Bachelor Thesis Management

Pauline van de Voorde

Performance of family firms in a poor
economic climate
Pauline van de Voorde

Date: 25-05-2016
Academic Year: 2015 2016
Supervisor: Drs. M. Stienstra
Tilburg School of Economics and
Management
ANR: 634495
Number of words: 7507
Management summary
Because of the changing economy, the performance of firms changes also. Family
firm performance has become an interesting topic of research. This study explores
why family firms perform better than non-family firms in a poor economic climate. The
independent variable of this study is ownership, and focuses on family firms and non-
family firms. The dimensions of the study of Kaplan and Norton (1992) explain the
dependent variable, firm performance. The moderating effect that is used on this
relationship is a poor economic climate. The characteristics of a family firm, which
influence performance, are: long-term view, risk averse behavior and financial and
non-financial goals.
The findings derive from this study are that family firms perform better than non-
family firms in a poor economic climate. This is due to the fact that family firms
change their risk taking behavior by being flexible and reduce costs. The findings can
be implemented in family firms when they operate in a poor economic climate.

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Table of Contents

Management summary ........................................................................................... 3

Chapter 1 Introduction ............................................................................................ 5

1.1 Problem indication ............................................................................................... 5
1.2 Problem statements and research questions ....................................................... 6
1.3 Methodology........................................................................................................ 6

Chapter 2 Firm performance .................................................................................. 8

2.1 Definition of firm performance.............................................................................. 8
2.2 Importance of performance ................................................................................. 9
2.3 Financial and non-financial performance measurements ..................................... 9
2.5 Conclusion ........................................................................................................ 11

Chapter 3 Influence of ownership on firm performance ..................................... 12

3.1 Definition of a family firm ................................................................................... 12
3.2 Difference in firm performance .......................................................................... 14
3.2.1. Long-term view .............................................................................................. 14
3.2.2 Risk averse behavior ...................................................................................... 15
3.2.3 Financial and non-financial goals ................................................................... 15
3.3 Conclusion ........................................................................................................ 16

Chapter 4 Performance in a poor economic climate ........................................ 18

4.1 Defining a poor economic climate ...................................................................... 18
4.2 Factors contributing to performance in a poor economic climate ....................... 18
4.3 Difference in firm performance .......................................................................... 19
4.3.1 Flexibility..................................................................................................... 19
4.3.2 Research and development ........................................................................ 20
4.3.3 Cost reductions........................................................................................... 21
4.4 Conclusion ........................................................................................................ 24

Chapter 5 Conclusion, discussion and recommendations ................................ 25

5.1 Conclusion ........................................................................................................ 25
5.2 Discussion and limitations ................................................................................. 26
5.3 Recommendations ............................................................................................ 27
5.4 Implications for managers ................................................................................. 27

References ............................................................................................................. 28

Appendices ............................................................................................................ 34
Appendix 1 Selected family firm definitions from the literature ................................. 34

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Chapter 1 Introduction

1.1 Problem indication

Family firms are a key player in the economy. A large portion of firms are
owned and still ran by families (Cucculelli & Micucci, 2008). From well known
companies like BMW and Wal-Mart to a local family restaurant in a small village.
Another good example of a firm established by a family is The Rothschild family
business. This family business was established in the1760s and is still a market
leader in the banking business (Rothschild Group, 2015). This firm survived two
financial crises. While other businesses do not survive one crisis.

Performance is an important aspect of a firm and therefore widely used as a

research topic. Some research states that family firms perform better than non-family
firms. According to Anderson and Reeb (2003) family firms are significantly better
performers than nonfamily firms. In contrast to the previous findings, Faccio, Lang,
and Young (2001) state that family firms are relatively poor performers due to
conflicts that come up when a family tries to manage an enterprise. Some research
finds that family firms perform efficiently while others argue with this statement. The
research about family firm performance is rather broad and contradicting.

There is a lot of literature on firm performance. Most of the existing literature focuses
the performance of family firms and non-family firms in times of a stable economy
and good market conditions (Zhou, 2012). Worldwide, between 70% and 95% of all
businesses are family firms (European Famiy Businesses, 2012). Family firms
certainly do survive crises, the question that comes to mind is: how do they manage
it? More research can be done on family firm performance in a changing
environment. When comparing the positive and negative research, which is done on
family firm performance, this thesis will investigate how family firms compete when
there is a poor economic climate.

An example of a poor economic climate is the latest financial crisis of 2007. This
crisis had a large impact on the worldwide economy, including family firms. During
times of crises firms have to change drastically. These changes have affect on both
family and non-family firms. How the changing environment will affect the
performance of a firm will be explained in this thesis. This research will give a better

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understanding of how firms are affected by a poor economic climate and if it will
change their performance.

1.2 Problem statements and research questions

The main goal of this paper is to see how family firms perform when there is a
poor economic climate. This research tries to investigate what makes family firms
special, and how this differs in performance in times of distress. The research which
is done on firm performance and changing environments, will be used to investigate
this problem. Based on the problem indication described in the introduction a
problem statement can be formulated. The problem statement will be as follows:
Why do family firms perform better than non-family firms when there is a poor
economic climate?
In order to answer this question successfully, several other questions have to be
addressed. The research questions that will help to answer the main question are:
What are the most important elements of firm performance?
How does ownership influence the performance of a firm?
How does a poor economic climate affect the relationship between ownership
and firm performance?
A graphical representation of the conceptual framework will be given below.

Figure 1 Conceptual framework

1.3 Methodology
The bachelor thesis will be a literature review. The main source of literature that is
used are articles in journals and papers written by professionals. The University of
Tilburg facilitated these articles. The Tilburg University Library provides the option to
search for data, like WorldCat Discovery and online databases. To make sure the
data is reliable and valid, most of the data is collected from academic journals in the
field of entrepreneurship, management and family firms. The year of publication is
also taken into account, to make sure the literature is up to date. Also Google
Scholar is used to collect relevant articles. To get the best and most relevant

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information the snowball effect is used (Sekaran & Bougie, 2013). The references
found in literature are used to find new relevant papers. When all information is
gathered all theories are combined to give an answer to the problem statement. To
give more insight and a better understanding of the research process, a table of the
most used search terms is provided below.
Search term Hits Used
Family firm performance 28,353 14

Firm performance 315,501 1

Performance measurement 4,092,686 3
Customer satisfaction 121,682 1
Non-financial performance measures 1,834 6
Family firm 112,480 16
Economic change 3,200,000 6
Table 1 Used search terms

1.4 Structure of the thesis

The main concept this thesis tries to investigate is the performance of a firm,
and how it differs when it is family-owned or not. The factor influencing this
relationship is a poor economic. To get to the main concept of the thesis some
variables need to be explained. After this introductive chapter the first research
question will be discussed. In this chapter the variable firm performance will be
explained. Also the relevant ways to measure firm performance will be discussed. In
the following chapter, chapter 3 the second research question will be discussed. The
concept of a family firm will be explained and how this concept influences firm
performance. In the next chapter, chapter 4 the last research question will be
addressed. This chapter gives an explanation of what a poor economic climate is and
how it affects firm performance. How a poor economic climate affects family firms
and non-family firm performance will be explained afterwards. Finally in chapter 5 the
answers to the previous research question will be given, which will result in the
answer to the problem statement. Furthermore recommendations and limitations are
given in this chapter.

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Chapter 2 Firm performance
The research question that this chapter addresses is: What are the most important
elements of firm performance? First a definition of firm performance will be given.
After this the importance of firm performance will be explained. Finally the financial
and non-financial ways to measure firm performance will be explained, which will
result to a conclusion.

2.1 Definition of firm performance

To see if a firm is valuable the performance of a firm must be measured.
According to Neely, Gregory & Platss (2005) performance measurement can be
defined as the process of quantifying action, where measurement is the process of
quantification and action leads to performance (p. 80). To give a more simpler
definition of performance measurement Neely et al. (2005) refers to the process of
measuring the actions efficiency and effectiveness. A similar definition is given in the
field of marketing. According to Kotler (1997) do organizations satisfy their customers
with greater efficiency and effectiveness to achieve their goals In addition firm
performance can be described as the benefits stemming from the firms shares by
the shareholders (Rouf, 2011).

Each author defines the concept of performance differently. There are some main
terms the definitions have in common. Terms that are frequently used in relation to
firm performance are: efficiency and effectiveness. Efficiency is a measurement of
how economically the firms resources are utilized when providing a given level of
customer satisfaction, while effectiveness refers to the extend to which customer
requirements are met (Neely et al., 2005). These definitions refer to the fact that
performance can be important for internal and external reasons. Therefore
performance can be measured in several ways.

Literature about firm performance focuses on different aspects of how to measure

performance. Dimensions that are frequently used are: time, quality, flexibility,
finance, customer satisfaction and human resources. An example of the performance
measures in each dimension can be seen in Figure 2.

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 Figure 2 (Hudson, Smart, & Bourne, 2001)

These six dimensions cover all aspects of an operation. The dimensions, which will
be used in this thesis, are flexibility, finance, customer satisfaction and human
resources. The dimensions quality and time are mostly measured in manufacturing
companies or service companies. Because this thesis does not research product- or
services aspects, but looks at the management of the firm, the dimensions quality
and time will not be used.

2.2 Importance of performance

Performance is an important measurement for a firm. In order to see if there
is process improvement outcomes have to be measured. The success of a firm can
be seen from its performance. It is argued that performance measurements can be
seen as an effective way to increase the competitiveness and profitability of a firm
(Tangen, 2003). Success can be measured in different ways. The different
measurements give different outcomes. Unfortunately no specific measurement is
able to measure every performance aspect (Snow & Hrebiniak, 1980).

2.3 Financial and non-financial performance measurements

The traditional approach to performance measurement is by the use of
financial performance measures. These measurements focus on the financial
dimension. The most common ones are return on assets (ROA) and return on equity
(ROE). Return on assets is one of the most widely used financial measurements
(Zairi, 1994). It is used to evaluate how effectively assets are being used. It
measures the combined effects of profit margins and asset turnover (Groppelli &
Nikbakht, 2000). ROA shows how effective or efficient a company is using its assets.
Another measurement that is frequently used is the return on equity. Return on
equity measures how well the company is doing for the investor (i.e. stockholders),

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since it tells how much revenue the investors receive on their investments (Tangen,
2003).

Besides financial performance measures, non-financial performance measures have

become also relevant and frequently used to measure performance (Kaplan &
Norton, 1992). Examples of non-financial performance measures are: quality, time of
delivery, flexibility and innovation. Non-financial performance measures focus more
on the firms long-term success (Banker, Potter, & Dhinu, 2000). Examples of factors
influencing this success are customer satisfaction, internal business process
efficiency, innovation and employee satisfaction.
Performance is measured best when financial and non-financial measures
complement each other. The study of Kaplan and Norton (1992) is widely used to
measure performance. This study focuses on four perspectives that cover financial
and non-financial measurement. The perspectives are: financial, customer, internal
process and learning and growth.

The financial perspective focuses on revenue growth, increased sales and adding
new customers. Also increasing productivity is a topic of this perspective and is used
to be more effective.

The customer perspective defines how the company differentiates itself from
competitors. Companies activities according to this perspective are: targeting of
customers, customer satisfaction and staff training. Also employee engagement is
measured in this perspective. When employee engagement is high customer
satisfaction will increase and therefore performance. Employee engagement is the
level of commitment of an employee toward their organization and its values. An
engaged employee is more motivated to perform the goals of the organization (Kahn,
1990). When firms focus on optimizing these factors, performance will increase.

The internal process perspective captures organizational activities. Innovation,

penetrating new markets and customer segments and improving the internal process
are examples of this perspective.

The last perspective is the learning and growth perspective. It includes employee
training and embracing change (Craig & Moores, 2005). In a world of rapid change, it
is necessary for humans to continue the learning process and implementing this.

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These perspectives give a good understanding of what performance is; therefore
they will be used to further explain performance in this thesis.

2.5 Conclusion
To answer the first research question, the previous findings have to be
summed up. It remains difficult to give a complete definition of firm performance.
Research has proven that firm performance is influenced by two important variables,
which are efficiency and effectiveness. The way firm performance is measured
relates to the definition that is given. In the research of Neely et al. (2005) firm
performance is defined as: the process of quantifying action, where measurement is
the process of quantification and action leads to performance (p. 80). This definition
is most suitable for this research and will therefore be used to describe firm
performance. The measurement of performance can be done by financial and non-
financial measurements. Previous research has shown that the use of both
measurements combined gives the most effective results. Therefore the four
perspectives of the study of Kaplan and Norton (1992) will be used to measure
performance.

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Chapter 3 Influence of ownership on firm performance
Ownership refers to the person or group of people who owns the company.
This thesis tries to explain the difference in performance between family firms and
non-family firms. Therefore the only forms of ownership investigated in this thesis are
family firms and non-family firms. The research question that will be answered in this
chapter is: How does ownership influence the performance of a firm? This chapter
starts with the definition of a family firm. Based on those findings, a few
characteristics will be formulated and the difference with a non-family firm will be
explained. The four perspectives of the study of Kaplan and Norton (1992) will be
used to explain performance. To answer this research question the performance of
family firm and non-family firms will be compared.

3.1 Definition of a family firm

Researchers tried to explain the definition of a family firm, but no complete
definition that is used by everyone has been found. Different definitions focus on
different aspects of the firm. Researchers agree that family firms are businesses in
which a family has influence (Chua, Chrisman, & Sharma, 1999). An example of
frequently used definitions of family firms can be found in appendix 1.

Approaches used to define a family firm are the components-of-involvement

approach and the essence approach. The components-of-involvement approach
holds that the familys involvement in the business is a sufficient condition for
considering a business to be a family firm (Chrisman, Chua, & Sharma, 2003). The
essence approach on the other hand does not agree with the previous theory. The
essence approach states that the involvement of a family is not what defines a family
firm, but this involvement is only a necessary condition (Chua et al., 1999).

The essence approach defines a family firm only when involvement leads to specific
behavior. Four characteristics constitute the essence approach: a familys influence
regarding the strategy of the firm, a familys vision and intention to keep control and
hand the firm over to the next generation, family firm behavior and distinctive
familiness. Familiness is explained as the unique bundle of resources a particular
firm has because of the systems interactions between the family, its individual
members, and the business according to Habbershon and Williams (1999, p. 11).

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Forming a good definition remains a difficult task in literature. In the research done
by Steier and Chrisman (2004) there is a broad definition that is generally used. A
familys ability and intention to influence business decisions and behaviors are what
makes family and non-family firms. Broad definitions are favored in previous
research. Mainly because comparing different types of firms would be easier. Also
the use of multiple dimensions such as ownership, management and supervision is
in favor of researchers. Because of the amount of definitions there are available, this
thesis will not refer to an established definition of a family firm. Most firms are
governed and managed by one family. The goal of the family is to sustain across
generations. When a family firm is mentioned later on it is referred to as: a business
that shares the vision of the family, that vision also influences the decision making
process.

Family firms differ from non-family firms in several ways. Unique characteristics of
family firms are found through previous research. Some important characteristics are:
the long-term view, risk aversion and the combination of financial and non-financial
goals.

Family firms tend to have a higher priority on continuity in contrast to non-family firms
(Sievers & de Vries, 1996).This is why family firms are more long-term orientated.
Family firms do not only focus on creating the most valuable firm, but also try to look
at the distant future, because family firms focus on the long-term view relationships
with employees, shareholders and customers change. The long-term commitment is
also visible in the relationship with suppliers or investors (Levie & Lerner, 2009). This
results in a more trust based relationship from both parties, which can improve
performance.

Another characteristic of family firms is risk averse behavior. Due to the overlapping
nature of family and business, family firms are more risk averse (McConaughy,
Matthews, & Fialko, 2001). The study of Sievers and de Vries (1996) contributes to
the previous findings. They found that family firms are more conservative and
resistant to change than non-family firms. This risk aversion behavior is also an effect
of not wanting to let the family down. Because family firms try to survive through
multiple generations, taking risks has more indirect effects than only financial failure.
Risky behavior has an important influence on activities and the wealth of a firm. By
behaving risky the family firm not only jeopardizes loosing family assets but also
social well being of future generation (Naldi, Nordqvist, Sjberg, & Wiklund, 2007).

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The third characteristic of a family firm is the focus on non-financial goals in
combination with financial goals (Chrisman, Steier, & Chua, 2008). The goal of most
firms is to make as much profit as possible. However family firms try to combine
financial and non-financial goals. Financial goals could be creating firm value, profit
and efficiency. Because of the emotional attachment to family issues such as
conflicts of nepotism, family firms do not purely focus on financial goals (Mustakallio,
Autio, & Zahra, 2002). Non-financial goals are family harmony, family employment
opportunities and cross-generational sustainability and management succession
(Chrisman et al., 2003; Chua et al., 1999; Sharma, Chrisman, & Chua, 1997).

3.2 Difference in firm performance

The difference in performance between family and non-family firms can be
derived from the previous mentioned characteristics. The characteristics will be
explained by the use of the four characteristics of firm performance. Both of these
variables will be explained simultaneously.

3.2.1. Long-term view

Family firms are willing to invest in relative long-term projects compared to
non-family firms. They also invest efficiently and more carefully than non-family firms.
This is mainly because family firms intend to pass the firm on to a next generation
(James, 1999). Also because family firms try to invest more, according to the market
rule. Because of the long-term view family firms have the advantage of a lower cost
of debt financing in contrast to non-family firms (Anderson, Mansi, & Reeb, 2003).

From a financial perspective, the long-term view of a family firm takes advantage of
better performance. Non-family firms tend to be more short-term oriented. Also the
need for survival of family firm is higher than non-family firms. This could be derived
from the risk averse behavior.

Also Stein (1988) stated that longer time horizon effects positively on employing
profitable investment decisions, which leads to better performance. The internal
process provides insight in in organizational activities that will lead to performance
eventually. The fact that family-firms are long-term orientated contributes to the
internal perspective. Maintaining long-term profitable relationships with suppliers and
customers will lead to a competitive advantage in terms of firm performance. This

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applies in a same way for the customer perspective. The learning and growth
perspective is not applicable to the long-term view.

3.2.2 Risk averse behavior

As presented above family firms, on average, are more averse to risk taking
than non-family firms. Seen from a financial perspective this could be a
disadvantage. The study of McConaughy et al. (2001) shows that family firms are
more averse to short-term debt than non-family firms. This could lead to giving up
profitable investments, and cause conflicts between family and outsider
shareholders.

It is also known that firms success relies on the ability to innovate. To innovate, a
firm must invest in research and development (R&D) projects, which can be of
potential risk; to be profitable firms must invest in research and development and
sometimes act in a risky manner. The risk averse behavior of the family firm will not
always lead to better performance. Therefore looking at the internal perspective, non-
family firms are in favor.

The learning and growth perspective is mostly about innovation and changing, but
also about skill training and employee engagement. As previously mentioned family
firms are risk averse and long-term orientated. Both of these characteristics do not
improve the innovation activities of a firm. To survive a firm needs to innovate, so this
could be a disadvantage for family firms. On the other hand, family firms maintain
longer relationships with employees. Employees are often family members, which is
in the family firms interest to treat them well. Family firms are known to have higher
employee commitment than non-family firms, which contributes to higher firm
performance. The customer perspective does not apply on risk averse behavior.

3.2.3 Financial and non-financial goals

The third characteristic, combination of financial and non-financial goals, has
an impact on how family firms make decisions. The family aspect and non-financial
goals influence the decision making process and therefore the performance. The
research from Mishra and McConaughy (1999) shows that family firms take both
economic and family-centered goals into account when making decisions. Non-family
firms do not have to take family-centered goals into account. Some argue, non-family

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firms perform better for not having to take the family aspect into account (Shleifer &
Vishny, 1997).

Very little research has been done on the customer perspective and family firms. To
overcome this problem, researchers have studied how the role of values shapes the
competitive advantage of family firms. The study of Koiranen (2002) for example.
This study states that family businesses are value based, and value their name
within communities. Combined with the long-term view of family firms, could this be in
favor of family firms. Family firms maintain longer relationships with customers;
employees and suppliers, with the support of the local community family firms can
build relations of trust. Anderson and Reeb (2003) found that loyalty contributes to
performance. From this perspective family firms do perform better.

One problem that is not advantageous to the family firm is the complexity of running
a family business. The influence of family can be a challenge. For example the study
of Shleifer and Vishny (1997) shows the power and incentives of founding families to
act in their own interests at the expense of firm performance. As a result the agency
problem could emerge. The agency problem states that managers (in this case the
CEO) have little incentive to work in the interest of the firm, when this means working
against their own self-interest (Berk & DeMarzo, 2011). Also family firms prefer to
limit the top management positions to family members rather than hiring more
qualified employees who are outsiders. These problems address the internal
perspective; it is more likely that non-family firms perform better, because they do not
need to address these problems.

The financial perspective is influenced by the previous findings. The internal

perspective states, family-firms also take family-centered goals into account when
making decisions. Because of that, the decisions made may not always be optimal
and overall profits could therefore decline. Also the hiring of family members instead
of more qualified employees influences the decision-making process and therefore
performance. Non-family firms do perform better seen from this perspective. The
learning and growth perspective does not apply to this characteristic.

3.3 Conclusion
The second research question is answered in this chapter. The question
states: How does ownership influence the performance of a firm? The definition of a
family firm used for this thesis is: a business that shares the vision of the family, that

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vision also influences the decision making process. Characteristics that distinguish
family firms from non-family firms are: the long-term view, risk aversion and the
combination of financial and non-financial goals. Each of these characteristics
influences firm performance in a different way. The long-term view has a positive
influence on performance for family firms. The risk averse behavior can be seen as a
disadvantage for family firms. The combination of financial and non-financial goals
has advantages and disadvantages for both family- and non-family firms. After
combining these findings can be stated, family firm and non-family firms perform
equal when the economy is stable.

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Chapter 4 Performance in a poor economic climate
This chapter will answer the last research question. The last research states:
How does a poor economic climate affect the relationship between ownership and
firm performance? First will be explained what this climate actually is. Which factors
positively influence performance in a poor economic climate will be discussed in
section 4.2. How these factors affect firm performance of family firms and non-family
firms will be explained in section 4.3 The four perspectives of performance will be
used to describe performance in a similar way just like they were used in chapter 3.
Finally there will be a concluding section.

4.1 Defining a poor economic climate

A poor economic climate means, a climate where the economy is not
functioning in its optimal way. This could have several causes. The most common
cause of a bad economy is a financial crisis. According to the study of Mishkin (1992)
the factors causing financial crises are: increases in interest rates, stock market
declines, increases in uncertainty, bank panics, and unanticipated declines in the
aggregate price level (p. 118). Other causes could be declining interest rates or
sales in a particular market, causing higher sales prices. Another cause of a poor
economic climate could be a new technology that leads to declining sales because
your product is dated. A poor economic climate is a broad definition, but the main
thing all causes have in common is that average industry performance suffers from it.
During times of economic distress, access to finance becomes more and more
difficult. Also demand declines and prices rise. Firms have to deal with these kinds of
changes to survive a poor economic climate. In this thesis a poor economic climate
will be seen as a market changing in a negative way, which in result affects firm
performance.

4.2 Factors contributing to performance in a poor economic

climate
There are some factors that influence performance in a poor economic
climate in a positive way. Firms who can respond flexibly in difficult situations have
an advantage to respond in a positive way to unanticipated situations. Firms who are
able to operate in a flexible way are in a better position than firms who operate in a
locked course of action (Barney, 1991; March, 1991). The study of Haluk Kksal and
zgl (2007) contributes to this finding. This study states that if firms modify their

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strategy appropriately, they can maintain or even improve their performance in times
of crisis.

Another factor that influences the performance of a firm in a poor economic climate is
the way they invest in research and development. It allows firm to change to new
products or ideas more rapidly than their competitors (Gunther McGrath & Nerkar,
2004). Firms who are involved in R&D projects are more focused on innovation
compared to other firms.

To survive a difficult time in the economy it is important for firms to reduce costs and
be prepared for financial setbacks to come. The preparation for financial setbacks
can be done mentally but also because of maintaining loyal and trustworthy
relationships.

4.3 Difference in firm performance

The factors that have an impact on firm performance during a poor economic
climate have been determined. As previously mentioned the most important factors
are: the ability to be flexible, the involvement in R&D projects and cost reductions
How these factors will affect firm performance will be explained by the use of family
firm characteristics and the four perspectives of performance. The characteristics of
family firms are: long-term horizon, risk averse behavior and focus on financial and
non-financial goals. The perspectives are financial, customer, internal and learning
and growth.

4.3.1 Flexibility
Strategic flexibility is a competitive advantage of a firm, and it is seen as a
critical component when it comes to dealing with turbulent environments (Pauwels &
Matthyssens, 1999). Strategic flexibility refers to a capability of firms to be proactive
or respond quickly to changing competitive conditions and develop and/or maintain
competitive advantage (Hitt, Keats, & DeMarie, 1998, p. 26). The study of Hitt et al.
(1998) also stated that increased flexibility will help firms to cope with a changing
environment and quickly implement decisions when the economy is uncertain.

To be flexible, firms have to be able to change rapidly. The ability to change arises
from the internal and the learning and growth perspective. High flexibility will

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contribute to better firm performance. Previously is seen that the family firm operates
in a steady and stable way in a stable economy. Because of the risk taking behavior
of competitors, family firms lacked flexibility and were afraid to take risks. The
changing environment also changed their way of deciding. Family firms tend to make
decisions in a centralized matter among family member, which increases their
strategic flexibility. The study of Sievers and de Vries (1996) found that family firms
make faster decisions in difficult market situations. Also Knez and Camerer (1994)
support this statement. They state that family firms have superior decision making
skills and can use these as an advantage. Non-family firms do not possess these
decision-making skills.

Non-family firms also do not have the advantage of working with family members;
therefore decisions cannot be made in a centralized matter. Also the research of
Tagiuri and Davis (1996) shows that family firms have a family language. According
to Tagiuri and Davis (1996) family firms communicate more efficiently and also
exchange more information with greater privacy, which adds to better decision-
making skills and therefore strategic flexibility. These decision-making skills add to
the strategic flexibility a firm has and therefore increases performance in changing
environments. The advantages found with regard to the internal and learning and
growth perspective have a positive influence on the financial perspective.

The fast decision-making and flexibility contribute to lower costs. Also the centralized
decision-making saves time, and therefore costs. The customer perspective does not
apply to flexibility.

4.3.2 Research and development

Not only the strategic flexibility contributes to better performance in poor
economic climates, also the involvement of R&D projects. The involvement in more
R&D projects derives from the change in risk taking behavior. In poor economic
prospects family firms are willing to take critical decisions like investing in R&D
projects or launching a new product (Patel & Chrisman, 2014). These traits can be
seen as effective for survival of a firm (Schulze & Kellermanns, 2015).

Previously is found that in a stable economy, non-family firms are more willing to
innovative than family firms. The fact that family firms invest less in R&D, when the
economy is stable, derives from the need for the business to survive. It also derives

20
from the fact family firms want to maintain the family wealth for future generations
(Naldi et al., 2007). The study of Chrisman and Patel (2012) shows a shift in behavior
when performance falls below aspirations.

When that happens family firms will try to achieve the family goals like firm survival.
Family firms tend to frame decisions more negatively than non-family firms and
therefore invest more in R&D projects. The negative framing of decisions could be a
disadvantage for family firms. Managers frame decisions in a negative way will it
most likely effect the employees. The negative influence will not benefit the
atmosphere in the workplace. Therefore the incrased R&D investments have a
negative effect on the internal perspective of performance.

Because of the late adaptation of R&D projects, staff members must be taught how
to cope with the changing working behavior. The involvement in R&D projects and
innovative nature of the firm entails challenges for staff members. The employees
must adapt to the new projects the firm takes on, therefore must change their ways.
This can be done by staff training, which will increase costs and therefore decrease
profits. The firm must also get used to the changes, which will probably give some
problems. The learning and growth perspective of performance is negatively
influenced by the involvement in R&D projects.

Seen from a financial perspective this might be not in favor of family firms. The costs
for family firms are probably higher in comparison to non-family firms. Because non-
family always invest in R&D project, are they probably more informed and make
better decisions, therefore will the cost be lower for them. In a stable economy non-
economic goals are most important, when performance falls below aspirations family
and business goals converge, which increases R&D projects. The customer
perspective does not apply to the R&D variable. The increased investment in R&D
project has a positive influence on firm survival at first sight. Because of the
challenges that the family firm faces and the additional costs, it will affect firm
performance in a negative way.

4.3.3 Cost reductions

Family firms tend to have lower recruitment cost and lower human resources
cost (Habbershon & Williams, 1999), mostly because of the employee commitment
which is very high in family firms. Overall family firms do tend to have lower
transaction costs (Aronoff & Ward, 1995) and lower monitoring and control costs

21
(Daily & Dollinger, 1992), which is in favor of the firm. In difficult times it is important
to be as efficient as possible, also when it comes to costs. The study of Anderson
and Reeb (2003) found that agency cost are limited in family firms, due to the overlap
of ownership and management. Non-family firms do not have these benefits, which
can be competitive advantages for family firms in order to cope with unexpected
situations. The cost reduction can be an advantage of the financial perspective of
performance.

One interesting fact about family firm performance in an economic crisis can be

found in the study of GomezMejia, Makri, and Kintana (2010). This study found

that family firms are more likely to diversify and also increase their risk, but only when
performance is declining. When a family firm operates in a stable economy they are
more risk averse. The changing environment stimulates the family firm to take more
risks. Similar findings can be stated in the article of (Patel & Chrisman, 2014). They
found that when family firms perform in a stable economy and the performance
meets or exceed aspirations, family firms most likely would be more risk averse. In
contrast to when performance is decreasing, family firms will be more acceptive
towards risk than non-family firms.

This changing of risk taking behavior can be seen as flexibility inside the firm. This
could be a result of the need for survival within family firms. This is one of the non-
economic goals family firms focus on more than non-family firms. So when financial
performance decreases, thus the survival of the firm is jeopardized, family firms will
take more risk. Patel and Chrisman (2014) also state that family firms are willing to
take more risk because of the fact that they have a longer time horizon. The longer
time horizon makes sure that family firms protect their short-term financial
performance in order to focus on the long-term goals. This covers the financial
perspective of performance, which previously found that family firms are risk averse.
Nevertheless, it has to be noted that non-family firms adapt risk averse behavior
faster than family firms (Patel & Chrisman, 2014). This risk aversion could be
negative for the performance. Now that family firms are willing to take more risks it
will ncrease their performance when there is a poor economic climate.

The long-term relationships can be an advantage form the customer perspective.

The long-term relationship with customers, employees and suppliers will strengthen
the firms relationship with local communities and stakeholders (Miller, Minichilli, &

22
Corbetta, 2013). Especially in difficult times, it is important to have good relationships
with suppliers and customers. Customers are more willing to contribute to local
companies when there is a good relationship. Family firms are value based and
value their name within communities. Also the loyal and trustworthy relationships
family firms have are really important when there is a poor economic climate. When a
firm can rely on local communities to support them, the financial setbacks will
probably be less hard. Also the loyalty of customers helps them to keep performing
and not having to reduce costs.

The internal perspective states that family firms maintain long-term relationships with
suppliers, business partners and customers, which is a competitive advantage.
Especially in a poor economic climate, it is difficult to have access to finance. Family
firms have typically more access to constrained resources because of the long-term
relationship and mutual trust with business partners (Berrone, Cruz, & Gomez-Mejia,
2012).

As stated before the study of Shleifer and Vishny (1997) found that family members
who manage the firm, act in their own interest at the expense of firm performance.
Family firms rather pick a family member to become CEO than a more qualified
outsider. This reflects negatively on performance. When a difficult situation arises the
primary focus for a firm is survival, especially for family firms. The long-term view of
the family firm and the non-financial goal to provide for the families future becomes
the main goal. The agency problem that is stated before will become irrelevant. It is
now in the interest of the CEO and the firm to survive. It is the job of the CEO to keep
up the family wealth and reputation for the next generations to come (Berrone et al.,
2012). The CEO will have the best knowledge of the firm; he or she knows its
identity, culture and strategy. For an non-family CEO to replicate this would be very
difficult (Berrone et al., 2012). Family member CEOs are close to the controlling
family, which makes them qualified to speak for the firm. Now that the family CEO is
more involved and work in the interest of the firm, the costs will probably go down,
which is in favor when there is a poor economic climate.

The learning and growth perspective previously found that family firms are more
involved in employee satisfaction. The study of Berrone et al. (2012) states that
family firms are characterized by affective commitment and emotional attachment of
owners, managers and all employees towards the firms success. This increased

23
commitment of employees will give the company a better chance of survival in
difficult times.

4.4 Conclusion
The last chapter of this thesis addressed the final research question: How
does a poor economic climate affect the relationship between ownership and firm
performance? First a poor economic climate is explained. Economic change that
leads to such climate can have different causes like a financial crisis or a change in
technology. A poor economic climate is defined as a market changing in a negative
way, which in result affects firm performance. The last research question can be
explained by means of some characteristics that contribute to better performance.
These characteristics are: being flexible, the involvement in R&D projects, and cost
reductions. Family and non-family firms react to these characteristics in a different
way.

24
Chapter 5 Conclusion, discussion and recommendations
In this final chapter, a conclusion will be given to answer the problem
statement. Next the literature that is found will be discussed. After that some
limitations and suggestions for future research will be given. Finally, this chapter will
end with some recommendations for practical use.

5.1 Conclusion
At the beginning of this paper, a problem statement was mentioned: Why do family
firms perform better than non-family firms when there is a poor economic climate?
With the help from the discussed literature and the answered research questions, an
answer to the research question will be given.

Firm performance is defined as: the process of quantifying action, where

measurement is the process of quantification and action leads to performance
(Neely et al., 2005, p. 80). Research suggests that performance is measured with
financial and non-financial measurement. Therefore the perspectives found in the
study of Kaplan and Norton (1992) are used to measure performance.

A family firm is seen as: a business that shares the vision of the family, that vision
also influences the decision making process. The characteristics that distinguish
family firms from non-family firms are: having a long-term horizon, risk averse
behavior and the combination of financial and non-financial goals. Each of these
characteristics influences performance differently. A long-term horizon has a positive
effect on family firm performance. Risk averse behavior has a negative effect on
family firm performance. The combination of financial and non-financial goals has
advantages and disadvantages for both family and non-family firms. When combining
these findings it is found that family firms and non-family firms perform equal when
the economy is stable.

The moderator, a poor economic climate, influences the relationship between family
firms and firm performance, Factors that contribute to better performance in this
climate are: the ability to be flexible, the involvement in R&D projects and cost
reductions. How these factors affect family firm performance can be seen in a
graphical representation below. Some propositions that can be stated along with this
graphical representation are:

25
 Being able to be flexible and to reduce costs leads to increased family firm
performance in a poor economic climate.
Investment in R&D projects leads to negative family performance in a poor
economic climate.

The separate findings combined give the following answer to the problem statement;
Family firms perform better than non-family firms in a poor economic climate
because of the change in risk taking behavior, which increases flexibility and reduce
costs. Also the long-term relationship with customers and suppliers reduces cost and
therefore firm performance. Increased R&D projects are found to be effective for
survival, but the additional problems that arise and increased costs therefore
influence firm performance negatively. Lastly the family involvement and the need for
survival for future generations have a positive effect on cost reduction, therefore help
family firms to manage a poor economic climate.

Figure 2 Relationships conceptual model

5.2 Discussion and limitations

This thesis found some contradicting findings about family firm performance. This
thesis contributes to the findings that family firms perform better than non-family
firms. Empirical literature suggests firm performance to be measured in real
numbers. Literature research on the other hand looks at existing literature, which has
proven to be right. Therefore, the findings of this thesis have to be interpreted with
caution. Following from the existing literature, family firms will perform better than
non-family firms in a poor economic climate. When researchers look at empirical
evidence, the answer can be different. Because there can be factors that exist in a
market that literature studies do not take into account. For example, changes in
technology that is unforeseen and force firms to invest in order to compete in the
market.

26
Another limitation of this study is the use of the definition of the family firm. There are
many different definitions that define a family firm. All definitions have different
aspects a firm has to possess. For example one definition includes the survival
through generations of the firm, while others define a family firms by the majority of
shares that are owned by a family. Therefore are the findings of this study only
applicable for family firms with family involved in the decision-making process.

5.3 Recommendations
To add to the previous discussion, more research has to be done to answer
the research question completely. More empirical research about family firm
performance in a poor economic has to be done. Because of the increased
popularity for family firms, it has been a widely used topic of interest in research.
With that arises the problem of a definition of family firms. Different studies used
different definitions, mostly interpreted by the researcher itself. Each definition is
different and therefore not always applicable for every research. The use of different
definitions leads to different results that not always can be compared. It is
recommended that more research will be on the definition of family firms and to
eventually result in a general definition.

The propositions that are state before can be interesting for further research. Risk
taking behavior is a widely researched subject but less researched related to family
firms. Also can be researched if being able to be flexible, increase R&D projects and
cost reduction influence each other or if they just influence the relationship between
family firms and firm performance in a poor economic climate.

5.4 Implications for managers

The conclusion that derives from this study is mainly useful for family
businesses, especially the managers of a family firm. Useful for them to take into
account is that they have to manage the firm differently when the economy changes.
When the firm operates in a poor economic climate it is important to make use of the
characteristics a family firm has. The firm has to change their risk taking behavior,
and focus on the employees to keep them satisfied. They can also make use of the
family involvement which is an advantage compared to non-family firm competitors.

27
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Appendices

Appendix 1 Selected family firm definitions from the literature

Source: Corinna Lindow (2013, p. 11)

34