The Three-Circle Model of Family Business
Turn this article into takeaways for your work.
Each assistant summarizes the article only for you and suggests best practices for your work.
A family business is two systems sharing one set of people. One runs on loyalty, belonging and fairness. The other runs on performance, accountability and pay. The three-circle model is the simplest tool anyone has built for seeing where those systems overlap, and why so many arguments in family firms turn out to be arguments about roles rather than personalities.
This article covers what the model is, who created it, what each of its seven positions means, how families and advisors put it to work, how it connects to the developmental model that followed, and where it stops being useful.
What the Three-Circle Model Is
The model describes a family business as three independent but overlapping groups: family, ownership and business (the people who work in the company). Draw them as three intersecting circles and every person connected to the enterprise lands somewhere on the diagram. John Davis, one of its creators, describes it as identifying three overlapping groups of people, employees, owners and family members, who inhabit the family business system.
The Cambridge Family Enterprise Group frames the purpose this way: the model describes the family business system at a single point in time. It helps you see the characteristics of the business, the family and the ownership group, and how these groups interact to influence the performance of both the business and the family.
That "at a single point in time" phrase matters. It's a snapshot, not a forecast. We'll come back to that in the limitations section.
Who Created It, and When
The model was created in 1978 by Renato Tagiuri and John Davis at Harvard Business School. According to the CFEG's 40-year retrospective, Davis was a first-year doctoral student at the time and Tagiuri was a senior professor of organizational behavior. It first appeared in print in Davis's 1982 doctoral dissertation, and it was circulated more widely in a 1996 article in Family Business Review.
Its staying power comes from restraint. The same retrospective attributes the model's longevity to its simplicity: it addresses the most essential issues without drowning people in complexity. A founder, a cousin and a banker can all understand it in ten minutes.
Key Facts: The Three-Circle Model
- The model was created in 1978 by Renato Tagiuri and John Davis at Harvard Business School (CFEG).
- It was first published in Davis's 1982 doctoral dissertation (CFEG, Three-Circle Model Celebrates 40 Years).
- The three overlapping circles are family, ownership and business, and their overlap produces seven distinct interest groups (CFEG).
- Each of the seven groups has its own legitimate viewpoints, goals and dynamics (CFEG).
- The developmental extension, the Three-Stage Model, is set out in Generation to Generation: Life Cycles of the Family Business (CFEG).
The Seven Positions
Where the circles overlap, people hold more than one role at once. That produces seven positions. The CFEG's description of the sectors lists them as follows.
| # | Position | Circles | Typical example |
|---|---|---|---|
| 1 | Family members not involved in the business | Family only | A sibling who became a doctor and holds no shares |
| 2 | Family owners not employed in the business | Family + ownership | A shareholder cousin with a career elsewhere |
| 3 | Non-family owners not working in the business | Ownership only | An outside investor or a trust |
| 4 | Non-family owners working in the business | Ownership + business | A senior manager who bought equity |
| 5 | Non-family employees | Business only | The finance team, the plant workers |
| 6 | Family members working in the business but not owning | Family + business | A daughter in sales, before any shares pass to her |
| 7 | Family owners working in the business | All three | The founder, or the sibling running the firm with shares |
The examples are illustrations of each category, not case studies. What the table shows is that one human being can sit in the center, carrying three sets of expectations, while another sits at the edge with only one.
Why Each Sector Wants Something Different
Each position has legitimate interests, and they pull in different directions. That's the whole point. Nobody in the diagram is wrong.
- Family-only members care about harmony, fairness and belonging. They want the family name to stay in good standing and holidays to stay peaceful.
- Owners who don't work in the business care about returns, dividends and the ability to sell or exit. They're exposed to the company's performance without any say in daily decisions.
- Employees who aren't owners care about pay, development, fair treatment and a future in the company. For non-family staff, that last one often depends on whether the family leaves room above them. The article on family and non-family employees goes deeper here.
- Family owners who work in the business carry all three agendas. They're expected to be loyal sons or daughters, responsible shareholders and effective executives, sometimes in the same meeting.
A dividend decision shows how this plays out. The sibling who runs the company wants to reinvest. The cousin who doesn't work there wants cash. The aunt who isn't involved wants a stable family. Three people can disagree sharply without anyone being unreasonable, because they're standing in different circles.
How the Model Is Used
The model isn't a theory to admire. It's a working tool, and it gets used in a handful of recurring ways.
Role clarity. Davis says the model helps identify where key people are located in the system, according to the CFEG retrospective, and that putting the emphasis on roles rather than personalities reduces blame. When two relatives clash, the first question becomes "which hat is each of you wearing?" rather than "who is being difficult?"
Diagnosing conflict. The same source says advisors use it to identify stakeholder perspectives, diagnose conflicts and understand role overlaps. The common sources of conflict in family businesses map closely onto these overlaps. A fight in a board meeting that looks like a business disagreement may really be a family-circle grievance, and treating it as a business problem won't make it go away.
Focus, alignment and segmentation. Davis summarizes the model's value in three functions: it focuses attention on three critical groups, it reminds leaders that those groups need to be aligned, and it identifies the seven subgroups that influence the system.
Governance design. Once you can see the three circles, you can build a forum for each. Families commonly separate a place to discuss family matters, a place to discuss ownership matters, and a place where business decisions get made, so each conversation happens in the right room. If you're building that business forum, the notes on a private company advisory board are a useful companion. And professionalizing a business covers what it takes to move decisions from family habit to explicit process.
Zooming in and out. The CFEG notes the framework lets you zoom out for a holistic view or zoom in on one part, and that what happens in one group influences the others. A succession plan, for example, touches all three circles at once, which is why succession planning in a family firm is rarely only a talent question.
From Snapshot to Movie: The Developmental Model
The three circles show one moment. Families need to know how the picture changes. That's the gap the developmental model fills.
The CFEG observes that the development of each circle over generations is fairly predictable, and that this realization led to the Three-Stage Model of Family Business System Development, presented in Generation to Generation: Life Cycles of the Family Business by Kelin Gersick, John Davis, Marion McCollom Hampton and Ivan Lansberg. The idea is that each circle develops in its own fairly predictable way, so the system as a whole changes as generations pass.
Davis points to stages such as the controlling owner, the sibling partnership and the cousin consortium in an interview, and says leaders can anticipate these changes and prepare for them. The article on the family business lifecycle walks through that progression in detail.
The CFEG adds that the three circles are always in motion, never static, as families, businesses and ownership groups change in response to conditions.
Where the Model Falls Short
Any simple model leaves things out. A few limits are worth keeping in mind.
- It describes; it doesn't prescribe. The model tells you who is where. It doesn't tell you what the right dividend policy or succession choice is. You still need judgment and, usually, agreed rules.
- It's a snapshot. By its own description it captures a single point in time. Pair it with the developmental model to see where the system is heading.
- Seven boxes are still simplifications. Real people drift between sectors, and the boundaries blur. A trust, a divorce or a share transfer can move someone across a line overnight.
- It doesn't measure quality. Two families with identical circle layouts can have very different levels of trust, communication and skill. Culture sits outside the diagram, which is why family business culture deserves its own look.
- It shows structure, not strengths or weaknesses. To see how overlap helps or hurts performance, read family business strengths and weaknesses.
None of this undermines the model. It's a map, and a map isn't the territory. Davis has said the model can keep accommodating the evolution of families, businesses and ownership structures, which is part of why it's lasted more than 40 years.
Putting It to Use
A practical way to start is a one-page exercise. List every person who matters to the enterprise, place each one in a sector, and note what each wants from the company. Then ask three questions. Who sits in the center and carries too many roles? Which sector has no voice in any forum? Which decisions are being made in the wrong circle?
Founders carry particular exposure here, since they usually occupy all three circles at once and their departure moves every sector at the same time. The notes on key-person risk are relevant for exactly that reason. And once the map is drawn, the question of how long the enterprise endures becomes easier to approach, which is the subject of family business longevity.
Related Reading
