization versus decentralization and 4) Short versus long-term time orientation. These 4 dimensions will be used to explain how culture works in a family firm and how this is associated with entrepreneurship. Further, the advantage of these dimensions is to encourage the business to be more proactive, innovative and risk oriented (Miller, 1983, Zahra et al., 2000).
Individual versus Group orientation
The individual versus group orientation will influence innovation and risk taking (Herbig, 1994). The RBV sees this as a potential source of sustainable competitive advantage (Barney, 1986; 1991). The differences between these orientation is that group orientation in the family business rewards individuals when they start sharing knowledge, cooperate and collaborate (DeLong & Fahey, 2000). The culture is incorporated in the firm and the basis for this teamwork is trust. The idea behind this is that only through joint effort the best solutions can be identified and tested (Burgelman, 1983). Family business are more associated with group orientation, because of the kinship relationships bind members of the firm. The individual orientation are cultures, opportunities and rewards, which are the results from the individuals. This may discourage the family members from collaborating and sharing knowledge or information (Lumpkin & Dess, 1996). According to Zahra et al. (2004) a balance between the two has the most advantages for a firm.
Internal versus External cultural orientation
This orientation refers to the family business relation to the external environment. The internal orientation refers to the cultural orientation, the development and the expertise that resides within the firm's boundaries (Detert et al., 2000). The internal orientation does not evolve and this will stifles entrepreneurship. An inward orientation will stimulate the family business innovation and practices that are introduced by its rivals. The external orientation focused on signals from the external environment and studying market trends that provides important opportunities for the family business. Hereby, customers, competitors, suppliers and markets can be seen as an important sources of information. These information is beneficial to resolve the organizational problems and is able to develop new innovative solutions for the family business.
Centralization versus Decentralization
This dimension refers to coordination and control. According to this dimension, is to form a continuum ranging from total decentralization to complete centralization of decision making authority (Zahra et al., 2004).The meaning of centralization is that the power is in the hands of a few selected people and this may result the stifle of the entrepreneurship by inducing rigidity within family firm's structure. Besides, it also limits the exchange of ideas between the employees. The decentralization encourage the employees to take initiative and propose new entrepreneurial ideas (Miller, 1983; Pinchot, 1985).
Short versus Long-term time orientation
This last dimension is about family business orientation toward time (Deal & Kennedy, 1983). Some family businesses are long-term orientated, although the long-term creating activities have a low probability of success, but are important for new business creation and revenue generation (Zahra et al., 2004). And some family businesses are short-term oriented , these businesses only supporting those projects with an immediate high potential payback. This is really concerning for the family members, because the business owners are risking their wealth or putting the future of their firms at risk. The family members might worry about their loss of their inheritance, pressuring managers and employees to downplay long-term value creating activities (Zahra et al., 2004).
Zahra et al. (2004) came to the conclusion that the association between the 4 cultural dimensions and entrepreneurship is stronger for family firms than for non-family firms. However, Heck (2004) commented at the article of Zahra et al. (2004) that further research needs to be done concerning the culture and the influence of the family culture on the business culture. This is because that organizational culture has many "layers" or dimensions (Hofstede et al., 1990), that it is easy to see how important the influence of culture is on family firms. Overall, the organization has a great impact on agency costs (Van den Berghe & Carchon, 2003).
Despite the importance of the family firm in the economy, there is still no universally accepted definition. For this research the definition of Flören (1998) has been used. The three-circle model provide a better overview and an interpretation of the firm can be achieved. The agency costs in family business are minimal (Jensen & Meckling, 1976), because there is no separation of the ownership and control, however nowadays the family business incur higher agency costs due to altruism. The family business has a special bond and each member of the family business has different contract. Because of reducing internal monitoring and an increase moral hazard, results the children will be dependent on their parents. Further, culture of the family firm can be seen as a positive and a competitive advantage what makes the family business different from non-family business ( Zahra et al., 2004 and Cabrera-Suárez et al., 2001)
3 Strategic decision making
This chapter starts with the definition of strategic decision making, which also explains the types of the decision making and the decision making model (3.1). Second, the decision making in the family business, hereby the decision making of the first generation and the second generation and the typology (3.2). Third, the decision making quality with the distinction between relational governance and contractual governance (3.3). Fourth, the typology of the decision making (3.4). Fifth, chapter 2 and chapter 3 will be combined and there will be an explanation about the relation between these two chapters (3.5). At the end of this chapter there will be a conclusion (3.6).
3.1 Definition of Strategic decision making
In every large organizations and each managers needs to make a strategic decisions. So also in the family business the entrepreneur needs to make a strategic decision. These decisions are important for the future existence of the family business (e.g. succession). There are many explanation about the definition of strategic decision making. Schoemaker (1993, p. 107) defined as: "Intentional choices or programmed responses about issues that materially affect the survival prospects, wellbeing and nature of the organization". On top of this, is that more decisions are becoming more complex and expensive (Janney and Dess, 2004). This refers that decisions are complex in nature. Harris (in Ivanova and Gibcus, 2003) mentioned that decision making: "Most decisions are made by moving back and forward between the set of criteria (the characteristics that the final choice has to meet) and the identification of alternatives (the possible outcomes to choose from). The available alternatives influence the criteria applies to them, and similarly the criteria influence the alternatives to be considered" (in Ivanova and Gibcus, 2003, p 26). From this definition there will be according to George & Jones (1999) and Ivancevich & Matteson (1999) two types of decision makers, namely, programmed and non-programmed decision making. The differences between these decisions is that programmed decision making can be seen as automatic. This decision making can recognize and identify problems or situations, which actions of decisions can be made quickly. This is because experts recognize the problems or situations from the previous situation or pattern (Colquit, LePine & Wesson, 2010). However, when new situation occurs, and there is no previous experience and the situation is complex, the programmed decision making cannot be used. The non-programmed decision making will be utilized. Generally, there is no single best way to make a decision. The purpose of the decision makers is to match the best strategy or approach to the right situation. The best approach is the one that fits the circumstances (Hoy & Miskel, 1991). Eisenhardt and Zbaracki (1992) sees the strategic decision making as the outcome of the politics. This means that the decisions that are made are containing actors with conflicting goals and individuals that tend to form coalitions. In the decision making, power plays an important role, because with power people can tell other to get things what they want. To find the best approach that fits the circumstance is to use the right decision makings model. There are many models that explains the decision making. For this research there will be two models explained namely, Classical Rational model and The Garbage Can model.
Classical Rational model
This model is designed by Mintzberg (1976). This model explains the decision process that exists of three phases, namely:
1. The identification phase:
This phase is made up of two processes:
Identify the problem: Managers have to be alert of problems or opportunities that will occurs in the environment or in the business
Diagnose the problem: Managers should diagnose the collected information that is being collected to understand the situation
2. The development phase:
This phase is made up of two processes:
Managers have to search (in the development stage) for the alternate solutions in the situation that occurs
Managers have to design potential solutions or modify the existing solutions to fit the new circumstances.
3. The selection phase:
This phase is made up of three processes:
Screen the alternatives
The alternative solutions will be analyzed and judged.
Final decisions is which of the alternative solutions to pursue
The reason why to choose the classical rational model is that this model explains the best alternatives and decisions. The minus of this model is when information is needed, but not available, this will not optimize the right decision. However, this classical rational model is the ideal model under ideal circumstances, but there still need other ways to make the right decisions in less ideal circumstances (Tarter & Hoy, 1998).
The Garbage Can model
Eisenhardt and Zbaracki (1992) introduced the garbage can model. This model is the irrational model of the decision making. This model describes that creative people make a decision and then create a theory or explanation to explain their decision; this means that people need to act before thinking (Tarter & Hoy, 1998). In contrary of the classical rational model is that the organizations needs to deal with high amount of uncertainty. "The garbage can model describes the accidental or random confluence of four streams:
1. Choice opportunities-occasions call for a decision;
2. Solutions-answers looking for problems;
3. Participants-people with busy schedules who might pay attention and
4. Problems-concerns of people within an outside the organization
(Eisenhardt and Zbaracki, 1992, p.28)".
The problem in this model is that it will be discussed, but the discussion leads to no solution. Till the problem and the solution present themselves at the same time, than a decision can be made.
Note that there is a link between the types of decision making and the decision making models. The programmed decision making can be linked with the classical rational model, because as well as in the programmed decision making and in the classical rational model, the situation must be ideal and recognized with the right available information. If the situation is less ideal than it refers to the link between the non-programmed decision making and the garbage can model, because new situation occurs and there is a high amount of uncertainty.
The definition of decision making is clarified, but how is the decision making in the family business? This will be explained in the following chapter 3.2.
3.2 Strategic decision making in family business
Aronoff and Astrachan (1996) wrote an article about decision making of the family business. From this article 34% of the founders (owner) made the decision themselves, 48% searched for a consensus and 6% discussed the issue and took a vote. However, family firms tend to be less rational in their decision making (Brouthers, Andriessen, and Nicolaes, 1998). Brouthers, Andriessen and Nicolaes (1998) give three reasons why strategic decision making in family firms differ from non-family firms:
1. Family business are more in a smaller seize, no access to extensive information and financial independence compared to the non-family business(McCann et al., 2001).
2. Family business are operating in an uncertain environment because family business has to distinguish themselves by being innovative and aggressive in their market. Besides, family business do not have routines in the business, while the non-family business does. The family business tend to make decisions on the basis of biases and heuristics. The non-family business makes decision on the basis of opportunism. When the environment is dynamic and complex it is believed that the strategic decision for the non-family business is lower.
3. The perception of seeing risk differs from family business and the non-family business (Busenitz et al., 1997). Family business sees risk different and more overconfident than non-family business.
According to Smith et al. (1988) entrepreneurs from family business are less comprehensive in their decision behavior than mangers from non-family business. Comprehensive is defined as individuals that follows a formal rational decision process. If the decision comprehensiveness declines, so does the organizational performance among family business and non-family business. Carney (2005) agreed with the reasons that has been given by Brouthers, Andriessen and Nicolaes (1998). Moreover, Carney likes to add that the decision making of the family business is not applicable for the non-family business. The reason is that family business use their own capital, which make the family business able to make opportunistic investments without accountability to outsiders. This means that family business have control over their investments. Furthermore, Poza (2007) summarize what has been said about decision making in family business by Smith et al. (1988), Brouthers, Andriessen and Nicolaes (1998) and Carney (2005) by "Family businesses may be able to make decisions more quickly and therefore take advantage of opportunities that other may miss. Quick decision making is critical in business and tight knit families in business move fast" (p.15).
3.2.1 First generation founder (entrepreneur) decision making
The definition of decision making and the decision making in the family business is clarified. Now it is time to look deeper in the decision making of the family business. Besides, it is important to understand what the first generation thinks about the decision making compare to the second generation (chapter 3.2.2).
To understand the nature of family business decision-making better, the differences between the generations should be explored. An entrepreneur is often a dominant personality who makes most of the decisions (Feltham et al., 2005; McCann, 2007). This leaves succeeding generations unprepared for decision-making in the absence of the founder (Dyer, 1986). Heavy dependence on a single entrepreneurial founder underscores the centralized decision-making process common in the majority of first-generation firms. In a study of 765 family firm executives, Feltham et al. (2005) found that the organization was either dependent or very dependent upon a single decision-maker in 75% of the firms surveyed. The decision-maker made all the decisions in 51% of the cases in the area of production and delivery, 87% of the decisions in finance and accounting, 65% in sales and promotion, 62% in purchasing, and 57% of all human resource decisions. Sixty-five percent of the respondents made all the decisions in three of the five areas, and a staggering 31% made all decisions in all five areas (p. 4).
Such dependence on the entrepreneurial founder was consistent with Dyer's research (1986, 1988), which showed decision-making in first-generation firms to be more centralized than for successive generations. Cater (2006) described the need for successive generations to â€•step out of the shadowâ€- of the founder (p. 1). The issues of â€•Founder Centralityâ€- (Kelly et al., 2000, p. 22), â€•The Shadow of the Founderâ€- (Cater, 2006, p. 1), and â€•Generational Shadowâ€- (Davis & Harviston (1991, p. 311) have been well studied. However, these concepts have positive as well as negative aspects associated with them. 34
Many entrepreneurs are controlling (Shane, 2008) and feel that their business is an extension of themselves-â€•a medium for personal gratification and achievement above allâ€--and that their creation is both their â€•baby and their mistress at the same timeâ€- (Levinson, 1971, p. 91). It is easy to understand why many entrepreneurial founders do not want to delegate decision-making authority or control to others. Voeller (2004) discussed the difficulty family business founders have in teaching decision-making skills to upcoming generations due to their entrepreneurial tendency to use intuition for many of their decisions. Entrepreneurs often make decisions based on heuristics (Busenitz & Barney, 1997), intuition, gut feel (Agor, 1989; Simon, 1987), hunches (Harris & Ogbonna, 2005), and satisficing (March, 1994; Simon, 1986). Kakkonen (2005) explored the use of intuition among family business entrepreneurs and reported its use in situations that required quick decision-making. Breen (1990) studied intuitive decision-making in American and Chinese family businesses and found that both groups had a preference to utilize intuition.
3.2.2 Second-generation decision making
3.3 Decision making quality
3.3.1 Relational Governance and Decision making quality
3.3.2 Contractual Governance and Decision making quality
3.4 Typology of the decision making
3.5 Family business and Strategic decision making process