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Foreword
Analysis of family businesses, as well as research into issues that may not only be unique to the family business concept such as diversification, succession and corporate governance, to name a few is not a new practice, but rather a well established practice from both, an academic as well as a practical perspective. Within this study, the main aim is to establish the effect of previously mentioned processes with specific emphasis upon diversification in the family businesses, as well as the resulting effect or effects, brought about by such strategic decision making and diversification processes.
A combination of primary and secondary research helped assessing these effects, as well as the consequences whether based on a positive or negative outcome, in addition to the various findings or inactions that were brought about by the primary research sampling, on the managerial level and the strategic direction of the companies concerned.
Based upon the fact that a family business concept is quite often a private or closely held affair, market research proves to be somewhat difficult in obtaining adequate contribution and clear responses in certain areas. However, the sampling within the primary research data is deemed to be sufficient in establishing an overall commonality or differences where applicable.
Specific issues pertaining to the sampling laid out according to the findings, with the summary providing an insight into lessons learned from the diversification process, as well as processes that become necessary on a post-diversification basis, have had to be implemented by the companies concerned to ensure continuity, succession, governance and adherence to the legal and operational frameworks where applicable.
Executive Summary
The rationale of the study was to analyze how does the decision to diversify family businesses impact the long-standing family business, providing the current formation/structure of the business from a legal perspective, as well as thoughts and impressions of the business ownership to the process of diversification, based upon the overall negative or positive result of pursuing such strategic decisions.
Although an average market response was received, the size and response of the sampling is sufficient to establish a certain median within the questions posed, and in turn, displaying sufficient results and patterns.
On the basis of post-analysis, a number of interesting issues surfaced which could have been included within the primary data collection phase, such as that of succession. However, a significant amount of research has already been conducted on this topic and is expanded upon both in the secondary data discussion, as well as the lessons learned, which can, furthermore, be stressed and considered by family businesses in their planning, not only for continuity but to achieve sustainability as well. These issues are further investigated by that of corporate governance or the lack thereof, of which is highlighted within the document in hand.
Hypothesis Statement
What are the effects of the previously mentioned processes with specific emphasis upon diversification in family businesses and the effects due to the strategic decision making and diversification processes?
Tools Used in Research
For this study, a web based survey has been designed using Survey Monkey. Survey Monkey helps not only in designing a survey with multiple options, but it also allows the user to send the survey to respondents by email. User can also publish the designed survey on networking sites like Facebook, etc. Another good feature offered by Survey Monkey is the result evaluation by the mean of graphical presentation and charts. These features helped a lot in evaluating survey results in the best possible way.
Introduction
This study involves analysis of family businesses, as well as the research over the issues that may not only be unique to the family business concept such as diversification, succession and corporate governance. Investigation not only involves the academic aspect of the topic but would also explore the practical perspective of the same. This study aims to establish the effects of previously mentioned processes with specific emphasis upon the diversification in family businesses, as well as the resulting effect or effects of the strategic decision making and the diversification processes.
The research side of this paper involves both, the primary and secondary data so that the effects of research and its implementation are assessed in the best possible way. This study also involves analysis of the consequences for the companies to rectify the managerial level and strategic direction of the companies concerned.
Literature Review
This section of the dissertation involves review of several term papers, researches, articles and journal, etc. As discussed above, this study involves primary and secondary data. Primary data is the unprocessed data, obtained via research. While secondary data is processed data, this could be a term paper, dissertation, article, journal, blog or any other piece of work that is written by someone and is based on some research. Methodology of any study involves two main sections. The first one is the literature review while the other one is the real research.
Summary of the Secondary Data
Secondary data of this study involves the relevant literature that is obtained and accessed via published journal articles, books and other available media items. All papers that have been utilized in this study are not only relevant to the diversification process and its impact upon the family business, but also to numerous other factors that come into play, as the business progresses in the form of growth, expansion, as well as the resource management and ultimate issues that affect the continuity of the business, which is somewhat more prevalent within the family business circumstances.
Additional factors that also engage a role within the business itself is the family relationship dynamic and how these dynamics play out within a business environment, whereby the family members may or may not associate their familial relationships within the business environment.
These factors are mostly discussed and investigated in the analysis, however, the literature has been analyzed with certain elements and conditions that came into light which require further exploration as they play a role within the specifics of the family owned and or controlled businesses under scrutiny.
Additional research possibilities and opportunities exist albeit on a secondary basis, via the internet, as well as published sources. The information that is highlighted here is selected in accordance with boundaries of the diversification process and the impact upon a family owned company, more importantly on well established family businesses, as per the research subject matter. One has to furthermore bear in mind that the family business is subject to additional phenomena , that may not be relevant to other companies, such as succession strategies, as well as the handling of internal family affairs and the resulting benefits or disadvantages thereof.
A number of statistics regarding the family business are well worth mentioning here, in order that one may gain an understanding of the large contribution that family businesses across the world actually provide within their respective locations. With respect to the additional research into the family business or organization, the family owned and controlled businesses are in fact the predominant form of business within the United States, yet a remarkably low level of research into these entities has been conducted, and furthermore, the authors claim that the ownership and management of the firms are widely separated (Phan & Butler 2008), which as revealed within the primary market research is not the case. The respondents within the study revealed that some sort of involvement whether via management or leadership had continued within the organization in one form or another.
A Look at The Top One Hundred Oldest Family Businesses
A closer look at the family business reveals that many companies that are now publicly listed may well have started off as a family business. OHara provides in his analysis of the top one hundred oldest family businesses, a variety of geographically located companies that operate in just diverse sectors and fields. In terms of these companies many internationally recognized brands and names are represented, the likes of which include that of Reidel Glassmakers, Villeroy & Boch, Taittanger, and Antinori. Interestingly, analysis of the descriptions of the companies as well as their development reveals that many of these companies underwent some sort of diversification from product offering expansion, to geographical diversification to that of mergers and acquisitions, to create companies that are established in modern day economies. A brief analysis of OHaras data and research is pertinent due to the relevancy of the topic at hand; it further provides an insight into the international viewpoint of the family business as well as location and subsequent developments of these very old family owned businesses (OHara n.d).
The geographic dispersion of these companies is interesting as one will realize a trend in countries which have the most representation of these companies. The illustration below reflects the geo-location, by country of some of the worlds oldest family owned companies.
The top position in terms of location is jointly held at Sixteen percent of the top one hundred, and represented by France, the United Kingdom and the United States, which are each represented by sixteen companies each. The fourth and fifth countries in terms of representation within the data are those of Italy and Germany, making up fifteen and fourteen percent or companies respectively. Hence the top five countries, in terms of the worlds top one hundred oldest family businesses make up no less than seventy seven percent of the top one hundred.
The average age of the top one hundred oldest family businesses is calculated at 383.1 years old, of which only 32% of the companies is in fact older than that median. The oldest known family business is one thousand four hundred and 31 years old, and remains within their core business of construction to this very day. The business is currently run by the fortieth generation, with involvement of later generations currently working within the company.
In terms of analyzing these companies who have or have not undergone some sort of diversification over long histories, it reveals that 31 percent of the selection has undergone a process or strategy decision that meets with the broader definition of diversification. The figure below represents the makeup of the percentages of the companies which have undergone such strategic processes.
What the above figure may reveal is that a non diversification strategy may well provide the basis for longevity of the company concerned, as the proof lies literally within the figures represented above. This may be seen as those companies retaining focus have survived both issues of market and economy volatility as well as the issues of succession, which play a vital role within family business. In the case of the remaining thirty one percent that have revealed some sort of diversification, include the processes of acquisitions, mergers, product line expansion as well as complete product differentiation into different sectors completely. Although the complete diversification out of their core business area and expertise was limited to less than five percent of the entire top one hundred list, which was represented by companies leaving a specific sector and entering into a completely new sector.
In terms of the analysis of the actual diversification process, and whether the business remained within their core business activities, compared to that of mergers and geo-location and so forth the following figure represents a breakdown of the variety of diversification decisions.
The areas into which the companies chose to diversify in terms of the above named classifications were led by that of diversifying within the same line via product expansion or service offering within the original core business activities, represented by no less than 25,81% of the analyzed 31% of top one hundred oldest family owned companies. The merger/acquisition, complete different activity and same line/with additions all shared the second top classification at 19.35% each, whilst the geographic location was the least represented process, at 16.13% or 5 companies of the thirty one diversifying companies analyzed.
Based on the fact that the companies chose to expand upon or diversify within their core business operations lead one to believe that this may well be the most popular choice within this specific data. However, as will be revealed by specific authors, this follows the academic thought of remaining within the companys core business activity to ensure success within the diversification process. However, the fact that a large majority of the analyzed data here, shared by the second position in terms of diversification processes or options, leads one to believe that this practice in all intensive purposes negates the writings and thoughts of authors, as per a saying, innovative efforts that take the existing business out of its own field are rarely successful (Druker 1985, p. 160); and by considering the data above and as per the Appendices attached, the proof lies in proven ability of these top one hundred oldest family companies proving this may be challenged and is not necessarily as accurate as one might be led to believe.
Although the oldest company to have elected the strategic diversification, only did so in 1936, in which instance, they elected to merge with a competing company. At that time, the company concerned, being that of Baroviers, had attained the age of six hundred and 41 years old. The merger took place between two families, being the Barovier and the Toso families, in Italy, to create the Barovier & Taso who are the creators of magnificent glass products and decorative pieces. Though, this could be seen as diversification within the same business sector the most notable of these top one hundred companies and specifically those that have diversified might be the Italian company of Torrini Firenze which diversified from an armory or armor producer to that of a goldsmith. One of the most diverse companies that are well worth mentioning is that of John Brooke & Sons, which is now four hundred and sixty eight years old, and having started in the fabric business is now currently involved entrepreneurial development, something of a far cry from their founding activities.
The basis for analysis of these figures was to provide an insight into what one might view as the very long standing business, highlighting the diversified companies versus those that did not diversify, and whilst the majority did not elect to take this route, all of these companies are still in operation.
Considering the various academic views of diversification, such as that of Drucker (1985) who claim that broad diversification may lead to an unfocused business model that may well not ensure success to the business concerned, one has to consider the research presented here, in that respect, quite a few of the respondents diversified outside their core business interests, and yet achieved success and what appears to be sustainability based upon the average age of the business (Chandler 2003). This fact taken in conjunction with the views of Rumelt in Strategy, structure, and economic performance (Rumelt 1974), who suggested that the broadly diversified corporation was a superior strategy to being more focused (Thomas, Pettigrew & Whittington 2000, p. 79), who further stated that from a financial perspective.
The more closely diversified business, displayed higher profitability (Thomas, Pettigrew & Whittington 2000, p. 80). These views are essentially contradictory, yet the factual results, as presented within the study, reveal that the element of both financial performance, as well as business survival, within the sampling was achieved in both the closely and wider diversified businesses analyzed. Moores & Barrett provide that the diversification concern is in fact one of the most important strategies or part thereof within a companys development (Moores & Barrett 2002, p. 158). And furthermore, will lead to increase participation by management, in this case mostly family members, in budgetary control and preparation (Moores & Barrett 2002, p. 100).
The larger proportion of the sampling further states that their initial decisions regarding the diversification was based on opportunities that were available within the marketplace at the time, with many taking advantage of such opportunity to contribute more towards the company and the familys revenue streams at the time.
Academic theory inclusively related to the writings of the authors mentioned above seems to be somewhat ambiguous. Their contradictory views are held with the diversification that it should be in a more focused or closer role in relation to the businesses core activities, in which it is claimed that higher profitability will ensue the closer such diversification is. However, from a strategic perspective, as stated above, it has been suggested that a wider diversification is in fact a superior strategy (Rumelt 1974). The sampling analyzed revealed that the majority of respondents pursue the wider diversification option, with those that diversified more closely also achieved success within their respective sectors. This is proven by the fact that companies surveyed are still in existence to this day, and continue with their diversified operations and most of the businesses are being controlled by the second generation already, some of which going on to the third even fourth generation involvement level. Therefore, provided the management strategies and leadership remain intact and suitable for the relevant business. It appears that success is not only achievable but, sustainable regardless of how closely or widely the business chooses to diversify within or outside their core business sector.
Diversification Process
According to Hess, the family and the business provide for an extremely dynamic environment, when operated together, in which the business and the family overlap, and based upon the fact that each is changing in its own right due to growth, or even within the instance of this analysis within the diversification process. The family dynamics make it in fact a lot more difficult to manage a family business, as compared to a non family business (Edward 2006, pp. 25-55). The result is that many issues are integrated into the business structure than would have been in a non family business environment, which creates the challenges and potential problems that come along with the family business management and subsequent analysis thereof. Hence regardless of whether or not the family business undergoes any diversification, one is forced to consider the familial factor that comes into play in the management of the business especially during times of change.
In analyzing diversification, there are two important trends in the diversification process, according to the significant historical events (Grant 2005). These events were seen as Post-War diversification and Post-1980s refocusing. The Post-War diversification process heralded an important phase within the corporate world and can be viewed as an important source of corporate growth across all sectors. Within this time, a period of significant decline in single business companies was revealed, whilst the number of diversified companies in both related and unrelated sectors increased steadily in a variety of geographical locations across the world, the 1960s and 1970s considered the height of the so-called diversification boom, which naturally led on to the post 1980s refocusing trend (Palmberg 2002, pp. 129-148). Many of the diversification processes came about due to an increase in that a variety of management techniques and processes, together with the newly found science of management which in all encouraged businesses to take on additional business units or divisions, which is nothing less than diversification.
The issue of growth of companies, rather than that of significant profitability was another contributing factor of this diversification trend (Palepu 1981, p. 19). But in the 1980s, the realization for the necessity of profitability became prevalent and although the diversification trend of the preceding decades slowed down significantly, but practice of acquisitions continued which meets with the definition of diversification, although according to Grant, this represented an unrelated diversification (Grant 2005, pp. 447-448). Considering the average age of the respondent companies surveyed, this period coincides with many of the companies strategic diversification efforts, and is further confirmed by many of the various sectors within which these businesses now operate, and are truly diverse as detailed.
The refocusing efforts of the 1980s as well as the resultant affects upon performance of the company (Cantwell, Gambardella & Granstrand 2004, p. 33). Their studies indicated that manufacturing productivity increased within the United States in this time, whilst analysis within the stock market returns of companies that had diversified, had revealed a positive growth within the stock returns and market sentiment of these companies, and more specific to the sampling within this study was that other studies also show that internally controlled firms with large-block ownership by corporate insiders show a better performance (Cantwell, Gambardella & Granstrand 2004, pp. 28-30). This correlates with the sampling within which those companies that had chosen to go the public listed company route, whilst retaining majority ownership and control would be viewed within this sector and would show positive market sentiment as described above.
As stated, the process of diversification is often a strategic decision within which the company stands to not only reduce their exposure to a specific market, but may consider such diversification as an additional form of revenue, which was clearly indicated by the researched and surveyed companies. The choice of which route to follow and how exactly to go about such diversification is arguably as diverse as the sectors within which the companies that were surveyed operate. Hess further provides that motivating factors behind the diversification process include that of consolidation of industry, market shrinkage or shareholders, or the company itself requiring additional capital for further expansion opportunities. These expansion opportunities may take the form of a variety of different strategies from investments, to acquisitions or mergers, geographical expansion or that of product line expansion. Although diversification process should, in fact, focus upon the addition of product lines within the business current area of expertise to maximize existing infrastructure and expertise within their field of operation, this will in effect avoid any dilution of any positive traits of the organization concerned (Chandler 2003).
Primary research indicated that although a small amount of respondents remain specifically within their niches, those that did remain there in sought to add value in their immediate supply chain; the balance of respondents diversified away from their core business, and in one specific instance even ceased to operate within their initial core business area. The precious studies imply that the diversifying business, going away from the original core activities will in all likelihood not succeed compared to those remaining close to their fields of expertise (Druker 1985). To the contrary, the research has revealed the opposite of be true, where companies diversified into a variety of specialized fields and continue to function to this very day. An individual, as with a closely held family business is in a vulnerable position without seeking out a diversification strategy (Jurinski & Zwick 2002).
However, in the face of volatility, as provided by Grant, should a business elect to diversify from such volatility to escape these market conditions, they would be foolish to believe that any business operates within an ideal world situation or environment. The strategies of the company concerned should rather be seen as a guidance of what the business wishes to achieve, as well as an aide in achieving those goals and objectives, whilst providing for sufficient preparation to face adversity, volatility and risk. The only guarantee that exists is that of the calculated risk of such product or geographical analysis and market research in planning for the diversification process and activities (Grant 2005, pp. 147-148). Hence the volatility issue does not really appear to be a feasible factor in the decision making process, but rather an informed acceptance and resultant exposure to the risk thereof that has the accompanying reward of the diversification strategy and implementation thereto associated.
From the perspective of geographical diversification, the company has the opportunity of alternative geo-targeting, in terms of existing product lines, as well as new product offerings, and the election of such a strategy will, furthermore, result in growth within the company itself (Channon 1999, p. 78). Hence, by venturing away from where the company originally started operation, the company stands to realize additional growth opportunities, by virtue of the increased size of the market being sought after. This does not ever take away from the added cost in terms of logistics that will be required to deliver such product to these new geographical locations, which needs to be analyzed prior to undertaking such a strategic direction. The company may seek to establish representation in the alternative geographic areas, which in all likelihood would represent a significant capital investment, realizing the issue of whether or not to seek internal or external funding or financing for such growth.
The geographic diversification is more often than not influenced by social and political factors that further need to be taken into account prior to undergoing such strategic processes. Regions that are influenced by religion may play a role in specific products, such as that of alcoholic beverages in predominantly Muslim countries as an example and would Therefore, require the specific analysis and investigation in terms the expansion into such a market that may be adversely affected thereby. Navarro provides that beyond the business unit diversification strategy, the geographical diversification strategy may not be solely motivated by that of any hedging initiative, but rather that of achieving greater economies of scale, whilst providing opportunity to deploy core managerial and production skills across a broader range of opportunities (Navarro 2006, p. 11), which in essence indicates the experience sought after by company leadership in providing to and dealing with alternative markets with respect to their products and services, gaining market share as well as invaluable experience in dealing within these varied geographical areas, each influenced by their respective socio-political infrastructure.
Financing of the diversification processes may well prove to be more of a challenge for the family business, due to the fact that it is not an exposure of risk to external shareholders, or stakeholders, but rather to that of the business owners which in this instance is represented by family members themselves (Poutziouris & Smyrnios 2006). Furthermore, research by the author suggests that issues of autonomy within the business will also play a determinant role, beyond that of the acceptance of the risk associated by such a strategy and to the family members themselves. It quite appropriately to add here that there is typically no clear demarcation line between business concerns and family concerns since the family business is typically the vehicle that fuels the familys current income and future wealth, and business results directly affect the family (Jurinski & Zwick 2002, p. 11), which concurs with Poutziouris in that the exposure may well be greater to the family business (Poutziouris & Smyrnios 2006), and the ownership as compared to that of the corporate or publicly listed company. Although within the primary research, some of the businesses were publicly listed companies, due to be allocated shareholding the family still retained large portions of ownership, if the majority share, in which case such exposure and the potential resultant effect upon the family and the business would still be realized in this instance.
The extent to which the business diversifies would be for all intensive purposes up to the risk tolerance level of the family concerned. Within the research, one of the respondents indicated that the family had diversified into no less than twenty-seven separate companies, and into a variety of different fields and disciplines. This may be construed as an undisciplined diversification strategy, in that once a company succeeds in a specific field the owners thereof would like to try ones talents in new industries or geographical areas (Gersick & Davis 1997, p. p189), specifically under that of the holding company.
Although this methodology or strategy may provide many benefits to the family concerned, specifically, in terms of the extended family such as that of cousins, as well as providing a basis for internationalization, there are disadvantages to the specific strategy, as provided by the author in if the process is not carefully evaluated and controlled (Gersick & Davis 1997, p. 190) which has been represented in a number of studies in which broad diversification can distract the company from its successful enterprises and dilutes needed investment in profitable ventures (Gersick & Davis 1997, p. 198). Once again reiterating the diluting effect of a too broad a diversification strategy. Interestingly, enough Gersick further provides that business owners are often left at odds as to how to manage or deal with the original founding business, in which many instances the family is merely attached to this company for entirely sentimental reasons. In many instances, the original business has either passed its maturity stage, or is no longer profitable or viable to retain and the most prudent course of action would be to deal with it accordingly, Although this may prove to be somewhat of an emotional challenge, based upon the involvement by the family over the years.
An important aspect of analysis of the company, instead of post-diversification strategy and performa
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