Performance measurement system in family businesses : a case study from China

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Amsterdam Business School

Faculty of Economics and Business

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Program: MSc Accountancy and Control (Control track) Student: Miao Zhang

Student number: 10824227 Supervisor: Dr. Rui J. O. Vieira Date: June 22nd₂₀₁₅

Word count: 17380

Performance measurement

system in family

businesses: A case study

from China

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Statement of Originality

This document is written by Miao Zhang who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Purpose:! This study focuses on how performance measurement system (PMS) is designed and used in a Chinese family business with systematic thinking.

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Methodology:!To achieve this purpose, a case study reached by documentary analysis and semi-structured interviewed is conducted. The case company QiaoNan is a representative Chinese family business located in Tianshui, Gansu, China, which is a business service company directing at household furniture and furnishing. Results from documentary and interviews are coded and analyzed.

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Findings: The results show how PMSs of QiaoNan are designed and used among different subsystems. Communication and interaction among different subsystems enable efficient operation of components of PMSs, while PMSs can be regarded and applied as an efficient mechanism to communicate and combine four subsystems within a family business for implementing strategy

Originality:In family business field,this study is an implication of systematic thinking suggested by theory of social systems to analyze a family business while previous researches focus on mainstream theories. In the view point of management control, this qualitative study puts the PMS framework into a special setting

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Abbreviations

QiaoNan: TianshuiQiaoNan Home Building Material City Co. Ltd:

PMSs: Performance measurement systems

KPIs: Key performance indicators

List of Figures

Figure 1Hierarchical type of autopoietic systems

Figure 2 Information about interviewees

Figure 3 Registered capitals (Source: Article of the company)

Figure 4 Family members’ positions

Figure 5Subsystems in QiaoNan’s hierarchy

Figure 6QiaoNan’s community and social activities

Figure 7 KPI sheet for normal employee

Figure 8 KPI sheet for department manager and management team

Figure 9 KPI sheet for merchants

Figure 10 KPI sheet for sales assistant

Figure 11 Organizational structure in QiaoNan

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1. Introduction

Family business is the most popular enterprise organization around the world and plays a vital role in national economy. As the largest developing country, China’s private economy has flourished after the emergency of reform and openness of Chinese economic. The family-owned business has played essential role and made considerable contribution to the GDP growth (Liu and Chen, 2013).In result of importance of family business, researchers have growing interests on this field but there is still lack of consensus and family business is still an emerging field of study (Chrisman, Chua and Sharma, 2013). Many researchers have paid attention to the family business in terms of management style, family behavior, family ownership, and family leadership and so on. Conflict, succession and decision-making are most popular topics in study of family business because of the distinction of family and non-family members (e.g.,Basco, 2014; Blumentritt, Mathews and Marchisio, 2012; Drozdow, 1998;Eddleston, Kellermanns and Zellweger, 2010;Habbershon and Astrachan, 1996; Harveston, Davis, and Lynden, 1997; Romana, Tanewski and Smyrnios,2010). According to Chrisman, Chua and Sharma (2013), in regard of management control in family business, the researchers use different theoretical frameworks. Specifically, agency theory and resource-based theory are the most frequently-used theories to investigate the family business. These two kinds of theories both are performance orientated, basically explaining the structure, fundament and content of family business by focusing on business operation, control, leadership, goal and strategy. Studies deploying the agency theory have proven that both altruism and entrenchment with both positive and negative effects on family firm performance (Fama and Jensen, 1983; Romano, Tanewski, and Smyrnios, 2000). Resource-based theory aims at answering whether family involvement can generate competitive advantages. Researchers use this theory to argue that family businesses are unique because of resources and capabilities of familiness (Habbershon and Williams, 1999). In addition, Blumentritt, Mathews and Marchisio (2012) introduce game theory as a model to contribute to understanding the decision-making and

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outcomes related to family succession and steward theory is applied by Eddleston, Kellermanns and Zellweger (2010) to explain behavior of family business.

However, by pointing out deficiencies and limitations of above theories studying family business, current trend in family business research suggests to use more comprehensive theory of social system (Benavides-Velasco, Quintana-Garcia and Guzman-Parra, 2011; Chrisman, Chua and Sharma, 2013). Deploying the knowledge of theory of social system developed by Luhamann (1921 -1998) and applying it on the business organization, current research will analyze the performance measurement influenced by family involvement in this way.After getting the idea of importance of family business and emerging research development of this study field, current research question is to analyze how performance measurement system is operated in family businesses. With the knowledge of management control, current research will direct at the performance measurement in the family business, since little previous researches have this focus. Ferreira and Otely’s performance measurement framework (2009) is deployed because this framework is well-developed from extant literature and personal observation, which is believed a useful tool for researchers to analyzed the structure and use of performance measurement systems in a holistic way with strategic consideration. Thus, current study will put this framework into the setting of Chinese family businesses. This research question is a “how” question and the outcomes of such a qualitative research is theory refinement by applying existing theory to a natural setting case. This research question is motived by the following reasons. Firstly, it is fitting and interesting to recognize the importance of family business studies. The economic landscape of most nations remains dominated by family firms (Blumentritt, Mathews and Marchisio, 2012). Secondly, after reading and learning papers of management control research, strategic management is considered as a current trend when looking at the business’s management and control, which highlights the pivotal role of strategy in the business management and operation. In addition, since Ferreira and Otely (2009) suggest that their performance measurement framework can be used to examine the appropriate design of

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performance measurement system in different contexts, family businesses are regarded as a different context.

The remainder of the study is organized as follows. Chapter 2 presents the related literatures divided into three parts and chapter 3 explains the theoretical framework in regard of theory of social systems and performance measurement systems framework. The research method is described in chapter 4. Chapter 5 develops the finding and further discussions of the case study. Chapter 6 gives a conclusion by presenting an overview of findings and discussion, followed by chapter 7 which brings to attention the limitation of this study and some recommendation for further research.

2.Literature review

In order to find research gap in regard of related study field, previous papers are described and their relationships with current research are discussed. Consistent with different subjects of current topic, the literature review will be divided to three parts. The first section will explore some ideas of what is the development and situation of Chinese family business. The next section is about the theory of social system applied to analyze the family business, which will discuss how this theory is used by previous researchers when studying the family business and what are the different views of points compared with current research. After discussing the theory towards the family business, the last section of literature review will turn the attention to the management control in the family business to see what have been analyzed in this regard within the specific setting of family business field.

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2.1: Family business in China:

According to the outcomes of searching papers about Chinese family business, most of them are discussing the characteristics and situations of family business in Hong Kong or in other Asian areas.!The followings are some of the discussion. Davies and Ma (2003) especially studied the strategic choice and nature of Chinese family business in Hong Kong by conducting a case study of watch industry. The focal point is the association between the nature of Chines family business and the choice of business strategy. In the light of analyzing the strategy choice in Chinese family business, the researchers select five dimensions: efficiency emphasis, price leadership, product-line breadth, market intensity and environmental scanning. Besides, there are two additional aspects considered with respect the relationship between Hong Kong and Chinese mainland. One is China as a source of resources, which embarks the cheap capital including labor, machines and equipment and land. The other one is China as an emerging market, which can lead the strategy of developing new product or market. Theses dimensions are valuable when considering the purpose and function of performance measurement with the respect of the case company in current research. This paper has generated two important results by conducting research of Chinese family business in Hong Kong. Differences in business strategy dimensions are significantly related with the different characteristics of Chines family business. Specifically, the nature of Chinese family business has positive relation with “traditional” business strategies while negative relation with “upgrading” strategies. Thus, the authors suggest there is large room for Chinese family business to exercise strategic choice with more focus on “upgrading” strategy.

The second paper discussed here is aiming at the innovation of Chinese family business and give implication on in which way Chinese family can make effort to transfer from traditional view and operation to a more strategic focus.At the beginning, the authors conclude strong and weak points of Chinese family business. Especially, getting idea of in which way Chinese family business is performance inadequately can help current research take careful insight of the design and function of the

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performance measurement in the case family business. The disadvantages consist of irrational decisions, negative impact of personal management, lack of external social resource and unsound development organization, Liu and Chen (2013) think that emerging Chinese economy is an opportunity for family businesses, which requests innovation and improvement in managerial control. Taking the advantages of uniqueness of family involvement, organizational structure, organizational culture and strategy are key points. The third paper is a theoretical research conducted by Wu and Chen (2012),based on situation of family business in China, who argue that organizational learning is essential among interaction of various factors of management control, such as organizational structure, business strategy, culture and environment. It states that obstacles of organization learning and self-transcendence are pitfall in Chinese family business, which needs to be paid attention and resolved for better performance of management control in the company. The key aspects brought by the authors are similar with opinions of Liu and Chen (2013), which are considered primary for Chinese family business to put effort and take action when conduct the management control and corporate governance. It is inspired for current research to take these essential aspects into account while current focus is about the aspects in the performance measurement system. Differently, Wu and Chen (2012) make the focal of knowledgeacquisition, information distribution and interpretation and organizational memory functioning in organizational learning in family business.

2.2: Theory of social system in family business:

After getting arguments of academic researches about the situation and development of Chinese family business, now the attention turns to the theory in general toward the family business, a specific form of business. In the study field, there are different theories applied to analyze the family business: agency theory, steward theory, game theory and institutional theory. Recently, researches have a trend to apply the theory of social system toward the family business and current research will explore how

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performance measurement systems function in the family business using the knowledge of the theory of social system. Thus, several related literatures that discuss the theory of social system applied in the family business is discussed below.

Schlippe and Frank (2013) regard the theory of social system as a proper framework for understand the setting of the family business. They argue that compared to the mainstream theories like agency theory and resourced- based theory, theory of social system is a better framework to provide explicit understand for dealing with the immanent specificities and complexities in family businesses. Specifically, it introduces three models using system theory. The first one is the three-circle model, which graphically illustrates three overlapping circles representing family, business and ownership and people may perform roles belonging to different circles. The second model is unified system model, which has a more dynamic perspective in regard of interactions between subsystems and the responding influences on organizations The last model is called bulls-eye model, which argues it is the most important to analyze the interplay between different sub-systems and take consideration of individual behavior and environmental impact. In a word, this paper gives the specific models during the development of system approach.

The second research conducted by Pieper and Klein (2007) has developed a framework suited in family businesses which captures the uniqueness and diversity at organizational level and environmental level. This paper helps a lot by concluding the family business model of system approach in the literature, which state three stages. Stage 1 in the early years is dual system thinking by identifying the family and the business are two block with family businesses and recognizing other two sub systems called ownership and management. This early stage has founded the basic prescriptive knowledge on systematic thinking of family businesses. Stage 2 starts to combine the systematic model with processes with family businesses, especially the succession planning and process, strategic planning process, management control system and corporate governance. Improving the limitation of lack of integration and one-way

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causality, stage 3 has developed different mainstream theories and paid attention to the outside environment of family businesses. Afterwards, this paper has developed its own model called open-systems family businesses approach, which has four levels: environment, family business, subsystem and individual. Relevantly, current research will consider all the levels, which is though most comprehensive way of systematic thinking of family businesses.

In the similar way, Habbershon, Williams and MacMilla (2003) applies a unified system perspective specifically and suggests that unique system in family businesses depends on the resources and capabilities of the organization. The systematic interaction of resources and capabilities can be recognized as opportunity or limitation to the performance result of family businesses. While this paper focus on the performance result of family businesses at the organizational level, current research will take the view point of performance measurement at individual and organizational level, as well as considering the outside environment.!

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2.3: Management control and strategyin family business

As the focus of current research is the performance measurement system in the view point of strategic management control, it is relevant to study previous literatures about how the family business design and use its management control and align the management control with strategy.

Sharma, Chrisman and Chua (1997) conduct deep analysis of past research and future challenges in regard of strategic management in the family business. It concludes that strategic management perspective is a must to take a strategic perspective to analyze economic and non-economic objectives achievement in the family business. Non-economic objectivesareimportantwhen considering the strategic and operational objectives in the family businesses, which are closely related with the control system on how to evaluate the performance and apply the strategy of the family businesses.

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Current research will also pay attention to how the family business response to and take actions in regard of the non-economic objectives and to investigate whether this characteristic will be embedded in the performance measurement system. Afterwards, Chrisman, Chua and Sharma (2013) expand their study of strategic management in family firms by developing a strategic management theory. This paper argues that applying this strategic management approach is a popular trend to analyze the family business. It states that there is empirical evidence suggesting that founding family involvement does affect the performance of large firms and requiring more studies about smaller scale family firms and more in depth analysis in regard of the impact of family involvement on firm’s performance since there may be other causes instead of family involvement. Furthermore, this paper suggests the following aspects are essential when studying the family business: different behavior of family, driving forces in family firms and strategic alternatives compared with non-family firms and reciprocal influence of family stakeholder. Consistently, current research will take consideration of the role and impact of different behavior, driving force and reciprocal influence of family stakeholder on conduct of performance measurement system in the family business.

Then, the study of Basco (2014) examines strategic decision-making in family business, and it argues that more fit between decision-making and strategy will lead to better performance in family business. This paper applies configurative research method to conduct survey data of private owned family firms. Both positive and negative aspects of family involvement are argued and the main conclusion emphases on the specific reputation-considered distinctive strategy when making decision. Similar with current research, this paper holds the view point of performance measure. It argues that family involvement changes the governance structure and especially family members in the top management characterize the corporate governance. By conducting quantitative research of 300 small-medium family business, this study provides empirical evidence that in family firms, founding family involvement in the top management plays important role in management control system design and

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operation. Especially, the study generate strong evidence that members of founding family holding the executive position performance differently compared from the executive director of non-family firms, in terms of using formal control mechanisms to implementing the strategy of business. While this study argues that influences of family involvement in the top management are weaker in large family firms, current research aims to investigate whether the impacts of family involvement on management control in medium scale Chinese family business is substantial or not. Hereto, literatures of three components of current research question have been discussed. Researches related to the Chinese family business suggest a transfer from traditional view to a more strategic focus and conclude the key aspects which deserve more investigation when studying family business in China. Consistent with such consideration, while there is lacking of empirical evidence to reveal the management control with Chinese family firms, current research will conduct a case study of a medium-scale family business in Chinese mainland in the view point of strategic management. In addition, there has been some literatures developing and improving understanding of theory of social system toward family firms; however, all the studies are theoretical focus without applying the theory in a real world setting. Lastly, framework of management control system is well developed in the previous literature in generally, furthermore, current research will take the specific form of business as the subject to explore the characteristic of functioning of performance measurement system in the family business. Overall, combined all the consideration discussed before, there is a research gap in performance measurement system within family businesses in China, especially analyzed by applying the theory of social system.Next, the theoretical framework necessary for conduct the further case study will be developed in separate dimensions.

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3.Theoretical framework

Since current research is conducted to analyze performance measurement system in the setting of family business, theory is developed in terms of family business and performance measurement system individually and the connection the two parts of theory will be built up. In regard of the family business, as mentioned, theory of social system is chosen and the following detailed framework is applied to guild current research.

3.1 Family business: !

3.1.1 Overview of theory of social systems in family businesses

The theory of social system is developed by NiklasLuhmann (1927 – 1998) who is considered as the greatest social scientist of the 20th century. The work on social system was published in German in 1984 initially and then was developed during times. At beginning, the work is regarded as a general system theory and later is explicitly related to the organizational field (Pieper and Klein, 2010; Schlippe and Frank, 2013;Seidl, 2004).

3.1.1.1Concept of autopoiesis:

To understand the theory of social system, the first thing is to know the concept of autopoiesis. Autopoiesis is originally the biological concept, which was raised by two biologists in the 16th and early 17th century (Seidl, 2004). Autopoietic system was defined as a reproductive system of its factors reproduced by its own factors. The focal point here is the interaction between different factors in the reproductive system. Another central idea of the theory of autopoiesis is structural coupling, referring the relationship between the system itself and outside environment. Hereto, two essential things are learned from the concept of the autopoiesis: interaction between different elements with the reproductive system and the connection between the system and environment.

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3.1.1.2 Autopoiesis in the society:

Next step to understand the theory of social system applied in current research is about the trans-disciplinary concept of autopoiesis from biology to sociology. Abstracting from the original biological concept, Luhmann (1995) explained that social systems can be defined as autopoietic, operatively closed systems that are constituted through communication. Consistently, the central concept of social system is the concept of autopoiesis, but applied in the sociology. Luhmann (1995) has transferred this concept of biological field in non-biological systems in general and developed the 3-level framework.

3.1.1.2 Hierarchy of autopoietic system:

Figure 1 (Sield, 2002) shows hierarchical types of autopoietic systems. The autopoietic systems at level 1 originate from the biology, which is generally described regardless of types of reproduction. Then, it can be divided into three level 2 system for different type of reproduction applied in specific fields. Living systems refer to the reproductive process on the basis of lifecycle. Luhmann identified the other two types. Psychic systems are argued on the basis of consciousness and minds, while social systems conduct the reproductive work based on the communication. Social systems are exactly the type of autopoietic systems to analyze the reproductive systems within an organization in current research. Within the social systems, there are three branches at level 3. Societies refer that the organization itself is a part of outside society. Organizations means an organization is a social system, consisting different subsystems. Interactions mean interaction between different subsystems within the organization and interactions between organizations and outside societies. Thus, the following will discuss how theory of autopotetic social system is applied in family businesses at level 3 to explaining subsystems in family businesses and their interactions.

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Figure 1: Hierarchical types of autopoietic systems (Sield, 2002)

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3.1.2 Setting of social system in the family business:

In the case of family business, there are four sub systems: family, business, ownership and management. Family and business are regarded as constituting sub-systems, while ownership and management are connecting sub-systems (Pieper and Klein, 2007). Each sub system has its specific functional logic and they interact and communicate with each other, which form a unique situation in the management control environment of the family business. Thus, by applying the theory of social system, it is assumed that because of an additional sub system in the organization, the family involvement impacts interaction among different sub-systems, communication and decision related with the performance measurement system in the family business. Applying the concept of autopoiesis on the situation of the family business, the organization itself is a system with different elements to reproduce the process.In addition, the organization consists of different systems, which have their own reproductive particularities. To analyze interaction and communication within the family business, it is primary to know the definition and functions of the four sub-systems.

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3.1.2.1Family subsystem:

Obviously, family is the distinctive sub-system in family businesses. The definition of “family” is various because of cultural and academic background and objective of different researches (Rothausen, 1999). The classification of Kertzed (1991, pp.156-159) is nuclear, joint or extended family, while Stewart (2003) defines “family” as a kinship group. Here, different definitions can be used in social system theory flexibly to get an idea of such subsystem.

3.1.2.2Business subsystem:

The business subsystem is the other constituting subsystem playing the essential role of family business system. Because of the significant family involvement, the resulted differences from non- family business are widely investigated. Since family businesses have focused on non-economic goals of, the business strategy, business operation is influenced in this way. The business system still is the main aspect in family businesses but the family makes the business process unique to some extent in terms of strategic management and organizational behavior (Stafford, Duncan, Dane, and Winter, 1999).

3.1.2.3 Ownership subsystem:

Ownership system is a subsystem connecting the family and the business subsystems. It is the family that provides the financial resource and starts up the company. When the family member is the founder and owns the company, the people has his own consideration preference, which will be reflected in the business operation and management control in the company for pursuit of his interest as an owner. Ownership subsystem has two dimensions: legal ownership and psychological ownership (Miller and Le Bre-Miller, 2006).

3.1.2.4 Management subsystem:

Management subsystem connects the family and business subsystem by mainly providing the labor force containing different hierarchy, like Top executives, middle management or low-level management(Adams, Manners, Astrachan, and

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Mazzola,2004).Management subsystem allows for integrated investigation of managerial behavioral to explain the system behavior in family businesses.

3.1.2.5Environmental subsystem:

It is the most comprehensive way of social system approach to regard the organization as a system consisting of several subsystems, but the organization itself is a subsystem of the wider outside system (Schlippe and Frank, 2013). That certainly applies to family businesses, and even because of family involvement, there are some special causes and effects between family business and the environment. The environmental factors for an organization can include its various stakeholders, like customer, suppliers, community, media and public. Especially, considering more about non- financial objectives, family businesses have much more close relationships with outside environment.It is attractive to analyze how the management controls system within family businesses functions in response to the relationship between the family business and different environmental elements.

3.1.3 Interaction and communication in family businesses:

As explained before, the interaction and communication are the key ideas in the theory of social system. Since current theoretical framework of system approach considers all the four subsystems and the outside environmental systems, it applies the same systematical thinking of open-systems approach concluded by Pieper and Klein (2007). The focal point to apply such an open-systems approach is to integrate the interplay between different subsystems within family business, together with considering human behavior and environmental factors (Kast and Rosenzweig, 1992). Communication is regarded as the key element functioning in the interplay of whole social system (Luhmann, 1995). There are different logics of communication of subsystems while decisions and actions are consequences of the communication within the organization.

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3.1.3.1Individual level:

The individuals are basic elements in current open-system family business approach. In each subsystem and also the at the organization level, the individual forms the system and is the basis analysis as showed in Figure 3 (Kast and Rosenzweig, 1992). Different humans have various beliefs of value and life, intention, interest, motivation and ability and all these differences can lead to the distinctive decision-making, action, managerial behavior and performance in workforce. Individuals belong to different sub-systems with the family business, and the value and belief of the individual will impact and be impacted by the decision of the groups or the sub-systems. In the family business, there is an obvious distinction between family-members and non-family members. The family members are highly likely to belong to different sub-groups at the same time. When this situation happens, it is meaningful to know how the individual will make decision and take action based on what considerations. In the management sub-system, since the managers mainly make decision in the daily operation, whether and how family-member manager and non-family manager are performing differently is worth discussing within the case.

3.1.3.2 Subsystem level:

The four specific sub-systems within the family business are already defined and explained before. Family and business are two constituting sub-systems, which play more essential role than other two sub-systems. The root of the family business field is the investigation of the reciprocal effects of family on business and of business on family itself (Astrachan, 2003). The influences between these two systems are mutual. The other two sub-systems are playing a connecting role between family and business. The four sub-systems function at the same time in the business. The elements communicate within each sub-system and meanwhile the sub-system interacts and communicates with each other, which will affect the whole performance of the family business as a whole.

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3.1.3.3 Family business level:

Family business is a specific form of business because of family involvement. Definition of family business has some differences among different researchers (Chrisman, Chua and Sharma, 2013). Traditional definition of family businesses focus on combination of some specific elements of family’s involvement in the business: ownership, governance, management and especially the transgenerational succession (Chua, Chrisman and Sharma, 2003). During the time, researchers define the family business in a more theoretical way by its essence. Recent researchers argues that the family has impact on the strategic orientation of the business, the family has the intention to control the business, family has characterized behavior and family can generate unique, synergistic resource and is capable to generate the resources by family involvement and interactions (Chua, Chrisman and Sharma, 1999; Habbershon, Williams and ManMillan, 2003). Getting the general idea of what is family business, here, the family business itself is regarded as a social system. It not only consists of four sub-systems, but also is a part of outside environmental system.

3.1.3.4 Environmental level:

Environment is a specifically considered system outside the organization. The family business is definitely surrounded by environmental situations. Organizations cannot survive without structural coupling with the related environment and must take into account the expectation and requirement of different environmental elements. Organizations need to get licensed or approve to conduct the business within the environment because they are operating in a framework formed by their particular economic and cultural environment (Ashmos and Huber, 1987). Especially, with family involvement, there are some special family relationships with outside environment. For the sake of the family itself, the business may take more effort on dealing with interests of different elements, which refer to different stakeholders. Integrated with other level of analysis, both the individuals and sub-systems with the family business system are encompassed in the environment. The environment will affect individual attitude and behavior, and also interact with the decision-making of

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sub-systems. The family business system must communicate with environment to know what is expected and to get approved and improved.

In a sum, the theory of social system is applied and specifically, a system approach which consists of four levels is used to analyze the family business. As discussed, the communication and interaction of different elements are essential in the reproductive process within the social system. Within the management control in the family business, performance measurement can be regarded as a process and different factor interact and communicate with each other to operate the performance measurement system together. Communication and interaction play essential role in the performance measurement in the set of family business as a social system, where the four sub systems communicate and interact with each other, and at the same time the individuals belonging different sub systems make decision and take action related to the management control. Since PMSs framework developed by Ferreira and Otley (2009) will be applied to analyze communication and interaction in different components in PMS, related theoretical knowledge will be described as following.

3.2 PMSs framework:

As for framework applied to analyze the performance measurement with strategy perspective in family business, PMSs framework developed by Ferreira and Otley (2009) will be explained in separate aspect, while the idea of Simons’(1995) levels of control will inserted in some components of the framework.

PMSs are considered a comprehensive approach to the management and control of an organization (Chenhall, 2003). Ferreira and Otely (2009) have concluded all the dimensions within an organization, which are divided to twelve subtitles. The framework of Ferreira and Otely (2009) is an extended framework providing broad view of PMSs in the view point of strategic management, which can be used to analyze the design and application of performance measurement of an organization.

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Current research aims to apply this performance management framework to the family business considering the specific communication and interaction between different sub systems within the business.

3.2.1 Vision and mission:

The fundamental consideration of evaluating performance is consistent with the objectives of the organization (Otley and Berry, 1980). As defined, vision is about the direction and mission identifies the needs of various stakeholders in order to attract and maintain them (Chenhall, 2003). What is the pursuit of the organization is reflected in the vision and mission statement, which clearly states the strategic objective and set the tone at the top. It encompasses the expectation of stakeholders and the long-term strategy of the organization. As the observable vision and mission is settled, it is essential to communicate it within organization and make sure decision-making and action are consistent with it. In sum, the focal point is how the value and purpose are established and communicated across the organization. Vision and mission is related to the belief system, conveying the organization’s core value and overall purpose to employees (Simons,1995).Belief systems are used by organizations to set the tone at the top and articulate the value and direction guiding all employees, which is the fundamental consideration. Belief systems draws attention at the first place on how to create value, what organizational performance is expected and how employees are expected to create value for the organization Core value is reflected in belief systems to guide employees in their work to be creative to seize opportunities to create organizational value. Shared belief is established in belief systems and expectation is translated to individuals on how to perform and contribute to achieve objectives. The key of belief system is to make value and purpose understandable for employees at each level. Communication plays essential role in belief systems.

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3.2.2 Key success factors:

Key success factors are the combination of important facts required in order to achieve business objectives, which can be activities, attributes, competencies and capabilities critical for the success of the organization (Thompson and Strickland, 2003). After establishing the vision and mission, the organization has to conduct specific activities and make it capable to fulfill the strategic objectives. Key success factors reflect critical factors to indicate whether and how can vision and mission be successfully accomplished. Key success factors change during different time periods.

3.2.3 Organizational structure:

Organizational structures are about the individual role, task and responsibility within the hierarchy of the organization, which are formally established (Chenhall, 2003). It encompasses structures, processes and relationships, clearly defining the responsibility and accountability of individual participant, in order to ensure effective and efficient behaviors for achieving objectives. Organizational structures are closely connected with key success factors because suitable structure with proper task distribution and responsibility is required to conduct activities capturing key success factors. In addition, organization structures can provide clear line of strategic formulation and strategic implementation (Langfield-Smith, 1997). Thus, the organizational structure is interacted with PMSs and strategic management process (Ferreira and Otely, 2009).

3.2.4 Strategies and plans:

Strategies are specifically about how can the organization achieve its objectives in long term, which must be consistent with the key success factors and strengthen the factors to achieve desired outcomes. In the research field of management control, literatures have increasing focus on strategic management and different strategies and plans need changes to control system in order to ensure the effectiveness of performance measurement. The focal point is the match between strategy and control

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and strategies are clearly communicated within the organization. In the typology, there are different classifications of strategy and there are two most used approaches: one is defender, analyzer, prospector and reactor (Miles and Snow, 1978); the other one is leadership and differentiation strategies defined by Porter (1980). Different classification can define how organizations establish a specific strategy and how it is reflected in the PMSs (Ferreira and Otely, 2009). Thus, the PMSs aim to evaluate how management and other employee behave in suitable ways for achieving strategic objectives and developing the organization.

3.2.5 Key performance measures:

Key performance measures are derived from the organization’s vision and mission, key performance factors and strategies and plans. The performance measures should be specified in different aspects to meet the expectation of different stakeholders. Proper performance measures are essential to successful strategic management. Strategic management requires coupling between performance measure, strategy and objective (Chenhall, 2003) and organizational performance is impacted by alignment between performance measure and strategy. Generally, the performance measures consist of financial and non-financial aspects and balance score card as one of the most popular performance measure approach consists of four aspects: financial, customer, internal business process, and learning and growth. In addition, key performance indicators are also applied as performance measure approach.

3.2.6 Target setting:

Following the key performance measures, target of performance should be established at different levels within the organizational structure. Targeting setting is considered critical to performance management (Otely, 1999). Target is set for analyzing and evaluating individual performance and the reward and punishment can be done. The process of setting target and the level of target are key considerations because target setting can have significant impact on individual behavior and performance (Fisher,

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Peffer, and Sprinkle, 2003).

3.2.7 Performance evaluation:

Performance evaluation means the process to evaluate performance at different levels. It concerns not only the individual performance, but also group performance, like different departments or division and organizational performance as a whole. Different time period and various approaches are taken account. Performance evaluation can be conducted by formal activities and informal indications (Ferreira and Otely, 2009). There are formal situation and routines established to precede evaluation, however, it is important to consider what approaches is actually more suitable in practice for the management to evaluate individual performance. Performance evaluation can be both objective and subjective or mixed. Both quantitative and qualitative approaches have advantages and disadvantages. Organizations usually determine the propriety and weight depending on specific situation. Generally, objective performance evaluations are more controllable in the organizations which have clear input and output relationship. However, subjective performance evaluation can provide additional information and correct flaws based on reality (Gibbs, Merchant, van-der-Stede, and Vargus2004).

3.2.8 Reward systems:

Reward systems include rewards for achieving targets, as well as penalties for failing to achieve targets. It is logical to discuss reward system in the analysis of PMSs because performance evaluations produce rewards and penalties. Rewards encompass a wide range of forms, both financial rewards and non-financial rewards. Typically, financial rewards consist of increases in salary, bonus and shares while no-financial reward can be long term promotion (Ferreira and Otely, 2009). The rewards and penalties issues are closely related to the organizational structure which establishes the role, task, responsibility and accountability. The organizational structure should be explicit enough to make rewards and penalties available. In addition, the business

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process and organization governance is strongly connected with reward system. Thus, a desirable reward system should be able to motivate individuals by aligning personal interest with organization objective. The alignment should be consistent with the strategy and plan as well. Besides, group reward comes from the group evaluation. Some researches shows rewards based on group performance can bring benefit, however, there are some drawbacks, like free riders, difficulties in keeping balance between individual and group rewards (Ferreira and Otely, 2009).

3.2.9 Information flows, systems and networks:

Information, systems and networks plays bridging and binding roles between different aspects within performance management systems. Otely (1999) regards them as enabling mechanisms to support the operation and make the whole system together. Specifically, information flows consist of feed-forward information and feedback information. The former means information before action in use of leading and undertaking actions and the latter is the information about the action has been done to enable analyze and learning. The point is the framework has unambiguous line to allow the information flows. Information is stored and organized in systems and networks. Organizations usually develop a system in networks to make us of information available to various parties within the organization. Typically, it relates to information technology and information system (Ferreira and Otely, 2009).

Afterwards, according to the theoretical development of family business and the real situation of the research sample setting, the aspects of PMSs framework will be revised and improved to reflect the situation in the family business.

3.2.10 PMSs use:

This aspect is about how to use the information within performance management framework. Typically, rigid use and flexible use describe the way using framework. In addition, the PMSs use here is highly connected with the dimensions of Simon’s level of control framework. Diagnostic control system and interactive control systems

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are specifically related to use of PMSs in FerreiraandOtely’s framework (2009). Diagnostic use typically concerns about mechanistic, suppressive, traditional control mechanism, while interactive use is more informal, organic and constructive (Ferrira and Otely, 2009). Diagnostic control systems aim to keep critical performance variables within boundaries. Diagnostic control systems are used by manager to track and evaluate how individual, group or production line perform in response to strategic objective by monitoring target, measuring profitability (Simon, 1995). Within the systems, feedback functions significantly, allowing more effective information flow and learning to evaluate performance and achieve objectives. Budgets, project monitoring systems, revenue and growth measures are examples of diagnostic control systems approaches. According to Simons (1995), one main purpose of diagnostic control system is to relief managers’ burden of fixed monitoring. Specifically, once goals are settled, individuals will perform based on the target and pursue for responding rewards. In this way, managers are able to focus on other important issues. By setting standards on performance, measuring outcomes and motivating individual to achieve objectives, diagnostic control systems enable effective resource allocation, organizational learning and ex post evaluation. Diagnostic control systems are not enough for effective control (Simons. 1995). Strategic uncertainties are controlled by interactive control systems, which encourage organizational learning in a more practical way and development of new ideas. Strategic uncertainty requires knowledge of changing business and environment to allow new initiatives and strategies. Interactive use of PMSs is significant for organizational learning on ley strategic issues. Interactive control system requires managers to involve themselves regularly in the daily decision-making and operation because management should be aware of what is happening in the organization and make response to dynamic business and environment. Typically, interactive control systems are connected with subjective, informal performance evaluation. In sum, Simons (1995) argues that interactive control systems have four features distinctive from diagnostic control systems. Firstly, they focus on dynamic strategic information useful to top-level

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managers. Secondly, they requires regular attention from senior operation managers on significant information, Thirdly, generated information should be communicated and discussed in face-to-face meeting with participants of all levels of members. Lastly, interactive control system enables ongoing discussion about uncertainties within businesses.

3.2.11 PMSs change:

Current PMSs has taken change dynamics into account. The changes happen in organization, in environment, thus, performance measures are supposed to respond to these changes to ensure usefulness and efficiency system (Ferreira and Otely, 2009). Specifically, the key success factor may change because of changing situation in the industry, and when the strategy has change, the way using information, approach of performance measures and evaluation activities are supposed to change accordingly. Thus, the focal point is changes taking in different aspects within performance management framework respond properly to changes in the organization and environment.

3.2.12 Strength and coherence:

In the end, the framework emphases a holistic view and links all components together to understand its operation. Different components have to align and coordinate with each other to make the whole PMSs function. Even though individual aspect is well designed and implemented, performance measurement may still fail to function efficiently because of lacking of fit. Considering the framework as a whole, according to Chenhall (2003), a desired performance measurement system should consider expectations of different stakeholders, measure efficiency and effectiveness, achieve financial and non-financial outcomes, enable links between strategy and operation and value chain and provide information related to changing environment. Everything is linked to the strategy and pursuit of strategic objective and each component is expected to support each other.

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Applying theory of social system is to understand how family businesses are different from non-family businesses because it involves four subsystems. Interaction and communication are central for different subsystems cooperate and work together for the best interest of the organization. Communication and interaction are also highlighted in operating components of PMSs framework. Since current study directs at performance measurement in management control filed, systematical thinking of family business lay the foundation to analyze and explore how different components of PMSs framework are operated in practice with involvement of four sub systems, especially, how family sub system can impact the use and design is worth of investigation. Interaction and communication among different sub systems at different will be analyzed prominently in the findings and discussions part.

4. Research methodology

4.1 Exploratory case study: !

To fill the research gap, qualitative research methodology is considered suitable for such research question because of in-depth and detailed contextual description and explanation. Qualitative research can be applied to understand social reality with rich description of individuals by emphasizing on interaction Ryan, Scapens, and Theobald (2002). In addition, a qualitative research encompasses naturalistic orientation and enables subjectivity through interaction and activates access to insight experiences of individuals with concerning instinct reality of human beings. These characteristics of qualitative research method match the “how” question, and allow the research question to be answered by revealing social reality in a natural setting. For a qualitative research, some criteria should be adapted. Current research will put effort on reliability and validity when designing the research method and developing results.

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Yin (2009) identified five types of qualitative research method: experiments, surveys, archival analyses, histories and case study. Case study is argued as the most suitable method for “how” or “why” questions when researcher is not able to control the natural setting, while current research suit for such situation. Importantly, according to Ryan, Scapens, and Theobald (2009), case study is particularly suitable for research field which doesn’t have well-developed theory or framework. While current research aims to fill the knowledge of performance measurement in family businesses, case study is suitable to help get idea of nature in practice by analyzing a detailed real-life context (Yin, 2009).Specifically, current research is an explanatory case study according to the classification of Ryan, Scapens, and Theobald (2002). Explanatory case study aims to understand and explain the specific situation not to do generalization. By getting knowledge of practice in the case company, current research is able to modify existing theory or develop some new ideas to explain results of the case. For more detailed analysis and attempt for triangulation of method, documentary analysis and interview will be deployed to help conduct such an explanatory case study.

4.2 Background information of case company !

The case company selected is TianshuiQiaoNan Home Building Material City Co. Ltd founded, owned and managed by family. In the literature of family businesses, there are various definitions. A family business is typically characterized as a company controlled by family member and managed by family members, often from multiple generations (Chua, Chrisman, and Sharma, 1999). Thus, this company can be regarded as family business with significant family impact and selected as the case company for following reasons. Firstly, it is a large scale of leasing and business service industry that has about 500 managerial and routine staff. It is a home shopping center providing one-stop service including building materials supplies, home furniture and furnishing, storage and logistic. The shopping center provides products

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of more than 500 famous brands international and nationally. QiaoNan is engaged in the project of Development of the West Regions in term of attracting and inviting investment. It is located in Tianshui City, Gansu province, the western area of China. It is established in 2001 with initial investment of 2.3 billion yuan. Now the business is extended to large scale of southeastern area of Gansu province, with three business units: Tian shuiQiaoNan clothing and small commodity city, TianshuiQiaoNan home, building and material city and LongXiQiaoNan home, building and material city. The business located in LongXi is relative new project. The scope of business are wholesale and retail: furniture, home, building material, general merchandise, hardware, electromechanical, minerals and Non-toxic chemical product, Management of transportation service, parking service, goods storage, rent of warehouse, advertising planning, consulting of business management and organizing commercial or advertising exhibition.Secondly, family members serve important positions in head quarter and business unit, which means significant impact of family members are assumed and worth of investigation. Thirdly, well-developed management control system is established for the all-around and complicated organizational structure with various sub- departments, so that it can provide valuable information and enables in-depth analysis. In QiaoNan, the revenues generated from commercial tenants are contractual fee, administration and management fee and leasing payment. The financial results of commercial tenants are independent from financial aspects of the company, while financial aspects of QiaoNan are controlled by family members in top management. This situation will be explored further later.

4.3 Documentary analysis: !

The company has its own official website and an official book introducing the development, operation and management control of the company. In addition, relevant reports on media and magazine and most importantly some internal information related performance measurement, such as KPI sheet, company statement

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and rule and regulation, etc. will be collected and analyzed. Some documentary can be searched on the internet, while the official book and other internal material will be scanned and sent by email. It can be sure that the scanned book will contain all the pages from the title page to the back pages. As for other internal material, the researcher can only make requirement for some wanted material and accept what is provided by the company, but cannot select the wanted documentary from the archives. Here, it commits current research method is limited in this way.

4.4 Semi-structured interview: !

Semi-structured interview is preferred because it allows open space for interviewees for expressing their thoughts and some useful information may come out naturally. Semi-structured interviews are best choice when there is only one chance to interview the participant (Cohen and Crebtree, 2006). Twelve semi-structured interviews are conducted separately. The interviewees include family members and most are non-family members who are informed and tied with the performance measurement system. Five participants are merchants who owns shops in QiaoNan’s furniture city, three are sales assistants working in shops, three are managerial staff of QiaoNan whose job is managing the operation of business and managing commercial tenants and the last participant is a family member in top management, who services as the general manager of project investment. Objective of current research was delivered and some basic information of the company was provided in return. However, because of limit of time and place, the interview will be conducted by video call, which can still make record and contents of each interview are typed for analysis. Conversations with interviewees were all in Chinese and were transcribed in English notes. An interview protocol is made at the first place to lead the interview, starting with broad open questions followed by more directive questions. It should be mentioned here that after finishing findings and results parts, an additional semi-structured interview were conducted with one of the managerial staff. This

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additional interview aims at getting some missing contents of the case company, which are important to complete the analysis. Information about interviews are listed in Figure 2. To reach validity, the transcription of all interview records will be provided.

4.5 Data analysis: !

Systematic and attainable data analysis is conducted to provide valuable and comprehensive information for developing findings and discussion. Two case study database regard of document and interview are organized and separately. Documentary data are all electronic, most of which is scanned copy of original written form and the rest is the information on website. Data from document is studied and analyzed at first, which then help develop the interview questions and analyze interview contents. As for interviews, each of them is recorded and transcribed. After finishing notes of all interviews, the data are analyzed together in terms of each aspect. Combined with documentary data, interview results are analyzed based on the theoretical framework, basically following 12 aspects of performance measurement systems. Then, additional results which draw extra attention are collected and developed. The purpose of data analysis is to provide systematic valuable information to refine the theoretical framework and to build a sound explanation for understanding the case study. Results from documentary analysis and semi-structured interviews are coded in separate items. First category of coding is related to background information of the company. Secondly, contents related to family involvement are analyzed together. Thirdly, results from interview are coded with twelve aspects of PMSs framework.

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Figure 2: Information about interviewees

Name Position Identity

(Subsystem)

Code Recor d

Duration

Yun Chao Sales assistant of floor board shop

Business S1 Notes 37min

Fang Huiwen Sales assistant of air conditioner shop

Business S2! Notes! 33min

Zhu Yihan Sales assistant of TCL Business S3! Notes! 36min Gao Yuelong Merchant of floor

board shop

Business Mer1! Taped! 78min

Yang Zhijun Merchant of lamps and lanterns shop

Wang Weijie Merchant of bathroom product shop

Wang Mingchen

Merchant of TCL brand

Dou Lei Merchant of air conditional shop

Zhao Renjie Director of investment project

Family Management

F! Taped! _54min

Li Xinyu Management team member

Management Man1 Taped 49min

Wang Xurui Manager of

Administrative

Personnel Department

Business Man2 Taped 55min

Wang Junbing Assistant of general manager

Management Man3 Taped 61min

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5. Case findings and Discussion

5.1 Systems in QiaoNan !

With systematic thinking, theory of social system guilds current study to divide a family business into four subsystems and regard the family business is a system as a whole, who is a part of outside environmental systems. The following will put the theoretical framework of social system into QiaoNan’s case.

5.1.1 Ownership subsystem:

In 2001, QiaoNan was founded by the family leader Zhao Jinfeng. The registered capital in 2001 was 100 million yuan and details of funding are listed in Figure 4 and all the listed persons are family members.

Figure 3: Registered capital (Source: Article of the company) Total registered capital: 100 million yuan in 2001

Name: Funding:

Zhao Jinfeng Physical funding: 70million;

Financial funding: 22million

Zhao Biyun Financial funding: 4miliion

Zhen Xiufeng Financial funding: 4million

According to the article of the company, the founder Zhao Jinfeng was legal representative and owns the whole company with holding the largest part of company capital. In 2014, Zhao Guilin, succeeded his father Zhao Jinfeng and became the legal representation of the company. There are two identified kinds of ownership in a business, legal ownership (Miller and Le Breton-Miller, 2006) and psychological ownership (Pierce, Kostova, and Dirks, 2001). Here, Two kinds of ownership can both be applied in QiaoNan. Before 2014, Zhao Jinfeng represented the legal ownership as legal representative, which is replaced by his son since 2014. While

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Zhao Guilin represents the legal ownership, Zhao Jinfengstrongly represents the psychological ownership in both family and the business. For family, he is the head of the household and for business, he serves as chairman. From all participants of interviews, status and force of Zhao Jinfeng are recognized and given high praise.

“Our chairman Zhao Jinfeng establishes this company and creates opportunity for us to do business in such an integrated service business. He represents the spirit of people in QiaoNan and inspires us all the time”. (Mer4)

“Zhao Jinfeng definitely is the leader of whole family no matter what position he is in charge. Every family member has high respect to him”. (F)

“Important decisions and planning must need agreement among all family members in management. That's the tradition in QiaoNan”. (Man 2)

In a word, the family of QiaoNan provides the business with funds through ownership subsystem both in legal ownership and psychological ownership. In addition, the family provides the business with labor force through management.

5.1.2 Management subsystem:

In QiaoNan, the family serves all the important positions in management, encompassing both top executives and middle management. Firstly, all the positions in headquarter are held by family members. Next, in each of the three project, there is a vice general manager leading the functional department and managerial team. The vice general managers all are family related members. The three vice general managers are second level of management. Below this level, there are managers of functional department and specific managers in charge of group business (functional department and group business will be showed and explained in later part related to organizational structure).In summary, management subsystem in QiaoNan consists of