When you hear the phrase “family business,” you may consider the backstabbing Roys of “Succession” or the dysfunctional Duttons of “Yellowstone.” But whereas TV’s family companies are entertaining, their real-life counterparts could also be even extra compelling.
Around the world, family companies produce about two-thirds of all economic output and make use of more than half of all workers. And they are often very worthwhile: The world’s 500 largest family companies generated a collective US$8.8 trillion in 2024. That’s nearly twice the gross home product of Germany.
If you’re not steeped in family enterprise analysis – and even in case you are – their ubiquity may appear a bit of unusual. After all, households can include drama, battle and lengthy recollections. That may not sound just like the components for an environment friendly firm.
We are researchers who examine family companies, and we needed to perceive why there are such a lot of of them within the first place. In our recent article printed within the Journal of Management, we set out to perceive this totally different type of “why” – not simply the aim of family corporations, however why they thrive around the globe.
The common solutions don’t actually clarify it
The customary reply to “Why do family companies exist?” is simple: They enable homeowners to generate earnings and probably create a legacy for future generations.
A associated query is: “Why do entrepreneurs even want to involve their relatives in their new ventures?” Research suggests entrepreneurs do so as a result of family members care and might help when resources are limited.
But that may not be distinctive to family companies. All companies – whether or not run by a family or company executives – steadiness short-term revenue and long-term objectives. And all of them need dependable staff who’re keen to pitch in.
So these solutions don’t clarify why family companies, particularly, are so frequent worldwide.
A distinct angle: Winning without preventing
For our examine, we thought-about a long time of analysis about family corporations to conclude that family companies are uniquely expert at protecting rivals out of their market area – usually without really competing with them.
How? We suppose a quote from Sun-Tzu’s “The Art of War” captures the concept:
To struggle and conquer in all of your battles shouldn’t be supreme excellence; supreme excellence consists in breaking the enemy’s resistance without preventing.
Family-owned companies usually do precisely this, which is why there are such a lot of of them. Here’s how it really works in observe:
Three key variations
Research on family companies has proven that they differ from different forms of companies in three key methods: the types of goals they pursue, the governance structures they establish, and the resources they have. Together, these three characteristics clarify how family companies could use their property rights to get an edge over their rivals.
The first is objectives. Unlike different forms of enterprises, family companies prioritize noneconomic objectives involving the status, legacy and well-being of the family – both now and in the future.
Of course, they nonetheless have to fear about making a revenue. But their curiosity in family-centered objectives can lead them to select initiatives that will yield decrease returns however nonetheless fulfill their noneconomic objectives. These types of initiatives might not be engaging to different forms of corporations. As a consequence, family companies could discover themselves working in areas the place there’s not a lot competitors to begin with.
For occasion, take Corticeira Amorim, a family-run Portuguese company that dominates the worldwide marketplace for cork stoppers and different cork merchandise. The cork business is a basic slim area of interest: There are solely a handful of significant international rivals, and Amorim is extensively described because the world’s largest cork processing group, with a large share of worldwide wine and Champagne corks.
The second key issue is governance. Family members who work collectively usually know each other well, care about one another and need the most effective for each the family and the agency, which can keep within the family’s possession for generations. This reality could scale back working prices and the price of contracting.
Why? When they make choices, they don’t at all times want to rent a flowery, Harvey Specter-like lawyer from the present “Suits.” They can resolve on the following transfer for the corporate whereas having dinner collectively. This considerably reduces the prices related to decision-making. In different phrases, as a result of they rely much less on formal contracts and monitoring, family companies can function extra cheaply.
Finally, family corporations use assets like data and cash otherwise. Since many established family companies have been round for many years, relations who work collectively accumulate data that’s arduous to purchase and switch, and may not even be helpful elsewhere. Being a family member means not solely doing enterprise with relations but additionally going via life collectively buying a singular perspective concerning the family itself.
As a consequence, family companies have decrease transaction prices than different companies. Sometimes this exhibits up in very concrete methods. An uncle could make investments cash within the enterprise and by no means ask for it again. Would that occur at a nonfamily enterprise? Probably not. This dedication makes family members a particular kind of human asset that’s arduous to change.
Put merely, nonfamily companies are unlikely to rent somebody who cares as a lot concerning the firm’s success as a deeply invested relative does. And as a result of these relationships aren’t on the market on the open market, rivals can’t simply entry them. That reality helps family companies maintain rivals at bay whereas basically being themselves – which in flip explains why there are such a lot of of them.
Family companies are so frequent worldwide that there are a number of holidays celebrating them, together with International Family Business Day on Nov. 25, U.S. National Mom and Pop Business Owners Day on March 29 and the United Nations’ Micro-, Small and Medium-Sized Enterprises Day on June 27. This vacation season, you may think about spreading a bit of additional cheer with the family-run retailers in your neighborhood.