Understanding small family firms

Introduction

Small firms represent world-wide a fundamental factor in economic development and wealth. In particular, in the Italian context businesses are overwhelmingly small and family owned (Istat, 1996; Bank of Italy, 1996).

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 rate of survival for small family business is lower, down to an average five to ten years (Perricone et al., 2001).

One of the main causes of failure is considered the centrality of the owner-manager, since it makes difficult for the successors to take over effectively (Feltham et al., 2005). The owner-manager represents the main source of competences and capabilities in the organisation and his/her leave may cause a relevant amount of knowledge, as would happen for key employees (Wong and Aspinwall, 2004). Malinen (2004) argues that one of the most relevant obstacle in business succession is the difficulty to retain the knowledge from the incumbent to the successor. The unique bundle of resources called familiness has appeared in the literature as a possible explanation of the competitive advantage of family firms (Habbershon and Williams, 1999). The owner-manager play a central role in the development of familiness, as organisational leader do in terms of influence on culture, values and performance of their firms (Schein, 1983). The long standing tenure of owner-managers (three times longer than non-family executives according to McConaughty, 2000) emphasises their role in shaping and making the organisation dependent on their physical presence.

Despite the relevance given in the literature to the distinctive resources and competences at the base of the family business competitive advantage, there is scope for further development of integrated conceptual models to help researchers and practitioners in dealing with business succession. Sharma et al. (2004), for instance, call for more studies directed to understand the transfer of tacit embedded knowledge to the next generation. The latter is considered one of the major concerns for a successful succession. Besides, with few exceptions, the literature has not focussed specifically on the peculiarity of small businesses (Venter et al., 2005).

Our main argument is that business succession in small family firms can be effectively interpreted and managed as a process of knowledge transfer and creation in an synergic relation among the incumbent, the successor and the rest of the organisation.

The aim of this paper is to develop a theoretical model for managing knowledge in family firms succession (FFS), informed by Intellectual Capital (IC) literature. In doing so, the paper draws from literature related to family business succession and IC management. FFS, in this sense, is perceived as a process of knowledge transfer to preserve and improve the organisation’s future value creation capacity. The theoretical model is proposed to understand how FFS can be interpreted as a process of IC management. The paper will be structured as follows: section 2 will present a summary of the family business literature focussed on the business succession, while the third section will analyse the small businesses characteristics under an IC perspective. The fourth section describes the assumptions and structure of the theoretical model, addressing both reflections on its research and practical implications, and limitations. Finally, some concluding comments and recommendations are presented.

Business succession in family firms: an IC perspective

In this paper we adopted a stringent definition of family firm and business succession. In detail, family firm is considered as a “business that will be passed on for the family’s next generation to manage and control” (Ward, 1987: 252). Business succession, coherently, is here defined as “either the occurrence or the anticipation that a younger family member has or will assume control of the business from an elder” (Churchill and Hatten, 1987: 52). Besides, throughout the paper, the terms business succession and business transfer would be used as synonymous, for the sake of simplicity. Business succession is undoubtedly one of the most critical process in a firm life-cycle and attracted the interest of several authors.

There is a bulk of literature on family business succession that focussed on different issues, in the attempt to shed some lights on its complexity. Business succession has been a central topic of the family business literature beginning from the 1960s, and represents almost one-third of the literature (Sharma, Chrisman and Chua, 1996). Succession is first of all a process (Davis, 1968; Barnes and Hershon, 1976; Morris et al., 1996; Sharma et al., 2001) that takes time to develop and needs to be planned and managed in order to be successful. In this process, however, several subjects are involved; the incumbent (Ambrose, 1983; Rubenson and Gupta, 1996), the successor (Barach et al, 1988; Birley, 1986, 2002; Handler, 1990), the family (Davis, 1968; Handler, 1990) and the stakeholders (Handler, 1989; Fox et al., 1996; Steier, 2001). Other studies, moreover, focussed on the difficulties that may be involved in the process, highlighting, among the other, the intricacy of the transfer of capabilities for running the business (Fox et al., 1996; Malinen, 2001; Cabrera et al, 2001).

Several factors influencing the succession have been suggested (e.g. Handler and Kram, 1988; Harveston, Davis and Lyden, 1997) leading to analysis on the ability of the incumbent and the successor to manage the complex and highly emotional process of succession (Magretta, 1998; Matthews et al, 1999). Despite this high interest, there is scope for improvement in theory and practice (Sharma et al., 1996; Sharma, 2004; Brockhaus, 2004).

There is a general agreement on that family business succession is a complex process that takes time and involves several and different factors (Le Breton-Miller et al., 2004), and see the incumbent and the successor go through different phases. In that process the relationships within the business and the business become the primarily governing factors (Churchill and Hatten, 1997). One of the surrounding issue, and major concern, involved in the business succession process is the transfer of tacit knowledge embedded in owner-manager’s mind to the successor (Sharma, 2004).

Indeed, family businesses develop distinctive resources and capabilities that are related to their capacity to outperform non-family businesses. Adopting a Resource Based View (RBV) perspective, Habbershon and Williams (1999) introduced the concept of “familiness”, defined as the unique bundle of resources and capabilities that are distinctive to a firm as a result of the family involvement. This concept has not been adequately theorized, although it is recognized as emanating from the interaction between family members, and may lead to enduring competitive advantage (Chrisman, et al., 2003). Familiness refers to the commonality of the unique resources, capabilities and visions within family firms, whether economic or non-economic. Family firms are not simply “made”, on the contrary they usually “born”, however they are affected by social, cultural and economic factors both of the external environment and of the family itself (Chua et al., 2004). Cabrera-Suàrez et al. (2001), adopting a RBV perspective, propose a theoretical model for family firm succession centred on the familiness concept, and suggest the importance of transferring the tacit embedded knowledge as well as other factor of competitive advantage. Steier (2001) analyses another more specific aspect of the competitive advantage, such as networks and social capital, and proposes a model to face the problematic relationship among the successor and the stakeholders. The cited contributions, however, miss to purpose to both having an integrated framework and practical implications at the same time.

For instance, the RBV framework, on which much of the study have been conducted centred on knowledge, has been criticized in the literature as tautological, and unable to provide practical and conceptual tools to support owner-managers and managers decisions (Foss and Knudsen, 2003; Prime and Butler, 2001). Whereas, the analysis of just one piece of the whole, like social capital, may miss the dynamic relationships among the components of the intangible and tangible resources of a family firm.

Adopting an IC perspective can overcome some of this limits, offering a more compelling and overarching framework able to picture the complexity involved in a FFS. According to Reed et al. (2006), IC is seen more apt to explain and measure the sources of competitive advantage of a firm. In a recent study Youndt et al. (2004) find positive correlation between IC and superior financial performances.

Small business and the consequences for IC

It is widely recognized that “the economic prosperity rests upon knowledge and its useful application” (Teece, 1981). Conversely, firm success and prosperity are based on its ability to create and retain the stock of knowledge. Penrose (1959) offered a new perspective in understanding the source of competitive advantage of the firm. Economic rents are not linked merely to the possession of resources, but to the extent they are managed and innovated through time. She stresses the importance of continuous maintenance of the firms’ existing capabilities and knowledge bases in protecting and strengthening the competitive advantage. As Kuznets (1966) suggests economic growth, and business growth, is due to the “increase in the stock of useful knowledge and the extension of its application”. Knowledge and information “have become the economy’s primary raw material and its most important outcome” (Stewart, 1997: x); they are the present and future basic economic resource (Drucker, 1993: 7). Ireland and Hitt (1999: 44) believe that “the ability to build, share, and leverage knowledge will replace the ownership and/or control of assets as a primary source of competitive advantage”. Intellectual capital can be conceptualised and defined as a set of bundled capabilities/competencies and knowledge resources, which are linked and mutually dependent (Rastogi, 2003). As a consequence, competitiveness is the ability to continually build capabilities and competencies, which have a historical trajectory and yet are able to produce new and innovative products. Knowledge management (KM) becomes strategic for every organisations, regardless the dimension of the business. The discussions on IC and KM, however, focus on large organizations, with little attention being paid to small businesses and small family business. The latter, often, compete through their intangible capabilities, since their resource scarcity (OECD, 2002; Welsh and White, 1981) does not allow to cope with large corporations’ tangible capital.

In the literature, there are different proposition of what intellectual capital is and what are its main elements (among the other Petty and Guthrie, 2000; Edvinsson, 1997). As defined above and depicted in Figure 1, we adopt an holistic approach in defining IC, as the result of dynamic interrelationships and conjoint interaction among its components (Rastogi, 2004). Structural capital can be considered as the knowledge created by, and stored in organisation technical devices (IT infrastructures), routines and processes, but also embedded in patents, copyrights, trademark, and so on. It comprises the “hardware, software, databases, organizational structure, patents, trademarks, and everything else of organizational capability that supports those employees productivity” (Edvinsson and Malone, 1997: 11), and “it can be reproduced and shared (like) technologies, inventions, data, publications (…) strategy and culture, structures and systems, organizational routines and procedures” (Stewart, 1997: 108-109).

On a knowledge perspective, Structural IC can be seen as a set of internalised knowledge composed by explicit and tacit knowledge embedded in structural elements, some with legal recognition. Structural IC can be thus equated to the capability of an organisation to manage its embedded knowledge, and sustain its personnel in developing skills, capabilities. According to Rastogi (2004) structural capital can be considered the Knowledge Management (KM) function of the organisation. Small businesses are likely to have low levels of Structural Knowledge due to the lack of financial and organisational resources (Beaver and Jennings, 2005). They are organised in simple, flat and less complex structure with a high level of functional integration. Most of small business activities and operations, however, are governed by informal rules and procedures, there is less formalization and standardization in their work (Spence, 1999; Ghodian and Gallear, 1997). Such organisation structures are likely to be organic and loosely structured rather than mechanistic and formalised (Beaver and Jennings, 2005). In small businesses the owner-manager normally represents the main source of strategic knowledge and dynamic capabilities. The latter is the ability to create visible and structured routines and processes, related to higher order capabilities which are cross-functional in nature (Bakhru, 2004). The lack of a management team and culture, information systems, managerial tools and processes is a significant weakness for small businesses when they face a business succession process. Indeed, this means that in small firms the stock of knowledge embedded in the organisation and the ability to create, develop, share, integrate and use its knowledge, are expected to be low (Wong and Aspinwall, 2004).

The External IC, or Relational, refers to brands, customer loyalty, distribution channels, financial institution collaboration. This group of IC relates closely to the concept of social capital SC (Nahapiet and Ghoshal, 1998) as an influencing factor of the economic performance of firms (Baker, 1990). Indeed, SC is considered as the network of relations, not just within the organisational boundaries, but most of all outside the firm. Particularly useful is the concept of “relational embeddedness” (Granovetter, 1992) that describes the set of personal relationships people developed with each other.

Given the lack of a management team, in small firms the strategic relations with the environment reside into the owner-manager. Moreover, the owner-manager is at the centre of a network of relations with the strategic stakeholders. What Nahapiet and Ghoshal defined as social capital refers to the “actual and potential resources embedded within, available through, and derived from the network of relationship possessed by an individual or a social unit” (Nahapiet and Ghoshal, 1998: 243). This is not far from Bourdieu’s position on social capital as “the sum of the resources, actual or virtual, that accrue to an individual or a group by virtue of possessing a durable network of more or less institutionalised relations of mutual acquaintance and recognition” (Bourdieu and Wacquant, 1992: 199). Thus, it is possible to assume that in small firms the individual unit of social capital is the owner-manager.

The last group of IC components is Human IC. Members of an organisation retain personal knowledge, experience, expertise and some may have also owner-managerial spirit and ability to adapt and change. Human IC recalls directly the concept of tacit knowledge owned individually by members of an organisation, the ability to think and innovate products or processes (Stewart, 1997). This is the most intangible of IC and it is hard to guarantee its presence and development over time. Employees can not be owned, they may leave the firm determining a loss of knowledge, experience and expertise. The level of strategic knowledge held by the employees in small business can be generally considered to be low. This is due to the low degree of specialisation that usually characterizes small firms’ employees. A low level of specialization may lead to inadequate expertise in taking charge of functions. Small firms may lack highly educated and experienced employees or expert professionals with management and ICT skills (OECD, 2002). Moreover, the investment on employee training is reduced or absent. The consequences are employees not having the necessary skills to manage and create knowledge.

By the learning process point of view, the owner-managers play a crucial role in the daily operations of their firms, which leads to a significant share of learning and knowledge at their level. This is especially the case of micro enterprises, in which the owner-manager tends to be the beneficiary of the learning process and not the employees (Wong and Aspinall, 2005). It is not surprising that the knowledge is kept in the head of the owner-managers becoming the main knowledge repository and storage. Indeed, small businesses’ management style is characterised as dominated by the owner-managers, who is also the strategic apex, and the decision making is centralised with low level of delegation (Ghobadian and Gallear, 1997).

The overall intellectual capital of a firm, in our analysis, is not the sum, but the result of the reciprocal influence of the three elements. Indeed, as suggested by Coleman (1988), SC is strictly related to the creation of Human Capital through trustworthiness relationships, regulated also by norms and sanction, and the access to information flows. At the same time, the quality of the personnel is affected by the support given by the firm in managing knowledge (KM), but also affects the intensity and extension of the network of internal and external relationships (SC).

Given these assumptions, business transfer is not just a matter of physical assets change of management and property. It is mainly a problem of maintaining and developing the level of operational and strategic knowledge embedded in the human and customer capital of the firm. Business succession, together with employees’ leave, are considered the major sources of knowledge loss for small businesses (Wong and Radcliffe, 2000; Wong and Aspinwall, 2004). Small business will endure a greater risk from the occurrence of knowledge loss compared to large organisation. This is because most of the key knowledge is held in the minds of few people, specifically the owner-managers.

To conclude, a successful FFS process is one that deals with the management of the flow of IC from the incumbent to either the successor of the organisation as a whole. In the first case we can refer as a process of knowledge transfer between two subjects, in the second one is a knowledge formalisation process, in both cases tacit knowledge needs to be made explicit and then internalised by the organisation through routines and technological supports (Nonaka and Takeuchi, 1995).

Theoretical model

The theoretical model is structured upon the IC and the knowledge management literatures. In the previous section, the analysis highlighted the relevance of the components of IC, and especially the role of the owner-manager as a source of knowledge. The latter, unlike other inputs such as land, labour and capital, is characterised by high levels of uncertainty and asymmetries across persons. Knowledge cannot be easily measured, valued, created, accumulated and transferred, but it represents the source of competitive advantages.I In small businesses, knowledge spawns and comes from one main source, the owner-manager.

Also on a theoretical point of view, the reasons for the succession of firms to heirs can be referred to: the existence of an idiosyncratic knowledge of how to run the family business; the complexity of some business and the uncertainty of the future; and the competitive advantage related to the creation of transaction cost reducing social network, based on strong family ties (Bjuggren and Sund; 2002). Also empirical evidence indicates that it is often more likely for an owner-manager’s child to become an owner-manager than for any other (Huuskonen, 1992). The family history, the day to day experience, the values and principle embedded in being owner-managers are very influential factors (Malinen, 2001). This is coherent with social capital theory, which demonstrated how family is important in shaping children’s choices. Coleman (1988) showed how the dropout rates differs widely according to the characteristics of the family and the expectation on children’s future. On this premises, the inter-generational transfer is one of the most frequent events in family business and represents the focus of the theoretical model.

We construct the theoretical model considering, as a key factor in a firm succession, the possibility to preserve and develop the stock of knowledge. The successor or/and the organization should be put in the condition to leverage the existing knowledge. Business succession from one generation to another is conceptualised as a process of knowledge transfer and creation.

Indeed, the perspective of IC focuses on the stock and flows of knowledge embedded in an organisation and is connected with the financial performance of the firm (Mouritsen, 2004). The main assumption of this paper is that business transfer in small family firms is mainly a matter of maintaining and leveraging the IC embedded in the owner-managers’ expertise, skills and experience and the rest of the organisation. 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 owner-managers as a form of tacit knowledge, work-related knowledge, work-related competencies, owner-managerial spirit, culture, values and so on. The owner-manager represents not just the main source of strategic human capital (Kelly et al., 2000), but also of social capital (Steier, 2001), such as customer relationships, business partnerships, distribution channels. In Penrose (1959) terms owner-managers possess two of the mechanisms for achieving competitive advantage, namely firm-specific knowledge possessed by managers; and the entrepreneurial vision of managers. Given the absence in small family firms of a management team, it is possible to assume that is the owner manager the bottleneck for the rate or efficient expansion to achieve profitable growth, and the key proactive role to perceive and pursuing productive opportunities. Several studies confirm the centrality of founders in family business. They exert considerable influence on the culture and performance (accounting profitability measures, market performance and cost of debt financing) of the firm during and beyond their tenure (Anderson et al., 2003; Garcia et al., 2002; McConaughy, 2000).

Based on these assumptions, during the business transfer process, most 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 (or measurement) and flow (or strategic) approaches (Petty and Guthrie, 1999). The paper refers to the latter, since managing IC in small family firm succession (FFS) is a matter of understanding “the creation and development of value” (Mouritsen, 2004: 261), and making sure it remains and develops with the next generation. As argued by Roos et al. (1997) intellectual capital flows within an organisation may be used to create and leverage knowledge to enhance firm value.

However, knowledge does not flow linearly within the organisations and it needs to be formalised in linguistic codes and symbols (Kogut and Zander, 1992). This is not always possible; often individuals and organisations do not know what they know. Most of knowledge is tacit and could be transferred and acquired only through observations, application and use. Another challenge in managing knowledge transfer is that it resides in multiple repositories different in quantity and quality. Walsh and Ungson (1991) identified five retention repositories for knowledge in organisations: individual members; roles and organisational structures; the organization’s standard operating procedures and practices; its culture; and the physical structure and the workplace. In a more recent contribution, McGrath and Argote (2000), condensed the number of repositories down to three basic elements of organisations: its members, its tools (hardware, software, information systems and others), and in its routines, tasks and culture. Translating these concepts in IC terms, the members repository represents the Human Capital component, which in small family business is centred around the role of the owner-manager.

The tools represent the technological component of the repository, and can be translated in the knowledge management component of the IC. Lastly, tasks and their interrelationships with members and tools, both outside and inside the organisation, represent the Social Capital component of the IC.

Knowledge transfer, thus, involves actively the members of an organisation and its technologies, also in terms of tasks and processes. In a business successions incumbent, successor and the rest of the organization are involved in a process of knowledge transmission, absorption and reuse. From the quality of such transformation on the repository of knowledge may foster or hamper the final result of the succession process. As suggested by Szulansky (2003), three factors affect the interfirm knowledge transfer, namely: the characteristics of the source of knowledge; the characteristics of the recipient of knowledge; and the characteristics of the organisation. A significant component of the knowledge that organisations acquire, especially tacit knowledge, is embedded in individual members. This is also the most difficult type of knowledge to be transferred and it depends on the relationship and on the quality of the recipient and the source of knowledge. In a business succession process we are interested in understanding the conditions and the means through which knowledge is transferred from the incumbent and the designed successor.

Knowledge can also be embedded in an organisation’s tools and technology. If it so, knowledge transfer may occur in a more efficient and effective way, since it is explicit in nature, thus, easier to capture and use. Explicit knowledge embedded in technology has been found to transfer more readily than knowledge located in other repository (Zander and Zogut, 1995). As a consequence, the characteristics of the organisation in terms of technology, processes, managerial tools, hardware, software and so on, represent both a support for the knowledge transfer from the recipient to the source, but also become an additional repository of knowledge.

Based on this foundations derived from the relevant literature, we structured the theoretical model upon the following dimensions:

􀂾 Characteristics of the successor. He/she represents the recipient of the knowledge transfer process whose characteristics impact on its efficacy. That includes the formal education and training received, the personal motivation and commitment on the venture, the intimacy with a and the trust with the source of knowledge, the experience and responsibilities within the business, the level of IC detained, and the level of responsibility covered in the organisation.

􀂾 Characteristics of the incumbent. He/she represents the main source of knowledge in small firms. We focus on characteristics such as the attitude toward delegation, observation and supervision of the successor’s activity, the motivation and commitment on the process, and the intimacy with the recipient of the knowledge, the level of IC detained and the level of responsibility covered within the organisation.

􀂾 Characteristics of the organisation. The organisation and its members may represent either a source or a recipient of knowledge. Indeed, the incumbent may decided to transfer his/her knowledge towards a manager, or an employee. On the other hand, the organisational processes and tools may store and made available previously tacit knowledge. That include the availability of managerial tools and processes, such as business plan, management accounting systems and ideas, integrated information systems and the presence of managers within the organisation.

As represented in figure 2, the above dimensions are interrelated and need to be considered in their systemic relationship. The knowledge repositories play a dual role in knowledge transfer in organisation, thus, in business succession (Argote and Ingram, 2000: 152). On the one hand, the knowledge repositories modify when knowledge transfer occurs. The change in the form and content of knowledge repositories, thus, represent the outcome of the knowledge transfer process. On the other hand, the form and content of the knowledge repositories affect the processes and outcome of knowledge transfer.

Some contextual factors are also considered, such as the motivation of both the incumbent and the successor, and the economic and family conditions. Motivated and committed successors is considered as desirable attribute (Chrisman, et al., 1998), as well as the motivation and the commitment of the incumbent. Indeed, a growing business is more likely to face a less problematic succession process, as more time and attention would be dedicated by the actors involved. Moreover, a family context characterised by harmony, shared values and principles is more likely to foster a quality relationships among the family members. Family firms are considered to be potentially an ideal context to develop misunderstandings and conflict (Boles, 1996; Miller and Rice, 1988), if compared with non-family business. A high rate of conflict could be detrimental to individual and group performances, even though it is also recognized to have potentially positive outcome such as the promotion of innovation and creativity (Harvey, 1998). The family context is thus an important aspect where conflicts may raise and be resolved, influencing firm performance, either in a positive or negative way.

However, the relationship between the incumbent (source of knowledge) and the successor (recipient of knowledge) should be based on intimacy and trust. The effectiveness of such exchange is depended on the strength of the tie between the parties involved (Hansen, 1999), which is reflected on the intimacy of such relationship. Besides, the source of knowledge (the incumbent) must be considered trustworthy by the recipient in order to be accepted (Szulansky, 2000). To a similar stance, Rulke et al. (2000) introduce the concept of relational learning channels that are activated among subjects, demonstrating their role in fostering the self-knowledge of an organisation, and an individual alike. The relationship between the source and the recipient of knowledge must be intimate, based on reciprocal trust and continuous in order to be effective.

The characteristics of the successor

The characteristics of successor is one of the influential factors on the succession process (Venter, Boshoff, Maas, 2005; Cabrera-Suarez, De Saa-Pérez, Garcia-Almeida, 2001; Brockhaus, 2004). The successor needs to have basic business skills and knowledge, through formal education and training period (external and/or internal to the firm), but also deeper information about the family business (Stenholm, 2003). Besides, the expertise and stock of knowledge of the successor determines the absorptive capacity (Cohen and Levithal, 1990: 128) that avoids delays and fosters the ability to exploit the new knowledge.

Another fundamental requirement is the motivation of successors entering the firm. Lack of motivation may result in procrastination, passivity or even rejection in the adoption and use of new knowledge (Szulansky, 2000). Stavrou (1998) suggested two main sources of motivation for a successor to continue the venture: becoming his/her own boss, and taking control of the firm’s operations. On this regard, Handler (1990) introduced the concept of personal need alignment and personal influence. The former relates to the degree by which personal ambitions can be satisfied within family business. Personal influence, on the other stance, refers to the capability to take responsibilities within family business. This is linked to the concept of planned or intentional behaviour, as proposed by Sharma, et al. (2003). Intentions are moulded by individuals’ attitudes (Kreuger and Arsrud, 1993), such as the perceived desirability of the outcomes to the initiator; the acceptability of the outcomes; and the perception that the behaviour will actually lead to the desired outcome. Moreover the successor needs to achieve credibility and legitimacy within and outside the organization and the family (Barach, Ganitsky, 1995). This will depend on the knowledge acquired and the leadership abilities, related to management skills, such as communication and motivation (Foster, 1995).

The relationship between the successor and the predecessor is the basis of a successful process. Tacit knowledge can be transferred and assimilated through the establishment of a shared understanding between two or more individuals, which includes common schemes and cognitive structures, metaphors and analogies, as well as anecdotes (Grant, 1996). This helps in creating a progressive transfer of tacit knowledge, both at an organizational level and an individual level. The transfer of complex and casually ambiguous practice requires reconstruction and adaptation by the successor (Kogut and Zander, 1992). It entails comparisons, exchanges of information and confrontations between the successor and the incumbent.

Tacit knowledge embedded in the owner-manager experiences and skills can only be transferred through observation, and thus direct practice in different decisional and managerial processes. Observation of the owner-manager (or managers where present) through tracking their work’ practices will foster, as the literature suggests, the flow of tacit knowledge, moreover it will activate a learning by doing process. Activating such a process (involving both the incumbent and the successor) may lead to an acceleration of knowledge creation and transfer, overcoming the causal ambiguity that generates stickiness. Causal ambiguity is a signals of the absence of “know-why”, rather than of “know how” to perform a certain tasks or attain a specific outcome. Moreover, knowledge that has been put to use for a brief period of time or on a limited scale or scope, may prevent its use. This reflects Nonaka and Takeuchi’s (1995) proposed pattern of the transfer of tacit knowledge between individuals, through, for example, observation and continuous use and reuse.

An other important aspect is the ability of the successor to enter into the social network within and outside the organisation. This means entering in a dialog with the stakeholders, like employees, customers, suppliers and so on, and gain respect and legitimacy. The education, training and the relationship with the incumbent may foster the development of decision-making abilities, interpersonal skills, intelligence and self-confidence. The transfer of social capital should be object of a deliberate and planned transfer allowing the actors involved to reconfigure and reconstitute the network structure and content (Steier, 2001). For the successor, it might mean moving, using Trott et al. (1995) and Harton (1997), from translation and interpretation of knowledge, towards the final step of assimilation and commitment. Indeed, acquiring knowledge and learning also involve the ability to “unlearn” (Bettis, Prahaled, 1995) the path dependent management practices that are no longer useful. Perren and Grant (2000) highlighted how owner-manager tend to create a micro-world in order to maintain his/her autonomy, power and control over organisation. The reconstruction and the adaptation of the receiving knowledge become inevitable in case of presence of complex and casually ambiguous knowledge (Kogut and Zander, 1992). In such case, the transfer takes time, and requires frequent exchanges and relationship in order to translate it in a comprehensible manner for the recipient.

The characteristics of the incumbent

In our framework, the incumbent represents the most relevant repository of knowledge in small firms that needs to be transferred and absorbed by other repository (e.g. the successor, and/or the organisation). The incumbent must be motivated and aware of the necessary steps towards business successions and the progressive loss of power and active role in the day-to-day and strategic decision. The source of knowledge must collaborate and put efforts to support the transfer. Of course, the process will not happen over-night and it must be planned and managed. The initial step is the awareness of this need, and the motivation and active involvement of the incumbent. Owner-managers should change from being a keeper of knowledge to being its provider and disseminator. Knowledge transfer may happen only with a continuous personal and professional relationship between the two actors. The effectiveness of such exchanges depends on the strengths of the ties between the recipient and the source of knowledge (Hansen, 1999), reflected in the ease of communication and the intimacy of family relationship. As suggested (Szulansky, 2000), the motivation of the source of knowledge to facilitate access to the successor may influence the efficacy of the transfer. The incumbent may fear to lose a position of privilege and superiority, and become dispensable overtime.

The characteristics of the incumbent, thus, play a fundamental role in all moments of the succession process. The incumbent should be able to transform his/her role overtime through the devolution of function and the supervision of the successor and organisational developments. The incumbent should involve the successor, but also devolve functions and power, while maintaining a supervision and observing role. In the later stage of the process, the owner-manager may cover a role of external consultant for strategic decisions, until his or her final exit from the firm (Handler, 1989). The interplay between successor and incumbent is also related with the transfer of the social capital of a firm above described. The latter needs to be maintained in order to foster a smooth succession. Social capital is strictly linked to the firm’s reputation gained in the market through specific behaviour and relations with different stakeholders. Corporate reputation is involved in shaping and, hopefully, ameliorating the interorganisational relations (Fombrun and Shanley, 1990). In small firms, the owner-manager is the front-runner in creating reputation and image of the firm, until the successor develops his/her own legitimacy and recognisance from the stakeholders. Also in this circumstance, the owner-manager should be able to devolve, supervise and observe, rather than merely control through holding on to his or her previous power and role. This analysis is transferable to any other subject within the organisation who may take up the role of successor’s mentor. Indeed, in more structured family firms, knowledge can be located in other employees, usually those with specialised functions.

The characteristics of the organisation

Having adequate characteristics of the recipient and the source of knowledge does not guarantee an effective transfer and absorption, since the characteristics of the organisation context may interfere. There could be impediments on the transfer and the recipient sides of tacit knowledge. Szulansky (1996) suggested the need to create a “fertile” organisation, through, for example, formal structure and systems. Small firms tend to be loosely coupled, founder-centred and with a low development of operative systems. As a consequence, the organisation is not capable to retain and to develop knowledge independently from the owner-manager presence, and it would not be able to support the succession process. On the contrary, the delegation of responsibility towards some key employees (if not the creation of management functions), the introduction and development of a management accounting culture and tools might reduce the risk of loss of knowledge and failure due to the succession. Owner-managers tend to concentrate on several functions and the successors might not be able to take on all of these. For example, a recent study in Canadian small businesses confirmed the central role of the owner-manager in most of the decisions (65%) and the small number of no-owner managers (2 or 3 at maximum) involved in the business (Feltham et al. 2005). In such a situation, business succession becomes more likely to fail without an adequate planning and awareness of the step to be taken. In a growing business, the creation of a management team will make the succession process easier in terms of business functionality.

Other important managerial tools that might support knowledge accumulation and transfer are several, such as a business plan, management and cost accounting system (MAS), integrated informative systems. MAS contributes to activate learning processes of the inner functioning of the organisation. In so doing, it represents a tool to formalised tacit knowledge, understanding the “know-why” and “know-what” that are involved on a certain output. MAS, to be efficient, calls both for human resource management and information technology investments. Indeed, human resource management and investments and information technology investments tend to have a higher influence on intellectual capital development (Youndt et al., 2004). MASs are recognized to overcome the cognitive limitations of the members of the organisations. Due to this cognitive limitations, people tend to look for the information that confirm their mental models, rather than look for the evidence to make the most appropriate decision (Hogarth, 1987). The introduction of MASs supports the alignment between the mental models of the organisation members involved in the process (de Haas, Algera, 2002). As a consequence, through MAS the successors and the incumbent may attain a common operational and strategic vision of the business sharing the same stock of formalised information and knowledge.

On a similar manner, business planning is one of the key factors in firms success (Drucker, 1973). Usually small businesses do not have a specific orientation in planning and rarely do they have a formal business plan. Indeed, in small family businesses, planning is based on personal perception and intuition by the owner-manager, it is not generally formalised into documents and processes. The business idea may stick in the mind of the incumbent, the management and other family members are marginally or not involved in this mental process. As such, there is no shared situational analysis or future action plan among various family members in a family business (see Fox et al., 1996; Handler, 1991). Formalising a business plan means involving the successor and the management to share the analysis of the business, the process of selecting the strategy and the future plans of the firm. Moreover, the same process will be possible to be replicated by the successor, management, and other family members, even in the case of complete exit of the incumbent. It can serve as a tool and a process for learning and explicating tacit knowledge usually contained in owner-manager’s mind and intuition. Business planning, however, has also demonstrated its utility in improving strategic decision making uniting the whole organization and, hence, reducing the risk of failure (Perry, 2001).

The literature generally shows that very small businesses have little, if none, management information system, and decision making is not formalised. The investment in highly expensive managerial tool or the cost of a manager might not be justified by the overall economic benefits. However, there is some empirical evidence on how small businesses are able to introduce and to develop management accounting idiosyncratically (Perren and Grant; 2000). It means that, MAS are developed internally without intervention by outside parties (consultant, software companies, etc.) in order to acquire effective information and control through often informal means. In this sense, regardless the size of the firm (small or very small) it would be possible to find in both cases forms of managerial culture crafted within the owner-manager’s business, or influenced of macro-level objectified management accounting ideas (Perren and Grant, 2000: 392). In the former case, the knowledge embedded in the decision making process must be reframed and transferred towards the rest of the organisation (employees or more formalised means) or the successor through delegation. The formalisation of such micro-world and/or the introduction of managerial ideas, objectified by the external world, represents two ways to support the succession process.

Model applicability and limits

The integration of the three dimensions permits to visualize the theoretical model as a tri-dimensional map (see Figure 3). Each dimension may span from low to high level, so that is possible to envisage a tri-dimensional space in which small firms may be located. This will help in understanding the main criticalities in the business processes and to better design the succession in family firm, with particular reference to ones which are small in size. The map is hermeneutic, in the sense that all elements are interrelated and mutually implicated, and can be considered as a lens through which understand the succession process. In this sense, it may understood as a skeleton theoretical framework that need to fleshed-out with empirical investigation (Laughlin, 1995).

The model allows enough flexibility to be adapted to very different contexts and avoids pre-tailored solutions. The final aim is to develop a process of enlightenment through which both the incumbent and the successor could share the vision on the succession path along the different dimensions involved. However, the theoretical model does not make an a priori judgment about the degree or nature of the risks in the succession process. In this regard, the model may be applied to all types of small businesses, regardless the product, the market served and the typology of succession. It allows both the researcher to identify and describe the criticalities a small business may face, and the incumbent and successors to activate a shared understanding and agreement on the actions to be taken in order to foster a smooth succession. Moreover, it clarifies the connection between the management of IC and the business succession process. Rather than focusing only on what incumbent and successors should do (independent variables) to achieve a successful outcome (dependent variable), the model also considers the IC outcomes as independent variables.

On this vein, the model also addresses some recommendations for practitioners. On the first instance, small family businesses should focus on what they have based the competitive advantage (e.g. the IC), and define the appropriate decisions and actions to maintain and increase the stock and flow of intellectual capital (Mouritsen, 2004). More in detail, the practitioners should pay particular attention on the flow and management of knowledge from the incumbent to the successors or the organisation, working on the quality of structural, social and human capital. The practical interventions can be directed towards the successors, the incumbent or the organisation. However, the relationship among the three factors must be taken into account. The quality relationship among the successor, the incumbent and the other members of the organisation is fundamental to create an environment that foster the transfer of knowledge.

We are aware, however, of some limitation of the model. First, it needs to be empirically tested, both through qualitative and quantitative studies. This would allow to verify and improve its structure, and define the internal content and representation of the variables considered. The IC perspective provides an accepted managerial and accounting framework able to guide researchers and practitioners in dealing with business problems. This calls for researchers to address more attention on the role of IC in explaining the competitive advantage of the family business and the successful or unsuccessful family business succession.

 Final remarks

Business succession represents a wide-world issue affecting economic and social development. Besides over the last decade IC management has come to be considered the prime basis for business success. Both topics have received high levels of attention from academics, consultants, policy makers and practitioners, resulting in a blossoming literature. Despite the relevance of both issues, little or no efforts have been directed within the context of small businesses.

In this paper we argue that family business succession in small settings may be fruitfully understood and managed as a process of IC and knowledge transfer. Family firms are considered to have some distinctive assets. Their competitive advantage is based on the tacitness of the knowledge embedded in these resources (Habbershon and Williams, 1999; Cabrera-Suàrez et al., 2001), and prominently in the incumbent’s experience and expertise. Indeed, the founder’s tacit knowledge is the strategic assets that need to be transferred and developed, especially in small businesses.

The study means to contribute to the on-going discussion through the integration of IC management within the business succession in small family businesses. Intergenerational transfer should represent an opportunity for the family business to give continuity and improvements to its competitive advantage. Our model suggests two main ways: (a) through the transfer of IC from the incumbent to the successors; and (b) through the development of IC within the organisation in terms of professionalisation and empowerment of employees, investments in IC and through formalisation managerial tools. As depicted in figure 4, any small family firm would enter the succession process with its own stock of IC and it would end the succession process with a different level of IC in types and content. Such a change implies that the knowledge repositories have affected and have been affected. The model support researchers and practitioners in understanding the transformation from ICt1 to ICt2, but most of all to foresee the most appropriate actions, along the succession process, in order that ICt2 is better of than ICt1.

The theoretical model offers an integrated perspective allowing the researcher to further develop the understanding of the variables involved in business succession in small organisational settings. Moreover, it helps the incumbents and successors to start a communicative process of self and shared reflection, in order to plan lines of action.

We believe that future research should go further in understanding the role of IC in small family business and its management during the business succession. It would be also fruitful to compare family and nonfamily business, as successful and unsuccessful succession process, in order to appreciate the uniqueness of family contribution to the performance. Although a formalised empirical test of the relationships established among the described model’s variables would be necessary, the present work shed some lights on the neglected research area of small businesses, and offers a theoretical support to some recommendations and evidence often sparsely presented both in family business literature and IC literature.