Understanding Generational Succession challenges in German Family Businesses

Introduction and statement of research question

Business succession is always a challenging time for any business, but generational change is often a critical factor in the success or demise of family-run businesses. During period of generational change, the company offers both the incumbent and the successor a great challenge. This sensitive issue thus has to be conducted with careful planning because it is one of the most critical phases in the life cycle of a company, with a lot of chances and risks linked to the process. Further successions are also complicated, with half of established family run companies successfully reaching the second generation stage, but only around three or four percent successfully mastering the handover to a third generation. The causes of these succession issues are varied, and the challenges they create will be investigated in this piece. As such, further research is needed in this area, including the specific succession challenges faced in German Family Businesses, and strategies to overcome them. The primary research question is:

What are the key generational challenges faced by German Family Businesses, and to what extent do they create risks of failure for these businesses?

Literature review of key literature

The literature is largely in agreement that the leadership succession event is a critical event for the success of any type of organization, but that this is even more important in the context of family owned businesses where the talent pool is much more limited by the available family members (Ayres 1990; Le Breton-Miller et al, 2004). Indeed, a study by Danco (1987) showed that a failure to provide for effective succession, and ensure that the succession process is effective, turns out to be one of the main causes of failure for family owned businesses. Indeed, according to Birley (1986) only one third of family run firms actually survive the initial transition into second generation ownership, and just ten percent are able to make it through two successions and into the third generation (Birley 1986). This is largely due to the fact that the majority of succession decisions in family run firms tend to be based on the needs of the family, as opposed to the needs of the business, and hence this can cause conflicts and issues if the two needs collide (Frishkoff 1994). In addition to this, the choice of a successor is often influenced more by the values and politics of the family rather than the values and politics of the business itself, hence potentially putting a successor in place who is not respected by the business (Aronoff and Ward 1992; Frishkoff 1994).

As a result of this, succession is widely seen in the literature not only as a critical issue, but also as the most important issue that most family firms will face, in terms of its ability to cause the demise of the company as a going concern (Ayres 1990; Le Breton-Miller et al, 2004). In fact, the succession process has been argued to be so central to the existence of the firm that Handler (1989; 1994) actually states that family run firms should be defined based on how likely they are to handle and survive the succession process. The literature identifies five key areas in which succession planning must be carried out successfully in order for the process to proceed without threatening the viability of the company. The first of these is the succession process, which requires the succession to be carried out in a range of stages, including identifying and training a successor and handing the firm over to them in good time, as well as how roles must adjust during the succession process (Dyck et al. 2002; Le Breton-Miller et al, 2004).

The second area that is identified as being important in the literature is the role of the founder. The area focuses on the type of leadership development by the founder of the business, and the nature of their personality. It thus considers how the founder develops and influences the culture and direction of the business, and how easy it will be for the found to step back from leadership and hand the business over when the time comes for succession (Handler, 1994; Sharma and Rao 2000). The third area is strongly linked to the second, and considers the role and perspective of the next generation. Specifically, it focuses on the extent to which the potential successors share the vision of the founder and the quality of relationship they have with the founder. It also considers the nature of the preparation provided to potential successors, and how well they take to being groomed, as well as their inherent business and interpersonal skills, as well as their commitment to the firm and its strategy and vision (Sharma et al. 2001; Wang and Poutziouris 2003).

The fourth area considered in the literature is the need for succession analysis to proceed on multiple levels, including considering the impact of different systems and institutions. These include the way the family manages and owns the firm, including single versus disparate ownership and the way any disputes are resolved. It also considers the role of any external providers of debt or equity as well as employees. This can help shed light on the political processes that occur between the different family and other stakeholder groups and how they influence succession (Churchill and Hatten, 1987; Handler, 1994). Finally, the fifth area focuses on best practice, looking to identify the critical factors that are associated with successful succession processes, and how these factors can be implemented in other businesses (Morck and Yeung 2004; Sharma, Chrisman, and Chua 1997; Wang et al. 2004).

As a result of this debate and discussion, De Massis et al (2008) notes that family business succession is not only a critical process, but also a complex one, and that it takes a significant amount of time to be done correctly. Indeed, it is often characterised as a phased process whereby the incumbent and the successor need to move through a number of different phases, developing and altering their relationships with the business and its stakeholders in order to be ready for the formal handover of power (Churchill and Hatten, 1987). In particular, Sharma (2004) argues that one of the most important issues in the succession process is the need to transfer tacit knowledge from the incumbent to the successor, as most family owned firms do not have specific knowledge management processes to capture this knowledge for future generations. Indeed, according to Cabrera-Suàrez et al (2001) and Chirico and Salvato (2008), this is one of the key factors influencing the success of any handover.

The reason for the importance of this knowledge transfer process is that family businesses tend to develop their own highly distinctive resources, which give them specific abilities to create value in the market. Habbershon and Williams (1999) argue that, under the resource based view of competitive strategy, these resources can be identified as ‘familiness’, and provide value which is linked to the level of family involvement in the firm. Sirmon and Hitt (2003) further argue that these resources allow family run businesses to develop unique capabilities, based on the interactions between the family and the business, and Chrisman et al (2003) demonstrates that this can lead to sustainable competitive advantage (Chrisman et al., 2003). As such, one of the key factors that needs to be considered in any succession process is the need to maintain this ‘familiness’ aspect of the business, as without it the business may lose its competitive advantage, and hence fail to survive in the external environment (Chua et al., 2004).

According to Lam (2011) the importance of this familiness, and the way that different family members contribute to it, makes the succession process a highly interactive and dynamic social process. However, Lam et al (2011, p. 58) argue that “the multi entity roles that family business members play simultaneously during the social process have been largely ignored”. This is a significant oversight, as the social process can have a major impact on the overall operation and success of any given business, as well as having a strong and significant impact on the succession process. Ultimately, this argument indicates that the traditional focus on the succession process as a series of phases that the incumbent and successor pass through is flawed. Instead, the process needs to be viewed as a series of social processes which involve all participating members of the family, in order to ensure that the succession process has the best chance of success.

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