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Management Series: leadership-entrepreneurship

Strategic Decision Making in Family Firms: How do family firms balance family and firm needs?

How do family run firms based in traditional societies make strategic decisions that simultaneously satisfy expectations intrinsic to a family as well as meeting the growth demands of a business?

Author(s): Joseph Lampel - Alliance Manchester Business School, University of Manchester, Manchester, UK; Ajay Bhalla - Cass Business School; Kavil Ramachandran - Thomas Schmidheiny Chair of Family Business, Indian School of Business, Hyderabad, India

Family run firms form an important part of traditionally minded economies, such as that we see in India. In an increasingly competitive global marketplace, this paper asks how such firms find a balance between protecting the long-term interests and values of the family while also making the strategic decisions necessary to compete in modern business.

In Western countries, a key problem facing family firms that rely on capital markets is the tension that arises between preservation of their values and the institutional logic that stock market and independent investors subscribe to. In India, the attempts by family firms to preserve their values face less hostility from external actors because of the stronger cultural acceptance of more traditional ways of operating a business.

However, there is a view that social and economic change in emerging countries will eventually lead to a structural separation of family and firm, as is prevalent in more mature economies. Family members may still influence strategic decisions via membership of the board but it is professional managers who will execute strategy.

This paper focuses on a differing view, which argues that strategic decision making in family firms is actually shaped between an intimate interaction between the local, sociocultural interests of the family institution, with the wider market awareness and adaptability required of the firm.

In this paper, new venture creation in Indian family firms is used to explore the family firm as an inter-institutional system.

The research proposes that in societies where the traditional family dominates social and economic life, the relationship between the two institutions, the firm and the family, is managed via inter-institutional logics. These inter-institutional logics help reconcile the tensions that often arise in family firms during strategic decision making. Archival and interview data on 36 new ventures in eight Indian family firms is used to identify these logics. The analysis shows that the interaction between firm and family institutional logics in Indian family firms generates four sub-logics: Economic, Expertise, Reputation and Attachment.

With relation to new venture creation, the logics can be defined thus:

Economic – guides how the family assesses the potential for success or risk of a new venture;

Expertise – this focuses the family on the extent to which new ventures can develop their own managerial and entrepreneurial skills;

Reputation – encourages the assessment of what impact, positive or negative, a new venture may have on the family's standing in the community;

Attachment – this is where the family evaluates the impact a new venture may have on cohesion between the generations, and whether it may stoke interest and commitment among younger family members.

The legitimacy that the family carries in traditional societies means that it can justify decisions that serve family interests more easily than is the case in Western economies, where family interests are viewed as private matters. This bestows greater flexibility on these family firms in their handling of the tension between the competing institutional logics.

This research contributes to emerging thought on institutional logics, particularly that which considers the family’s role as a non-market institution with its own institutional logic (i.e. to serve its own family members).

It also contributes to the discussion about entrepreneurship within family firms and specifically those operating in traditional societies.

The study suggests several ways in which its ideas can be developed, such as further research into how family firms evaluate the relative merits of each sub-logic, be it separately on in relation to each other. Greater understanding of the processes that guide key family decision makers in founder-controlled firms in their venture decisions is desirable, as is how it compares in firms where there is a sibling partnership or other family arrangement. How institutional logics influence decisions pertaining to M&A or R&D is also an area that merits study.

The published version of the paper is available for download at the link below.

Attachment(s)
{Family Values and Inter-Institutional Governance of Strategic Decision Making in Indian Family Firms}{https://www.cass.city.ac.uk/__data/assets/pdf_file/0003/374934/family-values-inter-institutional-governance-strategy-indian-family-firms.pdf}
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