Integration of family-owned business succession with turnover and life cycle models: Development of a successor retention process model

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Abstract

Family-owned businesses face a unique obstacle: continuation of the business through intergenerational transfer. Most family-owned businesses cease when the next generation does not enter the business. This paper develops parallels between failed intergenerational transfer and voluntary turnover. Based on past research, we develop a taxonomy of characteristics hypothesized to influence intergenerational transfer in family-owned businesses. We, then, integrate these dimensions with prominent turnover and socialization theories to propose a successor retention process model. Implications for research are described.

Introduction

Increasingly within the field of entrepreneurship attention is being focused on family-owned businesses (FOBs). This reflects the growing recognition of the importance of family business in economic activity (Astrachan and Shankar, 2003, Fletcher, 2002). For example, Heck and Trent (1999) use a broad definition to show that some 90–98% of all businesses owned by households are family businesses. Others suggest that FOBs contribute between 45–70% of GDP and employment in many countries around the world (Aronoff and Ward, 1991, Astrachan and Shankar, 2003, Ward, 1987). Family businesses come in many shapes and sizes (Mackie, 2001) and belong to any sector of the economy (Poutziouris & Chittenden, 1996). The overwhelming majority are small or medium-sized businesses (Neubaur & Lank, 1998) but there are also many huge, multinational family-controlled businesses.

In stark contrast with their economic significance, until the 1980s family business was largely ignored as a topic for academic research (Bird et al., 2002, Neubaur and Lank, 1998). Recently Aldrich and Cliff (1993) called for a family embeddedness perspective in entrepreneurship research, while Dyer (2003) noted that ‘family’ is still a missing variable in organizational research. This is despite the fact that FOBs face tremendous challenges. They must continually deal with the same issues that all businesses face in the marketplace. Yet, even if they are successful in managing these diverse activities, they must also overcome a significant and unique obstacle: the continuation of the business and often through intergenerational transfer. The future of the FOB depends on the capability of the owners in facing business challenges successfully while preserving family ties across the generations. Continuity is a cherished ideal among family members (Aronoff & Ward, 1991) as most parents and their children want the business to remain in family hands.

Succession has been one of the key issues studied in the family business field (Aronoff, 1998, Bird et al., 2002, Dyer and Handler, 1994, Dyer and Sánchez, 1998, Handler, 1994, Sharma, 2004, Zahra and Sharma, 2004), and the solution to the problem of succession is usually given as succession planning. From a human resource management perspective succession planning is typically defined as a process through which senior-level openings are planned for and eventually filled (e.g., Dessler, 2004). Typical components of the process include higher management projecting organizational needs, assessing the skills inventory of current managers, and addressing development needs that are found. These components are also addressed in the family business succession literature. For example Dyck, Mauws, Starke, and Mischke (2002) present a model for succession planning that utilizes the analogy of a relay race. Here the process of succession is likened to the conduct of a relay race where four principal factors – sequence, timing, baton-passing technique, and communication – need to be addressed in order to successfully complete the race. They argue that first, the best sequence for business succession should be determined. This means assessing the firm's current status and future requirements to ensure that a successor with the appropriate skills and experience to assume the leadership after the incumbent is chosen and developed. Second, the correct timing for a handover to the next generation needs to be observed. Good timing entails both the incumbent and successor have taken account of prevailing circumstances (eg. business climate) and are properly positioned for a ‘baton change’ in those conditions. Third, the appropriate technique for a smooth transition of power should be determined. How the incumbent should let go of the baton and how the successor should accept the released baton must be agreed. Finally, good communication is needed to coordinate all these activities and make certain that everyone ‘runs a good race’ (Dyck et al., 2002, p. 148).

Although useful, this focus on succession planning tends to ignore the critical role of the motivation of potential successors to continue in the FOB. To take a contemporary example of this issue we only need to look at the situation where Lachlan Murdoch – the heir apparent to his father Rupert Murdoch – announced his resignation from News Limited in 2005 and returned to Australia from the US to pursue other options. We want to understand why this happens. While Cannella and Chen (2001) have studied heir apparent exit in non-family businesses, the next generation has been less of a focus in the succession literature compared to the stages of the process of succession. Stavrou and Swiercz (1998) offered a model of offspring intentions to join a FOB focusing on family, business, personal, and market considerations. Le Breton-Miller, Miller, and Steier (2004) attempted to create an integrated model of effective FOB succession that includes the elements of successor motivation and other characteristics. Most recently, Sharma and Irving (2005) developed a series of propositions focusing on antecedents and consequences of different types of successor commitment to the FOB, while Cabrera-Suárez (2005) examined two propositions dealing with successors' training and commitment in the context of seven case studies in the auto industry.

We take a different approach by recognizing that failed intergenerational transfer is conceptually similar to voluntary employee turnover, and thus we draw from the turnover literature to explore the reasons why heirs apparent choose to leave FOBs. To support our proposition, we explore the parallels between succession and turnover by first defining the terms. Then, through an extensive examination of the literature, we consider factors that may impact the decision to stay or leave the FOB for the heir apparent and categorize them into a manageable number of dimensions. Finally, we integrate these dimensions with contemporary turnover theory and research (e.g., Hom & Griffeth, 1995) and career life cycle theory (Feldman, 1976) into a comprehensive model, which we call the Successor Retention Model.

Section snippets

Defining and linking successful succession with turnover

Succession can refer to the transfer of the management and/or the ownership of the FOB. Ownership succession focuses on who will own the business, when and how will that happen, while management succession focuses on who will run the business, what changes will occur, when will they be accountable for results and how results will be realized. Although ownership succession can occur without management succession and vice versa, one form does have implications for the other.

This raises the

Classification of factors influencing FOB successor motivation to participate

A relatively parsimonious way to begin is to compile a four dimensional classification system of key elements of the succession literature based on our review of the FOB succession literature; the literature on turnover antecedents; Goldberg's (1991) classification of the succession literature into two systems, behavioral and non-behavioral; Handler's (1989) individual, family relations, and externality factors; and Stavrou and Swiercz's (1998) family, business, personal, and market

Life cycle theory

To understand how the dimensions outlined above influence successor decisions, we integrate a life cycle model of socialization and career stages with contemporary turnover theory. Feldman (1981) suggests that there are three distinct career stages: anticipatory socialization — ‘getting in’, encounter — ‘breaking in’, and role management — ‘settling in’. While Feldman's intent was to explain the processes that employees use to make decisions about working for a firm, we feel that these may also

Research implications and conclusions

Historically, the issue of succession in family-owned business has been treated from a prescriptive, top–down point of view. Most FOBs continue to fail in their succession efforts as the decreasing numbers of FOBs that survive through the generations attests. One of the goals of this paper was to introduce the idea that failed intergenerational transfer was similar to employee turnover. We think that research deriving and testing hypotheses from the Successor Retention Model can add to our

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