The family business group phenomenon emergence and complexities

1 Introduction:​ Presenting the Case for Studying the Emergence and Development of Family Business Groups 3.​3 Methodological Challenge 2:​ Definitional Challenges 3.​3.​1 Unpacking the

Marita Rautiainen, Peter Rosa, Timo Pihkala, Maria José Parada and Allan Discua Cruz

The Family Business Group Phenomenon

Emergence and Complexities

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This book would not have been possible without the families who invited us into their

business lives We have seen family businesses of all sizes from all over the world We aregrateful to all of those family members with whom we have had the pleasure to work duringthis and other related projects that helped us to compile this book

Writing a book requires the work of large numbers of people It is important to us as

editors in this developing professional field to acknowledge the influence and contributions

of our colleagues We want to thank all the authors who gave their valuable data, time andeffort in writing and finishing different chapters of this book

During the years of research, there has been financial support of several kinds In Finland,Foundation for Entrepreneurship Research and Foundation for Economic Education havesupported the research of this topic in several projects, as has George David’s Endowment infunding activities of the Edinburgh University Business School research in this book Specialthanks to the Department of Entrepreneurship and Strategy at Lancaster University

Management School for continued support We are particularly grateful to the Department ofStrategy and General Management at ESADE and the STEP project in Spain

The Palgrave Macmillan press has our sincere thanks for helping us turn our research into

a publication

1 Introduction:​ Presenting the Case for Studying the Emergence and Development of Family Business Groups

3.​3 Methodological Challenge 2:​ Definitional Challenges

3.​3.​1 Unpacking the Definitional Complexities of Business Groups and Family Business Groups

3.​3.​2 Unpacking the Complexities of Legal Entities and Affiliates

3.​3.​3 Defining Portfolio Entrepreneurship​

3.​4 Methodological Challenge 3:​ Family Business Databases Amenable to Rigorous Statistical Analysis Are Difficult to Find and Access

3.​5 Methodological Challenge 4:​ The Phenomenon Is a Difficult Process to Research Rigorously Over Time

Marita Rautiainen and Timo Pihkala

4.​1 Introduction

4.​2 Business Group Emergence Through Portfolio Entrepreneurship​:​ A Case Study 4.​2.​1 The Portfolio Entrepreneur

4.​3.​3 The Complex Group Structure, Organized According to the Family Members 4.​4 Conclusion

References

6 Entrepreneurial Growth Through Portfolio Entrepreneurship​:​ The Entrepreneurial Career Ladder

6.​5.​3 Case Study Three:​ Sudhir Ruparelia:​ Starting Again Through Cash Flow and Property

8.​7 Conclusion

References

9 Understanding the Dynamics of Business Group Development:​ A Transgenerationa​l Perspective

10.​4.​3 Social Benefits of Owning a Family Business Group

15 Conclusions:​ Researching Family Business Groups:​ Lessons Learned and Avenues for Further Research

Peter Rosa, Marita Rautiainen, Timo Pihkala, Maria José Parada and Allan Discua Cruz

15.​1 Limitations and Further Research

Index

Fig 14.1 Portfolio development in the Svensson business family

Table 5.1 Chronology of the main events

Table 6.1 The entrepreneurial career Sheth Allidina Visram (1851–1916) East Africa’s firstlarge-scale portfolio entrepreneur

Table 14.2 Identity structure of family members, the set of identities that is chronically salient

to each family member in her/his day-to-day work

Rodrigo Basco

is an Associate Professor at American University of Sharjah (AUS) and holds the Sheikh Saoudbin Khalid bin Khalid Al-Qassimi Chair in Family Business, School of Business Administration,United Arab Emirates As part of a fourth-generation family-owned Argentinean firm, Rodrigohas always been interested in the nuances of family businesses His research focuses on

entrepreneurship, management and regional development with special interest in familyfirms, and he has taught economics, management and family business courses at universities

Sarah’s main research interests lie in entrepreneurship, new venture creation and

individual motivation and capability to engage in entrepreneurial behaviour Much of herrecent work explores learning and knowledge transfer, in particular the role of

networks/networking, on the development of male- and female-owned ventures, includingagricultural enterprises

Allan Discua Cruz

University Management School (UK) He has published in journals such as Entrepreneurship

Theory and Practice , Entrepreneurship & Regional Development , Journal of Family Business Strategy and Business History around portfolio entrepreneurship and family business groups.

Sarah Fitz-Koch

is a doctoral candidate in Entrepreneurship at the Swedish University of Agricultural Sciences(SLU) in the Department of Work Science, Business Economics and Environmental

Psychology Sarah started her doctoral studies at the Swedish University of Agricultural

Science in November 2015 Her research focuses on entrepreneurship and small family

businesses in the agricultural sector Her current projects examine the relationship betweenentrepreneurship and well-being of families and individuals, as well as lifestyle and portfoliobusinesses of entrepreneurial families Before her doctoral studies, Sarah studied Businessand Economics at the University of Tübingen in Germany and received her MSc in StrategicEntrepreneurship from Jönköping International Business School in Sweden Her recent work

Jussi Heikkilä

is a project researcher at the Jyväskylä University School of Business and Economics (JSBE).His research focuses on economics of innovation and intellectual property rights

Donato Iacobucci

is a Professor at the Università Politecnica delle Marche His research has focused on threemain areas, business group formation, growth and governance, and entrepreneurship andcluster agglomeration and firm performance He has published articles in leading

entrepreneurship journals on portfolio entrepreneurship

Tuuli Ikäheimonen

works with funding and research policy issues and is the Deputy Director of Entrepreneurship

of family business ownership, governance and board of directors

Markku Ikävalko

is an Associate Professor at Lappeenranta University of Technology and has been working atthe university since 1999 From August 2017 onwards, he has focused on building of J

Hyneman Center, a prototype laboratory for LUT students, and academic tasks related tostrategy, entrepreneurship, SME management and ownership He has decades-long

bespoke market research in challenging contexts, and executive education in the areas ofbusiness opportunities/challenges

Kajari Mukherjee

is an Associate Professor in Indian Institute of Management Indore (IIM Indore) Her area ofresearch spans three distinct arenas, namely, organization design using paradigm of

complexity theory, corporate social responsibility and family business firms She has

authored books, articles, case studies and conference papers in these areas She holds MSc(Mathematics), PGDRM (IRMA) and PhD from Tata Institute of Science (TISS) Prior to joiningacademics in 2012, she had two decades of corporate experience She is one of the 12 seniormanagers of India selected for Chevening scholarships (UK) in 2004

Ernestine Ning

on the relationship between entrepreneurship and ownership, especially on the portfolioentrepreneurship phenomenon and ownership in business governance

Marita Rautiainen

is a post-doctoral researcher at School of Engineering Science, Lappeenranta University ofTechnology (LUT) Her research focuses on integrating family business groups and historicalperspectives for a better understanding of the nature of family business group development

In addition, her research interests include systemic innovation, business transformation andownership She has a strong background as an entrepreneur and a researcher of

entrepreneurship She teaches entrepreneurship theory and family business

entrepreneurship She has several years of experience working in her own family business aswell as being an independent entrepreneur

Satu Rinkinen

works as a post-doctoral researcher at Lappeenranta University of Technology, LUT School ofEngineering Science Her research interests include innovation policy, regional innovationsystems and regional development Her doctoral dissertation focused on innovation policy’s

connect a company like Virgin Trains and Virgin Balloon Flights, for example, are the Virginbrand name and the ownership of Richard Branson To decipher the full spectrum of Virgincompanies and how they developed from Richard Branson’s first venture in 1960 would be acomplex and difficult exercise Over the years, there are joint ventures, acquisitions,

generations and which have developed sizeable business portfolios over the years The

Nurminen family in Finland, for example, has built up an extensive portfolio of companiessince its origins in the late nineteenth century (Rautiainen 2012) Family business groupsexist all over the world and appear to thrive in many different business environments andsettings Masulis et al (2011) in a broad cross-national study found that an average of 19 percent of firms listed on the world’s stock exchanges were family-owned or controlled businessgroups and that the proportion was as high as 40 per cent in countries with emerging

markets Their study only referred to listed companies There are many other large privatelyowned business groups not listed as public companies As they are not listed on stock

exchanges, their activities are less visible

Since the 1970s, there has been considerable research on large business groups Researchhas particularly centred on three core questions: Why do business groups exist? Does a

business group structure enhance performance, and if so, in which context? Are the overalleffects of business groups in the wider economy and society positive? Carney et al (2011), in

1

That business groups are groups of firms which consist of a number of legally

independent firms bound together by formal and informal ties and which are subject tocoordinated action (Khana and Rivkin 2001)

markets has proliferated as emerging countries have grown in economic importance

A number of questions arise from the prevalence and complexity of large-scale businessgroups How much diversity is there in the scale and nature of business groups, and how doesthis diversity reflect differing regulatory and market contexts in different sectors, countriesand regions? How have complex business groups arisen, and why do they continue to persistand exist in a modern corporate business environment where the fashion has been a

preference for concentration and specialization rather than unrelated diversification? Howmuch more complex are family business groups than non-family corporate groups? Why dolarge family business groups vary in prevalence in different parts of the world? In particular,why do they seem more numerous in developing countries?

Large family business groups represent a low proportion of the total stock of family

businesses, but in some countries they can account for a sizeable proportion of annual

economic growth and job generation In Uganda, for example, one family group alone, theMadhvani Group, are the largest private sector employers and taxpayers in Uganda (Balunywa2009) Their 27 companies in Uganda are themselves part of a wider family conglomeratethat operates in many other countries The Sawiris family in Egypt is the largest private

sector contributor to its economy, with its global Orascom Group specializing in construction,telecommunications and tourism (Hatem 2012) In the Far East, family business groups such

as Sony, Samsung, Mitsubishi and Alibaba are leading global companies Even in the USA, whatappear to be single corporations are, on closer inspection, entrepreneur-led business groups.The Microsoft Corporation, for example, has acquired 209 companies since its foundation,has divested 64 and has sizeable interests in 32 other companies

It is our contention in this book that the ‘complex processes and motivations’ observed inmany corporate business groups are greatly magnified where entrepreneurs and families areinvolved in the business It is only recently that any attention has been paid to large familybusiness groups (Masulis et al 2011) The family business group researchers have begun toassess how far business group organizations are different in family firms; how far cross-

companies were groups, funded by an entrepreneur or a family, and that nearly a fifth of

partnerships were associated with more than one firm In developing countries too,

business sectors (McGaffey 1987; Kiggundu 2002; Rosa et al 2006) Why are such families notconcentrating on growing a single business rather than (apparently) dissipating their

ownership of multiple enterprises has been observed to be common in the small- and micro-energies among two or more enterprises? What advantages does a small group have over asingle venture? Is opting for a multiple enterprise organization more advantageous in somecontexts than in others? How far do family ownership and goals complicate the management

of a business group even at a small scale of operation? Put another way, does having familymake it easier to delegate responsibility to family members when separate companies arestarted and developed from the core business?

The mainstream studies on business groups have focused almost exclusively on large-whether business groups are also relevant to non-listed businesses or to smaller businesses.Little of the mainstream management research on business groups, whether family-based ornot, has considered how business groups are formed in the first place How a business grouphas formed from small beginnings to its current complex form is a different question fromwhy it continues to persist and thrive once a firm has reached a large size To answer thequestion requires a more holistic approach, including the consideration of business groups insmaller (usually family) firms and even of the activities of individual entrepreneurs

A growing volume of research on smaller entrepreneur and family business groups hasbeen undertaken since the 1990s (reviewed by Ucsbasaran et al 2008) These studies havedemonstrated that the development of small business groups is driven mainly by

entrepreneurial growth, in which entrepreneurs or entrepreneurial families grow their

businesses by adding new ventures as new opportunities are accessed This process has beentermed ‘portfolio entrepreneurship’ (Birley and Westhead 1993; Scott and Rosa 1999; Rosa1998) However, interest in portfolio entrepreneurship and smaller business groups, despitehaving burgeoned since the 1980s, is still a niche specialization within the broader field ofentrepreneurship

This entrepreneurship-based literature on portfolio entrepreneurship has developed inparallel to the mainstream management literature on business groups On the one hand,

management researchers investigating large-scale business groups have tended to assumethat business groups are either nonexistent or at best embryonic in the small firm sector Asthe portfolio entrepreneurship research has focused primarily on smaller firms, it has failed

to attract the attention of mainstream management researchers on business groups On theother hand, researchers on portfolio entrepreneurship, by focusing on smaller firms, have notaccessed the mainstream business group research, as they may have perceived that most ofthe management literature on business groups may be less relevant in a smaller firm context(Iacobucci 2002) Interest in large-scale portfolio entrepreneurship (as displayed by

entrepreneurs and families who have developed large business groups) is only a recent

research development and is still at a pioneering stage A number of empirical studies havebeen conducted since the late 2000s on large-scale portfolio entrepreneurs and large familybusiness groups These include Balunywa’s (2009) and Malfense Fierro’s (2012) research onUgandan and Malawi portfolio entrepreneurs, Hatem’s (2012) research on the

internationalization of large-scale portfolio entrepreneurs and families in the MENA region,Rautiainen’s (2012) analysis of large-scale Finnish family business groups and Discua Cruz’sresearch on family entrepreneurial teams in Honduras (Discua Cruz 2010, 2012) These

studies have demonstrated that portfolio entrepreneurship continues to play a significantrole in the continued development and renewal of large business groups, particularly largefamily business groups Its role is not confined to the early stages of business group

development when the businesses were much smaller in scale

During the development of research into business groups and portfolio entrepreneurship,family business researchers have pursued research agendas that have overlooked the

existence or prevalence of family business groups Instead, they have tended to concentratetheir interests on family strategy and lifecycle issues such as long-term stewardship and

orientation, overcoming problems of succession and family conflicts, and understanding the

of businesses (Rosa et al 2014) In setting their research agendas, the complexities of familyownership, in particular, have not been prioritized It is only in recent years that family

business researchers have begun to take an interest in family business group structures, intransgenerational portfolio entrepreneurship and in the role of ownership in differentiatingfamily business groups from non-family groups (Rosa et al 2014)

In this book, we feel that understanding the formation, nature and complexity of familybusiness groups requires a holistic understanding and integration of mainstream

management business group research with research on portfolio entrepreneurship,

transgenerational family business research and family ownership We demonstrate that

‘business groups’ exist in forms that are not just large scale, but also small scale and evenrudimentary At one extreme, micro-scale entrepreneurs form ‘proto-groups’ of diversifiedvery small and informal enterprises in response to new opportunities which could fall underthe label ‘pluriactivity’, defined by Hetland as ‘the diversification of activities carried out byone household on and off the holding, in order to secure the household’s economy and

welfare’ (Hetland 1986, p 385) Even at this micro-level, the importance of the family

household, not the individual, as the unit of analysis has been stressed (Carter et al 2004) Atthe other extreme are highly complex large transgenerational family business groups withover a hundred companies and intricate systems of ownership across many family members,including some non-family members The neat well-organized multi-divisional forms of

business groups are contrasted by messy horizontal and loosely organized business groupswhen family groups are examined Many family business groups reflect the outcomes of

differing and often conflicting family business and ownership agendas and strategies, and it isthese issues that make large family business groups more complex than corporate groups

Therefore, a fuller understanding of family business groups requires not only blending andintegrating these different strands of research, but also widening the scope of the researchagenda to answer a greater range of questions These would include the role of ownership inincreasing the complexity of family business groups, to take a more holistic view of the field

by discussing family business groups and portfolio entrepreneurship at different scales ofsize, different regional and industrial contexts, and to assess the overall contribution of familybusiness groups to the economy and society The structure of the book is designed to

opportunity to do this Family business groups exist at all scales, from some of the largestbusiness groups in the world to small proto-business groups in the small- and micro-businesssectors Each scale has fundamentally different specialist requirements for efficient and

profitable business management, but family business groups have two things in common,

The vision of the book is to further our understanding of the interaction of family andentrepreneurship in the development and management of business groups Understandingthis interaction is an area of research that has received little attention in either the

mainstream management or entrepreneurship literatures In attempting to achieve this, thebook contains contributions addressing one of four themes:

1

The theories and challenges of researching family-owned business groups (Chaps 2and 3) As a phenomenon, the family business group reflects characteristics that have

been modelled within organization theory, strategic management and sociology In Chap

2, the theoretical basis for the understanding of the family business group phenomenon iscovered However, it seems evident that research on family business groups has been

conglomerates He illustrates how growth is achieved through a process of capital

accumulation based on portfolio entrepreneurship, which he terms the ‘entrepreneurialcareer ladder’ This is not just a process of trial and error; it is supported by an indigenousbusiness culture within which portfolio entrepreneurship is an embedded practice

Finally, in Chap 7, Akhter and Ning pose a similar question on how, amongst the poorestpeople in developing countries, pluriactivity, a survivalist necessity driven form of a

Pihkala and Rosa draw on theories of complex adaptive systems to analyse family

Finally, under this theme, Goel, Ikäheimonen and Rautiainen identify family governance

issues that affect the evolution, longevity and performance of family business groups

4

Family business groups and portfolio entrepreneurship operating in different local contexts This final theme consists of three chapters (Chaps 12, 13 and 14) They

illustrate how family business groups and portfolio entrepreneurship can be importantdespite operating in widely different local contexts In the Finnish economy, innovation-led industries make a vital contribution In Chap 12, Konsti-Laakso, Heikkilä, Rautiainen,

Rinkinen and Akhter study the role of family business groups for the regional innovation

system The present study is among the first to analyse the intellectual property rights(IPRs) filing activity by family business groups In Chap 13, Discua Cruz, Basco, Parada,

The book concludes with an overview by the editors of its main empirical and theoreticalcontributions It assesses how far the book’s contributors have managed to achieve the aims

of bringing together management and organization, entrepreneurship and family businessperspectives to provide a holistic understanding of the emergence and development of familybusiness groups It also offers insights into how future researchers, practitioners and familybusiness entrepreneurs and managers can benefit from the lessons that have emerged fromthe book’s authors

References

Balunywa, Waswa 2009 Portfolio Entrepreneurship and Economic Growth: The Case of Uganda PhD Thesis, University of

Stirling.

Rosa, Peter 1998 Entrepreneurial Processes of Business Cluster Formation and Growth by ‘Habitual’ Entrepreneurs.

Theoretical and Methodological Reflections

Researchers have identified many different forms of business organizations, which offerthe leaders of corporate firms a wide choice of organization The dominant single firm form iswhere a central corporate department directly controls the business along functional lines(such as production, marketing, finance, personnel (termed U-Form, Williamson 1992))

Business group types include different forms, for example, multidivisional form (M-Form), in

which a central parent company owns and coordinates smaller companies, which are legallyindependent The H-Form is a variation of the M-Form, in which constituent companies are

owned by a holding company These forms can be conglomerates, where a central parent

company oversees a group of two or more autonomous companies, which operate in

unrelated markets and industries as well as multinational corporations, where the parent

choice”, the firm leaders need to evaluate the advantages and disadvantages of a particularform of business, before they decide the best organizational form to adopt, or change over to.This can depend on the perceived nature of a changing business environment For example,since the 1960s, there has been a major shift in the USA and UK from large corporate

companies who had hitherto been organized as a U-Form into M-Form and from hierarchicalstructures into flatter organizations Highly diversified conglomerates have also declined inpopularity in these countries in favour of undiversified and highly coordinated M-Form

groups This has been a response to the need to respond more flexibly and quickly to rapidchanges in business opportunities and threats arising from innovation and globalization onthe one hand, and to volatility in inflation rates in the late twentieth century on the other,which eroded the advantages of a conglomerate organization In less developed parts of theworld, however, the conglomerate remains the preferred form or large businesses, as thebusiness environment still favours this form of organization The question arises, however,how far such choices are really “rationally” based on solid empirical research, rather than onindustry fashions Although there has been much academic research on the advantages anddisadvantages of various forms of organization, it is less clear how far industry leaders

actually consult this in any depth before making decisions This raises questions on how farcorporate strategic decisions are really rational, scientifically informed and premeditated

From an academic perspective, research has concentrated on the generic advantages ofbusiness groups, why they exist and persist, and whether corporations organized as businessgroups confer particular advantages and disadvantages (Yiu et al 2007) Since the 1970s

there has been a rapid development of studies on business groups from different theoreticalperspectives (e.g as reviewed by Granovetter 2005) Broadly, they have tended to be

researched under from four academic theoretical approaches and disciplines:

1

Finance, management and organization: These have focused on how business groups

confer advantages These explanations tend to draw on financial portfolio and governancetheories, which advocate that diversification into separate firms within the business

group spreads and mitigates risk and enhances efficient governance by centralizing

administrative and R&D functions in a parent company A business group allows the

creation of a corporate brand image, while at the same time permitting affiliates

autonomy to react quickly to new opportunities and threats (Rugman 1976; Amihud andLev 1981; Amit and Wernerfelt 1990) A business group structure can make it easier toreduce tax burdens, or improve access to localized tax breaks and subsidies (Prechel

2000)

2

Business economic and economics: Transaction cost theories (Williamson 1985) have

1976, 1978) The prevalence of market imperfections in developing countries has beengiven as a primary reason why diversified family-owned conglomerates are

disproportionally common in developing countries (Khanna and Palepu 1997, 2000a, b).The relevance of transaction cost theory has also been adopted in developed country

contexts Guillén (2000) has advocated that transactions between business group

affiliates improve information flows and access to resources; and that talent and skilledstaff can be developed and shared amongst affiliates more efficiently following repeatedtransactions (Chang and Hong 2000; Carney et al 2011, p 440)

3

Sociological research on how business groups help provide common norms and

integrative codes of behaviour while maintaining loose and flexible social and businessnetworks (Grannovetter 1994, 2005) The enhanced networking capacity of a group ofaffiliates confers advantages over that of a single organization An important advantage isimproved information flows concerning new market and technological developments,which can result in new and quicker responses to business opportunities (Luo and Chung2005)

4

Political economic approaches: These suggest that groups are mechanisms for accruing

disproportionate wealth in to the hands of a handful of families through rent seeking andinterlocking directorships based on kinship (Scott and Hughes 1980; Encarnation 1989;Gill 1999) In this literature, however, a business group does not refer to a firm with a

parent company with autonomous or semi-autonomous entities or affiliates, but to

groups of independent firms interlinked through members of the elite holding multipledirectorships in a range of companies Scott and Hughes (1980, p 260) observed that inScotland there was a move away from interlocking directorships across firms in the sameindustry, or functionally similar areas, to interlocks with financial companies that

provided financial resources to corporate business groups More recent research,

however, has demonstrated that interlocking directorships play an important role in thegovernance of a family business group (Piana et al 2012)

The sociological and political economic studies demonstrate that businesses are socialunits, not just functional profit-maximizing businesses Firms are not logical robots, but

organizations managed by people who have complex agendas and interests In listed

corporate companies, where ownership is in the hands of thousands of shareholders, and thecompany is managed by a professional team, the overriding incentive is to maximize sharevalue, as this ultimately determines the pay and bonuses of the senior executives Optimallystructuring the efficiency of a business group makes sense in this context Despite this,

agency theory predicts that even in efficient groups, managers and influential personnel inautonomous or semi-autonomous affiliates can be inspired by motives that conflict with theruling company goals They may be prone, for example, to empire build or maximize theirpersonal prestige and status within their affiliate rather than in the wider group Hence, inmany cases improving the profitability of affiliates cannot be assumed automatically to be adominant factor for retaining a business group structure (Morck and Yeung 2003)

The proportion of purely corporate firms listed on the world’s stock exchanges, however,

controlled (Masulis et al 2011) The motives and incentives are usually radically differentfrom listed corporations for the leaders of these firms While purely corporate firms are

anonymous shareholders Many, as stated earlier, are entrepreneur- or family-owned or -encouraged to maximize profits and their return on shares, families and entrepreneurs areprimarily (though not exclusively) motivated by growing their wealth and, once wealth hasbeen created to their satisfaction, retaining their wealth Business groups for such familiesare thus mechanisms not just for growing their capital but for creating stable and regularreturns by controlling and managing their wealth, for example, through adding trust and

investment elements to their portfolios (Gerlach 1992) Furthermore, there is always an

implicit insurance element or agenda in the management of a family business group (Lincoln

et al 1996) inspired not only by the need to spread risk when the external environment isunstable or unpredictable but also to accommodate family crises caused by conflicts and

succession

Family and entrepreneur led businesses, when financial resources for growth are

required, prefer to borrow rather than attract equity, to avoid diluting family ownership of abusiness There has been some interest in the development of business groups as a

specialized mechanism for leveraging and expropriation of capital from minority

shareholders, through the creation by controlling families of a pyramid structure of affiliates.Masulis et al (2011, p 3558) explain that this structure provides an internal capital market,which helps leverage internal capital and raise external capital which would go unfundedunder other types of ownership organization This is reinforced by Chung (2013) in an

analysis of how ownership structures affect diversification decisions in Taiwanese large

family business groups Chang found that a pyramidal ownership structure enhanced

diversification in these family groups The creation of such internal capital markets facilitatesrisk sharing, too, in environments of financial constraints (Khanna and Yafeh 2005)

Researchers have not only demonstrated its value to controlling families, but also sought toexplain why minority shareholders continue to invest despite their apparent exploitation byfamily owners (Almeida and Wolfensen 2006; Khanna and Yafeh 2007) This pyramid form ofbusiness group, however, is relatively specialized and uncommon in relation to the total stock

of business families There are, however, other mechanisms for achieving growth on internalcapital to invest on growth Malfense Fierro (2012) has noted that in Malawi large-scale

portfolio entrepreneurs use joint ventures and partnerships to pool resources and share risksdue to the uncertainty in the face of political, financial and economic volatility, and for

balancing the short supply of finance

2.2 The Emergence of Business Groups and the Role of

Portfolio Entrepreneurship

Research on business groups has concentrated on why and how a business group form oforganization confers advantages, and how far performance is enhanced by adopting such astructure The emergence of business groups from small beginnings has received less

attention Business groups usually begin to emerge when a firm is too small to attract theinterest of mainstream business and management researchers who have traditionally

considered as less modern or efficient than contemporary listed forms of corporations Inthese theories, organizational business forms are linked with various stages of human

economic development and modernization For example, many developing countries have yet

to reach a stage of what Rostow (1960) termed industrial “take-off” Porter (1990) terms

them factor-driven economies typified by underdeveloped infrastructures and institutions,

which are not conducive to the emergence of large corporate organizations Thus, many of theforms of proto-business group formation (such as pluriactivity, developing multiple

enterprises amongst the poor) could be interpreted as typical businesses of a pre-industrialevolutionary state where bricolage between individuals is the norm, rather than the

establishment of stable business organizations and firms

Similarly, family businesses engaged in personalized forms of management, or organized

as conglomerate diversified business groups, are seen as adaptations to a phase of humandevelopment equated with industrialization and emergent economies (or in Porterian

is that they have evolved past that phase Modernization theory has yet to be rigorously

applied to explaining the emergence of business groups and, like most generalized

modernization theorizing, cannot account easily for variations in organizational forms withineach country In Kenya, for example, the same developing country has seen the emergence ofnot only pluriactivity amongst its poor, but large conglomerates and even sophisticated M-Form business groups and multinationals Its legacy is that many researchers of large-scalecorporate businesses tend to assume that family businesses are a backward, less modernform of organization, even though there is little in-depth research to substantiate this

This inevitably affects the business group research agenda, as the importance and

significance of less modern forms of business may be deemed less interesting, and thus lessworthy of attention How a firm grows from small beginnings into a large firm has thus been

of less interest to business organizational theorists, than how a large firm expands and makesgains in profitability and performance As Granovetter (2005, p 431) observed, it was only asrecently as 1959, when Penrose wrote her seminal work on business growth that economicand organizational theorists became aware that how firms grow might be an important issue.Penrose (1959) drew attention to diversification as a driver of growth Once a particular

market had been serviced and optimized, as bounded by the resources and capabilities of afirm’s leaders, or through the market reaching saturation or maturity, the easiest way of

growing is to diversify into a new less exploited market Penrose’s thesis blends togetherentrepreneurship (the identification and pursuit of new opportunities to diversify into) andresource accessibility (the availability of resources to exploit a diversification) In Penrose’s

particularly the capabilities of a firm leader or management team to manage growth

Penrose’s resource-based view provides an important theoretical foundation for researchinto portfolio entrepreneurship Wiklund and Shepherd (2008), Plate et al (2010) and Sieger

“resource pools”, particularly less tangible social and socio-emotional resources such as

family networks, reputation, a sense of family identity and common sense of motivation andpurpose How these different sets of resources combine to facilitate the development of

business groups is again not theorized This may be linked to the relatively little attentionpaid to processes of growth in smaller family firms Zellweger and Sieger (2010, p 71) pointout that most family business research has been “embedded mainly in the context of

established, larger and often multigenerational firms in mature industries”, focusing on howfamily relationship affects managerial activities and where long-term planning horizons

favour stewardship and survival rather than entrepreneurial growth

If one accepts Penrose’s insight that business growth is ultimately determined by the

capabilities and resources of the entrepreneur or management team, then it follows that thesmaller the firm, the more likely it is for an entrepreneur or entrepreneurial family team toreach their limits in exploiting a business opportunity Thus to grow further, the easiest

option is to diversify by starting another small-scale business opportunity in parallel

(Lechner and Leyronas 2009) rather than acquire fresh skills and resources to grow the

existing business substantially By diversifying into a separate business, resources can beconcentrated in its development, and ownership and risk of failure or loss of reputation ringfenced from the main business (Iacobucci 2002, 2009; Iacobucci and Rosa 2010) As an

entrepreneurial team or family gains in experience, capital accumulation and competence, thescale of businesses diversified into can increase, both in terms of size of business and in

terms of number of businesses

Under this model, one would expect successful entrepreneurs in the small firm’s sector togradually expand the business group in two ways Firstly, they can add new businesses totheir portfolio Secondly, they can start larger and more resource-intensive businesses astheir capital and experience expand There is some evidence of this in empirical studies onportfolio entrepreneurship, which show a rise in the number of businesses started as theentrepreneur or family accumulates capital Starting a second business is the first big step,which may be followed by a host of small pilots resulting in a small cluster of satellite

businesses around the main business (Rosa 1998; Iacobucci 2009) At this stage there may beproblems encountered when previous experience may be a hindrance in trying to establish anew unfamiliar line of business and can lead to overconfidence (Ucsbasaran et al 2008)

Learning how to select suitable managers to delegate new businesses to and to use the skills

of others to overcome the personal limitations of the entrepreneur are key learning processes(Rosa 1998; Iacobucci and Rosa 2010) Such delegation often requires locking in the manager

of the new firm by sharing some ownership, to prevent him or her leaving and setting up the

An examination of the life histories of large-scale portfolio entrepreneurs and familiesshows that they have tended to develop through progressive increases in the size and scale oftheir business groups, rather than through growing a single business from small to large

(Balunywa 2009; Malfense Fierro 2012; Hatem 2012; Rautiainen 2012) Their large

conglomerates may contain dozens of businesses, some of extensive size, a mixture of olderand newer business ventures The current business group may bear little relation to the

original small-scale group, owing to the divestment of early smaller businesses as too small to

be viable any longer, or sold to provide capital for newer larger diversified ventures

A fundamental question in researching the development of family business groups overlong periods is whether development is a conscious strategic process or whether it is an

emergent one Much family business research in recent years has drawn from theories ofcorporate entrepreneurship, which posits that performance in firms is linked to the ability of

a firm to form long-term strategies, in particular to design and maintain an entrepreneurialorientation (EO) Entrepreneurial orientation would be needed especially in conditions ofuncertainty where survival and growth depend on the ability to access quickly new

opportunities (Rauch et al 2009; Zellweger and Sieger 2010) Family firms who fail to pursue

a positive strategic entrepreneurial orientation will tend to stagnate through “strategic

simplicity” and inertia (Zellweger and Sieger 2010, p 68) The concept of EO , developed byMiller (1983, 2011) and Lumpkin and Dess (1996) (Dess et al 2011), has subsequently beenadapted and applied to family firms (Martin and Lumpkin 2003; Zellweger et al 2011)

The concept of EO has been taken further by combining it with the notion of “long-termorientation” (LO), in which successful families are thought to have developed long-term

Miller 2005; Lumpkin et al 2010; Lumpkin and Brigham 2011) Family businesses, by taking along-term strategic view and by consistently adopting and pursuing the key strategies of

strategies that account for their long-term transgenerational success (Miller and Le Breton-autonomy, innovativeness, risk taking, proactivity and competitive aggressiveness (Lumpkinand Dess 1996), are able to survive and thrive over generations None of these studies hasapplied their theorizing specifically to family business groups rather than undifferentiatedfamily firms, but there is strong implication from their line of thinking that the emergence ofbusiness groups may play a part in this planned long-term strategic process Group

structures, it could be argued, are ways of accommodating strategically the development ofnew corporate ventures or affiliates within the family business Zellweger and Sieger (2010),however, have demonstrated through detailed case studies that success over time may notalways require high levels of corporate entrepreneurship, and that process of

entrepreneurship linked to the EO construct varies dynamically and even unpredictably overtime Overall, strategy-based corporate entrepreneurship theories have only shed limitedinsights into the nature and emergence of family business groups Long-term entrepreneurialorientation also assumes that mechanisms exist for transferring this orientation and theskills to put it into practice from one generation to another How far families with large

business groups pass on these orientation and skills to their children has not been researchedyet in much depth (Rosa et al 2014)

An alternative view is that family business groups are not the outcomes of long-term

strategic processes, but are the cumulative outcomes of short-term reactions to

opportunities and threats As Rosa (1998) and Scott and Rosa (1999) demonstrated, each

or pushed), and has its unique motivations for starting it Over time as more ventures areadded, the motives and circumstances that led to the original businesses being formed may

no longer apply, and the structure of the groups can become increasingly messy and

uncoordinated Over the long term, this emergent process can produce some very messy andcomplex business groups (Rautiainen 2012) As Rosa et al (2014, pp 76–7) put it:

A closer examination of the long-term trends of business group formation by

entrepreneurial families reveals that they tend to exhibit different kinds of portfolio

formation according to the circumstances they face Many large family businesses were

founded and expanded to form business groups by entrepreneurial founders, driven by pull diversification as favorable opportunities presented themselves Catastrophic events

of complex business groups (Aldrich 2007, 2012; Aldrich and Ruef 2014) This has yet to beattempted, and forms a major theoretical gap in researching long-term processes in the

emergence of business groups Another related approach with potential to shed insights intothe complexity of family business groups is complexity theory This is not a single theory, but

an umbrella term for a number of related approaches to understanding complex

organizations Complexity at its most extreme is chaos, when random events produce

unpredictable processes and outcomes Business organizations are not chaotic, but nor arethey perfectly ordered either as conceived by strategy-based organizational theorists In

between are organizations which are termed “complex adaptive systems” (Miller and Page2007), which are self-organizing, constantly changing, and driven by experience rather thanpremeditated strategy As in the case of evolutionary theory, its application to the study ofbusiness groups is promising, but as yet largely unexplored

Researching family business group complexity may also profit from taking a systematicview, in which changes in one element of the organization may affect changes in other

elements In their discussion of systemic views on family businesses, Pieper and Klein (2007)noted that research has developed from closed system approaches to open system

approaches; from dual-system thinking (family and business) towards complex and specificmodels Open systems view (e.g Katz and Kahn 1978) is considered more suitable in studyingcomplex systems, where several subsystems may interact with the environment In a family-owned business portfolio, built of smaller family-owned entities, the system contains both

strategies (Ward 1997) Through these dynamic processes, the family business system growsboth in size and complexity As an open system, the family business system is in constantrelationship with its environment through each subsystem—that is, businesses and familymembers (Rautiainen et al 2012)

In the portfolio system, the businesses require their own special maintenance and

management, which has implications on the family level and for the individual family

members Each of the subsystems needs to run efficiently and productively Should any of thesubsystems operate inefficiently, it could lead to severe problems in the whole family

business system or even a collapse if their integration is too closely developed (Rautiainen et

al 2010) For example, if a business started by a family member proves a liability, and hasattracted large amounts of financial investment from the other businesses in the group, itsfailure could lead to debt burdens for the surviving companies, a loss of reputation, a loss ofconfidence in the individual family members who led the creation and management of theventure, and even severe emotional conflicts within the family If integration of systems islooser and less developed, the failure of one company would not affect the whole group, butcould lead to too much autonomy for certain subsystems which could lead to schisms and thebreak-up of the group, motivating different family members go their own way Over time asdifferent subsystems evolve and conflict, this could lead to considerable complexity in thebusiness group dynamics of the family

Family subsystems of family governance, ownership management, the need for wealthretention and entrepreneurial motivations can cause business groups to being expanded,contracted and restructured in ways that crosscut any forces of change from the businessenvironment As a business group evolves within the first generation, the emergence andexpansion of the group may purely reflect the entrepreneurial family response to new

business opportunities and the market-driven management requirements of managing anexpanding group efficiently However, as the family expands, and passes on to subsequentgenerations, the need to pass on the family wealth efficiently may lead to the start-up of newinvestment companies designed purely to invest and retain wealth, not grow it This maycause conflicts between younger family members who wish more of the family wealth to beinvested in safe investments, and in companies specially designed to minimize tax, and thoseentrepreneurial members who wish to start new productive growth ventures Reward

systems also become important, with a balance needing to be struck between ensuring thedividends to passive shareholders are sufficient and yet enough money is available to invest

in growth Family subsystems reacting to such crises may result in messy groups developing,with ownership issues and family wealth retention issues not clearly separated or managed It

is not unusual for family business groups to be restructured radically following crises of

succession