Paul Andrews - Founder & CEO, Family Business United

The Three Circle Model: Central To Family Business Understanding

The Three Circle Model is a foundational framework in the study and management of family businesses, developed by Professors Renato Tagiuri and John A. Davis at Harvard Business School. This model provides a comprehensive way to understand the complex dynamics and interactions that occur within family businesses, which are unique due to their intertwining of familial and business relationships.

The model comprises three overlapping circles, each representing a crucial component of a family business system: Family, Business, and Ownership.

The first circle, Family, represents the family members involved in or affected by the business. This group includes not only those who are directly involved in the operations but also those who may have an indirect influence or stake in the business due to their familial ties. The dynamics within this circle can be complex, as family relationships often carry emotional connections and histories that can impact decision-making processes and business operations. Issues such as succession planning, family governance, and conflict resolution are particularly pertinent within this circle.

The second circle, Business, encompasses all aspects related to the operational side of the enterprise. This includes employees, managers, and executives who are responsible for running the day-to-day activities of the business. The focus here is on achieving business objectives such as profitability, growth, and sustainability. Challenges within this circle often relate to professional management practices, strategic planning, and maintaining competitive advantage while balancing family interests.

The third circle, Ownership, involves those who hold equity or have a financial stake in the company. This group can include family members as well as non-family investors or shareholders. The ownership circle is concerned with issues such as control, financial returns, governance structures, and shareholder relations. In a family business context, ownership can be particularly complex due to shared interests among family members and differing visions for the future of the business.

The Three Circle Model illustrates how these three circles overlap to create distinct sectors that represent different roles individuals can occupy within the family business system.

These sectors include:

Family Members Not Involved in Business or Ownership: Individuals who are part of the family but do not have a role in the business operations or ownership.
Non-Family Employees: Individuals who work in the business but do not have ownership stakes or familial ties.
Family Owners Not Involved in Business Operations: Family members who own shares but do not participate in daily operations.
Family Members Involved in Both Business Operations and Ownership: Individuals who manage or work in the business while also holding ownership stakes.
Non-Family Owners: External investors or shareholders who have no familial ties but hold ownership stakes.
Family Members Involved Only in Business Operations: Those who work in the company but do not hold ownership stakes.
Individuals Involved in All Three Circles: Family members who are involved in managing the business, hold ownership stakes, and are part of the family.

By delineating these roles and interactions, the Three Circle Model helps identify potential areas of conflict or synergy within a family business. For example, conflicts may arise when there is a misalignment between family expectations and business goals or when ownership interests diverge from operational needs. Conversely, synergies can be harnessed when these circles work together effectively towards common objectives.

Overall, the Three Circle Model serves as a valuable tool for understanding and managing the complexities inherent in family businesses. It provides a framework for addressing issues such as succession planning, governance structures, conflict resolution, and strategic alignment by highlighting how different roles and interests intersect within the family business system.