1.1 Problem indication
Peter Davis, director of division of Family Business Studies on the Wharton School of business argues that "succession in a family business is probably the most complex management challenge anybody faces". Moreover, only 30 percent of the family firms make it through the second generation, and only 10 percent through the third (de Vries, 1994).
Family business is a widely discussed topic in the literature and should not be underestimated. It can be said that a large number of the small and medium-sized enterprises (SMEs) are owned and run by families (Cucculelli & Micucci, 2008). In The Netherland there are at least 260.000 family firms operating who are responsible for amply 49% of the employment and almost 53% for the gross national product (Nyenrode, n.d.). As many Dutch family SMEs are existing at the moment, it is interesting to study this group and triggers researchers to investigate what makes them successful. For this reason, in this study small and medium enterprises (SME) are of interest.
In the first generation or the next generations most of the family firms had a maximum of five shareholders (Westhead, Howorth & Cowling, 2002). These small and medium firms are almost always private firms. Just these small family run firms cover a large part of the entrepreneurial world. This leads to the fact that many researchers are interested in this topic, but many use a different design. Most of the past studies used large, often internationally operating (Anderson & Reeb, 2003), U.S. based, public companies as the area of interested (Cucculelli & Micucci, 2008). This is because the data of these listed companies is easy to find, since they are listed on stock exchanges and for them it is mandatory to make annual reports publicly available. The research about the topic family firms is rather scarce outside of the U.S. (Westhead & Cowling, 1998). This thesis amplifies research about the Dutch family SMEs. Thus outside the U.S. and companies that are not listed.
Previous studies about family firms is often focuses on the performance of these firms. Hereby the researcher mostly compared family and non-family businesses (Eddleston, Kellermanns & Sarathy, 2008). At this moment, not a lot of research is done about the success within family firms (Nordqvist, 2005). This thesis therefore focuses on this aspect by finding out which characteristics can distinguish successful family firms from their counterparts, not successful family firms.
It is widely known that performance is very important for all firms. Succession affects the performance of a firm. In the world there are many different firms but in the long term they all share one common factor, survival. The survival of the firm depends on the long term strategy, how the management constructs it. In a family firm this is called succession planning (Garman & Glawe, 2004). Researchers in the field of family firms agree that succession is the most important issue that most family firms face (Handler, 1994). In this thesis is being tried to distinguish firm characteristics from firms which survived and firms that did not survive, thus respectively successful and not successful firms.
Many characteristics of businesses and family businesses are studied in the past decades, such as years CEO runs the business, culture, internal vs. external successor, corporate governance, stakeholder relations, management process, structure, leadership, decision making and strategy (Flören, 1998; Dyer, 1988; Lauterbach & Weisberg, 1999; Gomez-Mejia, Cruz, Berrone & Castro, 2011; Miller, 1986; Vera & Crossan, 2004; Busenitz & Barney, 1997; Wright, 1987).
The number of years the CEO runs the business is an important characteristic, as a relatively high difference is observed between family and nonfamily firms. In family companies 62% of the CEOs have maintained the leadership for eight years or more, for the nonfamily companies this is the case for 44% of the CEOs (Flören, 1998). Flören (1998) says that the long duration of the CEO runs the business in Dutch family firms could lead to a lack of flexibility and creativity in these organizations.
Management succession in its own right is a topic that is growing in importance. Partly because the transition of leadership has a great impact on a company and whether it is successful or not (Kesner & Sebora, 1994). The companies will at a certain point face the difficult choice concerning ownership and management (Westhead et al., 2002). The family firm can choose for an external successor, this choice affect both the family relationships and the long-term direction of the firm (Westhead et al., 2002). Royer, Simons, Boyd, and Rafferty (2008) find that nonfamily successors, external successors, are suitable in situations where educational skills, work experience and success in other firms of the same industry are demanded. A study of Lauterbach & Weisberg (1999) has found that for nonfamily firms the proportion of external successions is higher when the firm has a poor past performance, the firm is small and when the number of positions offered to the new manager increases. It can therefore be concluded that there are many different cases in which an external successor is suitable or not.
Strategy is a much-discussed topic. Michael Porter is a main researcher in the field of strategy to performance. His books Competitive strategy (1980) and Competitive advantage (1985) are used widely in the current literature. In this books Michael Porter identified three generic strategies. They are cost leadership, differentiation and focus strategies. These strategies are the most important in the field of competitive strategy studies. Many research is based on Porter's strategies. However, there exist studies which show the limitations of Porter's strategies. For example: Zajac & Shortell (1989), Murray (1988) and Hodgkinson (2013). A refinement of Porter's strategies is made by Wright (1987). There exist multiple refinements on Porter's generic strategies but studies which contradict Porter's strategies hardly exist.
Every firms has a structure, logically there exist a lot of research about the topic. Henry Mintzberg is recognized because of his studies about structure. In a study by Mintzberg (1980), five types of structure are described: simple structure, machine bureaucracy, professional bureaucracy, divisionalized form and adhocracy. Other studies about structure are for example: Grant (1996), Chen & Huang (2007) and Watson & Weaver (2003). Broadly speaking, organizational structure concerns work division, the distribution of tasks and activities and coordination mechanisms, which includes standardization and formalization (Meijaard, Brand, & Mosselman, 2005). Meijaard et al. (2005) conclude that there is not 'one best way of organizing', some organizational structures seem to perform better in specific sectors. A study of Lindow, Stubner & Wulf (2010) has found that family involvement in ownership, management and/or board of directors is an important factor that determines the degree of centralization of decision-making in the firm.
Out of the information from above the choice of characteristics included in this study is as follows: years CEO runs the business, internal vs. external successor, strategy and structure. These characteristics are chosen because there is a lot of research available about these characteristics, the characteristics can be defined as a specific family firm characteristic or research has shown that the characteristic leads to success or not. For this reason, small and medium-sized Dutch family firms and the chosen characteristics are the independent variables of this thesis.
This thesis will try to define a more coherent solution to what characteristics actually determine the success of Dutch family SMEs.
1.2 Problem statement
What characteristics lead to success in small and me
dium-sized Dutch family firms?
1.3 Conceptual model
Characteristics:
– Years CEO runs the business
– Internal vs. external successor
Dutch family SMEs – Strategy Success
– Structure
1.4 Research questions
The first two research question will be answered by using literature.
-What is a family firm and what are the typical characteristics?
-How is success defined in the literature?
The next question will be answered by both using literature and the responses of the interviews.
-Can a difference be made between heavy weight and light weight characteristics which lead to success and which not?
1.5 Structure
This research consists of seven chapters, these are structured as following. Chapter one describes the problem which is researched in this thesis. It mentions the problem indication, and the problem statement as well as the research questions. The next chapters, two and three, individually build a background on the two most important aspects in this study. These aspects are family firms and their characteristics and success. In chapter four the research methodology is discussed. Results of the interviews are discussed in chapter five. In the last chapter, chapter six, the conclusion and discussion is presented. After chapter six the reference list and appendices can be found.
Chapter 2: Family firms and the characteristics
2.1 Definition of the family firm
There are some researchers who say that research on family firms lacks a uniform definition (Block, 2010; Shanker & Astrachan, 1996 and Sharma, 2004). This is because most authors disagree upon which is the most suitable definition. According to the purpose of this research a well-grounded definition is made. Two researchers, Block and Flören, are experts in this field of research because they have been active in research on both Dutch and non-Dutch family firms for many years. After studying several definitions (Anderson & Reeb, 2003; Block, 2010; Flören, 1998; Litz, 1995 and Westhead, Cowling & Howorth, 2001) and with the expert vision of the two researchers three criteria best capture the understanding of the family firm. The most concise and measurable definition is the following:
1. More than 50% of the company is owned by one family
2. One family has control over the business strategy or succession decisions
3. At least two members of one family have a function in the executive board
A firm is a family firm when it meets at least two criteria. However, when the firm is established within the last ten years, the director of the firm (CEO) should have at least one relative who is working in the firm or owns a part of the firm.
2.2 Differences between family and non-family firms