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In it for the long haul?: succession planning within small entrepreneurial firms.

ABSTRACT

Small businesses, whether family-owned or not, need to plan for the eventual turnover of key contributors, especially owners/founders. Those firms that have not implemented or communicated a formal succession plan may not have qualified people to lead them in the future. A study was conducted among small manufacturing firms to explore succession planning practices. Only 40% of the firms studied engaged in formal succession planning. Key determinants of succession planning were top-management support of the initiative and having someone who possesses the knowledge to adequately implement succession planning. For those firms that had a formal succession plan, what determined whether or not they kept it a secret from employees was whether they believed the employees included in the plan would feel a sense of entitlement to the promotion. The results are discussed and recommendations are made for the small business owner/consultant.

INTRODUCTION

It has been reported that no more than three out of every ten small businesses survive past one generation of leaders, and only 16% survive to the third generation (Janjuha-Jivraj & Woods, 2002; Watson & Everett, 1999; mall businesses failure, 1996). Certainly, economic/financial issues are responsible for a lion share of small business failures. Many others are caused by the inability of the firm to overcome the loss of key contributors (Lussier & Sonfield, 2004).

No matter how successful, every small business will, at some point, experience the loss of key contributors. Examples of such losses may be in the form of an engineer (whose skill-set may not be easily replaced) or a sales associate (who has built strong relationships with key customers over the years). Oftentimes, these losses are in the form of an owner/founder (whose vision helped build and sustain the culture). In fact, given that half of all U.S. small business owners are aged 60 or older (Fleming, 1997), it appears that planning for the eventual urning over of the reigns is more important than ever.

SUCCESSION PLANNING

Succession planning is a contingency plan an organization develops to address the eventual loss of key human resources. More specifically, it is he process of developing key people through a process that identifies candidates and tracks their progress and development (Nardoni, 1997). Succession planning has gained wider acceptance in the corporate world. Studies conducted show 67% of those surveyed reported that succession planning had grown in importance in the last decade (J. Howard & Associates, 2003). The emergence of succession planning in larger firms can be credited to the teamwork and bureaucracy needed to run a large organization. In addition, the corporate boards of large organizations have forced senior management to consider succession planning (J. Howard & Associates, 2003). One poll of executives found 100% of those surveyed believed it useful to identify and groom a successor. However, the same study found that only 72% were actually grooming people for these key roles (Messmer, 2002).

Small businesses have an even greater need for succession planning, but face unique challenges. First, key decision makers in small businesses can be more critical to the organization than key decision makers in larger corporations. Small businesses will rely on key decision makers more, while larger corporations generally have more management depth, processes, and procedures. Secondly, small businesses have a limited internal talent pool from which to draw, making replacing the loss of key decision makers more difficult. Yet, according to a study conducted by the American Society of Chartered Life Underwriters & Chartered Financial Consultants, less than half of all small businesses engage in formalized succession planning (mall businesses failure, 1996). Why? Perhaps some do not fully understand the necessity to prepare for the future. Others may argue they have neither the time nor money to invest in succession planning. Still, others may claim they do not possess the expertise to adequately implement succession planning. The reasons that small businesses fail to have proper succession plans are as different as the organizations themselves. These reasons need to be explored to understand why companies do not utilize this valuable tool.

SUCCESSION PLAN SECRECY

Even for those small businesses that engage in formalized succession planning, many are not getting the full ang for their buck because employees are not made aware that succession planning even exists within the firm. One survey concluded that less than 17% of organizations publicly shared the criteria to be selected to the succession plan. In addition many organizations showed a reluctance to inform employees that they had been selected for the succession plan (J. Howard & Associates, 2003). Those firms that keep their succession plans a ecret argue they do so in order to preserve employee morale, prevent incumbents from feeling threatened, and avoid successor entitlement.

If the employees selected for inclusion in the plan were made public, some were concerned it would poison the morale of those not chosen. Firms were also concerned about morale problems from those employees currently in the position (i.e., incumbents). Fear may develop among less confident employees that the organization was simply grooming their replacement, in preparation for forcing them out of the organization. This fear appears to be most common among longer tenured employees who feel some anxiety with their job security (Rothwell, 2001). Finally, some firms worry about giving mplied guarantees to those employees that are included in the succession plan. They are concerned that the employees may feel as if they had the promotion n the bag and, as a result, may not prepare themselves properly (i.e., not pursue development opportunities).

The challenges and demands upon today small businesses require the talents of highly qualified people. To ensure continued viability, it is the responsibility of a company leadership to plan for turnover. Those that have not implemented or communicated a formal succession plan may not have qualified people to lead their organization in the future.

METHODOLOGY

In an attempt to determine the extent to which small businesses engage in succession planning, and the reasons why they do or do not, an exploratory study was conducted among small manufacturing firms in Springfield, Missouri. Springfield, Missouri is experiencing the fastest rate of economic growth in the State (Missouri Economic Research & Information Center, 2002). Small business is the backbone of that growth. Targeted firms were those manufacturers that employed 500 or fewer people. The Manufacturer Directory supplied by the Springfield, Missouri Chamber of Commerce was used to identify the survey population (N=100).

Personal phone calls were placed to each of the 100 manufacturers that fit the parameters of the study; the owner, general manager, or human resource manager (if the position existed) was requested. The purpose of the study was explained and, for those that agreed to participate (N=48), a questionnaire containing 25 items was sent and returned via fax. Table 1 provides some descriptive statistics on the 48 respondent firms. The mean number of employees among the forty-eight respondent firms was 154; median number of employees was 100.

RESULTS

While 38 (79%) out of the 48 respondents indicated they track employees when they acquire more skills/training, only 19 (40%) of the 48 indicated they had a formalized succession planning process. Firm size had no impact on the propensity to engage in formalized succession planning as the results of a z test performed on the proportions of those firms with less than 100 employees engaged in succession planning compared to those with 100 or more employees were not statistically significant. In addition, of the 19 firms that indicated they had a formalized succession plan, almost half indicated they keep the plan secret from employees.

DETERMINANTS OF SUCCESSION PLANNING

In an attempt to determine the main reasons why the respondent firms did/did not engage in succession planning, a logistical regression analysis was conducted on the responses to those items on the questionnaire offering possible explanations. Logistical regression was used in this case due to the non-linear nature of the dependent variable (i.e., one requiring responses of yes/no), which violates one of the assumptions of linear regression. Logistical regression transforms a non-linear relationship into a linear one and allows for the interpretation of the data similar to a ormal regression equation (Cohen & Cohen, 1983). Table 2 lists the five pertinent items and the resulting statistical significance associated with each. As can be seen in Table 2, two variables were statistically significantly related (at p< .05) to the respondent firms decisions whether or not to engage in formalized succession planning: they were ur organization leadership understands the value of formalized succession planning and ur organization lacks the knowledge to adequately implement a succession plan (which was negatively related, as expected). Together, these five variables explained roughly 52% of the variation in decisions whether or not to engage in formalized succession planning.

Next, for those firms that indicated they engage in formalized succession planning, an attempt was made to determine why they did/did not keep the plan a secret. The data analyzed was limited to those 19 firms that engaged in formalized succession planning. Another logistical regression was run (for the same reasons as stated before): this time the dependent variable was a Likert-type item with 5 response choices; there were 3 Likert-type independent variables (also with 5 response choices each) included in the analysis. Table 3 lists those 3 items and the resulting statistical significance associated with each. As can be seen in Table 3, one of the items was statistically significantly related (at p< .10; given the smaller sample size included in this analysis, the decreased statistical power warrants accepting a larger Type I error) to firms decisions whether to keep their succession plans a secret: it was e are concerned that employees who know they are potential replacements will automatically assume they have the position Together, these 3 variables explained roughly 38% of the variation in decisions whether or not to keep the plan a secret.

DISCUSSION

The finding that only 40% of the respondent firms engaged in formalized succession planning is consistent with prior research findings. A national survey conducted by the life insurance and financial services industry revealed that a majority of agents polled indicated that more than half their small business clients lacked business succession plans (mall businesses failure 1996). However, it is surprising that the proportion of small businesses engaged in succession planning has changed relatively little in the past 9 years, especially considering the volatility of the small business landscape during that time span. Nevertheless, this finding does not diminish the importance for small business to have a formalized succession plan (onfamily firms 1992); it merely amplifies the extent to which small business must heed the message.

One item that was significantly related to whether the respondent firms engaged in formalized succession planning was about top-management support. As Rothwell (2002) indicates, the first step toward implementing an effective succession plan for an organization is to fully support the succession planning process. The leadership must send clear messages, and support it with the resources that are needed. So, without top-management support, the implicit message becomes uccession planning is not valued here and any efforts directed towards it will not be recognized or supported Related to this, it is interesting to note that among those 22 respondent firms that indicated a lack of top-management support for succession planning, 17 (77%) indicated that a majority of their employees were not proactively preparing themselves for advancement. Is it any wonder?

The other item that was significantly related to whether the respondent firms engaged in formalized succession planning was about having the proper resources (knowledge) to implement succession planning. Typically, succession planning falls within the purview of the Human Resources discipline. However, it is entirely possible that many of those responsible for ypical HR issues (such as selection, training, performance management, etc.) among the respondent firms were not formally trained in Human Resources. In many small businesses, many different ats are worn by those in leadership positions due to resource constraints placed upon the firm. Without someone formally trained in HR, it is possible those firms were reluctant to even think about succession planning for fear they lacked the necessary expertise. In this study, since the presence of a ormally-trained HR manager was not determined, the explanation provided for this finding remains speculation.

It is interesting to note those items that were not significantly related to whether the respondent firms engaged in formalized succession planning: insufficient time, inadequate budget, and viewing turnover as a threat. Among the 48 small manufacturing firms that responded, only 14 (29%) believed they did not have either adequate time or money to devote to succession planning. So, that means, even among those that do not engage in succession planning, their decisions were not affected by these two resources that are typically given as reasons why small businesses do not engage in particular activities. Only 9 (19%) of the respondent firms indicated they would not view turnover in key positions as a threat to the organization. So, it appears that most small businesses understand the importance of succession planning, but other things get in the way (such as those mentioned above: not having top-management support and not having the knowledge to successfully implement succession planning).

Even when firms engage in succession planning, they vary with regards to whether or not employees are made aware that the plan exists and whether or not they are included in the plan. From this study, it appears that the driving factor behind this decision is whether the firm believes that employees, if told about their inclusion in the plan, will feel a sense of ntitlement to the promotion. Among the 19 respondent firms that engage in formalized succession planning, 9 (47%) kept their plans secret (apparently for the reason stated above). This is consistent with a previous study which found that 46% of surveyed firms with succession plans did not inform those employees included in the plan (J. Howard & Associates, 2003). However, keeping the plan a secret may be shortsighted. If employees are being targeted for promotion (regardless of the timeline associated with it), but don know it, they may not pursue the developmental opportunities necessary in order to acquire the knowledge, skills, or abilities required before being designated as eady immediately for promotion

RECOMMENDATIONS FOR THE SMALL BUSINESS OWNER/CONSULTANT

The findings from the present study can be used to make several recommendations:

1. Someone within the firm leadership must take ownership of the succession planning process and become its hampion An organization whose leadership does not support succession planning will be the least prepared for turnover in key positions. The support must be more than just vocal in nature. The leadership must give the individuals involved in the succession planning process the resources necessary to adequately do the job (Rothwell, 2002). Perhaps providing training for those in leadership positions on the value and necessity of succession planning would increase the likelihood of a stronger commitment to succession planning and devotion of more financial resources.

2. Requisite knowledge to adequately implement succession planning must be in place. In a similar regard, leadership can ensure the firm has the requisite knowledge to adequately implement a succession plan by employing Human Resource professionals that have been trained and are experienced in succession plan implementation. Such employment may be by filling full-time positions within the firm or by contracting with outside HR consultants on a project basis.

3. Firms need to worry less about entitlement and more about survival. Once the firm has made a commitment (both symbolically and financially) to succession planning, it needs to publicize the plan within the firm (especially to those selected for inclusion in the plan) in order to maximize its effectiveness. An open discussion with appropriate documentation in the personnel file should help eliminate the fear of a perceived guaranteed promotion. It needs to be explained to employees that a succession plan is not a promise, contract, or guarantee of future employment or advancement, but it is a contingency plan.

4. Once the employee clearly understands succession planning processes, the firm should inform the employee of the options available or actions that could be taken to address current skill deficiencies. The firm must be honest about what work is required for the position, and what assistance the firm will provide. Many firms perform individual development plans, called IDPs. These IDPs are designed to be maps for the employees so they can build the competencies needed to fill a higher-level position. Special forms of recognition would encourage key employees to complete these IDPs. Related research found that even key employees were less likely to grow their talent if they received no rewards for doing so (Rothwell, 2002). In Springfield, the Megavolt Corp. is an example of a local business that awards a bonus for certain levels of employee growth. Also, SRC Corporation rewards employees that earn a Master Degree with a sizeable monetary bonus.

CONCLUSION

The findings of the study described herein indicate that most small manufacturing firms do not engage in formalized succession planning due to lack of top management support and the requisite knowledge to effectively implement succession planning. For those firms in the minority that do engage in succession planning, it appears that many keep their plans a secret from employees out of fear that, should those who have been chosen for inclusion in the plan find out, they will feel a sense of entitlement to the promotion. Of course, this study only looked at small manufacturing firms within a particular region (Springfield, Missouri). Whether the region under study is representative of other regions remains under question. In order to determine whether these results can be generalized, future studies are warranted which look at small manufacturing firms from various regions across the country (and perhaps internationally as well). Future research may also wish to identify the specific issues behind firms beliefs that they lack the knowledge to adequately implement succession planning.

REFERENCES

Baldwin, M.D.(2000). The strategy of succession Planning. Course and Direction, CSSP. Retrieved July 24, 2004, from http://www.strategyletter.com/cp_0100/cp_fa.asp

Cohen, J. & P. Cohen(1983). Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences, 2nd edition. Hillsdale, NJ: Lawrence Erlbaum Associates.

Fleming, P.(1997). Helping business owners prepare for the future. Journal of Accountancy, 183(5),46-47.

Flouch, H.(2002, October 29). Companies must start to take succession planning seriously. Personnel Today, 16-17.

Higgins, B.(2003). Boomers may go bust without a business succession plan. National Underwriter, 107(6), 4-6.

J. Howard & Associates (2003). Companies taking succession planning more seriously-but secretly, HR Reporter, 20 (2), 8-10.

Janjuha-Jivraj, S. & A. Woods (2002). Successional issues within Asian family firms: Learning from the Kenyan experience. International Small Business Journal, 20 (1),77-94.

Lussier, R. & M. Sonfield (2004). Family Business Management Activities, Styles, and Characteristics: A correlational study. Mid-American Journal of Business, 19 (1), 44-69.

Messmer, M.(2002). Grooming your successor. Strategic Finance, 84(6), 17-19.

Missouri Economic Research & Information Center (2002). Update: A Report on Missouri's Economic Condition. Missouri Department of Economic Development.

Nardoni, R.(1997). Competency-based succession planning. Information Systems Management, 14(4), 60-62.

Nonfamily firms need successors, too. (1992). Nations Business, 80(9), 8-10.

Rothwell, W.(2002). Putting success into your succession planning. Journal of Business Strategy, 23 (3), 32-37.

Rothwell, W.(2001). Effective Succession Planning (2nd Edition), New York, New York: AMACOM.

Small businesses failure to plan for survival means dismal survival rate of 35% in second generation. (1996). Insurance Advocate, 107 (28), 23-25.

Timmons, H.(2002, December). Citi: Time for a succession plan. Business Week, pp. 48-49. Watson, J. & J. Everett (1999). Small business failure rates: Choice of definition and industry effects. International Small Business Journal, 17 (2), 31-48.

Wolfe, R. L. (1996). Systematic Succession Planning. Menlo Park, CA: Crisp Publications, Inc.

Mark D. Fulford, Central Missouri State University Ronald G. Breshears, Central Missouri State University R. Chad Breshears, AVATAR Components, Inc.
Table 1: Participant Firm Descriptions

Firm Size (# of employees)
 Range 22-500
 Mean 154
 Median 100

Organizational Attributes NO YES

 Track employees when they 10 (21%) 38 (79%)
 acquire more skills/training?

 Formalized Succession Plan? 29(60%) 19(40%)
 YES NO

 Is Succession Plan Secret? 9 10

Table 2: Logistic Regression Analysis of Possible Explanations on
Succession Planning

Independent Variables Regression Std. t-value Pr(>t)
 Coefficients Error

Intercept 1.91 .32 6.00 0.00
Turnover as a threat 0.07 .05 1.44 0.16
Top-management support 0.26 .05 4.98 0.00
Lack adequate knowledge -.12 .06 -1.98 0.05
Insufficient Budget -.03 .05 -.047 0.64
Insufficient Time -.01 .06 -0.25 0.81

Multiple R-squared: 0.52

F statistic: 8.94 with 5 and 42 degrees of freedom; the p value
is 0.00

Table 3: Logistic Regression Analysis of Possible Reasons for
Plan Secrecy

Independent Variables Regression Std. t-value Pr(>t)
 Coefficients Error

Intercept 4.79 0.72 6.69 0.00
Damage Employee 0.14 0.20 0.70 0.50
Morale
Incumbents Threatened 0.31 0.32 0.98 0.34
Entitlement 0.43 0.24 1.78 0.09

Multiple R-squared: 0.38

F statistic: 3.11 with 3 and 15 degrees of freedom; the p value
is 0.05
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Author:Fulford, Mark D.; Breshears, Ronald G.; Breshears, R. Chad
Publication:Entrepreneurial Executive
Article Type:Report
Geographic Code:1USA
Date:Jan 1, 2005
Words:3532
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