Family Business: Interactions in a Complex Adaptive System

Family Business: Interactions in a complex adaptive system

Deborah Shepherd

University of Auckland Business School

Christine Woods *

University of Auckland Business School

Abstract

In this paper we explore the emergence and re-emergence of entrepreneurial activity within family business. Drawing on complexity theory, a study of changing patterns of order and self- organisation, the entrepreneurial family business is considered a complex adaptive system where new and unexpected structures emerge between and at the edge of order and chaos. Adopting a complexity perspective on family business allows potential tensions to be explored, for example, order and disorder, change and stability, integration and differentiation, creativity and continuity.

While complexity theory may not be familiar to a family business owner, notions of order and chaos are part and parcel of business growth, particularly when a new generation moves into the business. In this paper we explore some of the complex interactions that occur within family businesses as the dynamics of family and business intersect. We offer a model to help explain family business interactions from the perspective of complex adaptive systems.

Key Words: Family Business, Entrepreneurship, Complexity Theory, Complex adaptive systems

* Corresponding Author

Dr Christine Woods, Management and International Business, University of Auckland, Private

Bag 92019, Auckland, New Zealand [email protected] ; 64 9 373 7599; Fax 64 9 3737477

Family Business: Interactions in a complex adaptive system

Abstract

In this paper we explore the emergence and re-emergence of entrepreneurial activity within family business. Drawing on complexity theory, a study of changing patterns of order and self-organisation, the entrepreneurial family business is considered a complex adaptive system where new and unexpected structures emerge between and at the edges of order and chaos. Adopting a complexity perspective on family business allows potential tensions to be explored, for example, order and disorder, change and stability, integration and differentiation, creativity and continuity.

Key Words: Family Business, Entrepreneurship, Complexity Theory, Complex adaptive

systems

1 Introduction

The entrepreneurial aspect of family business is an area of family business research often overshadowed by a focus on succession and strategic management (Johannisson, 2002; Zahra

& Sharma, 2004). Entrepreneurship is a particularly vital aspect of successful family business, indeed for any business. Being alert to new and innovative opportunities enables a business to grow and flourish; without entrepreneurial action a business becomes stagnant and will eventually be replaced in the market (Shane, 2003; Fletcher, 2004). In a recent review of family business research, Zahra and Sharma (2004) suggest that future work in this area will benefit by conducting research at the “intersection of sister disciplines” (p. 341). In this paper we take up that challenge and explore the overlapping domains of family business, entrepreneurship and complexity theory. Complexity theory is a study of emerging patterns of order and self-organisation. By definition therefore, organisations from a complexity perspective are dynamic (Carlisle & McMillan, 2006). We suggest that family businesses can usefully be thought of as complex adaptive systems where new and unexpected structures emerge through self-organisation. Complex adaptive systems are driven by negative and positive feedback loops whereby paradoxical states of stability and change, predictability and unpredictability are constantly emerging (Stacey, 1995). Adopting a complexity perspective on entrepreneurial family business offers one avenue for some of the possible tensions that potentially exist at the intersections of family and business to be usefully explored.

The theoretical foundation for adopting a complexity perspective of family business is developed in three stages in this paper. First, we briefly outline the widely adopted overlapping three circles model of family business (Hoy and Vesper, 1994). We then consider the unified system perspective (Habbershon, Williams & Macmillan, (2003) which presents some challenges to the three circle model; and then, present an elaboration to the three circle model developed by Fletcher (2004) that encompass a fourth dimension – entrepreneurial activity or interpreneurship.

Central to both of the challenges to the original three circle approach to family business is the dynamic interaction of agents within their environment. To take the centrality and significance of this dynamism of interaction further, the second stage of the paper turns to complexity theory and complex adaptive systems where interacting agents serve as the platform to understanding emergence, novelty and self organisation (McKelvey, 2004). From a complexity standpoint, the entrepreneurial family business is considered a complex adaptive system where new and unexpected structures emerge between and at the edge of order and chaos. For this to happen, we suggest that tensions are an inherent and key aspect of entrepreneurial interactions within family businesses and we offer a model for considering such tensions as the third and final part of the paper.

Family Business: Theoretical Perspectives

While there is no unified paradigm for studying the area of family business, according to

Habbershon, Williams and MacMillan (2003), the overlapping circles model of family business has become a common starting point. Based on a systems perspective three overlapping circles or subsystems are represented; these are family, ownership, and business/management. The overlapping circles model was extended by Gersick, Davis,

Hampton and Lansberg (1997) into a life cycle developmental model. For two decades the three circles model has been the standard theoretical model “for picturing family and business as interlinking systems that explain the competitive tensions in strategy making”

(Habbershon et.al., 2003, p. 453).

However, for the same period of time the limitations to this model have also been discussed.

Central to the critique has been the assertion that the model fails to take account of the dynamic nature of family business (Hoy & Verser, 1994). Further to this, the model provides little space for understandings of entrepreneurial processes and activities; entrepreneurial

3 issues are left implicit within the growth models and generally only related to the business founder and the start up phase (Johannission, 2002; Fletcher, 2004). Below we briefly discuss these limitations and consider two alternative perspectives that build on the three overlapping circles model: a strategic management approach and the inclusion of interpreneurship to the model.

Critique of Three Circles Model: The unified systems perspective

While the overlapping circles model provides a useful conceptual and practical platform, Hoy and Verser argue that it “barely touches on the true complexity of the firm” and does not adequately address the dynamics of how issues within the circles and between the circles overlap (1994, p.16). They suggest that critical strategic management issues for family firms are located at the nexus of the three circles, whereas the model simply provides static, descriptive pictures of the interaction. These authors argue that such an approach leads to the strategic management of family firms focusing “on a series of internal negative trade-offs to manage the overlap between family and business rather than a process for finding the systemic synergy that can lead to strategic competitiveness for the firm” (Habbershon et al,

2003, p. 454). Building on work by Habbershon and Williams (1999) suggesting that unique systemic family influences can be examined through an analysis of the resources and capabilities of the family firm, Habbershon, Williams and Macmillan (2003) develop a unified systems perspective demonstrating how parts of the family business system interact to generate idiosyncratic antecedents to firm performance. The idiosyncratic bundle of resources and capabilities result from systems interactions between the family unit, the business and individual family members. This bundle is referred to by Habbershon and colleagues

(Habberson et al., 2003) as the 'familiness' of the firm in which they focus on the dynamic interactions that occur and on the circular feedback processes with continuous influences; this contrasts to the overlapping circles model where subsystem analysis results in isolated points of influence.

4 As a result, the unified system model develops the systems dynamic of the overlapping circles model more broadly. Systemic strategic influences are captured by showing how events in one part feed through into other subsystem components. Habbershon and colleagues (2003) argue for a general performance proposition where the outcome of interest is the maximisation of the totality function of the family business social system. From a systems perspective, a social system model must “show how the systemic infusions of the system are a product of the continuous interactions of the parts” (Habbershon et al, 2003, p. 454). They focus on a metasystem: the family business social system. This metasystem is comprised of three subsystems: the controlling family unit: the business entity and the individual family members. These three subsystems create chains of interactions; these systemic interactions are complex and dynamic drawing on and bringing about the emergence of intangible and tangible resources and capabilities that serve to create transgenerational wealth creation. The model isolates the performance of the business entity as the appropriate outcome measure and explores the influence of the family and individual family members in relation to the business entity.

This model focuses on the strategic management perspective and remains broad in its focus to capture the systemic influences of the model. The detail of specific interactions occurring between specific stakeholders is not examined. The focus is on how enterprising families create transgenerational wealth through an analysis of the business metasystem. The enterprising family must pay attention to competitive advantage and seek above average returns, the “source of sustained wealth creation” (Habbershon et al 2003, p. 462). This is addressed through chains of interactions giving rise to the idiosyncratic resources and capabilities unique to the enterprising family that is in turn linked to performance outcomes.

However, the specifics of entrepreneurial interactions leading to competitive advantage and superior returns are outside the focus of the paper.

5 The ‘Interpreneurial’ Extension to the Three Circles Model

Fletcher (2004) also extends and builds on the initial three overlapping circles model by suggesting that a fourth dimension be included – entrepreneurial activity. Her aim is to give account of entrepreneurial activity within the context of family business. She argues that placing entrepreneurship at the centre of family business assists our understanding of intergenerational and organisation emergence in family firms. Fletcher’s work explores the emergence and re-emergence of entrepreneurial activity within family business, in particular the intergenerational dynamics of small family businesses. The two domains of entrepreneurship and family business are integrated and an entrepreneurial dimension is added to the existing overlapping three circles model to construct a four-axis model of entrepreneurship and family business (see Figure One below).

The fourth dimension comprises three stages: envisioning, realising and harvesting the business idea. During the first stage people envision new possibilities in terms of products, services or markets; these are then realised in the second stage drawing on resources and network contact to make things happen. The final stage sees new ideas harvested. The axis centres on the continuity of organisational processes and structures as new ideas are integrated into the existing organisation. Discussing this stage of the entrepreneurship axis

Fletcher draws on the concept of interpreneurship originally defined by Poza (1988) as intergenerational entrepreneurial activity. Fletcher argues that entrepreneurial activity does not just “occur”; rather it is always being constructed through the interaction of the past, present and future. Family firms must be alert to new distinctive ways of working that

“facilitate continuity and change” (Fletcher, 2004, p. 36). Thus interpreneurship is “the process of inter-generational emergence in which family members are interacting and creating new possibilities for themselves, their lives, their organizations whilst drawing upon past events, happenings, experiences and conversations that have gone before” (Fletcher, 2004 p.

38).

Figure One “Intrepreneurship” and the Three Circles Model

Source: Fletcher (2004) adapted from Gersick, et al. (1997).

Fletcher’s model of entrepreneurship provides a descriptively useful addition to the three overlapping circles model by bringing entrepreneurship directly to the intersection of the family ownership and management triangle. However, as stated above, Figure One is a static model that must be elaborated with detailed discussion around the interactions that occur between the axes. Fletcher does this with an interpretive analysis of a family business situation highlighting the interaction of family members creating new possibilities for themselves and the business.

7 The interpreneurship model and the unified systems perspective provide an interesting signpost for further research. A key focus for both is dynamic interaction; from a unified system perspective it is the systemic interactions of the family unit, the business and individual family members and how these are linked to strategic performance. From an interpreneurship perspective, the focus is on how interactions within the family can lead to the emergence of new possibilities that work within the tension of continuity and creativity.

Our purpose in this paper is to work toward better understanding the emergence and re- emergence of entrepreneurial activity within a family business context. What contribution does each of these models make in enabling us to do that? The unified systems perspective alerts us to the feedback occurring between different subsystems in the metasystem. It also highlights the need to explore interactions contributing to the superior performance of a firm creating transgenerational wealth. The Interpreneurship challenge highlights what is perhaps the number one tension that exists within family business paradox – how to effectively work between continuity and change; maintaining the familiness, the tradition, the history of the family firm while adapting, changing and innovating to survive and prosper over time .

Central to both of these perspectives are interacting agents. To explore the concept of interaction in more detail we argue that complexity theory is a useful lens, in particular, complex adaptive systems, in which interacting agents serve as the platform to understanding emergence, novelty and self organisation. (McKelvey, 2004).

Complexity science

Complexity science embodies a set of ideas that have emerged over the last 40 or so years from several disciplines including computer science, information theory, evolutionary biology and cognitive psychology (Gleick, 1987; Cilliers, 1998; Vaughn, 1999; Lichtenstein, 2000;

Stacey, 2000; Stacey 2002; McKelevey, 2004). In general, complexity science is concerned with the dynamic properties of non-linear and network feedback systems. All complex

8 systems are networks of many independent agents interacting with one another; these interactions give rise to emergent properties different to the properties of individual agents.

These properties are the consequence of self-organisation. Self-organisation is the result of agent’s action on local knowledge – there is no central controller to tell agents what to do, nor does any agent have complete knowledge of the circumstances surrounding its actions. The interaction between agents of a system creates novel and unpredictable patterns. Complex systems are also adaptive in that agents are able to learn and develop new strategies of action.

Of course the environment is made up of many agents who are all following their own paths of action, thus “a highly adapted system is one in which agents adapt to the strategies of each other through competition and cooperation” (Vaughn, 1999, p. 244). Examples of such systems can be found in the disciplines mentioned above, in particular evolutionary biology.

Thus complexity science is an emerging interdisciplinary field of investigation “in the natural and physical worlds and indeed in the silicon world inside the computer” (Fuller & Morgan,

2001, p. 48).

Complexity science also has resonance with the human and organisational domains. It provides an analogical and metaphorical domain from which to gain insight into the behaviour of organisations. The principles and insights of complexity science and its study of the natural sciences provide a lens through which to observe behaviour and activity in organizations (Smith, 2005; Stacey, Griffin & Shaw, 2000). It has particular relevance with respect to better understanding entrepreneurial family businesses at two levels. First, it provides an opportunity to place entrepreneurial activity at the centre of our systems thinking, and second, the notion of paradox is inextricably woven within complexity thinking.

“Since creation of new economic order in the form of new firms is what entrepreneurs do, complexity science makes much more sense as the preferred kind of science for entrepreneurial research” (McKelvey, 2004). As noted above, a complex adaptive system comprises a number of agents who are all pursing their own strategies; the adaptive strategies

9 of some agents open up niches for other agents to discover and exploit. As a result, the system never settles at a determinate equilibrium. Novelty is generated via opportunities to be exploited by other agents, a process similar to that of the entrepreneur as discussed by Kirzner

(Kirzner, 1973; Vaughn 1999; Shane 2003). Further to this, Fuller and Morgan (2001) argue that the characteristics of complex adaptive systems resonate with the characteristics of small and medium sized enterprises. Complex adaptive systems evolve through time and consist of rich, dynamic, non-linear interactions between a large number of elements. These interactions give rise to positive and negative feedback loops (McKelvey, 2004; Cillier, 1998). In particular, adaptive agents serve as a metaphorical representation of entrepreneurial behaviour. Adaptive behaviour means that an actor is able to change what he or she does and the rules they follow. More specifically for our purposes, we suggest that the family business can usefully be thought of as a complex adaptive system. Drawing on complexity theory as the study of changing patterns of order and self-organisation, the family business can then be considered a complex adaptive system where, through self-organisation, new and unexpected structures emerge at the edge of order and chaos.

Self-organisation “is a paradoxical process of repetition and potential transformation”

(Stacey, 2000, p. 38). Adopting a complexity perspective on family business allows the dynamics of both the family and the business and the interactions between, within and around these systems to be explored. Furthermore, potential tensions that sit at the intersection of family and business can be considered such as order and disorder, chaos and stability, integration and differentiation. Exploration of complex adaptive systems suggest that to produce creative, innovative and continually changeable behaviour, systems ‘must operate far from equilibrium where they are driven by negative and positive feedback to paradoxical states of stability and instability, predictability and unpredictability’ (Stacey, 1995, p. 478).

10 Complexity is the result of rich interactions giving rise to self organisation through positive and negative feedback loops; virtuous and vicious cycles emerge driving an organisation to paradoxical states of stability and change, spontaneous action and repetitive behaviour.

INTERSECTING TENSIONS WITHIN FAMILY BUSINESS: A DYNAMIC

FRAMEWORK

We suggest that interactions leading to potential tensions between and within family and business can be usefully understood as rich interactions that play themselves out over time as virtuous and vicious spirals, an example of negative and positive feedback loops existing within a complex adaptive system (Quinn & Cameron, 1988; Ropo & Hunt, 1995).

INSERT FIGURE TWO

Figure Two above offers one way of considering the complex and dynamic interactions that occur along two potentially competing dimensions within a family business. We draw on

Carlisle and McMillan (2006, p.4) who “place organisations along a spectrum ranging from random, unorganised and highly chaotic to highly ordered and mechanistic.” On the business axis we argue that tension exists within any business system between order and stability on the one hand and change and potentially chaos on the other.

We also argue that the dynamics of a family system range along a spectrum. On the family axis we suggest dynamic interactions can occur between the “old” and “new”. The old may centre on existing family members involved in the business (in any number of roles ranging from owner to director to active manager/employee); it may also focus on heritage, history, values and style. “Newness” may result from new family members entering the system in one or more roles or from a desire or perceived need by some or all of the family to adopt different styles or approaches in the way that they engage and interact and/or the activities they pursue. Emerging at the centre of this framework are the intersecting four dimensions is the dynamic complex adaptive system of the family business.

However, the interactive pull of any two of the individual points can bring the complex adaptive system into other states with consequences for both the family and business systems that need to be recognised. We argue that the emergent patterns that arise from a greater pull out to the extremes on the axes can lead to challenges that effect both the family and business dynamics. Below we provide a working definition of each of the four disequilibrium states.

Disintegration 1: This may emerge when new family members join the business in some capacity or the family looks to change the approach to the existing business and the business itself for any number of reasons is experiencing change and potentially chaos (due to internal and/or external changes). The interaction of these dimensions can lead to a state of disintegration between the agents in this environment.

Resistance: When new family members get involved in the business or when the family wants to change their approach to do business when the business is inherently drawn toward order and stability the emergent response may well be one of resistance. The business system would oppose or resist change leading potentially to conflict between new family members and existing business members (both family and non family). Equally the family would resist a business attempt to hold the prevailing stability and order.

Ossification: This state would result when there are no changes to the family dynamic and none to the business leading the system to a state of ossification and stagnation. Both systems would eventually fail if this state was sustained for any length of time.

Alienation: When the business imperative is heading toward the chaotic end of the spectrum with the family dynamic tending toward valuing the old, alienation among internal

1 Disintegration and Ossification are terms used by Carlisle & McMillan (2006)

12 stakeholders may well result. The business system could become alienated from the family and vice versa.

Complexity theory steers our attention to systems that are complex, seemingly disorderly and dynamic and changing (Stacey, 1999). What we have tried to capture in Figure Two is a dynamic model that highlights two potential tensions within and between the dynamics of the family and business and the various ‘extremes’ from which these tensions may lead. While there is a tendency to strive to reconcile and resolve tension, this model recognises the complexity and the dynamism of the interactions, and it is hoped, goes some way in providing an interpretive, sense making framework. It does not suggest that we need to necessarily reduce the inherent turbulence in the system (Seeley Brown, 2002). In an organisational context emergent complexity sits between order and chaos (Brown & Eisenhardt, 1997;

Carlisle & McMillan 2006). We have added the dimension of familiness as “old” and “new” in an attempt to better capture the interactive dynamics of family business. The emergent possibility that lies at the centre of our model is therefore one that takes into account the family dynamic.

Concluding thoughts

A family business cannot be broken down into discrete parts; rather there is an acceptance that the business has a “natural wholeness composed of contradictions” (Lewis 2000, p. 762).

These contradictions or tensions need to be accepted as part of the pathway to producing a creative, innovative and continually adapting family business. In order to do this, the tensions created between the interplay of family and business must first be explicitly recognised. The model presented in this paper goes some way to identifying these tensions by examining the various extremes that can potentially pull the family and/or the business. In our model we have integrated the notion of family into an understanding of business through the lens of

13 complexity theory. We have attempted to uncover the dynamics that sit at the centre of the entrepreneurial family business that is the complex adaptive system residing at the edge and between order and chaos and familiness (as represented by old and new). To realise fully the application of this model, further research and consideration both practically and theoretically is needed. A logical next step would be the empirical application of the model to specific family business case studies. Critical incidents and situations throughout a family business history would be explored using complexity theory as an interpretive lens for understanding and prpviding valuable insight into possible family and business tensions outlined in the model prsented here.

Figure 2: Entrepreneurial activity in Family Business: A Complex Adaptive System perspective

Business: Chaos

Alientation Disintegrations

Complex Adaptive Family: Old System Family:New

Business: Order Ossification Resistance

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