Reinventing the Family Firm - Chapter 1

DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

It should be pointed out that one of the most influential conceptual models for managing a family business is the so-called three-circle model proposed by Tagiuri and Davis (1996). The gist of this model is that the family business (circle 1) will be impacted by the owning family and its priorities (circle 2), as well as by the objectives of management (from the owning family and/or professional) (circle 3). In this book, we shall focus primarily on circle 1, which relates to the businesses in which SUI is involved. Nonetheless, the owners-cum-family members clearly also impact decision-making, particularly when it comes to imposing their individual views on risk. This is also the case when it comes to management’s objectives, of course. So, the shaded area in the middle of Exhibit 1.1 will be the key focus of this book. Renato Tagiuri together with John Davis created the famous three-cycle model of the family business system in 1978. Davis has recently written about how this came about (Davis & Lombard, 2019, pp 51–68). This includes the earliest known drawing of the three-cycle model by Tagiuri in 1978, reproduced in Exhibit 1.2. Flexibility One final consideration needs to be raised when it comes to arriving at a good strategy for a family portfolio firm. An important determinant for continuing business success is the ability to be flexible. What is the key to such flexibility? While there may be many important factors, the author believes that the concept of “listening posts” is particularly relevant for family firms. Although strategy means choice for most large established commercial firms, relatively small family firms might actually benefit from not following this dictum. Instead, investing in a relatively large number of listening posts might allow them to better identify what seems to work. This can best be done through investing in well-managed funds, which allows the firm greater flexibility in its approach: By testing out a relatively large set of options, they can exit quickly when things do not turn out as hoped. More substantial follow-on investments might then be relatively easier to make in that they might have been able to try things out at a lower level of investment initially. This flexibility, through trial-and-error and gradual, incremental levels of commitment, could be seen as the DNA of many family business portfolios.

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