Family Business Succession: Using the Resource-Based View and Clan Control as a New Perspective Noel D. Campbell North Georgia College & State University Dahlonega, GA 30597 [email protected] (706)867-1621 Kirk C. Heriot Francis Marion University ABSTRACT: This paper links the family business succession, resource-based view of firms, and “organizational clan” literatures. We develop a model in which family culture provides the intangible resources creating a family firm’s competitive advantage, specifically focusing on the tacit knowledge in family’s regarding the family’s goal congruence and shared paradigm. We develop a resource-based perspective of family business that generally relates family culture to family business succession, and to the family business’ financial performance. We use this model to discuss which family firms will tend to remain successful and under family control, and develop testable hypotheses and outline future empirical strategies. INTRODUCTION Family business succession remains among the most critical research questions facing family business researchers because the succession rate among family businesses has been consistently very low. While researchers have debated the reasons for such low succession rates, e.g. Handler (1992) and Sonnenfeld (1988), no clear consensus has emerged. We propose an alternative approach to the question of family business succession that synthesizes the resourcebased theory of the firm, family culture, plus the organizational development model emphasizing organizational clans. A “family business is a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (Chua and Chrisman, 1999, p. 28). They argue “a family business is distinguished from others, not on the basis of the components of family involvement, but by how these components are used to pursue the family’s vision. The vision provides the context, meaning, and reason for family involvement just as a strategy provides the context for the functional policy decisions of the firm” (Chua and Chrisman, 1999, p. 31). This study examines the differences between family-controlled firms that fail or are sold in the second or later generations with persistently successful family-controlled firms on the other hand. What causes some family firms to remain healthy and within the control of the founding family, while other family firms are sold or fail? We examine family owned firms within the framework of the resource-based theory of the firm, in which the search for rare, valuable, imperfectly immitable, non-substitutable resources (Barney, 1991) has led researchers to consider a variety of intangible resources. We discuss

family culture as an intangible resource, applying the intangible family cultural resource to the question of family business succession. That family culture may represent a valuable resource, we refer to Ouchi and others (Ouchi and Price, 1978, Ouchi, 1980, Wilkins and Ouchi, 1983), wherein clan structure may offer the efficient organization form by reducing transaction costs below the transaction costs of hierarchies or markets. Some family cultures generate the goal congruence and paradigmatic shared assumptions and values in the highly uncertain environment necessary for organizational clans to be efficient. When these family cultures are transferred to family firms, the family becomes an organizational clan. Furthermore, not all families’ cultures will generate the paradigms and goal congruence necessary to create organizational clans. We exploit identified differences between family cultures to explain why some family firms remain successful and within the founding family, yielding testable hypotheses. LITERATURE REVIEW Resource-Based Theory of the Firm The resource-based view of the firm argues that firms differ in their performance because of differentials in their resources. Resources that are valuable, unique, and cannot be imitated can be the basis for a sustainable competitive advantage (Barney, 1991). Firm resources can be tangible or intangible. However, intangible resources are able to produce a competitive advantage because they are often rare and socially complex, thereby making them difficult to imitate (Barney, 1991). Organizational culture is more directly considered in the research of Hall (1992, 1993). He argues that intangible resources “range from the intellectual property rights of patents, trademarks, copyright and registered design; through contracts; trade secrets; public knowledge such as scientific works; to the people dependent; or subjective resources of know-how; organizational culture; and the reputation of product and company” (Hall, 1992, p. 135). That cultural differentials constitute an intangible resource is particularly applicable to this research. Hall (1992) argues that culture applies to the entire organization. It entails “habits, attitudes, beliefs, and values, which permeate the individuals and groups which comprise the organization” (Hall, 1992, p. 136). We argue that the culture of a family business is derived from the culture of the controlling family, and may be the basis of a competitive advantage. Transaction Costs, Clan Culture, and Shirking Drawing on the transaction cost literature generally attributed to Coase (1937) and Williamson (1975), one can argue that an organizational form will arise and persist if that organizational form offers cost efficiencies relative to other organizational forms. Such cost efficiencies usually refer to implicit transactions costs. Under a particular set of transactional conditions, a particular organizational form will reduce transaction costs more than other forms. That organizational form is the efficient one under those circumstances. Ouchi (e.g. Ouchi, 1980; Ouchi and Price, 1978; Wilkins and Ouchi, 1983) identifies at least three basic organizational forms which arise as a consequence of different transactional circumstances: the market, the hierarchy/bureaucracy, and the “clan.” The clan may be the efficient organizational form when the transactional environment is characterized by high ambiguity (the transactions involve a unique product), high unpredictability (the transactions

evolve in an open-ended, imperfectly foreseeable future), and by notable production interdependence/complexity (the production process is such that is difficult to clearly assign a productivity share to a given individual). Organizational clans are formed and maintained through extended periods of extensive socialization. The clan’s socialization process produces a high degree of goal congruence and a shared paradigm. Goal congruence helps explain clan member’s motivations to cooperate and not shirk or pursue individual goals at odds with organizational well being, despite transactional conditions favorable to such behavior. “The resulting efficiency in terms of decisions that are in harmony with collective interests, made relatively quickly, and with a relatively high level of agreement” (Wilkins and Ouchi, 1983, 476) contribute to the “clan” form’s success in conditions of ambiguity, uncertainty, and interdependence. If socialized goal congruence helps explain clan members’ motivations to cooperate, the shared paradigm helps explain how clan members’ generally agree on the collective interest or direction. Wilkins and Ouchi (1983) discuss conditions suitable for the emergence and persistence of clan organizations. Clans will not be efficient relative to bureaucratic hierarchies or market relationships unless the transactional environment involves combinations of significant ambiguity, uncertainty, or complexity in production. They also state clans have a long and stable membership; a necessity, given the level of socialization that must occur for clans to be efficient. Stable membership is accompanied by a perceived lack of institutional alternatives and significant interaction among clan members. These factors help foster the long run perspective that life within the clan is preferable to life outside the clan, and to help develop collectively shared values, history, and referents. Furthermore, according to Wilkins and Ouchi (1983), clans often start with some form of technical advantage, which allows them to remain competitive during the long, costly socialization process. Family Business Succession A longer version of this paper is available from the authors which reviews additional family business succession literature. A summary of the literature on family business succession suggests that our understanding of family businesses is somewhat limited by a need to understand succession, and our understanding of succession is limited to an understanding of a number of behavioral or psychological factors. Much of the succession research focuses on behavioral issues surrounding the succession process, and such a perspective is an important part of our understanding of family firms. But, as Dyer and Handler (1994, p. 78) state, “we need more comprehensive models to show how various dynamics of succession relate to one another.” A more general model must be developed because succession is such a dynamic and complex process. DISCUSSION Much of resource-based theory necessarily revolves around intangible resources. Following Barney (1991), a firm possessing a rare, valuable, imperfectly immitable, non-substitutable resource may be at a considerable advantage relative to its competitors. Such a resource will be only imperfectly exchangeable because it is imperfectly immitable and non-substitutable. The discovery and exploitation of such a resource may yield a persistent advantage relative to competitors lacking the resource.

Adapting Hall (1992), we define family culture to be the habits, attitudes, beliefs, and values which permeate the individuals comprising the family. Family culture provides a convenient referent to the resource-based theory of the firm literature. Each family possesses an intangible resource in its family culture. Thus, family culture provides an imperfectly substitutable / imperfectly exchangeable resource around which the family can construct a business. Of key importance to our present argument, as family cultures differ from one another and from corporate culture, so may the competitive advantage conferred by this resource differ, thereby helping to explain which family firms remain viable and within family control. We may think of a variety of ways in which a particular family-controlled firm may possess advantages relative to non-family-controlled and other family-controlled competitors, not all of which are directly related to family culture. Organizing as a family firm may confer legal, illegal, or “extra-legal” tax and regulatory cost advantages. In situations of imperfect access to broader capital markets, family firms may allow for access to alternative capitalization or conservation of capital. Especially in cases of immigrant families, organizing as a family firm may allow family members to avoid linguistic and/or other broader, external cultural constraints. In this paper we focus on certain aspects of family culture as potentially conferring a competitive advantage. One’s family culture may resemble Ouchi’s clan culture. The socialization of family members may create goal congruence and a shared paradigm. Coupled with the non-market behavioral enforcement mechanisms available to families, this family culture may create the ability to align incentives and improve long-term decision making within the family. Should this tacit family culture be transferable to the family firm, it may provide an imperfectly exchangeable resource allowing for a persistent competitive advantage under those market conditions of uncertainty and complex production that allow clan organization to be efficient. Under those market conditions, those family cultures—transferred to family businesses--which most resemble clan organization will be the family businesses most like to succeed and remain under family control. Significantly, not every family culture will be as effective at creating goal congruence or a shared paradigm, nor will every family culture remain static through generations. As family cultures differ and as family cultures evolve through generations, so may the competitive advantage conferred by family culture differ, thus helping explain observed family business succession patterns. Family Culture and Reduced Shirking Family culture itself may confer advantages. We argue the successful family firm—one that remains competitive and under family control—will, under a large set of market circumstances, have a family culture that resembles Ouchi’s clan. More effective families will produce more persistently successful family business, wherein effectiveness relates to socialized goal congruence and creation of a shared paradigm. Families are likely to possess “clan” structures because of their long, stable membership, potent anti-shirking practices, and overlapping utility functions, whereby an individual’s well-being depends on the well-being of other family members. This creates in the family mechanisms to align incentives and produce decisions in harmony with collective interest that may be transferable to a family-controlled business. However, as these family cultural mechanisms are tacit, they may not be marketable to outsiders nor necessarily persistent through generations. Thus family culture provides a resource around which to organize a firm. If family culture is “clan culture,” and if family culture also effectively stops the shirking that may remain due to incomplete socialization, and if market conditions

favor clan culture as an organizational form, then this family culture forms the imperfectly exchangeable asset around which the family firm may build lasting competitive advantage. Significantly, families will differ in these abilities, and family culture itself will evolve over time. That is, the value of a family cultural resource will differ from family to family and may not persist over time. Therefore, we expect family firm survival rates (successful family succession) to differ accordingly. Conditions conducive to development of organizational clans are frequently present during the socialization of families. Among other conditions, Wilkins and Ouchi (1983) identify long history and stable membership, conditions describing most families’ lives. They identify an absence of perceived institutional alternatives to clan, which also resembles common family history, especially immigrant families. For most individuals, especially when young, few alternatives exist to family life, a situation which may be more pronounced among families of recent immigrants. Wilkins and Ouchi further argue clans are more likely to form and operate efficiently when there is substantial interaction among members. When family members enter the family business, they have been pre-socialized at home prior to bringing the culture into the business realm. They argue clans are likely to be formed when the organization enjoys an initially significant technical advantage, otherwise the organization may fail during the long and costly clan socialization process. It seems likely the family culture pre-exists the formation of the family business. Those families already possessing clan culture when they begin their family business will start from a position of lower operational costs upon start-up if the market conditions are favorable to clan organization, equivalent to a technical advantage. The authors state organizational clans will buy or adopt existing cultures, which is a convenient statement of one of this study’s main theses. The family transfers its home culture to a business culture. In circumstances where clan culture is efficient, those family businesses will remain under family control. Additionally, Wilkins and Ouchi state organizational clans frequently enjoy committed funding sources which do not require high short term returns. Though this has little immediate bearing on our “family as organizational clan” analogy, it dovetails nicely with our running emphasis on immigrant families, especially their difficulty in capitalizing a firm. Immigrant families may face substantial difficulties capitalizing their businesses through formal capital markets, and must resort to family-, ethnically-, or religious –based alternative financing. Such financing it will promote the development of clan organization. Two assumptions underlie the goal congruence that defines a clan: first, joint effort is the best way to achieve individual self-interest; and second, in the long run both honest and dishonest people will be discovered and dealt with accordingly. We argue that an organization with potent anti-shirking practices and with more effective ways of inducing individuals to identify self interest with collective interest will more rapidly and effectively produce and maintain this goal congruence. Families have powerful abilities to detect and reduce shirking within the family. Family members know when someone is shirking and are able to identify the shirker with precision. Furthermore, families are able to apply incredible leverage on the shirker to get him to amend his behavior. Such abilities will be difficult to exchange in the market because they are the product of long, familiar association and intense interpersonal interest. It also seems likely that families differ in their ability to detect such shirking and in the ability to limit it. This ability is likely intensified by the effects of family constraints by limited access to capital markets, linguistic or other cultural barriers. Therefore, those family may more intensively monitor and limit its shirking. The families that are more efficient at detecting and limiting shirking will be more successful should they transfer these skills from the home to a family-controlled business.

Some families display a remarkable ability to induce individuals to identify self-interest with the family’s perceived collective family interest. Families are often able to better align incentives than non-family organizations are able to align incentives vertically and horizontally in productive teams. This is because of the fondness, affection, love, sense of duty, and willingness to sacrifice often engendered by family. Thus, family and family business members may be more disposed to care about the family’s (business’) prosperity and less inclined to individualistic benefits than would be members of a production team hired in the market. Families will differ in these abilities. Again, the strength and effectiveness of these family bonds may be related to external capital market and social constraints facing the family. We must address whether clans are an efficient organizational form under the conditions facing many family firms. Ouchi has repeatedly stressed that clans may flourish in highly uncertain environments (e.g. Ouchi, 1980; Wilkins and Ouchi, 1983). A priori, we think that a large degree of uncertainty attends almost all small business start-ups, whether family controlled or not. Therefore, a priori, we think it is likely that the clan organizational form will be competitive for many family businesses. Testable Hypotheses Families whose tacit family cultures demonstrate greater degrees of intergenerational altruism and more efficient anti-shirking practices should be more effective at developing a shared paradigm and promoting goal congruence. Under uncertain market conditions, families who transfer their tacit “clan” family culture to the family business will find their family culture is a non-marketable resource which provides them with a competitive advantage. Therefore, those families possessing this valuable resource should be more likely to retain the family business within the founding family. Furthermore, families with further social or ethnic distance from the dominant social culture, and with reduced access to formal capital markets also should be more likely to retain the family business within the founding family. Repeatedly we have suggested that these family advantages are likely to be correlated with immigrant family status. Our model suggests that immigrant families form more family owned business than other families, ceteris paribus, and that these firms remain within control of the founding family longer. However, the theory also suggests that as immigrant families become assimilated into the dominant social culture through successive generations, the benefits the family confers relative to the wider market—the value of the family cultural resource--will diminish. Therefore, the failure / disposal-through-sale rate of immigrant-founded family firms should converge to the rate of “dominant social culture” family firms. Figure 1 summarizes our model and hypotheses. Figure 1 about here Of course, our list of potential advantages in organizing as a family firm is not exhaustive. Neither do we suggest that family-cultural traits tending towards family business success are in any way exclusive to immigrant families; however, focusing on immigrant families offers a convenient way of empirically approaching the construct.

REFERENCES Barney, J. B., (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99-120. Coase, R. H., (1937). The nature of the firm. Economica, new series, 4, 386-405. Chua, Jess H. and James J. Chrisman (1999). Defining the family business by behavior. Entrepreneurship: Theory & Practice, 23(4), 19 – 37. Dyer, Jr. W. G. and Wendy C. Handler (1994). Entrepreneurship and family business: Exploring the connections, 19(1), 71 – 83. Hall, R. (1992). The strategic analysis of intangible resources. Strategic Management Journal, 13(2), 135-144. Hall, R. (1993). A framework linking intangible resources and capabilities to sustainable competitive advantage, Strategic Management Journal, 14(8), 607-618. Handler, W. C. (1992). The succession experience of the next-generation. Family Business Review, 5(3), 283-307. Ouchi, W. G., (1980). Markets, bureaucracies, and clans. Administrative Science Quarterly, 25: 129-141 Ouchi, W. G. and Price, R., (1978). “Hierarchies, clans, and Theory Z: A new perspective on organizational development,” Organizational Dynamics, 21(4), 62-71. Sonnenfeld, J. (1988). The Hero’s Farewell. New York: Oxford University Press. Wilkins, A. L. and Ouchi, W. G., (1983). Efficient cultures: Exploring the relationship between culture and organizational performance,” Administrative Science Quarterly, 28: 468-481. Williamson, O. E. (1975). Markets and hierarchies: Analysis and anti-trust implications. New York: Free Press.

FIGURE 1: The Model and Derivative Hypotheses • Family culture is one of the rare, valuable, imperfectly immitable, non-substitutable resources around which the family firm forms and can exploit for competitive advantage. • Does family culture tend to lead to firm success as a family-controlled firm? Resources: Land, labor, capital, etc.

Family Culture as a resource

Family Firm

Does Family culture: 1). Promote goal congruence? 2). Provide a shared paradigm? NO

YES

Firm does not remain under family control

Firm remains in family control Correlates with: •

Immigrant Family

Therefore: • IF immigrant family firms initially remain within the family at a greater rate than “dominant social culture” family firms • And / Or IF Immigrant family firm succession rate converges to “dominant social culture” family firms succession rate • THEN this constitutes evidence supporting our theory.