An Evolutionary Theory of Family Business: Trust, Transition and Transformation

Principal Topic

Families and businesses evolve. Families transition and businesses transform. Fundamental to this process is trust, among family members and business stakeholders. In this research, we strengthen our understanding by introducing an evolutionary theory of family business rooted in Nelson and Winter’s (1982) evolutionary theory of the firm. We first unbundle their framework and then reconstitute it through both family and business lenses. We weave trust into this tapestry and add contextual richness by demonstrating how a third generation business-owning family concurrently orchestrated their generational transition and business transformation.

Nelson and Winter’s (1982) evolutionary theory of the firm is a hybrid theory that resulted from the integration of two theoretical approaches. The first theoretical foundation is based on evolutionary principles and sees the firm evolving as it (1) develops routines or repetitive activities that ensure the coherence between individual and collective behaviour, and (2) mutates and is involved in continually searching behaviours that consist of exploring and testing new routines and therefore introducing new characteristics into the firm. The second theoretical premise relies on the existence of cognitive (and behavioural) mechanisms of individuals and “the development of a collective knowledge base that encompasses the establishment of rules, habits, norms and codes” (Foss et al., 2000, p. 96), congruent with the evolutionary perspective of entrepreneurship (Aldrich & Martinez, 2003).

This approach offers the advantage of providing an explanation of three key issues that are crucial to a theoretical understanding of the firm: (1) how the firm can be defined (i.e., in terms of the set of competences that it controls); (2) why the firm differs from other firms (i.e., because of the reliance on different routines and competences that are specific and that cannot be transferred); and (3) the dynamics of the firm (i.e., through the combined mechanisms of selection and variation that work on the body of existing routines (Coriat & Weinstein, 1995; Foss et al., 2000)).

In this paper, we argue that the interplay between (1) defining components of the firm, (2) why the firm differs from others, and (3) how it operates, depends fundamentally on trust (Lewis & Weigert, 1985; Luhmann, 1979). Without trust as a relational governance component of the firm (Cao & Lumineau, 2015) the organization’s operational intricacies and its façade change. In our pursuit of a useful theory of family business, trust was omnipresent as a key ingredient (Steier & Muethel, 2014). Among the reasons are their close-knit social ties, as leaders in family firms “are emotionally committed to the long-run survival and reputation of their firms as their fortunes, careers, and their personal honor” (Le Breton-Miller & Miller, 2009, p. 1171). Therefore, adopting our evolutionary approach, we claim that family firms operate on a trust-centred approach to idiosyncratically (1) building a collective knowledge base among family and non-family members, and (2) orchestrating the evolutionary principles of routine optimization and mutation exploration among the incumbent and new generations.

The collective family members’ “willingness to be vulnerable” (Mayer, Davis, & Schoorman, 1995, p. 712), we argue, is a fundamental ingredient that lubricates business owning families’ ability to transition from one generation to the next by simultaneously transforming the firm through either expansion or consolidation and integration that is uniquely tailored to including the new generation.

Methods

We adopt a single-case study (Eisenhardt, 1989; Yin, 2009), embedded in a longitudinal, participatory-action research project (Brown & Tandon, 1983). Exploring relatively underexplored theoretical frameworks and complex phenomena, a case study is best practice, and the research team has been involved with this family firm for over a decade. The family business with more than 1000 employees operates in the apparel industry and is currently transitioning from the 2nd to the 3rd generation. In this case study, we assess the incumbent and new family members’ trust dimensions within and among generations in the context of the company’s strategic vertical integration of their entire supply chain. To do so, we conduct semi-structured in-depth interviews with members of the incumbent and emerging generation, which are analysed alongside other company documents. NVivo software is used to analyse the data.

Results

Theoretical implications of this study are associated with better understanding how business-owning families concurrently transition across generations and transform their business activities. Specifically, this study expands the literature on the evolutionary theory of the firm by examining how a family firm, through strategic vertical integration of the company’s supply chain, follows evolutionary principles. While the incumbent 2nd generation is entrusted to follow the principle of routine preservation, it simultaneously and collectively trusts the 3rd generation and its commission to explore and integrate routine mutations.
Practical implications of this research highlight the importance of understanding trust as the fundamental driver behind family firm evolution. Our findings can offer guidance to family as well as non-family firms, and the advisor community, that aim to transform the business through generational transitioning based on trust.