Introduction
Family businesses are those businesses that are owned, managed, and operated by members of the same family. These businesses are very common in India and make up a large part of the economy. Managing a family business can be complex because it involves both family relationships and business decisions. To understand this better, the “Three Circle Model” of family business was developed. This model explains how the family, ownership, and business roles overlap and affect each other. In this answer, we will describe the Three Circle Model of family business in simple terms.
What is the Three Circle Model?
The Three Circle Model was developed by Renato Tagiuri and John Davis at Harvard Business School in 1978. It is a useful tool to understand how family businesses function. According to the model, there are three important circles or systems in a family business:
- Family
- Ownership
- Business
Each person involved in the family business can belong to one, two, or all three of these circles. The model helps us understand the different roles, interests, and possible conflicts in a family business.
Explanation of the Three Circles
1. Family Circle
This circle includes all family members related by blood or marriage. Not all family members are involved in the business, but they may still have opinions and expectations about it.
- Example: Grandparents, parents, children, cousins, in-laws, etc.
- Main Concern: Family values, emotional bonds, succession planning, and harmony.
2. Ownership Circle
This circle includes all individuals who have ownership or shareholding in the business. They may or may not be involved in the day-to-day operations.
- Example: Family members who own shares, outside investors, or partners.
- Main Concern: Profit sharing, return on investment, voting rights, and business growth.
3. Business Circle
This includes all people who are working in the business, whether they are family members or non-family professionals.
- Example: Employees, managers, CEOs, workers, etc.
- Main Concern: Business performance, roles, responsibilities, and productivity.
Overlapping Areas in the Model
There are seven different categories based on how these three circles overlap. Each overlap represents a different group of people with unique interests.
- Family Only: Family members who are not owners or employees.
- Ownership Only: Shareholders who are not family members or employees.
- Business Only: Employees who are neither owners nor family members.
- Family + Ownership: Family members who own part of the business but do not work in it.
- Family + Business: Family members who work in the business but do not own it.
- Ownership + Business: Non-family owners who are also employees.
- Family + Ownership + Business: Family members who own the business and also work in it (typically founders or successors).
Importance of the Three Circle Model
- Helps in identifying potential conflicts between family, ownership, and business roles.
- Makes it easier to design fair policies and structures.
- Improves communication between family members and employees.
- Helps plan smooth succession and transfer of ownership.
- Clarifies responsibilities and expectations from each stakeholder.
Conclusion
The Three Circle Model is a simple yet powerful tool to understand the structure of a family business. By recognizing the different roles people play in the family, ownership, and business systems, this model helps entrepreneurs make better decisions and manage relationships wisely. It encourages balance, professionalism, and long-term success in family-run businesses.