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It is a weird topic to write about, but I did some research so... Anyways, we are here to broaden our vision! I am not limited to boring textbook info and can explain other things in a fun way if you want... I HIGHLY RECOMMEND YOU TO READ EARLY EPISODES!
Expansion/Formalization Period of Medium Size Businesses
After an uncertain time passed in the startup phase, a family company passes to the expansion and formalization phase where the character of the business changes. The business lines, production and sales may increase, organizational scheme of the company becomes more complex and formal, and several policies are formed which reflects the company’s core values like human resource policies (Gersick et al. 1997). The companies show to distinct behavioral pattern once they enter the expansion phase. The companies in the first category focuses on expansion, seeks for new markets, new product lines and new aura (Gersick et al. 1997). The companies in the second category focuses on formalization and consolidation (Gersick et al. 1997). They try to deepen in their area of expertise and consolidate their niche market (Gersick et al. 1997). Then, they focus on increasing company’s efficiency by routinizing their operation systems (Gersick et al. 1997). The major challenges of a company in the expansion/formalization phase will be managing its cash, creating strategic planning for further development, rearranging its old organizational system, creating policies to formalize and professionalize the business as well as reconsidering the owner-manager roles in the company regardless of the type of company (Gersick et al. 1997). So, what can a family CEO and a non-family CEO offer to the family business during expansion /formalization period?
A growing company should extend its product/service lines to protect its market share. It must be aware of approaching trends to easily adapt new environment and should be in search for investment opportunities. Scientific research shows that family companies who have a family CEO exhibits lower attention to research and development activities compared to the family companies with non-family CEOs (Gomez-Meija et al. 2003). Additionally, family CEOs do not seize the risky investment opportunities that is crucial for an expanding company, and the negative effects of lost opportunities is greatest in the area of fast-growing industries (Bennedsen et al. 2007). It can be hypothesized that riskier nature of the professional CEO is originated from short-term success pressure on it as well as financial motivations of the CEO is a major source. On the other hand, the negative effects of the family CEO’s non-financial interests on the business are well known (Miller et al. 2014). Therefore, it can be suggested that hiring a professional CEO is more appropriate to the purposes of an expanding company.
The continues success of a company requires its professionalization. The owner centered start-up approach and uncertain managerial roles create performance problems in an expanding middle size company. Research results show that founder-CEOs show low performance to professionalize their company (Wasserman 2013). The expected performance of a family CEO is usually lower than a professional CEO when the topic is professionalization and organizational change of the company, and it is even shown that the family CEO has a tendency to resist any change in the management strategies (Khanin et al. 2020). Researchers think that family CEOs have that kind of tendency because adaption of professional managerial techniques require distribution of decision-making responsibilities (Ellington et al. 1996). Although family tradition is an important advantage of the family companies, it decreases the successful integration of advanced managerial techniques (Ellington et al. 1996). As studies shows the low performance of the family CEO on the expertise of professionalization, formalization, and implication of advance management practices, they also confirm the success of non-family CEOs (Khanin et al. 2020). The emotional connections to business and family decreases the effectiveness of family CEO as well as the fear of loosing control. On the other hand, professional CEO has immune to these effects. The experience and expertise of the professional CEO took it one step further.
Additional research highlights that although family firms tend to prefer family employees over professional employees (Mahto et al. 2019) which even reach the level of nepotism (Klein and Bell 2007), there are larger pool of professional and average quality, education and talent of non-family employees are higher (Khanin et al. 2020). Then, it is also known that talent management of the professional CEO is effective (Khanin et al. 2020). Consequently, a combinational approach to the given research clears that a professional CEO is a more effective choice for an expanding and formalizing company. A non-family CEO provides an advantage to the family company during professionalization period because of its relative advantage, managerial abilities, talent pool management and experience.
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