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. 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 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. 2 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