Unlocking Success: How the Three-Circle Model of the Family Business System Transforms Dynamics and Drives Growth
Family business has its challenges.
The long-term success of your family business depends on the functioning and mutual support of each other. However, the complex dynamics, interests, and conflicts within your family enterprise can make communication and decision-making difficult.
Is there a model that can strengthen your family business? Will it help to clarify roles and perspectives or any other issues that need to be resolved?
In this article, we’ll discuss the benefits of the Three-Circle Model of the Family Business System and how the framework and overlaps may help improve family business dynamics.
What Is the Three-Circle Model in Family Business Management?
The Three-Circle Model of the Family Business System provides a framework for understanding and managing the overlapping interests of the family, the business, and the ownership.
This model helps to clarify the different roles and interests within the company, as individuals can fall into one of seven overlapping sectors depending on their relationships to these three circles.
How the Three-Circle Model Was Developed
The Three-Circle Model of the Family Business System was developed at Harvard Business School by Renato Tagiuri and John Davis in the 1970s. Tagiuri and Davis conducted numerous interviews with family company owner-managers and surveyed hundreds of executive students on various family business topics.
Diagramming the situation, they tried to explain why various issues or problems came about and how the family influenced the business. They worked through specific family business cases to see whether these systems could be described by three interdependent and overlapping groups: family, ownership, and business.
They discovered that an individual in a family business system can occupy one of the seven sectors that are formed by these three overlapping circles.
For over forty years, academics, business families, and their advisors have been utilizing these three circles to gain insight into the inner workings of their business and business family relationships.
But what is the Three-Circle Model in family business management, and how can it be used effectively?
A business coach like Jen Traeger can help.
By providing a neutral perspective, guiding the development of a strong value proposition, and improving leadership skills, Jen can navigate the complexities of family, ownership, and business.
Contact Jen Traeger Executive Coach today to learn how solid family governance and shared core values can fortify your family enterprise.
The Three Circles Explained
The Family Circle
The family circle includes all family members connected to the business, regardless of their role in its ownership or management.
The family circle embodies the emotional and interpersonal relationships among the family members in the business, and takes into consideration the impact of the family dynamics on:
Decision-making
Communication
Conflict resolution
For example, issues such as sibling rivalry or succession planning fall within the scope of this circle. Finding the balance between family concord and effective business management can become a central challenge.
If an individual falls in the family-only part of the circle with no overlap, it means they are a family member who is not involved in the business as an employee or an owner.
The Ownership Circle
The ownership circle represents all shareholders or owners of the business, family members or not, who are involved in the day-to-day operations of the company.
In this circle, the ownership structure and financial aspects of the family business can involve issues such as:
Equity distribution
Ownership agreements
Wealth management
Effectively aligning the interests of family members with the long-term financial goals of the business can become a major obstacle.
The Business Circle
The business circle includes all employees who work in the business, regardless of their family ties or ownership stake.
The circle focuses on the operational aspects of the business, emphasizing:
Strategy
Performance
Competitiveness
An individual defined in the business-only portion of the circle with no overlap is an employee who isn’t part of the family and doesn’t own the business. In some circumstances, it may be wise to hire a non-family executive for the family business.
Family businesses may struggle with the need for professional management and governance structures to ensure sustained success beyond generations. Embracing external expertise from a business coach can provide valuable insights and contribute to the professionalism of family businesses.
Jen Traeger Coaching offers a clear, streamlined process that can open pathways for unprecedented growth and possibilities by:
Establishing clear communication channels
Developing sound policies for conflict resolution
Delineating roles and responsibilities
Understanding the Intersections
When the three interdependent circles of family, business, and ownership overlap, they create four more distinct interest groups. The following information represents how individuals can have roles in multiple areas.
Family + Ownership
If an individual falls in the overlap of family and ownership, that person is a family member who owns a stake in the business, but doesn’t work there.
For example, a founder's son who serves as the CEO of the family company and has also inherited a majority of this company's shares would be categorized in this group.
Challenges may include being financially invested in the family business, but not involved in the company's daily operations, which could lead to:
Disconnect
Lack of trust and communication
Conflict with the management team of the business
Family + Business
When an individual is placed into the family and business overlap, they’re a family member who works in the business, but has no ownership stake. This includes when a family member works for the family company and receives a salary for performing their job duties, but they don't hold any stock certificates.
For example, a daughter who works as a marketing manager for her father's company is paid a salary and has all the benefits of any other employee. However, the company is 100% owned by her father and two other business partners, and no shares are distributed to her.
Challenges for an individual in the family and business overlap may include:
Feeling a lack of control, as their contributions are tied to family and business without a financial stake
Having conflicts over compensation and career progression when compared to other family members
Ownership + Business
Within the business and ownership overlap, there are no family ties – the individual is an owner who works in the business, but isn’t a family member.
For example, a senior manager, who’s a non-family employee, was given stock options as part of their compensation. This individual isn't a family member, but an employee who has a stake in the business through their ownership.
Challenges for non-family members in the ownership and business overlap may include:
Feeling a lack of influence if family members hold the majority of the voting shares
Difficulties in implementing professional standards if they differ from family members' practices
Family + Ownership + Business
An individual who falls into all three categories of family, business, and ownership is a family member who works in the business and is an owner.
One example might include a family member who is the CEO of the family company, who holds a significant equity stake inherited from a parent.
Individuals in this category may face the most complex challenges, including:
Succession planning
Power struggles
Compensation disputes
The need to maintain both professional and family relationships
Why the Three-Circle Model Is Effective for Family Businesses
According to research, family businesses constitute 65–70% of all enterprises in the world. In the private economy sector, this ratio is estimated at 70–90%.
It has also been argued that family firms have a lower capital structure and maintain more financially healthy operations than non-family firms, outperforming non-family businesses in terms of profitability, growth, and survival rates.
How does the Three-Circle Model of the Family Business System support the operations within a family business?
Some of the benefits of the Three-Circle Model for families and businesses include:
Clarification of roles and responsibilities
Reduction of conflict by identifying where tensions originate.
Facilitation of transparent communication and governance structures
Implementation for succession and leadership transition
Identification of where the business can compete and differentiate itself in the market
Common Challenges Highlighted by the Three-Circle Model of the Family Business System
Family businesses face challenges, primarily stemming from the intersection of personal and professional life.
Researchers have identified three forms of conflict:
Task
Process
Relationship
Task and process conflicts revolve around work issues. Task conflict is focused on disagreements on goals or objectives, while process conflict relates to how to achieve the agreed-upon goals. Relationship conflict is not related to the what or how of business operation, but is based upon negative emotions among family members.
Conflicts in business and family go hand in hand. While a family dispute may spill over into the business operations, impacting performance, a strategic business decision may have implications for family relationships.
The Three-Circle Model of the Family Business System can be used to predict common issues faced by family businesses, including:
Role confusion: Multiple roles within the business can lead to issues like objective performance standards, as personal relationships can influence business decisions.
Unclear expectations: The Three-Circle Model can provide clarity to help uncover when expectations are not aligned.
Governance gaps: A failure to create rules and processes for communication and decision-making between the circles can lead to conflict.
By understanding the current state and relationships within the three circles, this model can help predict future challenges.
A professional executive coach can use the Three-Circle Model of the Family Business System as a toolkit to understand the source of the problems, evaluate action plans, and develop recommendations for improvement.
Jen Traeger understands how family businesses operate and what best practices lead to long-term success and growth. Contact Jen today to learn about how coordinated family and corporate governance can enhance the effectiveness of your family business system.
How To Apply the Three-Circle Model to Your Family Business
The Three-Circle Model can be applied to your family business by:
Mapping your family members and their roles
Assessing gaps and identifying unaddressed areas
Establishing governance systems for each circle
Evaluating who belongs in each circle today, as well as in the future
Developing conflict resolution strategies to address issues that arise
Leverage the Three-Circle Model of the Family Business System With Expert Guidance From Executive Coach Jen Traeger
Ready to take your family’s business to the next level?
Jen Traeger Executive Coach specializes in helping family and non-family leaders grow with clarity, confidence, and purpose.
If you're ready to include the Three-Circle Model in your family business dynamics, schedule your complimentary discovery call with Jen to learn how her services can meet your company’s needs. You’ll be glad you did.
