398
Int. J. Entrepreneurial Venturing, Vol. 1, No. 4, 2010
Family business in family ownership portfolios
Marita Rautiainen and Timo Pihkala
Lahti School of Innovation, Lappeenranta
University of Technology, Saimaankatu 11,
FIN-15140 Lahti, Finland E-mail:
marita.rautiainen@lut.fi
E-mail: timo.pihkala@lut.fi
Markku Ikävalko*
School of Business,
Lappeenranta University of Technology,
P.O. Box 20 FIN-53851 Lappeenranta, Finland
E-mail: markku.ikavalko@lut.fi
*Corresponding author
Abstract: In this paper, we study family business portfolios and illustrate
ownership that connects family and business systems. Traditional family
business research has assumed the one family/one business concept to be the
main model. This study builds on the ideas of modern portfolio theory and
behavioural finance theory and suggests that the portfolio evaluation criteria of
risk and return coexist with the basic family-based evaluation criteria of
obligation, securing succession, or family unity. This longitudinal case study
and case analysis suggest that the family can be seen as a viable governor for
the business portfolio and that the family portfolio development can be
characterised by the complex set of portfolio evaluation criteria, including the
needs of the individual family members to the contingent needs of the distinct
businesses. The paper concludes with a redefined collection of portfolio
management criteria identified and suggestions for further research on the
subject.
Keywords: family members; family businesses; business portfolio.
Reference to this paper should be made as follows: Rautiainen, M., Pihkala, T.
and Ikävalko, M. (2010) ‘Family business in family ownership portfolios’, Int.
J. Entrepreneurial Venturing, Vol. 1, No. 4, pp.398–413.
Biographical notes: Marita Rautiainen is an Independent Portfolio
Entrepreneur and a Doctoral student at the Lappeenranta University of
Technology. Her research focuses on family businesses and especially the
portfolio management of business families.
Timo Pihkala is a Professor of Management and Organisation, specialising on
Entrepreneurship and Small Business Management at the Lappeenranta
University of Technology (LUT) School of Business and he is the Director of
the LUT Lahti School of Innovation. His research interests include
entrepreneurship, innovativeness, strategic management and inter-firm
networking.
Copyright © 2010 Inderscience Enterprises Ltd.
Family business in family ownership portfolios
399
Markku Ikävalko is a Senior Lecturer of Management and Organisation at the
Lappeenranta University of Technology (LUT) School of Business. He
specialises on entrepreneurship and small business management and he has
long experience in SME development and consultancy. His research interests
include SME management, entrepreneurship education, ownership issues and
family businesses.
1
Background
“Theory and practice indicate that in family-influenced firms, the interaction of
the family unit, the business entity and the individual family members create
unique systemic conditions and constituencies that impact the performance of
the family business social system.”
Habbershon et al. (2003)
Although there are several notions of enterprising families and of ownership as a
connecting element between the family system and the business system (e.g., Habbershon
et al., 2003; Pieter and Klein, 2007), there are surprisingly few empirical or theoretical
studies focusing on ownership as a phenomenon that actually connects families to
business activities (Nordqvist, 2005). The research on family businesses has traditionally
followed an oversimplified one company/one owner paradigm and the multifaceted and
dynamic reality remains unexplored. This tradition has most likely been the product of
entrepreneurship research that for a long time has had a similarly simplistic approach
(Kraus et al., 2010). Even if this basic assumption has its merits, the increasing
knowledge on serial entrepreneurship, portfolio entrepreneurship and pyramidal
ownership structures needs to be included in family business research (Rosa and Scott,
1999; Alsos and Carter, 2004; Almeida and Wolfenzon, 2006).
Family businesses have an important role in the economy and the concept of family
business offers a variety of challenges to researchers. There is no agreement on a single
definition of family business and as a result, separating family businesses from
non-family businesses is difficult (e.g., Astrachan et al., 2002). Westhead and Cowling
(1998) reviewed and analysed the definitions of family business used in previous research
and found the following five elements in family business definitions:
1
family involvement/perceived to be a family business
2
family ownership
3
family management
4
inter-generational ownership transition
5
multiple conditions.
In this paper, however, we build on a broad idea that a family business is a business
owned by a family (e.g., Tagiuri and Davis, 1996; Kets de Vries, 1996; Habbershon et al.,
2003) and simultaneously notice that a family consists of individual family members
who, through their social action, do business and construct the family together. A family
as a single undivided unit is a metaphor for describing this social group. If the family and
business composition obtain the majority of its character from the individual family
400
M. Rautiainen et al.
members and their relations, it is relevant to analyse family businesses while also taking
these individual aspects into account (cf. Habbershon et al., 2003; Thomas, 2002; Pieper
and Klein, 2007).
In this paper, we suggest that the phenomenon of family business development
contains both collective and individual reasoning and decisions concerning the control
and responsibilities over businesses. The purpose of this paper is to illustrate and analyse
the entrepreneurial and ownership processes carried out by a family and explore the
dynamics and interaction between the family and the family business. With an empirical
case study, we seek to highlight the process nature of family ownership and its meaning
for the management of family businesses.
We build on two fundamental assumptions concerning the business and the family
members. First, we assume that family businesses are possible even when the family and
family members own several companies and that these companies may differ from each
other very drastically. To be counted as family businesses, it may even be necessary to
apply different definitions of family business when it comes to these companies. For
example, one company is in a founding stage, while another has gone through multiple
successions. Secondly, we build on the idea that family members may have different
roles in these businesses. Family members form an important and flexible block of
human resources (Habbershon et al., 1999). They may have several simultaneous roles in
different companies and act e.g., as owners, investors, managers or employees
(Pieper and Klein, 2007). This family business role dilemma is also apparent in
theoretical considerations where agency theory and stewardship theory have gained
extensive interest. Despite the theoretical separation of ownership and control, an actual
family member may act simultaneously as a principal in the role of an owner, or as an
agent or as a steward in the role of manager.
In the theoretical part of the paper, we first focus on the research of family
businesses. Secondly, we bring in the phenomenon of portfolio entrepreneurship, which
has important implications for the understanding of family business dynamics. Finally,
we discuss the family as an owner and manager of a business portfolio. In the empirical
part of the paper, we present a qualitative case study from an ongoing research project
focusing on the relationship between family business and portfolio entrepreneurship. The
aim of our case is to explore and illustrate the logic of family business portfolio
management. The semi-structured interviews with the families form the main source of
information and other sources were applied to allow the framing of real event
descriptions to their relevant context.
2
Families in business
Academic interest in family business has only recently emerged. Family businesses have
an important role in the economy, but the concept of family business seems to offer a
wide variety of challenges to researchers. The basic idea of a family business being ‘a
business owned by a family’ both illustrates and conceals the essence of ‘familyness’ in
family firms. That is, there is the specific social group – the family – that collectively
owns the firm (Kets de Vries, 1996; Habbershon et al., 2003). According to Chua et al.
(1999), it seems generally accepted that the family’s involvement in the business makes
family business unique. The desire to understand and theoretically master the social
Family business in family ownership portfolios
401
dimension – the ‘familyness’ – of family business seems to underlie the increasing
interest in family firm ownership (Kets de Vries, 1996; Habbershon et al., 2003).
Family business research has specialised in studying the specific features and
processes of families being involved in business, such as succession and altruism and the
effects on the business system (Lubatkin et al., 2005; Pieper and Klein, 2007). As a
research setting, this implies that the family business peculiarities stem from the family;
affect the business and (most importantly) that ‘the company’ is a single unchangeable
metaphor for the stage where everything takes place. Therefore, it is likely that in many
cases, this setting oversimplifies both the character of the family as an owner and the
target of ownership as a complex set of businesses.
The confusion on the definition of family business has arisen from the difficulty of
using bare jurisdictional terms in the definition. If the legal ownership is inadequate to
illustrate the significance of the effect of ownership on the family business, some other
bases for definition are needed. More recent authors (e.g., Astrachan et al., 2002) have
suggested that instead of presenting an exact definition of a family business, it may be
more fruitful to create definitions for different levels of family businesses. Thus, family
business can be understood as a long continuum with different combinations of variables
such as the share of ownership, the number of family members participating in the daily
business, or the number of succession processes in the company.
One of the most important challenges within family businesses relates to the problem
of securing continuity. As such, family firms represent relatively stable systems as long
as the founder is present and in a leading role (Morris et al., 1997). This stability can be
questioned with only one exception – the succession process. The succession processes in
family businesses, during which the business is transferred from one generation to the
next, represent the most critical issue confronting family firms. The evidence suggests
that only 30% of family firms survive into the next generation and just 15% survive into
the third generation (Fox et al., 1996; Morris et al., 1997).
Even if the succession process is important, its role has been excessively exaggerated
as a distinct phenomenon. From the crisis perspective, the succession (and the family)
seems more like a problem rather than a normal state of affairs, or even an important
opportunity for business renewal. From this perspective, the resource-based view has
been applied within the family business research with some success (Davis and
Harveston, 1998; Habbershon and Williams, 1999). As an ongoing relationship, the
family forms an arena for carrying over the inherent and hidden knowledge of the
business and its operations. This takes place through the internal culture of the family, the
way of talking about business, entrepreneurship, new ventures and competition and the
commitment to the long-term development of the company (Johannisson and Huse,
2000). The presence of the family also adds to the strategic dimension of the business
development and the patience with the capital invested (e.g., McConaughy et al., 2001).
As a result, the lifecycle of the business is likely to differ from the lifecycle of the
business family. In this way, the family relationship with the business is a valuable
resource to the business. The family characteristics are difficult to imitate and may indeed
lead to several advantages that are applicable in the business.
The concept of ownership has generally referred to its economic-institutional
dimension (Westhead and Cowling, 1998; Chua et al., 1999; Hall, 2005). As such, family
firms represent relatively stable systems, provided the founder is present and in a leading
role (Morris et al., 1997). The leading role of one person within the family has been a
problem for family business research. The relationship between the family-owner and the
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M. Rautiainen et al.
operational leading family member has been explained using a combination of agency
theory and the stewardship theory. Agency theory basically argues that the relationship
between the principal and agent could be characterised as a control mechanism that seeks
to ascertain that the agent operates to secure the interests of the principal in all situations.
The interests of the principal, incentives of the agent and the agency costs arising from
the control mechanism are measured via monetary value (Davis et al., 1997; Eddleston
and Kellermanns, 2007).
Stewardship theory builds on the idea that people are not motivated and guided only
by monetary instruments, but are also influenced by higher values. These values would
also include non-financial factors such as responsibility, tradition or loyalty (Westhead
and Howorth, 2006; Miller and LeBreton-Miller, 2006). The theory builds on the
relationship between the individual and collective, that is, it argues that individual actors
replace their self-serving objectives with those of the collective (Davis et al., 1997). In
the context of family firms, the family members may thus show loyalty to the family
objectives at the cost of personal freedom of choice. In this sense, family as a collective
may in fact prevent some individual entrepreneurial intentions and ventures in the case
that they do not serve the family agenda. Following stewardship theory, we assume that,
the origin of family conflicts leading to family member’s exit from the family business is
likely to create a collision between family-serving and self-serving objectives.
3
Portfolio entrepreneurship
As a research subject, portfolio entrepreneurship is very empirical in nature. The research
builds on the empirical findings that businesses are interlinked through ownership (Rosa
and Scott, 1999; Alsos and Carter, 2004). This relationship could be interpreted as a
strong tie, even if it is not the case of ownership between the businesses, but instead
different businesses sharing the same owners. The character of a portfolio entrepreneur
grows out of the puzzling pattern of owning and managing several businesses
simultaneously. In this study, a portfolio entrepreneur is defined as a person who founds,
owns, manages and controls many companies simultaneously instead of owning only one
company (Carter and Ram, 2003; Alsos and Carter, 2004). Taken from this, portfolio
entrepreneurship can be defined as a mode of operation in which several companies are
founded, owned and managed at the same time by the same actors – the entrepreneurs.
Portfolio entrepreneurship is much more popular than generally assumed. According
to the study by the Cambridge Small Business Research Center (1992), approximately
25% of owner-managers have connections to two or three other companies and 18.5%
with four or more. In a recent study in Finland, it was found that among micro and small
business owners, 32% reported owning more than one business. Furthermore, the
portfolio phenomenon seems to be dependent on the size of the business: only 12% of the
micro entrepreneurs had more than one business in their ownership while 32% of the
small business owners and 45% of the medium sized business owners also owned other
businesses (Kiander et al., 2006).
The focus on portfolio entrepreneurship research has so far concentrated on the
relationship between entrepreneurship and the entrepreneur’s context (Alsos and Carter
2004; Brunåker, 1993; Rosa and Scott, 1999; Flores-Romero and Blackburn, 2005;
MacMillan, 1986). Carter and Ram (2003), Alsos and Carter (2004) and Brunåker (1993)
studied the structural changes taking place within the farming sector and the portfolio
Family business in family ownership portfolios
403
entrepreneurship arising from the change. In these studies, portfolio entrepreneurship was
presented as a survival strategy for farmers in structural crises. Rosa and Scott (1999)
studied the factors affecting new venture creation and the growth of small businesses.
They noticed that serial entrepreneurs and portfolio entrepreneurs are an important and
impressive group affecting the entrepreneurial climate. Flores-Romero and Blackburn
(2005) continued from this and focused especially on the differences between first-time
entrepreneurs and serial entrepreneurs in relation to start-ups and found that a serial
entrepreneur is more likely to succeed.
4
Families as owners of business portfolios
Even if portfolio entrepreneurship research has developed rather well, the collective
dimension of portfolio entrepreneurship has not been studied, nor has its process nature
been analysed. However, Carter and Ram (2003) pointed to the collective nature of
portfolios as they suggested that portfolio management should be studied as a process,
and that special attention should be paid to the composition of stakeholders in each
component of the portfolio.
The management of the family portfolio could be understood by building on the ideas
of modern portfolio theory (Markowitz, 1991; Lubatkin and Chatterjee, 1994). The
modern portfolio theory suggests that the decision maker is an intentional actor actively
managing his ownership and that he follows a set of rules in governing the ownership
portfolio. According to this theory, the governance of the ownership portfolio involves
rationally weighing the risk of the investment against its anticipated return (Markowitz,
1991). Because of the changes in the object of ownership and the situation of the owner
and the expected returns from the capital invested in certain objects, the owner
continuously chooses between different alternative methods to balance the portfolio to
meet his standards.
The structure of the portfolio is subject to relatively quick changes. While managing
the portfolio, the owner may perceive an increase in risk and a decrease in expected
returns and therefore change the amount of invested assets in a certain element or even
the entire portfolio. In special cases, the portfolio may consist of only one owned
company, which could be seen as a risky situation. However, this interpretation may be
misleading, as a single company can incorporate several distinct businesses. This would
thus be enough to balance the risk for the owner. Finally, the owner may choose to own
and control several separate companies at the same time, thus limiting the risk effect of
each individual company in the portfolio while being able to control the management and
returns of each business.
In the basic model of portfolio theory, the decision maker represents a single
operator – with no need to negotiate, compromise, achieve consensus, or display
democratic behaviour in decision making (Markowitz, 1991; Lubatkin and Chatterjee,
1994). In family contexts, however, the decision making needs all these methods to reach
an acceptable decision that can be implemented. In addition, the family context brings
along new criteria for judging the portfolio in the form of a family agenda. First, even if
only loosely related to economic thinking, the family is prone to prioritise the
employment of each family member and their competences in the family business. In this
way, the family seeks to secure the skills compatibility of the family members with the
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M. Rautiainen et al.
business needs in the future succession process. Doing this, the family may in fact accept
lower short-term profits for the company.
Second, portfolio management within the family business portfolio suggests distinct
expectations for each business. Almeida and Wolfenzon (2006) suggested that in
pyramidal family business structures, some companies are likely to play a special role. In
other words, some companies within the portfolio may be evaluated according to
different criteria than others. For example, a start-up would be evaluated by its ability to
provide continuity for the family business rather than its innovativeness or its ability to
collect venture capital. In a similar vein, the parent company would not be expected to
show extensive returns on capital in exchange for being an operative tool in managing the
portfolio or channelling the interests of the various family members through the family
council of the parent company.
Finally, as an intentional decision maker, the family incorporates two layers that
should be borne in mind: it works as a collective decision-maker at the same time that it
is a metaphor for a collection of individuals making their own decisions (e.g.,
Habbershon et al., 2003; Thomas, 2002). This duality leads among other things to the
coexistence of individual rational finance behaviour and the enmeshed model of family
investments. Therefore, the family’s or family members’ managerial interest(s)
associated with ownership and their possibility to participate in the decision making of
the owned object may play an important role in the family decision making. Thus, a
family member’s involvement in the family business may be understood as purely
economic behaviour as well as a managerial interest in the business. Consequently, a
family member’s withdrawal from the family business could be a result of problems with
any of these criteria.
5
5.1
Case flower gardens
Methodology
This study applies a single case study of a family business. The aim of our case is to
explore and illustrate the logic of family business portfolio management. The case
concerns a longitudinal analysis of a family doing business for more than 50 years. In a
case like this, the main challenge is to decide on the case, i.e., what lines to follow.
Eisenhardt (1989, p.534) stated that in order to fully grasp the “dynamics present in
single settings”, a longitudinal approach to case study research is specifically
recommended. This study takes a retrospective approach to the case and thus the
end state of the family business largely dictates which earlier steps need to be taken
into account. This longitudinal case analysis has, for example, been successfully used
to study the strategy evolution of an entrepreneurial business (Mintzberg and Waters,
1982).
The bulk of the data was collected through semi-structured interviews with the family
members. As in all retrospective studies, the interviewees’ ability to remember the facts
is questionable, so other sources such as archival records were also applied to allow the
framing of real event descriptions to their relevant context. In addition, the family
members were contacted several times afterwards to check different details or
contradictions in the case.
Family business in family ownership portfolios
5.2
405
Case description
The history of the business emanates from a small farm established after World War II.
Since then, the business has evolved into a well-established flower company with a wide
distribution network and wholesale operations. There were three daughters and three sons
in the family. While the daughters married and moved away, the brothers Vilhelm,
George and Andrew started to plan their own business. In 1952, they built their first
greenhouse and began growing roses. This was the start of the core business. The start-up
could be labelled as team entrepreneurship and the family links between the brothers
played a considerable role in the start-up. At the time, they owned the business equally
and the plan was to build an own company for each brother.
After ten years, in 1962, Vilhelm carried out the initial intention of having his own
company and withdrew from the family business, starting a company named VB Tailor
Ltd. The remaining two brothers George and Andrew rearranged the company and
organised the business into two segments with each owning half of the company. The
same year they also took part in a joint venture, establishing a major flower distribution
company together with other companies in the same field. By this stage, the brothers had
been involved in starting up three businesses.
In 1966, the brothers Andrew and George bought a new production place, Estate 2,
which was located nearby. Now they had two production locations under their control,
with the opportunity to divide the business, allowing Andrew to have Estate 2 and
George Estate 1. They also divided the six sales offices.
After ten more years, in 1977, Andrew and George had disagreements about the
business and George withdrew from the family company. He started his own company
Brothers Tailor Ltd., where he also included his sons as partial owners in the business.
After 25 years, four start-ups and one acquisition, the brothers had reached their original
goal of having their own separate businesses. George’s withdrawal also meant that
Andrew had to buy all the shares for himself and his wife Ellen, with whom he had four
children, Margaret, Dinah, John and Tim. In this situation, Ellen became a 50% owner. In
time, the whole family was working in the family business. Andrew Tailor started to
manage the core company by himself. Because of value-added tax regulations, he had to
divide the business into two different companies, one business focusing on growing
flowers (Flowers! Andrew Tailor Ltd., vat 0%) and one focusing on sales [Tailor Flower
Ltd. (hereafter TF Ltd.), vat 22%].
Until 1980, Andrew and Ellen were equal owners of the company. In 1980, it was
time to include the second generation in the legal ownership of the business. The parents
transferred 50% of the shares to the children. Thus, the parents owned one half and the
children the other. By now, the very basic family business included the father, mother
and four children as company owners.
In 1985, several changes took place in the business as well as in the ownership
structures. Daughter Margaret got married and withdrew from the family business. Later
on, she established her own catering company. Dinah and John stayed in the business and
the succession process started with a partial ownership transfer. Now, all the members of
the family also became legal owners of the company. The two companies of Andrew
Tailor Ltd. and TF Ltd. merged when TF Ltd. bought all the shares from Andrew Tailor
Ltd. At the same time, Andrew Tailor Ltd. converted to a corporation form, changing its
name to TF Ltd. Also in 1985, TF Ltd. integrated backwards as it acquired a new
company, Seed Ltd., which sold seeds and garden equipment.
406
M. Rautiainen et al.
After three years, in 1988, the company continued external growth both downstream
and upstream when they took over business from Flowerbed Ltd. (selling grass seeds,
saplings and gardening equipment) and Flower Exchange, a wholesale chain from
Finland’s Flower Associated. Flower exchange had sales offices in eight different towns,
allowing TF Ltd. the possibility to reinforce distribution and marketing areas. In 1988,
the company was involved in the start-up of a new company, Flowerschool Ltd., with a
50% share. Flowerschool produced summer flower saplings and potted plants. In the
same year the succession of the family business was continued with a new emission.
After the ownership reorganisation, two of the children, John and Dinah, became
majority owners with 70 shares each, with mother Ellen representing a minority with 20
shares. Father Andrew kept 50 shares. Other children were bought out of the business.
This can be understood, as the other children did not actively participate in the business.
In 1989, TF Ltd. sold the sapling business to Plant Company Ltd. and in 1997 TF Ltd.
sold the rest of the business of Seed Ltd. to Flower Import Ltd. This was done to clear up
the main business by concentrating only on the flower business.
In 2000, TF Ltd. bought Flowerhouse Ltd., one of the biggest flower shops in
Finland. In the same year, TF Ltd. also bought the rest of the shares of Flowerschool Ltd.
and became the sole owner. This was done to get a better view of the retail business. In
2000, the family business succession was completed. The children John and Dinah
bought their father out of the business, after which they both had 95 shares (45%), while
their mother still possessed 20 shares (10%). Son John became a managing director and
daughter Dinah continued as the chairman of the board. The father stayed on as a member
of the board and mother Ellen stayed on as a minority shareholder.
Dinah and John started to manage the company, although fairly soon problems in the
leadership of the business emerged. Two very strong people (who were also siblings) had
a very different way of thinking and managing the business. Finally, in 2007 they made a
decision that Dinah would leave the company. John bought the shares from Dinah, who
in turn bought Flowerhouse Ltd. from TF Ltd. and started her own retail company. Dinah
has also invested in her husband’s company Catering Ltd. John is now the main owner of
TF Ltd. and mother Ellen holds a 10% share of the company.
6
Summary of the case and analysis
This development has taken some 55 years. During this process, there have been about 20
different companies involved and the number of start-ups, acquisitions and buy-outs has
reached 19. In the present state, the core corporation includes the parent company and
three subsidiaries and is owned by the founder’s son and his mother. Both uncles’
families run separate businesses. One of his sisters runs a successful catering business
and another sister runs a complementing business with the core company and takes part
in other businesses as well. The forests and land are organised through a company
transferred directly to the third generation that consists of nine grandchildren. At the
moment Flowers! Tailor Ltd. is the parent company, while Flowerschool Ltd., Eastling
Ltd., Real Estate Ltd. and Flowers! Flower Exchange Ltd. are subsidiaries. John Tailor
owns the majority of the corporation’s shares.
In the case presented, a number of ownership, business and family related operations
can be identified. Table 1 depicts the different operations, showing the owners as the
Family business in family ownership portfolios
407
operators, the time of the operation, the type of the operation, the communicated reasons
for the operation and the criteria setting for basing the rationality of the operation.
Table 1
The family business portfolio management criteria
Owners
Time
First generation;
three brothers
1952
Second
generation; two
brothers
1962
Second
generation; two
brothers, other
companies
1962
Second
generation; two
brothers both 50%
1962
Second
generation; one
brother and his
wife, both 50%
1977
Second
generation;
husband and wife,
both 50%
1977
Second
generation;
husband and wife
1977
Second
generation;
husband and wife,
both 50%
1977–1980
Second and third
generation (four
children)
1980
Second and third
generation;
parents and three
children
1985
Second and third
generation;
parents and three
children
1985
Operation
Start-up
One brother
withdraws and starts
his own business
Joint venture,
start-up
Company divided
into two
One brother
withdraws and starts
his own business
Reason(s)
Rationality
The creation of
business, business
focus from
farming
Dissension in
management and
family, creation of
new business
F+
Grasping
opportunities,
creation of new
business
F
Dissension,
personal
managerial
attachment
Dissension, the
creation of new
business
B+++
I
F++
B++
I+++
B+++
I
F++
B
I++
F++
B++
I++
Bringing the children
into the business
‘Familyness’
Dividing the
company in two
because of tax
regulations
Diversification
The whole family
working in the
business
Learning,
resources, returns
Children included in
the legal ownership,
50% parents and
50% children
Succession
One daughter gets
married and moves,
she starts her own
business
Succession,
start-up
Ownership changes,
three children
become the main
owners
Succession
F+++
B
I
Notes: F = family, B = business, I = individual
F
B+++
I
F+++
B++
I
F+++
B
I
F+
B++
I++
F+++
B
I
408
Table 1
M. Rautiainen et al.
The family business portfolio management criteria (continued)
Owners
Time
Second and third
generation;
parents and three
children
1985
Second and third
generation
Second and third
generation
Second and third
generation
Operation
Reason(s)
Rationality
New company
formed in
corporation form
Business focus
1985
Acquisition of a new
company Seed Ltd.
Diversification,
value creation
1988
Acquisition of a
bankrupt estate
Flower Exchange,
reinforce distribution
and marketing
Business focus,
diversification,
value creation
Acquisition
competitor 50%
Flowerbed Ltd. into
Seed Ltd.
Business focus,
value creation
Start-up of a new
company
Flowerschool Ltd.
with 50% share
Business focus,
value creation
New real estate
company formed
Business focus,
risk
Grandfather buys
land and establishes a
new company Tailor
Ltd. for the fourth
generation
Succession
skipping one
generation,
business focus,
value creation
F+++
Ownership changes,
two children main
owners
Succession
F+++
1988
Second and third
generation
1988
Second and third
generation
1988
Second and fourth
generation, 100%,
nine
grandchildren
1988
Second and third
generation,
parents 70 shares
and two children
both 70 shares
1988
Second and third
generation
1989
F+
B+++
I
F
B+++
I
F
B+++
I
F
B+++
I
F
B+++
I
F
B+++
I
B+
I
B
I
Selling the sapling
business to Plant
Company Ltd.
Business focus,
core businesses
F
B+++
I
B+++
I
Second and third
generation
1996
Second and third
generation
1997
Buying business
from Gift Shop Ltd.
Business focus,
value creation
Selling business from
Seed Ltd. to Flower
Import Ltd.
Core business
F
B+++
I
F
B+++
I
Notes: F = family, B = business, I = individual
Family business in family ownership portfolios
Table 1
409
The family business portfolio management criteria (continued)
Owners
Time
Second and third
generation
1998
Operation
Buying new
company Eastling
Ltd. transportation
Reason(s)
Business focus,
value creation
Rationality
F
B+++
I
Second and third
generation
2000
Second and third
generation mother
20 shares and two
children both 95
shares
2001
Second and third
generation mother
10% and son 90%
2007
Buying a new
company Knight
Ltd., distribution and
marketing areas
Business focus,
value creation
Ownership changes,
children buy their
father out of the
business
Dissension,
succession
Ownership changes,
brother buys sister
out of the business
and sister starts a
new company
Flowerhouse. Ltd
Dissension,
succession,
start-up
F
B+++
I
F+++
B
I
F+++
B+++
I+++
Notes: F = family, B = business, I = individual
The family business history has seen a lot of changes in business, ownership and family
systems. The family has kept its business going via single businesses and shared
investments. The analysis shows that three different rationalities in the case development
can be identified:
1
Family rationality refers to the generational transition and family relationships and the
control and ownership of businesses. In this case there have been two full successions
where the ownership has changed. In addition, there have been four different times
when business ownership has changed due to family relationships. Ownership has
also changed, which additionally included the family’s children in the legal
ownership. It could be argued that these changes would not have happened without
the family-originated need to secure the continuity of the family ownership
to the businesses, or without changes in the relationships between family members.
Furthermore, these changes only determine the family members’ relationships to
each other as owners rather than the family members’ relationship to the business.
However, these changes may have had effects on business performance, even though
the changes were not designed to promote business per se.
2
Individual entrepreneurial rationality, which stems from the persons individual
entrepreneurship. In this family there are many strong individual members who have
carried out their personal entrepreneurial ventures and used their personal experience
and knowledge. Here, the individual’s inner desires to start his/her own business has
been the reason for the creation of four different new companies. Individual drive
has also been an important factor in the restructuring processes of the family
business – the disagreements and personal need to focus on one’s own domain have
been triggers for many personal start-ups.
410
3
M. Rautiainen et al.
Business rationality refers to the need to respond to changes in the market and the
desire to take advantage of resources that have accumulated within the firm. There
have been changes in businesses for several reasons: the family has seen new
opportunities in the field; the environment has changed (e.g., tax regulations made
them divide the business into two different companies); value creation by buying
other companies and business focus by selling branches which are not profitable or
far from the core business. Some of the developments can be seen as reactions to
changes in the business environment. From this perspective, the family has been
rather entrepreneurial in its business by growing, diversifying, streamlining and
adjusting it to its competitive environment. The rationalities behind ownership
decisions in a family owned business portfolio can be illustrated as follows:
Figure 1
Rationalities behind ownership decisions in a family owned business portfolio
Business
interactions
Business
rationality
Individual
entrepreneurial
rationality
Family
rationality
Family
”Family”
rationality
Individual
entrepreneurial
rationality
Business
rationality
7
Business
interactions
Discussion
In this paper, we have suggested that the phenomenon of family business development
contains both collective and individual reasoning and decisions concerning the control
and responsibilities over businesses. We have shown a longitudinal case study describing
the dynamics within one family and its family business. Our study has some implications
for the research of family business.
As an active entrepreneur, the family uses ownership as a tool. In this sense, it always
concerns changes in ownership – either in terms of owning some particular object (estate,
company, business, shares, concept) or in terms of changing the combination of owners
to those owned objects. Ownership changes can be used in the development of the
business, developing the relationships between the family members, or providing the
family members with an ability to carry out their individual ventures.
The concept of the family owning the family business should be reconsidered. It is
evident in our analysis that ownership is a dynamic element in the family business and
Family business in family ownership portfolios
411
that the family business includes several layers that are important to take into account in
research. On one hand, the analysis shows that the family running the business system
keeps changing constantly. On the other hand, the family members are also entrepreneurs
who make individual decisions on the allocation of their entrepreneurial spirit and
ownership. This leads to a new type of systems thinking in family business research.
The system includes the family as a collective level doing business and securing
continuity. The system is built of smaller pieces such as the individual businesses owned
either together by the family or the single family members. Furthermore, the businesses
require their special maintenance and management, which has implications on the family
level and for the individual family members. As an open system, the family business
system is in constant relationship with its environment through each subsystem – that is,
businesses and family members. This characteristic leads to three things to consider:
1
The family business is not a buffer against the environment but rather a core of the
business system, i.e., the family business system is not able to save any of its
subsystems from external influences.
2
Each of the subsystems needs to run efficiently and productively. Should any of the
subsystems operate inefficiently, it could lead to severe problems in the whole family
business system, or even a collapse.
3
The system contains both systemic cohesion and entropy, leading to the family
members needing to keep things within the family (‘familyness’) while at the same
time leading to diversification and independent venturing of the family members.
Through this dynamic, the family business system grows both in size and
complexity.
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