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.

Stable, high-velocity, turbulent and high-velocity/turbulent environments

 

Emery and Trist (1965), Terreberry (1968) defined turbulent environments (TEs) looking at the problem from the standpoint of change in interactions between players (government, companies, external stakeholders).

Interested in the dynamics of change, Dess and Beard (1984) and Eisenhardt and Bourgeous (1988) introduced the notion of high-velocity environments (HVEs).

Jones and Mahon (2012) synthesized the above material and suggested updated definitions of TEs and HVEs. They also suggested the notion of high-velocity turbulent environments (HVTEs) and contrasted it to stable environments (SE). They wrote

High velocity environments are those situations where change is rapid, large and discontinuous (that is, changes occur at intermittent times and are not related to what occurred more recently).

Turbulent environments … are more long lived and reflect large (or small, but significant) changes in the interactions between and among players in an environment … AND where those changes impact on the processes of interactions themselves.

For Jones and Mahon (2012) high-velocity/turbulent environments are those in which the pace of changes, the magnitude of changes and the interactive effects of change and magnitude are significant.

They argued that stable environments do not present dynamic changes or noticeable variations in players’ interactions.

I  summarize the combinations in Figure 1.

Figure 1. The four types of environments

References

Dess, G. and Beard, D. (1984), ‘‘Dimensions of organizational task environments’’, Administrative Science Quarterly, Vol. 29, pp. 52-73.

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.

Emery, F.E. and Trist, E. (1965), ‘‘Causal texture of organizational environments’’, Human Relations, Vol. 18 No. 1, pp. 21-32.

Jones, N.B. and Mahon, J.F. (2012), “Nimble knowledge transfer in high velocity/turbulent environments”. Journal of Knowledge Management, Vol. 16 No. 5 2012, pp. 774-788.

Terreberry, S. (1968), ‘‘The evolution of organizational environments’’, Administrative Science Quarterly, Vol. 12 No. 4, pp. 590-613.

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.

Generic types of business succession - examples and refined chart

 

Some real-life examples of business successions wouldn't fit in the chart introduced in the previous blog. That useful obstacle led to this "take two" version of the matrix.

  

Figure 1. Generic types of business succession

Below are typical managerial decisions which relate to the four generic types of business succession.

1. Management retained / Ownership retained

a) Partial management succession

This type of business succession includes cases when the company franchises (or licenses) out the right to use its business model, so the franchisees become de facto business unit managers of the franchiser.

b) Partial ownership succession

In this generic type of succession the company's owner retains the majority stake in the equity in 

undertaking public listing on a stock exchange, 

• merging with another company, 
• establishing a joint venture, 
• selling business to a financial investor or to other types of external or internal buyers.

2. Management transferred / Ownership retained

In this type of succession the owner benevolently gives the management to employees or to external parties but holds the majority or full ownership control of it.

3. Management retained / Ownership transferred

This generic type refers to situations when the company's owner sells the majority stake but holds a managerial position due to specific personal assets in the same sorts of deals as named in 1b.

4. Management transferred / Ownership transferred

This covers cases of the owner's full withdrawal from the company through selling it to internal or external buyers. That cause of succession also includes

• divestments, 
• contracting out, 
• rescues.

References

Co-Operatives (2003), “Delivering employee and community buyouts”, available at: www.uk.coop/document/delivering-employee-and-community-buyouts-guide-succession-process (accessed December 2013).

Hawkey, J. (2002), Exit Strategy Planning: Grooming Your Business for Sale or Succession, Gower Publishing, Aldershot.

Howorth, C., Westhead, P. and Wright, M. (2004), “Buyouts, information asymmetry and the family management dyad”, Journal of Business Venturing, Vol. 19 No. 4, pp. 509-34.

Sherman, A. (2003), Parting Company: Innovative Strategies to Plan for Succession, Manage the Transition, Sell or Transfer Your Business, Kiplinger Books, Washington, DC.

What is business succession anyway?

 

The most "corporate" definition of business succession appears to be the following:

A deliberate and systematic effort by an organization to ensure leadership continuity in key positions, retain and develop intellectual and knowledge capital for the future, and encourage individual advancement (Rothwell, 2001, p. 6).

It stresses management turnover but ignores the ownership transfer side of business succession.

There is an ownership-focused definition out there, though:

The transfer of a business that results from the owner’s wish to retire or to leave the business for some other reason. The succession can involve a transfer to members of the owner’s family, employees, or external buyers. Successful succession results in a continuation of the business, at least in the short term (Martin et al., 2002, p. 6; SBS, 2004, p. 7).

This one, alternatively, omits management turnover and stresses the ownership transfer problem of business succession.

In my second entry of this blog I modified the line pointing out that business succession “… in broad terms, it is a process through which companies plan for the future transfer of ownership and/or top management …” (Ip and Jacobs, 2006) into yet another definition that attempts to reconcile the first two:

Business succession is a transfer of ownership and/or top management in companies (Ip and Jacobs, 2006).

To present it graphically I constructed the grid shown in Figure 1:

Figure 1. Generic types of business succession.

Important - The term “owner” does not necessarily refer to a founder of a company. It merely indicates the one who owns a company (i.e. holds a major stake of shares) at the time of succession. My research design will, most probably, require partitioning a premier and subsequent business successions. In that case replacing the “owner” with the “founder” should explicitly imply that a company’s first succession is meant.

References

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.

Martin, C., Martin, L. and Mabbett, A. (2002), SME Ownership Succession - Business Support and Policy Implications, Small Business Service, London.

Rothwell, W. (2001), Effective Succession Planning: Ensuring Leadership Continuity and Building Talent from Within, 2nd ed., AMACOM, New York, NY.

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.