A FAMILY-BASED COMPETITIVE ADVANTAGE: HANDLING KEY SUCCESS...

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A FAMILY-BASED COMPETITIVE ADVANTAGE: HANDLING KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES* Jorge Avendano-Alcaraz* Louise Kelly** Rosa Nelly Trevinyo-Rodríguez**' Sergio Madero Gómez'*" This article is pan ofthe Project Family Infiuence on Financial Performance Satisfaction in Mexican Family Businesses. This project slatted on March 2004 and it was concluded on February 2007. It was a Project supported by the business school of Alliant Iniemational University (US) and Tecnológico de Monterrey (Mexico), The article was received on 30-04-2009 and was accepted for publicalion on 19-10-2009. Doctor in Business Administration. AUiant Internationa! University, San Diego, USA, 2006; Magister in Business Ad- ministration, Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Culiacan, Mexico, 1995; Ingeniem industrial eléctrico. Instituto Tecnológico de Saltillo, Saltillo. Mexico, 1989. Director ofthe Business Department at ITESM. Saltillo. Mexico. Member ofthe National Researchers System in Mexico and member ofthe Family Business Research Group at ITESM. E-mail: jorge.avendano@Ítesm.mx. PhD in Strategic Management, Concordia University. Quebec, Canada, 1996. Professor of Strategy at Marshall Golds- mith School of Bu-siness of Alliant Intemational University, San Diego, USA. E-mail: [email protected]. PhD in Family Business Management, lESE Business School, University of Navana, Barcelona, Spain. 2007; Magis- ter in Dirección e Intemacionalizacion de la Empresa Familiar, EAE-Universidad Politécnica de Cataluña. Barcelona, Spain. 2003: Licenciada en Administración de Empresas, Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Monterrey, Mexico, 2002. TEC of Monterrey Family Business Center Director and ITESM Campus Monte- rrey Family-Owned Business Chair. Worked for the legal firm Cuatrecasas (Barcelona) within the civil, administrative law and tax litigation department writing family business constitutions and offering advice to several governmental institutions. E-mail: [email protected]. Doctor in Economics and Administrative Sciences, Universidad de Deusto, San Sebastian, Spain, 2006; Magister in Desarrollo Organizacional, Universidad de Monterrey, Monterrey, Mexico, 2000; Licenciado en Sistemas de Compu- tación, Administrativa. Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). Monterrey, Mexico, 1986. Professor and researcher ofthe Administration Department of ITESM, Monterrey, México. Member ofthe Fa- mily Business Research Group at ITHSM. E-mail: [email protected]. Cuad .Adm. Bogotá (Colombia). 22 (39): ¡9J-2i2.ju¡io-diciembrf; de 2009 \ 91

Transcript of A FAMILY-BASED COMPETITIVE ADVANTAGE: HANDLING KEY SUCCESS...

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A FAMILY-BASED COMPETITIVEADVANTAGE: HANDLING KEYSUCCESS FAMILY FACTORS IN

MEXICAN FAMILY BUSINESSES*Jorge Avendano-Alcaraz*

Louise Kelly**Rosa Nelly Trevinyo-Rodríguez**'

Sergio Madero Gómez'*"

This article is pan ofthe Project Family Infiuence on Financial Performance Satisfaction in Mexican Family Businesses.This project slatted on March 2004 and it was concluded on February 2007. It was a Project supported by the businessschool of Alliant Iniemational University (US) and Tecnológico de Monterrey (Mexico), The article was received on30-04-2009 and was accepted for publicalion on 19-10-2009.

Doctor in Business Administration. AUiant Internationa! University, San Diego, USA, 2006; Magister in Business Ad-ministration, Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Culiacan, Mexico, 1995; Ingeniemindustrial eléctrico. Instituto Tecnológico de Saltillo, Saltillo. Mexico, 1989. Director ofthe Business Department atITESM. Saltillo. Mexico. Member ofthe National Researchers System in Mexico and member ofthe Family BusinessResearch Group at ITESM. E-mail: jorge.avendano@Ítesm.mx.

PhD in Strategic Management, Concordia University. Quebec, Canada, 1996. Professor of Strategy at Marshall Golds-mith School of Bu-siness of Alliant Intemational University, San Diego, USA. E-mail: [email protected].

PhD in Family Business Management, lESE Business School, University of Navana, Barcelona, Spain. 2007; Magis-ter in Dirección e Intemacionalizacion de la Empresa Familiar, EAE-Universidad Politécnica de Cataluña. Barcelona,Spain. 2003: Licenciada en Administración de Empresas, Instituto Tecnológico y de Estudios Superiores de Monterrey(ITESM), Monterrey, Mexico, 2002. TEC of Monterrey Family Business Center Director and ITESM Campus Monte-rrey Family-Owned Business Chair. Worked for the legal firm Cuatrecasas (Barcelona) within the civil, administrativelaw and tax litigation department writing family business constitutions and offering advice to several governmentalinstitutions. E-mail: [email protected].

Doctor in Economics and Administrative Sciences, Universidad de Deusto, San Sebastian, Spain, 2006; Magister inDesarrollo Organizacional, Universidad de Monterrey, Monterrey, Mexico, 2000; Licenciado en Sistemas de Compu-tación, Administrativa. Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). Monterrey, Mexico,1986. Professor and researcher ofthe Administration Department of ITESM, Monterrey, México. Member ofthe Fa-mily Business Research Group at ITHSM. E-mail: [email protected].

Cuad .Adm. Bogotá (Colombia). 22 (39): ¡9J-2i2.ju¡io-diciembrf; de 2009 \ 91

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JORGE AVENDANO-ALCAHAZ, LOUISE KELLY, ROSA NELLY TREVINYO-RODRÍGUEZ, SERGIO MADERO GÓMEZ

A Family-BasedCompetitive Advantage:

Handling Key SuccessFamily Factors inMexican Family

Businesses

ABSTRACTBeing a family business is not good or bad per se; it is an extra characteristic that ma-nagement has to deal with. In fact, family influence can become a blessing or a cursefor a company, depending on how family members handle Key Success Family Factors(KSFF). This paper presents the Two Stages Scoring (TSS) model, a tool Ihat compa-nies can use to develop a competitive advantage based precisely on family influence.TSS Model is based on results obtained in a Mexican Family Businesses research,in whicti the relationship between family influence and fimi performance was tested.The variable "family influence" was measured through the common F-PEC instrumentand by FAMILIAL INDEX, while the "firm performance" was measured by CEO levelof satisfaction on six financial performance dimensions. Conclusions of the researchinclude that family influence-firm performance relationship is not high for this sampleof companies and, as a consequence, the TSS model is proposed based on the ideathat firm performance is related more effectively to the KSFF.

Keywords:Mexican family businesses, competitive advantage, key success famiiy factors.

Una ventaja competitivabasada en la familia:

manejo de los factoresfamiliares clave para el

éxito en las empresasfamiliares mexicanas

RESUMENSer una empresa familiar no es bueno o malo per se; es una característica adi-cional con la cual debe contar la gerencia empresarial. De hecho, la influenciafamiliar puede llegar a ser una bendición o una maldición para una eompañia, se-gún cómo los miembros de ia familia manejen los factores familiares clave para eléxito (FFCE). Este articulo presenta el Modelo de Puntuación Bifásica (MPB), quelas compañias pueden usar para desarrollar una ventaja competitiva basada enla influencia familiar Se respalda en los resultados de una investigación realiza-da en empresas familiares mexicanas, en la cual se estudió ta relación influenciafamiliar-desempeño empresarial. La variable "influencia familiar" se midió a travésde los instrumentos F-PEC tipo común y el FAMILIAL INDEX; la variable "desem-pei^o empresarial", a través de la satisfacción de los directores ejecutivos de lasempresas, en seis dimensiones de desentipeño financiero. Las conclusiones dela investigación indican que la relación planteada no es alta para esta muestraempresarial; en consecuencia, se propone el modelo MPB con base en la idea deque el desempeño empresarial está más efectivamente reiacionado con los FFCE.

Palabras clave:empresas familiares mexicanas, ventaja competitiva, factores familiares clave para

el éxito.

Uma familia baseada navantagem competitiva:manejo dos principáisfatores de sucesso ñas

empresas familiaresmexicanas

RESUMOSer uma empresa familiar nao é bom ou ruim por si só. é uma caracteristica adicio-nal com a qual a gesEäo deve lidar. Na verdade. a influencia da familia pode ser umabënçâo ou uma maldiçâo para uma empresa, dependendo de como os membros lidemcom os Fatores Chave de Sucesso Familiar (KSFF). Este artigo aprésenla as duasfases de pontuaçâo (TSS) do modelo, uma fen-amenta que as empresas podem usarpara desenvolver uma vantagem competitiva baseada justamente sobre a influenciada familia. O modelo TSS é baseado nos resultados obtidos em uma pesquisa sobreas empresas familiares mexicanas, em que a relaçâo entre a influencia da familiae desempenho da empresa foi testado. A varíável "influencia da familia" foi medidaatravés da F-PEC e por o indice familiar; enquanto o "desempenho da empresa" foimedido pelo CEO nivel de satisfaçao em seis dimensóes de desempenho financei-ro. Em conclusâo. o relacionamento influencia familiar-desempenho da empresanao é alto para esta amostra de empresas e, como consequéncia, o modelo TSS éproposto com base na idéia de que o desempenho da empresa está relacionada deforma mais eficaz para o KSFF.

Palavras chave:negocio familiar mexicano, vantagem competitiva, fatores chave de sucesso familiar.

192 Cuad .Adm. Bogotá (Colombia). 22 (39): ¡9I-2l2.juli(hdidenibre de 2009

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A FAMIIY-BASED COMPETITIVE ADVANTAGE: HANDUNG KEY SUCCESS FAMIÍY FACTOHS IN MEXICAN FAMILY BUSINESSES

Introduction

The mode in which the owner-family affectsthe operations of a business captures the at-tention of many family-business researchersin the world, and is a matter of debate. In thispaper it is stated that the relationship betweenbusiness performance and family influence isnot as important as the relationship betweenbusiness performance and the Key SuccessFamily Factors (KSFF). Based on this con-jecture, a model to develop a competitiveadvantage in the business based on its familynature is proposed.

The paper begins with a review of the argu-ments that some authors use in favor of thepositive family influence as well as the argu-ments against the negative family influenceon the business. A survey of Mexican familybusinesses was conducted and its findings,which explore the nature of the relationshipbetween performance and family influence,are then presented. The family influence wasmeasured using the F-PEC instrument pro-posed by Astrachan, Klein, and Smymios(2002). Due to the fact that many Mexicanfamily businesses do not use the concept of"Governance Board" included in the F-PEC,in their daily activities a second instrumentwas applied: the FAMILIAL ÎNDEX propo-sed by Avendaño (2006).

From this research, it could be said that therelationship between performance and familyinfluence is not strong using any of the ins-truments, FPEC and FAMILIAL INDEX,for the Mexican FB included in the sample.

Next, the concepts and explanations of de-veloped model are presented along with anexample of the application to a real Mexicanbusiness. Finally, suggestions for future re-search on this topic are provided.

1. Importance of Family Business

In the global world of today, most countriesand regions have businesses as the basicunits for economic development, and manyof them are family-owned and operated. Thisform of business is probably the oldest in hu-man history (Lea, 1991 ), and it remains veryimportant even today. The following exam-ples demonstrate the importance of familybusiness: nearly 40% of the 1990 Fortune500 companies were family owned or con-trolled (Lea, 1991 ). The famous Levi StraussCompany was controlled by a family sinceits beginning—a cenmry and a half ago—andDuPont, controlled by the same family for170 years, has become the biggest chemicalcompany in the world.

Astrachan and Shanker (2003) presen-ted family business (FB) contributions tothe US economy in terms of number ofcompanies,%age of GDP and%age of wor-kforce in 2000. Considering their definition,there are 24.2 million family businesses inthe USA, which corresponds to 89% of the27,2 million registered with the Internal Re-venue Service (1RS). According to the broaddefinition, family businesses generated 64%of the Gross Domestic Product (GDP) andemployed 62% of the workforce (82 millionworkers). As can be seen, any of the three

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criteria yield solid arguments to establish thesignificance of the family business sector inthe U.S. economy.

Similarly, family businesses have a high con-tribution to the economy in other countries.For example, Neubauer and Lank (1998)presented some rough estimates of the num-ber of family businesses in some countries:in Portugal the number of family businessesaccounts for 70% of the total; in the UnitedKingdom, 75%; Spain, 80%; Switzerland,85%; and Sweden, Italy and Middle Easterncountries report over 90%.

In Mexico, the contribution of family busi-nesses to the Mexican economy is similar tothat of the United States. As evidence, fiveof the top ten biggest companies in Mexico(Expansion, 2008) are family businesses.These companies are America Movil, Ce-mex, Femsa, Telmex and Telcel. The otherfive companies of the top ten are Pemex andCFE (govemment companies) and Walmart,GM and BBVA-Bancomer (Global compa-nies). Continuing with contributions of FBto Mexican economy. La Porta, López-de-Silanes, and Shleifer ( 1999) stated that fami-lies control neariy 100% of Mexico's largestfirms. Unlike large businesses, there is notenough statistical information on mediumand small family firms; there is no censusto define the type of businesses (family andnon-family) in Mexico and no ofiñcial agencyregisters firms in this sector.

Despite the above evidence on the impor-tance of family business in the United Sta-tes, Mexico and other countries around theworld, the research in this field is still evol-

ving (Bird, Welsch, Astrachan, and Pistrui,2002), with many questions remaining unan-swered. One of them is the contribution offamily members to business performance: Isit good or bad for a company to have mem-bers of the owner family in the organization?How does the family infiuence the business?The next section includes some aspects ofthis question.

2. Family Influence on the Business

There is no general agreement among resear-chers on how the family influences the busi-ness. Ginebra (1999) identified some com-mon advantages and disadvantages aboutthis business type. Among weaknesses or di-sadvantages, Ginebra included (a) nepotism;(b) autocracy; (c) difficulty in delegation; (d)paternalism; (e) confusion in cash flows; (f)manipulation by family members; and (g)lack of definition of organizational structure.From this point of view, the family could beseen as a bad influence on a business, and insome extreme situations becomes a curse tofamily members.

From the opposite point of view, a familyinfluences a business positively. There aresome authors who identify advantages onbeing a family business. James and Kaye(1999) referred to three advantages that fa-mily businesses incorporate: (a) implicit con-tractual relationships among family memberspre-exist business involvement, and manyof them result in agency costs which arerelatively lower than formal, explicit rela-tionships; (b) competitive advantage ensueswhen the horizons of decision makers arebroadened due to commitment to the long-

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A FAMILY-BASED COMPÉTITIVE ADVANTAGE; HANDUNG KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES

term support ofthe family; and (c) firm va-lue is enhanced due to the access to familyresources, especially when access to othercapital is limited.

Continuing with the positive aspects of beinga family business, Ginebra recognizes thepotential presence ofthe following strengthsin family businesses: (a) comprehension; (b)acceptance of authority; (c) common goals;(d) dedication; (e) flexibility; and (f) agilityin deciding and implementing. Some additio-nal advantages are: knowhow, long term ho-rizons, service attitudes, executive stability,and the power ofthe family group. The bestfamily businesses have always maintainedthe principles of quality, customer serviceand respect in their treatment of employees(Goldwasser, 1986).

In addition, the family influence may lead toa sustainable competitive advantage throughleveraging on internal resources, as sugges-ted in the resource-based view (RB V) theory(Down, Dibrell, Green, Hansen, and John-son, 2003). Similarly, Habbershon and Wi-lliams (1999) argued that RBV applies tofamily business and deñned "famili-ness"as the unique bundle of resources that a par-ticular firm has because ofthe system's in-teraction between the family, its individualmembers, and the business.

From these arguments, family could be seenas a good influence to business and in someextreme situations becomes an absolute bles-sing to family members. This conclusion isthe exact opposite ofthat proposed earlier.

3. Empirical Research in MexicanFamily Business

A stirvey was applied to various companiesin Mexico to pursue the investigation oftherelationship between family influence andbusiness performance. The specific purposeof this research was to examine the type ofrelationship between family influence and thefinancial performance satisfaction in Mexi-can family businesses.

3.1 Sampie

All companies involved in this study arelocated in the northwest region of Mexico,specifically in the following cities: Tepic,Guadalajara, Culiacán, Hermosillo, Noga-les, Mexican, Tijuana, Tecate, and Ensena-da. A total of 354 surveys were sent out and102 were returned, a response rate of 28.8%.The firm's mailing addresses were extractedfrom Tecnológico de Monterrey databasesand from the Sistema de información Em-presarial Mexicano (SIEM), a public na-tional database of private companies. Thecriteria for company selection were that thecompanies were family businesses and thatmost of them were small-and medium-sizedcompanies. Less than 10 companies werelarge companies.

Data were collected through a questionnairesent to the CEO's of companies through: (a)mail or fax; and (b) electronic mail. In addi-tion, 10 face-to-face interviews were conduc-ted as a pretest stage. CEO's were selected asrespondents considering they have the ove-rall information ofthe business. , ' ^' '" i

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JORGE AVENDANO-AICARAZ, LOUISE KEaY, ROSA NELLY TREVINYO-RODRÍGUEZ, SERGIO MADERO GÓMEZ

An interesting finding during the collectionprocess was the fact that many Mexican fa-mily businesses were very secretive, and theydid not want to share information regardingthe family. This made the data collection avery difficult challenge; actions were there-fore needed in order to increase the responserate. First, surveys with a presentation letterwere printed out on official paper to get therespondents' trust. After that, one big envelo-pe containing the survey and a second envelo-pe with the mailing return address were sentto each firm. Then, the monitoring processtook place with a group of 11 people engagedpart-time in collecting activities. Six of themwere responsible for phone-call monitoring.The first phone call was made to each firm toconfirm that the survey had been received,and in some cases it was necessary to re-sendthe survey by mail, fax, or electronic mail.Three, four, or sometimes more phone callswere made in order to increase the number ofsurvey respondents. Even so, many surveyrecipients failed to answer effectively.

3.2 Measures •. >

This study focused on the relationship bet-ween the variables of family influence andsatisfaction with financial perfonnance inMexican family businesses. The family in-fiuence was measured through the F-PECinstrument (Astrachan et al., 2002), whichcomprises the subscales of Power, Experien-ce, and Culture.

Considering that Governance Board con-cept, included in power subscale of F-PEC,has low practical usage in Mexican FB, a se-cond instrument was incorporated to measu-

re family influence, the FAMILIAL INDEX(Avendaño, 2006). Both the F-PEC and FA-MILIAL INDEX instruments are explainedin detail later. On the other side, the financialbusiness performance was measured throughthe CEO level of satisfaction in six perfor-mance dimensions. These dimensions weresales volume growth, net profit growth, re-turn on investment, increasing positive cashflow, operating profit, cash balances/redu-ced debt. Figure I presents the research mo-del used in this study. The specific researchquestions investigated in this study are thefollowing:

• What is the relationship between the familyinfiuence, as measured by the F-PEC sca-le, and the satisfaction with financial per-formance in Mexican family businesses?

• What is the relationship between the fa-mily infiuence, as measured by the FAMI-LIAL INDEX, and the satisfaction withfinancial performance in Mexican familybusinesses?

3.3 Statistical Analysis

Data were analyzed with multivariate techni-ques, including correlation matrix analysis,factor analysis, bivariate, multiple regres-sions, and stepwise regression. SPSS version12 was used as statistical computer sofiware.

3.4 Results

Table 1 presents the descriptive statistics ofthe sample. And complete results are presen-ted in detailed format in Avendaño (2006);the main results are summarized next:

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A F.̂ MlLv-BASED COMPÉTITIVE ADVANTAGE; HANDUNG KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES

Figure 1

The Research Model

Family Influence(F-PEC and FAMILIAL INDEX)

SatisfactionFinancialPerformance

Source: Author preparation.

Table 1

Descriptive Statistics of the Sample (n=102)

Geographical Locations of the Family BusinessSample

City in Mexico

Tijuana

Mexicali

Hermosillo

Nogales

Tepic

Ensenada

Tecate

Other

Total

Percentage

25.5

18.6

3.9

7.8

2.9

5.9

6.9

28.4

100.0

CEO's Characteristics

CEO Education

Junior High

High School

Bachelor Unfinished

Percentage

6.9

7.9

8.9

Bachelor Graduate

Master or Doctorate

Other

CEO Relationship to Founder

Founder is the CEO

Son/Daughter

Grandson/Granddaughter

Brother/Sister

Wife/Husband

No relation

Other

60.4

11.9

4.0

Percentage

38.1

36.1

5.2

5.2

4.1

10.3

1.0

Company Characteristics

Items

Year Founded

Year Family Became Owners

# Full-Time Employees

# Total Employees

Mean

1975

1978

134.6

146.6

StandardDeviation

19.9

18.1

271.5

274.9

Contiiiued

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Industry

Agriculture

Manufacturing

Constmction

Real Estate

Retail

Services

Transportation

Wholesale/Distributjon

Other

Several

Percentage

2.0

23.5

4.9

4.9

10.8

26.5

2.9

14.7

5.9

3.9

Characteristics of Families in Business

Family Ownership

100% Ownership

90% Ownership

Less than 90%

Existence of GovernanceBoard

Yes

No

Percentage

78.0

5.0

17.0

Percentage

57.8

42.2

Source: Author preparation.

3.4.1 Family Influence vs. BusinessPerformance through the F-PEC

Multiple regression analysis was effected toaccount for the size of the variance in satis-faction with financial performance for thecombination of power, experience and cul-ture. Table 2 presents the results.

The combination of power, experience, andculture explains the 24.8% of the varianceof performance as measured for this analysiswith statistical significance (p^O.O). Howe-ver, experience subscale individually had nostatistical significance (t=0.058, p=0.954).

As measured through the F-PEC, family in-fluence compared to satisfaction with finan-cial performance is statistically significantand positive, as can be seen in Table 2, butthis influence is not high. Individually, Powerand Culture have a positive relation with sa-tisfaction with financial performance, whi-le Experience had no evident relationship.

Table 2

Results of Multiple Regression

Mode! Summary

Modei

1

R

0,524'

R Square

0.275

Adjusted RSquare

0.248

Std. Error of theEstimate

0.86440876

ANOVA

Model

1

Regression

Residual

Total

Sum. of Squares

21.248

56.04

77.288

Df

3

75

78

Mean Square

7.083

0.747

F

9.479

Sig.

0.000'

Continued

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A FAMÍLV-BASED COMPETITIVE ADVANTAGE: HANDUNG KEY SUCCESS FAMILY FACTORS ÍN MEXICAN FAMILY BUSFNESSES

0.514

0.005

Model

(Constant)

Power

Experience

Culture

Coefficients'

Unstandardized Coefficients

ß

-1.719

0.018

0.009

0.278

Std. Error

0.153

0.107

Beta

0.360

0.006

0.273

Standardized Coefficients

t

-3.344

3.388

0.058

2.590

Sig.

0.001

0.001

0.954

0.012

• Dependent variable: Business performance, independenl variabies: Power; Experience; Culture.

Source: Author preparation.

Table 3

FAMILIAL INDEX: Performance Regression Variables

Model Summary

Model

1

R

0.342'

R Square

0.117

Adjusted R Square

0.105

Std. En-orof the Estimate

0.94445707

ANOVA

Model

1

Regression

Residual

Total

Sum of Squares

8.404

63.332

71.736

Df

1

71

72

Mean Square

8.404

0.892

F

9.421

Sig.

0.003'

Coefficients'

Model

1(Constant)

FAMILIAL INDEX

Unstandardized Coefficients

B

-1.328

0.009

Std. Error

0.470

0.003

Standardized Coefñcients

Beta

0.342

t

-2.828

3.069

Sig.

0.006

0.003

' Dépendent variable: Business Performance. Independent variable: FAMILIAL INDEX.

Source: Author preparation.

Thus, Power and Culture influence satisfac-tion with financial performance in Mexicanfamily businesses. This finding is consistentwith those presented in Alexander's (2003)

research for cultural construct, but it doesnot include Experience. Alexander's studyhad no conclusion for Power construct dueto missing data.

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JORGE AVENDANO-ALCARAZ, LOUISE KELLI', ROSA ' TREVINYQ-RODRIGUEZ, SERGIO MADERO GÓMEZ

3.4,2 Family Influence vs. BusinessPerformance through the FAMILIALINDEX

This section presents findings on the relation-ship among family influence and businessperformance satisfaction variables throughthe FAMILIAL INDEX instrument. Table 3presents regression results.

Table 3 makes it possible to detect a positiverelation (standardized beta=0.342) betweenFAMILIAL INDEX and Performance withhigh statistical significance (p=.OO3). Howe-ver, the performance variance, explainedby FAMILIAL INDEX, is low (Adjusted RSquare=0.105).

Table 4 presents a summary ofthe relation-ships between independent variables andbusiness performance. As a conclusion itcould be said that the relationship betweenperformance and family influence is not highusing both instruments (FPEC and FAMI-LIAL INDEX), for Mexican FB included inthe sample. Thus, family influence is not asolid predictor of satisfaction with businessperformance. i • .

Table 4

Summary of Findings

RelatedVariables

Power-Perfor-mance

Experience-Performance

Culture-Perfor-mance

Type ofRelation

Direct

Direct

Direct

Grade ofRelation

Medium-Low

Low

Low

StatisticalSignificance

Yes

No

Yes

RelatedVariables

Family Influen-ce-Performan-ce {FAMILIALINDEX)

Family Influen-ce-Performan-ce {F-PEC}

Type ofReiation

Direct

Direct

Grade ofRelation

Low

Medium

StatisticalSignificance

Yes

Yes

Source: Author preparation.

4. Moving to the PotentialCompetitive Advantage Paradigm

We can confirm from the above discussionthat for a business it is not inherently bador good, positive or negative to be family-influenced. Thus, an alternative researchpath could be explored. Beyond the positive-negative, or good-bad dichotomy, family in-fluence could be seen just as a business cha-racteristic. All the characteristics of a familybusiness can be seen as potential advantagesor disadvantages. Depending on how familymembers manage these characteristics, theybecome an advantage, a disadvantage or aneutral characteristic regarding the businessperformance. For example, one family busi-ness characteristic —succession— can be anadvantage to performance if well managed,but it can be the reason for failure if badlymanaged. Also, it is possible for successionto be just neutral, without reducing or increa-sing business performance. The followingproposition can be stated:

Pl. In a family business, family issues can

become an advantage, disadvantage or neu-

tral to business performance depending on

how family members manage them.

200 Cuad. Adm. Bogotá (Colombia). 22 (39): ¡91-212, julio-dictembre de 2009

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A FAMILY-BASED COMPÉTITIVE ADVANTAGE: HANDUNG KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES

This proposition requires a definition of^-mily issues for better understanding. Familyissues are those characteristics which mightafFect or improve the business due to familyrelationships. These family issues can benamed KSFF based on similarity to the KeySuccess Factors (KSF) definition., presentedin following section.

5. Key Success Family Factors

In strategic management theory, KSF are thefactors that most affect business performan-ce. "Industry's key success factors (KSFs)are the things that most affect industry mem-bers' to prosper in the marketplace" (Thomp-son and Strickland, 2003, p. 106). This refersto the particular strategy elements, productattributes, resources, competencies, compe-titive capabilities and business outcomes thatspell the difference between profit and lossand ultimately between competitive successor failure. Based on similarity with KSF de-finition, KSFF are defined in this paper asthose factors regarding family relationships,with the potential of affecting or improvingthe overall business performance. SomeKSFF candidates are succession, family sa-lary system, ownership distribution, rules fornew entrants, previous experience of newentrants, job descriptions, and others. UsingKSFF definition. Proposition 1 can be modi-fied as follows:

P2. In a family business, KSFFs can beco-

me an advantage, disadvantage or neutral

to business performance depending on how

family members manage them.

The KSFFs can vary depending on the na-tional culture. For example, in the empiricalstudy applied to Mexican Businesses, onequestion was included to request respondentsto mention all the challenges ofthe firm, re-garding the family relations. Table 5 presentsa ranking with the most-mentioned challen-ges by Mexican family firms.

Table 5

List of Challenges

No.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Name of Challenge

Lack of a strategic business pian

Lack of administrative procedures

Lack of operationai procedures

Succession definition

Mixture of famiiy issues and busi-ness issues

Undefined positions or dupiicationof functions

Resistance to Change

Lack of a method of confiict soiution

Lack of njies for famiiy members toenter the business

Inadequate evaluation of familymembers' perfomiance

Undefined authority or dupiicationof command

Lack of previous experience of familymembers

Inadequate family and non-familyremuneration system

Lack of professionai education offamily members

Individual objectives not aligned withthe business

No. ofMentions

39

38

32

27

27

26

25

21

20

19

19

15

14

13

10

CoDtinued

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No.

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

Name of Challenge

More employees than the businessneeds

Conflict between family members ininvestment decisions

Lack of skilled personnel in functio-nal areas

Lack of commitment of the personnel

Showing sense in different emergen-cy situations

Being up-to-date

Creation of new businesses

Consolidation of a joint-stock com-pany

Documentation of operation proces-ses and administration

Change of legal regime

Diversify merchandise

Creation of up-to-date projects andpromotions

Personnel rotation

Inadequate motivational systems

Personnel training

Development and growth

Strategic Association

Student sons/daughters (minor)

Have sufficient funds for program-med growth

Be more profitable

No. ofMentions

10

9

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Source: Authors preparation.

This list of challenges produced by the sur-vey is a potential list of KSFF's for Mexicancompanies. An analysis of the challenges fa-ced by the companies of the sample show usthat the first three refer to business procedu-

res and strategic directions of the firm morethan family ties. These three challenges arecommonly present in non-family firms too,so this could be interpreted to mean that fa-mily firms share the challenges of lack ofan strategic plan, the lack of administrativeprocedures and the lack of operational pro-cedures with some non-family firms. The na-ture of a family firm does not exempt it fromfacing these challenges. On the other hand,challenges with Nos. 4, 5, 9, 10, 12, 13, 14,and 17 in Table 5 are exclusive for familyfirms, so we can conclude that in addition tousual internal and extemal challenges, familyfirms face a set of particular challenges rela-ted to family relations. This means in a com-parison with non-family firms; family firmsface a higher grade of difficult when mana-ging the business. This requires an additionalpreparation for the Top Management Teamof a family firm of topics regarding familyconflict solutions.

6. Two-Stage Scoring Model

A Two-Stage Scoring Model (TSS) was de-veloped as a consequence of the results ob-tained in the empiric research of MexicanFamily Businesses. If family infiuence is nothighly related to business performance, thenan additional path must be explored in orderto take advantage of the family ties and usethem in benefit of the firm.

This path is the TSS (Figure 2) which is aconceptual proposal to help companies win acompetitive advantage based on family cha-racteristics. This model allows to test Propo-sition 2 and allows for the potential construc-tion of business competitive advantage based

202 Cuad. Adm. Bogotá (Colombia). 22 (39): 191-212. jtdio-diciembre de 2009

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Figure 2

Two Stages Scoring Model (TSS)

stage 1 Stage 2

FamilialScore

Low\

Medium

\

\

High

KSFF1

KSFF 2

Success factors Score

No familial Surveillance -1impact offamiliy

dynamic

KSFFN-1

FamilialCompetitiveAdvantage

Conù'Ol* • of family

Influence

FamilialCompetitiveDisadvantage

Source: Authors preparation.

on internal resources, as suggested by Hab-bershon and Williams (1999), applying theresource-based approach. The TSS model isdivided in two main stages; the first is desig-ned to obtain a familial score, and the secondis designed to obtain scores for each KSFF.

7. The First Stage of Two-StageScoring Model

The first stage of TSS provides a score on theinfiuence of a family to a specific company("Familial Score"), which is categorized as"low" "medium" or "high". A low familialscore does not require that the companyshould worry about family aspects becausethe company is not a real family business; andthe model ceases to apply. For a medium fa-milial score, the situation requires the super-vision of family dynamics and taking actiononly when family problems become apparent.

Beyond that, the model ceases or apply. But ifthe familial score is high, then the company isfacing a stronger challenge and moves to thesecond stage of the model. Before explainingthe second stage, we must present the waysused to obtain the familial score.

7.1 Familial Score

Familial score is a number in a continuumscale reflecting the influence of the family onthe business and it can be obtained throughone of the available instruments in the familybusiness field. One of them is the F-PEC ins-trument proposed by Astrachan et al. (2002)which comprises power, experience and cul-ture subscales. Another instrument of mea-surement is the Familiar Index (Avendaño,2006) which comprises management andownership variables. The following sectionpresents these two measurement tools.

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JORGE AVENDANO-ALCARAZ, LOUISE KELLY, ROSA NELLY TREVINYO-RODRÍGUEZ, SERGIO MADEBO GÚMEZ

7.1.1 F-PEC Scale

The F-PEC tool is an instrument that assignsa grade of family influence to a business(Astrachan et al., 2002). The F-PEC scale(Family-Power. Experience, Culture) is for-med by three subscales: (a) power, (b) expe-rience, and (c) culture. Each subscale com-prises some elements as presented in Figure3. Power subscale comprises (a) ownership,(b) governance, and (c) management. Expe-rience subscale includes four elements: (a)generation of ownership, (b) generation ac-tive in management, (c) generation active in

governance (on the board), and (d) numberof contributing family members. Finally, theculture subscale comprises (a) family busi-ness commitment and (b) overlap betweenfamily values and business values.

The power subscale comprises the owners-hip, governance and management elements.According to the F-PEC authors, a familycan influence a business through the extent ofits ownership, governance and managementinvolvement, which explains the inclusionof these elements on the F-PEC. Among theauthors who use ownership or management

Figure 3

F- PEC Scale

F-PECPower Subscale

Ownership(drred and indirect)

Governance(family and non-family

board members)

Management{family and non-family

board members)

TheF-P EC Scale

F-PECExperience Subscale

Generation of ownership

Generation active inmanagement

Generation active on thegovemance board

Number of contributingfamily members

F-PECCultural Subscale

Family businessCommitment

Overlap between familyvalues and business vattjes

Source: Astrachan et al. (2002).

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A FAMILY-BASED COMPETITIVE ADVANTAGE: HANDLING KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES

in their definitions are Barry ( 1975), Bamesand Hershon (1976), and Stem (1986). Theownership element reeords the shares ownedby family members and non-family mem-bers. The governance element includes thequantification of family members, as wellas non-family members, participating inthe governance board. Finally, managementelement of the power subscale quantifiesthe number of members and non-membersof the family who participate in the mana-gement board.

The experience subscale incorporates theparticipation of the generation active inownership, the governance board and themanagement board, as well as the numberof contributing family members. Gene-ration has been considered a definitionalfactor for many authors like Churchill andHatten (1987), Ward (1987), and Handler(1989).

The culture subscale refers to organizationalculture and comprises family business com-mitment and overlap between family andbusiness values. Dyer (1986) and Carlockand Ward (2001) gave an important role tothe culture aspect ofthe family business de-velopment.

7.1.2 Familial Index

Similar to the F-PEC, the FAMILIAL IN-DEX is a tool that provides a score on theinfluence of the family members over thebusiness ( Avendaño, 2006). It comprises twoimportant measures of family infiuence usedby some business family authors: (a) degreeof family ownership and (b) family in ma-

nagement (Alcom, 1982; Bames and Her-shon, 1976; Donckeis and Fröhlich, 1991;Lansberg, Perrow, and Rogolsky, 1988).The FAMILIAL INDEX ranges from zeroto 200 points, and each ofthe two elementshas a 100-point maximum. Both elements aredescribed in the following.

Degree of Ownership. This element repre-sents how much ofthe business is owned byone family. It ranges fi-om zero to 100 po-ints, and the score for a specific business isthe result of multiplication ofthe percentageof family ownership degree by 100. Consi-dering the entrepreneur as the "root" of thefamily, the members considered to be part ofthe ownership are wife, siblings, children,grandchildren, nephews and nieces and theoriginal entrepreneur.

Family in Management. This element is anindicator of the degree of participation offamily members in management activities,particularly in management board or TopManagement Team (TMT), which includesthe CEO and all membei^ depending on theCEO. The score is the ratio of TMT memberswho are family, multiplied by 100.

An additional aspect to consider when com-piling the score for a specific company iswhether the score is ownership-concentrated,family management-concentrated or a ba-lance between them. This information musttherefore be added in to the total score. Thefollowing section presents some examplesabout the possible scores for family busi-nesses and Table 6 presents scores for threecompanies in total score format and detailedscore format.

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JORGE AVENDANO-ALCARAZ, LOUISE KELLY, ROSA N E U Y TREVINYO-RODRJGUEZ, SERGIO MADERO GÓMEZ

Table 6

Examples of Scores of Family Businesses

Com-pany

A

B

C

Degree ofownership(100 points

max)

100 points(100%ownership)

40 points(40%ownership)

10 points(20%ownership)

Family inManage-ment (100

points max)

44 points

FM = 4

Extemai = 5

100 points

FM = 5

Extemai = 0

25 points

FM = 2

Extemai =6

TotalSco-re

144points

140points

35points

DetailedScore

100-O44-M

40-O100-M

10-O25-M

Source: Avendaflo (2006).

Scores for company A are 144 total and ( 100-O, 44 M) detailed, which means that this isan ownership- concentrated family businessbecause the ownership (O) score is 100,while the management (M) score is just 44points. Company B has one 140 total scoreand (40-0,100-M) detailed because it is ma-nagement- concentrated. Company C scoresare 35 total and ( IO-0,25-M) detailed, whichmeans low family influence on business.

The FAMILIAL INDEX combines effecti-veness in assigning scores with an easy cal-culation process. It is very simple to obtaindata to grade a company, and this could beattractive to some organizations like banksand financial institutions when evaluating thebusiness perfonnance of a family business.The decision for loans or credit line autho-rizations could be influenced when conside-ring the familial grade ofthe company.

7.2 Second Stage of TSS

If a company has obtained "high" as FamilialScore, it can be seen as a company highly in-fluenced by the family and we can move to thesecond stage of TSS conceptual model. Here,every KSFF is evaluated in a three-positionscaling system (-1,0, I) to obtain an initialprofile ofthe company (see Figure 4). Minusone (-1) is assigned to an individual KSFFwhen it is a problem not yet attended to by thecompany; zero (0) means that the KSFF is nota problem and one (1) is assigned when theKSFF is a source of competitive advantage.The initial profile reveals whether the familyinfluence is advantageous, disadvantageousor neutral to company, at present. In otherwords, depending on how the company mana-ges family resources, they are an advantage, adisadvantage, or not used at all. Afler that, theprescription for a company is to prepare a planfor reaching a target (fiature) profile by meansof improving KSFFs. As can be seen, thismodel is congruent with contingency theory.

Figure 4

Present and Future Profiles of Family Business

Present profile Futura profile

KSFF1

KSFF 2

KSFFn

Source: Avendafto (2006).

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A FAMILY-BASED COMPÉTITIVE ADVANTAGE: HANDUNG KEY SUCCESS FAMILY FACTORS IN MEXICAN FAMILY BUSINESSES

8. Application of the Model:An Example

Next there is an example of Muebles y Aca-bados S. A., a real FB in Mexico. The familyowns 100% of the company and the TMTis formed by six people, five of them beingpart of the owner family. The first stage of themodel is to obtain the familial score. In thisexample, the familial score using FAMILIALINDEX is 183 points total and lOO-0,83-Mdetailed score. This means a high influence offamily over the business and according to theTSS model, the second stage must be applied.

From the ranking of challenges (see Table 5)mentioned by Mexican FB in the survey, thetop 11 challenges where selected as KSFFand used in this example to grade Muebles yAcabados. This enabled the Success Factorsscore to be obtained (see Figure 5a). For thisparticular example, the success factor score

was -0.82 which means that family influen-ce is producing a competitive disadvantageto the business. In the range of -1 to 1, thenumber -0.82 is the average obtained fi-omthe individual scores for each KSSF. Pres-cription for the company would be to preparea development plan forthe future. Specifica-lly, the business should improve each KSFFin the short tenn (three years) in order totransform family infiuence into a competitiveadvantage. From Figure 5b it is possible tostate that Muebles y Acabados must preparespecific projects for following KSFF's: bu-siness plan, mix of family issues, clarity ofpositions, resistance to change, evaluationof family members performance and clarityof authority. Additionally, the company mustimprove following KSFF: administrativeprocedures, operational procedures, succes-sion and a method for confiict solution. Thetarget profile had an average of 0.73 once theKSFF were improved.

Figure 5aTwo Stage Scoriog Model applied to Muebles y Acabados S. A.

Stage 1 Stage2

Familial score=183 pts

HighSuccess factors score = -0.82 pts

FamilialCompetitiveAdvantage

FamilialCompetHiveDisadvantage

Source: Authors preparation.

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JORGE AVENDANO-ALCARAZ, LÍÍUISE KELLY, ROSA NELLY TREVINYO-RODRÍGUEZ, SERGIO MADERO GÓMEZ

Figure 5b

Key Success Family Factors

1. Business plan

2. Administrative procedures

3. Operational procedures

4. Succession

5. Mix of family issues

6. Clarity of positions

7. Change resistance

8. Conflict solution method

9. Rules for new entrants

10. Evaluation of family members performance

11. Clarity of authority

Total grade

Present profile Future profile \

-1

• 1

3 1

_ - - *

i d ' ' " 1

h " " " n i .r ^ _ _ 3 ^

ir'"" 1^ ~ - - 1

»1

- - - *

k c ' " '

h " "" ~ - i.1

1

1 A 1-0,82 0,73

Source: Authors preparation.

Conclusions

The TSS model is offered to the eonsidera-lion of academic and research communityof the family business field for analysis andcritic. An important element to emphasize isthat the model suggests a change in the pre-sent form to view family companies. Insteadof insisting on the debate regarding the formin which the family affects the company,whether it is good or not for it to be a familybusiness, the model suggests to accept kins-hip axs just one extra business characteristic,and to focus on those aspects that explain the

success or failure of handling family rela-tions inside the businesses.

The results of research into the relationshipbetween family influence and performanceshows that family influence is not a solidpredictor of good performance in familybusinesses thus, it was necessary to look be-yond this relationship. Instead of exploring"family influence"-"firm performance" rela-tionship, TSS is proposing to change towardsthe KSFF-firm performance relationship.This relation could contribute to answer tothe question: Why some family business are

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successful at dealing with family ties whileothers are not? Thus in the author's criteria,this is a promising topic that could help tocreate a body of knowledge regarding theidentification of best practices for controllingfamily issues when managing a company.

The most important challenge of the modelis to identify what the appropriate KSFF areand how to evaluate them. The national cultu-re is a moderating variable that will potentia-lly affect the identification of KSFF for everycountry. In this paper, the KSFF proposed forMuebles y Acabados came from a MexicanFB sample. So, KSFF for other countriescould be different.

Nevertheless, in the field of family business,comparison between different research stu-dies is very diiïicult due to the disagreementabout the definition of "family business" asused by different authors. The TSS model,suggests the adoption of a unique scale forthe family business definition (among theavailable ones) which allows comparisonamong research studies, and promotes theaccumulation of knowledge.

One important limitation of the researchwas the availability of information becausenone of the sample companies were publicand CEO's did not want to share informa-tion, especially in relation to family issues.It was necessary to insist by phone in orderto increase the response rate. Additiona-lly, companies were selected on grounds ofconvenience because there is no database offamily businesses in México. Sample com-panies were selected from a database of theTecnológico de Monterrey, a private databa-

se, and from SIEM a database in which it isnot possible to identify family businesses.

Future Research

TSS Model is evolving from an idea to a use-ful instrument, and there is plenty of scopefor future research. This section includes so-me of these activities.

1. Selection of one specific instrument toobtain scores of family influence, forexample the F-PEC or the FAMILIALINDEX.

2. The boundaries of the high, medium, andlow categories of the familial score foruse in the TSS Model should be confir-med.

3. The KSFF for a family business shouldbe confirmed for use in the TSS Model.Here, culture is an additional variable toconsider when looking for KSFFs be-cause they could vary from one nationalculture to another.

4. The scaling system for KSFF in the TSSmodel should be tested. Fuzzy Logic is agood alternative to work with the ThreePosition Scaling System proposed (-1,0,1).

5. The benefits of getting the average of allKSFF, as an aggregated measure, shouldbe evaluated.

6. A software program of the TSS Modelneeds to be developed to provide resultsautomatically.

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7. The Two Stages Scoring (TSS) Modelshould be tested in family businesses as adiagnostic instrument for the constructionof a competitive advantage in connectionwith the Resource- Based View Theory(RBV) and Contingency Theory.

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