Keywords

Strategic Management, Business Succession, Succession Planning, Family Business, Case Study.

Introduction

Succession planning is an important factor that should not be ignored in business processes in small to mid-level family companies. Succession planning can be defined as a structured process involving the identification and preparation of prospective successors to take on new roles in the company (Garman & Glawe, 2004). The purpose of this research is to investigate issues that should be considered when a family business wants to elect a successor and examine the skills and experience needed for a business successor.

The topic needs to be explored further for several reasons. First, family-owned businesses usually experienced turbulence when during the succession process (Sharma & Smith, 2008). Second, The Family Business Institute (2014) stated that only about 30% of family-owned businesses would continue to operate after the transition from the first generation to the second generation; only 12% would continue to operate after the transition to the third generation and only 3% would survive the transition to the fourth generation. The third reason is related to the economic contribution of family business toward a nation’s economy. In many countries, family-owned businesses also contribute in employing a significant number of workers (Whatley, 2011; Grundström et al., 2011).

The important role of family business on the economic welfare has craft the significance of this topic. There were differences in the succession process of a small to medium sized family business when compared to large companies. While larger organization could elect any competent individual to become the successor of the business, the talent pool available to a family business is limited since the transition does not occur too often, and requires fewer stages in the succession process (Motwani et al., 2006). There were also factors that need to be examined in arranging succession in a family business, especially when the successor and the predecessor are from different generations. These factors include leadership, education, and readiness to assume responsibilities. These factors will also be investigated in this study.

Literature Review

Mentorship

The mentor-mentee relationship is a common relationship in a family-owned business and is a leadership process that must be carried out. The type of guidance that usually occurs in family businesses tends to be between formal and informal relationships. These special relationships are often unstructured, nor spontaneous (Chao et al., 1992). Mentees will eventually take over the business – which would automatically provide a number of structures to the mentor-mentee relationship in the family-owned business. In many occasions, the parents (mother or father) will take the role of guiding their son or daughter. Mentorship is said to have positive results not only for the mentees, but also for mentors. Mentors are in a position where they could provide the knowledge they have gathered from over time to the next generation. The process of sharing knowledge is a way to ensure that their business procedures will remain sustainable (Kumar & Blake-Beard, 2012). In the case of a small family-owned business, the preservation of the business procedures is shared and passed on to their children.

There are benefits of mentorship, including the increased upward mobility, higher salaries, increased job satisfaction, and better performance (Kumar & Blake-Beard, 2012; Oglensky, 2008). In the case of small family-owned businesses, some of these benefits could occur regardless of a formal coaching relationship. It is often known from an early age that children of the head of the family would one day be in a position to take over the business’ leadership. Many literatures focus on the positive results of this type of relationship; although sometimes conflict between a mentor and a mentee might be difficult to resolve. Usually, if a mentees experiencing an unpleasant situation with a mentor, they are more likely to focus on that obnoxious experience despite the fact that there are other positive outcomes as a result of the relationship (Eby et al., 2010). The fact that the mentor and mentee are family makes each party realize that they will work together and that knowledge will be passed down from generation to generation. Eby et al. (2010) state that problems such as personality differences and work style approaches can be the cause of poor relations between mentors and mentees. In the case of family businesses, this problem may be an important factor to consider. It will be very important for members of both generations to take on their respective roles, so that the guidance process can be a positive experience.

Joint Leadership

The majority of family-owned businesses are involved in a joint leadership. They may not want this leadership pattern, or even realize that they are involved in it. Joint leadership, which can be defined as two or more individuals who collaborate to lead a group (Crevani et al., 2007) is very often applied in family businesses. Often there are siblings or a team of husband and wife who work together to lead the business. Another way to share leadership in a family business is when the younger generation is in the process of inheriting companies from generations before them. When this happens, they will experience periods of work side by side with their parents, sharing responsibilities in decision making and leadership. In a mentor-mentee relationship; as young people become more capable, they will begin to be given more responsibility in leadership and organizational decision making. Joint leadership is something that is difficult for people to understand. This leadership model is referred to as a model that does not hone intuition; because decisions will be made collectively (Pearce & Conger, 2003).

Joint leadership provides young people with opportunities to learn with older generations, and provides opportunities to adapt to organizational culture. For organizations, having enough people in leadership positions is the best way to be able to maintain competitive advantage (Hoch, 2013). Joint leadership is an important step in sharing knowledge to ensure the success of a succession process.

Generational Difference

First generation owners often view businesses in ways that are very different from second generation (Chung & Yuen, 2003). Usually, the experiences felt by the two generations are very different. The first generation in many cases has built businesses from the ground up. Conversely, later generations in business are often unaware that there are important aspects they ignore. Relationships between family members in family businesses are often full of tension, so it is important for both generations to find ways to work together in harmony during and after the transition period (Ibrahim et al., 2001). The experience of two different generations in business is not necessarily the same and for this reason it is important for the second generation to have careful preparation regarding the transition that will occur.

There are many differences between generations, but the most striking differences mainly occur when giving feedback. Baby Boomers tend to believe that feedback is a one-way street and must come from the top down, in the form of an annual review. It is different for members of generation X and Y, where they believe that these two things must flow from the top down and from the bottom up (Lancaster & Stillman, 2002). The problem of feedback and its handling sometimes seems to be a less important problem but its long-term effects are worth considering. Ultimately, feedback will play a central role in organizational formation.

Relationship

There are a number of key things to consider when wanting to transfer a family business to the second generation: the successor must have a strong relationship with the family being replaced, with company employees, as well as with vendors or industry alliances (DeNoble et al., 2007; Chung & Yuen, 2003; Morris & Williams, 1997).

There is a vast amount of knowledge to bequeath to the heirs of leadership, and this can be well taught if there is a good relationship between business successors and their predecessors. This collaboration will provide second generation family members with significant knowledge related to the business they will take over (Fox et al., 1996). Transitions will be challenging if relations between generations cause a lack of communication or miscommunication about important company information.

Knowledge Transfer

The transfer of knowledge from one generation to the next is very important for the succession of a family business. This transfer of knowledge helps fill in the gaps in learning not found in formal education. Education outside the family business is important, but sharing knowledge with insiders will ensure future generations have a strong understanding of how their family organizations work. The knowledge gained by the previous generation is the foundation that enables the next generation to have the competitive advantage needed for sustainable success in the family business (Chirico, 2008). Explicit knowledge can be shared simply through notes and operating manual procedures (Chirico, 2008). For tacit knowledge, the challenges are greater. Passing tacit knowledge in the form of experience and skills can be done through a mentoring process before succession is carried out (Chirico, 2008).

Work outside the Family Business

It is normal for members of the generation who come to spend periods of time working outside the family-owned business before coming to work for their parents. Previous research suggests that the optimal amount of time spent working in companies other than their families are a minimum of three to five years (Chirico, 2008). This experience outside the family business will complement the experience of formal education, where they will be able to gather more knowledge, they want before returning to raise the family business. Usually, this experience prepares the successor to have a greater understanding of the types of challenges facing the family business, as well as to gain an understanding of a more formal management system (Chirico, 2008). The skills acquired so far will help future generations to see their own family business more critically, but also in building their own identities (Chirico, 2008).

Research Methods

Research Approach

This research uses a qualitative method using a case study approach. This method was chosen because qualitative research emphasizes the exploration of individual experiences, describing phenomena, and constructing theories (Cope, 2014). In order to obtain an in-depth understanding of the participants' life experiences in certain life contexts (Arcidiacono et al., 2009)

The case study method was chosen because researchers need an in-depth understanding of the phenomenon of life regarding succession in family businesses.

Case Study Protocol

To increase the validity and reliability of the case study research, the protocol will be used as a guideline for researchers on the amount of data generated from cases. This protocol contains a series of procedures and general rules compiled by researchers for the case under review.

Participants in Data Collection

Participants were drawn from three different family companies in Central Java, and had more than fifty employees. The participants are the second generation of each family company. They are the successors of the company, and or at least are being prepared to become the next generation of the company. Participants have joined at least two years in the business, and are working in the family business.

Principles of Data Collection & Triangulation

In this study there are three main principles in data collection (Yin, 2009), namely the use of various data sources, collecting case study databases, and maintaining various sets of evidence. The use of various data sources will deepen research analysis (Yin, 2009; Woodside & Wilson, 2003). This will also make the results of case studies more accurate (Yin, 2009).

Triangulation can include direct observation from researchers of the surrounding environment; inquiry through questions that explain and explain operational data; and analysis of written documents (Woodside & Wilson, 2003). In addition, this study uses member checking to clarify transcripts or initial interpretations that occur and is one way to find out whether the data analysis is in accordance with the experience of participants (Carlson, 2010).

The second principle is to build a data bank from case studies. How a data in a case study is collected, recorded, and documented neatly and directed. There are two types of data banks that can be collected, the data itself and the results of investigative reports that researchers write as data.

The final principle is to maintain various sets of evidence. This principle is used to increase the reliability or reliability of information in case studies (Yin, 2009).

Data Collection Method

In this study three data collection methods will be used, namely interview, observation and documentation. Interview was conducted by utilizing the data generated which is good language, spoken language and non-verbal language used. Observation is the process of observing body language (gesture), social interaction, and the environment, while documentation is collection of data which includes personal documentation, printed material, graphics, archive data and physical artifacts.

Data Analysis Technique

In this study, data analysis techniques will use two types of strategies namely; (1) comparing and contrasting the results with previous research and (2) describing case studies. Previous research helps describe existing case studies Data from this study will then be processed with descriptive analysis based on previous research. The qualitative data collected will be presented as a descriptive description of the implementation of succession in a family company in Central Java.

Results and Discussion

Discussion of the results of this study will be presented using descriptive qualitative methods. This research will describe the results of observations through data received through interviews, observations and documentation.

Participant Characteristics

This study took a sample from two family companies in Central Java. The participants’ identities were replaced by pseudonym at their request. The two participants are Merapi from Mawar & Co., and Merbabu from Melati Corporation.

The two participants surveyed had several similarities and differences in their profile. The characteristics of both participants are: (1) being the second generation of a family business, (2) being the eldest child and (3) had a university degree. The difference between the two participants is lies in the period of involvement with the company and ethnicities. Merapi had joined the family company for more than ten years, while Merbabu is less than ten years. Furthermore, Merapi is of Chinese descent and second child of three siblings while Merbabu is Javanese and first child of two.

Company Profile of Respondents' Families (Merapi and Merbabu)

Merapi’s family company, named Mawar & Co. was founded by Mr. Krakatoa (Merapi’s father) in 1967. This company was originally a pioneer in buying and selling typewriters in Central Java. Then in accordance with the changing times and demands, now Mawar & Co. has expanded its business by selling office equipment and has penetrated other industries such as hospitality, hotels, telecommunications, property and swimming pool equipment.

Merbabu family company, named Melati Corporation had the first and main business established by Mr. Semeru (Merbabu’s Father) in 1987. The corporation’s core business was producing furniture for overseas market under the name Melati Corporation whose factories are located in Semarang and Jepara Regencies. Merbabu also has a livestock breeding business in Bekasi, an ecotourism business in Kendal, and hospitality businesses in Semarang and Bali.

The decision because Mr. Semeru decided to open a furniture company was due to his background. He had previously helped his mother's furniture and carving business. In 1990, his business expanded, by the establishment of a second factory in Karangjati, Semarang municipality. The factory in Karangjati is managed by Merbabu’s uncle and produces mass production products, in contrast to the first factory managed by Merbabu which focuses on carving and handmade furniture. With the second workshop, Melati Corporation routinely ships goods to countries on various continents.

Profile of Participants (Merapi and Merbabu)

Merapi is the first child of three siblings, while Merbabu is the first child of two siblings. Nevertheless, both are the eldest son in his core family. Both joined the company after taking a bachelor's degree in Australia. Merapi holds a bachelor of information systems and business administration while Merbabu holds an Information Technology degree.

Merapi joined the company in 1993, and had never worked outside his family's company. So, with more than twenty years of experience he is now trusted as the managing director. Whereas Merbabu has less than ten years but has experience outside of his family business, where in addition to being a production manager at Melati Corporation, Merbabu also has a labor placement agency managed by his wife.

Characteristics of Merapi’s and Merbabu’s Family Companies

The characteristics of the Merapi family company are influenced by the history of its establishment which was almost half a century ago. Before being handed over to Merapi in 1993, Mr. Krakatoa started the establishment of Mawar & Co. after being expelled from a Dutch company.

Merapi views Mr. Krakatoa as a hard worker who loves his job. Mr. Krakatoa also has a social value that is also embedded in his children. Mr. Krakatoa’s concern for his employees made loyal employees enjoy working for him. It is not surprising that many elderly employees are still working in the Mawar & Co.

On the other hand, the Merbabu family company is managed by the nuclear family. Uncle, Aunt, and eight family members outside the nuclear family also joined but in different positions. The division of tasks of the Merbabu family company is very clear. The nuclear family, especially Mr. Semeru, has the authority to make decisions, while the authority of non-nuclear families is limited to the position of professional employees.

Historical experience in the form of conflicts between families that have occurred has become a reason for the separation of rights and obligations between nuclear and non-nuclear families. However, Mr. Semeru has a reason to include non-nuclear families in the company. In addition to meeting the needs of professional staff, other reasons are the welfare of the financial needs of his extended family and developing the business capabilities of other family members.

Merbabu also considers his father, Mr. Semeru, as a hard worker, a good decision maker, have the ability to understand costumer’s needs and have wide connections. These were factors considered by Merbabu as the success factors of Melati Corporation.

Similarly, the social value of mutual respect in the family is also embedded in the Merbabu family company. In the Melati Corporation, employees are considered as valuable assets and their welfare is also considered. At present the company instilling the core value of professionalism so that each employee could be treated equally based on their merit.

Merapi’s Family Business: The Succession Process on Mawar & Co.

The succession process at the Mawar & Co. has been completed. This regeneration had been planned since the beginning because indeed Mr. Krakatoa's hopes were very great so that this business would continue to live. He also forbade his children to work outside their family business. His fears and worries became motivation for Merapi to continue his family business.

Merapi grows and develops in Mr. Krakatoa’s startup business environment. Since childhood, Merapi and his siblings have been invited to visit the office after school even though they are just observing, so they already know the business process of the business. This early preparation also fostered a love for his father's pioneering business in the subconscious mind of Merapi and his siblings.

The succession process of the Mawar & Co. begins with a preparation period. In this phase, Merapi, who had just joined the family company after completing his studies in Australia in 1993, immediately received informal training by going directly into business and assisted by his brother as a mentor. The leadership transformation strategy uses a separate work scope strategy between Mr. Krakatoa as the founder and his children. Mawar & Co. is managed by Merapi and his siblings, while Mr. Krakatoa managed another company, named Puspa Corporation, without the interference of his children. This strategy helps to develop Merapi’s skills, and avoids the power syndrome that might occur because Merapi and his sisters want their father to remain valued as the founder.

There were several changes to the business and management of the Merapi’s family company during this regeneration process. First in terms of business lines, to respond to the changing times, Merapi succeeded in convincing Mr. Krakatoa to open new business lines in addition to office equipment, while still maintaining a line of startups.

Secondly, there is a change in the decision making model. As a result of the growing effort, the previous decision-making model, which must always be decided through joint discussion on every business matters, becomes less relevant. Merapi successfully proposes a task sharing model to streamline time and make work more focused.

The proposed model from Merapi is accepted, however, for investment problems, it will still use the previous decision making model with joint discussion. Only technical daily office work using the model of division of labor. Changes in duties and authority during the regeneration process have a positive impact on Mawar & Co., since it could minimize disunity for differences of opinion.

Decision making is only limited to the nuclear family, namely Merapi and his siblings. Other family members will be treated as professional employees.

The succession process of the second generation of the Merapi family company was completed after the death of Mr. Krakatoa in 2011. And the transfer of power was carried out by indirect transformation or without handover. There is currently no succession to the third generation because the successor of the fifth generation has not yet finished their education.

Merapi has an evaluation of this Generation II succession process, namely regarding lack of work experience because Mr. Krakatoa prohibited him from working outside his family's company. Merapi considers that work experience outside the family business remains important to be able to develop Merapi family business.

Merbabu’s Family Business: The Succession Process of Melati Corporation

Unlike the succession process at the previous Mawar & Co. that has been completed, the succession process at the Melati Corporation is still ongoing. However, according to Merbabu, the family company succession process is almost complete.

There are some similarities and differences in the succession process of companies owned by Merapi and Merbabu. The succession of the two family companies begins with the preparation and learning stages. However, unlike the Merapi which had been prepared since childhood by his father, Merbabu only actively studied family business after graduating from high school in 2008 and joined the company four years later after Merbabu completed his studies in 2011.

In the learning process in 2011, Merbabu received formal training for six months in a class, twice a week, and two hours for each session in his office with the help of a consultant. During this learning process Merbabu also explores the timber industry by observing, discussing with employees, and sometimes meeting consumers with Mr. Semeru out of town.

According to Merbabu initially there were major obstacles during this learning process, namely communication. The incomplete communication between Merbabu and subordinates made the input from Merbabu is less acceptable by them. Another challenge is that Merbabu gains lacks of recognition from his employees. Nevertheless, Merbabu was able to overcome those challenges overtime.

According to Merbabu, his motivation for continuing his family's company business comes from his own intention. This is different from Merapi who got encouragement from his father from the start. Merbabu felt that he had interests and passion without coercion or any doctrine from his parents. Furthermore, Merbabu has working experience outside the family company. Merbabu established a Human Resources training business with his wife two years ago.

Merbabu has several evaluations of the succession process experienced by his family's company. According to him, the regeneration process should be done as early as possible so that the ability managing the company can be nurtured at earliest as possible. Therefore, it will accelerate the process in which the successor could get recognition from employees.

Conclusion

Based on the data obtained through the interview, this study recommend several aspects for organization who are about to conduct business succession. First, the decision maker should make a clear division of authority and responsibility for the successor during the succession transition process. Second, it is recommended for family business to prepare the successor as early as possible. It is easier to habituate and instill the family business’ values when the successor’s candidate has been determined when they were still young. Third, the business owner should appoint their successor directly, with or without the approval of the other family members. Lastly, successor can be trained through formal training or on-the-job training. It is also benefitable if the successor’s candidate could get a mentoring from a more senior family member involved in the business, or by the business owner themselves.

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