Performance of family firms in a poor economic climate
Bachelor thesis research by Pauline van de Voorde
In June 2016, Pauline van de Voorde graduated from the Tilburg School of Economics and Management at Tilburg University. She followed the BSc Business Economics and wrote her bachelor thesis in the area of organizational performance of family firms.
From well-known companies like BMW and Wal-Mart to a local family restaurant in a small village, some successful firms have been controlled by families for generations. In entrepreneurial research, the performance of firms is an important topic. Some research states that family firms perform better than non-family firms (Anderson and Reeb, 2003), while other studies argue the opposite (Faccio, Lang and Young, 2001). So, the research about family firm performance is rather broad and contradicting.
In a world of rapid change, the economy and its fluctuations represent a primary factor in influencing the performance of a firm. Most of the existing literature focuses on the performance of family firms and non-family firms in times of a stable economy and good market conditions. However, more research can be done on family firm performance in a changing environment. Family firms certainly do survive crises, the question that comes to mind is: how do they manage it? Therefore, this paper will investigate “Why do family firms perform better than non-family firms when there is a poor economic climate?”
This question will be answered by performing a literature review, where most of the data is collected from entrepreneurial academic journals. Firm performance is defined as the process of quantifying action, where measurement is the process of quantification and action leads to performance (Neely, Gregory and Platts, 2005). Since no single measurement can measure every aspect of firm performance, both financial and non-financial measurements are taken into consideration. Four perspectives, which cover both these measurements (Kaplan and Norton 1992), are used: the financial, customer, internal process, and learning and growth perspectives.
The findings show that family firms perform better in a poor economic climate, because of two factors: increased flexibility and reduced costs. First of all, the close ties within family firms allow for quick, centralized decision making, which leads to increased strategic flexibility and allows them to respond better in a poor economic climate. Second, the long-term focus on providing for the family for the future has a positive effect on cost reduction, which allows the firm to deal better with problems. On top of that, family firms often have long-term relationships with customers and suppliers, which means economic setbacks will hit less hard. Lastly, the long-term focus of family firms also means they will increase R&D projects in a poor economic climate, which leads to a higher chance of survival, but also leads to some challenges in the short-term which negatively affect firm performance. These findings all apply to performance in a poor economic climate. In the case of a stable economy, however, family and non-family firms perform equally.
In conclusion: family firms do perform better than non-family firms in a poor economic climate. As a result of family involvement, they can make use of increased flexibility, cost reduction and long-term relationships with customers and suppliers, giving them an advantage when compared to non-family firms.
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding family ownership and the agency cost of debt. Journal of Financial economics, 68(2), 263-285
Faccio, M., Lang, L. H. P., & Young, L. (2001). Dividends and expropriation. Estados Unidos: American Economic Review.
Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard : measures that drive performance.
Neely, A. D., Gregory, M. J., & Platts, K. W. (2005). Performance measurement system design: a literature review and research agenda. International Journal of Operations & Production Management, 25, 1228-1263