Transfer of tacit knowledge in the succession process towards family members in family businesses Master Thesis Business Administration – Small Business and Entrepreneurship C.S. Heijblom 1808672 Supervisor: Drs. D. Maccow

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Transfer of tacit knowledge in the succession process towards

family members in family businesses

Master Thesis

Business Administration – Small Business and

Entrepreneurship

C.S. Heijblom

1808672

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Executive summary

The objective of this research is to gain more insight in the transfer of tacit knowledge in family firms and the role of tacit knowledge in the choice of a successor, thereby providing an explanatory research which contributes to a greater understanding of the concept of tacit knowledge and the transfer of it.

A literature study is conducted to define the factors facilitating an easier transfer of tacit knowledge towards family members. This literature study revealed that family businesses possess a set of unique resources and capabilities which are difficult to imitate for

competitors, because they are the result of family involvement. These unique resources are described as the “familiness” of the business. Most of these familiness factors are tacit, in that they are unique, imperfect moveable, imperfect imitable, personal, and non-substitutable. Examples of familiness factors of family businesses are: shared family history and values embedded in the firm, family language, loyalty, intense relationship, a high degree of trust, and a high level of motivation. These factors are usually the result of family interaction, which makes tacit knowledge a critical resource for family firms. Tacit knowledge is difficult to codify and can only be transferred through utilization and experience, which would makes it more easy to transfer it towards family members than towards non-family members.

The literature study revealed a couple of factors facilitating the transfer of tacit knowledge: family language; family history and values; high level of trust; strong commitment; loyalty; and intense relationship/direct contact. First, the use of personal language enhance

communication between family members, which allows them to exchange knowledge more efficiently and in a private setting compared to non-family businesses. Second, the successor being like-minded (having the same values and objectives; influence of family as reference group) as the founder facilitates the success of the transfer of tacit knowledge. Third, family firms are often reflected as having a high level of trust, which increases the level of openness and the opportunities for creating, sharing and transferring tacit knowledge. Fourth,

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These factors are embedded in the family of the family business, which makes the transfer of tacit knowledge towards family members easier than towards non-family members. Six hypotheses are formulated suggesting that these factors all make the transfer of tacit

knowledge easier towards family members. The seventh hypothesis suggests that this easier transfer of tacit knowledge increase the possibility of the selection of a family successor. A case study among three family businesses is conducted to examine whether the formulated hypotheses, identified on the basis of the literature study, are supported in practice.

All three family businesses mention strong commitment of the company towards employees, suppliers and clients as the driving force of success of the company. Moreover, family business B operates in a network with 12 other family businesses in the transport sector and all these family businesses demonstrate more commitment than non-family businesses in this industry. An informal approach is also mentioned as leading to success of the family

businesses.

Family business A demonstrates that all the six factors above are of importance on the transfer of tacit knowledge in this family business. Family language, commitment and loyalty are appointed as the most important facilitators for transferring tacit knowledge.

All six factors above are also of huge importance in transferring tacit knowledge towards family members for family business B. This business nominates a high level of trust as the most important facilitator of transferring tacit knowledge.

Family Business C indicates that family language, history/values and loyalty are important, however of less importance than a high level of trust, strong commitment and an intense relationship/direct contact for the transfer of tacit knowledge.

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5.1 FAMILY BUSINESS A _________________________________________________________________ 29 5.2 FAMILY BUSINESS B _________________________________________________________________ 30 5.3 FAMILY BUSINESS C _________________________________________________________________ 30 6 FINDINGS ____________________________________________________________________________ 31 6.1 FAMILY BUSINESS A _________________________________________________________________ 31 6.2 FAMILY BUSINESS B _________________________________________________________________ 35 6.3 FAMILY BUSINESS C _________________________________________________________________ 39

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1. Introduction

This research investigates the transfer of tacit knowledge in family businesses. As Grant (1996b) mentions, tacit knowledge is usually hard to exchange, because it needs to be

acquired through practice and observation. However, the transfer of tacit knowledge in family business is different than that in non-family businesses. The emotional involvement, the same history and the use of personal language enhance communication between family members, which allows them to exchange knowledge more efficiently and in a private setting compared to non-family businesses (Tagiuri and Davis, 1996). This could be a reason why tacit

knowledge is easier transferred to family members than towards non family members in family firms. This research will identify the factors which cause an easier transfer of tacit knowledge in these firms. A case study is conducted to examine whether the factors identified also hold in practice. Furthermore, the influence of an easier transfer of tacit knowledge on the choice for a family successor is investigated. The resource-based view is applied for this research, because this is an appropriate method for analyzing family firms, because family firms have been described previously as unusually dynamic, complex, and in the possession of much intangible resources (Cabrera-Suárez, De Saá-Perez and García-Almeida, 2001). This subject is interesting to research from a practical and scientific point of view.

Nowadays, a lot of business owners are retiring and have to hand over their business (KvK, 2009). Expectations are that this number will increase the next years due to the aging of the Dutch population and that there will be 18.000 business transfers come to pass in upcoming years. In a quarter of family business transfers the crucial success factor of a family business, specific business knowledge, perishes due to a suboptimal transfer of this implicit knowledge. A personal relationship between the current business owner and the prospective business owner is essential for transferring knowledge (Accountancynieuws, 2008). Investigating why tacit knowledge is easier transferred towards family members will provide information about how to transfer this knowledge in the most optimal way in practice.

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increases (Dyck, Mauws, Starke and Mischke, 2002). This communication level could be of importance for transferring certain knowledge. Difficulties in communicating could prevent this knowledge to be transferred, which could be a cause of failing transfers of family businesses.

The objective of this research is to gain more insight in the transfer of tacit knowledge in family firms and the role of tacit knowledge in the choice of a successor, thereby providing an explanatory investigation of tacit knowledge and the transfer of it in family businesses. The importance of this easier transfer of tacit knowledge to family members in family businesses on the selection of a successor will be investigated after the execution of the case studies. The research question this research aims to answer is:

Why is tacit knowledge more easily transferred to family successors in family firms and which influence has this on the choice for a successor?

This research question consists of two sub questions:

• Which factors facilitate the transfer of tacit knowledge towards family members in

family firms?

• What kind of influence exerts this easier knowledge-transfer on the choice of a

successor?

This paper will only research the transfer of tacit knowledge of family businesses satisfying the stipulative definition given in section 2.1. Tacit knowledge has a comprehensive meaning and could exist of many different sorts of knowledge. Therefore, section 2.6 will propose a stipulative definition of tacit knowledge. This research will investigate the transfer of tacit knowledge as a result of family involvement in family businesses. This means that tacit knowledge in a firm which has no roots in the family, but is rooted in the culture of the firm, is not investigated. This is decided to prevent confusing the influence of a family on the firm from a specific culture of a firm which is not a result of family interaction.

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2. Theoretical Background

2.1 Definition of family business

Flören (1998) defines a company as a family business when it fulfills one of these factors: (1) 50% or more of the shares are owned by one family; (2) one family holds major influence; and (3) a significant degree of the members of the management board are from one family. Zahra, Hayton and Salvato (2004) defined family firms as the companies where at least one family member has a distinguishable share in ownership and where multiple generations pursue leadership positions within the firm. Davis and Harveston (1998) describe family business as being owned/controller by members of the family, who are involved in the management of the business.

Most existing definitions of family business take ownership and management/control into account (Chua, Chrisman and Sharma, 1999). Chua et al. (1999) propose that a definition of family business must reflect the uniqueness of family businesses. This uniqueness is not reflected in ownership or control, but as scientific researchers believe, the family element moulds the company in a way that family members of executives in non-family firms cannot (Lansberg, 1983). To reflect the uniqueness of family business and to avoid excluding some family businesses because of a too narrow definition, Chua et al. (1999) define a family business as a business directed with the intention to mould and pursue the vision of the company by a small group of family in a way that is maintainable across family generations. Davis and Harveston (1998) state that in a family business, family members play a critical role in organizational processes at every level.

Practical experiences of family businesses reveal that the more family members taking a central role in the business the more the vision of the family is pursued.

This research will take a stipulative definition of family businesses, which combines elements of the definitions proposed by Flören (1998) and Chua et al. (1999) and practical experience. For the purpose of this research a family business is understood to be a business in which at least two family members have more than 50% of the shares, with a central role in the daily management of the firm and pursuing the vision of the family involved in the business, committed to the long haul”.

This stipulative definition of family businesses takes ownership, management and the

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2.2 Succession process in family businesses

De Massis, Chua and Chrisman (2008) define family succession as the situation in which the incumbent transfers his managerial control to a successor, who is a family member of the incumbent.

Morris, Williams and Nel (1996) executed a research into internal determinants of a

successful succession and have divided these factors into three main groups. The first group takes the preparation level of the successor into account, including the education level, work experience outside the firm, motivation for working into the business, start position at the bottom of the company, training and experience within the firm. The second group considers the relationships among family and business members, including commitment,

communication, conflict, jealousy, loyalty, rivalry between brothers and sisters, trust, commotion in the family, and shared values and traditions. The third group consists of planning and control activities, such as succession planning, tax planning and the use of consultants/advisors before and during the succession process.

Scientific researchers frequently observe that a lot of family businesses fail quickly after the second generation takes over the business (Davis and Harveston, 1998; Morris, Williams and Nel, 1996; De Massis, Chua and Chrisman, 2008). Therefore, De Massis, Chua and Chrisman (2008) investigated factors preventing family succession. They found three direct causes preventing an intended succession:

1. Family members are not willing to take over the family business;

2. The ascendant grouping of the business refuse all potential family successors;

3. The ascendant grouping of the business is reluctant against family succession, in spite of the existence of acceptable potential family successors who are willing to take over the business.

These three direct causes are influenced by five indirect causes:

1. Individual factors: under qualified potential successors; lack of motivation to take over the business; an incumbent who is too attached with the business and is not willing to hand over the business;

2. Relation factors: conflicts between incumbent/family members/non family members with the potential successor; lack of trust of the family or other firm-members in the potential successor; lack of commitment to the potential successor of the firm. 3. Context factors: reducing business performance; size of the firm decreases; loss of

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4. Financial factors: factors considered with tax issues and a lack of financial resources to finance succession.

5. Process factors (during the succession process): indistinctive roles of the incumbent and potential successor; insufficient attention to creating a shared vision; wrong perspective of the competencies of the potential successor by the incumbent; weak involvement of the potential successor in the succession process; absence of objective criteria for succession.

Chirico (2008) mentions commitment, psychological ownership, and family relationships as some of the most important factors facilitating the creation, sharing and transfer of knowledge in the succession process to a high degree. This corresponds with the second group of factors determining successful succession of Morris, Williams and Nel (1996), and with some of the individual and relational factors determined by De Massis, Chua and Chrisman (2008). Morris, Williams and Nel (1996) assign that preserving shared values, encouraging trust, and open communication are the most important elements in succession.

Moreover, Chirico (2008) mentions that the sharing of tacit knowledge is positively influenced by strong relationships between two generations of a family, because this positively influences the training and development of successors.

The aim of this research is to investigate the determinants of transferring tacit knowledge in family firms easier to family members. Context and financial factors are mainly factors that are not directly influenced by the transfer of tacit knowledge between family members, which makes them excluded from the research. However, individual, relational and process factors do have a direct influence and/or relation with the transfer of tacit knowledge between family members. Therefore, individual, relational and process factors are of importance for this research.

2.3 Tacit knowledge

Interactions between people are in general not tangible, but intangible resources. The key of the knowledge-based theory is that knowledge is the most fundamental asset of the firm where all other resources are dependent upon (Grant, 1996). The resource-based view sees firms as heterogeneous and the idiosyncratic, immobile, inimitable, and sometimes intangible bundle of resources present in the firm gives the firm an opportunity for competitive

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As described earlier, tacit knowledge could be a critical resource leading to a competitive advantage for family firms. Grant (1996b) defines tacit knowledge as ‘knowing how’ as the contrary of explicit knowledge, which deals with ‘knowing about’. Tacit knowledge is stored within individuals and can only be communicated when individuals possess shared

understanding (Grant, 1996b). Transferability and transfer mechanisms distinguish tacit from explicit knowledge. Explicit knowledge is easily communicated through marginal costs, whereas tacit knowledge can only be observed through its utilization and achieved through practice, which is costly, slow, and uncertain (Grant, 1996b). Chirico (2008) describes tacit knowledge as the ability to apply the accumulated explicit knowledge through the experience gained. Ambrosini and Bowman (2001) describe tacit knowledge as unique, imperfect

moveable, imperfect imitable and non-substitutable and propose that ‘tacit skills’ is a better term than tacit knowledge. So, tacit knowledge is difficult to codify and can only be

transferred through utilization and experience. This makes tacit knowledge a powerful tool for deeper firm specific knowledge for family firms than for non family firms (Sirmon and Hitt, 2003). This deeper firm specific knowledge is also stimulated by the human capital of family firms, which consists of close, friendly and intense relationships and remarkably commitment. Furthermore, the potential to involve children in the family firm from an early stage,

contributes also to deeper firm specific tacit knowledge (Sirmon and Hitt, 2003). Other factors influencing the degree of tacit knowledge in a firm, are loyalty, strong ties and long-term commitment, which could lead to a stronger position of family firms during an economic recession (Sirmon and Hitt, 2003), making family firms possessing a competitive advantage in comparison with non-family firms, and contributing to a longer-time horizon of family firms, because the survivability rate enlarges. Sirmon and Hitt (2003) propose that human and patient capital make family firms more capable of bundling and influencing resources, if they have developed heterogeneous and deep managerial tacit knowledge.

2.4 Resource based theory for investigating tacit knowledge

To determine which factors make tacit knowledge easier transferred to family members in family firms than in non-family firms, the characteristics differentiating family firms from non-family firms have to be determined and the way these differences influence the

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and García-Almeida, 2001). Because family firms have been described before as unusually dynamic, complex, and in the possession of much intangible resources (Habbershon and Williams, 1999), the resource-based view is an appropriate method for analyzing family firms (Cabrera-Suárez, De Saá-Perez and García-Almeida, 2001).

According to the resourced based view, the unique set of resources is the basis for a firm’s competitive advantage (Grant, 1991; Rangone, 1999). Aaker (1989) appoint the assets and skills of a firm as providers of the foundation of a sustainable competitive advantage and long-term performance. Moreover, the RBV states that the long-term competitiveness of a company depends on its endowment of resources that differentiate the firm from its competitors, that are durable and that are difficult to imitate and substitute (Grant, 1991; Rangone, 1999). This means that a firm may possess strategic resources, but does not necessarily achieve a competitive advantage with the possession of these resources, because the firm has to use the strategic resources in a right way to achieve a sustainable competitive advantage. The resource based view does not consider all the resources a company possesses, but focuses only on critical or strategic resources (Rangone, 1999). These critical and strategic resources are the basis of the sustainable competitive advantage of a company, and include: financial resources, physical assets, human resources, organizational resources, skills, know-how and competencies, brand and reputation (Rangone, 1999). Habbershon and Williams (1999) define four categories of firm resources: (1) physical capital resources (plant, raw materials); (2) human capital resources (skills, knowledge, relationship, training); (3) organizational capital resources (competencies, policies, culture, control, information, technology); and (4) process capital resources (knowledge, skills, disposition, and

commitment to communication, leadership, and the team) (Habbershon and Williams, 1999). Tacit knowledge deeply rooted it the founder of a family firm could be an important source of competitive advantage of family firms (Habbershon and Williams, 1999). Because tacit knowledge is stored in individuals and can only be communicated when individuals possess shared understanding (Grant, 1996b), tacit knowledge can be discovered in three of the four categories mentioned above: human capital resources, organizational capital resources, and process capital resources. Most of the resources mentioned by Rangone (1999) for a

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resources leading to a competitive advantage for a company, hence, this interaction could be indicated as tacit. A RBV analysis has to take into account the individual resources of a firm and after determining these, analyze the collaboration of these resources to create capabilities in order to create a competitive advantage (Grant, 1996b).

To determine if a resource is critical, a resource has to be competitive superior, inimitable, durable, appropriable and non-substitutable (Rangone, 1999). If a resource differentiates the firm from its competitors, it is competitive superior. Inimitability means that it is difficult for competitors to imitate the resource. A durable resource means that the resource benefits the firm in the long-term. If a firm is getting the value created from the resource, the resource is appropriable. If a resource is non-substitutable, it is difficult to replace the resource with an alternative that gives the same advantages.

Tangible assets can be achieved and imitated by another firm, which makes tangible resources less critical for a firm. Intangible assets cannot be imitated easily by another firm and is therefore critical for a firm. Cabrera-Suárez, De Saá-Perez and García-Almeida (2001) state that the key strategic asset of a company is the specific knowledge and the capacity to create and transfer this specific knowledge. This specific knowledge of a company is difficult to substitute and imitate, and moreover, is scarce, appropriable, and specialized. This perspective is rooted in the knowledge-based theory, which states that all resources in a firm depend on knowledge, which makes knowledge the most fundamental and important resource (Grant, 1996).

Ambrosini and Bowman (2001) describe tacit knowledge as unique, imperfect moveable, imperfect imitable and non-substitutable. Thus, tacit knowledge satisfies most of the criteria defined by Rangone (1999), it is competitive superior (unique for a firm), it is inimitable (imperfect imitable), and it is non-substitutable. Whether tacit knowledge is durable and appropriable depends on the knowledge which is tacit and the utilization of the firm of this knowledge. It can be concluded that tacit knowledge is a critical resource for all firms.

2.5 Resource-based view for family business

A family firm possesses a number of resources different than the resources a non family firm possesses. Sirmon and Hitt (2003) qualify five unique characteristics of family firms, derived from the incorporation of the family in the firm:

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personnel. Advantages are remarkably commitment, close relationships and the potential for firm specific tacit knowledge.

2. Social capital consist of three components: (1) structural component, consisting of network ties; (2) cognitive component, consisting of shared language and stories; and (3) relational component, based on norms, trust and commitment.

3. Survivability capital: due to the loyalty, strong ties and long-term commitment in family firms, family firms have the advantage of survivability capital, which non-family firms have not. Survivability capital can help sustain the business, e.g. during the recent economic recession, in that the above mentioned factors makes all

employees more willing to save the firm.

4. Patient capital: finance within a family company has positive and negative sides. Most family firms avoid sharing equity with nonfamily members, so they have limited sources of external financial capital. On the other hand, family firms have generally the incentive to exist for a long time, which creates patient capital, which is capital provided for the long term. This patient capital enables a firm to pursue more creative and innovative strategies.

5. Governance structure: the governance structure of family business will be more desirable because the lack of agency costs.

Zahra et al. (2004) state that organizational culture is an important strategic resource a firm can use to obtain a competitive advantage. Family firm cultures are difficult for rivals to imitate because of the ambiguity about their origins and their roots in family history and dynamics, which makes culture of more strategic significance for family firms than for non-family firms.

There are a number of advantages family firms possess over non-family firms.

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and Williams (1999) mention, more efficient organizational processes, as a distinctive characteristic of family businesses, reduce agency costs and gives family firms a competitive advantage. A high level of trust in family businesses, compared with non family business, leads to a decrease in transaction costs (Habbershon and Williams, 1999). This can be

explained by the fact that a shared history and personal ‘family-language’ (Tagiuri and Davis, 1996) leads to more efficient communication.

The unique set of resources and capabilities of a family business are difficult to imitate for competitors, because they are the result of family involvement (Habbershon and Williams, 1999).

These unique resources family firms posses are described as the “familiness” of the firm (Cabrera-Suarez, De Saa-Perez, and Garcia-Almeida, 2001; Habbershon & Williams, 1999). Familiness is defined as the unique set of resources a particular firm has because of the systems interaction between the family, the individual employees, and the business

(Habbershon and Williams, 1999). Tokarczyk, Hansen, Green and Down (2007) propose that familiness plays a positive and important role in the long-term financial success of family businesses. Divergent qualities and resources of family businesses favour a market-oriented culture, which has been associated to have a positive influence on the performance of a firm (Tokarczyk et al., 2007).

The specific knowledge of a family firm and the ability to transfer this knowledge are a key to a competitive advantage and is associated in a positive sense with a higher level of

performance (Chirico, 2008).

In conclusion, the resources distinguishing family firms from non-family firms are intangible and difficult to determine, in which tacit knowledge is a very important strategic asset. The definition of tacit knowledge needs to be further investigated before determining the factors influencing tacit knowledge and the transfer of it in family firms.

2.6 Transfer of tacit knowledge in family business

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The possibility to transfer the resources and capabilities of a firm is a critical determinant for a sustainable competitive advantage (Barney, 1986). As Grant (1996) mentions, transferability of knowledge is important among firms, but, more important, within a specific firm.

Tacit knowledge is intangible and hardly accessible for others, because it cannot be expressed in, or combined with, tangible resources (Fernández, Montes and Vázquez, 2000).

Therefore, tacit knowledge is hard to transfer, because it is invisible and very personal. It is a complex and a lengthy process to share or transfer it, and requires observation, face-to-face interaction and exhaustive personal contact (Chirico, 2008).

It is difficult to distinguish the real cause of a competitive advantage based on tacit knowledge when it is embedded in the culture and routines of the company, evolved over years of effort and experience (Fernández et al., 2000). However, tacit knowledge is needed for integrating, coordinating and mobilizing the unique family resources and capabilities in a successful way (Grant, 1991). To achieve a competitive advantage, the family firm has to ascertain and manage the family resources. To do this, tacit knowledge is important, because information about the resources of the family firm is frequently in the mind of the family business founder (Cabrera-Suárez, De Saá-Perez and García-Almeida, 2001). This leads to the question how to transfer this tacit knowledge in the succession process.

Leonard and Swap (2005) found that the successor being like-minded as the founder

facilitates the success of the transfer of tacit knowledge. Being like-minded is stimulated by having the same values and objectives. The influence of certain reference-groups is of importance in the manner in which people design and evaluate certain knowledge and in the way people are like-minded. This reflects the importance of the history and youth of the successor in the family. Furthermore, practicing, observing, problem-solving and

experimenting accompanied by an experienced person facilitates the development and transfer of tacit knowledge. Tacit knowledge of family business exhibits many familiness factors. Therefore, it can be said that the transfer of tacit knowledge in family business is different than that in non-family businesses. The emotional involvement, the same history and the use of personal language enhance communication between family members, which allows them to exchange knowledge more efficiently and in a private setting compared to non-family

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a high level of trust, which increases the level of openness and the opportunities for creating, sharing and transferring tacit knowledge (Chirico, 2008). Trust also decrease transaction costs (Habbershon and Williams, 1999). Thereby, trust between the current business owner and the successor increases the likelihood of effective succession (Dyck et al., 2002).

Another important feature of the family business is that family members identifythemselves with the family business, feeling that the business is an extension of them. This leads to the accumulation of knowledge across generations, and a strong emotional sympathy towards the business. Chirico (2008) concludes that knowledge accumulation is seen as a coexistence enabler in family business, with learning beginning in the family and continuing within and outside the company. Knowledge accumulation in family firms is different than in non-family firms, because of emotional factors, like trust and commitment, and openness factors,

positively influencing obtaining knowledge from outside the company.

A high degree of tacit knowledge makes it very difficult to transfer it from one to another (Cavusgil, Calantone and Zhao, 2003). The transmission of tacit knowledge is very difficult and only possible by utilization it in practice by a continuous and direct contactof the successor with the current business owner (Cabrera-Suárez, De Saá-Perez and García-Almeida, 2001). The unique bundle of resources of a family have to be maintained after the succession in order to maintain the competitive advantage arising from this bundle of family resources (Cabrera-Suárez, De Saá-Perez and García-Almeida, 2001). The importance of the family-aspect of the resources could make the founders’ sons and daughters more suitable candidates when selecting a successor, because they have a head start in contrast to a non-family member. Moreover, the possibility of the son or daughter to ask the parent for advice when he is retired is another advantage of choosing for a son or daughter.

Bjuggren and Sund (2001) mention advantages based on idiosyncratic knowledge of a family character as the main motive for intergenerational succession. This knowledge can be more easily transferred to the next generation within a family. In their article of 2001, they state that a family member has a relative higher degree of loyalty towards the family, the firm and the local community than a non-family member, which makes succession within the family favourable for a family business.

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3 Conceptual model

The research question this research aims to answer is: Why is tacit knowledge more easily

transferred to family successors in family firms and which influence has this on the choice for a successor?

This research question consists of two sub questions:

• Which factors facilitate the transfer of tacit knowledge towards family members in family firms?

• What kind of influence exerts this easier knowledge-transfer on the choice of a successor?

The literature study conducted earlier revealed that family businesses possess deeper firm specific knowledge than non-family businesses as a result of certain factors. These factors influence the degree of tacit knowledge as well as the transfer of tacit knowledge towards family members. Because investigating all these factors separate, the factors are combined in six variables, each containing a different facilitator of tacit knowledge.

The human capital of family firms, consisting of intense relationships and commitment, provides the firm with tacit knowledge, whereas it also facilitates the transfer of it. Involving children from an early stage contributes to deeper firm specific tacit knowledge, whereas the same history also facilitates the transfer of it. Transferring knowledge is also facilitated by shared values, which could be originated in the family. Loyalty could provide a firm with a stronger position, whereas loyalty also facilitates the transfer of tacit knowledge. A high level of trust facilitates the creation of tacit knowledge and also facilitates the transfer of it. Last but not least, the family language also facilitates the transfer of tacit knowledge.

These factors all exert an influence on the level of tacit knowledge en the difficulty for other firms/persons to acquire the tacit knowledge. A high level of tacit knowledge due to

‘familiness’ factors will be expected to lead to a higher possibility of family succession, because it will be easier to acquire the tacit knowledge of ‘familiness’ factors for a family successor than for a nonfamily successor.

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The familiness factors depicted in the conceptual model are hypothesizes to have a positive influence on the transfer of tacit knowledge. Furthermore, an easier transfer of tacit

knowledge towards family members due to familiness factors is hypothesized to lead to the selection of a family successor.

These hypotheses are tested by means of three case studies, which will show whether these propositions hold in practice. Thus, this research is a theory-testing research, whereby the hypotheses, formulated on the basis of the literature review are tested by means of case study.

Hypothesis 1: The more the existence/use of a ‘family language’ in a firm, the easier it is to

transfer tacit knowledge to a family successor.

Hypothesis 2: A high embedded shared history and values of the family embedded in the

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Hypothesis 3: A high level of trust, as a result of family relationships, facilitates an easier

transfer of tacit knowledge to a family member.

Hypothesis 4: Strong commitment of family members towards the family firm leads to an

easier transfer of tacit knowledge.

Hypothesis 5: Loyalty of a family member towards the family business facilitates the transfer

of tacit knowledge.

Hypothesis 6: Intense relationship and direct contact between family members in family

firms, facilitates the transfer of tacit knowledge.

Hypothesis 7: A high degree of all the factors mentioned above increase the tacitness of

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4 Research method

4.1 Case study research

The preliminarily literature study is conducted to provide some background information and to define the concepts used in this research. This is conducted through a literature survey, which is a variant of desk research (Verschuren and Doorewaard, 1999), characterized by: (1) the use of existing material; (2) the absence of direct contact with the research object; and (3) looking from a different perspective at the literature used than at the time the literature has been produced.

The advantages of a literature study are that information is gathered in a relative short period of time and a high reliability of the material gathered. A disadvantage could be that the material is gathered for other purposes than the intention of this article. Therefore, different literature sources are researched and combined into the conceptual model.

The research method has to provide empirical evidence whether the hypotheses, derived from a combination of scientific research from diverse authors, also hold in practice. Therefore, the method used has to provide qualitative and explanatory information, and therefore has to be practice-oriented. McCollom (1990) argues that qualitative field research is an appropriate research method for studies about family firms. Morris, Williams and Nell (1996) also propose qualitative and case oriented research as appropriate for this kind of research. This is because the dynamics of the succession process are complex, and information regarding the relationships of families could be sensitive. These factors are difficult to be reflected in quantitative research. However, research instruments such as surveys and structured

interviews are supposed to be insufficient for researching tacit knowledge as far as individuals cannot be asked to state what they cannot readily articulate (Ambrosini and Bowman, 2001). As Verschuren and Doorewaard (1999) mention, case study research gives thorough

understanding into processes and issues, and, therefore will be an appropriate research method for this research. Case study will provide information about whether the theory also holds in practice and makes the research more practice-oriented, which makes the report useful for family firms thinking about succession.

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practice-oriented research project, because it (1) gives an overall picture of the company; (2) is flexible and makes it easy to change course during the project; and (3) results are useful for the companies under study. A disadvantage is that the results could be invalid for other companies than those studied (Verschuren and Doorewaard, 1999). This last disadvantage will be reduced in this research, because the case study is conducted after the establishment of a theoretical foundation, based on scientific research done concerning all kinds of family firms. Therefore, this research will be deductive (Braster, 2000), because the start of the research is theory, followed by hypotheses which are tested with cases. The hypotheses are formulated as results of certain causes. The conclusion of the research has to be a logical result of the assumptions of this research. This research will explain the influence of familiness factors on the transfer of tacit knowledge. Therefore, this research will give a nomothetic explanation (Braster, 2000) of the transfer of tacit knowledge between family members, because the most relevant variables influencing this transfer are researched. This will present a generalized idea of this knowledge transfer. It is important to consider that other variables can also have an influence on the transfer of tacit knowledge. This means that the factors investigated in this research are not the only influencing factors of the transfer, but other factors could also be important for this transfer.

Case study research combines diverse methods of data collection, such as archives, interviews, questionnaires, and observations (Eisenhardt, 1989).

Case study will therefore provide the qualitative and practice-oriented information about the validity of the hypotheses. Too increase the validity and generalizability of the information obtained from the case study, multiple cases are researched. Multiple-case study views each case as an independent experiment to test whether the hypotheses conducted from the literature study are validated (Chirico, 2008).

4.2 Sample

For the purpose of this research a family business is understood to be a business in which at least two family members have more than 50% of the shares, with a central role in the daily management of the firm and pursuing the vision of the family involved in the business, committed to the long haul”.

This means that a business has to satisfy the following criteria to be selected for this research: • Two or more members having > 50% of the shares;

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• The firm has a long-term focus.

For the purpose of this research, the succession process is understood to be all activities undergone (preparation, planning, etc.) in transferring the control of the business from the incumbent to the successor, with the incumbent and successor having a family tie; with the process taking place during the research or already finished less than three years ago. This time constraint will give an accurate and actual representation of the motives and factors in the process, which is not provided when the process is currently not in the mind of the interviewees.

Firms selected have to operate in an industry where there is a lot of tacit knowledge involved. Businesses providing activities in industries in which a lot of skills are involved are suitable for this research, because it is expected that these firms possess a lot of tacit knowledge which is of much importance in their business.

There are three firms selected for this research:

1. Family Business A: an electro-technical wholesaler which also delivers specialized light solutions and provide services with regard to rack jobbing (the design of electro and accessories in shops). The business is innovative and delivers the newest

techniques. Especially the advising of other businesses with regard to the placing and use of certain innovative light solutions and rack jobbing reveals that there could be a lot of tacit knowledge present in the business.

2. Family Business B: a company specialized in logistics, delivering logistic,

transportation and storage services. The extent of service and specialization of the company in logistics, transportation and storage and the importance of finding the best solution of the client require a lot of skills, which reveals that there is a lot of tacit knowledge involved in the business.

3. Family Business C: a graphical media communication company. This company does not produce mass-products but makes specialized products fulfilling the requirements of a certain client. This means that the translation of the wishes of clients is a very important skill in this business. The importance of skills and the creative mind are examples of the tacit knowledge which could be available in this business.

The selection of these three cases is executed by examining family firms and, with limited and general information beforehand, an investigation whether they satisfy the conditions

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businesses available. The criterion that the business has to practice in an industry involving a lot of skills is formulated to have a general determination beforehand that there is a certain degree of tacit knowledge involved in the industry in which the businesses operate.

To prevent opportunism, the firms selected are not familiar beforehand, so that the interview is the first meeting between the interviewer and interviewees. This is done to prevent some generalizations or other subjective information beforehand. So there was no information beforehand about the existence of tacit knowledge due to familiness factors in the business, to prevent selecting cases which have a good match with a certain desired outcome. A consultant is obtained for the selection of three firms, who provided some general information on the basis of which three firms are selected satisfying the conditions mentioned above.

The three firms selected are all three family businesses and operating in an industry in which they have to distinguish themselves from other businesses in the industry, with something other than only the material they provide. Skills are important in these industries, which makes these firms interesting to investigate. The succession process is important at the moment for all three firms. Furthermore, the founders already decided to hand over the business to a family member, which means that the motives for the selection of the successor are discoverable. There has already been a transfer of a lot of knowledge in these firms, whereby the interview can provide the founder and successor of more insight into the factors causing this transfer of knowledge.

4.3 Data collection

Tacit knowledge is deeply grounded in action and in the commitment of a person to a specific context (a craft, an occupation, a particular technology or market, etc.) or in the activities of a team (Nonaka, 1991, cited in: Ambrosini and Bowman, 2001).

Consequently, there are difficulties in investigating and operationalizing tacit knowledge, because tacit knowledge cannot be readily articulated by individuals (Ambrosini and

Bowman, 2001), which makes surveys and structured interviews a less appropriate research instrument to use in this paper.

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could be articulated by using metaphors or telling stories. Both types of tacit knowledge could be investigated, whereas the deeply rooted tacit skills are hard, or impossible, to observe. Direct, daily and continuous observation of an organization is the most useful way of gaining understanding of the tacit knowledge present in an organization (Ambrosini and Bowman, 2001). However, this requires a lot of time, people and effort (Ambrosini and Bowman, 2001), because the researcher has to be available in the organization at all times, at all places and has to understand all the processes of an organization. Direct observation is therefore not possible for this research due to time constraints and the availability of only one researcher. This research aims to give a more nomothetic explanation of the transfer of tacit knowledge, which makes the investigation of multiple cases necessary. This means the time available for this research has to be divided among three cases, which makes direct observation too time-intensive and not necessary for the aim of this research.

Another way of operationalizing and investigating tacit knowledge is causal mapping which allow persons to reflect on the things they are doing, this technique could depict subjective data more significant than other models and could elicit tacit skills (Ambrosini and Bowman, 2001). This research will use certain aspects of causal mapping. Interviewees are asked to tell stories, in which certain aspects of tacit knowledge become apparent. When stories reveal some tacit knowledge and familiness factors, the interviewees are asked what influence this story has in the transfer of tacit knowledge and why. Interviewees are not only encouraged to tell stories, but also to reflect on their behavior in the specific situation, especially the why they behave in this way. Furthermore, they are asked what they would have done when the family member in the story is replaced by a non family member. This will stimulate them to reveal the underlying factors of the transfer of tacit knowledge and the influence of familiness factors on this.

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Story-telling will be used to test the hypotheses, in that interviewees are asked to give an example of certain events reflecting the influence of familiness factors on the transfer of tacit knowledge. These stories will reveal the influence and importance of certain familiness factors on the transfer of tacit knowledge. Therefore, the interviewee is not asked only if family language is important in the transfer of tacit knowledge, but giving an example of family language by a story. The stories will reflect whether the hypotheses hold or not. When a story reveals that commitment makes it easier to transfer tacit knowledge towards family-members, hypothesis 4 is supported. This story will reveal more and accurate information than only a “yes or no” on an interview question.

A set of questions related with the hypotheses to be tested is determined beforehand. These questions will be asked when these factors are not dealt with earlier in the stories told by the interviewees. The purpose is to motivate the interviewees to provide most of the information by telling stories. The predetermined questions will only be asked when the subjects are not dealt with earlier in a story of the interviewee. The interviewer will guide the interview in the right direction but will pursue a minimal pressure to allow the interviewees to tell their own story. The task of the interviewer will be mainly observing, guiding the structure and unraveling tacit knowledge in the stories.

A check is put into the interview to increase the credibility and validity of the results in this qualitative research, so data triangulation will be applied (Braster, 2000). After the

storytelling, interviewees are asked to give a mark, without any explanation. This explanation is expected to be given in the interview. This check will provide a more objective

representation of the influence of the factors. This also will provide a check whether the interpretation of the interviewer of the degree of influence corresponds with the degree the interviewee indicates on a 10-point Likert-scale.

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The execution of the investigation of three cases will also increase the validity and credibility of the results. Furthermore, the present managing director of the firm as well as his/her successor will be interviewed, which will increase the validity of the data acquired.

4.4 Data analysis

Tacit knowledge is difficult to interpret and transfer (Cavusgil, Calantone and Zhao, 2003). Thereby, it is important that tacit knowledge is observed during the interviews. Data acquired through the semi-structured interviews will be used in accordance with the theory and is used to prove whether the formulated hypotheses are confirmed in practice.

There are different perspectives on analyzing data obtained from case-study, but they all agree about the idea that it is especially important to deal each case as an independent entity

(Eisenhardt, 1989). This means that each case is related to the theory independent of the other cases, before generalizing certain patterns. Thus, each case will be treated firstly as an

independent case, and all hypotheses are tested for each case separately. And after this, the cases are compared with each others.

Pattern matching will be utilized as an analytic technique to compare empirical based patterns with predicted patterns (Yin, 1983). It will be tested if the hypotheses, that is, the initially predicted results, are confirmed and alternative patterns not predicted are not present. This will generate the confirmation or invalidation of the expected outcomes. So, each case will first be used to investigate whether the hypotheses are validate or not; and after this, the cases will be compared to investigate whether there are certain patterns perceptible between the three cases. This method provides more validate and reliable results whether the hypotheses are validate or not.

As Yin (1984) also mentions, to examine whether the hypotheses hold, the three cases are treated as experiment in which each case confirms of disconfirms the hypothesis.

Accordingly, each case is similar to one experiment, and multiple cases correspond to multiple experiments whether the hypotheses hold or not (Yin, 1984).

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4.5 Quality requirements

The familiness factors in the conceptual model are operationalized to ascertain that the results of this research correspond with the meaning of the concepts in theory. This is realized by translating the concept into examples in practice. This ensures that the interviewer knows which factors to look for in the stories and that the interviewee could be provided with an example of a certain factor. After translating the factors into a more practical clarification, the interview questions are established. Appendix A contains the table operationalizing the concepts in the hypotheses. The coherence between the results of the research and the results of other research into the factors is provided because a literature study is first conducted, after which the hypothesis to be tested are formulated.

Because the jointly interviews can cause conflicts or contradictions between the idea of the founder and the successor, there will be held two separate interviews at another time when there is some sign of constraints in the jointly interview. This is executed to be certain that the information provided is reliable. Besides, to provide the reliability of the conclusions drawn from the cases, these conclusions are discussed with the interviewees afterwards. The 10-point Likert scale also provides more reliability.

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5 Description of the firms

5.1 Family business A

Family business A is an electro-technical wholesaler established in 1996. It is a family business, and has already transferred from the founder to his son.

Father Jan was the manager of a shop in electro when son Remco was a little boy. The family lived upstairs and thereby Remco put in touch with electro from since childhood. After this job, Jan became a salesman of bags for vacuum cleaners and other electronic things. Remco was very interested in the newest electronic stuff and accompanied his father often. After a while, Jan took over an electro company with 16 employees with two other business

associates. After a couple of years, this company had troubles with the employees and one of the two other businesses associated contacted Remco and asked him to join the company. Jan did not like this idea, because he wanted Remco to graduate first, but Remco wanted to learn in practice. Remco became salesman of this company. Other people often remarked that Jan and Remco are the same persons, one person and a younger copy. Remco learned a lot of his father. Remco is very interested in the latest electric things and makes use of all new things in his job. For example, he was one of the first users of a mobile phone in the Netherlands. Because of this, his sales figures exceeded the sales figures of the other sales persons of the company. Clients appreciated the fast order processing of Remco, which was possible because of the use of his mobile phone. This brought about friction between Remco and the other sales persons, and Remco decided to start his own company. He agreed with Jan the use of the same suppliers as Jan’s company. He bought remaining supplies from the suppliers and sells this to other companies. His company is very successful. After a couple of years, the company of Jan went bankrupt. Jan asked his son Remco to join Remco’s company with his two

business associates. Remco decided to help his father and agreed and has the disposal of three experienced sales persons. Moreover, his example, his father, joined his company, which enabled him to learn a lot of the skills of his father. The turnover of the company increased fast. Jan retired two years ago and the other two business associated retired also. His father is retired, but is always willing to give his advice and sometimes, he goes to clients. The

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5.2 Family business B

Family business B delivers logistic services, and provides essentially transportation services and storage services. The business is founded by grandfather and is transferred to the father and the uncle of Esther. Esther came in to contact with the transportation industry since childhood and has always dreamed about being a freight forwarder. After finishing high school, she did a professional training but decided to become business associate of the family business when her father asked her. The cooperation of her father and her uncle became difficult when her nephew came into the company. After a conflict, Leo was the only managing director of the company and asked Esther to join the company. He decided by himself that he only would continue with the business when Esther became his business associate. Esther became his business partner and started working at the bottom at the company. ISO appears on the scene and this provided Esther with the opportunity to know everything of the company. After a couple of years, she has gone through all the departments of the family business. At this moment, Leo is 69 years old and is still working in the

business.

5.3 Family business C

Family business C delivers graphical media products of high quality and provides advice on media and communication issues with around 60 employees and is in the process of

transferring to the third generation. The succession of the first generation into the second generation was not voluntarily. Pieter (second generation) was forced to direct the company when his father quit. Pieter decided that his children had to choice in their own interests. Jeroen was never pushed into the graphical media industry, but decided it voluntarily. He was already walking between the machines in the family business since childhood. At the age of 12, he started working in the production of the family business in his school holidays. After a couple of years, he went to college to study Commercial Economy but decided that this was not his direction. He decided to work one year in the family business, before starting another school. This year let him decide to go to a college in graphical media. However, he never completed his education, but decided to work at the family business. He started at the bottom of the company, but his father decided to put him in a new management position of a

department with problems between the employees. This was a really difficult period and it turned out that the employees of this department were not able to cooperate. Pieter is still working in the family business, but Jeroen is the potential successor.

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6 Findings

6.1 Family Business A

The success of family business A arises from the informal contact, commitment of the

company towards customers and the fact that the company always keeps his promises. Remco describes the contact with clients as “warm and informal”. An example reflecting the

commitment of the company towards clients:

Remco thinks that this commitment and informal contact results from being a family business. The tacit knowledge available in the family business is mainly hidden in the way of selling; observing innovations; commitment towards clients, suppliers and employees; keeping promises, etc.

Family language

The communication between father and son is a lot easier and more efficient than the

communication between father/son and other employees. The reason for this is that they speak the same language. They know each other exactly and they think the same way.

In the communication with other employees, more time and effort is needed to make clear what they mean. This needs another kind of communication. The transfer of certain knowledge towards employees has to be repeated more and more control is needed if they know exactly what is intended.

This easier communication between father and son enhances the efficiency of the

communication and therefore, decreases transaction costs. This easier communication has a major influence on the transfer of tacit knowledge. Because father and son know exactly from each other what they mean, it is easier to transfer tacit knowledge towards each other.

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Family history and values

The family history is highly embedded in the company. Father Jan has always been interested in the sale of electric products. As a child, Remco was also very interested in the product his father sold, so he became familiar with the newest electric products and became interested in the market for electric products. Another example is the interest in light products. Jan has always dreamed of specializing in light. The company sold light products on a small scale when Jan retired, but Remco intends to specialize more in light. Because his father dreamed about it, Remco became also interested in light, and decided to focus more on light concepts in the future with the company and predicts that there is a good future for the company in this market. At this moment, he is building a house together with his father; they both own a part of this house. They invest in the newest sorts of light and Remco is planning to use his house as a sort of showroom for clients to show the possibilities of the newest sorts of energy-saving and durable light. The family of Remco is very amicable and close with each other, which is reflected in the company. All employees of the company are very close and amicable with each other. Remco states that this can be difficult for some employees, because they have to become used to it.

This all reflect that the history of Remco in his family provided him with the same interests as his father and agreement about the strategy of the business.

The values of the family are also reflected in the company. Most of these values are the values of Jan. Remco also agrees about these values. Some examples of values of the company, rooted in the values of the family are: (1) When you are doing something, you have to do it very well, and (2) beware that you do not do too much work on your own, (3) do not buy products when you cannot pay them, (4) you have to act pure.

The approach towards employees is also rooted in the family. Jan is used to pursue a bottom-up approach in his company. Remco learned at training that the top-down approach was the best approach to pursue in a company. He came into the company and saw his father pursuing the bottom-up approach. He decided to follow the strategy of this father. He thinks this is the best strategy for the company, the communication is easier and employees show more

commitment, because they have the feeling that they have a stake in the choice of the business strategy. Remco and Jan state that the transfer of tacit knowledge is easier between family members that towards other employees in their company.

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Trust

The level of trust between Jan and Remco is very high in comparison with the level of trust between the family and the employees. The employees do not know the history of the company. Suppliers, which are of inestimable value for a wholesale trade, especially for the industry in which the business operates, are only known by Jan and Remco and one employee. Although this information is especially secret for the sales persons of the company, Remco decided not to keep the suppliers secret for his father.

The family has no secrets for each other and a high level of trust that secrets will be kept within the family. Jan and Remco know everything of each other and of the company and do not have secrets for each other.

This high level of trust facilitates the transfer of tacit knowledge, because family members mutual can provide more background information when transferring knowledge, which clarifies the knowledge.

Strong commitment

The commitment of Jan and Remco towards the company is a lot higher than of the other non-family employees. Non-non-family employees work only during office-hours and after this, they generally do not think about their work. The family members of the business are not restricted to office hours and work, often unconscious, overtime. Jan is already retired, but before his retirement, he had no standard working week of 40 hours, but, like Remco, worked often more hours at home or beyond office-hours. Remco is always thinking about improvements of the business. His hobby is cycling; he gets the greatest ideas of the company when doing this. Thinking about the company in his spare time indicates that he is very committed to the family business. Despite the retirement of Jan, in private conversations or at birthday parties, the company is always present. Jan is officially retired, but often comes a day or more to the company to work. He is always available for Remco for advice and is very committed to the company. When the company will experience a bad economic time, Jan is willing to work for the company for free. The consideration that he is retired and is not obliged to help the

company would not arise in his mind. Remco indicates that he do not hesitate to ask his father for his advice or help. This is in contrast with his feelings about asking another former

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employees. Another example is the question of Jan towards Remco if he could join the business of Remco, because his own company went bankrupt. Remco immediately agrees with this, whereas he admits that he would not have done that when someone else asked him such a question. Then he would weigh all the factors and probably decline.

This indicates that the transfer of tacit knowledge is a lot easier among family members.

Loyalty

The loyalty of Jan and Remco towards the family business is high. A couple of years ago, another company made Remco a terrific offer.

This example reflects that Remco is very loyal to the family business. This loyalty

demonstrated that Remco was not willing to leave the company. Because of that, his father knew that the knowledge Remco possessed would be within the company. This is in contrast with other employees, who are working for that company because they need a job. They usual are not choosing to work for the specific company because of their feelings with that

company. They could be easier to persuade to work for another company. Therefore, more important and sensitive information about the company would not be transferred towards non-family employees in the non-family business. This makes the transfer of tacit knowledge easier towards family members due to loyalty.

Intense relationship / direct contact

The intense relationship and direct contact among Remco and Jan makes the transfer of tacit knowledge easier between them than towards other employees. Both Jan and Remco are very stubborn and this could cause some friction between them. But they know it from each other and they are able to stand it from each other, while they cannot stand it from other non-family members. They admit easier towards each other than towards another person.

Jan has no problem to recognize and admit his weaknesses towards other persons. This is a strong capability which not everyone possesses. Because Remco has grown up with this

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attitude, he has the same capability. Because they know from each other that they will admit when they are wrong or made a mistake, they are more honest towards each other and it facilitates the transfer of knowledge. When you make a mistake you can learn from it when you have someone with whom you can discuss the mistake and how you can do it better the next time. In such a setting, tacit knowledge can be transferred a lot easier.

6.2 Family Business B

Commitment is the driving force of the success of this family business. This commitment is reflected in the relation with clients, suppliers and with employees. The business is operating in a network with 12 other transportation companies, which are all family businesses. The strength of all these family businesses is the commitment of all the companies and the treatment of the employees. These family businesses cooperate because of the family component in their companies. Clients also mention this commitment as the strength of the company:

The tacit knowledge available in the family business is mainly hidden in the way of dealing with employees; commitment towards clients and suppliers; finding the best logistic solution for clients, etc.

Family language

Family language is an important aspect in the transfer of tacit knowledge in the family business, as Esther verbalizes:

Because Esther and Leo know exactly how the other person thinks and acts, they understand each other perfectly and intuitively know what the other wants to say. This causes a very efficient communication between them and almost no misunderstandings.

Another point of interest in the communication between Esther and Leo is the straightforwardness of Leo’ communication:

Esther: “I was talking with a new client who first was a client of a big transportation company. The commitment of our company with his company surprised him, because he had the experience of being only a number in the company of our competitor”.

Transfer of tacit knowledge in the succession process towards family members in family businesses Master Thesis Business Administration – Small Business and Entrepreneurship C.S. Heijblom 1808672 Supervisor: Drs. D. Maccow