The MER Model of Integral Management: Family Enterprises Strategic Management 1

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1 The MER Model of Integral Management: Family Enterprises Strategic Management 1 Dr. Mojca Duh, Assistant Professor University of Maribor Faculty of Economics and Business Razlagova Maribor, Slovenia mojca.duh@uni-mb.si Abstract: Family enterprises are a vital yet understudied element of our economy and society. We believe that more attention should be devoted to the research on family enterprises, especially on particularities of strategic management in these enterprises. Most of the researches on strategic management of family enterprises has not been conducted from the strategic management viewpoint. Therefore the most important cognitions of the research on particularities of strategic management process of small and medium-sized family enterprises will be presented in the paper. Keywords: family enterprises, integral management, strategic management, strategy, succession 1 Introduction Family enterprise is not synonymous with small enterprise ; some family enterprises are large corporations, but the vast majority of family enterprises are small and medium-sized ones (e.g.: [1, 2, 3]). It is estimated that there is between 60 and 70 per cent of family enterprises in the structure of small and medium-sized enterprises in Europe [1]. There are no reliable information on the number and structure of family enterprises in the Slovenian economy. However, if we proceed from the fact that in Slovenia, especially in the 1990s, the number of small and medium-sized enterprises has dramatically increased (the share of small enterprises with 0-50 employees in the structure of all enterprises is higher than 90 per cent), and if we take into consideration the estimates on the share of family enterprises in the structure of small and mediumsized enterprises world-wide it can be assumed that family enterprises also present a significant factor of the economic development in Slovenia. On the basis of the results of the empirical research on family enterprises in one Slovenian region (carried out in 1998 and 1999) we estimated that there was between 40 and 50 per cent of family enterprises in the structure of all enterprises in Slovenia (e.g.: [4, 5]). 1 Published in: Proceedings of 2 nd International Conference on Management, Enterprise and Benchmarking. Budapest Tech, Budapest, June 25-26,

2 Therefore, family enterprises are a vital yet understudied element of the world economy and society according to the opinion of many researches (e.g.: [6, 7]). Considering the number of published articles, publication outlets, schools offering family business programs, research support provided by private donors and foundation, or the membership of family firm associations, it can be concluded that the interest in family business studies is increasing (for data on this issue see: [8]). So as a field of study is developing. We believe that more attention should be devoted to the research on particularities of strategic management in these enterprises. Most of the researches on strategic management of family enterprises has not been conducted from the strategic management viewpoint, but typically focused on how to improve family relationships rather than business performance [9]. Therefore the most important cognitions of the research on particularities of strategic management of small and medium-sized family enterprises will be presented in the paper, as comprehensively as space allows. The basis for our research was the MER model of integral management developed in Slovenia, and the existed family business literature. 2 Definition of the Family Enterprise Several studies in many, especially developed, economies have concluded that family enterprises account for over two-thirds of all enterprises (e.g.: [1, 10]). They make a major contribution to wealth creation, job generation, and competitiveness. But on the other hand there are no statistics complete enough to map the presence of family enterprises throughout the world. One of reasons for the absence of statistics and data on this topic is the lack of universal definition of a family enterprise. Although in 1989, Handler wrote that defining the family firm is the first and most obvious challenge facing family business research [11] more then ten years later, the challenge remains. To date, there is no widely accepted definition of the family enterprise. Instead, various definitions are reported in the literature [12, 13, 14]. The variety of family enterprise definitions utilized cover dimensions such as family involvement, an enterprise perceived to be the family one, majority ownership by family members, management of the enterprise by at least one member from the family group owning the enterprise, or an inter-generational ownership transition (also see: [11, 15] for the list of different definitions). Because there is a lack of consensus as to what defines family enterprise we are of the opinion that it is very important that researchers fully describe the group of family enterprises they are studying. Only in this 2

3 way the results of a research will significantly contribute to the theory and practice of family enterprises. For defining small and medium-sized family enterprises we suggest qualitative and quantitative criteria (more about criteria see: [16]). Use of the proposed qualitative and quantitative criteria is suitable in the case of studying development particularities as well as particularities of management in small and medium-sized family enterprises. For defining small and medium-sized family enterprises we propose the following qualitative criteria: the family has a majority ownership of the enterprise, members of the family owners also control and manage the enterprise, there exists the wish that the enterprise be kept in the ownership and management of the family. The family, in terms of the mentioned qualitative criteria, is understood in a broad sense of the word and not merely as a nuclear family but as a broad or large family and/or relations, respectively (more about the family see: [16]). Because this is not only about distinguishing the family enterprises from non-family enterprises but also about distinguishing of small and mediumsized family enterprises from large enterprises, we must define also quantitative criteria. As quantitative criteria we must for example in Slovenia, consider criteria, which are provided by the Companies Act, in order to distinguish companies by size. Also the EU guidelines should be considered for defining the size of an enterprise. But we have to consider, as Hinterhuber and Minrath [17] ascertained, that a certain enterprise can exceed the upper borderline of quantitative criteria, but from the viewpoint of qualitative criteria it is a typical small or medium-sized family enterprise. 3 The Particularities of Family Enterprises Strategic Management 3.1 The MER Model of Integral Management Our research on particularities of family enterprises strategic management is based on the concept of the MER model of integral management (which is in more detail explained in: [18, 19, 20]) and the existed family business literature. In this chapter the basis features of the MER model are presented. 3

4 The process dimension of the MER model is presented by three hierarchical levels of the management process with its functions and phases. Hierarchical the management process is carried out on the political (formulating the enterprise's vision and policy including the enterprise s mission, purposes and goals), strategic level (strategy planning, implementation and control to achieve with the enterprise s policy defined mission, purposes and goals), and operative level. The instrumental dimension of the MER model of integral management is comprised of management principles, styles, techniques and methods. The institutional dimension of this model is dealing with people who are involved in the governance and management of an enterprise. Only a part of this model will be researched in our paper. Our attention will be given to the particularities of the strategic management process in family enterprises. 3.2 The Strategic Management Process Many authors argue (e.g.: [21, 9]) that the basic strategic management process is similar for both non-family enterprises and family enterprises in the sense that a strategy, whether implicit or explicit, must be formulated, implemented and controlled. In this sense, even performance is similar, since it should be measured with respect to achieving a set of goals. What are then particularities of the strategic management process in family enterprises? The process of formulating and implementing strategy is influenced not only by the need to ensure the health of the enterprise, but also by considerations for the health of the family [22]. Sharma, Chrisman and Chua [9] state that differences are in the set of goals, the manner in which the process is carried out, and the participant in the process. For example, in family enterprises, the owner-family is likely to influence every step of the process, whereas in non-family enterprises, family influences are at best (or worst) indirect. Family interests and values are incorporated into the goals and objectives set for the enterprise. Family relationships influence the strategies considered. Succession within the family can be one of the most important strategies determining the longevity of the enterprise. Decision criteria are affected by family considerations built into the enterprise s goals and the choice of alternatives to consider. Based on their research on family business strategy Harris, Martinez and Ward [21] conclude that the element of family enterprise affects strategy formulation and implementation. Some of the important characteristics of family enterprises that influence strategy are the enterprise s inward orientation. There is greater importance attached to family harmony, employee care and loyalty, long-term commitment, and generations of 4

5 leadership. The family enterprise shows slower growth and less participation in global markets; it is less capital intensive and has lower costs; and its board has a heavy influence on implementation of planning. They pointed out that the assessment of these family enterprise characteristics and their influence on strategy leaves more questions than answers. Donckels and Lambrecht [23] reported on differences of strategic behavior between family and non-family enterprises (based on the research in Belgium). Family enterprises differ from non-family enterprises in having less clear answers to the question of where the business should be heading in the next three years, and less often have anything written down on this subject. Family enterprises are less willing to take serious business/economic risks. They believe that growth is a less important objective, although this does not prevent them being well aware of the negative consequences of remaining small. They are less active internationally and follow a more traditional market approach. In the continuation we present cognitions on particularities of strategic planning process, strategy content, strategy implementation and succession in family enterprises. Strategic planning process Family-business researchers who have focused on the strategic planning process espouse the benefits of strategic planning. Based on their research Sharma, Chrisman, and Chua [9] argue that still must research must be done in this area, and we agree that more research must be done in the future. However we find it useful to give some insights on particularities of this process in family enterprises. Strategic planning for family enterprises differs from planning for other types of enterprises largely because the family enterprise must incorporate family issues into his thinking. Family concerns and preferences can influence the choice of strategy, and family considerations can limit the strategic aggressiveness of the family enterprise [24]. Many believe that the presence of strategic thinking is enough, especially for smaller enterprises. We agree with Mugler [25] who argues that several reasons speak for the need of the strategic planning process in small and medium-sized enterprises, that is: strategic planning is oriented toward an enterprise as a whole, it harmonizes (strategic ground for managing the enterprise are made complete, consistent and transparent through the planning process), it makes the control possible, and only transparent strategies make it possible to integrate co-workers and motivate them in the process of strategy implementation. Also Ward [24] points out that more formal approach to strategic planning is needed in family enterprises because strategic planning is the necessary groundwork for active strategic thinking. Formal planning meetings and 5

6 review help to promote the healthy, open, shared decision-making so often needed in the family enterprises. He believes that the best way both of addressing the changing environment and of coping with shifting family circumstances and needs is through a strategic planning process that incorporates both. Therefore, the author points out that family enterprise must consider not only preparing a business strategic plan but also a family strategic plan. The latter is the result of the family strategic planning process. Family strategic planning addresses different questions, for example [24]: why is the family committed to perpetuating the enterprise? How does the family see itself and the enterprise in the future? etc. Similar also Leach and Bogod [26] stated the importance of family strategic plan. The process of developing a family strategic plan helps families to approach their enterprises in a unified way. The chances of misunderstanding are greatly reduced when the objectives and rules are clear. Open communication not only improves a family s chances of preserving harmony, it also forms a sound foundation for the business strategic plan. Gersick and co-authors [3] write about the family plan which sets a family s sights on the future. The four parts of most family plans include a family history, a vision of the future, a family mission statement, and an action plan. Ward [24] also pointed out the importance of assessing the enterprise and its strengths and weaknesses. He especially pointed out the need for financial analysis. Such analysis has an additional significance for family enterprises: it reveals whether the family is reinvesting sufficiently in the enterprise to help ensure a vital future or whether it is financing personal needs at the expense of the company. The author [24] stresses that good family enterprises will share some strengths by the very fact that they are family enterprises (e.g.: long-term orientation, flexible organization, enterprise s motivation for quality, willing to invest in people are some of them). But there are also some relative weaknesses of especially smaller family firms, such as limited access to large amounts of capital and naiveté of management. In the strategic planning process attention should be devoted to these relative strengths and weaknesses of family enterprises, and the recognition of these characteristics should improve the choice of strategy. An important issue in the strategic planning process is also how family enterprises scan their environments. Sharma, Chrisman, and Chua [9] pointed out that little is known about that. Some authors argue (e.g.: [21]) that family enterprises participate more frequently in certain types of industries (less capital intensive and with lower barriers to entry). Strategy content 6

7 Many authors (see: [22] for references) portrayed strategies in family enterprises as centered on either the business or the family. Enterprises that are family centered may follow different set of strategies from more business-centered enterprises. Based on his research Ward [24] found that those family enterprises which had not only survived but also prospered renewed or added new strategies as market and competitive conditions required response. But his research noted another important pattern that was related to the family. Often, the new strategies came about as a result of changing family influences (e.g.: the new directions were an expression of a successor s interests). Ward [24] also stresses that the strategies suitable to the particular strengths of family enterprises (described above) include exploiting smaller markets, market niches, ethnic and regional markets, declining or more mature markets that yield profit through personal effort, and emerging markets. Due to increasing globalization, competing in international markets is certainly a crucial topic for all kinds of enterprises. Unfortunately, specific researches about the internationalization of family enterpirses are rare. One of the research shows that family enterprises tend to be less global or internationally oriented ([21] and there cited references). We found very important conclusions of Gersick and co-authors [3] regarding the strong influence of the founder on the enterprise s strategy. There is very often a strong and sometimes irrational loyalty to the original business or businesses started by the founder. They point out that strategic refocus operates on a different timetable than it did a generation ago. In the past, the life expectancy of a major innovation or technology was about twenty-five years - nearly identical to the typical span of control of one generation in a family enterprise. New ideas and systems entered with the new leaders. Now the typical product life cycle shrunk to four or five years (and, in some industries to a matter of months). No generational leadership can coast on its entry improvements for very long. Sharma, Chrisman and Chua [9] based on their research argue that the literature is by no means consistent on what strategies will be most effective for family enterprises. We do not know if family enterprises follow different corporate, business or functional level strategies from nonfamily enterprises in the same industry. Succession The important issue regarding the strategic management process is the succession issue. Succession is the most important and problematic issue for family enterprises [27, 2]. The transitions between the first and the second generation is one that many family enterprises do not survive. That emphasized the need for careful strategic planning and implementation during transition [22]. 7

8 The major portion of the family business literature on succession has focused on the succession process including succession planning, succession timing, interest of the next generation etc. Sharma, Chrisman and Chua [9] argue that for some families succession appears to be a strategy for achieving one or more goals rather than a goal itself. Except in the case of a dramatic event, when emergency succession arrangements have to be made, handing on the business to the next generation does not need to occur overnight. Time plays a very important role in succession, and it becomes clear that arranging for a successor takes time. This is mainly because so many people are involved, each with their own views, objectives, and interests. Each person should always bear in mind that they must seek some form of compromise. Like any other compromise, what family-business owners must devise is a solution they can live with, not necessarily one they can be enthusiastic about. For the success of succession it is important to distinguish between succession of ownership (kinship gives all the heirs the same rights of ownership) and succession of management (there should be only one valid criteria, that is competence) [23]. Due to their long tenures, family enterprise leaders possess a significant amount of idiosyncratic or tacit knowledge related to the enterprise. The family business literature has revealed that the level of preparedness of the next generation and its relationship with the senior generation have a significant influence on the next generation s performance. A supportive relationship characterized by mutual respect enables the smooth transition of knowledge, social capital, and networks across generations and as such could lead to competitive advantages for family enterprises ([8] and there cited references). Attempts have been made to reveal various dimensions and phases of the succession process, differentiating between successful and unsuccessful successions, and identifying the factors that contribute to effective successions. It is generally agreed that this process extends over time and needs to be carefully planned ([8] and there cited references). Strategy implementation Sharma, Chrisman, and Chua [9] stress that for successful strategy implementation, family enterprises need to effectively handle two key sets of relationships that generally do not affect non-family enterprises: those among family members and those between family members and professional managers. The emphasis is on the nature of these relationships and how to handle them. Much of the research done has been on relationships between fathers and sons [28, 29]. Another important issue is sibling rivalry, even though we don t know if or when sibling rivalry is dysfunctional for the family enterprise. 8

9 Other important issues considering the strategy implementation are organizational issues: what structure, systems, or process help the enterprise implement the strategy effectively. Sharma, Chrisman, and Chua [9] stress that most of the studies on the family enterprise s organizational structure are concerned with the transition to professional management. A family enterprise could need to professionalize and delegate authority because of growth, lack of management skills within the family, and preparation for succession. The authors also stress that little is known how a particular family influence helps or hinders the enterprise s achievement of its goals and objectives. Beside making strategic decisions and implementing them, an enterprise must also control and evaluate its performance vis-à-vis its goals and objectives. Sharma, Chrisman, and Chua [9] find out that existing literature tell us very little about whether strategic decisions and performance are evaluated and controlled differently in the family enterprise, or if such differences are justified. 4 Conclusions In the paper presented cognitions on particularities of family enterprises strategic management show that more researches should be done on this topic. The assessment of family enterprise characteristics and their influence on strategic management leaves more questions than answers. But as Sharma [8] pointed out: Asking the right question is the first critical step in finding the right answers. The similarities and differences in strategic management of family in non-family enterprises hold substantial opportunities for family-business studies. And as Sharma, Chrisman, and Chua [9] point out: The similarities provide the field with general working model of the factors that should affect a family enterprise s performance. The differences, or possibility of differences, suggest that each aspect of the strategic management process in family enterprises needs to be carefully explored and compared to the processes used in other family enterprises and in non-family enterprises. Such comparisons promise to improve the management practice in both types of enterprises, since the cross-fertilization of ideas cannot proceed effectively without an understanding of what those differences are, why they have occurred, and their results. Not only researches but also the efficient dissemination of acquired knowledge is important. Scholars of an emerging field of study need to find effective ways to share their ideas both within the academic community and among practitioners. We believe that in the paper presented cognitions could contribute to improving the management theory and practice, performance and 9

10 development of family enterprises. With this paper, we also hope to stimulate further research exploring the particularities of strategic management in family enterprises. References [1] Donckels, R., Fröhlich, E. (1991): Sind Familienbetriebe wirklich anders? Europäische STRATOS-Efrahrungen. Internationales Gewerbearchiv, 4, pp [2] Churchill, N. C., Hatten, K. J. (1997): Non-Market-Based Transfers of Wealth and Power: A Research Framework for Family Business. (Reprinted from the American Journal of Small Business, Winter 1987). Family Business Review, vol. 10, no. 1, pp [3] Gersick, K. E., Davis, J. A., McCollom Hampton, M., Lansberg, I. (1997): Generation to Generation: Life Cycles of the Family Business. Harvard Business School Press, Boston. [4] Duh, M. (1999): Razvojne posebnosti družinskega podjetja (Developmental particularities of family enterprises). Doktorska disertacija (doctoral dissertation). Ekonomsko-poslovna fakulteta, Maribor. [5] Duh, M. (2003): Family Enterprises as an Important Factor of the Economic development: The Case of Slovenia. Journal of Enterprising Culture, vol. 11, no.2, pp [6] Winter, M., Fitzgerald, M. A., Heck, R. K. Z., Haynes, G. W. and Danes, S. M. (1998). Revisiting the Study of Family Businesses: Methodological Challenges, Dilemmas, and Alternative Approaches. Family Business Review, vol. 11, no. 3, pp [7] Neubauer, F., Lank, A. G. (1998): The Family Business: Its Governance for Sustainability. Macmillan Press. [8] Sharma, P. (2004): An Overview of the Field of Family Business Studies: Current Status and Directions for the Future. Family Business Review, vol. 17, no. 1, pp [9] Sharma, P., Chrisman, J. J., Chua, J. H. (1997): Strategic Management of the Family Business: Past Research and Future Challenges. Family Business Review, vol. 10, no. 1, pp [10] IFERA (2003): Family Business Dominate. International Family Enterprise Research Academy (IFERA). Family Business Review, vol. 16, no.4, pp [11] Handler, W. C. (1989): Methodological Issues and Considerations in Studying Family Business. Family Business Review, vol. 2, no. 3, pp [12] Westhead, P., Cowling, M. (1998): Family Firm Research: The Need for a Methodological Rethink. Entrepreneurship Theory and Practice, vol. 23, no. 1, pp [13] Astrachan, J. H., Klein, S. B., Smyrnios, K. X. (2002): The F-PEC Scale of Family Influence: A Proposal for Solving the Family Business Definition Problem. Family Business Review, vol. 15, no. 1, pp

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