Sunday, August 9, 2020
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The Full Circle of Family Business Dynamics

Developed by John A. Davis and Renato Tagiuri at Harvard University in 1982, the three-circle family business systems model is an excellent illustration of family dynamics at work in a family business. This model describes the family business as three independent, overlapping subsystems.

Everyone involved in the family and the family business belongs to at least one of these subsystems – and possibly more. Only family business owners and/or investors are in the owner circle. Family members are in the family circle. Employees, regardless of whether they are a family member, are in the business circle.

Some people within the family and the family business may belong in only one circle or subsystem. Uncle Joe may be a family member but is not involved in the business. The business may have a key employee, Jan, who is not a member of the family. And the family business may have a non-family, non-employee investor in the owner circle.

What’s more likely, however, is that individuals belong to more than one subsystem, rendering the family business dynamic much more complex than non-family businesses. Someone can be a family member and an owner. Or an employee and a family member. Or an employee and an owner but not a family member. And in many cases, an individual is an employee, an owner and a family member all in one. As each member’s status changes throughout the organization’s lifecycle, so does that member’s position within the model. Periodic review of how the family business’s model changes over time can also provide insight into how each member is growing within the organization.

Now, how is this model used? Davis and Tagiuri intended the model to help family businesses identify and understand potential sources of conflict, roles, and how to determine boundaries. It also helps a family organization visualize in a simple manner the various roles and interactions their members have, as well as those members’ motivations and perspectives. And it may also help in the development of a more effective succession plan. (See more on succession planning.)

In fact, understanding the family dynamic is essential for effective succession planning. That’s because in a family business, succession issues are caused more often by family issues than by business issues. The authors of “Correlates of Success in Family Business Transitions” found that 60% of succession plans failed because of family relationship problems, and an additional 25% failed because heirs were not prepared to take over. Compare that to the paltry 10% of failures due to inadequate formal estate planning, and you can begin to see the importance of family dynamic in the success of family businesses.

Sources: “Succession Planning” by David Thayne Leibell; Three-Circle Model by John A. Davis and Renato Tagiuri in “Bivalent Attributes of the Family Firm.”.

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