Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
Factors Contributing to Business Challenges Faced by
Family – Owned Corporations in Davao Region and
Their Implications to Achieving Organizational
Effectiveness
Cleofe Alcibar Arib
A family owned business plays a very important role in every economy worldwide. In
the Philippines, they are considered to be one of the major job creators. This study
aimed to determine those factors contributing to the business challenges of family –
owned corporations and the implications of these factors in achieving organizational
effectiveness.
Descriptive statistics was used to describe the profile of these family – owned
corporations and the profile of their Chairmen of the Board. Factor analysis was
used to identify the factors contributing to the business challenges faced by family –
owned corporations. Multiple regression was used to determine which among the
factors has a significant implication in achieving organizational effectiveness.
Majority of the business type operating in the Davao region is small scale retail. Most
of them have been in the market for at least 10 years already and are still managed
by the original founder/s.
Many of the Chairmen of the Board are between 46 – 60 years old, mostly male and
are either Filipino or Filipino – Chinese.
The seven factors extracted through factor analysis were found to significantly
describe and name these business challenges: Regulatory Know How; Better SWOT
Understanding; Employment Security; Family Business Philosophy; Record Keeping;
Founder’s Personal Attachment; and Presence of External Investors.
The business challenges that significantly predicts profitability are regulatory know
how, employment security and family business philosophy For sustainability and
innovation, regulatory know how and better SWOT understanding are their
significant predictors .Family business philosophy, better SWOT understanding, and
regulatory know how are the significant predictors of competitive advantage and
productivity Regulatory know how is the consistent determinant of all five
organizational effectiveness variables.
The moderating variables in the study were found to have no moderating effects
between organizational effectiveness and the challenges faced by family – owned
corporations.
Field of Research: Management
Introduction
A family owned corporation plays a very important role in every economy
worldwide. It serves as one of the backbones of a healthy economic
environment. In North America, around 80% - 90% of all corporations are family
____________
Dr. Cleofe Alcibar Arib, CPA, Accountancy Division, Ateneo De Davao University, Jacinto Street,
Davao City, Davao 8000, Philippine, Email: caarib@addu.edu.ph
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
enterprises while in the United Kingdom the number is 75%. Moreover, some
37% of Fortune 500 Companies are family – owned and 60% of publicly listed
companies in the United States are family controlled.
In the Philippines, based on the Department of Trade and Industry’s estimate
in 2006, around 80% - 90% of SMEs in the country are family owned. They are
considered to be one of the major, if not, the biggest job creators in the country.
Considering the importance of these family owned corporations in the economy,
it is important that efforts should be made to ensure their organizational
effectiveness. One way to ensure this is to understand the different factors
contributing to the challenges faced by family owned corporations.
One of the factors that have an impact to organizational effectiveness is
family governance. According to Tannenbaum [1], one of the problems with
governance in a family owned business is that that decisions may be made for
purely non – business reasons.
Another factor to consider in achieving organizational effectiveness is with
regards to acquiring cheap sources of funds. Most of the businesses were
started with inadequate capital. Most owners simply rely on their own savings
and loans from family and friends. This significantly contributed to financial
problems and quick exit of many family owned businesses (Ifekwem and
Oghojafor, [2]).
Another issue that family owned corporations have to contend with is the
issue on workforce. Tannenbaum [1] discussed in his article that family – owned
business is not always run as a meritocracy, meaning, the "best and the
brightest" are not always asked to serve as leaders of the business.
As cited in Perryer and Te [3], the average lifespan of the family firm is
only 24 years, which is also the average tenure of the founders of the firm. Only
33% of family companies make a successful transition to the second generation,
while only 10% to 15% make it to third generation (Galura, [4]). Approximately
70% of family firms are either sold or liquidated after the death or retirement of
the founders (Beckard & Dyer, [5]).
Given the paramount importance of family owned corporations in the
Philippines, efforts should be made to ensure continuity of FOB from generation
to generation. Being the case, there is a need to come up with researches on
family owned corporations considering there have been only few studies done on
FOB in the Philippines.
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
Results and Discussions
Majority of the business type operating in the Davao region is small scale
retail and trade employing 10 to 99 employees. Most of these family – owned
companies have been in the market for at least 10 years already. The existing
family owned – corporations are mostly being managed by the founders who
started the business.
Many of the Chairmen of the Board are between 46 – 60 years old. They are
mostly dominated by the male population since the Philippines follow the
patriarchal system. Their lineage or ethnicities are either Filipino or Filipino –
Chinese. Education wise, majority of these executives are college graduate.
The result of Factor Analysis showed seven significant factors that were
found to significantly describe and name these business challenges: Regulatory
Know How; Better SWOT Understanding; Employment Security; Family Business
Philosophy; Record Keeping; Founder’s Personal Attachment; and Presence of
External Investors. The MSA result (see Table 1) showed that all business
challenges variables are mediocre since the KMO/MSA statistic measure at
0.608 but this is still acceptable since the minimum KMO/MSA index is 0.50 for a
satisfactory factor analysis to proceed. From the same table, we can see that
Barlett’s test of sphericity at 0.05 significance level showed that all business
challenges variables are highly significant at 0.000 significance level.
Table 1
Test of Sampling Adequacy
KMO/MSA
0.608
Barlett’s Test of Sphericity
Approx. Chi –
Df
Square
2395.551
595
Sig
0.000
The researcher opted for eigenvalue criterion and cumulative percentage of
variance to determine the number of factors to be extracted. Using these two
criterias, the seven factors extracted accounted for 63.041% of the cumulative
percentage of variance (Table 2). According to Hair et al [6], the factors extracted
must account for 60% of the total variance to be satisfactory.
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
Table 2
Factor extraction and cumulative % of variance
Component
1
2
3
4
5
6
7
Rotation Sums of Squared Loadings
Total
% of Variance
4.458
12.736
3.919
11.196
3.778
10.793
3.493
9.981
2.250
6.427
2.206
6.303
1.962
5.605
Cumulative %
12.736
23.932
34.725
44.706
51.134
57.437
63.041
The researcher used the guidelines for identifying significant factor loadings
based on sample size and practical guidance as the criteria. The study sampled
100 respondents. With a 100 sample size, a factor loading of 0.55 based on a
0.05 significance level was considered significant.
The researcher explored the organizational effectiveness of family –
owned business companies in terms of: Profitability, Sustainability, Innovation,
Competitive advantage, and Productivity.
For the purpose of analysis, Table 3 describes the meaning of the numerical
values for the mean rating:
Table 3
Description of Achieving Organization Effectiveness
Rating
5
4
3
Numerical Value
4.21 – 5.00
3.41 – 4.20
2.61 – 3.40
2
1
1.81 – 2.60
1.00 – 1.80
Description
Strongly Achieve
Achieve
Neither Achieve nor Do
Not Achieve
Do Not Achieve
Strongly Do Not Achieve
As can be seen from Table 4, all measures of organizational effectiveness as
used in the study (Profitability, Sustainability, Innovation, Competitive Advantage
and Productivity) have achieved their goals and objectives.
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
Table 4
Degree of Organizational Effectiveness
Profitability
Sustainability
Innovation
Competitive Advantage
Productivity
Mean
3.9155
3.6725
3.7100
3.8988
3.5713
Description
Achieve
Achieve
Achieve
Achieve
Achieve
For profitability, the stepwise multiple regression analysis showed an adjusted
R square of 22.30% which means that only 22.30% of the variability in
Profitability can be explained by the independent variables taken together. This
leaves 77.7% unexplained.
The Coefficients table (Table 5) reveals the significant regression coefficients,
namely, Regulatory Know How at p = 0.000; Employment Security at p = 0.002
and Family Business Philosophy at p = 0.009. The VIF values for each variable
are less than 10, thus, collinearity is not a problem.
Table 5
Coefficients of Profitability
Unstandardized
Coefficients, B
Constant
3.915
Regulatory Know
0.269
How
Employment
-0.222
Security
Family Business
-0.187
Philosophy
T
p-value
VIF
55.642
3.806
0.000
0.000
1.00
3.143
0.002
1.00
2.648
0.009
1.00
From the unstandardized b coefficients in the Coefficients table, the regression
equation of Profitability can be produced, namely:
Profitability
=
3.915
+
0.269(regulatoryknowhow)
0.222(employmentsecurity) – 0.187(familybusinessphilosophy)
(Equation 1)
For Sustainability, the stepwise multiple regression analysis showed an
adjusted R square of 13.5% which means that only 13.5% of the variability in
Sustainability can be explained by the independent variables taken all together.
The Coefficients table (Table 6) reveals the significant regression coefficients (α
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
= 0.05), namely, Regulatory Know How ( p – value = 0.002) and Better SWOT
Understanding ( p – value = 0.009).
Table 6
Coefficients of Sustainability
Unstandardized
Coefficients, B
Constant
3.673
Regulatory Know
0.200
How
Better SWOT
-0.164
Understanding
t
p-value
VIF
59.582
3.224
0.000
0.002
1.000
-2.646
0.009
1.000
The regression equation for Sustainability is:
Sustainability
=
3.673
0.164(betterswotunderstanding)
+
0.200(regulatoryknowhow)
(Equation 2)
–
For Innovation, the stepwise regression model shows that only 13.70% of
the variation in Innovation can be explained by the independent variables,
Regulatory Know How and Better SWOT Understanding. The Coefficients table
in Table 7 shows only two independent variables that are highly significant at α =
0.05 namely, Regulatory Know How ( p – value = 0.001) and Better SWOT
Understanding ( p – value = 0.031). This means that these two variable can
significantly predict the dependent variable which is Innovation and that their
inclusion in the model did not occur by chance.
Table 7
Coefficients of Innovation
Constant
Regulatory
Know How
Better SWOT
Understanding
Unstandardized
Coefficients, B
3.710
0.221
T
p-value
VIF
60.654
3.589
0.000
0.001
1.000
-0.135
-2.194
0.031
1.000
The regression variate as yielded from Table 7 is shown below:
Innovation
=
3.710
+
0.221(regulatoryknowhow)
(0.135betterswotunderstanding) (Equation 3)
–
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
For Competitive Advantage, its regression model shows an adjusted R
Square of 0.217. This means that 21.70% of the variability in Competitive
Advantage can be explained by the independent variables. The Coefficients table
(Table 8) reveals the significant regression coefficients (α = 0.05), namely, family
business philosophy ( p-value = 0.000); better SWOT understanding ( p-value =
0.003); and regulatory know how ( p-value = 0.016).
Table 8
Coefficients of Competitive Advantage
Constant
Family Business
Philosophy
Better SWOT
Understanding
Regulatory Know
How
Unstandardized
Coefficients, B
3.899
-0.186
t
p-value
VIF
82.545
-3.915
0.000
0.000 1.000
-0.144
-3.024
0.003 1.000
0.116
2.442
0.016 1.000
The regression variate for Competitive Advantage is shown below:
Competitive advantage = 3.899 – 0.186 (familybusinessphilosophy) –
0.144better (SWOTunderstanding) + 0.116 (regulatoryknowhow)
(Equation 4)
For Productivity, its regression model has an adjusted R Square of 0.108.
Table 9 shows the statistically significant regression coefficients of the
independent variables. One can see from this table that the strongest predictor
of Productivity is Family Business Philosophy with a t value of -2.347 that is
significant at α = 0.05. The other variables that are determined to be a significant
predictor of Productivity are: Better SWOT Understanding ( t-value = -2.297; pvalue = 0.021) and Regulatory Know How ( t-value = 2.065; p-value = 0.042).
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
Table 9
Coefficients of Productivity
Model 3
Constant
Family
Business
Philosophy
Better SWOT
Understanding
Regulatory
Know How
Unstandardized
Coefficients, B
3.571
-0.123
T
p-value
VIF
68.335
-2.347
0.000
0.021
1.000
-0.121
-2.297
0.024
1.000
0.108
2.065
0.042
1.000
The regression variate for Productivity is shown below:
Productivity = 3.571 – 0.123 (familybusinessphilosophy) – 0.121
(betterswotunderstanding) + 0.108 (regulatoryknowhow)
(Equation 5)
Conclusion and Recommendations
Based on the findings, it can be concluded that the business challenges
and their implications to achieving organizational effectiveness as discussed in
the literature are confirmed in the present study. Particularly, the business
challenges of these family – owned corporations are explained in the study. The
7 factors derived from factor analysis, variables were found to significantly
describe and name these business challenges.
There are business challenges that can significantly predict organizational
effectiveness. In particular, whether a higher or a lower rating will be given to
these business challenges variables, the result is still the achievement of
organizational effectiveness except in the areas of Profitability and Productivity. If
a maximum rating is given to the business challenges variables, objectives and
goals on Profitability and Productivity will neither be achieved nor do not be
achieved. Business executives should therefore consider the challenges found in
the study and how they will affect their business. These executives won’t have to
worry on certain demographic variables such as the industry the business is in,
the business and the founder’s ethnicity for these variables do not moderate the
relationship of the challenges the family – owned companies are facing and the
implication of these business challenges to achieving organizational
effectiveness.
Proceedings of Global Business and Finance Research Confe rence
5-6 May, 2014, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-50-4
In the light of the findings and conclusions, the researcher recommends
the following: for the local government units and other departments in the
government to come up with plans on how to properly assist our family – owned
companies; for the academe to develop family-business-specific courses as part
of existing curricula or as new curricula; for business executives to inventory their
company and family’s current strength, weaknesses, opportunities and threats
and to go for further studies if, necessary; and further research be made on the
sole proprietorship type of family owned businesses and that an in depth case
study be done on successful family owned corporations in the region.
References
[1] Tannenbaum, F, (2002). All in the Family: Corporate Governance Issues
Facing Family-Owned Businesses
[2] Ifekwem, N. E. and B. E. A,Oghojafor (2011). Growth, Sustainability and
Inhibiting Factors of Family Owned Businesses in the South East of Nigeria.
International Bulletin of Business Administration. Issue 11, 149 – 158
[3] Perryer, C. and J. Te. (2010). Management Succession In Chinese Family
Owned Business In The Philippines. SEGi Review Vol. 3, No. 2, Dec 2010,B16
58 – 70
[4] Galura, T. (2006). Family Business Succession (Personal Communication, 9
December 2006).
[5] Beckahard, R. and W.G. Dyer. (1983). Managing Continuity in the FamilyOwned Business. Organizational Dynamics (n.p.).
[6] Hair, J., Anderson, R., Tathan, R., & Black, W. (1995). Multivariate Data
th
Analysis, 4 Edition. Prentice-Hall International Inc.