Evolution in Thinking About Generational Transition in Family Enterprises

In this issue of The Practitioner, FBR editor Pramodita Sharma puts the oft quoted 30-13-3 statistic on family enterprise longevity into its historical context and provides new thinking and research on how to understand and plan for generational transitions in family enterprises.

From the 80s to early parts of this century, research on succession in family firms focused on leadership transfer from one generation of family member’s to the next (Ward, 1987). Efforts were directed to understand how many firms successfully managed this process (Ward, 1987), the perspective of incumbents and next generation family members (Handler, 1990, 1992; Sharma et al., 2001), and the process that leads to a successful transition (Dyck et al., 2002; Sharma et al., 2003). Comprehensive models were developed to incorporate contextual and behavioral factors that influence such generational transitions (LeBreton Miller et al., 2004).

If a firm went public, was sold, or closed down in favor of pursuit of other ventures, it was not considered to be a ‘successful generational transition’ as the firm did not get passed from one generation to the next of the founding family (Ward, 1987). The 30-13-3 statistic of percentage of family firms that succeed in being transitioned from 1^st – 2^nd – 3^rd generation took hold in the literature and media alike. These numbers reinforced sayings like ‘shirt sleeves to shirt sleeves’ or ‘rice paddy to rice paddy’ in three generations. Advisory and research efforts were directed to enable family firm leaders to ‘beat the odds’ and transition their firm to the next generation of their family.

With time, however, it was found that:

• Enterprising families ran an average of 3-4 firms during the tenure of any one generation
• Both parallel and sequential running of multiple firms was prevalent as ways to manage a portfolio of enterprises
• Exiting a firm through sale, public offering, or closing may be signs of successful transitions rather than failure as assumed earlier
• Firms may continue over generations but transition from the original controlling family to another enterprising family/ies
• A controlling family may evolve in its role to become the governing investors rather than continuing as operational controlling leaders of the firm (e.g., Rosa, 1998; Zellweger et al., 2012)

Business historians have helped shed light on the fact that ‘firm survival over time’ is a different metric than the ‘longevity of a family enterprise’ (Colli, 2012). While the first is entirely focused on continuity of a firm from year to year, and generation to generation – firms that make it to the ‘oldest family firm’ lists — the latter focuses on enterprising families and the ventures they create and destroy over time in their pursuit to create value and wealth over generations. Both the creative destruction of firms and pruning of the enterprising family are integral parts of longevity of an enterprising family (Lambrecht & Lievens, 2008; Schumpeter, 1954).

Efforts have also been redirected to understand the common themes and practices that prevail in family enterprises that do survive across generations of leadership, industrial and societal changes. The STEP project is one initiative that focuses on understanding common themes emerging from transgenerational entrepreneurial families from different parts of the world. Lessons from such families are captured in the Elgar STEP books (e.g., Au et al., 2011; Nordqvist & Zellweger, 2010; Nordqvist et al., 2011; Sharma et al., 2014).

Recent reviews of the research on succession, governance, professionalization and performance all point in the same direction – that one size does not fit all and the overarching numbers of ‘success’ are insufficient to capture the complexity and heterogeneity of family enterprises and their pathways to success (e.g., Gersick & Feliu, 2014; Long & Chrisman, 2014; Stewart et al., 2012).

Practically, when thinking about generational transition it is important to be clear about two things:

• What is being transitioned – a firm, an enterprise, entrepreneurial spirit, company name etc.,
• Why this transition is important?

Clarity on these fundamentals should ease the way to discuss the next level of issues – to / from whom must the baton be passed, when, and how?

Gone are days when the 30-13-3 statistics anchored our discussion around generational transition. We now know better the constraining limits of such numbers. However, the pursuit to understand and enable families on their entrepreneurial pathways must continue!

About the contributor:

Pramodita Sharma is the Sanders Professor for Family Business at the School of Business Administration, University of Vermont. She is also is a visiting scholar at Babson College where she serves as the academic director of the Global Successful Transgenerational Entrepreneurship Practices (STEP) project. Dita is the editor of Family Business Review, an FFI Fellow and the 2011 recipient of the Barbara Hollander Award. Dita can be reached at psharma@bsad.uvm.edu.

 

 

 

REFERENCES:

Au, K., Craig, J., & Ramachandran, K. (2011). Family enterprise in the Asia Pacific: Exploring transgenerational entrepreneurship in family firms. Cheltenham: Edward Elgar.

Colli, A. (2012). Contextualizing Performances of Family Firms: The Perspective of Business History. Family Business Review, 25: 243-257.

Dyck, B., Mauws, M., Starke, F.A., and Mischke, G.A. (2002). Passing the baton: The importance of sequence, timing, technique and communication in executive succession, Journal of Business Venturing, 17(2): 143–162.

Gersick, K.E. & Feliu, N. (2014). Governing the family enterprise: Practices, performance, and research. In SAGE Handbook of Family Business. Edited by Melin, L., Nordqvist, M., & Sharma, P. Sage Publications: London, U.K.

Handler, W. (1990). Succession in family firms: A mutual role adjustment between entrepreneur and next generation family members, Entrepreneurship Theory & Practice, 15(1): 37–51.

Handler, W. (1992). Succession experience of the next generation, Family Business Review, 5(3): 283–307.

Lambrecht, J. & Lievens, J. (2008). Pruning the Family Tree: An Unexplored Path to Family Business Continuity and Family Harmony. Family Business Review, 21(4): 295-313.

Le Breton-Miller, I., Miller, D., and Steier, L. (2004). Toward an integrative model of effective FOB succession, Entrepreneurship Theory & Practice, 28(4): 305-328.

Long, R.G. & Chrisman, J.J. (2014). Management succession in family business. In SAGE Handbook of Family Business. Edited by Melin, L., Nordqvist, M., & Sharma, P. Sage Publications: London, UK.

Nordqvist, M., & Zellweger, T. (2010). Transgenerational Entrepreneurship : Exploring Growth and Performance in Family Firms across Generations. Cheltenham: Edward Elgar.

Nordqvist, M., Marzano, G., Brenes, E.R., Jimenez, G., & Fonseca-Paredes, M. (2011). Understanding Entrepreneurial Family Businesses In Uncertain Environments

Opportunities and Resources in Latin America, Cheltenham: Edward Elgar.

Rosa, P. (1998), Entrepreneurial processes of business cluster formation and growth by ‘habitual’ entrepreneurs, Entrepreneurship, Theory & Practice, 22(4), 43-62.

Sharma, P., Chrisman, J., and Chua, J. (2003). Predictors of satisfaction with the succession process in family firms, Journal of Business Venturing, 18: 667-687.

Sharma, P., Chrisman, J., Pablo A., and Chua, J. (2001). Determinants of initial satisfaction with the succession process in family firms: A conceptual model, Entrepreneurship Theory and Practice, 25(3): 17–35.

Sharma, P., Sieger, P., Nason, R., Cristina, A., & Ramachandran, K. (2014). Exploring Transgenerational Entrepreneurship Research: The Role of Resources and Capabilities. Edward Elgar Publishing Inc., Northampton, MA.

Stewart, A. & Hitt, M. (2012). Why can’t a family business be more like a non-family business: Modes of professionalization in family firms. Family Business Review, 25(1): 58-86.

Zellweger, T. M., Nason, R. S., & Nordqvist, M. (2012). From longevity of firms to transgenerational entrepreneurship of families: Introducing family entrepreneurial orientation. Family Business Review, 25(2): 136-155.

 

Stay tuned next week for another issue of The Practitioner.

Yours in Practice,

The Practitioner