Table of Contents
List of Tables
List of Figures
1.1. Problem Definition
1.2. Aim and Research Question
1.4.1. Family Business
2. Literature Review
2.1. Succession in Family Businesses
2.1.1. The Succession Process
2.1.2. Succession Planning
2.1.3. Success Factors for Succession
2.2. Employees’ Perspective
2.3. Incumbent and Successor
3. Empirical Approach
3.1. Description of Analysis Method
3.3. Setting of the Interview
4.1. Responsibility and Role Assignment to Successors
4.2. Incumbent Moving to the Background
4.3. Investing into the Next Generation
4.4. Early Integration of the Next Generation
4.5. Working Atmosphere
4.6. Open and Trustworthy Relationship with Employees
4.7. Open and Transparent Communication
5.1. Give Signals to Employees
5.2. Build Trust and Foster Communication
5.4. Critical Reflection and Future Outlook
List of Tables
Table 1. Interview Participants
Table 2. Example for Interview Analysis Step 1
Table 3. Example for Interview Analysis Step 6
List of Figures
Figure 1. The Three-Circle Model of Family Business
Figure 2. The Three-Dimensional Developmental Model
Figure 3. The Developmental Stages of Business Families
Figure 4. Mutual Role Adjustment between Incumbent and Successor during Succession
Succession to the next generation is a widely discussed topic connected to family businesses. Thus, planning for this event, while also considering the employees of the business can be considered to be very important. This bachelor thesis therefore aims at giving a guideline on what actions incumbents and successor of a family business should take in order to prepare their employees for succession. Firstly, a comprehensive literature review highlights several important topics connected to the succession within a family business. The significance of the incumbent and successor, as well as of the employees of a family business are also elaborated in order to highlight the relevance of these topics. Furthermore, succession within the family business is then connected to various steps and theoretical models. Moreover, a qualitative research approach in the form of expert interviews, combined with a case example of a family business are used in order to identify relevant information connected to the topic.
The findings show that the incumbent and successor should focus their actions on two broad topics, which are firstly, giving signals to employees and secondly, focusing on trust and communication. Specific actions connected to giving signals to employees are as followed. The incumbent should assign responsibilities and tasks towards the successor, while at the same time he himself should move towards the background. Furthermore, the incumbent should invest into the successors in order to send a clear sign of continuity and importance of the next generation towards employees. This also connects to an early integration of the successor, which can be seen as an action taken by the successor but should also be encouraged by the incumbent. When it comes to focusing on trust and communication, the incumbent and successor should focus on three specific actions. Those are building open and trustworthy relationships, fostering a good working atmosphere as well as encouraging open communication. Those three actions can be seen as rather long-term, nevertheless, they are identified as being crucial for the purpose of preparing employees for succession.
Family businesses are one of the main drivers of many economies, for example, 95% of businesses in Germany are described as a family business, while the majority of those businesses are small to medium sized (Bundesministerium für Wirtschaft und Energie, 2014, pp. 4–5). Even during the economic downturn, which took place the last few years, most family businesses seem to have managed a relatively stable economic position, according to a study conducted in Austria (Haushofer, 2013, p. 21). The influence of family businesses has been identified as crucial for the overall economic performance for many countries all over the world, including Germany and Austria (Kellermanns, Eddleston, Barnett, & Pearson, 2008, p. 1; Smallbone & Cumming, 2015, p. 9; Zahra, Hayton, & Salvato, 2004, p. 363).
Most family businesses follow certain specific patterns and face special challenges, which others might not. “Family businesses face the dilemma of long-term survival by not only overcoming difficulties common to all economic activity but also conflict specifically arising from their family-business nature” (Brenes, Madrigal, & Molina-Navarro, 2006, p. 372). One of the inevitable steps for continuing the existence of family businesses is the succession to the next generation at a certain point in time. Moreover, family businesses in general usually think rather long-term and therefore have a more sustainable perspective than other businesses might, which can be explained by the motivation of succession of the business to the next generation (Haushofer, 2013, p. 21).
However, the transfer of a family business to the next generation can be seen as a rather radical change with a complex underlying structure (Brenes et al., 2006, p. 373; Ibrahim, Soufani, & Lam, 2001, p. 254). If a succession process fails, family businesses are often sold to third parties or in the majority of cases this might even lead to the failure and respective closure of the whole business. This problem is highlighted by a study, showing that while 67% of family businesses survive to the second-generation, a minority of 32% make it through to the third generation and the average life span of family businesses is only around 24 years (Haubl & Daser, 2006, p. 12).
1.1. Problem Definition
As highlighted above, the succession of a family business to the next generation can be seen as a major change as well as challenge within the company. This special form of change can even be seen as one of the most significant strategic issues, which most family businesses are likely to face at one point in time (Ibrahim et al., 2001, p. 245). Especially for the family business top management this issue is one of the most important ones to consider (Chua, Chrisman, & Sharma, 2003, p. 91). Several prior studies have been dealing with the succession process within family businesses. Special focus has been given to the area succession planning (Bigliardi & Dormio, 2009, p. 48; Morris, Williams, Allen, & Avila, 1997, p. 398; Sharma, Chua, & Chrisman, 2000, p. 237; Tatoglu, Kula, & Glaister, 2008, p. 173). Further studies also dealt with the correlation between succession and business performance (Wang, Watkins, Harris, & Spicer, 2004, p. 77) as well as the relationship between a family business structure and succession (Brenes et al., 2006, p. 374). The prior studies dealing with the topic of family business succession have been conducted in different areas such as North America (Chua et al., 2003, p. 102; Sharma et al., 2000, p. 237), South America (Brenes et al., 2006, p. 372), Turkey (Tatoglu et al., 2008, p. 163) or various European countries, including Poland, Italy and Great Britain (Bigliardi & Dormio, 2009, p. 46; Koładkiewicz, 2013, p. 162; Wang et al., 2004, p. 70). However, only very little research concerning this topic refers to German-speaking countries (Klein, 2004, p. 37), even if there has been an increasing interest amongst researchers towards this topic during the last years (Felden & Zumholz, 2009, p. 7).
Succession within a family business usually leads to change and resulting risks, which is likely to affect the whole business (Senegovic, Bublic, & C´oric, 2015, p. 175). Furthermore, the physiological pressure during succession should not be underestimated (Filser, Kraus, & Märk, 2013, p. 272). Not only the top management will be affected by this change but also the employees will play a crucial role in the process. Additionally, the natural reaction of humans towards change is usually rather negative, leading to phenomena such as resistance to change (Waddell & Sohal, 1998, p. 544). Consequently, if a business is not dealing with its people during change appropriately, they are likely to face financial as well as non-financial problems in their future business performance (Agboola & Salawu, 2011, p. 235; Boohene & Williams, 2012, p. 135).
The two parties, which are likely to be responsible for dealing with the succession process most, are the incumbent as well as the successor of the family business. As Wang et al. (2004) confirm “successors are an important stakeholder group in the succession process” (p. 61). Nevertheless, according to Lipfert (2013) also incumbents play a crucial role during succession (p. 69). However, also non-family managers and the relationship with them should not be neglected (Chua et al., 2003, p. 104). Nevertheless, especially the incumbent as well as the successor should deal with their employees during the succession process appropriately. Furthermore, they should also prepare them in the best possible way for the change, in order to avoid negative consequences of the change. The sufficient planning of the succession can be seen as a key factor for success (Bigliardi & Dormio, 2009, pp. 47–48; Morris et al., 1997, p. 398). Overall, it has been identified that there is a lack of research concerning the question of how to deal with the employees of a family business, more specifically what the roles of the incumbent and the successor are, when it comes to the preparation of employees for succession.
1.2. Aim and Research Question
This bachelor thesis aims at highlighting the importance of the respective role of the successor as well as the incumbent of a family business, when it comes to preparing family business employees for succession. Furthermore, it also gives guidelines on what actions to take by those two parties in order to deal with the employees appropriately. On the basis of valuable evidence from the literature review as well as the empirical research of this bachelor thesis, the overall goal is to give recommendations for incumbents and successors on how to prepare their employees for succession, specifically referring to small to medium sized businesses. This leads to the following research question: What actions should the incumbent as well as the successor of a family business take in order to prepare their employees for a succession process?
This aim will be achieved firstly by conducting a comprehensive literature review concerning the most important topics of the succession process in a family business, secondly identifying the impact on the employees and lastly determining the roles of the incumbent and successors connected to the succession process. Furthermore, a qualitative research is used in order to back up the literature as well as discuss the actions, which incumbents as well as successor should take in order to prepare their employees for succession in a family business. The results as well as the discussion section, which highlight the most important findings, finalize this bachelor thesis.
It should be mentioned that this bachelor thesis does not identify the best fitting successor but rather assumes this process has already taken place before the incumbent and successor start with the preparation of the employees for succession. Furthermore, it also does not aim at giving implications on when the best time for the resignation of the incumbent will be. It does also not answer the question of what management or leadership style might fit best in order to deal with succession appropriately or furthermore, the impact of the respective corporate culture in a family business for a succession process.
An empirical research in the form of qualitative research is used in order to discuss the theory based literature review of this bachelor thesis to get a deeper understanding of the researched topic. Qualitative research is generally known for really dipping into the underlying meaning of a topic, by building thematic categories and analysing them accordingly (Hesse-Biber & Leavy, 2006, p. 8). Furthermore, qualitative research is based on fundamental principles such as the tendency to higher subjectivity, the connection to the real world and the respective interpretation of results (Mayring, 2002, p. 19).
The required data for the qualitative analysis, is collected by conducting interviews, which can be seen as one of the most common methods in the qualitative research approach (Hesse-Biber & Leavy, 2006, p. 119; Strauss & Corbin, 1996, p. 3). More specifically, semi-structured interviews are conducted. This interview format gives the opportunity to the interview subject to talk openly and encourages a natural conversation. However, the underlying structure aims at specifically addressing the research question of this bachelor thesis (Mayring, 2002, p. 67).
The chosen subjects of the interview are assumed to have special knowledge about the field of research (Hesse-Biber & Leavy, 2006, p. 119). The selected interviewees are therefore incumbents as well as successors of family businesses. In further detail, four family members and one employee of a family business located in Germany are interviewed. One interviewee represents the past owner and manager, the second interviewee the current owner and manager and the third and fourth interviewees are most likely going to be the future owners and managers of the family business. The interviewees therefore represent three generations of incumbent and successors within their family business. Furthermore, one employee, who has also already experienced the transition from one generation to the next within the family business, is interviewed. Further detail concerning the methodological approach of this bachelor thesis is given in the empirical approach section.
1.4.1. Family Business
The definition of a family business can be seen as rather complex, even if people usually have a general understanding of what it means (Chua, Chrisman, & Sharma, 1999, p. 22; Lansberg, Perrow, & Rogolsky, 1988, p. 1). Different researchers and governmental bodies have developed various definitions over the years. The definition, which is referred to in this bachelor thesis goes back to the Three-Circle model, as illustrated in Figure 1, which includes the factors family, ownership and business. These three factors can refer to the roles, which family members but also external actors usually take in a family business environment, whereby every role has a specific interest in different parts of the business or the family itself. The model can also be used to illustrate the development within a family business over time, as well as highlight the complexity of a family business (Gersick, Davis, Hampton, & Lansberg, 1997, pp. 6–7; Pfannenschwarz, 2006, pp. 29–30; Tagiuri & Davis, 1996a, pp. 200–201).
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Figure 1. The Three-Circle Model of Family Business. Retrieved from “Generation to Generation” by K. E. Gersick, J. A. Davis, M. M. Hampton, and I. Lansberg, 1997, p. 6
Due to the intersection of the three factors, overall seven different areas arise within the model, as illustrated in Figure 1. Each factor can either stand-alone, be combined with one of the other two factors or all three factors can be combined. All stakeholders of a family business belong to one of the seven sections. While some are only part of one of the three factors, others might be part of two or even three factors and therefore belong to the overlapping areas (Gersick et al., 1997, pp. 6–7). Furthermore, each of the three roles has its own characteristics. Nevertheless, they are also interdependent and need to work together in order to assure success in the family business (Wimmer, Torsten, & Simon, 2004, p. 5). It should be considered that “the family company has several unique inherent attributes, and each of these key attributes is a source of benefits and disadvantages for owning families, nonfamily employees, and family employees” (Tagiuri & Davis, 1996a, p. 200). The factors family, business and ownership can also be described as three separate systems, in which each system has its own rules. However, they need to play together and are influenced by each other due to their common surrounding (Distelberg & Sorenson, 2009, p. 66). The roles in a family business therefore need to be balanced and work towards a common goal in order to create a strong and well functioning business system (Tagiuri & Davis, 1996b, pp. 200–202).
Furthermore, this bachelor thesis refers to small and medium enterprises, which are declared as family businesses. Those “are defined as businesses which employ less than 250 staff and have an annual turnover of less than EUR 50 million, and/or their balance sheet total is less than EUR 43 million” (Muller et al., 2015, p. 7), according to the European Commission standards. In Germany, most small and medium enterprises are declared as family businesses, often operated by the family business founders (Bundesministerium für Wirtschaft und Energie, 2014, p. 4). The importance of family businesses, which are defined as small and medium enterprises can therefore be described as crucial for economies such as Germany or other European countries (Bundesministerium für Wirtschaft und Energie, 2014, p. 3; Muller et al., 2015, p. 9; Pérez-Cabañero, González-Cruz, & Cruz-Ros, 2012, p. 116).
To sum it up, the definition of a family business for the purpose of this thesis is a business, which is governed or dominantly managed by the members of a family and the majority ownership of the business lies in the family members’ hands. This definition is in line with several prior studies (Chua et al., 1999, p. 25; Litz, 1995, p. 102; Lussier & Sonfield, 2010, p. 416; Zahra et al., 2004, p. 369). Additionally, the focus of this bachelor thesis lies on small and medium sized family businesses.
Other researchers describes the term succession as followed:
By definition, succession is a dynamic process during which the roles and duties of the two main groups of individuals involved, i.e., the predecessor and the successor evolve interdependently and overlap, with the ultimate goal being to transfer both the management and ownership of the business to the next generation. (Cadieux, Lorrain, & Hugron, 2002, p. 18)
This highlights the complexity of succession and clearly identifies succession as a process rather than a short-term event (Le Breton-Miller, Miller, & Steier, 2004, p. 324). Linking this back to the Three-Circle model, also the succession in family business includes three dimensions, which are the three factors family, ownership and business. In each of these areas a passing on to the successive generation is likely to take place when it comes to succession within a family business. However, not necessarily in all areas at the same time (Pfannenschwarz, 2006, pp. 50–51).
This bachelor thesis furthermore, focuses on the succession of family members within a family business rather than the succession to third parties such as a non-family manager, referring to the definition: “Succession planning in the family firm is the explicit process by which management control is transferred from one family member to another” (Sharma et al., 2000, p. 233). This definition highlights that succession involves mainly two parties, the incumbent and the successor, who should usually aim for the overall goal of transferring the business ownership as well as the control to the next generation within the family business (Churchill & Hatten, 1987, p. 52).
2. Literature Review
2.1. Succession in Family Businesses
In general family businesses can be seen as a stable business environment, however, only as long as no major change occurs. A major event, which is likely to destabilize the family business environment is when a new family member is brought into a leading position within the business (Morris et al., 1997, p. 389). Especially, small businesses are often densely dependent on their manager, who is often represented by the founder within a family business. This fact increases the need for successful succession towards the next generation once the incumbent retires or dies, at the latest (Christensen, 1979, p. 10). Such a succession process can be seen as a vital part of a family business, which usually aims for the continuity of the business. Family businesses generally follow certain rules and ownership succession can be seen as one of the most critical, yet necessary changes in this specific business environment in order to assure long-term success (Bjuggren & Sund, 2001, p. 11; Brenes et al., 2006, p. 373; De Massis, Chua, & Chrisman, 2008, p. 183; Dyck, Mauws, Starke, & Mischke, 2002, p. 144; Handler & Kram, 1988, p. 377).
Connected to the Three-Circle model, which was elaborated in the definition for family businesses, a Developmental model according to the three factors Ownership, Family and Business, has been developed by Gersick et al. (1997), as illustrated in Figure 2. The Developmental model divides the development of the Ownership level into three forms. Those forms are firstly the Controlling Owner, with one single owner, the Sibling Partnership, where siblings hold the ownership and the Cousin Consortium, where a group of cousins hold the ownership of the business. The ownership type within a family business can be stable for many years and does not necessarily change if succession occurs. Nevertheless, succession often leads to a turning point also in the structure of ownership (Gersick et al., 1997, pp. 30–31).
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Figure 2. The Three-Dimensional Developmental Model. Retrieved from “Generation to Generation” by K. E. Gersick, J. A. Davis, M. M. Hampton, and I. Lansberg, 1997, p. 17
Furthermore, as shown in Figure 2, the dimension development of the factor Family includes the four stages Young Business Family, Entering the Business, Working Together and Passing the Baton. The length of the stages varies from business to business and family members usually move along the stages purely in one direction, mainly forward as they become older and move from entering the business towards handing the business over to the next generation. Within this dimension succession can clearly be seen as a natural development within a family-business and a necessity in order to assure continuous success for the business (Gersick et al., 1997, pp. 60–61).
Finally, Figure 2 also illustrates the business development with the stages Start-Up, Expansion/Formalization and Maturity. While these stages might be true for most companies as they grow, it is especially interesting for family businesses as changes in one or both of the two other dimensions family or ownership might trigger or delay the development of the family business accordingly. Overall, the division of a family business into the three factors ownership, family and business is a useful tool to understand the complexity of family business and also identify where specific conflicts might arise before, during or after succession (Gersick et al., 1997, pp. 106–107). It should also be considered that a succession process is likely to have significant impacts on all three factors and therefore on the whole system of a family business (Handler & Kram, 1988, p. 364).
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Figure 3. The Developmental Stages of Business Families. Retrieved from “Succeeding Generations: Realizing the Dream of Families in Business” by I. Lansberg, 1999, p. 153
The Developmental Dimension model mentioned above also corresponds with another model, which has been developed by Lansberg (1999), as shown in Figure 3. The Developmental Stages of Business Families model includes similar steps to the above-mentioned family development model, starting with the phase Young Business Families, continuing with the Mid-Life and Managing Entry phase, the Working Together phase and finally the Letting Go and Taking Charge phase. Nevertheless, it focuses even more on the stages the individuals of a family business, namely the juniors and seniors are going through as they become older. They are also specifically referring to the age of the two actors and suggesting respective behaviour they should follow during the life cycle of a family business (pp. 152–153). Overall, both models clearly highlight the necessity for succession within a family business at one point, in order to assure continuity of the business and highlight the complexity of the system of a family business when it comes to succession.
Nevertheless, even if succession can be seen as crucial for family businesses it also has the potential to lead to one of the most common crisis arising in family businesses (Pfannenschwarz, 2006, p. 319; Wimmer, Domayer, Oswald, & Vater, 1996, p. 253). Succession can clearly not be seen as a singular event, where the ownership or management of a family business is handed over to the next generation but it should be seen as a long-term process, which requires various resources and continuous adaption to changing circumstances (Le Breton-Miller et al., 2004, p. 324; Longenecker & Schoen, 1978, p. 6). In addition, numerous important parts of a family-business will change during succession. Lansberg (1988) describes some areas, which need to change during such a process as followed: “family relationships need to be realigned, traditional patterns of influence are redistributed, and long-standing management and ownership structures must give way to new structures” (p. 26).
2.1.1. The Succession Process
As already highlighted, succession can clearly not be seen as a single event but rather as a long-term and complex process (Cabrera-Suarez, Saa-Perez, & Garcia-Almeida, 2001, p. 40; Cadieux et al., 2002, p. 18; Sharma et al., 2000, p. 233). Furthermore, especially the timing of the process plays a crucial role and it is important for family businesses to understand, “the process begins well before the successor is brought into the business and ends when the predecessor retires” (Cadieux et al., 2002, p. 18). Various factors play a crucial role in the succession process and as already mentioned above “timing appears to play a crucial role in making a transition successful” (Dyer, 1986, p. 123). Other studies have identified several phases during this process (Longenecker & Schoen, 1978, p. 4; Stavrou & Swiercz, 1998, p. 22). Those phases can generally be summarized as “the initial phase, the integration phase, the joint management phase, and the retirement phase” (Cadieux et al., 2002, p. 18).
Furthermore, Stavrou and Swiercz (1998, p. 22) developed a transition model concerning the succession process, which consists of three stages. The first stage is the potential successor’s Pre-Entry stage, where the potential successor gets to know how the business is functioning by getting a deeper understanding of the family but more importantly of the firm itself. At this point in time the potential successor is not fully employed in the family business yet, the successor is rather introduced to the business through summer jobs or part-time work in the family business (Cadieux et al., 2002, p. 18). The second stage implies the actual entry of the potential successor into the family business as a full-time employee. However, his or her responsibility at this level is often seen as rather low and successor “typically learned the operations and skills associated with one or more departments of the organization“ (Handler, 1990, p. 45) within this stage. The next stage contains the decision of the potential successor, whether he or she wants to continue their career within the family business or not. During this phase “the predecessor and the successor work side by side, thereby ensuring a transfer of responsibilities and authority until the successor is able to make business decisions on his or her own” (Cadieux et al., 2002, p. 18). If the successor decides to stay in the family business, the third stage, which is likely to happen at one point in time, is the promotion to a managerial position within the family business. Such a promotion usually indicates the transfer of power from the incumbent to the successor (Stavrou & Swiercz, 1998, p. 22).
While the above elaborated transition model ends at the power transition, other models are even going one step further. It can also be argued that the final stage of succession happens only when the incumbent decides to retire and pulls out of the family business, while finally leaving all the control of the business to the successor (Cadieux et al., 2002, p. 18; Churchill & Hatten, 1987, p. 58). Throughout the succession transition there is a relatively high potential for problems and difficulties for both the successor as well as the incumbent and therefore also for the family business as a whole (Lansberg, 1988, p. 26). The three stages model mentioned above also corresponds with a study conducted by Longenecker and Schoen (1978), who identify another model dealing with management succession in family businesses. The model consists of seven stages, which are connected to two very important events during the succession process. Those two events are firstly, when the successor enters the business as a full-time employee and secondly, when the leadership position is transferred to the successor (p. 4). Those two stages can be seen as crucial to the effectiveness of a succession process, especially the final stage, where the leadership is handed over to the next generation (Handler, 1990, p. 45).
Various factors within a family business have to cooperate in order to increase the success rate of a succession process. A prior study describes the succession process by using the model of a rely-race with the cornerstone factors sequence, timing, the technique when it comes to the so called passing of the baton and finally the communication, which need to play together in order to make the process successful (Dyck et al., 2002, p. 161). This highlights the complexity of a succession process as well as the different perspectives, which need to be considered. Often problems may also occur due to a trade-off between the family based view and the performance based view of a family business (Christensen, 1979, p. 189). “After all, the business is a performance-based system, while the family is a relationship-based system" (Handler & Kram, 1988, p. 367), which usually leads to a high potential for upcoming conflicts.
2.1.2. Succession Planning
“To plan and carry out a succession is a complex matter” (Bjuggren & Sund, 2001, p. 11). This statement highlights, not only that the succession process itself is likely to lead to difficulties but also that the succession process usually starts way earlier, with a plan for upcoming succession. Lansberg (1988) defines succession planning as “the preparation necessary to ensure the harmony of the family and the continuity of the enterprise through the next generation” (p. 25). The planning phase can be seen as a crucial step in order to increase the likelihood of successful succession. Family businesses, which are lacking succession planning might face difficulties when it comes to continuity of the business (Christensen, 1979, p. 19; Dyer, 1986, p. 119; Trow, 1961, p. 237). Additionally, once a succession plan has been developed, it is much easier to recognize a clear structure of the upcoming succession process and implement possible supportive actions before, during and after succession takes place (Sharma, Chrisman, & Chua, 2003, p. 3). Furthermore, planning can be seen as a helpful tool to create a common understanding of the process and a sufficient plan might encourage more people to get involved and support the process (Ward, 1988, p. 195).
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