Family business Family business

Professors Renato Tagiuri and John Davis developed the Three Circle Model in the 1970s at the Harvard Business School.

The Three Circle Model represents the family business system with three distinct roles (Family Members, Owners, and Employees in Business). In addition, there are four overlapping roles (Family Owners, Non-Family Owners employed in Business, Family members employed in Business and the Family Owner employed in the Business). The seven zones present complexities and unique needs that need to be addressed appropriately.

dots dots

Three-Circle Model of the Family Business System

Zone 01


  • Those who are blood relations of the founder and/or owners of the family business.
  • They are neither involved in the business operations nor have any ownership rights.

Zone 02


  • Family members with ownership rights and involved in governance.
  • They are not involved in managing the business.

Zone 03


  • Owners who are not family members but have a legal claim to the assets, profits, and decision-making authority within the company.
  • They are not involved in managing the business.

Zone 04


  • Non-Family professionals who work in the business and own shares/ equity in the business (ESOPs).

Zone 05


  • They provide professional services to the firm in exchange for compensation, based on their skills.
  • They do not have any ownership rights in the company.

Zone 06


  • Family members who are employed in the business but do not have any ownership rights in the business.

Zone 07


  • Family owners who are actively involved in the day-to-day operations of the business.
  • They hold significant leadership positions.

In each circle and overlapping zone, the individual’s perspectives and needs tend to vary. For instance, consider a situation when some family members are active shareholders (owners involved in running of the business) while few others are only passive shareholders. Those who are active in the business tend to understand the business challenges. However, the passive shareholders might not be privy to such insights. This divergence in perspectives can give rise to differences in decisions pertaining to profitability, funding requirements, liquidity, dividend income etc.

Due to the diversity in perspectives and needs of members in different zones of the 3-circle, differences are likely to emerge.

These could revolve around decisions like:


Strategic roadmap for the business


Eligibility criteria for employment of family members in the business, board positions etc.


Performance evaluation standards for working family executives and the compensation philosophy


The role of ‘in-laws’ in the business and ownership


Rules / Principles around exit from ownership and rationale for economic compensation


Principles and process for succession / transition, rotations etc.


With the help of this model, we can identify the diverse needs of the various sub-groups within a family business and address potential sources of differences. This understanding allows for effective communication, problem solving, and decision-making within the family business.

The Four Circle Model, recently introduced as an extension of the well-known Three Circle Model by Mr. John Davis, serves as a transformative framework addressing the intricate dynamics within family-owned businesses. It was developed to foster family unity across generations while steering the system towards social and environmental sustainability. Unlike its predecessor, the Four Circle Model incorporates an "individual circle," emphasizing the importance of healthy adult individuation within the family context. This model underscores competencies essential for success at the intersections of family, business, ownership, and individual realms. This approach emphasizes inclusivity, competency mastery, and strategic planning, offering a roadmap for navigating complex familial and business landscapes.

The Four-Circle Model






Source: The Four-Circle Model - FFI Practitioner


Mapping Competencies within Family Business Dynamics

Competencies of Intersection 1:

Between adult individuals and their family of origin

  • Emotional and Financial Separation: Individuals must achieve maturity by establishing emotional and financial independence from their family of origin, fostering a robust self-esteem.
  • Purpose Discovery: Adults must define their purpose by pursuing passions within or beyond the family enterprise.
  • Effective Communication: Families must foster active listening and robust communication skills to promote understanding and unity.

Mapping Competencies within Family Business Dynamics

Competencies of Intersection 2:

Between the family and the business

  • Role Definition: Establish clear boundaries between family and business roles to facilitate differentiation.
  • Business Acumen: Develop a comprehensive understanding of the business's operations and industry landscape.
  • Fair Compensation: Balancing family fairness with industry standards in compensation planning is essential for business sustainability.

Mapping Competencies within Family Business Dynamics

Competencies of Intersection 3:

Between the business and ownership

  • Strategic Planning: Owners and the business must craft a cohesive strategy encompassing mission, vision, and growth objectives for multi-generational success.
  • Structural Alignment: Ensure organizational structures support strategic goals by placing suitable individuals in appropriate positions.
  • Leadership Development: Professionalize the business by blending qualified family members with capable non-family executives.

Mapping Competencies within Family Business Dynamics

Competencies of Intersection 4:

Between ownership and adult individuals

  • Succession Planning: Critical management transitions between generations should align with the business's strategy and structure, considering next-gen family leaders or non-family executives.
  • Effective Governance: Establish advisory or fiduciary boards to ensure long-term business success.
  • Holistic Estate Planning: Estate, financial, and tax plans should complement other competencies, capturing the values and aspirations of current and future shareholders.

Contrasting the Four-Circle Model with the Three-Circle Model


Incorporation of the "individual circle" is crucial. In family-owned enterprises, advisors often engage with a cohort of independent adults. Typically, these adults have differentiated themselves from their original family unit, making this circle vital for understanding dynamics.


The model emphasizes competencies, particularly those essential at the crossroads depicted in the diagram's four intersection areas.


Individuals or individual beneficiaries, rather than families, possess ownership of family businesses.


Non-family members, such as board members and advisors, are positioned within Sector 8 of the model.