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Succession in Family Businesses: How to Transfer Knowledge Across Generations and Cultures

Growing up in a family business, I’ve always been intrigued by the unique dynamics of family enterprises. What makes family businesses particularly fascinating is the intricate interweaving of family and business, making it challenging to disentangle them. As the adage goes, the first generation establishes the business, the second generation nurtures it, and the third generation risks its decline. Regrettably, only around one-third of family businesses manage to endure into the third generation.

Among the challenges confronting family businesses, particularly those of a smaller or medium scale, is the preservation and transfer of knowledge during the pivotal transition to the next generation. In the course of our empirical research spanning multiple family businesses, we’ve uncovered a common theme: knowledge within these enterprises isn’t always seamlessly shared. Family members often exhibit caution in disclosing information to those outside the family fold, apprehensive that these non-family individuals might one day exit the business. Their knowledge is highly regarded, and sharing it is a deliberative process.

This challenge intensifies during the succession phase. It’s not only family members who wrestle with this dilemma; non-family employees can be discerning about the extent to which they divulge their expertise to the incoming successor. Aspiring family successors often feel compelled to prove themselves to non-family employees. Yet, the methods they employ in achieving this goal can be divergent. While some integrate non-family employees into every facet of the transition, others opt for a more conservative approach, sharing only essential information to circumvent potential conflicts.

Family businesses frequently embody the cultural values of their respective families, and this influence permeates their decision-making processes. We’ve observed how various cultural backgrounds, even within the same country, can significantly shape how succession is handled. At times, these cultural disparities serve as the linchpin explaining the divergent approaches to succession within family businesses.

The conduct of family businesses is less guided by formal rules and structures and more by the intricate web of family relationships. Nevertheless, this doesn’t imply that a family business is entirely beholden to its cultural underpinnings. Instead, certain facets of culture wield more influence than others, especially when they intersect with the norms and regulations of the country or industry in which the business operates.

We’ve discerned that both the wisdom passed down through generations and the insights of non-family members play pivotal roles during succession in family businesses. However, how this knowledge is transmitted and utilized hinges on the cultural backdrop of the family. Some cultures have a tendency to confine knowledge to a select few, whereas others are more inclined to share it broadly. This cultural backdrop significantly shapes the educational opportunities available during the succession process.

Succession stands as a watershed moment in the life of a family business. It is a multifaceted process demanding meticulous planning and execution. The successful transfer of knowledge from the incumbent to the successor stands as a linchpin for the prosperity of the business.

Several key implications emerge from the intricacies of succession in family businesses:

  1. The effective transmission of knowledge from the incumbent to the successor is a prerequisite for the survival and prosperity of the business.
  2. The manner in which knowledge is conveyed and utilized is heavily influenced by the cultural background of the family.
  3. Family businesses must cultivate a culture of knowledge-sharing and openness to facilitate a seamless succession process.
  4. Non-family employees can play a pivotal role in succession by sharing their wisdom and experience with the incoming successor.

Insights by: Dr Jay Wasim