Understanding Entrepreneurial Firms in Family Businesses

McKenny, Short, Payne, & Mitchell Presented by Aaron McKenny

Processes, practices, and decision-making styles of entrepreneurial firms. (Lumpkin & Dess, 1996) Autonomy Competitive Aggressiveness Innovativeness Proactiveness Risk Taking Positive relationship with firm performance (Rauch, Wiklund, Lumpkin, & Frese, 2009) Moderately strong relationship

Increasing research on EO in small family businesses EO Dimensions Performance (e.g., Naldi et al., 2007) Moderation in small businesses (e.g., Casillas, Moreno, & Barbero, 2010; Casillas & Moreno, in press) Little focus on large family businesses E.g., Ford, WalMart, Disney, S.C. Johnson Levels of EO (e.g., Short, Payne, Brigham, Lumpkin, & Broberg, 2009)

Two Studies Study 1 EO Performance relationship in large, publicly-traded businesses Does family business status moderate? Study 2 Configurations perspective to look for patterns of EO dimensions First study to look at patterns of EO Compare family/non-family businesses use of patterns Look at performance consequences of pattern use

The moderating role of family business status

The characteristics of a firm that are central to the character of the organization, distinguish the organization from others, and endure through time (Albert & Whetten, 1985) Two, sometimes competing, identities in family businesses Utilitarian Identity: Business Economic goals of business (Albert & Whetten, 1985) Normative Identity: Family Idiosyncratic goals to family (Tagiuri & Davis, 1992)

Family has significant, ongoing influence on normative identity (Arregle, Hitt, Sirmon, & Very, 2007) Identity emerges from management s interactions with most salient stakeholders (Scott & Lane, 2000; Mitchell, Agle, & Wood, 1997) Families have urgency, legitimacy, and power Family may be represented in management

Competitive Aggressiveness Aggressive organizational positioning or responses to defend against competitors, unfavorable industry trends, and other external threats (D Aveni, 1994; Lumpkin & Dess, 2001; Smith, Ferrier, & Grimm, 2001) Family businesses are likely to respond in a way that minimizes the total impact on both financial and non-financial goals. Non-family businesses would primarily minimize the impact on the financial performance of the company.

Family business status moderates the entrepreneurial orientation-performance relationship among large, publicly-traded companies.

Sample S&P 500 over the years 2001-2003 75% of the US publicly traded equity (Standard & Poor s, 2009) 33% are family businesses (Anderson & Reeb, 2003) Unit of analysis Shareholder letters Took three-year averages Control for year-specific idiosyncrasies

Firm Performance Approximation of Tobin s Q (Chung & Pruitt, 1994) Ratio of the market value of the firm to the replacement cost of its assets Entrepreneurial Orientation Content analysis using DICTION 5.0 (Hart, 1990) Use dictionaries validated to measure EO (Short, Broberg, Cogliser, & Brigham, 2010)

Family Business Status If any member of senior management or the board of directors was also a member of the founding family, the company was classified as a family business (cf., Dyer & Whetten, 2006; Short et al., 2009) Control Variables Firm size, in number of employees (cf. Stam & Elfring, 2008) Industry sectors (SIC Divisions A-J) (cf. De Clerq, Sapienza, & Crijns, 2005)

Two EO dimensions were related to performance Competitive Aggressiveness ( =-0.14, p<0.05) Innovativeness ( =0.13, p<0.01) Family business status was related to performance ( =0.25, p<0.01) Family business status did not moderate the EO-Performance relationship Hypothesis 1 was not supported

Patterns of Entrepreneurial Orientation

Strategy and Entrepreneurship Literatures Strategic groups (Cool & Schendel, 1987) Generic strategies (Dess & Davis, 1984) VC investment criteria (MacMillan, Siegel, & Narasimha, 1985) Entrepreneurial strategy making (Dess, Lumpkin & Covin, 1997) EO, access to capital and dynamism (Wiklund & Shepherd, 2005) New possibility: Dimensions of EO Related to, but vary independently (Lumpkin & Dess, 1996) Different relationships with performance (Rauch et al., 2009)

Family business scholars are interested in family business performance relative to that of non-family businesses EO influences firm performance Patterns of EO may influence firm performance If family businesses espouse some patterns over others, this may influence family business performance

Hypothesis 2: orientation can be detected in large, publicly- traded firms. Hypothesis 2: Patterns of entrepreneurial Hypothesis 3: different patterns of entrepreneurial orientation than non-family businesses. Hypothesis 3: Family businesses exhibit Hypothesis 4: among the patterns of entrepreneurial orientation. Hypothesis 4: Performance differences exist

Same sample and unit of analysis as study 1 Cluster analysis 5 dimensions of EO (Lumpkin & Dess, 1996) Standardized (Z-Score) (cf., Ketchen & Shook, 1996) Two-stage clustering procedure (Ketchen & Shook, 1996) 1. Hierarchical Agglomerative Clustering Percentage Change in Heterogeneity stopping rule (Hair, Black, Babin, & Anderson, 2010). Ward s Method combination procedure 2. K-Means Clustering

Two clusters found: First, higher on Competitive Aggressiveness, Innovativeness, and Proactiveness Second, higher on Risk Taking and Autonomy Hypothesis 2 supported Higher percentage of family businesses in first cluster Hypothesis 3 supported First cluster outperforms second cluster Hypothesis 4 supported

Multiple definitions of Family Business Not all of them classify the same firms the same way (Chrisman, Chua, & Sharma, 2005) Future research should replicate using other measures of family business Shareholder letters contain impression management rhetoric (D Aveni & MacMillan, 1990) Most firms engage in impression management Future studies should try using other data sources (e.g., intracompany email, training matierials, meeting transcripts

Definition of organizational identity is contested Albert and Whetten (1985) include an enduring aspect Other studies have offered that an identity can change over time (e.g., Fox-Wolfgramm, Boal, & Hunt, 1999; Gioia, Schultz, & Corley, 2000; Gioia & Thomas, 1996) Future research should look at the extent to which identity reflected in EO is persistent through time

Generalization and extension of previous EO studies in family business (Tsang & Kwan, 1999) Casillas and Moreno (in press) Family Involvement moderated link between EO and firm growth in small-med companies We found that this did not hold in large, publicly-traded companies Does the EO-performance relationship behave differently between large and small family businesses? Do the family identities of family businesses from certain cultures influence the EO-performance relationship differently? What role does industry play when understanding the dynamics of family influence?

Two patterns of EO dimensions emerged in large, publicly traded firms Family businesses were present in both groups Family businesses made up a greater percentage of firms in the group with higher competitive aggressiveness, innovativeness, and proactiveness Consistent with previous studies Family firms lower on autonomy (Short et al., 2009) Family firms lower on risk taking (Naldi et al., 2007; Short et al., 2009) Future studies should look at why certain firms espouse some elements of EO over others

Only just begun to look at EO in family business Three key contributions Illustrate the importance of looking at large, publicly-traded businesses in family business research Identify common patterns of EO espoused by these businesses Explore the performance consequences of each pattern.

Albert, S. & Whetten, D. (1985). Organizational identity. In B.M. Staw & L.L. Cummings (Eds.), Research in Organizational Behavior (Vol. 7, pp. 263-295). Greenwich, CT: JAI Press. Anderson, R. C., & Reeb, D. M. (2003). Founding-family ownership and firm performance: Evidence from the S&P 500. The Journal of Finance, 58, 1301-1328. Anderson, R. C., & Reeb, D. M. (2004). Board composition: Balancing family influence in S&P 500 firms. Administrative Science Quarterly, 49, 209-237 Arregle, J.-L., Hitt, M. A., Sirmon, D. G., & Very, P. (2007). The development of organizational social capital: Attributes of family firms. Journal of Management Studies, 44, 73-95. Astrachan, J. H. (2003). Commentary on the special issue: The emergence of a field. Journal of Business Venturing, 18, 567-573. Astrachan, J. H., & Shanker, M. C. (2002). Family Businesses Contribution to the US Economy: A Closer Look. Alfred, NY: The George and Robin Raymond Family Business Institute. Birley, S. (2001). Owner-manager attitudes to family and business issues: A 16 country study. Entrepreneurship: Theory & Practice, 26, 63-76. Brush, C., Bromiley, P., & Hendrickx, M. (2000). The free cash flow hypothesis for sales growth and firm performance. Strategic Management Journal, 21, 455-472. Burgelman, R. A. (1983). A process model of internal corporate venturing in the diversified major firm. Administrative Science Quarterly, 28, 223-244. Cantillon, R. (1734). Essai sur la nature du commerce en general [Essay on the nature of trade in general] (H. Higgs, Ed. and Trans.). London: MacMillan. Carney, M. (2005). Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship: Theory & Practice, 29, 249-265. Carton, R. B., & Hofer, C. W. (2006). Measuring organizational performance: Metrics for entrepreneurship and strategic management research. Cheltenham, UK: Edward Elgar. Casillas, J. C., & Moreno, A. M. (in press). The relationship between entrepreneurial orientation and growth: The moderating role of family involvement. Entrepreneurship and Regional Development. Casillas, J. C., Moreno, A. M., & Barbero, J. L. (2010). A configurational approach to the relationship between entrepreneurial orientation and growth of family firms. Family Business Review, 23, 27-44.

Chrisman, J. J., Chua, J. H., & Litz, R. A. (2004). Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence. Entrepreneurship: Theory & Practice, 28, 335-354. Chrisman, J. J., Chua, J. H., & Sharma, P. (2005). Trends and directions in the development of a strategic management theory of the family firm. Entrepreneurship: Theory & Practice, 29, 555-576. Chua, J. H., Chrisman, J. J., & Sharma, P. (1999). Defining the family business by behavior. Entrepreneurship: Theory & Practice, 23, 19-39. Chua, J. H., Chrisman, J. J., & Steier, L. P. (2003). Extending the theoretical horizons of family business research. Entrepreneurship: Theory & Practice, 27, 331-338. Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of Tobin s Q. Financial Management, 23, 70-74. Cool, K. O., & Schendel, D. (1987). Strategic group formation and performance: The case of the U.S. pharmaceutical industry, 1963-1982. Management Science, 33, 1102-1124. Courtis, J. K. (1982). Private shareholder response to corporate annual reports. Accounting and Finance, 22, 53- 72. Covin, J. G., & Covin, T. J. (1990). Competitive aggressiveness, environmental context, and small firm performance. Entrepreneurship: Theory & Practice, 14, 35-50. D Aveni, R. (1994). Hypercompetition. New York: Free Press. D Aveni, R.A., & MacMillan, I. C. (1990). Crisis and the content of managerial communications: A study of the focus of attention of top managers in surviving and failing firms. Administrative Science Quarterly, 35, 634-657. De Clerq, D., Sapienza, H. J., & Crijns, H. (2005). The internationalization of small and medium-sized firms. Small Business Economics,24, 409-419. Dess, G. G., & Davis, P. S. (1984). Porter s (1980) generic strategies as determinants of strategic group membership and organizational performance. Academy of Management Journal, 27, 467-488. Dess, G. G., Lumpkin, G. T., & Covin, J. G. (1997). Entrepreneurial strategy making and firm performance: Tests of contingency and configurational models. Strategic Management Journal, 18, 677-695. Dutton, J. E., & Dukerich, J. M. (1991). Keeping an eye on the mirror: Image and identity in organizational adaptation. Academy of Management Journal, 34, 517-554. Dyer, Jr., W.G., & Whetten, D.A. (2006). Family firms and social responsibility: Preliminary evidence from the S&P 500. Entrepreneurship: Theory & Practice, 30, 785-802.

Ellis, L. (1994). Research methods in the social sciences. Madison, WI: WCB Brown & Benchmark. Emrich C. G., Brower H. H., Feldman J. M., & Garland H. (2001). Images in words: Presidential rhetoric, charisma, and greatness. Administrative Science Quarterly, 46, 527-557. Etzioni, A. (1964). Modern organizations. Englewood Cliffs, NJ: Prentice-Hall. Foreman, P., & Whetten, D. A. (2002). Members identification with multiple-identity organizations. Organization Science, 13, 618-635. Fox-Wolfgramm, S. J., Boal, K. B., & Hunt, J. G. (1998). Organizational adaptation to institutional change: A comparative study of first-order change in prospector and defender banks. Administrative Science Quarterly, 43, 87-126. Gioia, D. A., & Thomas, J. B. (1996). Identity, image, and issue interpretation: Sensemaking during strategic change in academia. Administrative Science Quarterly, 41, 370-403. Gioia, D. A., Schultz, M., & Corley, K. G. (2000). Organizational identity, image, and adaptive instability. Academy of Management Review, 25, 63-81. Gomez-Mejia, L. R., Larraza, M., & Makri, M. (2003). The determinants of executive compensation in family controlled public corporations. Academy of Management Journal, 46, 226-239. Hair, Jr., J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate data analysis (7thed.). Upper Saddle River, NJ: Prentice Hall. Harris, D., Martinez, J. L., & Ward, J. L. (1994). Is strategy different for the family owned business? Family Business Review, 7, 159-174. Hart, R. P. (2000). DICTION 5.0: The text-analysis program. Thousand Oaks, CA: Sage. James, H. S. (1999). Owner as manager, extended horizons and the family firm. International Journal of the Economics of Business, 6, 55-69. Ketchen, D. J., & Shook, C. L. (1996). The application of cluster analysis in strategic management research: An analysis and critique. Strategic Management Journal, 17, 441-458. Knight, F. H. (1921). Risk, uncertainty, and profit. New York: Kelley and Millman, Inc. Li, Y., Guo, H., Liu, Y., Li, M. (2008). Incentive mechanisms, entrepreneurial orientation, and technology commercialization: Evidence from China s transitional economy. The Journal of Product Innovation Management, 25, 63-78. Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21, 135-172.

Lumpkin, G. T., & Dess, G. G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16, 429-451. MacMillan, I. C. (1982). Seizing competitive initiative. Journal of Business Strategy, 2, 43-57. MacMillan, I. C. (1983). Preemptive strategies. Journal of Business Strategy, 4, 16-26. MacMillan, I. C., Siegel, R., & Narasimha, P. N. S. (1985). Criteria used by venture capitalists to evaluate new venture proposals. Journal of Business Venturing, 1, 119-128. Marino, L., Strandholm, K., Steensma, H. K., & Weaver, K. M. (2002). The moderating effect of culture on the relationship between entrepreneurial orientation and strategic alliance portfolio extensiveness. Entrepreneurship: Theory & Practice, 26, 145-160. Maury, B. (2006). Family ownership and firm performance: Empirical evidence from Western European corporations. Journal of Business Venturing, 12, 321-341. Miller, D., & Friesen, P. H. (1978). Archetypes of strategy formulation. Management Science, 24, 921-933. Miller, D., & Le Breton-Miller, I. (2005). Managing for the long run: Lessons in competitive advantage from great family businesses. Boston: Harvard Business School Press. Miller, D., Steier, L., & Le Breton-Miller, I. (2003). Lost in time: Intergenerational succession, change, and failure in family business. Journal of Business Venturing, 18, 513-531. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22, 853-886. Mitchell, R. K., Morse, E. A., & Sharma, P. (2003). The transacting cognitions of non-family employees in the family business setting. Journal of Business Venturing, 18, 533-551. Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293-315. Naldi, L., Nordqvist, M., Sj berg, K., & Wiklund, J. (2007). Entrepreneurial orientation, risk taking, and performance in family businesses. Family Business Review, 20, 33-47. Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press.

Rauch, A., Wiklund, J., Lumpkin, G. T., & Frese, M. (2009). Entrepreneurial orientation and business performance: An assessment of past research and suggestions for the future. Entrepreneurship: Theory & Practice, 33, 761- 787. Scott, S. G., & Lane, V. R. (2000). A stakeholder approach to organizational identity. Academy of Management Review, 25, 43-62. Shanker, M., & Astrachan, J. (1996). Myths and realities: Family busnesses contribution to the U.S. economy. Family Business Review, 9, 107-123. Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of Political Economy, 94, 737-783. Short, J. C., Broberg, J. C., Cogliser, C. C., & Brigham, K. H. (2010). Construct validation using computer-aided text analysis (CATA): An illustration using entrepreneurial orientation. Organizational Research Methods, 13, 320-347. Short, J. C., Ketchen, D. J., & Palmer, T. B. (2002). The role of sampling in strategic management research on performance: A two-study analysis. Journal of Management, 28, 363-385. Short, J. C., & Palmer, T. B. (2008). The application of DICTION to content analysis research in strategic management. Organizational Research Methods, 11, 727-752. Short, J. C., Payne, G. T., Brigham, K. H., Lumpkin, G. T., & Broberg, J. C. (2009). Family businesses and entrepreneurial orientation in publicly-traded businesses: A comparative analysis of the S&P 500. Family Business Review, 22, 9-24. Short, J. C., Payne, G. T., & Ketchen, D. J. (2008). Research on organizational configurations: Past accomplishments and future challenges. Journal of Management, 34, 1053-1079. Smart, D. T., & Conant, J. S. (1994). Entrepreneurial orientation, distinctive marketing competencies and organizational performance. Journal of Applied Business Research, 10, 28-39. Smith, K., Ferrier, W., & Grimm, C. (2001). King of the hill: Dethroning the industry leader. Academy of Management Executive, 15, 59-70. Stam, W., & Elfring, T. (2008). Entrepreneurial orientation and new venture performance: The moderating role of intra- and extraindustry social capital. Academy of Management Journal, 51, 97-111.

Standard & Poors. (2009). S&P 500. Retrieved November 12, 2009, from http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT- Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename% 3DSP_500_Factsheet.pdf&blobheadername2=Content- Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=cont ent-type&blobwhere=1243622927629&blobheadervalue3=UTF-8. Tagiuri, R., & Davis, J. A. (1992). On the goals of successful family companies. Family Business Review, 5, 43-62. Tsang, E. W. K., & Kwan, K.-M. (1999). Replication and theory development in organizational science: A critical realist perspective. Academy of Management Review, 24, 759-780. Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value? Journal of Financial Economics, 80, 385-417. Weick, K. E. (1979). The social psychology of organizing. New York: Random House. Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2005). Organizing and the process of sensemaking. Organization Science, 16, 409-421. Wiklund, J., & Shepherd, D. (2005). Entrepreneurial orientation and small business performance: A configurational approach. Journal of Business Venturing, 20, 71-91. Zahra, S. A. (2005). Entrepreneurial risk taking in family firms. Family Business Review, 18, 23-40.