If you hear the phrase “household enterprise,” you may consider the backstabbing Roys of Succession or the dysfunctional Duttons of Yellowstone. However whereas TV’s household firms are entertaining, their real-life counterparts could also be much more compelling.
All over the world, household companies produce about two-thirds of all economic output and make use of more than half of all workers. And they are often very worthwhile: The world’s 500 largest household companies generated a collective US$8.8 trillion in 2024. That’s nearly twice the gross home product of Germany.
In case you’re not steeped in household enterprise analysis—and even in case you are—their ubiquity may appear a bit of unusual. In any case, households can include drama, battle, and lengthy reminiscences. That may not sound just like the components for an environment friendly firm.
We are researchers who research household companies, and we needed to know why there are such a lot of of them within the first place. In our recent article printed within the Journal of Administration, we got down to perceive this completely different type of “why”—not simply the aim of household companies, however why they thrive world wide.
The standard solutions don’t actually clarify it
The usual reply to “Why do household firms exist?” is easy: They permit homeowners to generate revenue and doubtlessly create a legacy for future generations.
A associated query is: “Why do entrepreneurs even wish to contain their kin of their new ventures?” Analysis suggests entrepreneurs achieve this as a result of relations care and might help when resources are limited.
However which may not be distinctive to household companies. All firms—whether or not run by a household or company executives—stability short-term revenue and long-term targets. And all of them need dependable employees who’re prepared to pitch in.
So these solutions don’t clarify why household firms, particularly, are so widespread worldwide.
A unique angle: Profitable with out combating
For our research, we thought-about a long time of analysis about household companies to conclude that household companies are uniquely expert at preserving rivals out of their market house—usually with out truly competing with them.
How? We expect a quote from Solar-Tzu’s The Art of War captures the concept:
To battle and conquer in all of your battles isn’t supreme excellence; supreme excellence consists in breaking the enemy’s resistance with out combating.
Household-owned companies usually do precisely this, which is why there are such a lot of of them. Right here’s the way it works in observe.
3 key variations
Analysis on household companies has proven that they differ from different varieties of firms in three key methods: the types of goals they pursue, the governance structures they establish, and the resources they have. Collectively, these three characteristics clarify how household companies could use their property rights to get an edge over their rivals.
The primary is targets. In contrast to different varieties of enterprises, household companies prioritize noneconomic targets involving the fame, legacy, and well-being of the household—both now and in the future.
In fact, they nonetheless have to fret about making a revenue. However their curiosity in family-centered targets can lead them to decide on tasks that will yield decrease returns however nonetheless fulfill their noneconomic targets. These kinds of tasks is probably not enticing to different varieties of companies. Consequently, household companies could discover themselves working in areas the place there’s not a lot competitors to begin with.
As an illustration, take Corticeira Amorim, a family-run Portuguese company that dominates the worldwide marketplace for cork stoppers and different cork merchandise. The cork trade is a traditional slim area of interest: There are solely a handful of great world rivals, and Amorim is extensively described because the world’s largest cork processing group, with a large share of worldwide wine and Champagne corks.
CEO Antonio Rios de Amorim discusses the historical past of his household enterprise on this Enterprise Insider video.
The second key issue is governance. Relations who work collectively usually know each other well, care about one another, and need the very best for each the household and the agency, which can keep within the household’s possession for generations. This reality could scale back working prices and the price of contracting.
Why? After they make selections, they don’t at all times must hire a elaborate, Harvey Specter-like lawyer from the present Fits. They’ll determine on the subsequent transfer for the corporate whereas having dinner collectively. This considerably reduces the prices related to decision-making. In different phrases, as a result of they rely much less on formal contracts and monitoring, household companies can function extra cheaply.
Lastly, household companies use sources like info and cash in a different way. Since many established household companies have been round for many years, kin who work collectively accumulate info that’s onerous to amass and switch, and may not even be helpful elsewhere. Being a member of the family means not solely doing enterprise with kin but in addition going by life collectively, buying a singular perspective concerning the household itself.
Consequently, household companies have decrease transaction prices than different firms. Generally this reveals up in very concrete methods. An uncle could make investments cash within the enterprise and by no means ask for it again. Would that occur at a nonfamily enterprise? In all probability not. This dedication makes relations a particular kind of human asset that’s onerous to exchange.
Put merely, nonfamily companies are unlikely to rent somebody who cares as a lot concerning the firm’s success as a deeply invested relative does. And since these relationships aren’t on the market on the open market, rivals can’t simply entry them. That reality helps household companies hold rivals at bay whereas basically being themselves—which in flip explains why there are such a lot of of them.
Household companies are so widespread worldwide that there are a number of holidays celebrating them, together with International Family Business Day on November 25; U.S. National Mom and Pop Business Owners Day on March 29; and the United Nations’ Micro-, Small, and Medium-Sized Enterprises Day on June 27. This vacation season, you may take into account spreading a bit of further cheer with the family-run retailers in your neighborhood.
Vitaliy Skorodziyevskiy is an assistant professor of administration and entrepreneurship on the University of Louisville.
Hanqing “Chevy” Fang is an affiliate professor of enterprise and data expertise on the Missouri University of Science and Technology.
Jim Chrisman is a professor of administration at Mississippi State University.
