University of Economics, Prague
Master’s Thesis
2021 Mel Loetscher
University of Economics, Prague Faculty of Business Administration
Masters field: Management and Consulting
Title of the Master’s thesis:
Succession Planning and Talent Development in Family Business
Author: Mel Loetscher
Supervisor: Doc. Ing. Martin Jurek, Ph.D.
Declaration of Authenticity
I hereby declare that the master’s thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from other sources. This
work has not been published or submitted elsewhere for the requirement of a degree program.
Prague, 11
thMay 2021 Signature
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Title of the Master’s Thesis:
Succession Planning and Talent Development in Family Business
Abstract:
The objective of this thesis is to analyze family businesses and their approach to succession.
Which factors contribute to a family business surviving it beyond the third generation. The theoretical chapters focus on the family business and exploring concepts related to succession planning. The knowledge gained was then absorbed and used for the practical chapters.
To reach a conclusion, a quantitative and a qualitative method were used in the form of surveys and interviews. The surveys allowed participation from both family businesses and non-family businesses to understand differences related succession and talent development. Interviews with successors of family businesses were conducted then analyzed. Ultimately, conclusions were reached on what differentiates family entities from non-family entities and what contributes to successful succession planning.
Books, journals, scientific articles, reports, and the internet were used to conduct research.
Key words:
Family-business, succession planning, leadership, talent-development
5
Acknowledgement
I hereby express my gratitude and appreciation to the supervisor of my thesis Doc. Ing. Martin Jurek, Ph.D. for providing me with support, guidance, and recommendations during the time of writing my thesis. In addition, I would also
like to thank my parents and sister for their continued support and care.
6 Contents
Introduction ... 10
1. Research Question and Design ... 11
2. Family Business ... 12
2.1 Competitive Advantage of Family Businesses ... 14
2.2 Resource Based View ... 16
3. Succession Planning Process ... 17
3.1 Different Succession Models ... 19
4. Organizational Structures and their Impact on Succession ... 21
5. Leadership Approaches ... 24
6. Talent Development and Succession ... 31
7. Successor Selection in Family Business ... 34
8. Strategy and Succession ... 38
9. Financial Ability for Succession ... 39
10. Causes for Failed Succession ... 40
10.1 Key Success Factors for Harmonious Succession ... 40
11. Methodology ... 42
12. Survey ... 44
12.1 General Findings ... 44
12.2 Filtered Results ... 46
12.2.1 Size of Businesses ... 46
12.2.2 Years of Experience ... 47
12.2.3 Position ... 48
12.2.4 Written Strategic Plan ... 49
12.2.5 Recruitment Methods ... 50
12.2.6 Sufficient Dedication to Talent Development ... 51
12.2.7 Approached about Replacing a Key Position ... 52
12.2.8 Does Succession Planning Contribute to Longevity... 53
12.2.9 Results for Respondents who Stated Lack of Talent Development ... 54
12.2.10 Experience Level of Respondents who believe Talent Development is Lacking... 55
12.2.11 Succession Planning Comparison ... 56
12.2.12 Performance Evaluation Comparison... 58
13. Interviews with Family Business Successors ... 60
13.1 Differences in Succession Planning between Family Businesses and Type of Succession ... 61
13.2 Current Responsibility over Daily Operations and Experience ... 63
13.3 The Role of the Family Council and Awareness of Succession Plans among Stakeholders ... 65
13.4 Concerns about Legacy ... 66
13.5 The Competitive Advantage of Family Businesses ... 68
13.6 Plans for after the Transition has been Finalized ... 69
14. Conclusion ... 71
7 Bibliography ... 73 Appendix A ... 83 Appendix B ... 85
8 List of Tables
Table 1: Differentiation Between Family System and Business System Table 2: Ten largest Family Owned Businesses
Table 3: Different Leaders and their Characteristics Table 4: Objectives of Leadership and Management Table 5: Leadership Traits
Table 6: Transformational Leadership Table 7: Path-Goal
Table 8: Leaders, Followers, Tasks Table 9: Types of Capabilities
Table 10: Talent development components which builds optimal workforce Table 11: Benefits and Challenges of Family-businesses
Table 12: Issues Related to Succession Planning Table 13: Financial Perspective on Succession Table 14: Succession Plans for Key Roles Table 15: Performance Evaluation Frequency
Table 16: Overview of the Family-businesses used for Interviews and Observations Table 17: Father-Son and Mother-Son Succession
9 List of Figures
Figure 1: Nine box grid for talent development Figure 2: Traditional Three-Circle Model
Figure 3: Managing the Family Component in Succession Figure 4: Comparison of Size between Types of Businesses Figure 5: Years of Experience from Respondents
Figure 6: Job-Position of Respondents
Figure 7: Perception of Respondents related to the Strategic Plan of Companies Figure 8: Type of Recruitment Method Used
Figure 9: Perception if enough Resources are dedicated to Talent-Development Figure 10: Approached About Replacing a Position
Figure 11: Succession Planning and Longevity
Figure 12: Size of Companies where Talent Development is not Deliberate Figure 13: Succession plans for family businesses
Figure 14: Succession plans for non-family businesses
Figure 15: Performance Evaluation frequency for family business Figure 16: Performance Evaluation frequency for non-family business Illustration 1: Multigenerational Family Business Model
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Introduction
Family businesses are one of the largest contributors to today's globalized economies. They are not limited to one size or specific industry, instead, they operate across all of them. Many family businesses struggle with survival and being passed on to the next generation
Succession planning in business is integral when creating longevity for a company. Every business will eventually have to replace key people and positions. To ensure this transition can be conducted successfully, multiple models and theories have been created to support ideas on how succession should be conducted. Most companies in today's interconnected world will have unique characteristics and therefore one system, plan, model, framework, will not be suitable for all. It has been shown that there are differences in ownership, governance, returns, networks and relationships, leadership, careers, and management between family and non-family businesses (Pimentel, 2017). To create a succession plan which works there needs to be an understanding of what kind of business is being transferred.
Which key roles need to be replaced during which given timeline and what kind of leadership style is present. It has been found that 26-47% of leadership transitions are considered
failures just two years later (Keller, Meaney, 2018).
The emphasis in family business succession transition should be put on making the right strategic business decisions that will create long-lasting success but also protecting internal relationships. Further, a succession plan should not overshadow a business's strategic objectives, they should be aligned. A transfer of a business can't take place if it seizes to exist. More than half of small businesses do not have any sort of succession plan (Thienel, 2020). This can be attributed to the focus being on the present moment and an inability to dedicate resources to future planning. With larger companies, this percentage is likely to fall as they will have resources and plans present. Finding suitable people to develop and being able to retain them is a major challenge of succession and it is a process which if not started far enough in advance can lead to failure. According to Walsh (2011): While the majority of family business owners would like to see their business transferred to the next generation, it is estimated that 70% will not survive into the 2nd generation and 90% will not make it to the 3rd generation.
Successful succession planning is about creating a sustainable legacy, transferring key skills, and making all parties involved aware of the process. The suggested timeline for succession is five years but it can also last longer (Lofgren, 2019). Shorter timelines are not advised as it may lead to the process becoming rushed and a higher likelihood of failure occurs. Planning will generate a clear overview of the framework that needs to be put in place to enable the succession. Plans can change over time but they are a critical starting point to any business- related endeavor. Ultimately, having a succession plan is better than not having one,
however, to successfully translate a plan into action the appropriate leadership abilities need to be present to act as an enabling mechanism.
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1. Research Question and Design The question
How can succession planning contribute to family businesses surviving beyond the third generation? What role does talent development play in preparing successors for their future leadership responsibilities? How are family businesses unique in regards to succession planning?
The research problem
Creation and implementation of succession plans for family businesses which will undergo succession in the near future. How will businesses be affected by the succession process and how are family businesses unique in regards to transition planning.
The design
Consists of a mix of primary and secondary research. Secondary data and a literature review along with the most important ideas associated to succession and family business will be the core of the theoretical section of this paper. The primary research consisting of interviews, surveys and observations. Further, the primary research will consist of quantitative and qualitative analysis of family and non-family business succession practices/methods. The primary research and findings will be of high importance when determining what is within the scope of possibilities for companies along with uncovering limitations that are not possible to be currently overcome.
Key factors
Creation of family business succession plans will vary greatly in origin and scope.
Differences can be attributed to different leadership styles, industry they operate in, the current business environment, ownership structures, perspective of the incumbent and
successor. Further, process of candidate selection, candidate development, and current role of the owner can be factors which impact the family business succession process.
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2. Family Business
European Family Businesses defines a family business as the following (n.d.):
“The common feature of these companies is that of the family dimension, where business and ownership are intertwined. Family businesses can be small, medium sized or large, listed or unlisted. Family businesses in Europe have been widely equated to Small and Medium- Sized Enterprises (SMEs) in public and policy discussions. However, this neglects the fact that there are also large family businesses.”
Chua, Chrisman, and Sharma (1999) defined a family business as "A business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families."
Erenesto J. Poza, Family business (2007) states the following:
1. Ownership control (15% or higher) by two or more members of a family or a partnership of families;
2. Strategic influence by family members on the management of the firm, whether by being active in management, continuing to shape culture, serving as advisors or board members, or being active shareholders
3. Concern for family relationships
4. The dream (or possibility) of continuity across generations.
Miller and Le Breton-Miller (2003): ”One in which a family has enough ownership to determine the composition of the board where the CEO and at least one other executive is a family member, and where the intent is to pass the firm on to the next generation.” .
Chua et al. (1999): ”The family business is a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition
controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families.”
Coli et al. (2003) “A family member is chief executive, there are at least two generations of family control, a minimum of five percent of the voting stock is held by family or trust interest associated with it.”
13 Table 1
Differentiation Between Family System and Business System
Area of Conflict Family System Business System
Goals Development and support of
family members
Profit, revenue, efficiency, growth
Relations Deeply personal Semi personal/impersonal
Rules Informal Written and formal
Evaluation Members rewarded No systematic evaluation
Succession Caused by death, divorce, voluntary willingness
Caused by retirement Authority Based on family position or
seniority
Based on formal position Commitment Life time, based on identity
of the family
Short term, based on rewards received
Note. Adapted from Raju, 2008 and Whidya, Christina, Bernardus, 2017
Table 1 shows the differences between family and business systems. It is estimated that 90 percent of US companies are family businesses (Conway Center, 2020). In the Czech Republic it is around 85%, Germany 84%, and United Kingdom 65% (Alderson, 2018).
Table 2
Ten Largest Family Owned Companies
Note. Adapted from Bain, 2021
Table 2 shows the largest family owned businesses, their legal structures, and ownership stakes that the families hold to this day.
Rank Name Owner Founded Public/Private Country Stake
1 Walmart Inc. Walton 1945 Public United
States
48%
2 Volkswagen
AG
Porsche und Piech
1937 Public Germany 31%
3 Berkshire Hathaway Inc.
Buffet 1955 Public United
States
38%
4 Exor N.V. Agnelli 1899 Public Netherlands 55%
5 Ford Motor Company
Ford 1903 Public United
States
40%
6 LG Group Koo 1947 Public South
Korea
36%
7 SK Group Chey 1953 Public South
Korea
38%
8 PJSC
LUKOIL
Alekperov 1993 Public Russia 30%
9 Schwarz
Group
Schwarz 1930 Private Germany 100%
10 Bayerische Motoren Werke
Klatten and Quandt
1916 Public Germany 43%
14 Illustration 1
Multigenerational Family Business Model
Note. Adapted from Ward, 1987
Illustration 1 displays how family businesses evolve when passed on to the next generation.
With each additional generation the chance of failure increases especially after the second generation the percentage becomes significant.
2.1 Competitive Advantage of Family Businesses
The competitive advantage that family firms are able to generate will be affected by which generation is currently running it, and size of the market it is operating in. The following are sources of competitive advantages for family firms.
1. Loyalty 2. Legacy
3. Access to labor 4. Access to capital 5. Key employees 6. Patience
7. Values
8. Career opportunities 9. Relationships
10. Financial rewards 11. Succession
12. Community and philanthropy (KPMG, 2011) First Generation Family
Business
Second Generation Family Business (Sibling Partnership)
Third Generation Family Business (Cousin
Consortium)
15 Additionally, trust is mentioned as a major factor when creating advantages for family firms
• 75% trust family businesses more than non-family businesses
• 54% would work for a family business instead of non-family business
• 66% more willingness to pay higher prices for products/services (Edelman, 2017) Family business has the ability to build higher levels of trust and loyalty than their
counterparts. Because of this they are able to have a more long-term oriented approach. Most family businesses will not choose to pursue short term success over longer term compared to many businesses today who choose the opposite because their personal reputation may not be attached to the legacy of a company. Family businesses are able to utilize the competitive advantage they naturally have over other companies if they make it known that they are one (Alderson, 2018).
It is suggested family businesses have the following
• Clear sense of agreed values and purpose as a company
• Documented vision and mission statement
• Code of conduct
• Shareholder agreement
• Testament/last will
• Emergency and contingency procedures
• Entry and exit provisions
• Conflict resolution mechanisms (PwC, 2021)
Family businesses are the heart of the global economy and they are an imperative part of every countries economic prosperity. (EY Global, 2019). They enjoy the advantages of common values, strong commitment, loyalty, stability, and decreased costs (NI Business info, n.d.). Conflict resolution are key to preserving the future of family businesses and making sure they exist past the third generation (Robertson, Stover, Teo, n.d.).
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2.2 Resource Based View
The view states that sources of competitive advantages can be found in the resources of a company given they are scarce, valuable, no perfect substitutes, and hard to imitate (Barney, 1991). Prior contributions to the resource-based view perceive companies as bundles of resources (Wernefelt, 1984; Rummelt, 1984). The first contribution to RBV was based on the premise that a firm's growth is based on the firms resources and limited by managerial
resources (Penrose, 1959). It was identified that family businesses can have a competitive advantage concerning RBV due to the premise that their orientation and values are directed more towards the long term and increased transparency with information within the business.
(Barney, Clark, Alvarez, 2002). The competitive advantage firms can generate can also be linked to having a comparative advantage over others in producing a product or service more cheaply or efficiently in relation to other products, with Resource based view it means that some companies will be able to generate advantage through the acquisition along with usage of a resource (Ricardo, 1891). In the view or theory the resources play a crucial role in generating an advantage, they can be tangible or intangible and must be heterogeneous as well as immobile (Barney, 1991).
Rothaermel in 2013 changed Barney's 1991 VRIN framework and adjusted it to be the VRIO framework which determines if a company has a competitive advantage by the following factors.
(V) = Is a resource/capability valuable? No results in a competitive disadvantage. If yes move to R.
(R) = Rare? No results in competitive parity. If yes move to I.
(I) = Difficult to imitate? If not it results in a temporary advantage. If yes move to O.
(O) = Is the firm organized to capture value? As with I, no results in a temporary advantage.
If the answer to the all for questions of the acronym VRIO is yes then it results in a sustained competitive advantage for a firm (Rothaermel, 2013). Only having resources that are
immobile and heterogenous is not enough for creating a sustainable advantage (Barney, 1991).
RBV differs from other theories on creating competitive advantage in the sense that it does not take the outside environment into account when trying to achieve its main objective. The best approach is to use both VRIO and take into account outside factors when trying to achieve a competitive advantage.
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3. Succession Planning Process
Companies which successfully make it past three generations and are able to add to their legacy do so by investing into family which creates succession options (Robertson, Stover, Teo, n.d.). In family business the succession planning process focuses around choosing a successor or heir to take ownership over the business at a planned date or earlier due to unforeseeable circumstances (Krishnan, 2020).
Areas of focus for succession planning are; 1. Leadership 2. Ownership 3. Legacy and values 4. Family wealth (Robertson, Stover, Teo, n.d.)
Charity Village lists five key elements for the succession planning process (2010) 1. Identifying key positions for which a succession plan is necessary
2. Identifying the successor or successors 3. Identifying job requirements
4. Building competencies 5. Assessing progress
Who is responsible for planning?
Elements for succession planning according to Jones (2020) describes what must be in a succession plan
1. Have a plan 2. Identify prospects 3. Be transparent
4. Focus on skills development
According to Glynn and Whelan (2017) family governance consists of Addressing fundamental issues such as:
• Vision and values of the family
• The family's involvement in the business roles and responsibilities
• Board membership
• Long-term strategic goals of the business succession management
• Share ownership dividends and voting control
• How and when to employ non-family members
• Family meetings
• Family office
• The role of the Family Council, if appropriate
18 Nine Steps to Succession Planning divided into Family and Business Transition
Family Transition Planning
1. Family Planning & Communications 2. Ownership Planning & Alignment 3. Retirement & Estate Planning 4. Governance Planning
Business Transition Planning 1. Business Strategic Planning
2. Risk Assessment & Contingency Planning 3. Management Organizational Planning 4. Family Leadership Development
5. Stakeholder Communication Planning (Isaac, 2019)
Family planning should be conducted before everything else. If a succession plan is designed for a family business where ownership will transfer within the family then most of the
planning and deciding happens internally (Crown, 2019). The planning should be thorough so that other stakeholders can be presented with a decisive plan of action that will meet the objectives of the business. If succession is rushed and the plan of action is presented prematurely and incompletely it can potentially scare clients, employees, and other
stakeholders (Solera, 2009). A highly sub-optimal outcome should be avoided at all costs.
Decisions need to be rational with no biases which can be difficult in a family business environment since relationships are not just part of work but carry over to private aspects of a participant's life (Karofsky, 2006). Risk needs to be assessed, leadership clear, and
stakeholders should be presented with a convincing plan (Jeffery, 2009).
The succession plan should account for changes in the business environment and build competencies to ensure a company is ready for transformation if the industry they operate in becomes disrupted (Toliver, 2017). Some businesses may have appropriate succession plans in place and can still fail due to a variety of factors which can include; lacking resources to turn the plan into action, selecting the wrong candidate, industries becoming disrupted, and lack of communication (Bochenski, 2020). Countless factors can lead to failure in succession and therefore having a realistic plan that does not fail in execution is crucial but easier said than done (Wharton, 2005). It is important to have a realistic time horizon of more than two years ideally and having a contingency plan in place in case a key person decides to leave the company or other unexpected events occur (Deloitte, 2015). Further, when the succession takes place the person taking over operations should have existing relationships with clients and employees, if this is not the case there is potential for alienation between the new and existing parties involved (Ciampa and Watkins, 2014).
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3.1 Different Succession Models
According to HFInsight (2016) there are three ways on how to conduct succession, Routch, Monahan, Doherty (2018) suggest four more approaches on how succession and leadership are linked.
Hope model
Whereby the current CEO or management team does not take an active approach to succession planning. Rather, as the name suggests, the model is based upon hope that any vacancies will be filled with capable and qualified replacements of the position for which there needs to be succession. Pitfalls of this model include finding suitable candidates for vacancies and the time necessary for the replacement to become fully productive. Model has a failure rate up to 30%.
Nominal model
Model that identifies one or two possible successors in advance. These people are already in the organization and therefore time needed to find candidates compared with the “hope model” is much lower. In fact once suitable candidates are chosen there is no time necessary to identify them. This model carries along the disadvantages that it can give the chosen employees certain expectations which if not met could lead to setback. Additionally, it is possible that the wrong candidates are chosen and more qualified employees are left unnoticed once the decision is made. Lastly, even when selecting adequate candidates for succession it may be hard to determine ahead of time if they will be able to act as a fully functional replacement until the moment actually arises.
Robust model
Talent for succession within this model is identified both within the company and in its external environment. This allows finding the most suitable candidates for succession.
Candidates are trained in advance so that succession can take place swiftly when the position in question becomes vacant. By finding candidates that have existing skills that match the succession criteria and also training them to learn the crucial skills they will need ahead of time makes this model effective. Finding talent and then training it is a costly endeavor and this model can’t be implemented over night without a concise plan of execution in place (“3 Models of Succession Planning | HFInsight,” 2016).
According to Routch, Monahan, Doherty (2018) there are four more approaches to succession planning from a leadership perspective.
Competitive approach to succession planning
• Process-centric and objective
• Builds objective criteria
• Development programs and assessments are of outmost importance
20 Centered approach
• People-centric and objective
• Focuses on the leader and the successor
• People centric approach which accounts for emotions
• Approach encourages leader participation and is designed to be perceived as less threatening compared to a competitive approach
Compliant approach
• Process-centric and subjective
• Treats succession as a standardized business process
• Mainly conducted by HR
• Leaders tend to be less pro-active in this approach and focus more on immediate responsibilities excluding succession planning
Comfortable approach
• People centric and subjective
• Driven by intuition and reputation
• Leadership groups make decisions about succession
• Not based on objective data and rather on maintaining current culture
• Prominent for family businesses (Routch, Monahan, Doherty, 2018)
Organizations are complex mechanisms and not every succession plan that works for company x will have the same effect on company y. Out of the three models described
previously the “hope model” is the least formal, “nominal model” is a hybrid, and the “robust model” the most thorough. Not all organizations may have the resources and capabilities to adapt a “robust model” and for some companies that will seize to exist in the future investing in such a system may be a misallocation of resources that would add more value elsewhere.
Which model is adequate for a specific organization can depend on a variety of factors which include: financial condition, organization size, management direction (“3 Models of
Succession Planning | HFInsight,” 2016; Deloitte et al., 2018).
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4. Organizational Structures and their Impact on Succession
Structures play a role in regards to succession because they describe how an organization is run. The successfulness of succession is largely measured by its ability to find effective future replacements of current positions and depending on which organizational structure is currently in a company it may impact its ability to do so. Certain structures will allow for more seamless identification of key replacements because they give employees more autonomy to act and display skills on their own while other structures allow such authority only to a qualified selected few. It is crucial to understand the structure of a company for which succession systems are created as it allows the identification of key positions and competencies for which talent needs to be found to succeed. Organizational structure can be changed, however, it should be avoided undergoing such change during succession as it may add to the complexity of the existing process.
Flat – Horizontal structure
A structure more common among small businesses. Allows the elimination of middle management. Employees in this structure will have the ability to actively participate in the decision making process. Communication flows freely within an organization and employees enjoy greater levels of autonomy. Tends to become difficult to maintain as an organization may experience growth and possible informal hierarchies can occur over time (Nouri, 2020).
Hierarchical-Vertical structure
The most traditional organizational structure in which everything flows from top to bottom.
The opposite of a flat structure. Decisions are made by the CEO and top management, lower level employees have very little input on important issues. Communication may not flow throughout every level which can result in delays however decisions can be made faster due to less discussion being necessary and less parties need to be satisfied. Still a common structure especially amongst older traditional companies and government (Clarity consultants, 2020).
Functional structure
A typical organizational structure where employees with tasks of similar nature work together in the same division. Common divisions for companies include human resources, IT, and finance to mention a few. Benefits of this structure include high levels of specialization and productivity where tasks of individual departments are conducted separately. It is the most common type of organizational structure (Corporate Finance Institute, 2020).
Divisional structure
Divides a company’s organizations into different divisions which focus on a concentrated area. Tasks are performed in teams dedicated to either the region or product depending what the division focuses on. A structure designed for large companies which need to satisfy different customer needs and do not operate in only one region or sell only one product.
Normally under this structure the CEO will appoint managers to operate the different divisions(Corporate Finance Institute, 2020).
22 Matrix structure
Also referred to as grid organization. This structure combines elements from both functional and divisional structure. Employees report their work to more than one person. Usually a functional and project manager. Provides advantages when expertise needs to be shared across the organization and not fixed to one department (Stuckenbruck, 1979).
There are three different type of Matrix structures which impact the dynamic between functional and project manager, they are:
Weak matrix organization
Functional manager has more authority than project manager Balanced matrix organization
Functional manager still has more authority than project manager Strong matrix organization
Project manager has more authority over functional manager (Indeed, 2021)
Hybrid structure
Similar to the matrix structure combines elements of both functional and divisional structure.
Functional and divisional departments are created in which related jobs are conducted (Corporate Finance Institute, 2020).
Holacracy
A new organizational structure with no clear titles or jobs being assigned to employees. It is similar to a flat structure in the sense that employees enjoy great levels of autonomy but there remains a strong formal structure which is not present in a flat structure. The structure allows high levels of flexibility (Hargrave, 2019).
Team based structure
A structure where tasks are performed in teams. In team environments there tends to be a more co-operative atmosphere rather than command coming from one central authority.
Different teams have the ability to work individually on projects or co-operate depending on circumstances. Employee autonomy of this structure is similar to a flat structure and opposite to a traditional one(Corporate Finance Institute, 2020).
Network structure
Agile decentralized structure which allows for free flowing communication. Used by larger companies operating in more than one specialized area and therefore it can become very complex. Allows companies to maintain focus on their core competencies while adding new operations to the existing network (Boundless Management, 2021).
23 Every organization should utilize and apply the structure which best meets its unique needs.
Which structure is best can depend on which industry/sector an organization operates in.
Further, size and growth prospects of a business can play a large role when deciding which structure to utilize. Recent trends have shifted from traditional top down structures to more dynamic ones. Ultimately the structure applied should be one which best helps a company achieve their strategic objective.
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5. Leadership Approaches
Leadership ability can determine how well a company executes its strategy through motivating employees, resource allocation, and executing the mission (Germano, 2010).
Enacting effective leadership can drive improvements in team motivation and greatly benefit the dynamics of organizational culture (Körner et al. 2015). Leader's engagement and how they motivate employees allows them to be viewed as role models if they lead correctly.
(Gutermann, 2017). Leadership's main goal is to achieve the strategic objectives of a
company and plays an important role in the decision-making process (Jabbar and Alfartoosi, 2017). Strategic leadership is defined as “the ability to anticipate, envision, maintain
flexibility, and empower others to create strategic change as necessary” (Hitt, Ireland, Hoskisson 2008). The most important role that strategic leadership plays is to influence decision-making in a way in which the organization is enhanced (Rowe, 2001). Being a successful leader includes helping those being lead develop their professional and personal skills (imd, n.d.). Leadership is the ability to set clear goals and then taking appropriate actions to achieve them, also impacts corporate culture and management (Groysberg et al.
2018).
Table 3
Different Leaders and their Characteristics
Strategic, Visionary, and Managerial Leadership Strategic Leaders
✓ Synergistic combination of managerial and visionary leadership
✓ Ethical behavior and value-based decisions
✓ Formulate and implement strategies for immediate impact and preservation of long-term goals to enhance organizational survival, growth, and long-term viability
Visionary Leaders
✓ Proactive, shape ideas, change the way people think about what is desirable, possible and necessary
✓ Non-linear thinking
✓ Believe in strategic choice, that is, their choices make a
difference in their
organizations and environment
Managerial Leaders
✓ Reactive, adopt passive attitudes towards goals; goals arise out of necessities, not desires and dreams;
goals based on past
✓ Linear thinking
✓ Believe in determinism, that is, the choices they make are determined by their internal and external environments
Note. Adapted from Rowe, 2001
As shown in Table 3 there are many types and styles of leadership that leaders of various companies adopt. These styles are described as leadership approaches and the most common ones with a short explanation can be found below.
25 Table 4
Objectives of Leadership and Management
Leadership Management
Produces change and movement Produces order and consistency Establish direction Planning and budgeting
Align people Organizing and staffing
Motivate and inspire Controlling and problem solving Note. Adapted from Kotter, 1995
Table 4 shows differences in leadership and management objectives. Leaders have less structured roles than management but are responsible for motivating and getting people to work towards organizational goals/objectives. In the late 1930’s Lewin created his leadership style framework in which he identified three styles of leading suitable for different
circumstances. Leaders should use the style best suited to their current objectives but not refuse change if the situation demands it (Lewin, K.,1939).
Authoritarian Leadership
Leader makes decision with little or no input from others. In this type of leadership the leader acts largely on his own and giving instructions on what others should do. This style of
leading is suitable for circumstances where others lack expertise and need the leader to set the direction which they can follow. Expectations are clear (Cherry and Susman, 2020).
Participative-Democratic Leadership
In this style of leadership the subordinates have more input in the decision making process.
Since employees will be more involved in the final decision it can allow for higher levels of motivations but also allows the leader to get specialized opinions on areas or subjects from them where they may lack it. Ultimately, the final decision is still made by the leader but compared with authoritarian style allows for more freedom. It is easier to change from democratic to authoritarian than vice versa (Lewin, K., 1939).
Delegative Leadership
The style that gives subordinates the most influence out of Lewins three main styles of leadership. Leaders do not give any demands to subordinates and allow them to make decisions largely on their own. Using delegative leadership works well in situations where there are many experts who are qualified and will make rational decisions on their own. Often times this is not the case and out of the three styles it produces the lowest productivity
amongst its members due to the lack of cooperation (Lewin, K., 1939).
Trait approach
Table 5 shows different traits identified by different authors related to the approach. Identifies the personality traits of leaders which can determine why they are successful or not (MSG, n.d.). The assumption of this approach is that leaders are born and not made, good leadership
26 can be attributed to a list of traits which can define what makes a good leader (Prentice hall, 2007; Morrison, 2014).
Table 5
Leadership Traits
Note. Adapted from Northouse, 2007 Big five personality traits
✓ Openness
✓ Conscientiousness
✓ Extraversion
✓ Agreeableness
✓ Neuroticism (Cherry and Susman, 2021) Skills approach
Similar to the trait approach, the skill approach focuses largely on the leader, the difference being in this approach that skills are the main focus, which can be learned and are not fixed like personality traits (Northouse, 2007).
According to Katz (1955), effective administration requires three types of skills 1. Technical skills
2. Human skills 3. Conceptual skills
• Top management will require more human and conceptual skills, less technical skills
• Middle management requires equal skills across all three types
• Supervisory management needs technical and human skills more than conceptual (Katz, 1955).
Stogdill (1948)
Mann (1959)
Stogdill (1974) Lord, DeVader, and Alliger (1986)
Kirkpatrick and Locke (1991)
Zaccaro, Kemp, and Bader (2017)
Intelligence Alertness Insight Responsibility Initiative Persistence Self-confidence Sociability
Intelligence Masculinity Adjustment Dominance Extraversion Conservatism
Achievement Persistence Insight Initiative Self-confidence Responsibility Cooperativeness Tolerance Influence Sociability
Intelligence Masculinity Dominance
Drive Motivation Integrity Confidence Cognitive ability Task knowledge
Cognitive ability Extraversion Conscientiousness Emotional stability Openness
Agreeableness Motivation Social intelligence Emotional intelligence Problem solving
27 Recognizes the trait approach but differs from it in the believe that skills are trainable.
Includes three components which are; Competencies, individual attributes, and leadership outcomes. Approach was developed by military and how the components make a leader more effective is not described in more depth (Morrison, 2014).
Style approach
Focused on tasks and relationships. Tasks being objectives a company is trying to reach or results based and relationships meaning the dynamic between leader and employees.
Descriptive and realizes that every leader has their own style to leading which it tries to explain (Morrison, 2014).
Situational approach
Leaders have directive behaviors and supportive behaviors. Approach focuses on the needs of those people that the leader is leading. Better understanding an employee’s competence and commitment towards their work (Northouse, 2007).
Consists of four leadership styles
1. High directive – low supportive style = Directing style 2. High directive – high supportive style = Coaching approach 3. High supportive – low directive style = Supporting approach
4. Low supportive – low directive style = Delegating approach (Blanchard, K., Zigarmi, P., Zigarmi, D., 2013)
Contingency theory
Similar to the situational approach but more complex. Diagnosis criteria for this theory include leader member relations, task structure, and position power. Based on the results it is then advised to the leader to either take a more task-oriented approach to leading in the instances that results are either on the very low or very high end and conversely a relationship oriented approach when results do not fall under either extreme. Theory emphasizes that leadership style should match the right conditions (Morrison, 2014).
Leader-member exchange theory
Identifies a need for the leader to have individual relationship with those they lead. The goal is to have strong relationships with all participants on an individual basis to shift the focus from self to the overall objective which the leader wants to work towards. Theory is
considered flawed since it explains how some relationships will have more depth than others (Morrison, 2014; Northouse, 2007).
Transformational leadership
Table 6 shows how characteristics and behaviors can effect followers. Theory transforms motivation and morality of both the leader and those being lead. Leadership and change are correlated therefore having the appropriate leader will help transformation take place. The focus of this approach is on the leader and his/her ability to identify the needs of their
28 followers and how to best develop them. Success of this approach is highly dependent on the leader and their approach (Morrison, 2014; Northouse, 2007).
Table 6
Transformational Leadership Personality
characteristics of the leader
Behaviors Effects on followers
• Desire to influence
• Self- confident
• Strong moral values
• Sets a strong role model
• Shows competence
• Articulate goals
• Communicates high expectations
• Expresses confidence
• Arouses motives
• Belief similarity between leader and follower
• Unquestioning acceptance
• Affection toward leader
• Obedience
• Identification with leader
• Emotional involvement
• Heightened goals
• Increases confidence Note. Adapted from House, 1976. Northouse, 2007.
Team leadership
Focuses on tasks, relationships, which are team performance, and team development. Model focuses on internal and external environment. Eight characteristics of effective team leaders.
1. Clear goal 2. Results-driven 3. Competent members 4. Unified commitment 5. Collaborative climate 6. Standards of excellence 7. External support
8. Principled leadership (Larson and LaFasto, 1989) Psychodynamic approach
Ignores business aspect of leadership and is rooted in psychology. Approach is based on the leader focusing on himself rather than on understanding those around him. Due to the self- centeredness of this approach it advises gaining a deeper understanding of ones heritage, habits, patterns, before trying to change others one should try to understand and change him or herself first (Morrison, 2014).
Adaptive leadership
Distinguishes between technical and adaptive challenges. Technical challenges being more simple by nature while adaptive challenges are more complex. To deal with adaptive challenges six things are advised to the leader (Morrison, 2014; Northouse, 2007).
29 1. Gaining a clear overview
2. Identifying the adaptive challenge 3. Regulating distress
4. Maintaining attention to the adaptive challenge 5. Delegation
6. Allowing stakeholder participation (Heifetz, 2001) Servant leadership
The opposite of the psychodynamic approach. Focus is laid on the needs of the followers first. Primary objective is not to lead people but as the name suggests to serve. An approach focused on working and understanding each other rather than usage of authority from the leader. A submissive leadership approach. Ten characteristics of servant leaders are listed below.
1. Listening 2. Empathy 3. Healing 4. Awareness 5. Persuasion
6. Conceptualization 7. Foresight
8. Stewardship
9. Commitment to growth of people
10. Building Community (Greenleaf, 1977; Spears, 2010) Authentic leadership
This form of leadership lays attention to leaders remaining true to their value. Possession of both high intelligence and emotion quotient. The ability to understand ones strengths and weaknesses. If authentic leadership is established the relationship with followers become heightened (Morrison, 2014; Northouse, 2007).
Complexity leadership theory
New-age theory designed towards knowledge-oriented economy. Ultimate purpose of leadership being adaptive outcome oriented. Framework gives leadership three roles; 1.
Adaptive leadership, 2. Administrative leadership, 3. Enabling leadership (Morrison, 2014).
Path goal theory
Based on Vroom’s expectancy theory 1964. Focuses on both the leader and followers behavior. The main objective for the leader is to create a clear path for the followers on how they can achieve their goals by creating a path with the least obstacles and most clarity. The most important aspect of path goal theory is to identify the needs of the follower so the leader can use the style which is most likely to cause a positive reaction and motivate followers to work towards a goal. The main objective is to create engagement between follower and leader (Northouse, 2007).
30 Table 7
Path-Goal
How Path-Goal works Components of Path-Goal
• Defines goals
• Clarifies path
• Removes obstacles
• Provides support
• Leader behavior
• Follower behavior
• Task characteristics
Note. Adapted from House, Mitchell, 1974
In table 7 it is shown how path goal works on the left side by clarifying the path and creating objectives that need to be achieved. The right side shows what components can lead to achievement or failure. Path goal creates objectives that can be executed if the components function properly.
Table 8
Leaders, Followers, Tasks
Leadership Behavior Follower Characteristics Task Characteristics Directive
Provides guidance and psychological structure
Dogmatic Authoritarian
Ambiguous Unclear rules Complex Supportive
Provides nurturance
Unsatisfied
Need for affiliation Need for human touch
Repetitive Unchallenging Mundane Participative
Provides involvement
Autonomous Need for control Need for clarity
Ambiguous Unclear Unstructured Achievement Oriented
Provides challenges
High expectations Need to excel
Ambiguous Challenging Complex Note. Adapted from Northouse, 2007
From table 8 it becomes clear that there are multiple approaches and theory when it comes to leadership. Not every company is suitable for every leadership type. Conversely, a leader might be praised and followed in one company but the same approach might not work in another company. Therefore, it is crucial to understand the internal dynamics of a company to determine the best style of leadership. Leadership skills unlike management skills cannot be learned which results in most natural born leaders having a distinct style that is hard to change to the skill being considered highly unteachable.
31
6. Talent Development and Succession
At the heart of creating successful results in succession planning lies talent identification and development (Kim, 2012). To produce a higher likelihood of success during the succession transition, talent should be identified, monitored, and nurtured, on an ongoing basis rather than an activity that is conducted once (Day, 2007). Developing and finding the right talent is a process that is not completed overnight and should be in place in organizations even if succession is not currently being planned or conducted (Black, 2019). Offering opportunities that motivate employees both intrinsically and extrinsically can make the attraction as well as retainment of talent a more basic task compared with companies who cannot offer talent alluring possibilities to move their career forward (Ben-Hur, Avagyan, & McTeague, 2018).
Therefore, companies which can offer fulfilling job-opportunities for prospect and also resources dedicated to talent development will have an advantage over others (OECD, 2018).
When it comes to smaller operations, talent development will be a more internalized process and in certain instances candidates are hand-picked. Identifying talent internally will allow for a smaller budget and have the benefit of being able to base decision making on past performance which has already taken place in the company and not elsewhere (Krishnan, Scullion, 2017). Larger organizations will have more resources and therefore talent can be identified internally or sought externally. Further, larger organizations will likely have succession systems already in place for multiple key positions and most of the process is conducted by the human resource department (SHRM, 2020). For smaller organizations, such systems will be less complex and focused around fewer key positions for which talent needs to be developed (Sambrook, 2005). Smaller companies will tend to have fewer people dedicated to human resources and therefore the identification of successors for key roles is conducted by those who will be replaced or the CEO.
Sophistication, depth, and level of dedication towards how succession is conducted depends on what kind of organization it is, and which kind of leadership approach is present.
Commonly used methods for identifying which talent to develop include a nine-box grid that ranks potential on the vertical axis and performance on the horizontal access. The grid allows the classification of employees into nine different categories which describe their work behavior and therefore recognizing suitable as well as inappropriate candidates to further develop (Wells, 2018).
Figure 1 shows how talent can be ranked into nine different categories which are rated upon an employee’s potential and performance. Successful evaluation of an employee allows for better future identification of capabilities along with taking appropriate developmental actions tailored towards the individual depending on how they rank. Performance and potential can be ranked to chose the best course of talent development, there are also some dilemmas that the grid can create.
32 Figure 1
Nine box grid for talent development
Note. Adapted from Vulpen, 2020
In research from Vulpen (2020) showed the grid produces the following categories related performance, potential and also possible dilemmas.
Performance is ranked into three categories 1. Low performance
2. Moderate performance 3. High performance
Potential is ranked into three categories 1. Low potential
2. Medium potential 3. High potential
The objective of the grid is to rate employees and figure out if people are performing up to their potential.
Three dilemmas of the grid include
1. Bad hires who have low potential and do not perform
2. Up or out those which can lack both potential and performance
3. Dysfunction geniuses and workhorse which are both difficult to develop or change (Vulpen, 2020)
33 Table 9
Types of Capabilities
Personal capabilities Professional capabilities Organizational ability Communication Learning sciences Business insight
Emotional intelligence Instructional design Consulting and business partnering
Collaboration and leadership Training delivery and facilitation
Organization development and culture
Cultural awareness Technology application Talen strategy and management
Project management Knowledge management Performance improvement Compliance and ethical
behavior
Career and leadership development
Change management
Lifelong learning Coaching Data and analytics
Decision making Evaluating impact Future readiness Note. Adapted from Association for Talent Development, 2019
Table 9 and 10 explore what kind of attributes or so called capabilities employees should display in order to be developed. Further, it shows which components build efficient workforce that can produce high productivity.
McKinsey has found that the following talent management practices lead to the highest likelihood of a company outperforming its competitors-rivals
1. Rapid talent allocation 2. Positive employee experience 3. Strategic HR team
Have shown to be most impactful in developing effective talent management ranked in that order. Companies who re-allocate talent more rapidly have also proven to review
performance more frequently (McKinsey, 2019).
Table 10
Talent development components which builds optimal workforce Planning – Strategy-Evaluation
Attracting -Marketing-Talent acquisition Developing-Performance appraisals-Learning Retaining – Culture - Compensation
Transitioning – Succession planning-Exit interviews Note. Adapted from Momtazian, n.d.
34
7. Successor Selection in Family Business
Family businesses differ from non-family businesses in the sense of succession since the selection of the successor in a family business often is part of that family. This can be attributed to a desire from the family to keep the business within the internal ownership and operated on similar principles (Fiegener, et al. 1994). Next, keeping a business family-owned after succession takes place still allows for a higher impact of family members on influencing company decision-making even after the process is complete. This can hinder the successor from implementing his or her footprint and style on the company since there can be ongoing disputes on how operations should be run (Schell, Haunschild, 2019). When it comes to succession in family businesses the importance lies in the selection of the successor, development, implementation, but also sticking to the individual timeline for each plan (Lofgren, 2019). Further, not all family businesses may have the best internal relationships and when conflict arises it can become more difficult to solve since likely it will carry over to an individual's private life (Heritage Trust, 2019).
Figure 2
Traditional Three-Circle Model
Note. Adapted from Cambridge Family Enterprise Group 2019 and Tagiuri, Davis, 1992 Figure 2 shows the traditional three-circle model shows how family, ownership, and management, are related. In the traditional models, all circles are the same size (Tagiuri, Davis, 1992). However, it has recently been argued that the family component has a much larger impact on the other two underlying components than previously assumed. The new model also shows that in many family businesses the “family” aspect is much more engrained in ownership and management roles than in the traditional one (KPMG, 2011). For family businesses to reach their strategic objectives a lot is factored on the family component of the three-circle model.
35 Table 11
Benefits and Challenges of Family-businesses
Benefits of family businesses Challenges of family business
✓ Loyalty
✓ Legacy
✓ Labor pool
✓ Key employees
✓ Patience
✓ Values
✓ Career opportunities
✓ Relationships
✓ Community and philanthropy
× Conflicting goals and values
× Conflicting personalities
× Expectations
× Work ethic
× Employment of family members
× Compensation
× Reluctance to plan
× Element of time Note. Adapted from KPMG, 2011
Table 11 displays what benefits and challenges family businesses experience compared to non-family businesses. Family businesses will tend to experience more loyalty and more aligned work-force since work is directed towards objectives that can benefit the family.
However, those employed by family businesses, especially family members will also have more built in expectations without producing performance that validates them.
Figure 3
Managing the Family Component in Succession
Note. Adapted from KPMG, 2011
Figure 3 shows how to manage the family component in succession planning. The model combines processes, activities, and desired outcomes. It is suggested to undertake
management succession first before ownership succession but both can also be conducted simultaneously. Setting up a family council to conduct family meetings and making all parties involved feel comfortable will make achieving the desired outcome more probable.
The last activity which is shareholder agreement in most instances of family businesses will
36 pertain around other family members since most such companies will be majority family- owned.
Guiding principles for family business
1. Beware of the tax driven/cost savings succession plan 2. Creating a legacy
3. Opportunity versus entitlement 4. Family ownership
5. Exit strategies 6. Taking the lead
7. Compensation for family members 8. Compatibility
9. Accommodation for family members 10. Informed decision making (KPMG, 2011)
Table 12 shows a summary of issues related to successions. They are divided into categories of general issues which are the most basic types of issues. Then management and ownership issues related to succession are listed which are more complex. It is important to understand that there are many areas where succession can fail. Understanding where the potential threats lie can help in preventing or tackling them. From the table it becomes clear that conducting succession takes time and planning since it needs to be dynamic enough to overcome issues when they occur.
37 Table 12 Issues Related to Succession Planning
Note. Adapted from KPMG, 2011
General Issues Management Succession Issues
Ownership Succession Issues 1. Rationale for
having a set of
‘family business rules’
2. Family business meetings and family council meetings (Why?
Who? When?
Where?) 3. Conflict
resolution process (family
disagreements)
4. Timeline for management succession
5. Communication to family, managers, and employees
6. Employment of family members (criteria) 7. Employment of
spouses and in-laws (criteria)
8. Compensation philosophy/approach for family members 9. Grooming/training the
management successor
10. Performance reviews for family members 11. Role of current
owners during and after the management succession
12. Leadership (e.g. co- leadership,
management team) 13. Role of non-family
members in senior management
14. Leave of absence and sabbatical by family members
15. Conflict resolution process
16. Timeline for ownership succession
17. Communication to family, managers, and employees
18. Who can own shares and why?
19. How will the shares be acquired?
20. Will the ownership transfer be
gradual/partial or all at once?
21. Does the ownership succession support the management
succession?
22. Role of current owners during and after the ownership succession 23. Compensation for the
owners 24. Exit strategy
25. Minority shareholders 26. Role of non-family
employees in ownership
27. Nuptial and prenuptial agreements for future owners
28. Loans to family members 29. Public relations 30. Conflict of interest for
family members 31. Shareholder agreement 32. Conflict resolution
process
38
8. Strategy and Succession
Selecting or creating the right strategy suitable for a product/service which a business offers can be a source from where competitive advantage is established and exploited. The strategy should be designed to meet a company’s objectives and achieve its mission/vision. The succession plan should be an element of a company’s overall strategy but many companies do not choose to combine them (Ryan, 2020). If the overall business strategy and succession planning are aligned it will ensure future talent is developed which will reflect on the strategic direction (Paige, n.d.). A business strategy should be in place which performs not just during but also after the transition has taken place (Generational Equity, n.d). Numerous companies operating in today’s economies mainly public companies are short-term oriented and destroy value by not investing in the long run (Kaplan, 2017). Since succession planning is a medium-long term process it is probable that companies with a more short-term
orientation will not have succession as part of their overall strategy, as there likely is no clear long-term strategy. In order to create direction for a business, there needs to be a strategy suited towards the current market position, and adequate key performance indicators should be created to monitor (PKF, 2015). For non-family businesses, it is advised to align
recruitment and succession to reach maximum benefit from both practices (workforce, 2015).
Succession planning and strategic planning are both long-term efforts that will create a long- term impact that can be positive or negative (Rawls, 2012). The development of a succession plan should be part of the strategic planning of a company since without the ability to find the replacement of current positions will leave it without competencies that need to be fulfilled in order for operations to continue over time (Ritter, 2017). When combining both strategy and succession plans they should both account for more than one scenario becoming a reality in order to be better prepared for a variety of possibilities occurring. Relying only on a single possibility, talent, strategy, can significantly increase the time needed to respond to new scenarios when it happens. This does not mean a company needs to account for all situations or occurrences as this would result in lost time that could be used more productively,
however, being over-prepared is better than having no preparation.
