Managing succession in small family business: an Intellectual Capital based framework

Small enterprises (SEs) represent wide-world a fundamental factor in economic development and wealth. In Europe, small businesses account for some 99% of the total firms, and some 60-70% of total employment (Observatory of European SMEs, 2004). In a similar manner, family business is one of the most frequent organisational and managerial typology. The Family Firm Institute published data concerning the number of family business in industrialised countries. As such, in North America family businesses account for some 80-90%, while in the U.K. some 75%, in Germany two third of SMEs are family owned and managed, while in Italy they reach 80% (Shanker and Astrachan, 1996; Marseguerra, 2004). Again, Birley (2001) highlighted that 99% of 554 Japanese firm surveyed considered their business as a Family one. One of the cause of business termination is the conclusion of ownership by one generation and the failure of the following generation to assume ownership. A recent European Commission’s study conducted by the Best Project Expert Group (2002) estimated that 1/3 of European SMEs will experience an intergenerational transfer in the following 10 years: on average, this would mean some 600.000 SMEs per year. The literature suggests that 30% of firms survive into the second generation of family ownership, and just 15% survive into the third generation (e.g. Kets and Vries, 1993; Ward, 1987; Matthews, Moore and Fialko, 1999). The economic and social consequences of this data are relevant. Despite the importance of the issue, there is still wide areas for theoretical development (Sharma, Chrisman and Chua, 1996). Business transfer will become more and more strategic for the future economic stability and development in Europe, as larger number of entrepreneurs are reaching a retirement age. Thus, along the attention on business creation, it would become politically and economically necessary to develop actions, studies and projects on this specific topic. This is particularly relevant for SMEs that are usually family owned. The interest on studying SMEs and Family Business in particular has developed in Italy especially during the 1970’s. In those years, the economic growth of the past decades come to an end, while big corporate started to show several competitive problems, SMEs were able to meet the difficulties. However, as happened in other countries, Family Small Business were considered as an initial stage towards a natural growth path. Small businesses without dimensional growth were classified as anomalies and doomed to failure. In the 1980s, business and management studies started to focus more attention to family business, SMEs and intergenerational succession, together with the revision of the theory of firm growth (Demattè and Corbetta, 1993: 27). The relevance of family businesses and their succession in the past and the future was also presented in several studies (Corbetta, 1995; Corbetta and Tomaselli, 1996; Corbetta, Montemerlo, 1999; Montemerlo, 2000). The main assumption of this paper is that business transfer in small family firms is mainly a matter of maintaining the intellectual capital (IC) embedded in the entrepreneurs’ expertise, skills and experience. Indeed, Petty and Guthrie (2000: 159) suggest that “knowledge management is about the management of the intellectual capital controlled by a company”, conversely in small businesses most of the IC is controlled and owned by the entrepreneurs as form of tacit knowledge, work-related knowledge, work-related competencies, entrepreneurial spirit, and so on. The entrepreneur represents not just the main source of strategic human capital, but also of relational capital, such as customer relationships, business partnerships, distribution channels. Given this assumption, during the business transfer process, most part of the organisation’s IC is at risk and needs to be adequately managed. IC management can be conceptualised using two different perspectives: the stock and flow approaches (Guthrie et al., 1999). The paper refers to the latter, since managing IC in small-medium family business succession (FBS) is a matter of understanding “the creation and development of value” (Mouritsen, 2004: 261), and making sure it remains with the new generation. The aim of this paper is to develop an integrated theoretical framework for managing knowledge in FBS. In doing so, the paper draws from literature related to family business succession and IC management. FBS, in this sense, is perceived as a process of knowledge transfer to preserve the organisation’s future value creation capacity. The theoretical model is then used as an hermeneutic device to understand how FBS can be adequately planned starting from IC perspective, in some case studies of SMEs experiencing a business succession process. The paper will be structured in the following fashion. The following and second sections present the literature analysis, while the third section describes the theoretical framework adopted. The final section describes the research design methodology and methods