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The relationship betweensuccession issues and business

performanceEvidence from UK family SMEs

Yong WangBusiness & Entrepreneurial Management Department, School of Social Science,

University of Wales, Lampeter, Dyfed, UK

David Watkins and Neil HarrisSouthampton Business School, Southampton Institute,

Southampton, UK, and

Keith SpicerCrime and Criminal Justice Unit, Home Office Research, Croydon, UK

Keywords Family firms, Business performance, Succession planning

AbstractResearchers widely argue that the most significant difference between family controlledand non-family business concerns the way in which executive succession occurs, and more

specifically, unique aspects of the process of intergenerational family business transfer. Theimportance of this study is acknowledged by the fact that it offers researchers and practitionersempirical evidence that links succession issues and the state of performance in UK-based small-and medium-sized family businesses. The article commences with a review of the conceptual

framework that relates to the critical factors influencing the succession process, followed by anintroduction of the methodology. Then the article proceeds with a detailed statistical analysis based

on a stratified randomly selected sample (169 small- and medium-sized family controlledbusinesses). In summary, the article concludes with a set of tentative recommendations. It isanticipated that this study will enable a deep debate of the issues surrounding the succession

practice and raise a wide awareness of the critical factors shaping the ownership transition.

Introduction

Family businesses are reckoned as one of the engines of the post-industrial growth

process since they are credited for nurturing across generations entrepreneurial talent,

a sense of loyalty to business success, long-term strategic commitment, and corporate

independence (Poutziouris, 2001). Studies of this type of business attract an unusually

diverse group of researchers and practitioners. However, in contrast to the proliferation

of the family business organisation, the family business sector is characterised by

alarmingly deteriorating survival rates. Researchers confirm that only about one

third of family businesses survive the transition from the founders (first generation) to

the second generation of owner-management. Moreover, of those who do that, only

about one third tend to survive the transition from second to third (and beyond)

generation of ownership (Poutziouris, 2000; Wang et al., 2000; Ibrahim et al., 2001a).

Hence effective succession within family business receives broad attention in the

academia.

The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at

www.emeraldinsight.com/researchregister www.emeraldinsight.com/1355-2554.htm

Successionissues

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59

International Journal of

Entrepreneurial Behaviour &

Research

Vol. 10 No. 1/2, 2004

pp. 59-84

q Emerald Group PublishingLimited

1355-2554

DOI 10.1108/13552550410521380


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Family business theories emphasis on successionFamily firms have been an integral part of the British economy for centuries. Firms aregenerally reluctant to adopt the corporate form because owners are unwilling to handover the administration of at least part of enterprises to non-family, salaried managers.

Despite great changes in British economy since the end of the Second World War, familybusiness continues to play an important role, though its relative significance is certainlydiminishing (Payne, 1984). Researchers observe that in large companies, familyownership is no more the central concern. In contrast, in smaller firms, ownership controlis still a key characteristic (Donckels and Frohlick, 1991). Since the Department of Tradeand Industry (DTI) (2003) and Brooksbank (2000) report that over 99 per cent of the UKbusinesses are small- and medium-sized, how to facilitate these firms the greatmajority of which are family operated, managed and/or controlled in order to surviveand achieve sustainable growth, becomes a major topic for researchers and practitioners.

Family business literature indicates that succession can be viewed as a process (Sharmaet al., 2003; Dycket al., 2002) with specific pre-arrival and post-arrival phases (Gordon andRosen, 1981). Handler (1994) suggests that succession can be categorised into distinctstages based on the functions and roles played by the incumbents and their offspring.Stavrou and Swiercz (1998) propose a three-level model that charts the succession process.The first level represents an offsprings pre-entry stage where successor(s) can learn fromthe incumbent about business operations. The second is an entry stage where integratingthe offspring into the business operations is the main theme. The final level involves thepotential successors promotion to a managerial position. Studies indicate that the businessrequirements at different stages tend to be diverse and the strategies to handle these needsvary (Stavrou and Swiercz, 1998; Stavrou, 1999).

Not only is succession as a process studied in the academia, but also theeffectiveness of this strategic procedure receives significant attention (Handler, 1994).The effectiveness of succession is not l imited to whether a managing

director/CEO/leader has been designated, but includes the ongoing health of a firm,quality of life, and family dynamics. Research in relevant areas indicates thatstrategically many critical factors are related to the effective succession, such assuccession planning (Ibrahim et al., 2001a; Gersick et al., 1997; Kets de Vries, 1993),offspring grooming (Ibrahim et al ., 2001b; Danco, 1997), inter-generationalrelationships (Handler, 1992; Seymour, 1993; Kets de Vries, 1993), and remunerationof managers (Aronoff and Ward, 1997). The following sections, briefly reviews theliterature that focuses on these key succession issues.

Succession planningAccording to Sharma et al. (2001), succession planning is emphasised in familybusiness arena for two reasons. First, activities relevant to succession planning arepart of the succession process; second, succession planning is reckoned as a means toimprove the success rate of ownership transition. Davis (1997) argues that successionplanning has three main objectives:

(1) to efficiently and fairly distribute assets from older to younger generations;

(2) to pass control of the business in a way that will ensure effective businessleadership; and

(3) to maintain and promote family harmony.

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Although remarkable effort has been invested in family businesses towards meetingthese three simple objectives, the effort does not normally lead to an effectivesuccession but agony, confusion, and paralysis (Davis, 1997).

The existing literature, such as Sharma et al. (2001) and Morriset al. (1997), suggests

that well developed succession plans can increase the likelihood of co-operation amongstakeholders in businesses, therefore enhancing the chance of a smooth and effectivesuccession. However, converse to the significant concern on planning, business ownersand managers rarely outline their future succession (Sharma et al., 2000, 1996;Astrachan and Kolenko, 1994). According to Lansberg (1988), most stakeholders infamily businesses are psychologically ambivalent toward succession planning.Company founders encounter psychological deterrents to succession planning as itmay imply a letting go of power. Family members avoid planning, worrying about thesubsequent loss of identity, family harmony, and privacy. Senior managers, havingworked along with incumbents long-term, are reluctant to transfer from a personalrelationship with the incumbent to a more formal one with the successor (see alsoSharma et al., 1996, 2000; Kets de Vries, 1993). Successors, on the other hand, have toprepare themselves to handle residual conflicts.

The absence of a succession plan can cause serious management problems, evenleading to a business failure (File and Prince, 1996). Wards study (1987) on strategicplanning and business transfers offers interesting statistics about Fortune 500companies:

Since 1955, only 188 companies have kept their status on this list as independent concerns.More than 60 per cent have been sold or acquired or have watched their sales declinesignificantly in the past thirty years (pp. 1-2).

Correspondingly, it is revealed that, from 1924 to 1984, 80 per cent of 200 successfulfamily owned manufacturing firms no longer exist and only 13 per cent are still ownedby the same family as in 1924 (Ward, 1987; Handler, 1994). The reasons for the demiseof these family businesses are many. However, Ward (1987) indicates that inability toplan strategically for the business future is a major cause. In line with Ward (1987),Shulman (1991) advocates that family businesses should start thinking abouttransferring ownership and managerial responsibility five-20 years in advance, whileDyck et al. (2002) and Davis (1992) all express similar sentiments.

Successor developmentSuccessors are an important stakeholder group in the succession process. In theabsence of a successor who is managerially and physically capable of taking over theownership, succession within the family will rarely occur. Thus, successor groomingcomes under the microscope of researchers and practitioners (Wang and Poutziouris,

2003; Ibrahim et al., 2001b). Fiegener et al. (1994) compare successor development infamily and non-family businesses and conclude that family firms favour morepersonal, direct, relationship-centred approaches to successor development, whilenon-family businesses rely more on formalised, detached, task-centred approaches.Lansberg (1997) suggests that to be effective mentors, seniors must understand thedifferences between parenting and mentoring. The key to an effective succession is tofind an optimal blend of well-timed parenting and mentoring. In the whole successionprocess, to achieve an effective mentoring, seniors should negotiate the mentoring

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process with juniors from the very beginning, specifying jobs and competencies thatneed to be mastered at each stage. Meanwhile, juniors should be assigned real jobs thatgenerate reliable performance data, leading to the final gain in authority. Lansberg andAstrachan (1994) argue that successor training is mediated by the familys

commitment to the business and the quality of the relationship betweenowner-manager and successor. They conclude that the familys commitment to thebusiness is positively associated with the degree of successor training, and that thequality of the relationship between owner-manager and successor is positivelyassociated with the extent of successor training. Goldbergs (1996) study furtherconfirms that business effectiveness is related to successor grooming by providingevidence that effective successors[1] had more years of experience with the businessthan that of the less effective group.

Inter-generational relationshipsThe inter-generational relationship is critical to business development since successorsin family businesses are normally trained in a personalised way (Wang andPoutziouris, 2003; Fiegener et al., 1994). Fox et al. (1996) indicate that the nature offamily relationships during the transition stage is related to a successful successionprocess and suggest the need to initiate the constructive dialogue between incumbentand successor. A similar conclusion has been reached by Wang and Poutziouris (2003)and Seymour (1993) who suggest that respect, understanding, and complementarybehaviour between the two generations are critical to an effective succession.

Kets de Vries (1993) identifies a number of psychological and emotional barriersencountered by family people in the succession process, which are similar toLansbergs (1988) findings. For example, parents do not want to let go of power andmay even be jealous of their children due to their own physical limitations. Children

may worry about the potential conflicts arisen within businesses because of theirparents absence. According to Sharma et al. (2000), initiating the succession processwill drive incumbents to confront their managerial mortality and significant life stylechange. Consequently, many incumbents are reluctant to step aside and may becomethe greatest single barrier to succession (Rubenson and Gupta, 1996, p. 29). Underthis circumstance, cohesive inter-generational relationship can greatly mitigateincumbents psychological deterrent and facilitate a smooth succession. Sonnenfeldand Spence (1989) recognise four departure styles of founders or CEOs: monarch,general, governor and ambassador. They further suggest ambassador as the best formof departure given that founders or CEOs in this pattern are willing to leave businessand prolong their service to business as advisors.

Both owner-manager and heir are central persons in the succession process. In

essence, the succession process is a mutual role adjustment procedure between thefounder and the young generation. Parallel to the increase in the young generationsauthority from no role to final chief decision maker, the predecessors role in thefirm diminishes from sole operator to consultant (Handler, 1990). Therefore toenable a successful succession, it is suggested that

The successor should be sensitive to the needs of the founder (Lansberg, 1988) and shouldexercise patience and diplomacy (Jonovic, 1989); he/she needs to become a student of theorganisation and learn its intricacies and culture (Horton, 1982) (Sharma et al., 1996, p. 21).

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Compensation in family businessResearch on management compensation has received a great attention both fromresearchers and society at large (Barkema and Gomez-Mejia, 1998). A positiverelationship between top managers compensation and firm performance would be

consistent with agency theory, which emphasises that managers are self-serving andthat formal monitoring and reward systems should be articulated to align theincentives of top managers with the interests of shareholders (Barkema andGomez-Mejia, 1998; Jensen and Meckling, 1976).

Within family business, ownership and management are normally overlapping andfamily members are likely to consider their firms as entities to achieve their owninterests and opportunities. Thus, it is not unusual to observe that family members,especially those top management members, charge higher remuneration frombusinesses, contradicting business performance. This unreasonable charge willconstrain effective succession in a long term and may also cause conflicts betweenfamily and non-family members. Non-family members, on the other hand, sometimeshave a notion that family members who work for the business should be paid less toreduce the companys payroll costs to ensure the businesss healthy survival. Aronoffand Ward (1997) suggest that ensuring that all family members clearly and openlyunderstand what kinds of money are moving from owners to employees would resultin far fewer conflicts over compensation. They further recommend developing andsharing a compensation philosophy which is a framework that pays the job rewarding people based on the market value of their position. Shelly (1995) concludesthat creating a formalised compensation arrangement is a better way of dealing withcompensation issues and suggests establishing a bonus based on a formula that is fairto the people involved. Daily et al. (1998) suggests that the composition of remunerationcommittees may be relevant to explaining the level a mix of top managementcompensation. In general, the separation of management and ownership can be an

effective way to circumvent inherent family and firm contradictions on compensation.

Succession and business performanceAs aforementioned, research on family business succession results in the identificationof a variety of factors associated to effective transitions. Researchers generally agreethat business performance is a valid indicator to assess the effectiveness of businesssuccession (Morriset al., 1997; Goldberg, 1996). Hence more empirical investigationsinto the relationship between succession issues and business performance becomesnecessary.

In the literature, relatively few papers endeavour to address this issue empirically(see Table I) and most of these attempts focus on the comparison between family and

non-family businesses (Daily and Dollinger, 1992; Chaganti and Schneer, 1994).However, Goldberg (1996) and Morris et al. (1997) do empirically investigate therelationship between succession issues and business performance.

Goldberg (1996) surveyed 63 family businesses operated by successors who havebeen the CEOs for a minimum of five years to uncover significant elements thatdifferentiate effective from less effective successors. The findings suggest thatincumbents mentoring is correlated with successor effectiveness. In addition, thestudy indicates that effective successors had a significantly better relationship with

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Sample Data collection Key points

Daily andDollinger

(1992)

104 smallmanufacturing

firms

Mailedquestionnaires,

telephoneinterviews

The professionally managed firm willfollow more aggressive growth-oriented

strategies than the family-owned andmanaged firm. The professionally managedfirm will rely more on internal controlprocedures than the family-owned andmanaged firm

Chaganti andSchneer (1994)

345 businesses Mailedquestionnaires

Performance is dependent on the ownersmode of entry with start-up businesseshaving a higher average ROTA, but withinherited businesses having higher averageannual sales. Start-up businesses ratedthemselves significantly higher onbusiness, competitive, and operationalstrengths

Goldberg(1996)

63 businesses Mailedquestionnaires,personalinterviews

Successor effectiveness is associated withthe incumbents mentoring. Effectivesuccessors had a significantly betterrelationship with their fathers; they wereintroduced to the businesses at an earlyage; and they began working full-time inthe businesses at an earlier age

Guthrie andDatta (1997)

214 CEO selectiondecisions

Survey, businessweek database,newspaper andindustry tradereports

Pre-succession profitability, size andadvertising intensity are associated withthe chosen executives organisationaltenure levels. Pre-succession firm size andrisk are associated with the age of selectedCEOs. Pre-succession profitability andadvertising intensity are associated with

type of functional background experienceKimhi (1997)* Proper management of family businessesshould include planning ahead for thesuccession stage and parents should makethe business more attractive to theirchildren. A smooth inter-generationalsuccession is essential to the profitability ofthe business and to the welfare of thefamily as a whole

Morris et al.(1997)

209 businesses Mailedquestionnaires,personalinterviews

Family business transitions do occur moresmoothly when successors are betterprepared, when relationships among familymembers are more affable, and whenfamily businesses engage in more planning

for wealth-transfer purposes. Smoothertransitions may not necessarily result inbetter post-transition performance

Note: *Conceptual article

Table I.Literature on familybusiness performanceand succession issues

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their fathers; they were introduced to the businesses at an early age; and they beganworking full-time in the businesses at an earlier age.

Supported by an empirical study, Morris et al. (1997) propose a fairly comprehensivemodel, which indicates that three sets of determinants can determine the nature of the

transition, or what Handler (1990) refers to as the quality of the succession process;while the nature of the transition can further affect post-transition performance(referred to by Handler as the effectiveness of the transition). These determinantsinclude the preparation level of heirs, the nature of relationships among familymembers, and the types of planning and control activities engaged in by themanagement of the family business (see Figure 1). Based on the evidence, Morriset al.(1997) conclude that:

Family business transitions do occur more smoothly when successors are better prepared,when relationships among family members are more affable, and when family businessesengage in more planning for wealth-transfer purposes (p. 386).

Although Morriset al.s (1997) model provides comprehensive guidelines on succession

management, no further studies can firmly confirm the findings raised from the study,leading to an enquiry whether it can be reckoned as a domain-specific framework thatcharts the succession process.

Hypotheses generationAs discussed earlier, a number of factors in the context of family business successionhave been identified by researchers and practitioners. They can be generallycategorised into the following four dimensions:

Figure 1.The conceptual model

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(1) Succession planning can significantly affect the succession process (Sharmaet al., 2000, 2001; Davis, 1997; Ward, 1987). Topics covered include who shouldparticipate in preparation and when they should be prepared (Davis, 1997;Davis and Tagiuri, 1989), the establishment of a family council (Crane, 1982),

the responsibility of successors (Gersick et al., 1990, 1997) and the impact ofplanning on business succession (Sharma et al., 2001; Ward, 1987, 1988).

(2) Successor development constitutes a major step in the succession process(Wang and Poutziouris, 2003; Sharmaet al., 1996; Goldberg, 1996). Work in thisarea addresses why heirs need to acquire the requisite managerial capabilities,business skills, and knowledge of company operations (Ward, 1990; Osborne,1991) and how they can gain access to these (Ibrahim et al., 2001; Lansberg andAstrachan, 1994). Specific variables receiving attention include workingexperience outside family firms, quality of training, training method, and theimpact of incumbent on successor development (Ward, 1990; Handler, 1992;Fiegener et al., 1994).

(3) Inter-generational relationships can both facilitate and hinder successionplanning and successor development depending on the quality of therelationship (Ward, 1987; Handler and Kram, 1988; Kets de Vries, 1993). Theprinciple issue focus on the communication between the two generations(Williams, 1990). Other issues in this category include family turmoil, conflictand trust between the two generations (Wang and Poutziouris, 2003; Handler,1991; Ward and Aronoff, 1992) and the incumbents refusal to let go and sharepower with the potential successors (Handler, 1990; Kets de Vries, 1993).

(4) Compensation issues have recently received increasing attention. However,researchers are still in dispute as to whether family members working for thebusiness should be paid less to reduce the companys payroll costs or morebecause of the nepotism (Aronoff and Ward, 1997; Shelly, 1995). Specificvariables receiving attention include family members shareholding schemes,remuneration and pension issues (Shelly, 1995; Gersick et al., 1990).

Variables discussed above reflect the key issues in the succession process andtherefore, form the skeleton of the questionnaire for the current study. There are, ofcourse, a number of other variables that can also affect business transition, e.g.business external environment, business objectives and financial pressures fromresource suppliers. However, they are not taken into account due to the difficulty inobjective measuring. The framework of Morris et al. (1997) is considered as a startingpoint for the current study, nevertheless two critiques have been raised. First, Morriset al. (1997) start with an investigation of the impact of the three identified successiondimensions on the nature of ownership transition. This is followed by an examination

of the impact of the ownership transition on post-transition performance. In reality, thesuccession process is a long-term concept, starting from the incumbent generating aninitiative to transfer ownership within the family, until finally the business being takenover by the offspring(s) and the incumbent stepping down from the position. Theexperience and emotional feeling during the whole process tends to vary. Therefore,measuring the characteristics and the succession experience can be highly subjectiveand complicated. Secondly, in Morris et al. (1997), a post-transition concept isemployed when business performance is concerned, but the concept itself is patchy.

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For example, a family business, which is currently managed by the second-generationperson and is transferring the ownership to the third generation, could be categorisedas a post-transition business as it has already experienced a transition from thefounder to the second generation. On the other hand, it can be classified as a

pre-transition business since the owner in the second-generation is arranging for hisor her retirement.

Having recognised these, unlike Morris et al.s (1997) two-stage investigation,the current study only concentrates on the relationship between key successiondimensions and business performance, ignoring the succession characteristicsexamination. In addition, the study investigates business performance rather thanpost-transition performance[2]. Based on the discussion in the literature review,the following proposition is suggested:

Proposition 1.Succession issues are positively related to business performance.

To operationalise the testing, the four dimensions of succession issues discussed in theearly section are integrated into the proposition, generating four general hypotheses.

H1. Succession planning is positively related to business performance.

H2. Successor development is positively related to business performance.

H3. Inter-generational relationships are positively related to businessperformance.

H4. Compensation issues are positively related to business performance.

Academics and researchers argue that business performance is a multi-dimensionalconstruct (Fitzgerald and Moon, 1996). Two widely accepted business performance

assessment models, the American Malcolm Baldrige National Quality Award(MBNQA) model and the European Foundation Quality Management (EFQM) model,provide comprehensive frameworks by which business performance can be assessedand compared. However, researchers argue that both models are more appropriate forlarger companys assessment rather than that of the smaller one.

Financial outcomes enable managers and business owners to make decisions andplan for business development (Jenkins, 1995). They are broadly utilised in the SME(small- and medium-sized enterprise) and entrepreneurship literature (Jennings andBeaver, 1997; Morris et al., 1997; Westhead and Cowling, 1997). However, there is aconsensus that no single financial indicator can accurately and comprehensivelycapture business performance, particularly in the small firm arena (Begley and Boyd,1987; Daily and Dollinger, 1992). In light of this, it is preferable to devise a multiple

measure of financial performance and interpret the results based on one indicator inconjunction with others. Multiple financial measures are consistent with the theoreticalpoint of view that performance, as a construct, should be viewed as beingmulti-dimensional to cover diverse purposes and types of businesses (Levin andMinton, 1986).

In examining the performance difference between family business and non-familybusiness, Westhead and Cowling (1997) adopt growth in sales revenue, employment,productivity, exports and profitability; while Daily and Dollinger (1992) call for sales

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growth, rate of improvement of net margin and operating margin. Jennings and Beaver(1997) utilise sales growth, profitability, cash flow, productivity and job creation tomeasure the performanceand competitive advantages of small firms. Barth (2003) adoptssales growth to compare small business performance in mature and new industries.

Morris et al. (1997) use sales growth, profit growth, employment growth, asset growthand new markets products to study success of a family business transition. Tosummarise, Dyson (1997) states that business financial performance can be measured byfour ratios: profitability ratio, growth ratio, efficiency ratio and liquidity ratio.

In the current study, a series of performance indicators utilised in the privately heldowner-managed small business context are adopted. Taxonomically, profit margin,ROCE (return on capital employed), and ROSE (return on shareholders equity) areused to assess business profitability. Sales growth and employment growth areemployed to measure businesss potential for further development, while employeeproductivity is employed to estimate business effectiveness. The reason why these sixdifferent measures are chosen is that multi-dimensional indicators can facilitate a morecomprehensive view of business performance and help reduce possible bias.

Considering the six financial performance indicators being utilised, each of the fourgeneral hypotheses H1-H4 is further sub-divided into six hypotheses. For example,hypothesis H1 is investigated with six hypotheses listed as the following:

H1a. Succession planning is positively related to business performance measuredby profit margin.

H1b. Succession planning is positively related to business performance measuredby return on capital employed.

H1c. Succession planning is positively related to business performance measuredby return on shareholders funds.

H1d. Succession planning is positively related to business performance measuredby sales growth.

H1e. Succession planning is positively related to business performance measuredby employment growth.

H1f. Succession planning is positively related to business performance measuredby employee productivity.

Similarly, the other three hypotheses H2-H4 are also investigated, each with sixperformance indicators generating 18 sub-hypotheses (24 in total).

H2a. Successor development is positively related to business performancemeasured by profit margin.

H2b. Successor development is positively related to business performancemeasured by return on capital employed.

H2c. Successor development is positively related to business performancemeasured by return on shareholders funds.

H2d. Successor development is positively related to business performancemeasured by sales growth.

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H2e. Successor development is positively related to business performancemeasured by employment growth.

H2f. Successor development is positively related to business performance

measured by employee productivity.H3a. Inter-generational relationships are positively related to business

performance measured by profit margin.

H3b. Inter-generational relationships are positively related to businessperformance measured by return on capital employed.

H3c. Inter-generational relationships are positively related to businessperformance measured by return on shareholders funds.

H3d. Inter-generational relationships are positively related to businessperformance measured by sales growth.

H3e. Inter-generational relationships are positively related to businessperformance measured by employment growth.

H3f. Inter-generational relationships are positively related to businessperformance measured by employee productivity.

H4a. Compensation issues are positively related to business performance measuredby profit margin.

H4b. Compensation issues are positively related to business performance measuredby return on capital employed.

H4c. Compensation issues are positively related to business performance measuredby return on shareholders funds.

H4d. Compensation issues are positively related to business performance measuredby sales growth.

H4e. Compensation issues are positively related to business performance measuredby employment growth.

H4f. Compensation issues are positively related to business performance measuredby employee productivity.

Data and methodologySample and dataThe sample family businesses were selected from FAME database. FAME contains

information on business management team, which allows the authors to search for thosefirms that have two or more directors sharing the same surname. These firms wereassumed to be potential family businesses (in the questionnaire a formal definition offamily business based on Leach etal. (1990) was given. Businesses, by referring to thisdefinition, were invited to self-classify themselves as family business or not). Secondly,all small and medium sized (fewer than 250 employees) independent firms were pickedout. As a third step, those incorporated before 1979 were selected (1979 saw the advent ofthe Thatcher administration with a commitment to an enterprise culture). This was to

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ensure that businesses selected have at least the experience of considering businesssuccession since The UK Co-operative Council (1995) reports that in the UK, on average,every five years small business will experience an ownership transition. As a result, thesampling frame contains 12,042 established incorporated businesses. As a limitation of

this study, it should be indicated that non-incorporated family businesses (sole tradersand partnerships) were excluded simply because the data were not available.Consequently, any generalisations based on the current study will exclude theunincorporated family businesses.

Within the sampling frame, a stratified random sampling procedure according tothe year of business incorporation was used to ensure that different groups of thesample frame were adequately represented in the sample. The sample comprised 924businesses, which is, according to Zikmund (1994), big enough for this researchconsidering the size of the sample frame. A questionnaire with a cover letter wasposted to the managing directors of these businesses. Six weeks after the initialmailing, a second copy of the survey was sent to the non-respondents. Given the factthat 145 useful replies were received from the first wave and 24 from the second wave,it is unlikely that many more respondents would be obtained from the third or furtherwaves. Thus, no extension of data gathering was undertaken. The overall usableresponse rate was 18.3 per cent (169/924). Referring to the literature, Malone (1989) hada response rate of 19.5 per cent when he undertook a survey about succession planningin family businesses. Welsch (1993) studied the impact of family ownership andinvolvement on the process of management succession and had a 20 per cent responserate. Based on these and the fact that the family business sector is highly insular andsecretive, the current response rate of 18.3 per cent is considered acceptable.

To assess the possible non-response bias resulting from the sampling procedure,checks for differences in demographic characteristics, such as business size (in terms ofthe number of employees), business age and type of industry, were conducted. The

results indicate no significant differences between respondents (169 usablerespondents) and non-respondents (755 non-respondents) at the 0.05 level. Thissuggests that results from the sample could be broadly generalisable to those in thesampling frame (Tables II-V).

Empirical resultsAnalysis of itemsFactor analysis was employed to identify a relatively small number of factorsrepresenting themes of succession. However, it was observed that different sized

Number of employees Number of companies

Response sample

(%)(n 169)

Original sample

(%)(n 924)

Micro 0-9 19 11.2 13.6Small 10-49 73 43.2 41.6Medium 50-99 54 32.0 29.5Medium 100-249 19 11.2 13.2Missing 4 2.4 2.1Total 169 100 100

Table II.Sample characteristics ofbusiness size

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businesses tend to have different views about succession issues, as well as adopt avariant form of formality in dealing with succession planning, and therefore analysisbased on the entire sample could be confusing and lead to misunderstanding forfurther analysis, cluster analysis. As a result, the whole sample was split into two

separate parts, small-sized businesses (those with fewer than 50 employees) andmedium-sized businesses (those with 50 or more employees), according to the DTIsdefinition. The two sub-samples respectively include 94 (55.6 per cent) and 75 (44.4 percent) businesses.

Principal components factor analyses with varimax rotation were performed. Factorloadings of ,0.30 (Kline, 1994; White and McCain, 1998) were used to interpretdimensionality. Scale purification procedures resulted in the deletion of several itemsacross the two family business parts. Regarding factor selection, an agreement wasreached among most factor analysts about a decade ago that Cattells (1978) scree testis just about the best solution (Kline, 1994). In the scree plot, the cut-off point for

Type of business Number of businesses

Response sample(%)

(n 169)

Original sample(%)

(n 924)

Retail and wholesale 42 24.9 22.1Manufacturing 56 33.1 36.3Service 47 27.8 29.2Construction 24 14.2 12.4Total 169 100.0 100

Table III.Sample characteristics of

business sector

Generation in the control of the family business Number of companies Percentage

1st 50 29.61st + 2nd 46 27.22nd 29 17.22nd + 3rd 13 7.73rd 15 8.9Other 16 9.4Total 169 100

Table IV.Sample characteristics ofgeneration in the control

of the family business

Year of incorporation Number of companies

Response sample

(%)(n 169)

Original sample

(%)(n 924)

1970-1979 69 40.8 45.01960-1969 38 22.5 21.51950-1959 26 15.4 12.41940-1949 16 9.5 7.81939- 20 11.8 13.3Total 169 100 100

Table V.Sample characteristics of

business age

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selection of the correct number of factors is the point of inflexion where the variation

accounted for by a factor becomes little more than that expected from random noise.

Therefore, a five-factor solution was generated for the small sized business sector that

accounts for 42.9 per cent of the variance (Kaiser-Meyer-Olkin statistic 0.62[3]; Bartlett

Test of Sphericity 963.3; significance 0.000). Similarly, a four-factor solution was

produced for medium-sized business sector, accounting for 38.5 per cent of the variance

(Kaiser-Meyer-Olkin statistic 0.61; Bartlett Test of Sphericity 889.3; significance 0.000).

The factor loadings are shown in Tables VI and VII.

Factors for the small-sized businesses can be interpreted as follows:

. factor 1 represents succession planning;

. factor 2 focuses on successor development;

. factor 3 emphasises predecessors influence;

. factor 4 stresses inter-generational relationships; and

. factor 5 focuses on various relationships.

Factor 1 Factor 2 Factor 3 Factor 4 Factor 5

Succession planning: consistent with otherstrategies 0.82

Succession planning: stakeholders awareness 0.77Succession planning: systematically designed 0.66Succession planning: existence 0.65Successor development: necessity to acquire skills

and knowledge 0.80Successor development: training improving

inter-generational relationship 0.76

Successor development: communication betweenthe two generations 0.48Successor development: quality of training 0.42Succession planning: necessity to be implemented 0.80Successor development: necessity of managerial

ability 0.71Inter-generational relationship: incumbents impact

on succession 0.70Inter-generational-relationship: essentiality of

agreement 0.77Inter-generational-relationship: incumbents

willingness to leave 0.51Inter-generational-relationship: management

advice from predecessors 0.49

Inter-generational-relationship: essentiality ofbalancing emotionality and rationality 0.43

Succession planning: successors entry 0.78Inter-generational relationship: succession

planning enforcing the inter-generationalrelationship 0.75

Cronbach alpha 0.79 0.71 0.66 0.65 0.60Eigenvalue 4.74 2.80 2.75 2.03 1.85Percent of variance 14.36 8.47 8.32 6.15 5.60

Table VI.Results of factor analysison succession issues(small family businesses)

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Similarly, for the medium sized family businesses, the factors can be interpreted as

follows:

. factor 1 emphasises on successor development;

. factor 2 represents inter-generational relationships;

. factor 3 focuses on succession planning; and

. factor 4 is about management advice.

In the two business parts, some succession factors, although labelled the same, may

have different contents. For example, Factor 2 in the small business sector has one

element different from that of Factor 1 in the medium-sized business sector. However,

the main content of these two factors is the same (the other three elements). Thus, the

same name is provided while the difference is acknowledged. Interestingly,

compensation issues, although they have recently received significant attention,

were not identified by the factor analysis. This indicates that this issue is at least not

regarded as a key dimension by business owners in the current succession

management context.

Factor 1 Factor 2 Factor 3 Factor 4

Successor development: necessity to acquire skillsand knowledge 0.87

Successor development: communication between thetwo generations 0.80

Successor development: necessity of managerialability 0.79

Successor development: training improvinginter-generational relationship 0.76

Inter-generational-relationship: essentiality ofagreement 0.78

Inter-generational-relationship: essentiality ofbalancing emotionality and rationality 0.75

Inter-generational-relationship: family councilestablishment 0.71

Inter-generational-relationship: incumbents

willingness to leave 0.68Inter-generational-relationship: trust 0.56Succession planning: succession planning enforcing

the inter-generational relationship 0.68Succession planning: systematically designed 0.68Succession planning: consistent with other strategies 0.59Succession planning: stakeholders awareness 0.43Inter-generational-relationship: management advice

from predecessors 0.84Successor development: assimilation of lessons 0.61Succession planning: necessity of implemention 0.45Cronbach alpha 0.84 0.61 0.62 0.63Eigenvalue 5.65 2.59 2.26 2.22Percent of variance 17.13 7.84 6.86 6.71

Table VII.Results of factor analysis

on succession issues(medium-sized family

businesses)

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Cluster analysisBased on the results of factor analysis, cluster analysis was further employed toclassify family businesses. Considering the impact of business size and age on businessperformance (Porter, 1980; McConaughy and Phillips, 1999), these two elements were

also employed as independent variables. In the present study, company size wasmeasured by the average number of employees of the last five years. Using thesevariables as inputs, dendrograms suggested a four-cluster solution for both businesssectors. One way ANOVA and Bonferroni tests were further adopted (see Tables VIIIand IX). The high F-values indicated the significant differences between clustersacross the succession issue factors, implying the robustness of the clusters from theanalysis procedure.

Correlation analysisBefore conducting correlation analysis, all financial performance indicators werenormalised to standard scores with the controlling variable, the business sector. This isbecause all these financial indicators have different means and standard deviations indifferent industries. The direct comparison between businesses involved in differentbusiness sectors could be confusing and misleading. Furthermore, to objectively reflectthe business performance, an average of businesss last five years financial outcomeswas utilised. The results of the correlation analysis demonstrate a number ofsignificant relationships (see Tables X and XI).

Variable Cluster 1 Cluster 2 Cluster 3 Cluster 4 F-value

Factor 1 20.19 1.10 21.09 20.86 13.16*Factor 2 20.10 20.01 20.05 21.40 3.43*

Factor 3 20.06 0.17 20.58 21.35 2.91*Factor 4 20.10 0.35 21.30 21.80 9.41*Factor 5 20.11 0.61 0.68 21.34 5.02*Number of companies 60 12 8 8

Notes:Values listed in Table VIII regarding Factors 1-5, business age and number of employees arestandardised values; Six businesses are not included because of missing values; *Significant at 0.05level

Table VIII.Cluster analysis for thesmall family businesssector

Variable Cluster 1 Cluster 2 Cluster 3 Cluster 4 F-value

Factor 1 0.05 20.54 20.57 20.33 4.32*Factor 2 20.24 20.08 1.29 20.27 7.50*Factor 3 0.16 20.81 21.15 1.93 23.02*Factor 4 20.02 20.19 0.17 1.65 4.65*Number of companies 49 10 8 4

Notes:Values listed in Table IX regarding Factors 1-4, business age and number of employees arestandardised values; Four businesses are not included because of missing values; *Significant at 0.05level

Table IX.Cluster analysis for themedium-sized familybusiness sector

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Small-sized business sector. For the profitability ratios, the relationship betweeninter-generational relationships and profit margin was identified as significant. Thushypothesis H3ais confirmed. This result is in line with Morris et al.s (1997) findingswhere family relationships are found ras a dominant variable in business transition.

Family relationships are a multi-dimensional concept, which includes relationshipsbetween heirs, the family business head, the spouse of the head, and so forth. Theinter-generational relationships is a key dimension of this multi-dimensional conceptsince the mutual respect between the two generations can minimise rivalry, bickering,hostility, and tension, thus enhancing the family business managerial system.

Second, in terms of business growth ratios, a significant positive relationshipbetween successor development and sales growth was established. Hence, hypothesisH2dis accepted. This finding is in line with that of Goldberg (1996), which suggests arelationship between successor effectiveness and successors business training. Itimplies the necessity of strategically developing a successor-grooming scheme withinfamily business.

Finally, a significant positive relationship was identified between successordevelopment and employee productivity. Thus, hypothesis H2f is confirmed. Thisindicates that well trained successors are more capable of running business effectively.Disappointingly, in the current study succession planning did not demonstrate anyrelationship with performance despite of remarkable emphasis both in academia and

Profitmargin ROCE ROSE

Salesgrowth

Employmentgrowth Productivity

Factor 1 (succession-planning focus) 0.85 0.29 0.88 0.27 20.01 0.55Factor 2 (successor development

focus) 0.60 0.33 0.09 0.98* 20.47 0.98*

Factor 3 (predecessors influencefocus) 0.89 0.53 0.53 0.82 20.18 0.90

Factor 4 (inter-generationalrelationship focus) 0.97* 0.59 0.75 0.63 0.02 0.76

Factor 5 (various relationshipsfocus) 0.39 20.01 20.06 0.89 20.74 0.32

Note:*Significant at the 0.05 level

Table X.Correlations betweensuccession issues andbusiness performance

indicators in smallbusiness sector (tests

were conducted at thecluster level)

Profitmargin ROCE ROSE

Salesgrowth

Employmentgrowth Productivity

Factor 1 (successor developmentfocus) 0.75 0.93* 0.96* 20.23 20.41 20.25

Factor 2 (inter-generationalrelationship focus) 0.05 0.93 0.80 20.71 20.98* 0.61

Factor 3 (succession-planning focus) 20.45 20.83 0.97* 0.95 0.98* 20.21Factor 4 (predecessors influence

focus) 20.33 20.48 20.73 0.85 20.92 20.57

Note:*Significant at the 0.05 level (two-tailed)

Table XI.Correlations between

succession issues andbusiness performance

indicators inmedium-sized business

sector (tests wereconducted at the

cluster level)

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industry (Sharmaet al., 2000, 2001; Ward, 1987). In fact, small-sized business leaderstend to employ emergent strategy to administer businesses, ignoring the detailed

planning. They believe that they can make prompt and appropriate decisions given the

knowledge and experience accumulated through practice. Based on the above findings

a schematic model regarding the relationship between succession issues and businessperformance has been constructed (see Figure 2).

Medium-sized business sector. In the medium sized business sector, for theprofitability ratios, three significant positive relationships were recognised,

respectively between successor development and ROCE, between successor

development and ROSE, and between succession planning and ROSE. Thus

hypotheses H2b, H2c, and H1c are confirmed. The confirmed hypotheses H2b and

H2c are consistent with Goldbergs (1996) conclusion, while the accepted hypothesis

H1cis consistent with the repeated emphasis placed on succession planning (Sharma

et al., 2000, 2001; Caponet al., 1994; Ward, 1987). This study offers empirical support tothe consensus view that family businesses need to strategically plan their ownership

transition.Second, regarding the business growth ratios, two significant relationships were

identified between inter-generational relationships and employment based growth

(positively) and between successor planning and employment growth (negatively).

More specifically, hypothesis H1e is confirmed, while the other hypothesis H3e isrejected. The confirmed hypothesis H1e indicates that poorly planned familybusinesses are not competent in business growth, while well-planned family firms are

more capable of expanding business. For the rejected hypothesis H3e, an enquiry israised as to whether the selection of employment growth as a performance indicator is

appropriate. For example, a business may reduce its employment, but keep the

profitability at the same level. Under this circumstance, superficially employment

growth is negative, but it is an efficiency gain in fact. Researchers thus should bear inmind that in different situations, performance indicators may reflect different contexts.

Based on the findings obtained, a model is constructed (see Figure 3).

Figure 2.Relationships betweensuccession issues andbusiness financialperformance in small-sizedbusiness sector

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DiscussionHypotheses H1 through H3[4] have been tested to examine the impact of successionissues on family business performance. In this study, family businesses have beenclassified into two categories due to their different perspectives (and formality) onsuccession. In both family business sectors, results suggest that the successordevelopment dimension is an effective predictor of business performance. Hence, it isrecommended that businesses draft a training charter, possibly including thefollowing: identification of strengths and weaknesses of the potential successor(s);identification of opportunities and threats of the family business; definition of strategictraining vision and objectives; recognition of training needs; programme of strategicvision and development of training action plan; institution of periodic and irregularappraisal of training performance; and introduction of recognition mechanisms.

Furthermore, family business owner-manager should formally consider the usage ofthe services provided by a variety of supporting agencies, counsellors and consultants.Specifically, educational and training services should be taken into account. Of coursetraining programmes should be chosen, tailored to the business scenario with anemphasis on equipping successors with essential managerial skills. Matley (2000)states that in the last 20 years, a number of costly training programmes and initiatives,e.g. Investors in People, Business Links, and Training and Local Enterprise Councils,have been launched in the UK, aiming to promote training arrangement linked tobusiness managerial skills. However, Matley identifies that owner-managersawareness, understanding and interest in the training services on offer is at lowlevel and the further take-up rate is even more disappointing. It is claimed that thebusiness success rate has association with those businesses that take up training

initiatives (Matley, 2000; Westhead and Storey, 1997). Hence it is recommended thatfamily firms consider an open and forward-looking approach to formally consult withvarious agencies and consultants to gain professional advice and incorporate addedvalue approaches into managerial practices under the auspices of advice providers.

Second, recognition of the relationship between inter-generational relationships andprofitability and growth in the small business sector confirms Morris et al.s line thatfamily relationships constitute a dominant variable in succession. Morris et al. (1997)suggests that the two most critical issues in relationship are trust and affability. Trust

Figure 3.Relationships betweensuccession issues and

business financialperformance in

medium-sized businesssector

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can be characterised by mutual support, honesty, confidence in each partys reliabilityand integrity and a willingness of each party to acknowledge the others achievements.Affability is concerned with mutual respect between the two generations andminimisation of rivalry. Properly handling and managing this relationship focusing on

the trust and affability can effectively reduce bickering, hostility and tension withinbusiness, enabling a smoother succession and higher level of performance. In addition,senior non-family managers are, quite often, actively involved in the successorgrooming process (Wang and Poutziouris, 2003; Lansberg and Astrachan, 1994). If therelationship between owner-manager and successor is in trouble, non-family managersmay doubt the owner-managers commitment to succession and hence view training asbeing of no consequence. Effort therefore, should be invested toward the constructionof harmonious inter-generational relationship since it can at least provide confidence tonon-family managers and ease the succession process.

The fact that inter-generational relationships is recognised as a significantdimension in the small business sector, but not in the medium-sized sector implies thatbusiness size may influence business owners perceptions of the importance of therelationship between two generations. For larger businesses, due to their complicatedhierarchical structure, the relationship between the two generations may becomealienated and be distracted by other sub-relationships, e.g. the relationship with othersenior non-family directors. Meanwhile, the board of directors (non-family directorscan be on board) can also play a key role in business administration by providing freshperspectives and initiatives, conducting more objective analysis of the firms strengthsand weaknesses, and directing business on a more professional track. In smaller-sizedbusinesses, due to the unavoidable close contact between the two generations, thequality of the relationship is vital. Quite often, the incumbents attitude and willingnessto leave the business will directly influence the effectiveness of transition. While thisattitude and willingness are, to a great degree, affected by the inter-generational

relationship.Finally, evidence indicates that succession planning plays an important role in

medium-sized family businesses, while in small-sized businesses it has beenoverlooked. This fact suggests that the owners perception on the planning maycorrelate to business size. This is reasonable since when businesses grow to a certainstage, their structure becomes more formalised and hierarchical and subsequentrequirements more multifaceted. This deserves more planning work. Ward (1988)identifies several explanations for the high failure rate in family business, but the mostsignificant is that many owner-managers do not strategically plan for the businessfuture. Researchers also identify that business owners in smaller businesses are apt toadopt emergent strategy to administrate and leave succession planning to chance(Sharma et al., 2003, 2000). The UK Co-operative Council (1995) indicates that

owners/managers of SMEs are generally lacking of management skills. This impliesthat generally they lack of the knowledge on how to strategically plan for businessdevelopment, how to market products and increase their market share and how tomotivate their employees to better serve companies and their customers. Provided sucha situation, a greater concern toward succession planning is highly recommended.

Specifically, succession planning refers to the process of developing a businessstrategy that provides prescriptions about how business generational transition can beoperationalised effectively. It is designed to create insights into the company and

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environment in which the company operates. Such a plan could seek to address thefollowing issues:

. Why should the family be committed to perpetuating the business?

.

What is the vision of the business at the post-succession stage?. Who should participate in the planning process?

. When and how should the offspring be prepared?

. When and how should the incumbent depart?

. How will the family resolve various conflicts, both on the family and the businessside?

. How to constitute and use the board of directors?

Meanwhile, how to nurture, enthuse, identify and encourage offspringsentrepreneurial spirit should also receive a significant attention. Open strategiescoupled with entrepreneurial ventures have been confirmed to be able to endow

business with more competence to succeed in the highly competitive market, while aconservative philosophy with a passive lifestyle pursuit will only constrain the longterm business survival and growth

The methodological challenges in conducting family business research indicate thata number of limitations constrain the conclusions of any study such as this. First, thelack of secondary data forces researchers to conduct their own primary studies, whichare difficult both to implement and to compare with prior research (Brockhaus, 1994).Reasons for this include many family business owners disinterest in participating insuch studies and the lack of consistent definitions from study to study. Such caveatsimply that any generalisation across the sector can be difficult or even dangerous toachieve. Furthermore, family business research has suffered from the shortage oflongitudinal studies (Brockhaus, 1994). Family business owners are reluctant to

participate in studies that only require single response, let alone those that requireseveral rounds of intervention or interaction. Furthermore, the high discontinuancerate related with small family businesses makes follow-up studies almostunachievable.

Future study can be extended towards checking how exogenous variables in themodel (i.e. succession planning, successor training and inter-generationalrelationships) interact with one another. For example, are businesses experiencingmore cohesive inter-generational relationships likely to create better-preparedsuccessors, or conduct higher degree of succession planning? Another critical issuerequiring further research is the causes of failure and success in descendent-controlledfamily businesses. Is it possible to measure success or failure relative to norms for agiven industry? Are there identifiable failure factors, and to what extent are these

related to family versus non-family issues?Moreover, some very basic research issues need to be addressed when studying

business performance in the context of family business, since this involves specifyingindicators of success which go well beyond the financial, and are certainly moremulti-dimensional than would be the case for more professionally run and publiclimited companies. But just what are the indicators of success used by familybusinesses? Are there differences in types and uses of success evaluation betweenfamily businesses with high and low financial performance? Certainly, it warrants

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more work before one can hope to develop domain-specific theories pertaining tofamily business succession and performance.

Notes

1. Effective successors in Goldberg (1996) are defined as those who have demonstratedfinancial competence by increasing revenues and profits during the five-year period of 1989to 1993.

2. In this study, business performance was measured by an average of the businesss last fiveyears financial outcomes.

3. Small values for the KMO measure mean that a factor analysis of the variables may not beideal, since correlations between pairs of variables cannot be explained by the othervariables (Norusis, 1994). Kaiser (1974) characterises measures in the 0.80 as meritorious, inthe 0.70 as middling, in the 0.60 as mediocre, in the 0.50 as miserable, and below 0.50 asunacceptable.

4. HypothesisH4 has been excluded due to the results of the factor analysis.

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