Monday, July 27, 2015

Researchers Assess the Meaning of ‘Value Creation’ in Family Firms

An article in the June 2015 issue of the Journal of Family Business Strategy, “Value creation in family firms: A model of fit,” investigates the convergence of goals, resources and governance in the family firm and how they can either create or destroy value over time. Value-creation in family firms is a commonly-debated issue amongst researchers and has led to several empirical studies and many publications arguing that family firms either have unique competitive advantages, superior financial performance, or alternately, unique disadvantages as a result of their “familiness” and idiosyncrasies which are not present in non-family firms.

While this particular article is neither easily digestible nor a particularly essential read for the average family business member nor professional advisor, and while it was also intended to frame several other articles elsewhere in the journal’s special issue on value creation in family firms, the authors do make several attempts to outline relevant questions and areas of exploration for advisors when working with families, which we will briefly summarize here, followed by some useful and practical questions for use in work with families.

The authors argue that advisors and professionals working with family firms must take into account the family firms’ goals, resources and governance mechanisms in order to accurately draw conclusions about value creation within the firm, and furthermore, that in order to create a fit and maximize effectiveness, the three main factors in value creation (goals, resources and governance structure), should be prioritized when assessing the “fitting process.”

The authors describe the meaning of “fit” as the effects between goals, resources and governance as well as the fit of the specific firm and its surroundings, ultimately calling for integration of and accounting for the environment, the owners and the organization. An effective illustration of their concept is depicted in Figure 1, “Model of value creation in family firms,” which readers of this blog should be able to find by conducting a simple Google search of images, using the following specific search phrase: “Fig 1 Model of value creation in family firms 64 N. Kammerlander Journal of Family Business Strategy 6 2015.”

The authors write:
… even when a family firm has managed to build up unique resources, if these resources do not match the requirements of the firm’s context, value creation is unlikely … The deployment of even the most useful and valuable resources is inefficient if governance structures are set up in a way that impedes purposeful resource orchestration. When there is a misfit between the family-specific goals in the family firm and the output created by the firm’s specific resources within the given governance structures, the created ‘value’ will likely not be perceived as being ‘valuable’ by the family owners. Creating fit among several ‘ingredients of value creation’ – in our framework, goals, resources, and governance – raises the question of which of the three elements – goals, resources, or structure – should be prioritized when initializing the ‘fitting process.’

Cautioning professional advisors to assess a family firm’s governance structures carefully in order to distinguish between actual and ceremonial governance elements, the authors provide the following questions to provoke thought and use in discussions with family members:

What are the main goals of the family owners?

What resources are available?

Do the available resources support or hinder the family owners’ goals?

How can we adapt the resource base through leveraging, acquiring, and shedding resources to attain those goals?

What governance structures are in place in the family firm and why do they exist?

Are things this way for historical reasons or because of ‘‘fit’’?

Have structures been adapted over the years?

Are there constructive discussions about whether and how the extant governance structures support the efficacious deployment of resources?

Do governance principles exist for all levels — firm, owners, family, and wealth?

How are they coordinated and aligned?

Are they adapted to the existing goals?

How effective are they at mitigating potential conflicts?


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