Examination of the family business and the importance of having skilled successors

 

1.      Abstract

Effective succession planning is a critical component of the future success and survival of family businesses.  However, choosing the right successor within a family business is not an easy process.  Research suggests that it is important to achieve some form of match between the firm and the successor, but it is unclear how important this is, or what factors should be matched.  This study draws on a positivist, deductive research paradigm, and the use of quantitative methods and data analysis, to examine how important it is for family business to have successors trained in the particular field they are entering.  In so doing, it focuses on the skills, education, knowledge, experience, and commitment of the potential successor.

 

2.      Introduction, Background and Justification

Family businesses can be defined as those where management is either control by family members, or owned by it.  They are also defined according to a specific proportion of family ownership, directorships or managerial control (Dyer, 2006).  Some authors argue that family firms can be more profitable than non-family ones because the former benefit from advantages such as lower agency costs and greater cohesiveness (Jensen and Meckling, 1976; Anderson and Reeb, 2003; Miller and Breton-Miller, 2006).  Others suggest that they lack the capacity to hire external managers into key positions, reducing available human assets and critical knowledge (Bonilla et al., 2007).  Irrespective of the relative value of firms, their long-term success depends on effective succession.  Indeed, succession is an important part of the future success of family businesses, referring to the passing of firm leadership from the current leader or owner to a successor (Beckhard and Dyer, 1983).  In this respect, a wide body of evidence highlights the criticality of succession planning to effective succession and firm success (Kaye, 1996; Le Breton-Miller et al., 2003).  Since succession planning is not a single event, but rather a process (Morris et al., 1997), understanding the relationship between the incumbent and successor is an important component of succession planning (Robinson et al., 2007).  This study is interested in the relationship between the successor and the particular field that the firm operates in. 

 

3.      Research Aim, Question and Objectives

This research project aims to examine whether it is important for family businesses to have successors trained in the particular field that they are entering.  In so doing, the following research question will be answered: How important is it for family businesses to have successors trained in the particular field they are entering? To address this research aim and question, the following objectives have been set:

 

To critically discuss the literature on succession planning in family businesses to identify the importance for there to be a match between the firm and successors’ skills, education, knowledge, experience, and commitment. To identify measures of successor skills, education, knowledge, experience, and commitment, which can be assessed against the needs of the firm. To investigate the relationship between the firm and successors’ skills, education, knowledge, experience, and commitment. To investigate the role of the generational stage of the firm on the relationship between the firm and successors’ skills, education, knowledge, experience, and commitment. To provide family businesses with recommendations regarding the relative need to develop potential successors in skills, education, knowledge, experience and commitment that fits with the firm’s needs. 4.      Literature Review

Whilst there are clear human ties in family businesses that lend themselves to succession between family members, it cannot be assumed that the abilities, interests, background and strengths of potential successors match the needs of the business, or its particular stage of development.  This is potentially problematic concerning the need for a good fit to exist between such factors to improve the potential for the effective implementation of succession planning (Sharma, 2004).  This suggests that an important component of succession planning in family businesses should involve the training, development and education of potential successors to ensure that they have the required abilities, skills, knowledge and experience, as well as commitment, to take on the leadership of the firm (McLean, 2000).  On this basis, there is also the debate whether family businesses should remain family-owned or family-managed if there is not an adequate match between the potential success and the firm.  As such, the following hypothesis will be tested:

 

H1:      A greater fit between the firm and successors’ skills, education, knowledge, experience, and commitment increases the potential for success in family businesses.

 

In assessing whether there needs to be a fit between the needs of the firm and the specific skills, education, knowledge, experience, and commitment of the successor, it is also important to examine the generational stage of the firm (Sonfield and Lussier, 2009).  A study by Dyer (1988) showed that first generation firms were dominated by a paternalistic management style and culture, whilst second generation firms moved towards a more professional management style and culture, in some cases, involving a greater proportion of non-family members.  This generational change in management style and culture tended to have a positive impact on firm performance (McConaughy and Phillips, 1999).  Stavrou (1998) highlighted how generational factors influence the choice of successors to new management positions, distinguishing between issues related to the family, business, personal factors, and the market.   Moving from one generation to the next, especially the first to second generations may require very different skills, experiences, education and knowledge, with the latter generations tending to be more professional, focusing more on strategic management and financial management (McConaughy and Phillips, 1999; Filbeck and Lee, 2000). As such, the following hypothesis will be tested:

 

H2:      The required fit between the firm and successors’ skills, education, knowledge, experience, and commitment is dependent on the generational stage of the firm.

 

Identifying the appropriate successor does not always take place in-house, but may involve the skills of a trained expert, even a psychologist, to provide an effective successor.  The use of 360 degree review is also encouraged (Boyatzis et al., 1999; McLean, 2000).  In this respect, Boyatzis et al. (1999) recommend the use of the 360 degree Emotional Competencies Inventory to assess the emotional competences of an individual and whether these make them a potentially successful successor.  Whilst useful, there is a need for a broader measure of successor competence and fit, which takes into account the skills, education, knowledge, experience, and commitment of potential successors.  Indeed, having the relevant emotional competence does not necessarily mean that the individual has the requisite experience or education to lead a family business during a particular stage in its development.  Neither does it ensure that potential successors have the skills in the given field where the firm operators, or the commitment to lead the firm over the long-term.  This research aims to bridge this gap in understanding the necessary fit between the potential successor and the needs of the firm.

 

5.      Research Design and Hypotheses

 

The research would be underpinned by a positivist epistemological approach, which has proven popular in both the physical and social sciences (Bryman, 2004).  The positivist epistemological approach is based on the principal that there is a ‘truth’ out there that can be discovered.  The object and the subject are independent of each other in the sense that “the world is made up of necessities” (Thietart, 2001, p.15) that can be objectively identified and studied.  Such a positivist epistemology often draws on a deductive ontological research approach.  Such a deductive approach is based on the idea that new theory can be created through the systematic, objective study of research phenomenon.  The proposition of new theory is set out in terms of a number of research hypotheses that are tested, typically using quantitative methods.  The findings from the research process are usually subjected to statistical analysis, leading to the acceptance or reject of the research hypothesis.  This results in the creation of causal laws and quasi-immutable facts (Thietart, 2001).  The value of the knowledge gathered is determined according to its reliability and validity (Bryman, 2004). 

 

The research will be based on quantitative methods, in line with the positivist, deductive approach.  A questionnaire will be distributed (online or in paper format) to incumbent leaders and their potential successors in around 10 to 20 family businesses.  Whilst a sample size calculation will not be made, it is anticipated that this will lead to sufficient cases to provide a large enough sample for the purposes of statistical analysis.  Such statistical analysis of the data will be performed using a statistical software package such as SPSS.  The sampling strategy will be a non-probability one, namely the convenience sample.  It is acknowledged that this will reduce the external validity of the findings (Bryman, 2004).

 

6.      Practical and Ethical Issues

Access problems are not anticipated in the project. There are a very large number of family businesses in the Saudi Arabia Or UK, including in the area where the researcher is based.  Access to these will be arranged by letter, followed by a follow-up call, and if required, a personal visit to the firm to discuss the research.  However, since each firm provides only a limited number of cases; that is, one incumbent and a small number of potential successors, it will be important to gain access to a large number of firms, perhaps 10 to 20 firms, which will be time-intensive.  The costs of the project will be minimal, including the cost of gaining access, as well as the cost of the use of an online survey product.  Access to research materials will involve access to books, journals, papers, and so forth, which are publicly available, as well as the use of statistical software for the analysis of the data collected.  It is not felt that the succession planning information of a small to medium sized family business is particularly commercially sensitive.  However, the confidentiality and privacy of individual firms will be maintained.  The data collection process will not involve the recording of personally identifiable information and the names of firms will not be associated with the research outputs.  Rather, participating firms will benefit from the aggregate results, which should help to illustrate the relative importance of ensuring that potential successors have been trained in the particular field of the business or otherwise, depending on the outcome of the research.  This is important to protect individuals within the firms; that is, not causes any kind of direct or indirect harm, which is an important ethical concern (Diener and Crandall, 1978

 

7.      Plan or Timetable

 

Tasks

Acceptance of research proposal Critically review the literature, leading to the creation of the research instrument to be distributed across the family firms. Write up Introduction and Literature Review of the main report. Identify a suitable sample of family firms and attempt to arrange access to distribute the questionnaire. Distribution research questionnaires and collect data.  Follow-up mid-month to encourage further responses.  Collate and statistically analyse the data using a statistical software package such as SPSS, directly addressing the research hypotheses set. Write-up Research Methodology and Findings of the main report. Write-up Conclusion and Recommendations of the main research report.

 

 

 

8.      References

 

Anderson, R.C. and Reeb, D.M. (2003) Founding-family ownership and firm performance: Evidence from the S&P 500, Journal of Finance, 58(3): 1301-1328.

 

Beckhard, R. and Dyer, W. (1983) Managing continuity in the family-owned business, Organizational Dynamics, 12(1): 5-12.

 

Boyatzis, R.E., Goleman, D. and Rhee, K. (1999) Clustering competence in emotional intelligence: Insights from the Emotional Competence Inventory (ECI), Handbook of Emotional Intelligence. San Francisco: Jossey-Bass.  

 

Bryman, A. (2004) Social Research Methods, 2^nd ed. Oxford: Oxford University Press.

 

Diener, E. and Crandall, R. (1978) Ethics in Social and Behavioral Research. Chicago: University of Chicago Press.

 

Dyer, W. (1988) Culture and continuity in family firms, Family Business Review, 1: 7-50.

 

Dyer, W. (2006) Examining the ‘Family Effect’ on firm performance, Family Business Review, 19(4): 253-273.

 

Filbeck, G. and Lee, S. (2000) Financial management techniques in family business, Family Business Review, 13: 201-216.

 

Jensen, M. and Meckling, W. (1976) Theory of the firm: Managerial behavior, agency cost and ownership structure, Journal of Financial Economics, 3: 305-360.

 

Kaye, K. (1996) When the family business is a sickness, Family Business Review, 9(4): 347-368.

 

Le Breton-Miller, I., Miller, D. and Steier, L.P. (2003) Towards an integrative model of effective FOB succession, Entrepreneurship Theory and Practice, 28(4): 305-328.

 

McConaughy, D.L. and Phillips, G.M. (1999) Founders versus descendents: The profitability, efficiency, growth characteristics and financing in large, public, founding-family-controlled firms, Family Business Review, 12: 123-131.

 

McLean, B. (2000, August 14) Growing up Gallo, Fortune Magazine.

 

Miller, D. and Le Breton-Miller, I. (2006) Family governance and firm performance: Agency, stewardship, and capabilities, Family Business Review, 19(1): 73-87.

 

Morris, M.H., Williams, R.O., Allen, J.A. and Avila, R.A. (1997) Correlates of success in family business transitions, Journal of Business Venturing, 12: 385-401.

 

Robinson, D.A., Harvey, M. and Yupitun, M. (2007) Destructive leadership in family businesses: Modelling social exchange between generations, Business Papers, Bond University [online] http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1043&context=business_pubs[accessed 17 April 2010]

 

Stavrou, E.T. (1998) A four factor model: A guide to planning next generation involvement in the family firm, Family Business Review, 11: 135-142.

 

Sharma, P. (2004) An overview of the field of family business studies: Current status and directions for the future, Family Business Review, 17(1): 1-36.

 

Sonfield, M. and Lussier, R. (2009) Family business generational stages: A multi-national analysis, Small Business Institute National Proceedings, 33(1): 143-

 

Thietart, R-A. (2001) Doing Management Research: A Comprehensive Guide. London: SAGE Publications.