As long as the family is the organisational basis of an enterprise, businesses tend to remain small and undercapitalised, unable to compete with modern capital and technology intensive non-family businesses. Any efforts of CFBs to expand are generally thwarted by firstly, the limited number of reliable relatives; and secondly, the Chinese custom that each son receives an equal share of the family assets (Whyte, 1996). In counterargument to the argument that high business success is the motive behind the CFB model because loyalty to the family is a very strong source of motivation and performance for the business.
However, this also supports the argument for CFBs placing family before business success because they do this for the sake of the family. On the job, family members are willing to work very hard and put in long hours for the family rather than personal benefit. They are willing to accept lower pay than non-family and would take pay cuts for the success of the business for the family (Whyte, 1996). Redding (1995, p64) argues that “money becomes the only meaningful surrogate for security and the pursuit of wealth is only conducted rare passion. ” This implies that maybe business success may come before family commitments.
However, Redding (1995) notes that the influences for this is firstly, gaining high status from conspicuous consumption of, such as the sales of Mercedes Benz or Rolls Royce cars. Secondly, due to their sense of responsibility for the building of family financial resources so the family name can be preserved with respect in the long term. This second section will argue that the CFB model, due to its many advantages, actually causes high levels of business success and so family is not the focus of businesses but rather the mechanism to reach, and become, a successful business and thus the two go hand-in-hand.
Kao (1993) states that privately owned Chinese companies, most of which are outside China, make up the world’s fourth economic power after North America, Japan and Europe. Whyte (1996) argues that the entrepreneurial behaviour expressed by the Chinese families in general is at least part of the driving force behind China’s dramatically improved economic performance. Starting from a domestic base, some CFBs have become extensive MNCs. Prominent examples include Hutchinson Whampoa of Hong Kong, the Salim Group of Indonesia, Hotel Properties of Singapore, Formosa Plastics of Taiwan, and the Charoen Pokphand of Thailand (Tsang, 2002).
So this brings up the question of if CFBs put family concerns above that, and to the detriment of, the success and wealth creation for the business, how has CFBs become so successful? This essay will again use Chen’s (2001) elements of CFBs to demonstrate how these elements utilising the family as a business model causes business success and thus family is the tool for business prosperity. The first pillar is that a CFB is a ‘family-directed operation’. The emphasis on relationships and reciprocity within Chinese ideals has given rise to ‘Guanxi’ which is a network of connections to gain a competitive advantage.
“Guanxi operates in concentric circles, with close family members at the core and with distant relatives, classmates, friends, and acquaintances arranged on the periphery according to the distance of the relationship with the degree of trust,” (Park and Luo, 2001, p456). CFBs will have a large network of relatives and close friends that spans across various industries, both horizontally and vertically. Therefore, when analysing the industry one is in or about to expand into using Michael Porter’s (1979) classic five forces of competition.
A CFB with its guanxi network fares very favourably with no need for bargaining power between suppliers and buyers as they are rendered irrelevant as most likely they will be in the same guanxi network. Furthermore, the large network lends itself to high levels of guanxi and therefore a large competitive advantage over rivals. However, CFBs do suffer from the threat of new technologies. An element of guanxi is the high level of trust backed up by a strong set of ethics within a guanxi network which is deep rooted in the culture.
This leads to interpersonal obligation bonding as the main means of expanding the range and size of a CFBs’ capacities. Under the CFB model decisions are made with greater speed and much lower costs. An important outcome is the reduction of transaction costs and paperwork resulting from the elimination of lawyers and analysts (Redding, 1995; Chen, 2001; Chung, 2005). Chinese businesses utilise guanxi to manage organisational interdependence and to mitigate institutional disadvantages, structural weaknesses, and other environmental threats (Park and Luo, 2001).
Guanxi is a valuable entrepreneurial tool to bridge gaps in information and resource flows between unlinked businesses and between businesses and important outside stakeholders. As institutional uncertainty increases, businesses more eagerly turns to guanxi networks to lower external dependence for key resources and to improve their legitimacy. Thus, a guanxi network helps a business overcome the lack of resources to accommodate growth while alleviating substantial bureaucratic costs that would result from internalising operations.
Networks provide member organisations greater access to human and financial resources, knowledge and management expertise (Oliver, 1990). By linking together, businesses expand their product and market reach and exercise greater market power than freestanding competitors. However, it must be conveyed that sustaining guanxi can be costly in terms of the reciprocal and utilitarian demands despite the contribution to sales growth. The obligation to personal attachments can prevent business changes that are necessary to improve profit. Therefore, networks do not always contribute to profit growth (Park and Luo, 2001; Yeung and Tung, 1996).