Family Business: Interactions in a complex adaptive system

Deborah Shepherd

University of Auckland Business School

Christine Woods *

University of Auckland Business School

Abstract

In this paper we explore the emergence and re-emergence of entrepreneurial activity within

family business. Drawing on complexity theory, a study of changing patterns of order and self-

organisation, the entrepreneurial family business is considered a complex adaptive system where

new and unexpected structures emerge between and at the edge of order and chaos. Adopting a

complexity perspective on family business allows potential tensions to be explored, for example,

order and disorder, change and stability, integration and differentiation, creativity and continuity.

While complexity theory may not be familiar to a family business owner, notions of order and

chaos are part and parcel of business growth, particularly when a new generation moves into the

business. In this paper we explore some of the complex interactions that occur within family

businesses as the dynamics of family and business intersect. We offer a model to help explain

family business interactions from the perspective of complex adaptive systems.

Key Words: Family Business, Entrepreneurship, Complexity Theory, Complex adaptive systems

* Corresponding Author

Dr Christine Woods, Management and International Business, University of Auckland, Private

Bag 92019, Auckland, New Zealand

cr.woods@auckland.ac.nz; 64 9 373 7599; Fax 64 9 3737477

1

Family Business: Interactions in a complex adaptive system

Abstract

In this paper we explore the emergence and re-emergence of entrepreneurial activity within

family business. Drawing on complexity theory, a study of changing patterns of order and

self-organisation, the entrepreneurial family business is considered a complex adaptive

system where new and unexpected structures emerge between and at the edges of order and

chaos. Adopting a complexity perspective on family business allows potential tensions to be

explored, for example, order and disorder, change and stability, integration and

differentiation, creativity and continuity.

While complexity theory may not be familiar to a family business owner, notions of order and

chaos are part and parcel of business growth, particularly when a new generation moves into

the business. In this paper we explore some of the complex interactions that occur within

family businesses as the dynamics of family and business intersect. We offer a model to help

explain family business interactions from the perspective of complex adaptive systems.

Key Words: Family Business, Entrepreneurship, Complexity Theory, Complex adaptive

systems

2

Introduction

The entrepreneurial aspect of family business is an area of family business research often

overshadowed by a focus on succession and strategic management (Johannisson, 2002; Zahra

& Sharma, 2004). Entrepreneurship is a particularly vital aspect of successful family business,

indeed for any business. Being alert to new and innovative opportunities enables a business to

grow and flourish; without entrepreneurial action a business becomes stagnant and will

eventually be replaced in the market (Shane, 2003; Fletcher, 2004). In a recent review of

family business research, Zahra and Sharma (2004) suggest that future work in this area will

benefit by conducting research at the “intersection of sister disciplines” (p. 341). In this paper

we take up that challenge and explore the overlapping domains of family business,

entrepreneurship and complexity theory. Complexity theory is a study of emerging patterns

of order and self-organisation. By definition therefore, organisations from a complexity

perspective are dynamic (Carlisle & McMillan, 2006). We suggest that family businesses can

usefully be thought of as complex adaptive systems where new and unexpected structures

emerge through self-organisation. Complex adaptive systems are driven by negative and

positive feedback loops whereby paradoxical states of stability and change, predictability and

unpredictability are constantly emerging (Stacey, 1995). Adopting a complexity perspective

on entrepreneurial family business offers one avenue for some of the possible tensions that

potentially exist at the intersections of family and business to be usefully explored.

The theoretical foundation for adopting a complexity perspective of family business is

developed in three stages in this paper. First, we briefly outline the widely adopted

overlapping three circles model of family business (Hoy and Vesper, 1994). We then consider

the unified system perspective (Habbershon, Williams & Macmillan, (2003) which presents

some challenges to the three circle model; and then, present an elaboration to the three circle

model developed by Fletcher (2004) that encompass a fourth dimension – entrepreneurial

activity or interpreneurship.

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Central to both of the challenges to the original three circle approach to family business is the

dynamic interaction of agents within their environment. To take the centrality and

significance of this dynamism of interaction further, the second stage of the paper turns to

complexity theory and complex adaptive systems where interacting agents serve as the

platform to understanding emergence, novelty and self organisation (McKelvey, 2004). From

a complexity standpoint, the entrepreneurial family business is considered a complex adaptive

system where new and unexpected structures emerge between and at the edge of order and

chaos. For this to happen, we suggest that tensions are an inherent and key aspect of

entrepreneurial interactions within family businesses and we offer a model for considering

such tensions as the third and final part of the paper.

Family Business: Theoretical Perspectives

While there is no unified paradigm for studying the area of family business, according to

Habbershon, Williams and MacMillan (2003), the overlapping circles model of family

business has become a common starting point. Based on a systems perspective three

overlapping circles or subsystems are represented; these are family, ownership, and

business/management. The overlapping circles model was extended by Gersick, Davis,

Hampton and Lansberg (1997) into a life cycle developmental model. For two decades the

three circles model has been the standard theoretical model “for picturing family and business

as interlinking systems that explain the competitive tensions in strategy making”

(Habbershon et.al., 2003, p. 453).

However, for the same period of time the limitations to this model have also been discussed.

Central to the critique has been the assertion that the model fails to take account of the

dynamic nature of family business (Hoy & Verser, 1994). Further to this, the model provides

little space for understandings of entrepreneurial processes and activities; entrepreneurial

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issues are left implicit within the growth models and generally only related to the business

founder and the start up phase (Johannission, 2002; Fletcher, 2004). Below we briefly discuss

these limitations and consider two alternative perspectives that build on the three overlapping

circles model: a strategic management approach and the inclusion of interpreneurship to the

model.

Critique of Three Circles Model: The unified systems perspective

While the overlapping circles model provides a useful conceptual and practical platform, Hoy

and Verser argue that it “barely touches on the true complexity of the firm” and does not

adequately address the dynamics of how issues within the circles and between the circles

overlap (1994, p.16). They suggest that critical strategic management issues for family firms

are located at the nexus of the three circles, whereas the model simply provides static,

descriptive pictures of the interaction. These authors argue that such an approach leads to the

strategic management of family firms focusing “on a series of internal negative trade-offs to

manage the overlap between family and business rather than a process for finding the

systemic synergy that can lead to strategic competitiveness for the firm” (Habbershon et al,

2003, p. 454). Building on work by Habbershon and Williams (1999) suggesting that unique

systemic family influences can be examined through an analysis of the resources and

capabilities of the family firm, Habbershon, Williams and Macmillan (2003) develop a

unified systems perspective demonstrating how parts of the family business system interact to

generate idiosyncratic antecedents to firm performance. The idiosyncratic bundle of resources

and capabilities result from systems interactions between the family unit, the business and

individual family members. This bundle is referred to by Habbershon and colleagues

(Habberson et al., 2003) as the 'familiness' of the firm in which they focus on the dynamic

interactions that occur and on the circular feedback processes with continuous influences; this

contrasts to the overlapping circles model where subsystem analysis results in isolated points

of influence.

5

As a result, the unified system model develops the systems dynamic of the overlapping circles

model more broadly. Systemic strategic influences are captured by showing how events in

one part feed through into other subsystem components. Habbershon and colleagues (2003)

argue for a general performance proposition where the outcome of interest is the

maximisation of the totality function of the family business social system. From a systems

perspective, a social system model must “show how the systemic infusions of the system are a

product of the continuous interactions of the parts” (Habbershon et al, 2003, p. 454). They

focus on a metasystem: the family business social system. This metasystem is comprised of

three subsystems: the controlling family unit: the business entity and the individual family

members. These three subsystems create chains of interactions; these systemic interactions

are complex and dynamic drawing on and bringing about the emergence of intangible and

tangible resources and capabilities that serve to create transgenerational wealth creation. The

model isolates the performance of the business entity as the appropriate outcome measure and

explores the influence of the family and individual family members in relation to the business

entity.

This model focuses on the strategic management perspective and remains broad in its focus to

capture the systemic influences of the model. The detail of specific interactions occurring

between specific stakeholders is not examined. The focus is on how enterprising families

create transgenerational wealth through an analysis of the business metasystem. The

enterprising family must pay attention to competitive advantage and seek above average

returns, the “source of sustained wealth creation” (Habbershon et al 2003, p. 462). This is

addressed through chains of interactions giving rise to the idiosyncratic resources and

capabilities unique to the enterprising family that is in turn linked to performance outcomes.

However, the specifics of entrepreneurial interactions leading to competitive advantage and

superior returns are outside the focus of the paper.

6

The ‘Interpreneurial’ Extension to the Three Circles Model

Fletcher (2004) also extends and builds on the initial three overlapping circles model by

suggesting that a fourth dimension be included – entrepreneurial activity. Her aim is to give

account of entrepreneurial activity within the context of family business. She argues that

placing entrepreneurship at the centre of family business assists our understanding of inter-

generational and organisation emergence in family firms. Fletcher’s work explores the

emergence and re-emergence of entrepreneurial activity within family business, in particular

the intergenerational dynamics of small family businesses. The two domains of

entrepreneurship and family business are integrated and an entrepreneurial dimension is

added to the existing overlapping three circles model to construct a four-axis model of

entrepreneurship and family business (see Figure One below).

The fourth dimension comprises three stages: envisioning, realising and harvesting the

business idea. During the first stage people envision new possibilities in terms of products,

services or markets; these are then realised in the second stage drawing on resources and

network contact to make things happen. The final stage sees new ideas harvested. The axis

centres on the continuity of organisational processes and structures as new ideas are

integrated into the existing organisation. Discussing this stage of the entrepreneurship axis

Fletcher draws on the concept of interpreneurship originally defined by Poza (1988) as

intergenerational entrepreneurial activity. Fletcher argues that entrepreneurial activity does

not just “occur”; rather it is always being constructed through the interaction of the past,

present and future. Family firms must be alert to new distinctive ways of working that

“facilitate continuity and change” (Fletcher, 2004, p. 36). Thus interpreneurship is “the

process of inter-generational emergence in which family members are interacting and creating

new possibilities for themselves, their lives, their organizations whilst drawing upon past

events, happenings, experiences and conversations that have gone before” (Fletcher, 2004 p.

38).

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Figure One “Intrepreneurship” and the Three Circles Model

Source: Fletcher (2004) adapted from Gersick, et al. (1997).

Fletcher’s model of entrepreneurship provides a descriptively useful addition to the three

overlapping circles model by bringing entrepreneurship directly to the intersection of the

family ownership and management triangle. However, as stated above, Figure One is a static

model that must be elaborated with detailed discussion around the interactions that occur

between the axes. Fletcher does this with an interpretive analysis of a family business

situation highlighting the interaction of family members creating new possibilities for

themselves and the business.

8

The interpreneurship model and the unified systems perspective provide an interesting

signpost for further research. A key focus for both is dynamic interaction; from a unified

system perspective it is the systemic interactions of the family unit, the business and

individual family members and how these are linked to strategic performance. From an

interpreneurship perspective, the focus is on how interactions within the family can lead to the

emergence of new possibilities that work within the tension of continuity and creativity.

Our purpose in this paper is to work toward better understanding the emergence and re-

emergence of entrepreneurial activity within a family business context. What contribution

does each of these models make in enabling us to do that? The unified systems perspective

alerts us to the feedback occurring between different subsystems in the metasystem. It also

highlights the need to explore interactions contributing to the superior performance of a firm

creating transgenerational wealth. The Interpreneurship challenge highlights what is perhaps

the number one tension that exists within family business paradox – how to effectively work

between continuity and change; maintaining the familiness, the tradition, the history of the

family firm while adapting, changing and innovating to survive and prosper over time .

Central to both of these perspectives are interacting agents. To explore the concept of

interaction in more detail we argue that complexity theory is a useful lens, in particular,

complex adaptive systems, in which interacting agents serve as the platform to understanding

emergence, novelty and self organisation. (McKelvey, 2004).

Complexity science

Complexity science embodies a set of ideas that have emerged over the last 40 or so years

from several disciplines including computer science, information theory, evolutionary biology

and cognitive psychology (Gleick, 1987; Cilliers, 1998; Vaughn, 1999; Lichtenstein, 2000;

Stacey, 2000; Stacey 2002; McKelevey, 2004). In general, complexity science is concerned

with the dynamic properties of non-linear and network feedback systems. All complex

9

systems are networks of many independent agents interacting with one another; these

interactions give rise to emergent properties different to the properties of individual agents.

These properties are the consequence of self-organisation. Self-organisation is the result of

agent’s action on local knowledge – there is no central controller to tell agents what to do, nor

does any agent have complete knowledge of the circumstances surrounding its actions. The

interaction between agents of a system creates novel and unpredictable patterns. Complex

systems are also adaptive in that agents are able to learn and develop new strategies of action.

Of course the environment is made up of many agents who are all following their own paths

of action, thus “a highly adapted system is one in which agents adapt to the strategies of each

other through competition and cooperation” (Vaughn, 1999, p. 244). Examples of such

systems can be found in the disciplines mentioned above, in particular evolutionary biology.

Thus complexity science is an emerging interdisciplinary field of investigation “in the natural

and physical worlds and indeed in the silicon world inside the computer” (Fuller & Morgan,

2001, p. 48).

Complexity science also has resonance with the human and organisational domains. It

provides an analogical and metaphorical domain from which to gain insight into the

behaviour of organisations. The principles and insights of complexity science and its study of

the natural sciences provide a lens through which to observe behaviour and activity in

organizations (Smith, 2005; Stacey, Griffin & Shaw, 2000). It has particular relevance with

respect to better understanding entrepreneurial family businesses at two levels. First, it

provides an opportunity to place entrepreneurial activity at the centre of our systems thinking,

and second, the notion of paradox is inextricably woven within complexity thinking.

“Since creation of new economic order in the form of new firms is what entrepreneurs do,

complexity science makes much more sense as the preferred kind of science for

entrepreneurial research” (McKelvey, 2004). As noted above, a complex adaptive system

comprises a number of agents who are all pursing their own strategies; the adaptive strategies

10

of some agents open up niches for other agents to discover and exploit. As a result, the system

never settles at a determinate equilibrium. Novelty is generated via opportunities to be

exploited by other agents, a process similar to that of the entrepreneur as discussed by Kirzner

(Kirzner, 1973; Vaughn 1999; Shane 2003). Further to this, Fuller and Morgan (2001) argue

that the characteristics of complex adaptive systems resonate with the characteristics of small

and medium sized enterprises. Complex adaptive systems evolve through time and consist of

rich, dynamic, non-linear interactions between a large number of elements. These interactions

give rise to positive and negative feedback loops (McKelvey, 2004; Cillier, 1998). In

particular, adaptive agents serve as a metaphorical representation of entrepreneurial

behaviour. Adaptive behaviour means that an actor is able to change what he or she does and

the rules they follow. More specifically for our purposes, we suggest that the family business

can usefully be thought of as a complex adaptive system. Drawing on complexity theory as

the study of changing patterns of order and self-organisation, the family business can then be

considered a complex adaptive system where, through self-organisation, new and unexpected

structures emerge at the edge of order and chaos.

Self-organisation “is a paradoxical process of repetition and potential transformation”

(Stacey, 2000, p. 38). Adopting a complexity perspective on family business allows the

dynamics of both the family and the business and the interactions between, within and around

these systems to be explored. Furthermore, potential tensions that sit at the intersection of

family and business can be considered such as order and disorder, chaos and stability,

integration and differentiation. Exploration of complex adaptive systems suggest that to

produce creative, innovative and continually changeable behaviour, systems ‘must operate far

from equilibrium where they are driven by negative and positive feedback to paradoxical

states of stability and instability, predictability and unpredictability’ (Stacey, 1995, p. 478).

11

Complexity is the result of rich interactions giving rise to self organisation through positive

and negative feedback loops; virtuous and vicious cycles emerge driving an organisation to

paradoxical states of stability and change, spontaneous action and repetitive behaviour.

INTERSECTING TENSIONS WITHIN FAMILY BUSINESS: A DYNAMIC

FRAMEWORK

We suggest that interactions leading to potential tensions between and within family and

business can be usefully understood as rich interactions that play themselves out over time as

virtuous and vicious spirals, an example of negative and positive feedback loops existing

within a complex adaptive system (Quinn & Cameron, 1988; Ropo & Hunt, 1995).

INSERT FIGURE TWO

Figure Two above offers one way of considering the complex and dynamic interactions that

occur along two potentially competing dimensions within a family business. We draw on

Carlisle and McMillan (2006, p.4) who “place organisations along a spectrum ranging from

random, unorganised and highly chaotic to highly ordered and mechanistic.” On the business

axis we argue that tension exists within any business system between order and stability on

the one hand and change and potentially chaos on the other.

We also argue that the dynamics of a family system range along a spectrum. On the family

axis we suggest dynamic interactions can occur between the “old” and “new”. The old may

centre on existing family members involved in the business (in any number of roles ranging

from owner to director to active manager/employee); it may also focus on heritage, history,

values and style. “Newness” may result from new family members entering the system in one

or more roles or from a desire or perceived need by some or all of the family to adopt

different styles or approaches in the way that they engage and interact and/or the activities

they pursue. Emerging at the centre of this framework are the intersecting four dimensions is

the dynamic complex adaptive system of the family business.

12

However, the interactive pull of any two of the individual points can bring the complex

adaptive system into other states with consequences for both the family and business systems

that need to be recognised. We argue that the emergent patterns that arise from a greater pull

out to the extremes on the axes can lead to challenges that effect both the family and business

dynamics. Below we provide a working definition of each of the four disequilibrium states.

Disintegration1: This may emerge when new family members join the business in some

capacity or the family looks to change the approach to the existing business and the business

itself for any number of reasons is experiencing change and potentially chaos (due to internal

and/or external changes). The interaction of these dimensions can lead to a state of

disintegration between the agents in this environment.

Resistance: When new family members get involved in the business or when the family wants

to change their approach to do business when the business is inherently drawn toward order

and stability the emergent response may well be one of resistance. The business system would

oppose or resist change leading potentially to conflict between new family members and

existing business members (both family and non family). Equally the family would resist a

business attempt to hold the prevailing stability and order.

Ossification: This state would result when there are no changes to the family dynamic and

none to the business leading the system to a state of ossification and stagnation. Both systems

would eventually fail if this state was sustained for any length of time.

Alienation: When the business imperative is heading toward the chaotic end of the spectrum

with the family dynamic tending toward valuing the old, alienation among internal

1 Disintegration and Ossification are terms used by Carlisle & McMillan (2006)

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stakeholders may well result. The business system could become alienated from the family

and vice versa.

Complexity theory steers our attention to systems that are complex, seemingly disorderly and

dynamic and changing (Stacey, 1999). What we have tried to capture in Figure Two is a

dynamic model that highlights two potential tensions within and between the dynamics of the

family and business and the various ‘extremes’ from which these tensions may lead. While

there is a tendency to strive to reconcile and resolve tension, this model recognises the

complexity and the dynamism of the interactions, and it is hoped, goes some way in providing

an interpretive, sense making framework. It does not suggest that we need to necessarily

reduce the inherent turbulence in the system (Seeley Brown, 2002). In an organisational

context emergent complexity sits between order and chaos (Brown & Eisenhardt, 1997;

Carlisle & McMillan 2006). We have added the dimension of familiness as “old” and “new”

in an attempt to better capture the interactive dynamics of family business. The emergent

possibility that lies at the centre of our model is therefore one that takes into account the

family dynamic.

Concluding thoughts

A family business cannot be broken down into discrete parts; rather there is an acceptance

that the business has a “natural wholeness composed of contradictions” (Lewis 2000, p. 762).

These contradictions or tensions need to be accepted as part of the pathway to producing a

creative, innovative and continually adapting family business. In order to do this, the tensions

created between the interplay of family and business must first be explicitly recognised. The

model presented in this paper goes some way to identifying these tensions by examining the

various extremes that can potentially pull the family and/or the business. In our model we

have integrated the notion of family into an understanding of business through the lens of

14

complexity theory. We have attempted to uncover the dynamics that sit at the centre of the

entrepreneurial family business that is the complex adaptive system residing at the edge and

between order and chaos and familiness (as represented by old and new). To realise fully the

application of this model, further research and consideration both practically and theoretically

is needed. A logical next step would be the empirical application of the model to specific

family business case studies. Critical incidents and situations throughout a family business

history would be explored using complexity theory as an interpretive lens for understanding

and prpviding valuable insight into possible family and business tensions outlined in the

model prsented here.

Figure 2: Entrepreneurial activity in Family Business: A Complex Adaptive System perspective

Business: Chaos

Family: Old Family:New

Business: Order

Complex Adaptive System 

Alientation 

Ossification 

Disintegrations

Resistance 

15

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