There are various definitions that describe a family business, and each definition describes the family business with a different way. According to Birley and to Godfrey, "whether utilizing a broad or narrow definition of family business, it is clear that family businesses comprise a very significant proportion of business throughout the world. Family businesses can range in size from a small corner store to a large multinational corporation." (Birley & Godfrey, 1999).
According to Chua, Sharma, and Chrisman (1996), "family business as a business governed and/or managed on a sustainable, potentially cross-generational, basis to shape and perhaps pursue the formal or implicit vision of the business held by members of the same family or a small number of families"..
For the purpose of our dissertation, "a family business is a company whose ownership and management are concentrated in one family, with at least one member of the family at the helm of the business and another being groomed or considered for eventual leadership". (de Pontet, Wrosch and Gagne, 2007)
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In order for a family business to survive through the years an appropriate succession plan must be created to ensure in the long run prosperity and success for the family firms. According to Viktorin and Downs the definition of succession planning is "the identification and development of an individual, or a small pool of individuals, with the skills, attributes and experience to fill specific roles. In reality this is more like Replacement Planning-where companies look to replace individuals based on a never-changing organisational chart. (John Viktorin and Lee Downs, 2010)
Also, according to Christee Gabour Atwood, "succession planning is described as having the right people in the right place at the right time. More specifically, succession planning is the ongoing process of identifying future leaders in an organization and developing them so they are ready to move into leadership roles. This process includes reviewing the organization's strategic plan, studying the current workforce, forecasting future trends and developing employees in a structures plan to replace leaders as they retire or depart from the organization." (Atwood, 2007)
In order to enhance Business continuity in the long term after a major event that affects the business a succession plan must be provided that will give ensure survival. According to David Honour "An holistic management process that identifies potential impacts that threaten an organization, and provides a framework for building resilience and the capability for an effective response which safeguards the interests of its key stakeholders, reputation, brand and value-creating activities." (Honour, 2006)
Business Continuity planning is defined as the Planning which identifies an organization exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention and recovery for the organization, whilst maintaining competitive advantage and value system integrity. (Dominic Elliott, Ethné Swartz, Brahim Herbane,2002)
Why succession in family business is important
According to the survey from the Price Waterhouse Cooper Cyprus they found that the 50% of family firm across Cyprus are expecting a change of ownership and the 30% of these will change in the next five years. However in Cyprus the 34% expect change of ownership in the five years, which is higher than the rest of Europe. Also 58% would pass their business to next generation and 29% would sell to another company. Unfortunately this 29% of family business in the future will have a problem in the future.
The succession to family firms is a key moment in the life of any family firm. Although only 16% of the Cypriot participants of the survey respond that they will manage succession. This indicates that only a few Cypriot family firms will be able to survive in the future. In the U.S. only the 30% of family firms will survive in the second generation and 10% to the third generation. In general the 50% of world's economy is made up of family businesses and only 10% will survive to the third generation, these shows that the world economy depends wholly in the long term sustainability of the family entity.
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According to Aronoff "It has been said that the three important issues comforting the family business are succession, succession and succession." In order for a family business to survive it must be succeeded each and every generation must be succeeded by the next which is the most crucial family business
No one can plan for the worst case scenario because even you can predict your financial status for the future and make a breakeven analysis there is no way to predict the unpredictable. The unpredictable can be natural disaster, national economy collapse, CEO illness or retirement which is a good reason for having a succession plan prior. Contingency planning can anticipate the worst case scenario that will help the company to stay afloat.
Succession planning together with current evolved practices over the year have grown and changed. Succession planning is not only a plan for leadership change is something more, it helps to establish a strong leadership that will ensure the survival of the business from competition in the marketplace and stress the executives the importance of reviewing and examining the mission and objectives of the company.
Also having a well prepared succession plan for a family business it gives the opportunity for the rest of family members to have a voice and express their needs and concerns. It will make them more responsible and care more about the organization which will enhance a successful succession planning. It will increase the team spirit and will avoid the temptation to solely carry the entire weight of creating and sustaining a plan.
Income and expenses are sustained when a succession plan is in place, because it can provide answers as to the future income the company will need and what expenses will occur once the founder steps back from the main leadership role. Having a good succession planning gives to someone a helicopter view on how to examine his or hers employees and not mistakenly focus solely on replacing high level executives. Neglecting to add all the employees from all layers of management and their subordinates, not just the high executives to succession planning can cause a series of consequences into the future.
Moreover succession planning increases better relationships between departments by developing better communication between them and resulting into a more cooperative environment of synergy which develops a culture of strength and team spirit. Succession planning activities must be linked with human resource practices because after all Human Resource is about people and people are the most valuable asset of every company. Including HR in succession planning can reveal important processes such as employee evaluation processes that help to decide whether to fill vacancies with internal candidates from the company.
Succession planning keeps emotions always high because change is major component of succession plan. Change can be a source of stress in case of people where the jobs at risk. On the other hand it can be an exciting process because it plans for the future and can inspire employees to get involved and loyal to the company.
4- The Family Business Challenge
Family businesses in developed countries such as the U.S account for the 50% of the gross domestic product from small business to large corporations. However in the fortunes 500 companies list family businesses account for the 35% which shows that big family corporations rule the world. These family businesses are powerful and at the same time very complex that create both of them advantages and opportunities as well as challenges. The most important challenge is to effectively align the business system with the family system which it cannot come naturally. In the one hand we have the family which is driven by emotions and on the other hand the business that is driven by economics. The interaction of family cohesion and business achievement often creates outstanding business performance but at a cost. If there is lack of coordination, good things that benefit the business can damage the family and when there are family conflicts can damage the business.
The crossroad between ownership, management and family found in family business creates challenges for succession. During succession trust and harmony in the family can complicate the transition process and cause conflicts. Elements affecting family business succession can be the influence of the board of directors and other experience with succession that can be considered as business factors.
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According to Carlock the following diagram describes the conflict between the family expectations and the business demands in planning a family enterprise strategy which includes the strategy for all the activities that need to be conducted by a family business family including its operating businesses, its investments and other business activities. Family Enterprises have four general strategies: invest, hold, harvest or sell. These strategies reflect the owners investment commitment based on the business' strategic prospective for value creation. Moreover looking at the diagram we can see that family expectations, business demands and result in different tactics and actions shape the choice of enterprise strategy.
Figure 1: Aligning family expectations and business demands
Family Enterprises need to develop family and business plans because of five important issues that arise from the conflict between the family expectations and the business demands. These issues appear to be in most of the family firms not caused by conflicted relationships among members but driven by life cycle and life events, family values and experiences and real differences between family goals that are emotional and business goals. In order to have the control of these issues, cautious planning and decision making must be considered, in order to ensure family harmonization and business performance. Also to secure effective communication between these family and business goals, conflicting demands must be addressed from both aspects.
The five structural issues are:
Â· Control: How are decisions made?
Â· Capital: How are financial resources allocated?
Â· Careers: How does the family create career and leadership roles?
Â· Connection: How do we keep family relationships strong?
Â· Culture: What values drive our planning, decision-making and behavior?
Looking to the above issues closely we can understand how family expectation and business goal often don't match and result in to conflict. Preparing the next generation careers is often a source of stress and misunderstanding. All businesses need capable and well trained executives to manage the firm. However most of the parents see their children as the most suitable and entitled to the family business than anyone else but is not always like that. Usually there are children that are entitled to run the business but they lack of expertise and attitude, these cannot be entitled of the business because they will drive the business downward. When a family member expects to run the business like its parents, his or her dream collapse because the family haven't planned succession properly or there is a lack of fairness in recruitment method. These scenarios may cause conflicts among family members relationship within the company and losses for the business. So, in that case family and business planning must be completed and linked with each other in order for the family members to be informed and focused about the business requirement, where family is treated fairly and the business has capable employees.
Figure 2: Structural Conflicts in Family Business Systems
A good start for the family is to identify its values and its future vision. Its values can be filled in the vision statement of the company that will inspire and determine what the actual business and its strategy will become. However if the family's vision is to remain a small family business that competes in the local market, then family employment is feasible. The criteria of selecting family members will be devotion and interest only, which in case of staying within the family business, then the management positions for family members are certainly possible.
On the other hand if the vision of the family is to grow the business and dominate the market or industry, the family will think of its business requirements and consider a professional management that includes skills of being able to identify strategies that suits the family business needs to dominate the market or industry. Hence, the family business will require key management people with elevated skills that could come from the family or not. In conclusion, families that identify their values helps them to agree on their vision statement that drives planning for align family and business activities that will ensure in the family and business performance.
Leaders of family businesses who usually are the primary owners can exercise great control over the process of succession. According to much of the research on this subject has focused on their unwillingness to cede control, which according to relevant theories is an example of people who lose leadership and suffer from a psychological loss from retirement due to their role as leaders that offered them respect and admiration which they may not discover it somewhere else. Another challenge may be consider the emotional burden of the leader of choosing a successor from among his children, which can delay the succession process. Additionally they rely on income from the business to fund retirement and they may not forward with succession if they believe the business cannot function without them.
Referring to the successor's experience of succession, its interests and abilities have an impact on succession outcomes. In most organizations they gain control through demonstrating their previous experience and competence but in family business it is unclear if this process works in the same way. Relevant family business research finds that the way the heir experiences the succession process can add to his or her fulfillment with work as well as to be prepared to take over. (Stéphanie Brun de Pontet, 2007)
An Exploration of the Generational Differences in Levels of Control Held Among Family Businesses Approaching Succession
5. Determining the current owners needs and objectives
The base of family business succession plan is to determine "what", "when" and "how" the owner's goals and objectives. It is important to know about the goal and objective of family business because this is necessary to decide about financial planning, retirement planning, business planning, business succession planning, tax planning and strategy of company.
The goal and objective can help the owner's advisors to establish a good outline for succession planning. This information can give guideline to balance between family situation and business situations. Also difference between current situation and their goal and objective situation can show strengths, weakness and reality of the family business situation. Therefore, achievement of good plan needs many parameters that it is including family values and business values. Family values present their situation in the business, the owner's family dynamics, Restrictions of the business and the family currently. Business values can present company's cash flow, competition level, reputation and their role in current market.
In a nutshell, this part involves determining and considerate the business owner's goal and objectives that present situation and the Limitations, observing the reality of the situation and making realistic recommendations that achievable by the owner and his business and family.
A family succession plan needs to involve the financial needs of the owner and his or her spouse. In reality most of the family business owners are depending on the business to provide for their retirement because they can have less cash in hand and more cash on paper which means that most of their money is invest into their business. Family Business Owners having in mind that one day their money from pension will be spend after they retire and do things that they have not done before where for many years they made sacrifices to run their business. Also whatever they have not done all these years even for the rest of the years they have left they want to spend their time with their family and get involved in community and not profit activities. However is it possible for the business to support their owner and his or her spouse after succession? And is it possible for the family business to support the new owners "children".
In addition the owners goals and financial needs need to be synchronized in order to be brought into harmony because most of the times the owner evaluates its company much more that it actually. A true business valuation will convince the owner about the correct value of the business in order to be cautious to make correct decision that concerns his or hers personal goals and financial needs, particularly for retirement.
The Vroom-Yetton-Jago Normative Leadership DecisionÂ Model
Management or leadership in family business is all about making decision, setting the goal, set guideline to achieve the goal and assess strategy of succession plan. Leadership can be effective when the leader can take decision in difficult times and situations. An effective leader is considered when he/she gives ideas and suggestions in appropriate situations when advice is needed. The decision making is base thing for leaderships. How decision-making and decision-making positions is very important. A decision could have different result in variety situation.
One of these decisions is creating and choosing succession plan. In decision making we have to know that what things effect our decisions. , what is the managers expectations about his/hers output of its decision?, when the managers require consultation from for others in their decision making?, and How does the managers get commitment from his/her employs on specific decision?
Therefore we need a theory for identifying the leader's decision making. Vroom-Yetton-Jago Normative Decision Model can help us to answer the above questions. This model present five different styles on the different situation & level of involvement. These five styles are following:
Autocratic - 1 (AI): This part is completely autocratic that means the manager solve the problem and crisis with himself decision by manager's information that is available.
Autocratic - 2 (AII): In this part, manager collect specific information from members and staff. Ultimately, the manager's decision is individual decision and maybe the follower doesn't have aware about this decision. They involve in this part only for data Collection.
Consultative -1 (CI): The manager explains the problem or situation to each follower individually and asks to evaluate from each followers. In this part, followers do not constitute a group and manager will decide alone.
Consultative 2 (CII): The manager and flowers constitute a group about their situation and will consult together but the final decision will give manager.
Group-based 2(GII): The managers and followers constitute a group about their situation or problem and they will decide together. In this part manager will accept final decision and he/she doesn't force his/her individual decision.
Vroom-Yetton-Jago formulated some questions on decision quality, commitment, problem information and decision acceptance, with which leaders can determine level of followers involvement in decision. These question are following and the managers has to answer only Yes/ No for each question.
1- Is there a quality requirement? Is the nature of the solution critical? Are there technical or rational grounds for selecting among possible solutions?
2- Do I have sufficient information to make a high quality decision?
3- Is the problem structured? Are the alternative courses of action and methods for their evaluation known?
4- Is acceptance of the decision by subordinates critical to its implementation?
5- If I were to make the decision by myself, is it reasonably certain that it would be accepted by my subordinates?
6- Do subordinates share the organizational goals to be obtained in solving this problem?
7- Is conflict among subordinates likely in obtaining the preferred solution?
Quoted from: (Vroom & Jago, 1988)
Then the manager cloud find type and level of decision from below graph.