Family owners in conflict with each other

• Family blockholders do not always act in a united fashion. Family blockholder conflicts
represent misaligned interests among blockholders, that is among family owners.
( A blockholder is the owner of a large block of a company's shares and/or
bonds. In terms of shareholding, these owners are often able to influence the company
with the voting rights awarded with their holdings.

• In contrast, because conflicting blockholders tend to control significant

shares of the asset(s) and have significant personal wealth invested in the
firm, they have the power and incentive to influence key strategic decisions
so as to enforce their individual preferences.

• For instance, even though the family owners may be aligned in their overall wish to
increase the value of their ownership stake, they may still exhibit heterogeneous
preferences on important strategic questions, such as those about risk taking,
dividends, diversification, hiring of family members and the like (Zellweger and
Kammerlander 2015).

• Family blockholders may thus use their prominence against other family blockholders to
enforce controlling access to the firm’s money. For example, they may unseat
undesired directors and board members, adapt bylaws in their favor, and
enforce change in the direction of their individual interests. Because of the
high stakes involved, the blockholders have an incentive to escalate the
conflict, which makes it particularly costly to mitigate.

• Battles among family blockholders are also likely to create loyalty conflicts among board
members and nonfamily management over which blockholder to follow. What is more,
family blockholder conflicts create an atmosphere of mistrust and
uncertainty about a firm’s future that can cause inertia around strategic
choices and hamper the firm’s agility and ultimately its competitiveness.
• In addition, conflicts within the family blockholder group are costly for the
family itself as they weaken the family’s unified exercise of power and thus
undermine the powerful monitoring of nonfamily managers.
(undermine- lessen the effectiveness, power, or ability of, especially gradually or
insidiously)

The resource-based perspective

• The resource-based view assumes that resources are the foundation of firms’ sustained
competitive advantage and performance (Barney 1991).

• Resources are understood to encompass both the tangible and intangible

assets of the firm. To generate a sustainable competitive advantage, firms
must possess and combine resources that are at once valuable, rare,
inimitable and nonsubstitutable (often referred to as the VRIN criteria of
resources).

• It is the cumulative combination of these attributes that is essential for a

firm’s success. In their attempts to use resources to build a sustainable
competitive advantage, firms have to take a dynamic approach.
 • Resources can be built, acquired, reconfigured, traded and disposed of. No company
can be completely self-sufficient when it comes to resources: at least to some degree,
every firm is dependent on outside resources (‘resource dependence’). Over time, the
efficient use of resources results in capabilities and finally in core competencies.

• In their attempts to use resources to build a sustainable competitive advantage, firms

have to take a dynamic approach. Resources can be built, acquired, reconfigured,
traded and disposed. No company can be completely self-sufficient when it
comes to resources: at least to some degree, every firm is dependent on
outside resources (‘resource dependence’). Over time, the efficient use of
resources results in capabilities and finally in core competencies.

Familiness
(Definition of familiness: The unique bundle of resources a firm has because of the interaction
between the family and the business.)

• Applying the resource-based view to family firms has resulted in new insights into
their competitive advantage. For example, some scholars have argued that family
firms possess unique types of resources as a result of the interaction between the
family and the firm. This idea has been termed ‘familiness’ (Habbershon and
Williams 1999).

• More recent accounts suggest that it is not only the family’s contribution of
resources that matters for performance, but also the family’s configuration of
resources (Sirmon and Hitt 2003). While the resource endowments of a firm may be
important, these resources must also be configured effectively through an appropriate strategy
to achieve a competitive advantage.

Family thus interferes in the resource management process at two levels.

• First, the family contributes certain resources to the firm, such as financial capital,
networks or knowledge.
• Second, the family interferes in the resource management process through the
configuration of resources, that is, through resource selection, deployment, bundling,
leveraging and also shedding.

• The familiness concept foresees that family-provided resources are potential

sources of both competitive advantages and competitive disadvantages. For
instance, while deep tacit knowledge (human capital) may be a source of strength
because it is hard to imitate, it may turn into a disadvantage because it is also hard
to multiply, which hampers growth.

• Similarly, strong networks may be valuable in a fairly stable and local market, but the same
networks may become obsolete and even hinder the evolution of the firm when it comes to
entering new markets (e.g., international markets) for which new relationships have to be
secured. Hence, family-provided resources can turn into positive or negative familiness.
Moreover, family influence might hamper the acquisition or development of certain crucial
resources such as quick access to capital on the stock market or the hiring of ‘top talents’.
Family as resource provider
• Families typically provide their firms with a distinct set of resources. The most prominent of
these include financial capital, human capital, social capital, physical capital and reputation.

• Financial capital - The provision of financial capital by the family is essential to

family firms, which are distinguished from nonfamily firms precisely by the more or
less tight control of family ownership with a transgenerational outlook.

• The nature of the money provided by the family may have various facets beyond the sheer
nominal amount. For example, financial capital can come in forms and ‘qualities’ varying along
dimensions such as type (equity/debt), amount, availability, cost and investment horizon.

• But beyond these obvious features, the money provided by a family has some unique
contractual features that are important to recognize as they can be directly linked to sources
of competitive advantage and disadvantage. These features are displayed in Table 6.2
(discussed by lady camille)
Table 6.2 shows that financial capital in family firms has unique features. The
amount of capital that can be provided by the family tends to be limited, as the family serves
as the firm’s principal capital market unless the firm is publicly listed. This resource restriction
is normally seen as a disadvantage for this type of firm. At the same time, limited availability
encourages owners to use the resources efficiently and parsimoniously.

• Human capital - represents the acquired knowledge, skills and capabilities of a person that
allows for unique and novel actions. Family firms create a distinct context for human
capital (both positive and negative). Some argue that the quantity and quality of
human capital in family firms are limited. For example, when family owners
appoint ill-qualified family members to top management positions because of their
family ties, they deplete (consume) the quality of the firm’s workforce. Moreover,
qualified managers may avoid family firms due to their exclusive succession,
limited potential for professional growth, lack of perceived professionalism and
limitations on equity participation (Sirmon and Hitt 2003).

• In addition to the employees, family members themselves can also be regarded as an

important and unique source of human capital. This is particularly the case when a long-
tenured and committed family CEO—who has learned the business from scratch and who
knows the firm, its products and its customers by heart—is at the helm of the company.
Moreover, in many cases, family members are willing to show extraordinary commitment due
to their personal identification with the firm (for instance, by working significantly more hours
than agreed upon if needed).

• Social capital- involves relationships between individuals or between organizations and is

defined as the sum of the actual and potential resources embedded within, available through
and derived from the network.

• Social capital can affect a number of important firm activities such as resource exchange, the
creation of intellectual capital, learning, supplier interactions, product innovation, access to
markets and resources as well as entrepreneurship (for an overview, see Hitt et al. 2001).
• Families are thus particularly good at creating social capital and can use this resource
advantage to the benefit of their firms. For instance, the family firm can build more effective
relationships with customers, suppliers and support organizations (e.g., banks). In doing so,
the firm garners resources from its network. Thus, family firms may be particularly effective in
reaping the rewards of networks (Sirmon and Hitt 2003).

• Physical capital - includes tangible resources such as property, plant and equipment and can
come in the form of the particular location or setup of a plant, store or building.

• Location-based physical assets may be valuable as they are inherently difficult to imitate. For
instance, a retail store location in a downtown shopping area may provide an enduring
competitive advantage via the preferred customer access. Similarly, the location of a plant
may ensure access to production materials that are unavailable elsewhere (e.g., raw materials
such as minerals, food or chemical products). Physical assets can also lead to a competitive
advantage by providing lower purchasing or production costs.

• Over the years, family firms may have also set up production machinery and capacity that are
hard to copy. However, depending on the industry and region, the value of such physical
assets might deplete over time. What was once an attractive location might become less
valuable due to economic, political or environmental developments. If firm owners do not
recognize and react to such evolutions in a timely manner, a former asset might turn into a
liability.

• Reputation- Family firms are often said to possess unique reputations and brands (Miller and
Le Breton-Miller 2005), such as being trustworthy and quality-driven.

• The credibility and trustworthiness of family firms in the marketplace as well as in the wider
stakeholder community (e.g., local opinion leaders, suppliers and competitors) is often tied to
the personal engagement and visibility of family members within their firms. This seems to be
particularly true in the case of eponymous firms, that is, firms that bear the name of the family
or family founder.

• A firm will not necessarily benefit from a price premium simply because it is known to be a
family firm. However, customers will value a family’s long-term personal engagement with the
firm—as evidenced, for example, in higher customer retention and referrals—which is a
resource that is hard to imitate (Binz et al. 2013).

• Here again it is important to consider the opposite side of the coin: although family
firms may have a reputation for reliability and quality, they may also stand for
resistance to change, stagnation and outdated business processes. Hence, the
relevant question is not whether a firm has a family business reputation, but
whether that image is a source of positive or negative familiness.