Entrepreneurship and Small Business Management: Family Enterprise Essay
Entrepreneurship and Small Business Management: Family Enterprise
Entrepreneurship in most of the small businesses often tends to become family enterprises. This mainly occurs when children of the founder join hands and start working either full-time or part time for the business. Many of the family owned business are referred to as entrepreneurship simply because of the fact that owners tend to portray professionalism in their work. Others are concerned with nepotism of which may affect perception of customers. Family enterprises have various advantages compared to non-family owned business. Moreover, they also tend to have a number of limitations. This essay provides detailed information about the unique nature, characteristics and limitations of family enterprises. The essay will also compare and discuss various differences between family enterprises and non-family owned enterprises.
Unique Nature of Family Enterprises
One of the unique natures of family enterprises is ownership control. According to Poza & Daugherty (2014, p.7), family businesses are formed by two or more members of a family. This kind of business may also be owned by a partnership of families. Family members participate fully in running of the enterprise. On this case, participation means that family members work as the management team, where they support continuity of the business. Ownership control also means that family members have the rights and responsibilities of voting shares. Members also have the right to govern the business according to their wishes so far as they comply with the set laws and standards. In most cases, owners dream of making sure that the enterprise remains under the control of family members. This simply means that continuity of the business moves from one generation to the other (Poza & Daugherty, 2014, p.10).
The other unique nature of family business is employment. Family enterprises exist with a primary goal of benefiting family members. Employment is based on birthright and the willingness of a family member to join the enterprise. Even though this kind of enterprises may employ non-family members to run the business especially in top management, secrecy of various issues is paramount within the family members. In most cases, all the family individuals working in the enterprise are paid equally or nearly equal amounts of salary (Berry, 2002). In cases where salary is paid equal to all employees, issues such as responsibility and overall merit are not addressed. However, there are some family enterprises that pay their employees depending on responsibility and performance. Most of these businesses do not pay employees depending on the hierarchy they hold in the family.
Family enterprises are also unique in the sense that members are always loyal to the principles set by those who developed the business. Even after a generation takes responsibility of the business from another, they always maintain the expected loyalty. Moreover, even when the founder of the business is not alive and does not participate actively running of the business, there always remains a sense of respect for him/her. This kind of loyalty tends to create a sense of togetherness and make a strong relationship between family members. Walsh (2004) states that there are some business secrets that contributes in keeping the family together. In order to succeed in running a family business, the members must be in a position of managing their relationships in an effective manner. This means that any disagreements should be solved before dealing with issues that relate to the business itself.
Characteristics of Family Businesses
One of the characteristics is that family businesses are based on family values. This means that in order for the business to function accordingly, the values must be emphasized. Example of these values includes fairness, mutual trust and respect among many others. More importantly, the businesses must up-hold conflict management and commitment in order to have a bright future. Commitment in this case offers members an opportunity to enhance a strong working spirit without undue assertiveness.
The other characteristic of family enterprises is natural inclination in order to make sure that the business continues to benefit family members. As noted in the above information, family business is designed in such a way that one generation takes control in terms of management after the other. Ballell (2009, p. 65) defines a family enterprise as a business that is owned by one family or a combination of many families whereby the main aim is to ensure there is generation succession. Therefore, generation succession of which is a natural inclination tends to create the basis and foundation of a family business.
Family enterprises are based on long-term mutual relationships. In order for a family enterprise to operate, there must be personal relationships and rules are always informal. These kinds of businesses do not evaluate members’ achievement and in most cases, they assist in motivating those who seem to be dragging behind. Weak individuals in the business are loved and supported unconditionally. This always happens because the aim of a family business is to support other members of the same family so that they can succeed in their lives.
Limitations of Family Enterprises
Family enterprises tend to be limited in their operations. One of these limitations is poor stewardship. This means that family businesses are normally run by individuals who hold the view that the firms are their personal fiefs. This perception makes them believe they have the discretion to act or even resist from acting (Miller & Le Breton-Miller, 2006). Without any non-family person involved in counter-checking how operations run, these individuals can lead to risky decisions or even stagnant strategic situations. Where such cases occur, the businesses end-up incurring heavy loses of which is a major limitation to future progression.
The other major limitation is poor de facto agents of which means that some members of the family who enact certain activities for the business may be incompetent. The Owner-CEO Control perception leads some family members to think that they can do everything they want so- long as the business in their personal property. In large businesses, such CEO cannot be controlled by the directors and therefore, they end-up making decisions and enacting according to their free will of which may end-up costing the enterprises much. Miller & Le Breton-Miller (2006) indicates that such CEOs tend to abuse their powers by extracting money and other resources from the business and in some cases, other family members have little control of the CEO actions.
The other limitation of a family enterprise is agency lapses. Miller & Le Breton-Miller (2006) states that family owned businesses tend to experience difficulties especially in situations whereby a CEO have voting control. In such cases, the CEO may also end up behaving recklessly by influencing weird decisions or even exploiting minority members. Even in situations whereby the ownership is broad, family businesses experiences the challenges of disagreement between members. Not all situations where family members agree and in some cases, it becomes almost impossible for the CEO to balance power and act in a recommendable manner. That means family businesses that are run by agents can end-up incurring costly consequences in situations whereby the agent is beyond the effective control of the business.
Similarities between Family Enterprises and Non-Family Enterprises
One of the similarities between family enterprises and non-family enterprises is that their operations contribute to improvements of the economy. This means that even though they tend to make different profits because of various factors, both forms of business play a significant role in economic development of a region. The other main similarity is that strong working relationship is a must in order to have productive results. In a family enterprise, there is a more strong relationship because members are of the same blood (Smith, 2006). The issue of a strong working relationship is also emphasized in order for the business to progress effectively.
Apart from the above similarities, both of two forms of enterprises can be managed by individuals who do not have direct relationship with the business. This simply means that there are family enterprises that are managed by individuals who do not have any connection with the family. The same case applies with non-family enterprises where CEOs are recruited according to their experience and ability to enact the required responsibilities. The other major similarity is that both of the two businesses are guided by certain values and norms. There must be certain values that guide employees for a business to work accordingly.
Differences between Family Enterprises and Non-Family Enterprises
One of the differences between the two forms of enterprises is the fact there are fewer organizers in family businesses of which in most cases contribute risk aversion. The fact that family businesses are controlled by members of the family means that most of them are limited to skills. This leads to the business suffer much in terms of creativity and growth of which are key elements of growth.
In family businesses, employees who fail to perform are not retrenched but they are motivated and supported so that they can improve their performance. Such a move tends to take a long period especially in situations whereby the employee is not willing to make the necessary improvements. However, in non-family businesses, the situation is totally different whereby there are various individuals with different skills needed by the enterprise. The employees in non-family enterprises must comply with the set rules and regulation. Failure to do that, the management of the enterprise may take stiff disciplinary actions, which include retrenchment. The fact that there are many employees with various different skills means that the level of creativity and innovation is always high (Berman Brown & Coverley, 1999).
The other difference is that family enterprises tend to pay higher salaries compared to non-family enterprises. This is because they care much about satisfaction of their employees. Moreover, family businesses always care about the future of their employees because they are members of the same family. On this perspective, Miller & Le Breton-Miller, (2006) indicates that family businesses always pay their employees highly as a means of promoting them. However, this case is always different with non-family enterprises. Payment of salary is very competitive in this kind of businesses and employees are paid depending on their responsibilities.
Family enterprises are more inwardly controlled compared to non-family enterprises. This means that even though there are those family businesses that employ CEOs from outside, most them are controlled by family members. The founder of the business is normally the one who acts as CEO. In cases whereby this kind of CEO does not have enough of the required skills and experience, the business may end-up incurring huge losses. In non-family businesses, the top management have the mandate to control the business but their actions are looked upon carefully by other stakeholders and interested parties. Therefore, if wrong decisions are made, the top management is always questionable and subjected to provide answers for its actions. However, it is the opposite in family businesses whereby the top management may not be questioned because of the position members hold in the family.
The other difference is that family businesses do not seem to require a large network of socio-economics. Most of these businesses are independent and they also seem to have less intense interdependence with the environment-culture situation. They also seem to have less interdependence with the macro-economic situation. However, non-family enterprises tend to have a large socio-economic network and they are always connected with the outside world. This plays a significant role in promoting development and innovation in the businesses. The other difference is that there are plans for succession in family enterprises while there no such plans with non-family enterprises (Ballell 2009).
With respect to the above information, it is clear that family enterprises and those that are non-family tend to share some similarities while at the same time share some differences. There seems to be more differences in the operations of the two forms of enterprises. Family businesses are mostly concerned with the well-being of the family members and hence there are no stiff rules and regulations. However, non-family businesses is all about making profits and competing with the many competitors available. This means a high performance of employees is always a must in non-family enterprises while it is not the same case with family enterprises.
Wal-Mart Family Business
There are many successful family businesses that have moved to the global business environment of which makes many business personnel try to emulate their steps. This case study focuses on Wal-Mart, which is regarded as the most successful family business of all times. Wal-Mart is an American company and was founded in 1962 by Sam Walton (Ferrell, Fraedrich & Ferrell, 2011). The first store was opened in Rogers, Ark. According to Beck (2009), the company started as just a retail store but has managed to open many chains of departmental stores. The company also runs warehouse stores. After several years of successful business operations, the company moved to the global business environment and has since managed to open many stores worldwide.
According to Fortune Global 500 list, Wal-Mart holds the second position in the ranking of the world’s largest corporation. The company is also regarded as successful due to the fact that it is the world’s biggest private company in terms of providing employment opportunities. Wal-Mart is still a family business whereby after the death of its founders back in 1992, his wife and children took over the role of managing and heading the company. Even though some of the Walton’s children do not engage directly in the running and operating the family business, they still remain important shareholders.
Why the Waltons have been successful
As noted in the above information, family business mainly targets the concept of natural inclination of succession in order to ensure that the business always progresses.
According to Ferrell, Fraedrich & Ferrell, (2011), even after the death of Walton, his family has always ensured that they are in control of the business where they own about 50% ownership of the entire stock. Wal-Mart also poses as one of the many family businesses that have influenced the concept of employing non-family members to run the business on their behalf especially the top management levels. Only about six Walton family members sit at the board of governors of the company. All other officials are non-family members. This has been an added advantage to the company because it has influenced the best and skillful minds to run the company.
Beck (2009, p. 21) states that many family businesses have not been able to succeed in their operations due to the fact that some family members take-up leadership positions even when they are not prepared. Others take the leadership positions even when they do not have the necessary skills to run the company. Some of the available statistics according to Beck (2009, p. 21) indicates that 64% of the family owned businesses do not require family members to have experience of the recommended qualifications in order to secure employment in the business. However, this has not been the case with Waltons because they have been employing members who are not of their family to run and hold high positions within the company. There are even those members of the Walton family who have distanced themselves from direct operations of the company in order to give professionals their space to conduct their entitled obligations.
Challenges that Wal-Mart has been facing
The success story of Wal-Mart has not been a walk in the part to come to reality. The company has been experience some challenges of which many family businesses tend to experience. Fortunately the company has been able to deal and solve the challenges amicably.
One of the challenges has been misconduct of some officials in the top management of the company. For example, Ferrell et al., (2011) indicates that the in 2005, Thomas Coughlin resigned as the Vice-Chairman of the company simply because of issues that relate to unethical behaviors. He was one of the most influential individuals in the company and had a close relationship with the founder Sam Walton. He spent most of his time with the founder especially when opening the Sam’s clubs and therefore deemed to be one of the potential CEO. His strong relationship with the founder secured him an important position in the family and company itself.
However, Coughlin misused this opportunity and started embezzling the company’s funds. He was forced to resign from the company after being accused of misusing more than half a million American dollars and using authorized gift cards. It was also discovered later that Coughlin was used to make an authorized payments of which benefited him personally. Having had a strong relationship with Walton himself and now his children, Coughlin received all his allowance even after resigning and he also continued to serve as a board member for the company.
Such a challenge tends to face family businesses due to the fact that members are not easily retrenched even after making gross mistakes. Critics argue that if it were a non-family business, Coughlin would have been sacked and probably charged in a court of law for misusing the company’s funds. However, the fact that he had a strong bond with members of the family, he managed to retain his position as board member and participate actively in operations of the company.
Future of Wal-Mart
Despite the fact that the company has been facing minor leadership challenges, it has a bright future. Wal-Mart represents most of the successful family businesses that have managed to maintain a top position in the highly competitive market environment.
The fact that the company has managed to successfully employ skillful individuals especially in the top managerial positions is a clear indication of its future progression. However, family members ought to distance friendship from business activities in order to avoid mistakes such as those done by Coughlin from occurring again. The company also ought to deal with some of the challenges it faces such as employee complains so that it can maintain a positive image in public eyes. Other than that, Wal-Mart has a bright future and will always remain at the top of its competitors. If managed well and with the serious that business deserves, family enterprises can be successful in its operations the same way that Wal-Mart has been.
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University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 8 March 2016
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