The Three Circle Model Explained

In India, usually, the next generation family members are often expected to join the family business and commit their working lives to it, regardless of their aptitude, talent or inclination. Everyone involved in a family business falls within one (and only one) of the seven sectors created by the three circles. Below, the model is broken down for understanding.

• Areas marked 1,2 and 3 are individuals in sectors that have only a single link with the business-  they are either family, or they are owners, or they are employed by the business.
• The area marked 4 is connected to both the family and ownership circles, and therefore comprises family members who own shares in the business, but are not employees.
• Section 5 entails owners who work in the business, but are not family members.
• Area 6 in the three circle model consists of family members who work in the business but who do not own any shares.
• In the area marked 7, who occupy all three circles are owners who are family members as well as employees of the business.

This model is essentially adopted to help recognize and illuminate the different perspectives and motivation of family business owners, as well as the prospective sources for interpersonal conflict and role confusion. For example, the owners-only individuals (in area 2 of the diagram) they are the investors, who are predominantly concerned with return on their investment and liquidity, while the owners who are also managers (in area 5) will have the same concerns but with an added layer of self-interest relating to issues such as job satisfaction and autonomy. likewise, when taking a view on the appropriate level of dividend payments, non-owning family members who work in the business (area 6) often take a different view from their relatives who own shares in the business but are not employed by it (area 4). The former may want to cut dividends to boost reinvestment in the business (and at the same time, improve their career prospects); the latter may want to increase dividends to provide a better return on their investment.

Other possible areas of tension and conflict are reflected in questions like, who should lead the business, who should work on it how they should be remunerated and who should own shares in the family firm. Because family life and business life represent different cultural spheres with distinct behavioral patterns, these questions are often the cause of emotionally troublesome dilemmas for those who have to resolve them. Quite often, families resort to short sighted and dysfunctional approaches, to try and keep a lid on tensions as seen in some classic family business syndromes such as

• Procrastination- always putting off discussion on difficult matters.
• Selective amnesia- forgetting some discussions and decisions that do not suit their own perspective, but having a clear recollection of others do.
• Taboos- certain subjects are not talked about at all, supposedly in the interests of the family.
• Fear- raising certain issues that may risk provoking unpleasant confrontations.
• Divide and conquest- excluding some family members, shareholders or employees from certain decisions as part of a generally secretive managerial style.

Some of the problems above can be solved through proper communication and effectively managing the problems which requires transparency and open communication. While this model is helpful in segregating and identifying the range of concerns and motivations operating in a particular family business, it is a static model-a snapshot in time. Family businesses are however constantly changing and evolving across all three dimensions of the model.

For further information on the three circle model, refer to “Indian family Business Mantras”- the book. Coming soon, watch this space for more.