Journal of Small Business and Enterprise Development

Exploring succession planning in small, growing firms

Sally Sambrook

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Sally Sambrook, (2005),"Exploring succession planning in small, growing firms", Journal of Small Business
and Enterprise Development, Vol. 12 Iss 4 pp. 579 - 594
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Exploring succession planning in

small, growing firms

Exploring
succession
planning

Sally Sambrook
University of Wales Bangor, Bangor, UK

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Abstract
Purpose The paper aims to explore some of the issues in voluntary succession associated with
finding and successfully developing principal successors to ensure the survival and growth of small
firms. It highlights the key issues identified, including recruiting employees with potential,
considering the work/career motives of potential successors and ways of transferring organisational
and personal/tacit knowledge from the owner-manager to the successor, whether an internal employee
or a new purchaser. An initial, simple model is presented, identifying three types of knowledge
transfer and two tiers of succession.
Design/methodology/approach Literature from entrepreneurship, organisation studies and
human resourcing highlights the issues associated with succession planning. Qualitative research
provides empirical data from four owner-managers and employees.
Findings Insight into the reasons why it is difficult to plan voluntary succession are provided.
Research limitations/implications A recognised limitation of this research is the small sample
size. Further research is required to explore whether these issues and the proposed model are
indeed relevant across other small firms, and whether there are any differences in succession planning
between growth and non-growth oriented firms, and between family and non-family firms.
Practical implications The model can be used to analyse succession planning issues and develop
successors.
Originality/value The paper offers new insights into succession planning and the model provides
a framework for developing successors.
Keywords Succession planning, Human resource management, Knowledge transfer, Owner-managers,
Small enterprises, United Kingdom
Paper type Research paper

Introduction
This paper explores the concept of succession planning in small, growing firms in
Wales. Small firms play an important role, representing around 99.8 per cent of all
businesses active in the European Union, and accounting for 68 per cent of total
employment and 63 per cent of business turnover (Matlay, 2000). Growth-oriented
small businesses make a major contribution to economic development and
employment generation within local communities and national economies
(Smallbone and Wyer, 2000). However, not all SMEs have growth as an objective,
and therefore, contribute little to economic development. Harrison (2002, p. 226) notes
that many small firm owner-managers do not have substantial growth as their goal.
Gray and Lawless (2000) identify that the most important constraint on small business
growth lies in the career motivations and personal expectations of each individual
small firm owner and manager.
The paper draws on data from owner-mangers and employees in Welsh Fast
Growth Fifty (FG50) companies. The FG50 project (www.fg50.newi.ac.uk, accessed
1 January 2004) began in 1996, initially funded by a European Regional Development

Journal of Small Business and

Enterprise Development
Vol. 12 No. 4, 2005
pp. 579-594
q Emerald Group Publishing Limited
1462-6004
DOI 10.1108/14626000510628243

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Fund grant and through the contributions of the partners: University of Wales Bangor,
the Western Mail, KPMG and BT. A significant feature of the Welsh economy, as in
Europe, is the proliferation of SMEs. Across Wales the proportion of SMEs is 90 per
cent, and in North West Wales this rises to 98 per cent, with 67 per cent of
organisations employing less than 50 employees (WDA, 2000). The aim of the project
was to identify the fastest growing SMEs in Wales, highlighting the best of Welsh
business as a whole and raising the profile of individual businesses within their sector.
The FG50 project focuses on growing SMEs, trying to identify critical success factors,
although it is difficult to determine a single entrepreneurial profile of success. However,
the success of these businesses depends to some extent on how the growth is managed,
and this creates the need for careful succession planning.
This paper explores some of the issues in voluntary succession in small, growing
firms. Voluntary succession is where the incumbent owner-manager has some control
over the succession process. This is in contrast to succession due to death or serious
illness (or even dismissal by boards or stockholders, which are rare in small firms
because incumbents tends to have ownership control) which are beyond their control
(Sharma et al., 2003a). The focus is also on non-family firms, as it is well documented
that family firms have unique succession issues (see below).
As Gray and Lawless (2000) state, the most important constraint on small business
growth lies in the career motivations and expectations of owner-managers. If the
motivation is lifestyle then there may not be a desire to consider the life of the firm
after the owner-manager retires. However, if the motivation is growth, whether to
secure an income for retirement, to provide future employment for family members or
just for the sense of pride/achievement, then there is a need to consider succession
planning: who will succeed the entrepreneur, and when? A key question influencing
this is: how will successors be identified and developed for their new role?
Succession planning and business lifecycle
Succession planning can be defined as the attempt to plan for the right number and
quality of managers and key-skilled employees to cover retirements, death, serious
illness or promotion, and any new positions which may be created in future
organisation plans. This definition includes covering for the potential growth of a
small firm and exit strategy of an owner-manager, which might be a management
buy-out. Succession planning forms part of the human resourcing plan, which should
contribute to the overall business plan. Human resource planning (HRP) attempts to
ensure there is a match between the demand and supply of labour, from the internal
(ILM) and/or external (ELM) labour markets. It helps calculate critical resources,
including succession planning and career pathing of employees (Beaver and
Hutchings, 2004, p. 81). As an element of human resource management, it should
also relate to the stage the business is at within the life-cycle model start-up, growth,
maturity, decline, although progression through this model is not a neat, linear
process (Harrison, 2002, p. 230). For example, managers can deliberately choose not to
grow, to close down a financially viable firm, or allow the firm to be taken over.
However, the model is useful in considering some of the human resourcing aspects
during growth and the owner-managers exit strategy. Storey and Sisson (1993, p. 61)
state that at start-up entrepreneurial firms need to attract best technical, professional
talent, meet or exceed labour market rates to attract needed talent, establish

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the employee relations philosophy and define future skill requirements and begin
establishing career ladders. Even at this early stage, there is a need to consider career
paths, which are related to succession. During growth, firms need to recruit adequate
numbers and mix of qualified employees, establish succession planning for managers,
manage rapid internal labour market movements, and mould an effective management
team through management and organisational development (Storey and Sisson, 1993).
Here, succession becomes an explicit human resourcing requirement. However, Newell
(2002) suggests that small firms are less able to sustain ILMs and often struggle to
retain key employees, and are more vulnerable to changes in the ELM. She does not
discuss succession planning, but this might also be more difficult, given the small
internal labour market. Following growth, Harrison (2002, p. 230) notes that as the
firm becomes more mature, it often undergoes change of ownership, organisational
structure and managerial style. At this point, the need to develop people for the future
is likely to become apparent. The succession process begins when owner-managers
begin to consider their exit strategies, although Linnard (2001) notes that effective
succession planning can take 10 years to come to fruition. Succession would appear to
be a key strategic element of HRM. However, Harrison (2002, p. 227) states there is
little evidence of a planned or strategic approach to HRM in SMEs in the UK and
thus, perhaps, little succession planning. Brand and Bax (2002) argue that little
research has been focused on strategic HRM in SMEs, and although Beaver and
Hutchings (2004) make a useful contribution in this area, there is very little discussion
of succession planning, a strategic issue in growth-oriented small firms.
Developing entrepreneurs and their successors
A key factor influencing succession planning is the role of human resource
development, which includes organisational development, career development and the
learning and development of potential successors. Beaver and Hutchings (2004, p. 87)
argue that, not paying attention to strategic HRD in the short term translates into a
lack of career pathing and succession planning . . . in the long term. Until recently
(Hill, 2002; Stewart and Beaver, 2004), there has been little research into HRD in small
organisations. HRD in small firms is not a scaled down version of that in large
organisations. There are differences between training and development practices
relative to organisation size, and small firms face unique barriers, including access to,
time for, and the cost of training (Sambrook, 2003). Small firms overwhelmingly use
OJT (on-the-job) because of its low cost, (Beaver and Hutchings, 2004:86). They tend to
focus on the informal transfer of work skills and knowledge between individual
employees, and this is particularly relevant in succession planning. Small
organisations often lack any formal HRD infrastructure (Hill and Stewart, 2000).
The training and development role is carried out, if at all, by owners/managers, and the
amount and quality is dependent on the management styles of the owners, managers
and/or families involved (Gray and Lawless, 2000). However, owner-manager
entrepreneurs may lack training and development skills, and many lack any formal
education and training themselves. Many have had little if any formalised
management/HR education or training, (Harrison, 2002, p. 228). Much of what is
learned is tacit knowledge (Nonaka, 1991) through informal learning. Harrison (2002,
p. 231) notes the importance of informal training in SMEs, and how tacit skills are a
vital strategic asset.

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In a similar vein to leadership, it might be argued that entrepreneurship cannot be

taught or learned, and entrepreneurs are born rather than made. However, there
is growing global evidence of formal entrepreneurial education and training (De Faoite
et al., 2003; Ibrahim et al., 2003; Li et al., 2003; Massey et al., 2003). Whether to expand
education and training products and markets, and/or to respond to economic needs,
there has been a recent surge of new entrepreneurship undergraduate and postgraduate
programmes. There are several categories of entrepreneurship education and training.
Jamieson (1984) identifies three: education about, for and in enterprise, whilst Matlay
and Mitra (2002) suggest about, through and for. About is about raising awareness of the
role of entrepreneurship; for is for preparing aspiring entrepreneurs and in is developing
existing entrepreneurs in their firms, although Matlay and Mitra include both of these in
their for; through is developing entrepreneurship through teaching (and learning) styles,
such as the use of project work. However, there is little mention of the need to develop
existing employees into successors, the focus on this paper.
Succession planning in small firms: a review of literature
Succession planning is increasingly becoming an important issue for both large and
small firms due to demographic factors such as the rising number of employees due for
retirement and the dwindling number of younger workers stepping in to replace them.
This becomes more acute at the senior level. As organisations realise their cutting-edge
competitiveness is linked to the talents and enterprise of their employees, what are they
doing to ensure that they do not run out of this vital raw material, particularly in the
form of leaders and managers? A recent review suggests very little (HRMI, 2004).
However, forward-thinking organisations are implementing succession plans for
senior management, which helps create a learning culture for employees at all levels
and helps build a development process (Strategic Direction, 2004). Whilst large
organisations may have a large internal labour market from which to select successors,
this is more problematic in small firms.
Some research has been conducted in succession planning in small firms,
particularly in family business firms. Ibrahim et al.(2003) report that the survival rate
of family firms is very low compared to non-family firms, and so training family
members is vital both to improve their business skills but also, more importantly, to
improve generational succession. They identify some of the training issues unique to
family firms, including the reluctance of the founder to let go, lack of succession
planning, the lack of grooming (of offspring) and managing the transition. Wang et al.
(2004) note that researchers argue that the most significant difference between family
and non-family firms is the way in which executive succession occurs, and particularly
the process of intergenerational family business transfer. Wang et al. (2004) provide a
conceptual framework identifying the critical factors influencing the succession
process within UK family SMEs. Sonfield and Lussier (2004) have also explored the
intergenerational differences among family firms, finding that first-generation family
businesses do less succession planning than second- and third-generation family firms.
Sharma et al. (2003a) have investigated the satisfaction with the succession process in
family firms. Succession has two interactive dimensions satisfaction with the
process (the decision-making) and effectiveness of succession (its impact). Sharma et al.
(2003a) propose that satisfaction with the process is influenced by five factors
including:

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the propensity of the incumbent to step aside;

the successors willingness to take over; and
succession planning, as well as family and role issues.

They found that perceptions varied between incumbents and successors, and that
incumbents were more satisfied with the process and believed more strongly that they
were ready to step aside and succession was planned, (2003a, p. 668). However, the
misalignment might be due to the fact that the incumbents may not have communicated
their propensity to step aside and may have been planning the succession without
consulting or communicating with the successors (2003a, p. 668). Incumbents indicated
that their satisfaction is influenced by the successors willingness to take over but not
by their own propensity to step aside. Successors . . . indicate . . . their satisfaction is
influenced by the incumbents propensity to step aside but not their own willingness to
take over. However, both parties agree on the importance of succession planning,
(2003a, p. 668). This research suggests that there are different perceptions between those
handing over, and those taking over, family businesses.
In addition, Sharma et al. (2003b) also investigated succession planning as planned
behaviour and found that the propensity of a trusted successor to take over
significantly affects the incidence of all succession planning activities. They conclude
that succession planning may be the result of push by the successor more than of pull
by the incumbent.
Gender is another issue in succession. A recent Women in Management Review
(2001) noted that, in a study of nearly 130 small companies, both the incidence of
planning and the identification of female successors was lower than expected. No
company selected a female successor, despite strong existing candidates, whether
relatives or internal managers. Daughters were inappropriate for succession, being
either too good for the workplace or doing something better, such as teaching or
healthcare. Only male relatives were seen as heirs apparent in terms of work status
and treatment. Female relatives were neither developed nor encouraged as managers,
despite acting as mentors and trainers to the male successors.
However, not all small businesses are family firms, where there are natural (and
possibly competing) successors waiting within the family labour market. Yet, there is
very little research exploring succession planning in non-family, and growth-oriented
firms. This paper makes a small contribution in this area.
Research study
Design
The FG50 project organises workshops to assist firms develop. The author was
involved in two workshops, co-facilitated by the School for Business and Regional
Development (SBARD) University for Wales Bangor and KPMG Cardiff, who hosted
the events. The first Success and Succession: A Strategic Approach was run in
March 2001 and the second Keeping Key People in May 2001. This paper draws on
the discussion during the first workshop. The format of the workshops was a
presentation by an academic or consultant to provide an initial background to the
discussion topic, and then breakout sessions to discuss the specific topics, facilitated
by members of SBARD and KPMG. All members of the FG50 were invited to attend
these workshops, although only four were able to participate in the first, representing

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three different companies. Given the small size of their firms and the unique role they
play, it is often difficult for owner-managers and key employees to leave their
businesses to learn more about management and growth from both
academics/consultants, and perhaps more importantly from each other. However, the
paradox is that this failure to take time out might, in turn, impede their ability to
manage and the ability of their firms to grow!
Participants
Of the four participants, two were owner-managers and two were employees, one of
whom worked for one of the owner-managers. One (male) owner-manager ran an HR
consultancy. The second (male) owner-manager ran an IT software business, and the
accompanying (male) employee was involved in the telesales function. The other
(female) employee was an HR manager for a medical supplies company.
Data collection
Despite the small sample size, this paper reports the qualitative findings of a highly
interactive workshop. Data collection was achieved by the author taking hand-written
notes during the discussions/breakout sessions. The materials for the workshop
included an initial document that identified three key issues:
(1) Why are you successful;
(2) How do you find people to succeed in the future; and
(3) How do you develop successful successors?
These are linked to Storey and Sissons (1993) key HR functions during the start-up
and growth phases of the business life cycle and Harrisons questions (2000, pp. 224-5).
Within each key issue, there were several specific questions to stimulate discussion
and allow space for participants to consider their responses to these questions
(actions). The second document was a short questionnaire, requiring participants to
score their firm against these three key issues. Given the small sample size, it is unwise
and unhelpful to provide the quantitative responses to these questionnaires. Therefore,
this paper focuses on the qualitative data generated in the three breakout sessions.
Data analysis
It was considered inappropriate to tape-record the workshop discussions due to the
sensitivity of the material being discussed (see below), and all material presented here
has been anonymised. The author read the hand-written notes from the workshops
and transcribed these in chronological order (by each session). The qualitative material
was analysed using a combination of the approach suggested by Easterby-Smith et al.
(2001) and framework analysis (Richie and Spencer, 1994), from which the key themes
were identified. Then, the material was constructed into case studies of the three
organisations through the comments of the four participants. The emerging themes are
presented from each session, although it was often difficult to contain these
discussions to the specific issues and so there is some overlap.
Workshops
The initial discussion focused on agreeing the conduct of the workshops, and how to
deal with openly discussing aspects of the businesses that could be commercially

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sensitive. One of the owner-managers noted that the FG50 network has a non-hidden
agenda, however we recognise the sensitivity because we can be competitors.
However, there was value in being a member of the network as it can be lonely,
growing alone, yet we experience similar issues, so the network is useful. A key factor
influencing participation was a high quality network, where trust and sharing are
critical. It was agreed that the discussions would be confidential.
After establishing the ground rules, the discussion turned to how to manage growth
and success, which involved strategy/forward planning. Succession was linked to the
business life cycle, and a key issue was how to transfer knowledge as the business
grows. A key area of interest was how employees were developed in their current roles
and possibly for promotion and succession.
Findings
The findings are presented under the three breakout session headings, although due to
the problems in containing these discussions, there is some overlap between sections.
Issue 1: Why are you successful?. In this session, we were interested in two overall
questions: What makes your business tick? What skills and knowledge are needed to
make that happen?
First, we discussed business strategy and vision. The HR consultancy
owner-manager wanted to be Number 1 in HR in the Northern Hemisphere. He
saw his role in five years as being redundant. As the business continues, he is
considering his personal exit strategy. I would like my business to run successfully
without me there, hand over a growing company. The type of employees he recruits
are people with vision, who demonstrate flexibility, loyalty, commitment and customer
focus. This firm is located in an urban area, where there is a large (and skilled) external
labour market.
The IT software owner-manager wanted to provide customer service if despatch
gets it wrong, it reflects on the whole business. The strategy was driven by the
bottom line start there and work back up. Look at the results, how you achieved
those results, and at what level of risk? His strategy was explicitly one of growth: last
year we grew 20 per cent gross profit per annum. With such growth, you cant do
everything, so you have to delegate. . . We bring them in at the bottom level and there is
internal promotion, not movement, as their jobs become more focused. They have skills
training and are monitored. . . The external labour market is a major problem. There
are poor school-leavers. This is a rural area, with a lack of IT skills, so we take them in
low and grow them. We attend local fairs and HE, to enhance the company profile.
The HR manager reported that the company wanted to provide the best possible
customer service, although there was not a formalised strategy of where we will be in
three years time. We struggle to manage day-to-day, we need to take a step back. Its
more luck than judgement. We are increasing the formality, but there is tension.
Again, this firm is located in an urban area with a large (skilled) external labour
market.
Although there are differences in how the participants talked about strategy and
vision, all three organisations have customer focus as a key strategy.
Issue 2: How do you find people to succeed in the future?. In this session, we were
interested in two overall questions: What/where is your labour market, i.e. internal and
external? Where can you look for the type of people you need?

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The HR consultancy owner-manager recruits people with vision, who demonstrate

flexibility, loyalty, commitment and customer focus. He appoints people on a project
basis. There are no job descriptions, as these are perceived as a constraint. There is
some labour turnover, which is a good thing. However, he notes that there are
moans about the obvious internal promotion. You go through the process, advertise,
its seen as a conspiracy because obviously youll select the best competences for the
job. In describing how he might develop people to succeed him, he would identify
superior performers in particular roles, and tease out, and distil in behaviours what
made them superior. Now we know that, we can transfer it. However, in terms of
succession planning, he doubted whether a business needed a clone, or whether it is
more useful to deconstruct the owner-manager and chisel out different aspects that
contributed to the companys success, and then consider different people and a
different structure for the future.
As the IT software owner-manager reported earlier, We bring them in at the
bottom level and there is internal promotion, not movement, as their jobs become more
focused. This suggests that people are not moved around the organisation, developing
further knowledge of the business, but are developed within specific roles. This firm
operates in a rural area where, the external labour market is a major problem. There
are poor school-leavers . . . with a lack of IT skills, so we take them in low and grow
them. He states that they promote, but there is not internal movement its
development. When asked how he knew his staff were developed, he reported that
accreditation is an issue in the technical software sector. Employees are recruited to
meet the external specifications of accreditation, not contribute to the bottom line.
These threshold competencies are needed to maintain credibility with suppliers, and
force the manpower plan. It is interesting to note the reference to manpower
planning, and how this exists purely at the bottom end of the overall business plan,
with no reference to succession. From a discourse perspective, it is also interesting to
note the use of manpower rather than human resource planning.
The telesales employee noted that the business had the owner-manager, a sales
director, five managers plus administrative and technical staff. He identified a
possible Achilles heel where the owner-manager and employees relied upon the sales
director for his knowledge of the sector and knowledge of the business. How could this
knowledge be transferred to key staff in the team, to act as a deputy? Staff were always
asking questions, and in and out of the Directors office, which increased his
workload. How could he delegate? We could examine knowledge and skills, give people
jobs and they would develop. Looking at the owner-managers role, he commented
that there isnt a detailed plan of what we see in 5 years for the MD role.
The HR manager had been recruited when the owner-manager couldnt cope, so (he
had to) bring in HR and marketing, and this has helped to free up the general
manager to grow and acquire new business. The HR manager was involved in hire
and fire and everything in between. Its a bit hit and miss. Consistency is the middle
name in HR, its what we need as we grow. This suggests the lack of a strategic
approach to HRM, but at least an attempt to recognise the need for more formalised
and consistent practices as the business grows. She reported that we try to promote
internally, but this has created problems, weve focused heavily on management
development. People could have good knowledge, but not managerial skills. They have
been promoted beyond their competence. They lack ability, and are in the wrong

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positions. Its historical, a packer gets promoted into a senior position. Previously, there
was no formalised recruitment and selection, or measuring performance. Emotions get
in the way, theres jealousy. We need to look more closely, match requirements and
abilities, and look externally. This business operates in a more urban area, in which
there is a large external labour market.
Issue 3: How do you develop successful successors?. Here, our key question was: How
will the business grow and survive? The two owner-managers wanted their businesses
to survive to provide a personal exit route or future income stream. This suggests a
pull on the part of the incumbent to consider succession planning (Sharma et al.,
2003b). However, there was also general consensus that survival was desirable to
avoid organisation trauma, as survival impacts on the wider community/society.
The IT software owner-manager reported that the way to develop successors was
for directors to delegate, and reduce their amount of hands-on. However, to do this
required having confidence in staff. When they cannot meet the requirements,
training becomes necessary. However, if this does not work, individuals can lose
respect which can be traumatic in a small organisation. The telesales employee
confirmed that responsibility increases with the growth of the company, with new
roles. I enjoy this, it wasnt my original intention, nor (the owner-managers). I was
recruited for a job, but now its also how could you contribute to the business? The
question was raised about how one could predict future performance from job
interviews. The IT software owner-manager agreed that you cannot predict future
performance, but replied that you need to recruit someone who will fill the current role
and have some potential to develop. How can you identify potential? Through their
qualifications, personality, attitude and gut feeling.
The HR consultancy owner-manager recruited people who were responsible for
projects, which allows people to do things. When asked if this empowers, the reply
was or disemprisons them. People might be allowed to do things, but not often
beyond whats expected of them. People are recruited to fill the existing role and then
you grow your own because they are allowed to and desire it. Wide selection
parameters are set to attract the right people, both those that demonstrate quality
thinking and those who have similar values to the owner-manager. The quality
thinkers are innovative and creative, free thinkers who cannot be commanded. What
retains both, and helps the firm run so subtly is leadership.
This raises the question of how owner-managers are developed and develop their
leadership qualities. Reinforcing Gray and Lawlesss (2000) comments, the IT software
owner-manager noted that your own development influences how you develop others,
although there are some external constraints, such as Microsofts requirements. In
terms of how successors are developed, one participant suggested that internal
movements give opportunities for experience, to feel the load, increase responsibility
and confidence. It was also noted that this is risky, they can make mistakes. An
issue here was the extent to which the founder adopted a parental role, to protect the
developing successor. However, it was also noted that learning from failures was
important, from which successors could capture knowledge.
Discussion
Two key issues emerged from the workshop: the need to transfer the incumbents
knowledge and the need to select and develop successors in two steps.

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Focusing on the need to capture and transfer knowledge, the workshop discussions
generated three different types of knowledge required for a successful successor,
labelled here are K1, K2 and K3:
.
K1 Technical knowledge, which is taken-for-granted, and a threshold
competence (examples of this include knowledge of tax, law, business sectors).
This is task related, specialist, functional and can easily be codified and passed
on and learned informally and/or formally.
.
K2 Knowledge about the organisation and how it works/succeeds/grows. This
is environmental/ecology related and can be relatively easily teased out (made
explicit) and indoctrinated into potential successors (informal).
.
K3 Specific tacit, embedded knowledge related to leadership,
decision-making, risk-taking, and learning to learn, for example. This is more
cognitive than behavioural, focusing more on process than task. Being tacit, this
is difficult to identify/access in the principal and more difficult to make
explicit/transfer to the successor(s). This can be informal, in the sense of copying
the incumbent, but personal skills can also be learned through formal
entrepreneurial education.
In small firms, recruitment and selection and succession planning appear to occur in
two tiers. It is relatively easy to recruit to the first tier (from the external labour market,
or the internal family labour source in family firms) these are the lower level
employees who are employed for their specific skills or into jobs which require minimal
skills. Some of these first tier employees may demonstrate potential and then be
developed and promoted to the second tier, where they take on additional
responsibility and become specialists. If no internal talent is identified, these second
tier employees may also be recruited from the external labour market. However, the
difficulty in succession planning comes from finding people capable (and willing) of
moving from the second tier to the top job. This raises the issue of how to develop the
principal successors.
There appear to be two key succession steps as small businesses grow. Figure 1
shows some of the features of the first step.

Figure 1.
The first step to
succession

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At the core of the start-up firm is the generalist (G) owner-manager, an entrepreneur
with sufficient business knowledge and personal skills (K2 and K3) although not
necessarily all the required specialist skills (K1). This will depend on the amount and
type of entrepreneurial education and training, whether formal or informal. For
example, some specialist (K1) and personal and cognitive skills (K3) might be gained
from formal education for entrepreneurs (Jamieson, 1984; Matlay and Mitra, 2002), or
from other external training provision, although this is often perceived as being too
formal (Hill, 2002) and not directly related to specific business needs.
As the business develops, the owner-manager reaches the point where they can no
longer cope with the amount of managerial work and increasing complexity,
commonly referred to as the crisis of control. An individual alone is no longer able to
control the increasingly specialised aspects of the business as it becomes larger and
more complex. Functional specialists (S) with specific knowledge (K1) are brought in
(or promoted) to fill specific roles, such as finance, human resourcing and marketing,
and perhaps can be characterised as organisation people, with different work/career
motives to the entrepreneur. These employees are successful in their own specialisms,
but may not have the same degree of broad business knowledge and may focus on their
own segments of the firm. This may be appropriate and beneficial at this stage as the
owner-manager is still involved in the business, and able to continue to take the holistic
view of the firm. However, Step 2, when the owner-manager considers their exit
strategy, becomes problematic (Figure 2). Transfer of organisational/ environmental
(K2) and tacit knowledge (K3) must occur to develop the generalist and entrepreneurial
skills of the successor(s) (internal specialist).
However, is it possible, or desirable, to attempt to create a clone of the original
entrepreneur?
The broader (K2) knowledge of the organisation and the environment in which it
operates/competes will need to be transferred from the owner-manager to potential
successors. This probably occurs through informal learning, rather than formal
education. Furthermore, the specific tacit knowledge (Nonaka, 1991) associated with
leadership, decision-making and risk-taking skills will also need to be developed (K3).
This requires making explicit the owner-managers knowledge and skills and
transferring them to the succession. Whether (and how) this occurs will depend on the
owner-managers:
.
attitude towards learning and development (Gray and Lawless, 2000) and
succession planning;
.
their own personal development (whether formal or informal); and

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589

Figure 2.
The exit strategy
developing principal
successors

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590

their own developmental skills (whether they are skilled developers, mentors and
coaches).

Harrison (2002, p. 231) noted the importance of informal learning and the critical role of
tacit skills in small organisations. Tacit knowledge and skills (K3) also give
competitive advantage because they are difficult to copy (Harrison, 2002, p. 232). Once
made explicit, they can be copied or poached. This might explain the sensitivity about
confidentiality expressed at the beginning of the first workshop.
There are various planned exit strategies. As many small firms are family firms,
handing down to the next generation is a common exit strategy. Neither of the
owner-managers in this small study is handing their business over to relatives, but they
considered handing from father to son problematic as this might reduce the sons
motivation. In the absence of failure (an unplanned exit), their other options are: floating,
selling to venture capitalists, buy-in, buy-out, and trade sale, although the latter was
considered difficult because of the companys persona. This suggests the small firm is
very closely associated with the personality and style of the original owner-manager,
although this can also be the case in large organisations which are bought and sold.
In the buy-out scenario, the new owner-manager(s) (existing employees) might
retain the original owner-manager for an interim period, often called parallel running,
whilst they gain the necessary knowledge of exactly how the successful business
operates (K2 and possibly K3). This can also be defined as an earn out period, and
helps retain staff morale and customer loyalty during the change process. It might also
help the owner-managers transition and letting go. Once knowledge has been
transferred, the original owner-manager leaves. Or as one participant commented, you
put away the dosh, but some stay because they are still motivated. This suggests an
inability to let go, and has implications for the successor.
Alternatively, the new owner-managers might consider changing/developing the
business. Here, the owner-manager remains (for a finite time) as the fulcrum around
which the business is changed under its new ownership. This has similar benefits in
terms of staff morale and customer loyalty. However, can the owner-manager cope,
because the successor can take your vision somewhere else, some where you dont
want. Here, knowledge and different interpretations of the firms success factors and
potential markets (K2) and different work motives and leadership styles (K3) may
result in the firm being developed in different ways, both in terms of process
(structure, management style) and product. This could be the non-clone approach,
briefly noted earlier, but risks losing the very essence of what made the original firm
(and owner-manager) successful.
With no apparent family heir, the issue of whom to hand the business over/on to can
be more problematic. It is not only a question of the incumbent deciding whom to hand
over to, but also who might be interested in taking it on (the successors)? As the
successful business has grown, specialists have been brought in to focus on specific
aspects of the business. Do they have the appropriate skills and, more importantly, the
motivation to consider taking over? This reminds us of Gray and Lawlesss (2000)
comments about career motivations and personal expectations. The IT software
owner-manager was motivated to run his own business because I like to do things my
own way. He argued that successors required ambition, drive and the need to be in
control. Conversely, the HR consultancy owner-manager was motivated by lifestyle,

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I dont work hard, Im not ambitious. When asked about succession planning, the HR
consultancy owner-manager reported he thinks about it 5 minutes every morning . . .
even on holidays, which create mini succession issues. The point being made here is
that whenever the owner-manager leaves the business even for a holiday there is the
need to consider who will take charge either in the short-term temporary nature of
the annual vacation, but also in the long-term nature of retirement. Thinking about how
to fill the holiday gap might help develop and generate possible long-term successors.
Having identified a key problem of who might be motivated to succeed (in terms of
both business survival and succession), the workshop considered ways of developing
successful successors. Referring back to the notion of three types of knowledge involved
in successful, growth-oriented businesses (K1, 2, and 3), one suggestion was to consider a
rolling programme of how this knowledge can be transferred from owner-manager to
potential (internal) successors. The first step is to release knowledge from the core
where tacit owner-manager knowledge is made explicit. This was seen as crucial by the
participants, and talked about as doing the back-up or saving to floppy disk. Once
this knowledge is released/made explicit, it can be interpreted by potential successors
and re-interpreted in terms of their own knowledge and skills. However, as Harrison
(2002) notes, this vital business knowledge and skills can also then be copied or poached,
potentially threatening the survival of the firm. This transfer becomes a continuing
process, and informal way of developing successors, but depends on having initially
recruited specialists (non-entrepreneurs) who might be motivated to take over (and
develop/grow) the business. During the discussion, one participant had asked if you
could develop an organisation man into an entrepreneur? One response questioned the
need for a clone, particularly when markets and environments change. The concept of
cloning suggests developing a successor with identical knowledge and skills as the
incumbent, which may be both impossible and inappropriate.
A further problem noted was the internal labour market in small firms. The IT
software owner-manager was asked how he might develop successors if he always
recruited at the bottom end. His reply was that he was always looking for quality
because with growth in mind, the organisation was always changing. Rather than
bring in specialists at a higher level, the strategy here was to spot future talent and
promote internally. This might be in response to the lack of skilled employees in the
(rural) external labour market. However, the weakness of this approach is that it does
not involve movement around the firm, and so would not develop broad business skills,
only the specialist, functionalist skills. This might impede the development of the
successors organisational knowledge (K2).
The findings from this workshop, albeit limited, can be constructed into a simple
initial model of succession planning in small (non-family), growth-oriented firms
(Figure 3). Succession planning occurs at two levels: first, after initial recruitment at

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Figure 3.
An initial model of
succession planning in
small firms

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592

Tier 1 into more responsible positions in Tier 2. This involves successors developing
specialist, task related knowledge, which can relatively easily be acquired with
informally or through formal entrepreneurial education (Jamieson, 1984; Matlay and
Mitra, 2002). The second level is more problematic, planning who will succeed from the
ranks of Tier 2 into the top job. This involves developing successors with the
necessary organisational (K2) and personal (K3) knowledge, which are increasingly
difficult to access and transfer (from tacit to explicit). Figure 3 shows and synthesises
the findings from the workshop in an attempt to begin theorizing executive succession
planning and the associated learning and development required in small firms.
Conclusions
Succession planning is an important issue for all firms due to demographic factors
such as the rising number of employees reaching retirement age and the dwindling
number of younger workers stepping in to replace them. Small firms can recruit from
both internal and external labour markets for junior/middle management roles,
although Newell (2002) notes the difficulty of sustaining internal labour markets in
small firms. Family firms can also recruit from the family labour market to fill these
and the principal roles. However, for non-family firms, with no family labour market
to recruit from, identifying and developing successors becomes more acute at the
senior level. This research has explored some of the issues associated with finding and
successfully developing principal successors to ensure the survival and growth of
small firms. Key issues identified include recruiting employees with potential,
considering the work/career motives of potential successors and ways of transferring
organisational and personal/tacit knowledge from the owner-manager to the successor,
whether an internal employee or a new purchaser. However, this paper draws upon the
perceptions of only four stakeholders two owner-managers and two small firm
employees. Therefore, more research is required to explore whether these issues and
the proposed model are indeed relevant across other small firms, and whether there
are any differences in succession planning between growth and non-growth oriented
firms, and between family and non-family firms.
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