Piecing together the line of succession.
Building a successful business can depend on many factors. The quality of the product or service offered; the current trading conditions and the way the company is marketed are all important aspects. But in the case of family businesses, the relationship between staff members is more pivotal to the smooth running and survival of the company.
In the UK, between 60% and 70% of companies are classified as family businesses. In some other European countries, such as Spain and Italy, the figure is even higher, with estimates suggesting 85% of the businesses fall into this category. But although it is a popular business form, only 30% of family firms manage to pass their ownership to the next generation, and only about 10% progress to the third tier.
Dr Yong Wang, from the Management Research Centre at the University of Wolverhampton Business School, has been researching this area for 10 years. He experienced working in a family business himself in China before gaining a scholarship from the government to Manchester Business School. He completed a PhD which focused on family business succession.
He explains that family businesses are established for various reasons. "For some family businesses, the main purpose is to provide financial income for the family and education for the younger generation.
They sometimes suffer from a skills shortage, as people are recruited purely because of their family membership rather than qualifications and capabilities," he says.
Yong explains that the vast majority of family businesses are small to medium sized enterprises (SMEs), with two or three family members involved. However, one company he met during his research featured 14 relatives from three generations of the same family, which is unusual. There are some notable examples of large companies run by families, particularly the supermarket chains of Sainsbury’s, Walmart/Asda and Morrisons, but also Toyota and Clarks. Family businesses are generally in low tech fields, often operating in the catering, service, and transport sectors.
The inter-generational relationship is critical when succession within the family is considered. A healthy relationship between incumbent and successor will pave the way to a smooth transition, whereas respect, understanding, and complementary behaviour between the two generations are essential.
Yong explains: "People in family businesses can talk more easily with each other. The communication line is short, and decisions can be made very quickly and even over the dinner table. This means that family businesses can often respond to market changes quickly."
One of the main areas of research Yong has carried out has focused on why succession seems to be such a problem for many family businesses.
He says that there are three key elements to a successful changeover between the generations. Firstly, the relationships within the family, and how members interact with non-family employees. Sometimes there is no potential successor, as someone from the next generation has been given the opportunity to pursue a university education and then does not want to come back into the business. Secondly, research indicates there is a lack of succession planning in family businesses, as the leaders do not foresee any problems in the future. Yong states that research has indicated that if a boss wishes to pass ownership on within the family, he or she needs to plan up to 20 years in advance.
Lastly, there needs to be adequate training for the successor, and sometimes there is a shortage of resources for this. Yong suggests that a good method is to allow the proposed successor to walk out of the business in the early stages of their career and develop their experience outside, and then return with fresh ideas and new skills.
Research has also focused on the style of leadership. Yong explains there are generally two types of leadership across all forms of companies. The autocratic and centralised style has one person making the decisions, while participative is more democratic and relies on delegation to the next tier of management. Research shows that the more democratic style of management tends to trigger the better business performance, but many family organisations, by their very nature, rely on one person making the decisions. Yong has met many interesting families over the years he has been researching this area, and is able to look in-depth into this type of business through interviews, case studies and standardised questionnaires.
In the past two decades, family business research has gathered momentum. Both the quantity and quality of research soar.
Dr Wang and his colleagues recently hosted the IFERA@CHINA Family Business Forum in China, commissioned by the International Family Enterprise Research Academy (IFERA). The Forum received papers on subjects such as the survival, longevity, and growth of family businesses, as well as other themes of research related to family firm commitment, human capital, governance practices, culture and dynamic capabilities.
Family companies are credited with nurturing entrepreneurial talent across generations, a sense of loyalty to business success, long-term strategic commitment, and corporate independence. With the on-going evolution of the world economy and globalisation, new waves of family firms are emerging. They have the potential to reshape the socio-economic structure and reconfigure the future global landscape. Research in this increasingly popular subject area will attract more attention from both practitioners and researchers.
In fact, insights into this specific domain will enrich our knowledge of family firms and allow us to understand how these companies can survive and prosper with their unique resources, initiatives and capabilities.