Management in Family Firms: Reflections on Research

Daniela Scur, Assistant Professor in the Charles H. Dyson School of Applied Economics and Management at Cornell University, recently delivered a lecture on “The Challenges of Family Business Research” for the Leaders in Family Enterprise class. Dayris Arias, MBA ’20, offered the following reflection based on her own experience as an entrepreneur and growing up in Peru.

Coming from a Latin American country, specifically Peru, I found Daniela Scur’s research very interesting because it is based on data from Brazil, which is an emerging economy similar to Peru. Scur indicates that family firms are the most prevalent type of firm in emerging countries, accounting for over half of medium-sized firms in the manufacturing sector. According to the Foreign Trade Company of Peru (ComexPeru), micro-firms and small firms (also known as mypes) represented 96.8% of the companies in Peru in 2017 – 5.9 million companies that employ 8.23 million people and represent 19.2% of the GDP. Thus, the data highlights the relevance of family businesses for the development of Peru and the growth of the country in the long-term.

In the case of mypes that underperform, the root causes are related to poor money management, messy growth, poor management, confusion of business money with family expenses. Education impacts these businesses considerably because most of the family CEOs don’t have a business background, thus their learning curve is slower and impacts the performance of the firm. Instead, an external CEO, with a business background, will contribute to the growth of the firm. Thus, education impacts family businesses in emerging countries such as Peru.

However, there is a segment of family businesses that contradicts this assumption: dynastic family firms. Scur highlights that dynastic family firms, in which the founding family owns a controlling share and have appointed a second-generation (or later) family member as the CEO, account for a quarter of firms. Martin Monsalve, a Peruvian researcher who published a paper about the evolution of the Peruvian large family business, agrees with that. Monsalve mentions that entrepreneurial families in Peru diversified their investments after 1960, forming economic groups. Peruvian economic groups operate through a company under majority control of the family, constituting the core business. Thus, Peruvian large family businesses are studied in the context of the economic group of which they form part (Monsalve, 2014).

Due to political and economic uncertainty during the period 1960-1990, family groups invested in banks and insurance companies to guarantee access to capital, and later developed a pyramidic structure to their businesses, allowing them to make cheap loans for their companies and make internal transfers between them. After 1990, family groups initiated a process of internationalization and diversification among business sectors. Others formed alliances with companies from abroad. For example, the Lindley family sold the Inka Kola brand to Coca Cola Co. in exchange for a percentage of the sales and the role of bottler and distributor of the US company in Peru (Monsalve, 2014).

Scur mentions that family ownership is not an issue for management quality rankings, but rather the choice of CEO. Currently, these family groups are against making capital increases that would involve the entry of partners from outwith the clan and prefer to issue bonds when they need access to capital. However, these family groups have increased the use of professional managers that have no family relationship for the high management and CEO positions for the broad portfolio of firms that each economic group manages. Thus, the structure of the economic groups or holding companies allows the combination of family-based administration and “management revolution” (Monsalve, 2014).

In either case, with a family CEO and without one, the firms that belong to these family groups have that highest performance in people and operational management, and thus firm management performance. Nowadays, family holdings are focused on capturing talent and have developed broad employee incentives to achieve that.

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Dayris Arias is an MBA candidate Class of 2020 at the Samuel Curtis Johnson School of Management at Cornell University. After obtaining her Bachelor’s in Economics at Universidad del Pacifico in Peru, Dayris worked for 5 years in an airport management company in Peru in which she transitioned through three positions. During her last position as Chief of Travel Retail Division, Dayris managed a portfolio of clients, developed marketing campaigns and led cross-functional projects.

Bibliography

ComexPeru. (2018, August 3). Situacion de la Mype en Peru: muchos retos en el camino. Peru: ComexPeru. Retrieved November 23, 2019, from https://www.comexperu.org.pe/articulo/situacion-de-las-mype-en-2017-muchos-retos-en-el-camino

Cornwell, C., Schmutte, I., & Scur, D. (2019). Structured management: how firms can hire and keep the best people. Centre of Economic Performance. United Kingdom: The London School of Economic and Political Science. Retrieved November 23, 2019, from http://cep.lse.ac.uk/pubs/download/cp563.pdf

Monsalve, M. (2014, March 17). Evolution of the Peruvian large family business 1980-2012. Lima, Peru: Center of Research of the Universidad del Pacifico. Retrieved November 23, 2019, from http://www.worldbhc.org/files/full%20program/A3_B3_Monsalve_EvolutionofPeruvianFamilyBusiness1890_2012.pdf

Scur, D. (2018, January 18). Second-generation family CEOs: are they up to the task? LSE Business Review. United Kingdom: The London School of Economics and Political Science. Retrieved November 23, 2019, from https://blogs.lse.ac.uk/businessreview/2018/01/18/second-generation-family-ceos-are-they-up-to-the-task/

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