"The business of family business in Asia is the family." Discuss

University Degree Business and Administrative studies

East Asian Business and Society Shah Ali

“The business of family business in Asia is the family.” Discuss

“The father who does not teach his son his duties is equally guilty with the son who neglects them.” Confucius

“The essence of Chinese economic organisation is familism,” (Wong, 1985, p58). The majority of Chinese businesses outside mainland China, including the largest conglomerates, are family owned. The family is the foundation for all Chinese business enterprise. It is argued by many that Chinese family businesses (CFBs) place family above business. The Chinese tend to view their business duties more as responsibilities to the family rather than creating wealth and profits. As a result of this they have been termed “Chinese Business Families” rather than “Chinese Family Businesses” (Chen, 2001). This is a significant topic to discuss as the Chinese model for doing business is not that well researched. The West has been fairly scared of the East and their business structures as they are so dissimilar to the Western model. However, it is critical for Western businesses to understand the Chinese model for business in the ever increasing of globalisation and the increasing participation of Chinese businesses in the global market.

This essay will firstly briefly discuss the cultural and historical background to the CFB. Then the essay will be divided into three sub-sections. The first section will argue that CFBs do focus on family rather than business success. The second section will argue that the CFB model, due to its many advantages, actually causes high levels of business success and so family is not the focus of businesses but rather the mechanism to reach and become a successful business and so the two go hand-in-hand. The third section will argue that at the of the day CFBs place wealth creation above family as they, reluctantly, move away from the CFB model and become more westernised so they are able to compete in the global market.

There are two main deep-rooted treads of culture that have bound the Chinese people for over 5000 years. The first is agrarianism, which conjures a very communal ethos, group cooperation and harmony as well as loyalty and obedience to familial hierarchy. The second thread is said to be morality: the Confucian system is said to be the social fabric of Chinese culture and has been ingrained within Chinese society for over 2000 years. Confucian scholars developed an ideology based on the moral nature of man, harmony of society, political legitimacy and order and unity and it is claimed, “the early period of intellectual ferment profoundly affected the formation of Chinese management”, (Chang, 1976, p76). Confucian ideology centred on morality, virtuous rule and rigid, hierarchical socio-political relationships. Confucius stressed the importance of social hierarchy and social relationships and the requirement of harmonious operation and welfare of society (Wah, 2001; Pun, K., Chin, K. and Lau, H, 2001).

The first section will argue that CFBs do concentrate on their family responsibilities rather than business success. Confucianism’s negative evaluation of profit is still available to structure the calculations of the educated Chinese. The organisational structure of CFBs incorporates the family in all its elements and Chen’s (2001) four pillars of CFBs demonstrate how family is the focal point and emphasis on family over profits (Brook, 1999).

The first pillar is that a CFB is a ‘family-directed operation’. It is headed by either a patriarch or a matriarch, usually the individual who founded the business, with other members holding key positions within the business. The extended family will normally have its own allied companies or subsidiaries that are all linked together to form a complex network of companies with ownership distributed through out the extended family and cross holdings are common to create intra-family interdependencies. Even when a Chinese business is a publicly held corporation, it is often family controlled. CFB members share responsibility of operations and take a hands-on approach. A main feature of the CFB model is that of informal decision making, which occur outside the boardroom at events such as family dinners (Chen, 2001).

The organisational chart of a CFB seldom reflects a true picture of power distribution within that company. Job titles have little reflection on members’ actual roles and often someone with a high-level sounding title may only be a figurehead. Business deals maybe based on family reasons rather than the merits of the business proposition, which leads to a financially attractive deal to be rejected (Chen, 2001).

The second pillar is that a CFB has a ‘dominant family head’. CFBs usually are controlled by a dominant family head who has the final say on all important decisions for the business and has maximum flexibility in his action. This person may have advisors who will be family members or close friends who will provide the head with most of the information they need. Managerial ideology is shaped by Chinese cultural values such as clear hierarchy, reciprocal vertical obligation, benevolent autocracy etc. (Tsang, 2002). Often a lower level manager will go straight to the head without going up through the chain of command. This emphasis on family-cantered decision making can lead to difficulties within the business that can affect their business performance. For example, business responsibilities are sometimes vaguely defined, and CFB’s emphases on family loyalties makes it difficult to form close and cooperative relationships with non-relatives and conscientious managers can often lead to them feeling left out and frustrated and therefore leave the business when opportunities beckon. More importantly the lack of transparency can be discouraging for Western businesses who do not understand the principles of how CFB system functions (Chen, 2001; Whyte, 1996). Though the family head has complete control over the businesses’ capital, it is not his personal property. He is just a trustee of the CFB assets which ultimately belongs to his children. So the emphasis is on the continuation of the family line rather than utilising capital to its maximum for highest profit gains (Wong, 1985).

The third pillar is that a CFB focuses on ‘family obligations and enduring roles of members’. The importance that the Chinese place on family is most clear when a family business is passed down from one generation to the next. Heirs feel a sense of responsibility and respect for their family and its business and it is seen as more than a financial support for the heirs. It is seen as a connection to their parents and further into their past. Chinese pride is as critical as economic success and prosperity (Chen, 2001). This therefore can lead to actions ...

This is a preview of the whole essay

A clear example of how family is placed above business profits is shown in the inefficiency of a CFB due to nepotism, meaning favouritism shown to family members in employment. CFBs cannot appoint, reward, discipline, and fire business members according to their qualification and performance because individual treatment is always skewed by the obligations attached to family roles. Even if no family members are has the required skill to manage the business, family members or extended family members are always preferred over outside professional and skilled managers. This can therefore have an impact on the success of the business as unskilled, ill-knowledged managers may reduce profits and wealth, so showing the families’ disregard for profits and emphasis on the family. Furthermore, the CFB may take on many extra relatives as employees, even when those relatives contribute very little or constitute a drain on resources. Even more importantly, if the head of the family and business is no longer able to make wise business decisions, he or she cannot be replaced very easily (Whyte, 1996; Chen, 2001; Wong, 1985).

The fourth pillar is that a CFB is a ‘family financed and a family accountable corporation’. CFBs do not wish to rely on external institutions such as banks but prefer to rely on the family and be self-reliant. The formal accounting for CFBs tends to be for tax reasons, with the actual books kept within the family members. However, this overemphasis on keeping everything within the family such as the accounts can lead to non-family professionals not being able to make well-informed decisions for example business deals with that firm. This can lead to a loss of business prosperity and profits (Chen, 2001)

Wong (1988, p134) argues the case of modernisation theorists that “[The family] provides shelter and food for all its members, regardless of their individual contributions, so that he indigent and indolent alike are cared for….Working members are expected to pool their earnings for the benefit of everyone; individual saving is discouraged….Family loyalty and obligations take precedence over other loyalties and obligations. Thus, the extended family tends to dilute individual incentives to work, save and invest.” This then will lead to a lack of investment and so reduced business prosperity due to this emphasis on family. A further indication of CFBs focus on family over profits is the high premium placed on family loyalty is, filial piety, and reverence for ancestors conflicts directly with the entrepreneurship, risk taking, and innovation that are required for business success in modern industrial societies, (Whyte, 1996).

As long as the family is the organisational basis of an enterprise, businesses tend to remain small and undercapitalised, unable to compete with modern capital and technology intensive non-family businesses. Any efforts of CFBs to expand are generally thwarted by firstly, the limited number of reliable relatives; and secondly, the Chinese custom that each son receives an equal share of the family assets (Whyte, 1996).

In counterargument to the argument that high business success is the motive behind the CFB model because loyalty to the family is a very strong source of motivation and performance for the business. However, this also supports the argument for CFBs placing family before business success because they do this for the sake of the family. On the job, family members are willing to work very hard and put in long hours for the family rather than personal benefit. They are willing to accept lower pay than non-family and would take pay cuts for the success of the business for the family (Whyte, 1996).

Redding (1995, p64) argues that “money becomes the only meaningful surrogate for security and the pursuit of wealth is only conducted rare passion.” This implies that maybe business success may come before family commitments. However, Redding (1995) notes that the influences for this is firstly, gaining high status from conspicuous consumption of, such as the sales of Mercedes Benz or Rolls Royce cars. Secondly, due to their sense of responsibility for the building of family financial resources so the family name can be preserved with respect in the long term.

This second section will argue that the CFB model, due to its many advantages, actually causes high levels of business success and so family is not the focus of businesses but rather the mechanism to reach, and become, a successful business and thus the two go hand-in-hand. Kao (1993) states that privately owned Chinese companies, most of which are outside China, make up the world’s fourth economic power after North America, Japan and Europe. Whyte (1996) argues that the entrepreneurial behaviour expressed by the Chinese families in general is at least part of the driving force behind China’s dramatically improved economic performance. Starting from a domestic base, some CFBs have become extensive MNCs. Prominent examples include Hutchinson Whampoa of Hong Kong, the Salim Group of Indonesia, Hotel Properties of Singapore, Formosa Plastics of Taiwan, and the Charoen Pokphand of Thailand (Tsang, 2002). So this brings up the question of if CFBs put family concerns above that, and to the detriment of, the success and wealth creation for the business, how has CFBs become so successful?

This essay will again use Chen’s (2001) elements of CFBs to demonstrate how these elements utilising the family as a business model causes business success and thus family is the tool for business prosperity. The first pillar is that a CFB is a ‘family-directed operation’. The emphasis on relationships and reciprocity within Chinese ideals has given rise to ‘Guanxi’ which is a network of connections to gain a competitive advantage. “Guanxi operates in concentric circles, with close family members at the core and with distant relatives, classmates, friends, and acquaintances arranged on the periphery according to the distance of the relationship with the degree of trust,” (Park and Luo, 2001, p456). CFBs will have a large network of relatives and close friends that spans across various industries, both horizontally and vertically.

Therefore, when analysing the industry one is in or about to expand into using Michael Porter’s (1979) classic five forces of competition. A CFB with its guanxi network fares very favourably with no need for bargaining power between suppliers and buyers as they are rendered irrelevant as most likely they will be in the same guanxi network. Furthermore, the large network lends itself to high levels of guanxi and therefore a large competitive advantage over rivals. However, CFBs do suffer from the threat of new technologies.

An element of guanxi is the high level of trust backed up by a strong set of ethics within a guanxi network which is deep rooted in the culture. This leads to interpersonal obligation bonding as the main means of expanding the range and size of a CFBs’ capacities. Under the CFB model decisions are made with greater speed and much lower costs. An important outcome is the reduction of transaction costs and paperwork resulting from the elimination of lawyers and analysts (Redding, 1995; Chen, 2001; Chung, 2005).

Chinese businesses utilise guanxi to manage organisational interdependence and to mitigate institutional disadvantages, structural weaknesses, and other environmental threats (Park and Luo, 2001). Guanxi is a valuable entrepreneurial tool to bridge gaps in information and resource flows between unlinked businesses and between businesses and important outside stakeholders. As institutional uncertainty increases, businesses more eagerly turns to guanxi networks to lower external dependence for key resources and to improve their legitimacy. Thus, a guanxi network helps a business overcome the lack of resources to accommodate growth while alleviating substantial bureaucratic costs that would result from internalising operations. Networks provide member organisations greater access to human and financial resources, knowledge and management expertise (Oliver, 1990). By linking together, businesses expand their product and market reach and exercise greater market power than freestanding competitors. However, it must be conveyed that sustaining guanxi can be costly in terms of the reciprocal and utilitarian demands despite the contribution to sales growth. The obligation to personal attachments can prevent business changes that are necessary to improve profit. Therefore, networks do not always contribute to profit growth (Park and Luo, 2001; Yeung and Tung, 1996).

The second pillar is that a CFB has a ‘dominant family head’. Paternalism, a key feature of Chinese culture and CFBs, causes a high degree of centralisation. The result being leadership of businesses tend to be long lasting and stable, allowing for the accumulation of deep knowledge about an industry and the building of strong networks. Another result is that power structures in businesses can be kept relatively simple (Redding, 1995; Luo, 2003).

Besides reinvestment, the father-entrepreneur is also able to transfer funds from one line of business to another for lateral expansion and mutual sustenance. Capital is mobile within the family group of businesses because it belongs to a common, unified ‘family head’ budget. Furthermore, the existence of a pool of common family resources can be used to provide security against failure, and to survive an economic downturn if one occurs (Whyte, 1996; Wong, 1985). The use of family roles to organise management also provides a cultural basis for business authority, reducing conflict with the boss and inhibiting strikes and other disruptive behaviour (Whyte, 1996).

The third pillar is that a CFB focuses on ‘family obligations and enduring roles of members’. In the early stage of the development of a CFB, from Wong’s (1985) phases of development, many enter partnerships, which are notably unstable. There is an element of mutual mistrust and all involved will attempt to increase their portion of ownership relative to the others. Some partners will have an advantage over the other as the usual method is to capture the key managerial positions as these carry extra shares. Therefore those who have close relatives among the partners will have an obvious edge over others as they can act jointly (Wong, 1985). Family members are likely to stay with the firm even when better paying opportunities arise elsewhere, contributing to continuity in firm management (Whyte 1996).

During the latter stages of the development of a CFB, there is competition among sons thus providing an added stimulus to economic performance, and the resulting diversification between them is a competitive asset in itself. Furthermore, the existence of a pool of common family resources can be used to provide security against failure, through the ability to transfer funds from one subsidiary to another to survive an economic downturn if one occurs (Whyte, 1996).

This third section will argue that at the end of the day CFBs place wealth creation above family as they, reluctantly, move away from the CFB model and become more westernised so they are able to compete in the global market. Even proponents for the CFB model admit there are weaknesses. There is a tendency of such firms to operate with short time perspectives, to engage in questionable business practices, and to raise large sums for research & development investment. However, the primary weaknesses are built in limits on expansion of family businesses, their difficulty in managing succession after the business founder passes from the scene, and their vulnerability to fission (Whyte, 1996).

The CFB is often said to be limited both in scale and lifespan. Chinese companies are now adapting to compete in a new Western-led global reality and expand beyond the family’s reach. This demonstrates the willingness to let go of traditional family based structures for the pursuit of global prosperity and profits. The strict Confucian hierarchy of roles and relationships that has characterised the overseas CFB must now accept the new innovative high-tech industries. In these industries the CFB model had to be discarded if to remain competitive. Therefore it can now be seen that many of Taiwan’s high-tech companies have moved away from CFB model, placing business success above family (Chen, 2001; Wong, 1985).

The CFB model is in a stage of transition where CFBs are expanding beyond their home markets into globalised markets. However, they have to reluctantly move away from the CFB model as they adopt global business standards and practices for the pursuit of profits. Regulations introduced by the International Monetary Fund have increased transparency and are standardising organisational practices. To compete in the global market CFBs must converge with the Western model for businesses. An example can be seen within Indonesia’s Sinar Mas Group. They have restructured themselves into four separate holding companies and are now listed on the Jakarta Stock Exchange. The organisation is now managed by trained professionals of whom many are not ethnic Chinese. Many of the heads of CFBs now believe to become internationally competitive, CFBs must push for specialised and professional management, and in doing so place the profits of the company above family ties (Chen, 2001).

Succession of the CFB has lost its link to family heritage and tradition and now an opportunity for further reorganisation and convergence with the practices of the West. This is vastly accelerated by the Western professional education now possessed by the heirs of the large conglomerate CFBs. The heirs return to Asia with knowledge and experience but more importantly have been given chance to break away from the traditional tight family network and launch independent ventures, and so placing individual achievement above that of the collective family (Chen, 2001).

In conclusion, this essay has examined the case that CFBs main concern is the family and not of business prosperity and profits. This was evident as CFBs have many structures and methods of doing business that did not lend itself to maximising the success of the business. However, CFBs dominate the corporate world of Asia and so a paradox was created in how a business model that did not place success or profits as its main concern or motive has managed to become so successful and dominate the Asian markets. This was examined and argued that focusing on the family and traditional Confucius values led to extremely successful businesses. The family was a tool for business success and therefore CFBs did not place family above profit but used it as a mechanism for profit gains and therefore they went hand-in-hand. However, the essay concludes that in today’s modern, global market, CFBs that wish to stay competitive and enter the increasingly Westernised and standardised business practices must move away from the CFB model. This is apparent and so concluding that CFBs do not place family above profit as when it comes down to it, CFBs are gradually converging to western practices for the reason of business success and profits.

REFERENCES

Brook, T. (1999). Profit and righteousness in Chinese Economic Culture. In T. Brook, & H. V. Luong (Eds.), Culture and Economy: The Shaping of Capitalism in Eastern Asia (pp. 27-44). University of Michigan.

Chang (1976), ‘Early Chinese Management Thought’, California Management Review, 10(2)

Chen, M-J. (2001) “Family business, Business families.” Inside Chinese Business: A

Guide for Managers Worldwide, Boston: Harvard University Press, pp. 19-44.

Chung, S P (2005) ‘Changes and continuities. Evolution of a Chinese family business (1876-2004)’, Asia Europe Journal, 5, pp259-268

Greenhalgh, S (1994) ‘De-Orientalizing the Chinese Family Firm’, American Ethnologist, 21(4) pp746-775

Kao, J (1993) ‘The worldwide web of Chinese business’. Harvard Business Review, 71, pp 24 –36.

Luo, Y. (2003) "Industrial dynamics and managerial networking in an emerging

market: The case of China". Strategic Management Journal, 24: 1315-1327.

Oliver, C (1990) ‘Determinants of interorganisational relationships: integration and future directions’, Academy of Management Review, 15(2) pp241-265

Park, S.H., and Y. Luo, 2001, "Guanxi and organizational dynamics: Organization

networking in Chinese firms", Strategic Management Journal, 22: 455-77

(Read especially pp. 455-63 and 476-77).

Pun, K., Chin, K. and Lau, H. (2001), ‘A Review of the Chinese Cultural Influences on Chinese Enterprise Management’, International Journal of Management Review, 2(4).

Redding, G (1995) Overseas Chinese Networks: Understanding the Enigma’, Long Range Planning, 28(1) pp61-69

Tsang, E W K (2002) ‘Learning from overseas venturing experience. The case of Chinese family businesses’, Journal of Business Venturing, 17 pp21-40

Wah, S (2001), ‘Chinese Cultural Values and the Implication to Chinese Management’, Singapore Management Review, 23(2) pp75-83

Whyte, M K (1996) ‘The Chinese Family and Economic Development: Obstacle or Engine?’, Economic Development and Cultural Change, 45(1), pp1-30

Wong, S.L. 1985. “The Chinese Family Firm: A Model.” British Journal of

Sociology, 36(1): 58-72. This is a classic study of the birth, growth and

demise of the Chinese family-run firm.

Wong, S. L. (1988) ‘The Applicability of Asian Family Values to Other Sociocultural Settings,’ in Berger, P. and Hsaio, H. (1988) In Search of an East Asian Development Model, New Brunswick: Transaction Books

Yeung, R and Tung, R (1996) ‘Achieving Business Success in Confucian Societies: The Importance of Guanxi (Connections)’, Organisational Dynamics, pp54-65

"The business of family business in Asia is the family." Discuss

This is a preview of the whole essay

Document Details

Related Essays

Discuss the factors that Influence the behaviour

Discuss the main factors that make 3M an innovative organization.

Conflict is an essential part of management '. Discuss.

Discuss critically the relevance of transformational approach for effective...