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For ‘family business’, there is a long history of world-wide family business and the first well defined family firm appeared in manufacturing in the United States between the 1870s and the 1890s and was stimulated by ‘the second industrial revolution’ (Chandeler and Hikino, 1997). The topics relate to family businesses are hot research topics for researchers and scholars focusing on. There were numbers of past literatures of family business and mainly focused on the western family firms and most of them were done by the western researchers and scholars. In this chapter, the secondary resources of related research literatures of family business were collected by analyzing some journal articles such as ‘Family Business Review’, which could be download and reviewed through searching engine Google Scholars, and some published text books were also used as theory support. As the topic of research is about Chinese family business, there are some Chinese text books and journal articles such as ‘Asia Pacific Journal of Management’ also used for collecting information.
Typical character of family business: family involvement in ownership, management and performance
The definition of family business were defined in different perspectives by different researchers and scholars, and generally most of them argued the family business is the integration of family and business, and the family business is the business with family involvement in the part of ownership and management (Handler, 1989). Inside family-owned businesses, family members are hired and playing different roles in the enterprises. There are number of researches attempted to understand whether if family involvement in ownership and in management could affect the performance of family businesses (Mazzola and Sciascia, 2008). The presence of the family in the ownership and management of the firm can either be one of the advantages or disadvantages for company competitiveness (Moores and Barrett, 2003). According to the edition of Ram and Holliday’s ‘Keep It in the Family’ by Chittenden and Robertson (1991), the intensive use of familial labour resources means the management of the enterprises in the family context. And the use of this kind of labour resources in the key positions of the businesses can serve to constrain management, where the managing power is highly controlled by the family. In contrast, once the family owed the highly controlled central management power, the family labour resources could also help the business achieve benefit by using ‘flexible’ familial ties, where all the relationships between family members and friends or the relates could provide variety resources, not only the labor resources, but also the resources of technology, financial capital, information.
On the other hand, it also imposed requirements which contradicted economic diffusion, when the family involved in the performance of the business, empirical studies such as the one from Morck et al., (2006) conclude that the result could be bad due to reasons as the family’s wish for capital preservation, firmness of long-term satisfactions, and risk aversion. According to authors like Schulze et al (2003), they argued that once the ownership of the business is concentrated in the hands of a single family or a number of family members, there will potentially have a negative impact on profit of the business with inefficiencies, that the owner-managers’ desire for family harmony and personal loyalty, coupled with ineffective control authorities create inefficiencies hurt the management of the business.
With empirical researches, Sciascia and Mazzola (2008) found there was negative relationship between family involvement in management and performances after running regression analyses on data drawn from 620 family firms in Italy. Once the family involvement in management is high, they suggested the family business owners should pay more attention on the nature of relationship between the family and the business, whether the working ability and the position in management is matched or not. When the family and business combined together, this form often leads to deep contradictions, and consequently changes of business leadership, it would cause the risk to the firm’s survival (Rose, 1993). Sharma (2004) also argued that the success of the family business should be achieved depending on effective management on integration of family and business.
Overlapping circle models – useful tool for defining the family businesses as system entities
Discussions of the relationship between the family system and business system on the performance, strategy or growth of family business referenced the global adaptation of family business in China (Yeung, 2000), in strategy of financial decision makings or the business growth (Romano, et. al, 2000). From the past literature, the two or three overlapping circle models (figure 1a and b) were used for understanding and analyzing the family business as a distinct strategic entity (Hollander and Elman, 1988), and how the subsystems circles of family, manager and ownership contributes to the system. These models are ‘the models for picturing family business and business as interlinking systems that explain the competitive tension in strategy making’ (Habbershon, Williams and MacMillan, 2003).
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Figure 1: Overlapping circles models.
Moreover, by using the overlapping circles models as organizational behavior models, complex individual and organizational phenomena associated with the overlapping subsystems was clearly identified with the stakeholder perspectives, roles, and responsibilities (Habbershon, Williams and MacMillan, 2003). These overlapping circle models helped the professionals from all disciplines, for example, business consultants, family counselors and also the business owners have clear image of the family business and think more about themselves (Gersick, et. al, 1997).
Characteristics of typical Chinese management model in Chinese family businesses
In Chinese business, there were common characteristics of management model. Chinese family business is also the business managed with typical Chinese management model, and it shared the similar management model with family-centered management. According to Jean Lee (1996), there are four main characteristics of Chinese management that are distinctive from Western management which reflect the Chinese culture characteristics and are persistent in most of the Chinese organizations: human-centeredness, family-centeredness, centralization of power, and small size. These characters are described as following:
Human-Centeredness. In Chinese management, human is the key operators in running businesses, stated in the centre position and played very important roles. The researcher Sheng (1979) described that ‘For Chinese, the business relationship is always subsumed under the moralistic notion of friendship, loyalty, and trust worthiness.’ Doing business is about building the trust and loyalty between different organizations and humans. Humans are the center of concern, and when making the management decisions, all the consideration about the trading people are important, and the effective using of social network of human relationship make contributions to the business decision makings. ‘Any management decisions have to take emotion into considerations’ (Lee, 1996).
Family-Centeredness. In Chinese culture, family is extraordinary and especially in Chinese organizations it ‘has exerted the most significant influence on the individual’s value system and role expectations’ (Lee, 1996, p64). Many Chinese organizations are family-run businesses, that family relationships are inevitably brought into the organizations and make the organizations running in the form of a family (Lee, 1996). Once the family is playing in key positions of business, it is about the ownerships and the management of the family members in family business, where family comes first and business come second.
Centralization of Power. It is about controlling business by using strong power on management. Lee (1996) argued that in Chinese organizations, the managing power is usually controlled by two distinct levels: the power core controlled by the business owner or a small number of people, usually family members; and the second level formed by the employees, who are family relatives, or totally outsiders. In Chinese family business, the power of governance and management is usually centralized by the family members, especially on the management decision making. The key strategic decision making were normally a family affair conducted with family members and beyond the reach of non-family member. The head of family, usually also the top managers of the business has the final say in these decisions (Tsang, 2001). The internal system of coordination and control of family business is highly personal, and tight control is exerted on financial and production management by family members, Chinese trust family members more than outsiders. Extensive networking and relational contracting between family and non-family members are used when dealing with the external environment (Redding, 1990).
Small size. The size of the organization usually impact on the management of the Chinese organizations. Most of the Chinese organizations start up with small numbers of employees, small amount of capitals and few business experiences. This kind of small size provides the simple management for the business managers. And also could be a kind of advantages for small Chinese organizations. The primary advantage according to the small size is simple management. When comparing with large businesses, small business has less number of employees, which could save money for company developing and spend less operating costs. Following by the researches of Beaver (1984) and Jennings & Beaver (1993), small businesses could achieve the maximum goals in short term. By using the size advantage, this kind of business could make changes on their internal operations and performances quickly to avoid the big risks and make suitable adoptions frequently to fit the external environmental changes.
Trust and ‘sustaining cycle of trust’ model within family businesses
There were numbers of literature on trust on different disciplines, and based on a cross-disciplinary review, trust was defined as ‘a psychological state comprising the intention to accept vulnerability based upon positive expectation of the intentions or behavior of anther’ (Rousseau, et. al, 1998, p395). Trust is a kind of relationship usually between different people, and refers to a person’s belief that individuals engaged in exchanges will make honest efforts to uphold their commitments and usually relates with loyalty, and it depends on person’s willingness that decide to rely on others and keep this kind of relationship as long as they can (Rousseau, et.al, 1998). In family businesses, trust is centralized in the enterprises where a group of individuals are connected through family relationship such as bloody tie and marriage, and this kind of linkage could be the source of competitive advantage for the firms (Sundarmurthy, 2008) where it ‘often represents a fundamental basis for cooperation’ ( Steier, 2001, p.354).
As trust is a kind of interpersonal trust, it could be difficult to sustain even when it was achieved. It would be disrupted by both internal and external factors, and the accrued changes from either side of this relationship, once the commitment broke the trust is ended. In trying to understand why trust remains such an intangible and transient resource within many organizations, researchers have focused attention on identifying some barrier of trust that impedes the development of trust (Karmer, 1999), which include the distrust and suspicion. For distrust, it has been defined by Grovier (1994) that it is a lack of confidence in the other, Distrust has been
defined as a .lack of confidence in the other, a concern that the other may act
so as to harm one, that he does not care about one.s welfare or intends to act
harmfully, or is hostile. (Grovier 1994, p. 240). Suspicion has been viewed as
one of the central cognitive components of distrust (Deustch 1958) and has
been characterized as a psychological state in which perceivers .actively entertain
multiple, possibly rival, hypotheses about the motives or genuineness
of a person.s behavior. (Fein & Hilton 1994, p. 168).
Theoretically, in order to sustain the trust relations, five corresponding virtues: loyalty, filial piety, faithfulness, care, and sincerity should be practiced carefully. According to research Sundarmurthy(2008), there is a ‘sustaining cycle of trust’ model (Figure 2) clearly shows the whole trust system in different stages of the family firms based on the integration of trust literature and family business literature, which include three aspects – interpersonal trust in early stage, competence trust in middle stage and systems trust in late stage. Different researchers and scholars gave different basis premises of the model, for example, Child (1998) argued that ‘the trust cycle is regenerative and the family firm will continue to revisit each of the three aspects of trust after the initial cycle’ (Sundaramurthy, 2008, p92) and the three aspects are connected to each other.
Figure 2: Sustaining Cycle of Trust
(1)Early stage: interpersonal trust and family business – Argued by some researchers and scholars such as Carney (2005), the interpersonal trust among the members of the family is based on the personal commonality of experiences, history, kinship, and familiarity, which is the relationship of trust of oneself. In family business, the trust level is usually ‘high’ in the early stage, as the family is a common identifying factor, the family members usually make contributions of capital and other resources to the firms and willing to make commotion in the name of the general family welfare (Gersick et l, 1997). On the other hand, when the trust in early stage of the family business is in depth high level, some possible risks about ‘blind’ trust will occur and will hinder the growth of the firms.
(2)Middle stage: competence trust and outside influences in family business – Competence trust is the second form of trust, which is not only the form developed form interpersonal trust but also to complement it. It is a belief that the working members with the firms are not only willing to taking the job but capable of performing the job effectively (Mishra, 1996). In the family businesses, those members who are not actively involved in the business or not the members of the family seek to have confidence and are capable of running the business system and adapting the keep changed environmental needs. And this kind of confidence can be fostered when the family business system is open to outside influences. In the middle stage of family business, the developing of the business requires the changes on the management system, and hiring outsiders or the non-family members can offer a family business access to external resources such as information experiences and wider networks (Aronoff and Word, 1996). For example, in family business, the adoption of professional managers is the way of hiring outsiders on management system. The outsiders can be vital in dealing with the costs of role blurring on family and business in integrated family business, and could help the family business owners on making decisions (Ward, 2004), which help the family business grow and develop.
(3)Late stage: system trust and transparent polices in family business – System trust is the third dimension of trust and is vital for the sustaining cycle of trust in a family business, when the firm is sustaining in late stage (Luhmann, 1988). In this form of trust, differentiating with interpersonal trust, it is impersonal and connects to the trust on the systems and processes, and it can contribute ‘as a source of trust for a wide network of individuals, introduce some potential resources such as active family members, and some outsiders like potential partners, non-family employees and suppliers (Sundaramurthy, 2008). In family business, the transparent rules can clarify the roles and responsibilities of the family firm actors enhancing the trust in the working of the family business system. And conducting clear policies in family business enables the family members discover the importance to them whether as a family or an individual. Especially in successful family business, there are transparent compensation polices established offer opportunities to build system trust and help the businesses manage the expectations of both current and future generations, such as internal employees and external shareholders (Harvey and Evans, 1994).
Transition from founder management to professional management in family business
In the governance view of firms that operated with founder management, the researchers Gedajlovic et al argued the authority in this kind of firm is largely conditioned by the coupling of ownership and it tends to be centralized, control of the firm is vested in the hands of the founder. In family business, the founders are usually a number of family members or a family, and usually operated as the owner-managers in family business then the management is usually centralized. In founder management firms, ‘the founders are individuals who demonstrate the alertness, character and temperament needed to exploit a discovered opportunity’ (Kiezner, 1985), and also the are usually the main resources of the firm’s initial equity capital in start-up stage, typically make contributions of providing labour and technical expertise, and hold the decision rights afforded top managers (Gedajlovic, et al., 2004), therefore, the founder has largely unchallenged discretion to share(or not share) authority with family members and trusted associations or corporation with the family members, and directly affect the decision making of firms. This kind of tight relationship between the founders and firms make the firms highly prone to failure (Gedajlovic, et al., 2004) when the firms were over relied on the resources provided by the founders. When these resources are no longer able to support the firms to find more opportunities and hit a juncture in their evolutions, the firms need to adopt outside resources to cross the ‘threshold’ to survive, where the firms are transiting to professional management firms (Daily and Dalton, 1992). The researchers Zhang and Ma (2009) defined the professionalization in family business as it ‘refers to the adoption of non-kin (outside) managers to fill management positions, especially the chief executive officer’s potion. The adoption of outside managers signifies the separation of ownership and control, or at least dilution of family control in the actual management of the business.’
On the other hand, when the founder management firms are crossing the threshold to becoming a professional management firm is possible, the transition process is difficult because of the legacy of founder management. In family business, the transforming to professional management means the change of business management team by adopting outside non-family managers, and introduces a new set of values and culture of the new professional managers that often incompatibles with the firm’s initial founding values and culture, which would possibly diluted personalization and idiosyncratic nature of founder management of the family business. Moreover, transformation will possibly compromise the potential benefits of the founder-manager and the founder’s opportunity costs may remain uncompensated, this kind of unbalanced change would make the founders resist transformation and the battle between the founders and new owners-professional managers would affect the transition (Gedajlovic, et al., 2004).
Small business performance
There is no official definitions of the small business, and the related definitions of small businesses were clued since the government departments and researchers have a wide variety of definitions depending on the kind of economic activities have been studied (Cross, 1983; Curran, 1986). According to the researchers Curran and Blackburm (1994), small business could be indentified in the economic perspectives in two different contexts: qualitative definitions, which identified the behaviors, captures by distinctive from large firms; and quantitative definition, which identify the small firms with numerical factors, such as the number of employees and turnover profits. For small family business, it could be defined in the integration term of literature of small business and family business, which contains both major characteristics of small businesses and family businesses.
In small family business, the management usually controlled by one head manager from the family or the business owner, this kind of hierarchical control system make the management system centralized controlled by the family. As described by Jennings and Beaver (1997), the management process in small businesses could be characterized by nature of managerial activities. Once the business is during the developing period, the management process is running following the personality set and experiences of the key players (entrepreneur, business owner, and/or owner -manager). In small family businesses, the three key players usually combined as one player, which could run the whole managing process separately.
There were a huge number of past literatures of family businesses by different researchers and scholars, most of the researches were done with western views and only few discussed about the Chinese family businesses. Relating with the social reality and personal analytics of the researchers and scholars, the theoretical analyzing of family business is dynamic and need be more explored later with the changes of social environment. There were very few researches about small family business in China in past decades, and in the following chapter writer is going to using proper research methodology to do the research and then discuss some findings about small family businesses in mainland China in the following chapters.
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