The conceptual model so far

The idea for the research is:

Both the environmental situation (velocity plus turbulence) and the growth strategy of a company (explorative or exploitative) prescribe the pattern for business succession (ad hoc replacement, heir development, talent pool management). If the actual pattern, which a company chooses, matches the prescribed one, the company performance will be higher than in the case of mismatch.

Assumptions and units of the research

Research question

What is the linkage between environment, growth strategy and stakeholder satisfaction with business succession?

Type of the research

Quantitative variance study.

Assumptions behind the conceptual model

1. Companies operate to satisfy all of their stakeholders. Stakeholders pursue quantitative and qualitative, rational and irrational, explicit and implicit goals. Given such a broad range of interests, stakeholder satisfaction is an ultimate measure for all processes and results that companies perform and achieve.

2. All types of resources are scarce, including knowledge and skills. Therefore, they are distributed among companies unevenly, what results in differences of foresight and implementation capabilities which companies possess.

Table 1. The variables and units of the conceptual model

Variables	Name	Units of analysis[1]	Units of observation[2]
V1	Environment	Environments	Macro- and micro-factors
V2	Growth strategy	Companies	Companies
V3	Business succession pattern	Companies	Companies
V4	Stakeholder satisfaction	Stakeholder groups	Individual stakeholders

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[1] Units of analysis are those about whom conclusions are drawn.

[2] Units of observation are those at whose level data are collected.

Founder successions in Russia: linking environment, strategy and stakeholder satisfaction (framing, take 1)

 

The European statistics of the 2000s shows that only 5-15% of family businesses reached the third generation, and 30% of closures were considered transfer failures (FEE, 2000; Le Breton-Miller et al., 2004; SBS, 2004). At the same time, established companies in the US faced shortfalls of experienced managerial talent for leadership positions due to a rapidly ageing workforce as the baby boomer generation began to retire (Groves, 2006; Williams, 2010). In other developed economies both SMEs and large firms suffered from shifts in workplace demographics and lack of structured efforts in planning for succession, for example, in Australia, UK, Canada (Taylor and McGraw, 2004; Ip and Jacobs, 2006). Russia’s new economy is currently entering the period of business transfers across all industries and all sizes of companies. There was the wave of start-ups in the 1990s, as entrepreneurs were launching their ventures. They have led them until recently and now they start to exit from management and/or ownership positions. That raises the wave of business successions in Russia. Similar situations are observed in China, India and South Africa. The problem of business succession is becoming a major strategic challenge for a significantly larger proportion of companies than usual. Therefore, studying business succession from different perspectives and in different contexts is an appropriate modern research agenda. Providing practitioners with generalizable models, practical approaches and reliable tools may help reduce the number of business transfer failures in this global top-management turbulence.

In the current discourse business succession issues fall in three broad categories: family and organizational; legal, finance, tax; practical approaches to business succession. The debate focuses primarily on SME of developed countries. However, there is a discussion with the emphasis on implementation aspects of business succession management in established corporations. In the last decade emerging economies have contributed to the business succession discourse. Concerns related to planning for succession are spread across diverse industries (Ip and Jacobs, 2006; Stadler, 2011).

Organizational behavior and human resources management researchers seem to have been investigating the problem of business succession mainly from a company internal perspective (Ip and Jacobs, 2006). That fails to explain the degree and nature of influence a company environment and strategy have on business succession. Strategic management researchers have done a number of studies on the linkage between founding conditions, strategy and growth of young companies (Eisenhardt and Schoonhoven, 1990). However, their approach does not distinguish business succession as a separate problem of organizational development, therefore it fails to provide advice on how companies should approach it to minimize damage to performance.

Additionally, the measures, which the majority of researchers currently use for evaluating the process and outcomes of business succession, are mainly financial. Clearly, financial measures cannot be considered ultimate and/or satisfactory for all cases for business successions have multiple internal and external stakeholders with different goals and motives. The human perspective in measuring success of business succession has just started to emerge in resent research. It is bringing in new measures reflecting stakeholders' satisfaction with the process of succession and its outcomes (Serra and Borzillo, 2013).

The purpose of this work is to link a company’s environment and strategy to stakeholder satisfaction with the process and outcomes of business succession. The conceptual model (see Figure 1) underlying this work combines four variables:

V1. Environmental situation.

V2. Company strategy.

V3. Business succession pattern.

V4. Stakeholder satisfaction.

Figure 1 also depicts three propositions on how and why the variables interact:

P1. Environmental situation determines the business succession pattern, which more likely leads to stakeholder satisfaction.

P2. Growth strategy determines the business succession pattern, which more likely leads to stakeholder satisfaction.

P3. Coherence of the prescribed and actual business succession patterns more likely results in stakeholder satisfaction.

Figure 1. The conceptual model.

Environmental turbulence and velocity define resource intensity of business succession as a task, which a company should manage. In stable environments business succession is independent from external factors. High-velocity/turbulent environments require significant planning, organization, managerial skills and time for business succession to become a success.

To match environment and internal resources, companies pursue two generic types of growth strategies: explorative and exploitative. While explorative strategies achieve growth by expanding customer base at a fixed efficiency, exploitative strategies generate growth through a higher efficiency on a fixed customer base. Explorative strategies require diversified organizational structures, which substantially increase the demand for business planning, organization and management. Exploitative strategies allow companies to grow with the nearly unchanging organization. The former bring additional internal challenges to business succession, which leads to its high resource intensity. The latter, in turn, take fewer resources to achieve success in business transfers.

With regard to the resource claim, patterns of business succession fall in three categories (i) ad hoc reactions, (ii) heir development and (iii) talent pool development. The first two are person-focused and have a lower resource claim in comparison with the third, which is merit-focused, functioning as part of an established strategic management process and, therefore, highly resource-intensive.

In this work stakeholder satisfaction with the process and outcomes of business succession is used as an ultimate measure of success. Five types of succession stakeholders are identified as subjects with the strongest interest and influence: (i) the exiting owner-CEO, (ii) the incoming CEO, (iii) the top-management team, (iv) the external investors and (v) the external experts/consultants.

This work focuses on the cases of founder exits from managing positions. Among all varieties of business successions those have the highest potential impact on company. That has been proven by the previous research, which indicates that personal ability plays a significant role in small firm growth (Sexton and Bowman-Upton, 1991; Jennings and Beaver, 1997; Covin and Slevin, 1997; Wiklund and Shepherd, 2003), and that founding teams produce a strong path dependence[1], which increases over time and which is more significant that the influence of later CEOs (Eisenhardt and Schoonhoven, 1990).

A cross-sectional sample survey is planned for 2014-2015. It will supposedly engage about 200 companies from a range of industries in Russia’s mining, manufacturing, transportation, construction and service sectors. All of the companies will have to have passed through founder successions at least one year before the study. Five stakeholders of different types from each company will be asked to fill out questionnaires on a specially created website. The questions will address (i) environmental situations before and at the time of founder successions, (ii) types of strategy the companies pursued, (iii) actual succession patterns the companies implemented and (iv) the stakeholders’ evaluation of the process and outcomes of the successions. The research is supposed to test propositions P1, P2, P3 and to yield the findings that

• Environment and strategy pre-determine the business succession patterns, that will likely lead to stakeholder satisfaction.
• Coherence of the prescribed and actual succession patterns will likely result in stakeholder satisfaction.

The research will conceptualize and attempt to explain the linkage between environment, strategy and business succession. It is expected to provide insights on how companies should approach the problem of founder and other types of business successions to ensure the satisfaction of internal and external stakeholders. The variables of the conceptual model are universal across countries and independent from the degree of economic maturity. That ensures the findings will have a strong potential for generalization. They may be particularly useful for practitioners in the emerging economies where the waves of founder exits are expected, as well as for those developed economies that are currently passing through the decline in workforce demographics.

References

(The) European Federation of Accountants (FEE) (2000), “Keeping it in the family. SME family business succession”, available at: www.fee.be (accessed November 2013).

Le Breton-Miller, I., Miller, D. and Steier, L. (2004), “Toward an integrative model of effective FOB succession”, Entrepreneurship Theory and Practice, Vol. 28 No. 45, pp. 24-5.

Small Business Service (SBS) (2004), “Passing the baton – encouraging successful business transfers: evidence and stakeholder opinion”, available at:www.gov.uk/ (accessed November 2013).

Groves K. (2006), “Integrating leadership development and succession planning best practices”, Journal of Management Development, Vol. 26 No. 3, 2007, pp. 239-260.

Taylor, T., McGrow, P. (2004), “Succession management practices in Australian organizations”, International Journal of Manpower, Vol. 25 No. 8, 2004, pp. 741-758.

Ip, B., Jacobs, G. (2006), “Business succession planning: a review of the evidence”, Journal of Small Business and Enterprise Development, Vol. 13 No. 3, 2006, pp. 326-350.

Stadler, K. (2011), “Talent reviews: the key to effective succession management”, Business Strategy Series, Vol. 12 No. 5, 2011, pp. 264-271.

Eisenhardt, K.M. and Bourgeois, L.J. (1988), ‘‘Politics of strategic decision making in high-velocity environments: toward a midrange theory’’, Academy of Management Journal, Vol. 31 No. 4, pp. 737-70.

Serra, Caroline Kaehr  and Borzillo, Stefano (2013). "Founder successions in new ventures: the human perspective." Journal of Business Strategy, Vol. 34, No. 5, pp. 12-24.

Sexton, D. L. and Bowman-Upton, N. B. (1991). Entrepreneurship: Creativity and Growth. New York: Macmillan.

Jennings, P. and Beaver, G. (1997). The performance and competitive advantage of small firms: a management perspective. International Small Business Journal, 15, 2, 63–75.

Covin, J. G. and Slevin, D. P. (1997). High growth transitions: theoretical perspectives and suggested directions. In Sexton, D. and Smilor, R. (Eds), Entrepreneurship 2000. Chicago, IL: Upstart Publishing Company.

Eisenhardt, Kathleen M., Schoonhoven, Claudia Bird (1990). Organizational growth: Linking founding team, strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988. Administrative Science Quarterly (RSS).

Wiklund, J. and Shepherd, D. (2003). Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities. Oxford, UK and Malden, MA, USA: Blackwell Publishing.

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[1] Path dependence means that both the starting point and accidental events can have significant effects on the outcome. In other words, history matters.

Business succession landscape in the OB and HRM debate

 

The organizational behavior (OB) and human resources management (HRM) researchers seem to have been investigating the business succession problem mainly from a company perspective. Therefore, the measures they use are business performance variables (Serra and Borzillo, 2013).

In the past few years a human perspective has emerged in OB/HRM conversations on business succession. That brought in new measures reflecting stakeholders' satisfaction with succession processes and outcomes.

Both the established and emerging conversations occur in the natural realm of actor-focused organizational theories.

Figure 1 shows two dimensions of the business succession debate: theory (X) and perspective (Y). 10 organizational theories are placed on the X dimension. Classes of measured variables (business performance, stakeholders' reactions) are positioned on the Y dimension. Thus, Figure 1 maps the fields of the existing conversations and "unexplored/unexplorable" areas.

It is my intention to join the emerging conversation of the left upper corner by moving in from the foothold of the conceptual model based on the resource dependence theory with variables from the stakeholders' reactions class.

Figure 1. The map of the business succession debate

Abbreviations of organizational theories

RA - Rational actor

OP/LPS - Organizational process/Limited problem solver

C/BP - Coalitions/Bureaucratic politics

OA/GC - Organized anarchies/Garbage can

OL/KPM - Organizational learning/Knowledge-practice model

OC - Organizational culture

RD - Resource dependence

NO - Network organization

NI - Neoinstitutional

PE - Population ecology

References

Serra, Caroline Kaehr  and Borzillo, Stefano (2013). "Founder successions in new ventures: the human perspective." Journal of Business Strategy, Vol. 34, No. 5, pp. 12-24.

McFarland, Daniel A., Organizational Analysis. Stanford/Coursera, Fall 2012.

Acknowledgements

I express my sincere gratitude to Audrone Nakrosiene, my fellow PhD student, for her help in framing my PhD research question.

Why there must be a divide between the first and subsequent business successions

 

Personal ability plays a significant role in small firm growth (Sexton and Bowman-Upton, 1991; Jennings and Beaver, 1997; Covin and Slevin, 1997; Wiklund and Shepherd, 2003).

Founding teams produce a strong path dependence* which increases over time and which is more significant that the influence of later CEOs (Eisenhardt and Schoonhoven, 1990).

Two propositions ensue from the above: 

(i) it is not the size of a company what influences growth after the first succession, but the path dependence which amplifies resistance to change after the founder exits and the successor steps in;

(ii) the first business succession in a company's history has a stronger impact on its growth than later successions.

These propositions imply that business succession is most vulnerable to external and internal factors if it is a first-time transfer of the founder's managerial and/or ownership position. Therefore, measuring first-time successions promises a lower level of noise and, accordingly, a clearer evidence. That, in turn, will lead to a "weather-tight" practice (namely, prescriptive succession patterns), whose efficiency in extreme conditions of first-time successions guarantees its appropriateness in less critical situations of later successions.

Footnote definition

* Path dependence means that both the starting point and accidental events can have significant effects on the outcome. In other words, history matters.

References

Covin, J. G. and Slevin, D. P. (1997). High growth transitions: theoretical perspectives and suggested directions. In Sexton, D. and Smilor, R. (Eds), Entrepreneurship 2000. Chicago, IL: Upstart Publishing Company.

Eisenhardt, Kathleen M., Schoonhoven, Claudia Bird (1990). Organizational growth: Linking founding team, strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988. Administrative Science Quarterly (RSS).

Jennings, P. and Beaver, G. (1997). The performance and competitive advantage of small firms: a management perspective. International Small Business Journal, 15, 2, 63–75.

Sexton, D. L. and Bowman-Upton, N. B. (1991). Entrepreneurship: Creativity and Growth. New York: Macmillan.

Wiklund, J. and Shepherd, D. (2003). Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities. Oxford, UK and Malden, MA, USA: Blackwell Publishing.

Two conversations to join, two assumptions to attack

 

There are two conversations in social science that are relevant for me. One is about strategic management, the other is about human resources management. Each uses own language, definitions and methodology, each unfolds in own ecosystem of events (conferences) and communication channels (journals). Each is quite isolated from the other. 

I cannot take part in both conversations. I must choose and stick to my choice for the length of the PhD research.

The upside of the situation is that my research question gives me a fair chance to add value in either conversation. My conceptual model appears to be capable of challenging implicit assumptions which underlie both discourses. And it takes only minor adjustments of the model at this early stage of the thesis.

Which way do I go?

The strategic management conversation

This conversation implicitly assumes that people in organizations do not change over the long term, and it is external environment and internal resources what determines business performance. I may attack that by claiming people do change and it is business succession pattern what influences performance. 

The research question adjusted for this conversation would be framed as follows: 

The velocity of environment and type of growth strategy define the pattern of business succession which, in turn, influences the company's performance.

The conceptual model for this case is presented in Figure 1.

Figure 1. The conceptual model for the strategic management conversation

The human resources management conversation

Those participating in this conversation assume that business succession efficiency depends on companies' internal structures and systems and/or succession participants' qualities. I can challenge that by arguing that the business succession pattern is prescribed by environment and growth strategy, and its compliance with the actual succession practice is what determines stakeholders' satisfaction.

The research question tuned for this conversation is as follows: 

The velocity of environment and type of growth strategy define the pattern of business succession which, in turn, influences stakeholders' satisfaction.

The adjusted conceptual model is shown in Figure 2. 

Figure 2. The conceptual model for the human resources management conversation

So which way should I go? Little or no time left to decide.

References

Davis, Murray S., That's Interesting! Towards a Phenomenology of Sociology and a Sociology of Phenomenology, Phil. Soc. Sci. 1 (1971), 309-344 (Modified), Sage Publications.

Dimov, D., ISM Academic Writing Course (2013).

Huff, A.S. (1999), Writing for Scholarly Publication, Thousand Oaks, CA: Sage.

Industry prescribes one recipe to all

 

Industry complexity is what appears to be defining a succession pattern for all companies which constitute the industry. The higher the degree of complexity is, the more resources companies are to invest in business succession to satisfy stakeholders and vice versa.

The most resource intensive pattern of business succession is the talent pool, while the least costly is the ad hoc reaction.  

Stakeholders’ satisfaction with the outcomes of succession will be the highest, should the pattern chosen for business succession match industry complexity. At the same time stakeholders opine on succession results negatively in cases of mismatch.

It is important to notice that SMEs operating in complex industries usually lack resources for appropriate - prescribed - patterns like the long-term heir and the talent pool. Instead, they tend to apply less laborious and expensive patterns. That leads to unsuccessful successions and leaves involved stakeholders dissatisfied. In other words, each industry signals its companies which succession pattern is to be used, and those who do not recognize it fail in business transfer.

It works like this:

Patterns of business succession

 

To be efficient, patterns of business succession should match industry complexity

Figure 1. How patterns of business succession should match industry complexity

  

Business succession is a transfer of ownership and/or top management in companies.

Business succession management is a process through which companies plan, organize, motivate and control business succession.

Efficiency of business succession reflects the degree of stakeholders’ satisfaction with the process outcomes after a period of 12-18 months after the succession took place.

Complexity of business succession management represents the variety and amount of resources companies invest in the process.

Complexity of industry depends on its rate of consolidation, capital and technology intensity, market volume and potential, general exposure to macro-factors. It is properly represented by the rank of the industrywide weighted average β-factor against the overall financial market benchmark.

Patterns of business succession are “model plus action” kits which companies build and use to efficiently transfer ownership and/or top management. Four patterns are observable: ad hoc reaction, short term heir, long term heir, talent pool.

Ad hoc reaction is a practice of unplanned management replacement decisions made to respond to internal or external emergencies.

Short term heir is a personalized replacement-targeted practice of leadership development planned and performed over a period of 1-3 years.

Long term heir is the same as above but with the time span of 3-10 years.

Talent pool is an integrated leadership development and succession practice applied to the whole organization’s human resources as part of strategic management.

What the business succession problem looks like internationally

In the current discourse business succession issues fall in four broad categories:

•  family and organizational;
•  legal, finance, tax;
• other barriers against business succession;
•  practical approaches to business succession.

It appears the debate focuses primarily on small and medium companies of developed countries. That can be explained by a high rate of closures of such companies due to lack of strategic approach to business succession and by the active role governments wish to play in supporting SMEs as employers and taxpayers. However, there is a noticeable discussion with the emphasis on implementation aspects of business succession management in large corporations. That one often takes for granted business succession is an integral part of the process of strategic management and, therefore, frequently seen as a stand-alone problem area. In the last decade emerging economies have contributed to the business succession discourse (Ip and Jacobs, 2006; Stadler, 2011).

Concerns related to planning for succession are spread across diverse industries (Ip and Jacobs, 2006).

Generally, the personalized replacement approach to business succession is being widely criticized as it is obviously less “strategic” and probably less satisfactory to stakeholders than the long-term talent management based on pooling talents and using competence merits for selecting the best (Groves, 2006; Hatum, 2010).

Why industry may shape the pattern of business succession

There may be a reason to question the versatility of the strategic talent pool approach to business succession. Researchers indicate there are apparent differences in actual patterns of business succession between companies representing different industry sectors. The heir pattern was preferably practiced in retail, wholesale and manufacturing industrial sectors; the talent pool pattern was most frequent in financial sector, as well as in education, real estate, transport, utilities; the ad hoc reaction pattern was largely used in construction, mining and services (Taylor and McGraw, 2004).

The talent pool succession pattern appears to be most rational way to identify best candidates for management positions. It is depersonalized, objective, performed in a comprehensive way as part of strategic management in companies. Stakeholders admitted its high efficiency. On the other hand, they justified high costs associated with it by indicating that otherwise their companies would have not been able to meet the challenges of industrial rivalry and other external factors (Groves, 2006; Ip and Jacobs, 2006; Stadler, 2011).

It seems that the degree industry complexity influences stakeholders’ views of how much effort and money should be invested in business succession management to offset potential strategic losses in the future. In other words, the more complex an industry is, the bigger investment is considered necessary.

It also seems that the opposite is correct, too. If there is no industrial strategic challenge for major investments into the talent pool pattern, companies’ practice of business succession becomes less complex. Stakeholders tend to choose less expensive and less time-consuming approaches to business succession: the long- and short-term heir patterns, or the ad hoc reaction.

Hence, if stakeholders’ satisfaction with the outcomes of business succession is viewed as an adequate measure of its efficiency, it is sound to link the degree of industry complexity to matching patterns in business succession management. The least complex pattern would be the ad hoc reaction, it is followed by the short- and long-term heir patterns, and the talent pool pattern works best in cases of high industry complexity. The model is presented in Figure 1.

Such reasoning has led me to this entry’s headline hypothesis proposition (modified Dec 04, 2013): to be efficient, patterns of business succession should match industry complexity.

                          

References

Groves K. (2006), “Integrating leadership development and succession planning best practices”, Journal of Management Development, Vol. 26 No. 3, 2007, pp. 239-260.

Hatum, A. (2010), Next Generation Talent Management: Talent Management to Survive Turmoil, Palgrave Macmillan, New York, NY.

Ip, B., Jacobs, G. (2006), “Business succession planning: a review of the evidence”, Journal of Small Business and Enterprise Development, Vol. 13 No. 3, 2006, pp. 326-350.

Stadler, K. (2011), “Talent reviews: the key to effective succession management”, Business Strategy Series, Vol. 12 No. 5, 2011, pp. 264-271.

Taylor, T., McGrow, P. (2004), “Succession management practices in Australian organizations”, International Journal of Manpower, Vol. 25 No. 8, 2004, pp. 741-758.