Business Planning Practices of Family-Owned Firms within a Quality Framework

Business Planning Practices of Family-Owned Businesses Within a Quality Framework*

Sharon M. Danes, Professor University of Minnesota

Department of Family Social Science 290 McNeal Hall

1985 Buford Avenue St. Paul, MN 55108

Phone: 651-625-9273 Fax: 651-625-4227

e-mail: [email protected]

Johnben Teik-Cheok Loy, Research Assistant University of Minnesota

Department of Family Social Science

Kathryn Stafford, Associate Professor The Ohio State University

Department of Consumer Sciences

Topic of small business research: Family and Founders Owned Enterprises

Keywords: family business, quality management, business planning, customer service, employee management, strategic management, financial management

*This study reports results from the Cooperative Regional Research Project, NE-167R, “Family Businesses: Interaction in Work and Family Spheres,” partially supported by the Cooperative States Research, Education and Extension Service, U.S. Department of Agriculture, and the Experiment Stations at University of Hawaii at Manoa, University of Illinois, Purdue University (Indiana), Iowa State University, Michigan State University, University of Minnesota, Montana State University, University of Nebraska, Cornell University (New York), North Dakota State University, The Ohio State University, The Pennsylvania State University, Texas A and M University, Utah State University, The University of Vermont, University of Wisconsin-Madison, and the Social Sciences and Humanities Research Council of Canada (for The University of Manitoba). Supported, in part, through the Juran Scholar Award from the Juran Center for Leadership in Quality in the Carlson School of Management, University of Minnesota and the Family Owned Business Institute Research Scholar Award, Seidman School of Business, Grand Valley State University.

Business Planning Practices Of Family-Owned Businesses Within A Quality Framework

Abstract

The purpose of this 572 family-owned business study was to investigate business planning practices within a holistic quality framework including strategic and financial, product and service, and employee management, and to investigate their impact on business success. A positive reputation with customers was the most important business goal for 44.6 percent of the businesses. Evaluating the quality of services or products and analyzing customer satisfaction on a continual basis were the most widely used business planning practices. The findings indicate that revenue is enhanced more by a holistic quality management approach than by a single narrow focus on product or service quality. Training small business owners in a holistic approach to quality management would increase the annual revenue of the average firm by more than $495,396 a year. Given the size of the average family firm, these firms could potentially increase their revenue 48.7 percent using a more holistic quality framework.

Family-owned Businesses

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Business Planning Practices Of Family-Owned Businesses Within A Quality Framework

The quality management movement in the United States has progressed from an initial

emphasis on operations management within the manufacturing industry to a systems approach to

quality management inclusive of all phases and aspects within the firm across a wide variety of

industries (Benson, Saraph, and Schroeder, 1991; Reed and Lemak, 1996). A crucial part of this

systems approach to managing quality is employee motivation and participation (Saraph,

Benson, and Schroeder, 1989). Such an integrated, interfunctional approach to quality

management is a means of achieving and sustaining competitive advantage (Flynn, Schroeder,

and Sakakibara, 1994). The objective of this study is to utilize a holistic quality framework to

investigate the business planning practices of family-owned businesses.

The great majority of family-owned businesses are small, and the small business

literature on business planning practices indicates that business planning leads to better

performance (Ibrahim, Angelidis, and Parsa, 2004; Miller and Cardinal, 1994; Schwenk and

Shrader, 1993). However, quality management is an often-missing element in the research of

small business planning, and customer service is sometimes disregarded in the research of

quality management (Yusof and Aspinwall, 1999; Saraph, Benson, and Schroeder, 1989). While

there are separate literature bases within the small business literature for quality management and

business planning, there is scant research addressing the integration of those two topics, although

these two concepts are considered inseparable corporate activities (Bennington and Cummane,

1997; Temtime, 2004; Vinzant and Vinzant, 1996). Furthermore, Kuratko, Goodale, and

Hornsby (2001) state that the research on quality in smaller businesses is primarily conceptual

rather than empirical.


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Utilizing a holistic lens to studying the business planning practices of family-owned

businesses is needed because larger corporations cannot fully implement Total Quality

Management (TQM) unless their smaller suppliers provide them with quality products and

services (Van der Wiele and Brown, 1998). There is a perception that smaller firms do not have

the resources necessary to effectively implement such things as TQM (Beheshti and Lollar,

2003) or strategic planning techniques (Scarborough and Zimmerer, 1987), so the literature in

these areas has primarily focused on large organizations. As a result, the overall dynamics of the

set of business planning practices (strategic planning, financial management, product and service

management, customer orientation, employee management) that smaller businesses use to

provide quality products and services are not well understood. By taking a more holistic

approach, this study provides insight into the overall business planning practices of family-

owned businesses that are all part of creating a business environment with a quality focus.

Family-owned businesses constitute a major portion of the United States economy (Heck

and Stafford, 2001; Olson, Zuiker, Danes, Stafford, Heck, and Duncan, 2003; Shanker and

Astrachan, 1996; Winter, Fitzgerald, Heck, Haynes, and Danes, 1998) and contribute about half

of both the United States. GDP and total wages (Astrachan and Shanker, 2003; Heck and Trent,

1999). For example, in 1996, depending on how they were defined, family businesses generated

from $1.3 trillion to $10.4 trillion in revenue (Heck and Stafford, 2001). Yet, there is little

empirical research that has examined the business planning practices used in these family

businesses (Rue and Ibrahim, 1996). The employee structure of family businesses is unique in

that there are both family and non-family employees that affect the firm culture where these

quality practices are executed. Any study of quality business planning practices of family-owned

businesses would be remise if it did not include employee management within the context of the


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study. This study investigates business planning practices utilizing a representative, random

national household sample of family business owner/managers (Winter, Fitzgerald, Heck,

Haynes, and Danes, 1998). Having such a sample is unique in that many of the previous studies

of business planning behavior for small businesses have small samples, and are limited in

industry and geographic coverage (Gibson and Cassar, 2002).

The Sustainable Family Business Model

If one is to take a holistic, systems approach to the study of business planning practices

within family-owned businesses, then that study needs to be grounded in a conceptual model

having a holistic, systems orientation. The Sustainable Family Business (SFB) Model (Figure 1)

is such a model. The SFB Model draws from family systems theory, giving equal recognition to

the family and business systems and to the interplay between them in achieving mutual

sustainability (Stafford, Duncan, Danes, and Winter, 1999) This model is considered by some as

an “...innovative approach to the study of family business” (Trent and Astrachan, 1999, p. v.).

The SFB Model portrays a dynamic theory that addresses the issues related to either the family

or the business independently and in conjunction with each other. It also emphasizes the

sustainability of the family business system as a holistic entity and treats the family and business

systems equitably. The SFB Model implies that the sustainability of a family business is a

function of both business success and family functionality (Stafford, Duncan, Danes, and Winter,

1999). The model also implies that an individual in either system may affect parts of both

systems (Heck and Trent, 1999).

The SFB Model suggests that at various times, concrete resources and interpersonal

transactions from either the business or family may facilitate or inhibit the sustainability of

family businesses. In line with a process approach to business management (Mintzberg and


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Waters, 1985; Pettigrew, Ferlie, and McKee, 1992), the SFB Model recognizes that different

processes occur in each system during times of stability and times of change (Danes, Rueter,

Kwon and Doherty., 2002; Stewart and Danes, 2001). The business manager must perceive,

process, and respond to a changing environment and reconstruct business processes to ensure

sustainability over time (Benson, Saraph, and Schroeder, 1991). This study focuses on the

business planning processes within family-owned businesses within a quality framework. It

considers the available resources of both the business owner and the business organization that

might influence the quality of those practices. It acknowledges that employees are critical to the

changes that are necessary in order to meet quality goals. Since employees in family-owned

businesses include family members who bring with them the dynamic of the family system,

some of the quality management processes will occur at the intersection of the family and

business systems. The effectiveness of any quality management goals will be reduced if this

family dynamic is ignored. For example, decentralized decision making is required when

incorporating a holistic, extensive adoption of quality management across business processes.

Because family-owned businesses tend to centralize their decision making (Ellington, Jones, and

Deane, 1996), the leadership style of the business owner and employee management structure

and process of the business are critical foci in the deployment of any holistic quality

management approach (Kuratko, Goodale, and Hornsby, 2001; Ryan, Deane, and Ellington,

2001). This study addresses research questions identified by Kuratko, Goodale, and Hornsby

(2001) by investigating the impact of quality practices on business revenues and by investigating

factors such as location and size of the business and age of the business owner on quality

practices.


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The SFB Model recognizes that family business achievements are evaluated in both

objective and subjective terms. Objective financial measures of success have been the primary

concern of most business and economic theories. However, subjective indicators such as

motivations (for example, maintaining personal freedoms), rewards (for example, meeting

challenges), goals (for example, increasing family security by building the business), and

perceptions of success also are important assessments for measuring success (Cooper and Artz,

1995; Cooper, Dunkelberg, and Woo, 1988; Kuratko, Hornsby, and Naffziger, 1997; Stafford,

Duncan, Danes, and Winter, 1999) Utilizing both types of success measures in family business

research leads to an understanding of the entire context in which business owners choose to

invest their time and money, whether they choose to stay in business, how they work with

customers and employees, and how they recognize and solve problems. Objective and subjective

measures are each an important part of a complete outcome assessment, although they measure

different things (Cooper and Artz, 1995; Cooper, Woo, and Dunkelberg, 1988). This study

investigates the impact of business planning practices on both an objective and subjective

measure of business success.

Literature Review

Business Planning

Over the past two decades, research on business planning for the small business has

shown that overall planning leads to better performance (Ibrahim, Angelidis, and Parsa, 2004;

Miller and Cardinal, 1994; Schwenk and Shrader, 1993). Closer examination of literature

reveals a more complex picture of the relationship between planning and performance. The

business planning literature focuses primarily on the type, nature, and extent of the planning.

Literature on the type of small business planning has focused on formalization, where formal


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planning involves written plans and non-formal planning has no written plans (Bracker and

Pearson, 1986; Robinson and Pearce, 1983). Studies comparing companies that engage in formal

planning and those that engage in non-formal planning find that formal planners outperform non-

formal planners on growth of sales, but perform the same on return on investment and return on

assets (Lyles, Baird, Orris, and Kuratko, 1993; Rue and Ibrahim, 1998).

Miller and Cardinal (1994) conducted a meta-analysis of 26 studies that examined the

relationship between planning and performance. That meta-analysis took into account seven

contingency variables: firm size, capital intensity, level of turbulence the firms faced, industry

effects, source of planning data, source of performance data, and quality of assessment strategy.

They indicated that firm size was not a significant predictor of the relationship between planning

and performance as measured by either profitability or growth. However, they did find that

when studies controlled for a number of other contingency variables, a stronger positive

relationship was revealed between planning and performance. Studies that did not restrict the

definition of planning to only written plans revealed statistically significant relationships

between planning and performance.

The most common concepts about the nature of business planning within the literature

were such items as the following: (a) formulation of target objective to be achieved, (b) strategies

to achieve those goals, (c) financial planning, (d) statement of the firm’s mission, (e) written

long-range strategic plans, and (f) assessment of external factors that serve as inputs (Ibrahim,

Angelidis, and Parsa, 2004; Matthews and Scott, 1995; Perry, 2001; Robinson and Pearce, 1983;

Rue and Ibrahim, 1996). Two of these studies found that small businesses, including family

businesses, engage in more sophisticated planning than was anticipated – more than 80 percent

of small businesses and over 50 percent of small family businesses used some type of long-range


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written plans (Ibrahim, Angelidis, and Parsa., 2004; Rue and Ibrahim, 1996). However, the

above studies did not specifically include items on quality and customer service as aspects of the

planning process.

Quality Management

A conceptual definition of quality management is the general set of activities that

contribute to the intentional improvement of products and services (Saraph, Benson, and

Schroeder, 1989). Researchers who study quality management practices of smaller businesses

indicate that the challenges faced by small businesses (identified as relative lack of human,

financial, and technical resources) are intrinsically different from those faced by large

businesses; thus, they argue that they require a different set of measures for quality (Beheshti and

Lollar, 2003; Yusof and Aspinwall, 1999). These quality management studies of small

businesses also differ from those that study large corporations by including a direct interaction

with the customer as part of the quality management function. In fact, some researchers of

quality management hold that customer satisfaction may be the most important fundamental

principle of quality management (Kuratko, Goodale, and Hornsby, 2001; Lyman, 1991).

In their study of small and medium enterprises, Beheshti and Lollar (2003) identified

eight different performance goals for quality programs: (1) improved product quality; (2)

increased efficiency; (3) improved customer service; (4) cost reduction; (5) improved decision

making; (6) less defects; (7) improved teamwork; (8) increased productivity. While these

performance goals do not represent ways in which quality is measured in small businesses, they

nevertheless indicate areas that are perceived to impact quality management practices. Within

quality management literature for small businesses, there has been a repeated call for integrating

quality management into business planning research (Bennington and Cummane, 1997; Kuratko,


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Goodale, and Hornsby, 2001; Temtime, 2004; Vinzant and Vinzant, 1996). This study not only

addresses the call to integrate business planning and quality management but expands the call by

utilizing a holistic approach toward quality inclusive of financial and strategic management,

product and service management, and employee management.

Two aspects of firm orientation, an outward focus on customers and a more inward focus

on operations, are both critical to effectiveness of quality processes (Reed and Lemak, 1996). In

a review of the seminal works on quality management, Reed, Lemak, and Mero (2000) stated

that one of the points of agreement across the authors (for example, Deming, Juran, Crosby,

Ishikawa, Feigenbaum) was that the customer defines quality and that quality creates customer

satisfaction that, in turn, leads to an improved competitive position. In fact, Anderson,

Rungtusanatham, and Schroeder (1994) in describing the philosophy of Deming, indicated that

customer satisfaction was the cornerstone of quality management and was the motivational force

behind Deming’s 14-point approach to quality management.

Another central focus of quality management processes is the development of employees

not through directives but through the removal of barriers (Anderson , Rungtusanatham, and

Schroeder, 1994). Employees are key to the internal operations of the business that create the

quality of product or service that meets the expectations of the customer. In investigating firm

characteristics that impact the relationship between quality management and firm performance,

Hendricks and Singhal (2001) found that smaller firms do better than larger firms, that less

capital-intensive firms do better than more capital-intensive firms, and more focused firms do

better than more diversified firms.


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Research Questions

There were three research questions that gave focus to this study: (a) What are the

business planning practices of family-owned businesses? (b) What are the business owner and

business characteristics that influence the business planning practices of family-owned

businesses? and (c) What are the business owner characteristics, the business characteristics, and

the business planning practices that influence gross revenues and the perception of business

success? The business owner characteristics and the business characteristics represent the

available resources and constraints identified in the SFB model. The processes being

investigated in this study are: strategic and financial management, product and service

management (inclusive of customer satisfaction), and employee management. The SFB model

stipulates that achievements of the business system can be measured in two different ways.

Gross revenues is the objective success measure and the owner’s perception of business success

by the business owner is the subjective success measure used in this study.

Methodology

Sampling Procedures and Description

This study used a representative, random national sample of family businesses, the 1997

National Family Business Study (NFBS). Households made up the sampling frame (see further

sampling selection detail in Winter, Fitzgerald, Heck, Haynes, and Danes, 1998). A family

business was defined as a business that was owned and managed by one or more family

members; thus, the sample for this study was limited to family households in which at least one

person owned or managed a family business. To qualify as a family business, the

owner/manager had to have been in business for at least a year, had to have worked at least 6

hours per week year round or a minimum of 312 hours a year in the business, had to be involved


10

in its day-to-day management, and had to reside with another family member. Three types of

telephone interviews were conducted for each family business: a screen interview to establish

eligibility, a household manager interview, and a business manager interview. The overall

response rate was 71.19 percent. The sub-sample studied in this research was 572 family

businesses with completed family and business manager interviews that were not farm

businesses. The 101 farm businesses were excluded from this study because those businesses

were found to have statistically different business planning practices from the 572 non-farm

businesses. Characteristics of the sample reported in this article were derived from unweighted

data. The regression results reported were based on weighted data. The NFBS data set contains

weight variables, the use of which permitted us to mimic the prevalence of family firms

throughout the United States without inflating the degrees of freedom and biasing our hypothesis

testing.

When investigating business planning practices, it is important to understand the types of

business that compose the sample. The NAICS (North American Industry Classification

System) was used to code the family-owned businesses. NAICS is a universal occupation

classification scheme that groups businesses by their production processes (Levine, Salmon, and

Weinberg, 1999). Since the NFBS sample is a national, representative sample of households

with family businesses, it naturally follows that the NAICS codes would be diverse. The finance

industry code represented 24.8 percent of the sample. Approximately a fourth of the sample

(25.7 percent) fell under the retail trade codes. The NAICS code of “Other” represented 14.7

percent of the sample. Construction composed about 12.8 percent of the sample. Manufacturing

family businesses composed 5.4 percent of the sample. The educational and health industry code


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represented about 7.2 percent of the sample. The forestry and mining industry codes composed

about 2 percent of the sample. The services industry code composed 7.3 percent of the sample.

How firms interact with their external and internal environments has an impact on their

performance (Reed and Lemak, 1996). One of the unique features of the internal environment of

family-owned businesses is the nature of the employee structure; employees may include both

those who are part of the family-owning system and non-family employees. Family members

working in the business may be paid or unpaid employees. The family employees may be living

in one household or several. The number of paid family employees who lived in the same

household as the business owner ranged from 0 to 7 with an average of 1.29. The number of

relatives employed but not living in the same household as the business owner ranged from 0 to

10 with an average of .47. The number of other immediate relatives who did not live in the same

household of the business owner but who helped in the business on an unpaid basis ranged from

0 to 6 with an average of .40.

Operational Definitions

Business Planning Practices. The business planning practice questions were introduced

to the business owners during the telephone interview with this stem, “I will read a list of

business activities that business owners may perform. Please indicate to what extent each

activity is part of your business’s regular practices by using a scale from 1 to 5, where 1 means

the activity is not done at all and 5 means the activity is done to a very great extent at your

business.” The business owners indicated the extent to which each of 10 business planning

practices (Higgins, 1994) was a regular part of what they did in their business. Those 10

practices were categorized within these business planning processes: strategic and financial

management, product and service management and employee management (See Table 1).


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Business Gross Revenues. The objective measure of business success was the gross

revenues of the business. It ranged from $100 to $86 million with an average of $1,057,973

(SD=5,671,803). Since the variance of gross revenues was heteroskedastic, in the regression

equation, the natural log of gross revenues was used to address issues of heterogeneity of errors

that would exist in the linear form and the curvilinear relationship of gross revenues with the

independent variables.

Owner’s Perceived Business Success. The subjective measure of business success was

the business owner’s perception of the success of the business. The question was introduced

with this stem, “Overall, how successful is your business to date?” The business owners could

respond on a 5-point scale from “1” representing “very unsuccessful” to a “5” representing “very

successful”. The mean was 4.03 (SD=.79).

Business Owner Characteristics. Business owner characteristics were included as control

variables in the study because decision making in smaller family-owned businesses is much

more centralized than in larger corporations. The business owner is most often the primary

decision maker driving whether and how much emphasis to place on quality management that

might ultimately result in improved performance of the organization (Saraph, Benson, and

Schroeder, 1989). They provide the leadership and commitment to the enactment of an

integrated quality focus (Reed, Lemak, and Mero, 2000). There were four variables representing

the business owner characteristics: age, gender, education, and the number of hours worked in

the business by the business owner. Age of the business owner was a continuous variable with a

range of 20 to 81 years and a mean of 45.4 years. The gender variable was a dummy variable

with a “1” representing female; 30.9 percent of the business owners were female. The average

number of hours that the business owner worked per week was 42.5 hours. The average number


13

of years of education was 14.3 years. Education and NAICS codes were found to be statistically

significant in early bivariate analyses. In order to save on degrees of freedom in the regression

analyses, education became a proxy variable for the industry code. From lowest to highest

education, the industry codes fell as follows: agriculture, manufacturing, construction, retail,

other, services, education and health, and finance.

Business Size. Business size was operationally defined as number of employees. The

business owner solely operated the business in about a third (31.8 percent) of the cases. Slightly

over half (55.8 percent) had from .5 to 9.5 employees. Another 6.1 percent of the businesses had

from 10 to 19.5 employees. Family businesses with 20 to 49 employees represented 3.4 percent

of the sample. Just fewer than three percent of the sample (2.9 percent) had between 50 and 351

employees. Although the size standard of a small business varies somewhat across industries

according to the United States Small Business Administration, all the family businesses in the

sample have less than 500 employees, which would classify them as small businesses (U.S.

Small Business Administration, 2004).

Most Important Business Goal. Business owners were queried about the most important

of five long-range business goals for their family business. The five options and the percent who

choose each option in rank order were as follows: a positive reputation with customers (44.6

percent), long-term viability (18.0 percent), growth (17.8 percent), profit (15.7 percent), and

adequate financing (3.8 percent). Because such a large proportion of the family businesses

identified positive reputation with customers as their most important goal and the remainder of

the goals were financially-based, a dummy variable labeled “customer goal orientation” was

created. Businesses were coded as “1” for the 44.6 percent of the sample who identified positive


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customer reputation as the most important goal and “0” for the remainder of the sample who

identified various financial goals as the most important.

Urban Influence Code. The urban influence code (UIC) was used to control for

geographic differences in economic opportunities (Ghelfi and Parker, 1997). The UIC divide

counties, county equivalents, and independent cities in the United States into nine groups. Those

groups range from one to nine with “1” indicating a large metropolitan area (equal to or greater

than a population of 10,000), to a “9” that represented a location not adjacent to a metropolitan

area with less than a population of 2,500 people. About a quarter of the sample (24.7 percent)

was located in a large metropolitan area and 39 percent were located in a small metropolitan

area. About one percent of the sample was located adjacent to a large metropolitan area and 12.1

percent were located next to a small metropolitan area. Twenty-three percent of the family

businesses in the sample were not adjacent to a metropolitan area.

Business Problems. The business problems variable represents the external context of the

family-owned businesses. Those external factors, such as customer demands, competitive

pressures, and government regulations, are the factors that drive quality problems (Benson,

Saraph, Schroeder, 1991). The business owners were queried about six different types of

business problems (Holland and Oliver, 1992; Kraft and Goodell, 1989; Sharma, Chrisman, and

Chua, 1996). The question was introduced in the telephone interview in this manner, “Next, I

am going to read a list of problems many businesses face. Please use the scale from 1 to 5 to rate

these problems for your business, where 1 is not a problem at all and 5 is a major problem.” The

responses were factor analyzed and a single factor emerged with a reliability coefficient of .66.

Consequently, the responses to the six problems were summed to compute the business problem

scale that had a range from 6 to 28 and a mean of 13.99.


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Business Liabilities. The business owners were queried about their liabilities. The range

was $300 to $7 million with an average of $367,516. This variable was chosen as a control

variable in the regression equations rather than business assets because some of the business

planning practices such as the development of a strategic plan are required by financial

institutions when they apply for loans.

Analysis Procedures

Frequencies were performed for all variables to examine normality of the distributions

and to obtain the descriptive statistics. Two sets of regression equations were estimated. The

first set was estimated to identify the predictors of quality management and other business

planning practices. This first set of OLS (ordinary least squares) regression equations had as the

dependent variables each of the ten business management practices measured in this study. The

independent variables were a set of business owner characteristics (age, gender, education, hours

worked in the business) and business characteristics (size of the business, customer goal

orientation, urban influence code, business problems, and business liabilities). Clearly, the

planning practices occur simultaneously. Estimating the equations with the same observations

and the same independent variables is equivalent to estimating simultaneous equations.

The second set of OLS regressions was estimated to find the effect of quality

management on business success. This set had an objective measure of business success (the

natural log of gross revenues) and a subjective measure of success (perception of business

success) as the dependent variables. The independent variables were the same set of business

owner and business characteristics. In addition, seven of the ten business planning practices

were entered in these two regression equations. Three of the practices were left out of the

analysis because of concerns about multicollinearity. There was a .61 correlation between


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“evaluating the quality of services and products” with “analyzing customer satisfaction on a

continual basis”. There was a high correlation of “evaluating employee performance” with the

other two employee management questions. There was a .75 correlation with “motivating

workers to become better employees” and a .61 correlation with “estimating or setting personnel

needs, labor costs, or performance standards”. Unlike the coefficients of a standard OLS

regression, the coefficients of the interval variables in a semi-logarithmic regression equation

like gross revenues in Table 5 are interpreted as the percentage change in revenue per unit

change in the independent variable.

This second set of regression equations has two sources of simultaneity. The first is the

simultaneity of the outputs or dependent variables. As with the first set, this source of

simultaneity is taken into account by estimating both equations with the same independent

variables. The second source of simultaneity, however, cannot be managed by this simple

technique. The second source of potential simultaneity arises from the influence of owner and

business characteristics on both planning practices and objective and perceived success. This

potential problem was addressed by estimating two sets of equations.

To estimate the impact of changing quality management practices on the firms, the

regression coefficients from the gross revenue equation in the second set (Table 5) were

multiplied by average firm revenue. To estimate the impact of changing quality management

practices on the United States economy, the firm effect was multiplied by the number of family

firms in the United States. To be conservative, economic impact estimates were based on only

ten percent of firms changing their practices. Findings from these analyses are reported in the

final section on summary, discussion, and implications.


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Findings

Business Planning Practices

The ten business planning practices included three dimensions: strategic and financial,

product and service, and employee management (Table 1). The highest means were for the

product and service management practices, followed by the employee management practices,

followed by the strategic and financial management practices. Among all the practices, the

highest mean was for evaluating the quality of services or products (4.31), and the lowest mean

was for developing or updating a written strategic plan, including a mission statement (2.28).

----------------------------------------------------------- Table 1 about here.

-----------------------------------------------------------

About 60 percent of the business owners indicated that they evaluate the quality of their

services and products to a very great extent. Analyzing customer satisfaction on a continual

basis was done to a “very great extent” by 52 percent of the business owners. The attention that

is paid to these two business planning practices is well aligned with their reported most

important business goal of having a good reputation with customers reported by 44.6 percent of

the business owners. If the percent in the 4 and 5 categories on these two service and product

management variables are summed, 82.7 percent of the businesses evaluate the quality of

services and products while 70.1 percent analyze customer satisfaction on a continual basis. It is

unique that businesses in this sample do not perform these business practices.

There are a number of business planning practices that over a quarter of the business

owners report never doing. More than a fifth of the business owners reported that they never

develop or update a written strategic plan that includes a mission statement (43.7 percent), never

plan advertising and promotion budgets or strategies (27.8 percent), never motivate workers to


18

become better employees (21.0 percent), and never evaluate employee performance (21.8

percent).

Regression Analyses

Strategic And Financial Planning. All of the F-scores for the regression models

predicting strategic and financial planning practices were statistically significant (Table 2). The

variance explained in the models ranged from 4.1 percent for developing written strategic plans

to 14.6 percent for estimating costs and expenses. The business owners who had a customer goal

orientation compared to a financial goal orientation performed a number of business practices

less often: planning advertising budgets and strategies, determining sales and earnings numerical

objectives and developing written strategic plans, including a mission statement. Older business

owners determined numerical objectives and developed strategic plans less often than did

younger business owners. The business owners with higher education levels (in the finance and

education and health NAICS codes) estimated costs and expenses and prepared financial records

less than those with lower levels of education.

----------------------------------------------------------- Table 2 about here.

-----------------------------------------------------------

Larger businesses prepared financial records and developed written strategic plans more

than did smaller family businesses. The businesses with higher levels of liabilities prepared

financial records, determined numerical objectives, and estimated costs and expenses more often

than did businesses with smaller levels of liabilities. The latter two practices were also

performed more often by businesses who reported having a greater extent of business problems.

Product And Service Management. The F-scores were statistically significant for both

regression equations for quality management practices (Table 3). About four percent of the


19

variance was explained by the variables in the model for both analyzing customer satisfaction on

a continual basis (3.6 percent) and evaluating the quality of services and products (5.3 percent).

The only statistically significant variables in both models were three characteristics of business

owners. The more hours the business owner worked per week, the more evaluation of the quality

of services and products was done. Business owners with more years of education did less

analyzing of customer satisfaction on a continual basis and less evaluation of the quality of

services and products. Female business owners performed these two product and service

management practices more often than did male business owners.

----------------------------------------------------------- Table 3 about here.

-----------------------------------------------------------

Employee Management Practices. Each of the regression models in the employee

management practices factor had a statistically significant F-score (Table 4). The percent of

variance explained across the three items was from 14.6 percent to 15.6 percent. The more hours

the business owner worked, the more of each of the three employee management items was

done: estimating or setting personnel needs, labor cost, or performance standards, evaluating

employee performance, and motivating workers to become better employees. Those business

owners with more education estimated and set personnel needs, labor costs, or performance

standards and evaluated employee performance less often than those with fewer years of

education. Older business owners evaluated employee performance more than younger business

owners. The business owner did all three employee management practices to a greater extent

when liabilities the business held were high. When more business problems were reported,

business owners also reported motivating workers more and estimating labor costs, or


20

performance standards more. Larger businesses reported evaluating employee performance

more than small businesses.

----------------------------------------------------------- Table 4 about here.

-----------------------------------------------------------

Objective and Subjective Business Success

There were business owner characteristics, business characteristics, and business

planning practices that influenced gross revenue and the perception of business success by the

business owner, but not necessarily the same ones (Table 5). The R2 for gross revenues was .475

and .148 for perception of business success. The F-scores for both regression equations were

statistically significant. The older the business owner was and the more hours the business

owner worked in the business, the greater was the gross revenue. Businesses in rural areas

reported lower gross revenues. The larger the business and the higher the liabilities, the greater

was the gross revenue. The more that determining numerical objectives was part of the business

planning practices, the greater was the gross revenue. The businesses that reported developing

written strategic plans to a greater extent were the ones that reported lower gross revenues.

Those businesses evaluating employee performance to a greater extent reported higher gross

revenues.

----------------------------------------------------------- Table 5 about here.

-----------------------------------------------------------

Those business owners who worked more hours in the business perceived greater

business success. The bigger the business, the more the business owner perceived the business

was successful. The more business problems the business owner reported, the less successful the

business owner perceived the business to be. When business owners reported estimating costs


21

and expenses to a greater extent and when they reported having a written strategic plan, the

business owner perceived their business as less successful. On the other hand, when business

owners reported keeping financial records, they perceived their business as more successful.

Summary, Discussion, and Implications

The purpose of this study of 572 family-owned businesses was twofold: (1) to investigate

business planning practices through a holistic lens including strategic and financial management,

quality management inclusive of customer service, and employee management, and (2) to

investigate the impact of these practices on an objective and subjective measure of business

success, controlling for business and business owner characteristics. This study was unique in a

number of ways: (a) the sample is a representative, random national household sample of family

businesses; (b) it is based on a holistic, dynamic conceptual model-the Sustainable Family

Business Model; (c) it incorporates quality management inclusive of customer satisfaction and

employee management; and (d) it investigates the impact of these practices on business success,

measured both objectively and subjectively.

A positive reputation with customers was the most important business goal for 44.6

percent of the businesses. Evaluating the quality of services or products and analyzing customer

satisfaction on a continual basis were the most widely used business planning practices. Those

businesses with a customer goal orientation determined sales and earnings numerical objectives

less often, planned advertising strategies less often, and prepared financial records less often.

Those business owners who determined numerical objectives and evaluated employee

performance more often reported higher gross revenues.

Evaluating the quality of services or products and analyzing customer satisfaction on a

continual basis were the most widely used business planning practices. In fact, these quality


22

management practices are done more often than any of the strategic and financial management

practices such as estimating cost and expense figures or preparing financial records. Customer

satisfaction (including having a quality product or service) appears to be the ultimate quality

barometer for these smaller family-owned businesses—a finding that contradicts earlier studies

that suggested that family firms tended not to embrace quality management principles (Ellington,

Jones, and Deane, 1996; Ryan, Deane, and Ellington, 2001). This is good news for the larger

corporations who depend on these smaller suppliers to provide quality products and services.

It is the businesses that report a higher number of major problems that perform more

strategic and financial management practices such as estimating costs and expenses, and

determining sales and earnings numerical objectives. Those businesses that report a higher and

greater extent of business problems also do more employee management. Those businesses with

higher liabilities prepare more financial records and do more employee management. Only

certain business planning practices are affected by the number of hours the business owners

work. The amount of time the business owner works in the business influences the extent to

which advertising budgets and strategies are planned, numerical objectives are determined, the

quality of services and products is evaluated, and employee management is performed. Many of

these practices ultimately affect the quality of the product or service the business provides.

The results of this study have practical implications as well as implications for

measurement of success and quality management. Most of the owners in this study reported they

evaluated customer satisfaction on a continual basis to a very great extent. Most also reported

they evaluated the quality of their services and products to a very great extent. For those who

did not, the results of this study indicate that increasing the frequency with which they evaluate

the quality of their services and products 20 percent, or one unit on a five point scale, could


23

increase gross revenue $69,172 a year. If only ten percent of the firms did this, American family

firms would generate $60.6 billion more annually.

If the owners were to take a holistic approach to quality control and combine evaluation

of product quality with other aspects of quality management, the impact would be even greater.

Setting numerical objectives for quality attributes could increase revenue $291,948 per year,

adding $255.7 billion to the economy, if just ten percent were to do this 20 percent more

frequently. If the owners were to evaluate employee performance based on their contribution to

product quality, the average firm’s revenue would increase $134, 276, thus adding $117.6 billion

to the economy, if just ten percent of them did this 20 percent more frequently.

These figures indicate that attention to quality can enhance revenue. They also indicate

that revenue is enhanced more by a holistic approach to quality management than by a single

narrow focus on assessing the quality of the product or service once produced. Training the

owners of small firms in a holistic approach to quality management would increase the annual

revenue of the average firm by more than $495,396 a year. Given the size of the average family

firm, these firms could potentially increase their revenue 48.7 percent from these three quality

management practices (evaluating quality of products and services, setting numerical objectives,

and evaluating employee performance). If only ten percent of family firms were trained in this

approach and increased the extent to which they used the recommended practices, there would be

an additional $433.9 billion generated by the economy.

This study used the Sustainable Family Business Model to guide its holistic study of

business planning practices of family businesses owners within a quality framework. As

depicted in the model, it used available resources and constraints of the business owners and the

businesses to explain the integrated dimensions of business planning including strategic and


24

financial, quality (inclusive of customer satisfaction) and employee management. By

investigating the influence of resources and constraints on the ten business planning practices, a

more precise yet dynamic picture about the business planning practices of owners of family-

owned business owners evolved. The findings added evidence to the premise of the model that

there are two types of business success measures and that they do not measure the same thing.

Different business owner, business, and business planning practices explained each measure of

business success (objective: gross revenues; subjective: perception of business success).

This study provides evidence that quality management is done by family business

owners; however, it may be operationalized differently from large corporations. These

businesses may not have the resources to implement the detail of TQM as do larger corporations

but they do have customer service at the forefront of their operations. These family-owned

businesses also place high value on evaluating the quality of services and products. The business

owners are well aware that part of the process of remaining sustainable and viable is attention to

these two critical dimensions of business planning and quality management. The findings of this

study add to the premise identified by Kuratko, Goodale, and Hornsby (2001) and Lyman (1991)

that customer satisfaction may be the most important principle of quality management.

Thus, a call for more holistic studies of the business planning processes of family

businesses is in order. Those holistic studies need to include the dimensions of quality

management (inclusive of customer service), and employee management in addition to the usual

strategic and financial management dimensions. The findings from this study indicate that

individual indicators of business planning dimensions need to be investigated prior to developing

scales of combined indicators because each indicator is uniquely influenced by varied business

and business owner characteristics. The richness gained from such an investigation is vital to


25

understanding the context of business planning in family-owned businesses, but particularly to

understanding quality management within those businesses.

Based on this study, several implications for the future arise concerning the nature of the

employee structure of family-owned businesses and its impact on business planning practices

within a holistic quality framework. For instances, how does the quality orientation of the family

business owner influence the extent of a focus on quality and customer service? How does this

orientation affect employees? Specifically, are family members versus non-family members, or

paid versus unpaid employees differently affected? And lastly, are consequences to the lack of

implementation of a quality/customer service ethic equally applied to all employee types?


26

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Figure 1. Sustainable Family Business Model

AvailableResource and Constraints

Disruptions in Family/Business

Transactions

Responses to Disruptions in Family/Business

Transactions

Sustainability

PROCESSES

Times of StabilityInterpersonal Transactions

Resource Transactions

Times of ChangeInterpersonal Transactions


Achievements

Objective SuccessSubjective Success

Available Resources and

Constraints

PROCESSES

Times of StabilityInterpersonal Transactions


Times of ChangeInterpersonal Transactions


Achievements

Objective SuccessSubjective Success

BUSINESS

FAMILY


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Table 1 Business Planning Practices of the Family Business Owners Not done

at all Very great

extent

Business Planning Practices 1 2 3 4 5 Mean

Percent Strategic and financial management

Estimating cost and expense figures for the business 7.3 14.2 18.4 24.1 36.0 3.67Preparing financial records such as cash flow statements, balance sheets,

or inventory control methods 17.0 19.4 20.3 16.3 27.1 3.17

Determining numerical objectives such as sales or earnings 18.7 13.5 28.1 18.5 21.2 3.10Planning advertising and promotion budgets or strategies 27.8 24.1 21.3 10.7 16.1 2.63Developing or updating a written strategic plan, including a mission

statement 43.7 18.4 16.1 10.0 11.9 2.28

Product and service management

Evaluating the quality of services or products 3.7 4.2 9.4 22.4 60.3 4.31Analyzing customer satisfaction on a continual basis 6.1 6.1 17.7 18.0 52.1 4.04

Employee management a

Motivating workers to become better employees 21.0 9.2 18.5 24.4 26.9 3.27Evaluating employee performance 21.8 11.3 19.5 20.8 26.7 3.19Estimating or setting personnel needs, labor costs, or performance

standards 18.5 14.1 26.2 20.8 20.5 3.11

a Frequencies are presented for those businesses with at least one employee.


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Table 2. Regression of Characteristics of Business Owner and Business on Strategic and Financial Management Practices

Characteristics

Planning Advertising Budgets and

Strategies

Estimating Costs and Expenses

Preparing Financial Records

Determining Sales and Earnings

Numerical Objectives

Developing Written Strategic Plan,

including a Mission Statement

Beta Beta Beta Beta Beta Business Owner Age -.069 .012 -.018 -.084* -.120** Gender -.004 -.035 -.069 .015 .032 Education -.002 -.168*** -.094* -.009 -.043 Hours Worked .125** .041 .055 .150*** .070 Business Size -.036 .008 .099* .011 .083* Customer Goal Orientation -.109** -.041 -.078* -.117*** .012 Urban Influence Code -.002 -.008 -.042 -.013 -.052 Business Problems .077 .147*** .038 .084* .071 Liabilities .076 .262*** .154*** .135*** -.035 R2 .060 .146 .086 .097 .041 F-score 4.25* 11.28*** 6.25*** 7.12*** 2.83** df 9 9 9 9 9

* p < .05; ** p < .01; *** p < .001


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Table 3.

Regression of Business Owner and Business Characteristics on Product and Service Management Practices Characteristics

Analyzing Customer Satisfaction on a Continual

Basis

Evaluating the Quality of Services and Products

Beta Beta Business Owner Age -.055 -.031 Gender .095* .134** Education -.127** -.123** Hours Worked .044 .132** Business Size .007 .014 Customer Goal Orientation -.049 .063 Urban Influence Code -.048 .055 Business Problems .052 .020 Liabilities -.036 -.003 R2 .036 .053 F-score 2.49* 3.68*** df 9 9 * p < .05; ** p < .01; *** p < .001


34

Table 4.

Regression of Characteristics of Business Owner and Business on Employee Management Practices

Characteristics

Estimating or Setting Personnel Needs, Labor Costs, or Performance

Standards

Evaluating Employee

Performance

Motivating Workers to Become Better

Employees

Beta Beta Beta Business Owner Age -.027 .083* -.022 Gender -.068 -.045 -.046 Education -.221*** -.110** -.065 Hours Worked .126** .209*** .229*** Business Size .033 .082* .025 Customer Goal Orientation -.014 -.074 -.053 Urban Influence Code .019 -.022 .008 Business Problems .153*** .055 .131** Liabilities .119** .178*** .114** R2 .147 .156 .146 F-score 11.38*** 12.20*** 11.25*** df 9 9 9 * p < .05; ** p < .01; *** p < .001


35

Table 5. Regression of Business Owner Characteristics, Business Characteristics, and Business Planning Practices on Gross Revenues and Perception of Business Success Gross Revenues Perception of Business Success B SE Beta B SE Beta Business Owner Age .017 .007 .073* .005 .003 .066 Gender -.301 .171 -.058 .121 .068 .074 Education .037 .035 .033 -.011 .014 -.032 Hours worked .044 .005 .276*** .015 .002 .296*** Business Size .027 .003 .257*** .004 .001 .118*** Customer goal orientation -.258 .156 -.051 .125 .062 .080 Urban influence code -.068 .036 -.059* -.008 .014 -.022 Business problems -.003 .017 -.006 -.023 .007 -.142** Liabilities .124 .105 .277*** .001 .006 .010 Business Planning Practices Planning advertising budgets

and strategies -.095 .065 -.052 -.022 .025 -.038

Estimate costs and expenses .014 .076 .007 -.104 .030 -.171** Financial records .117 .063 .065 .051 .025 .091* Numerical objectives .287 .070 .154*** .066 .028 .114* Written strategic plan -.387 .063 -.221*** -.052 .025 -.095* Evaluating the quality of

services and products .068 .081 .029 .044 .032 .059

Evaluating employee performance

.132 .054 .085* .011 .022 .022

R2 .475 .148 F-score 33.23*** 6.375***df 16 16 *p <.05, **p <.01, ***p < .001

Documents

Business Planning Practices of Family-Owned Firms within a Quality Framework