• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 2/14/2013

The challenge of entrepreneurship in the Family Business 

The challenge of entrepreneurship
Is the family business setting conducive or not to entrepreneurship? Researchers are divided about this question. On the positive side of the debate, the long-term nature of family ownership allows managers to dedicate the resources required for innovation and risk-taking, thereby fostering entrepreneurship.

Other scholars, however, argue that family involvement is a liability to a firm’s entrepreneurial efforts. In particular, the goal of preserving wealth for future generations may lead to risk avoidance and maintenance of the status quo, as well as to lower engagement of external talent, all factors that hamper entrepreneurship. Furthermore, the involvement of multiple generations of the family in the management of the business may lead to increased conflict in the context of entrepreneurial efforts, due to the lack of clarity for the direction of the firm and the emotional-laden nature of family businesses.

Given this, how can entrepreneurship be effectively deployed in family businesses and should multiple generations of the family get involved?

Analyzing entrepreneurship and business performance

A recent paper by Francesco Chirico and colleagues, published in December 2011 in the Strategic Entrepreneurship Journal, explore this question by analyzing a sample of 200 Swiss family firms. The authors analyze the level of entrepreneurial orientation of the firm (its ability to engage in product market innovation, be pro-active in the face of environmental changes, and be able to engage in risky initiatives) and interact it with the level of multi-generational involvement in the management of the business to try to predict business performance in terms of sales growth, profit, cash flow, and net worth.

The results from a survey answered by the two highest leaders of 199 Swiss family firms are surprising. The entrepreneurial orientation of the firms and level of multi-generational involvement interact negatively, leading to lower performance. That is, the firms with the lowest performance in the sample were the ones that engaged in more entrepreneurial behavior and simultaneously had multiple generations of the family involved in the business.

It seems that this combination leads to high levels of conflict within the family and business which then hurts performance. This result is puzzling as we all know family businesses that are able to combine entrepreneurial behavior with multi-generational involvement. What is their secret?

Participative strategy

The study suggests that the secret is how the different generations of the family are involved in the business and coordinate their actions. In particular, if the firm adopts a high level of participative strategy, in which the family members are engaged in an open and direct discussion about the innovation needed and the direction of the business, then not only does performance not suffer, but it actually improves the more the entrepreneurial orientation and the higher the level of multi-generational involvement.

This result may challenge the idea of sending the younger generations of the family to promote a new business isolated from the core business. Multi-generational involvement in the business is a great asset because it brings a diversity of perspectives into the present state and future directions of the business.

If the family leader is able to create a participative strategy-making process, in which family members are engaged and feel free to express their views, open debate is promoted and nurtured, and consensus views are allowed to emerge, then multi-generational involvement becomes a great asset for family firms, in particular for the ones that attempt to be open to entrepreneurship and innovation, breaking industry norms and shaking the status quo.

To find out more, and for further reading references, download The challenge of entrepreneurship in the Family Business (PDF 66 KB)

Filipe Santos

Filipe Santos
Filipe Santos is Associate Professor of Entrepreneurship at INSEAD. He is the director for the Maag International Centre for Entrepreneurship and the academic director of the INSEAD Social Entrepreneurship Initiative.

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