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 402 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 404 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. 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