Transition in successors’ behavior and mindset while managing long-lived small and medium-sized manufacturing enterprises: a qualitative study

Theory and literature

Three-circle model

The modern form of the company is based on the separation of “ownership” and “management,” which has been advocated by Berle and Means (1932). Many business theories are based on this idea, such as agency theory, which illustrates that the adjustment of conflict between a company’s owner and manager is the main issue of company governance.

With respect to the case of family business, Tagiuri and Davis (1982) presented the “Three-circle model”, which explains the crossover of “Ownership,” “Family” and “Business” as an essential aspect of family business, and claims family business decision making to be determined by balancing the interests of three stakeholders.

The 4Cs model

Miller and Le Breton-Miller (2005) researched the factors for successful family-controlled businesses by comparing 46 successful and 24 struggling family-controlled businesses. Successful factors founded from their qualitative study are concluded as “the 4Cs”: continuity, community, connections, and command. A brief explanation of these factors is provided in Table 1. Okumura (2015) is of the opinion that the balancing of these factors is important for family business operations.

Empirical studies on family business

Asaba (2015) also summarized previous studies on family businesses. In the early stage, the researcher conducted a direct comparison of the performance of family-owned and non-family firms. However, the superiority or inferiority of family businesses pertaining to performance is unclear from the standpoint of Japanese cases (Saito, 2008; Mehrotra et al., 2013) as well as worldwide cases (Anderson & Reeb, 2003). Thus, the interest of studies has shifted from benefit to behavioral characteristics such as investment or market strategies.

Having examined the research on investment in family and non-family businesses, Asaba (2013) concluded that family businesses continued their investment under volatile and stagnant economic conditions, which is difficult for non-family businesses. From the R&D investment viewpoint, family businesses are “avoiding radical innovations and pursuing incremental innovations” (Asaba & Wada, 2019, p.277). These studies imply that family businesses have long time horizons and consider continuity, which is one of the traits of their strategy.

Succession of family businesses

Chrisman et al. (2003) examined papers on family business management from 1996 to 2003. They found 29 of the 190 strategy-related papers, 22.1% of the total, that were related to the succession of companies (Category 1). The other categories include economic performance (15.3%) and corporate governance (9.5%). This research study brings to light the fact that succession constitutes a major interest among researchers. Having reviewed worldwide studies related to family business succession, Iguchi (2019) found that there are three major research questions: 1) which factors affect the choice of the successor of a family business; 2) which factors affect the success or failure of a family; and 3) how much does succession impact the performance of the family business. These questions were derived from the top 50 cited papers on economics and management. Iguchi (2019) concluded that the impact on performance, including financial analysis should be studied as empirical studies (research question 3). However, previous studies have only covered the factors responsible for the selection of successors (research question 1), and the factors responsible for the success or failure of succession (research question 2), which were were mainly derived from case studies. The many parameters of the family business, such as family connections or emotional factors make empirical studies on these fields difficult, the exception being performance analysis. Thus, the accumulation of case studies is important for the maturation of this field of study. Iguchi (2020) extended his study to find the correlation between the preparation of the successor and the intention for long-term investment by the current CEO. This is fruitful research, as it should that the CEO’s current decision-making affects the expectations of his/her successors.

Kamiya (2018) defined these five factors as the unique issue of SME management and innovation, and created an analytical framework by combining these five items with the timeframe, starting from “Unfreeze,” to “Change,” and then to “Freeze,” introduced previously by Lewin (1947). By interviewing the management of a certain food company, Kamiya (2019) presented the matrix of the five factors of SMEs and Lewin’s three-step transition (unfreeze, change, freeze) as the process illustration of SME transformation.

Modeling of the succession process

Le Breton-Miller et al. (2004) created a diagram of an “integrative model of the succession process” by combining empirical research, theoretical research, and anecdotal evidence. In particular, they demonstrated the industrial context and social context, which was previously neglected in the inner-process of the family business. Moreover, a broader viewpoint is required to model the succession process of family businesses. In this study, in order for the transition in family business to be complete and smooth, not just the factors within the family or company, but also industry and social factors should be considered.

Ochiai (2016b) presented the idea of the successor’s dilemma between autonomy and constraints, which is drawn from the expansion of the observation of many case studies carried out by Gersick et al. (1997).

Previous studies have recognized that the successors from owners’ families are more likely to introduce discontinuous change than the internally promoted managers, for the successors from the owners’ families do not have to consider the predecessors and current employees (Kagono, 2008). From this explanation, the successors seem to conduct autonomous activities. Ochiai stated that the successors from the owners’ families are ascribed status of being the future management and are treated as special person in the family-owned company. Ochiai further stated that they negotiate equally with the current president and have little concern about the employees. However, the successors are under constraints such as limited choice of occupation, restriction from the current management team, or psychological distance from the employees. The intention of reducing this dilemma is to establish the successors’ achieved status and gain acquired legitimacy as future CEOs with their innate legitimacy from the family.

Ochiai (2016a) also found a systematic approach to reduce this dilemma in well-established family-owned companies by conducting interviews with both the current CEOs and the successors from several well-established Japanese companies. This resulted in the formulation of the diagram “autonomy under guardianship”. This diagram presents the current CEO’s role as that of a guardian who gives proper assignments to the successor in order for him/her to adjust to their autonomous behavior and acquire legitimacy. Such modeling of the successor’s behavior is a unique study to understand the wisdom of a well-established family business.

Study purpose

The duration of CEOs in a family-owned company is generally 20 years long, for it has been proven that the family-owned businesses’ peak profits and growth usually come at the end of their long tenure (Yamaguchi, 2014; Miller & Le Breton-Miller, 2005). However, many previous studies operated within the framework of business succession, and the research that ended during the period of succession had been completed for several years. Only a few studies have brought out the complete lifecycles of successors, right until the end of their tenure as top management. Ochiai (2017) also stated that current studies focused only on the transition process itself, such as the analysis of the early stage of succession or the transition process of president influence, not covering the entrepreneurship of the successors during the middle of their managerial experience.

The purpose of this study is to try and find the process of succession in long-established family-owned SMEs and understand how successors established their mindsets as the owners of companies and top management post the early stage of succession. The modeling of these processes might be of help to potential successors during their preparation for a smooth succession.

Study design and participants

From April to August 2020, semi-structured interviews were conducted with the management of six companies. The interviewees were selected by purposive sampling to meet the following criteria: pre-, current, and former CEOs of family-owned manufacturing SMEs that are more than 50 years old and have been managed by three generations. Methods of approach for participants were face to face, email, telephone, or online. The list of interviewees with their attributes and the contact measures for participation is shown in Table 2.

Ethical considerations

In accordance with the ethical guidelines of University of Tsukuba, Faculty of Business Science, concerning human beings or specimens, no ethical approval was sought for this study. This is due to the study not involving any physical or mental intervention on the participants. Written informed consent to participate was obtained from each participant prior to the interview.

Data collection

The interview time ranged from a minimum of 50 minutes to a maximum of 100 minutes (average time was 78 minutes). All interviews were conducted at their workplace face-to-face or online without the presence of any other participants (Table 2).

Prior to the interviews, the participants agreed on the purpose of the interview and the expected questions, and they granted permission to audio recording for research purposes.

The verbatim transcriptions were made from the entire recorded data so that the field notes were not created through the interviewing process. Transcripts were not returned to the participants.

The interview items are as follows: 1) self-introduction, 2) the business domain and the transition of the main business, 3) how to tackle the past market change, 4) how to access the new market, 5) the creed related to the organization, human resources, and management philosophy, 6) future perspectives on business, and 7) anything else.

Data analysis

The data were analyzed using the modified grounded theory approach (M-GTA) (Glaser & Strauss, 1967). The GTA is a qualitative study method to generate “grounded theory” based on actual data by creating “concepts” from the original data and finding the relationship between these concepts. One of the features of the original GTA is the process of fragmentation of sentences to create the concept by removing the researcher’s bias (Saiki-Craighill, 2014). M-GTA is a modified version of the original grounded theory approach, which holds the intention of being rigorous and scientific with the symbolic methodology of fine fragmentation of sentences constituting as raw data for research. Kinoshita (2003), who developed the M-GTA method, noticed that the original GTA method lost the context, including the cultural aspect, and hindered the formulation of richer concepts from the data (Kambaru, 2018). One of the key features of M-GTA is its avoidance of the fragmentation process by keeping the rigorousness of the original GTA method intact and introducing the procedure of creating the “concept,” which refers to the analytical theme and analytical person, by using an “analytical worksheet” to balance the deep interpretation of data and the rigorous procedure.

M-GTA is a tested method for finding the process in social human interaction and solving the actual problem via a generated theory (Kinoshita, 2007); therefore, this method is judged to be appropriate for this study. The analytical theme of this study is finding the process of succession and developing the management principle in long-lived small and medium-sized manufacturing enterprises. The analytically focused persons are successors in long-lived family-owned manufacturing SMEs, up to some hundred employees with a history of more than a half-century.

The analytical procedure consists of the following steps based on Kinoshita (2003).

Figure 1. The procedure of the M-GTA method (modeled by the author).

Constraints under the predecessor

During the first stage of joining the company, the successor starts performing tasks using the successor’s expertise and improves his/her business performance by carrying out tasks related to his/her educational background or experience before joining the company, such as expanding domestic/overseas sales channels and launching the R&D/production facility.

While gaining work experience by following the instructions of the founder, the successor inherits the basic philosophy and management spirit. Besides, he/she acquires the awe toward previous management by knowing the predecessors’ excellent decision making during the past business development and their deep relationship of trust with customers. This way, the inheritance of the basic values from the predecessors is observed by following the examples of the following statement:

Another example is the idea of frugality taught by the predecessor. When sales were increasing due to the bubble economy, the (predecessor) often said: “suppress the spending.” Another thing that often remarked was “when you make a profit, you should store it, you shouldn’t use it just because you made a profit.” (Interviewee A).

Autonomous action

At the same time, the successor’s unique movement against company constraints were also observed at the same time. Since the successor is a special person in the company, he/she makes efforts to foster informal interaction with employees to have a close relationship, such as having a meal with them or holding sports events after business hours. Also, the successor starts forming their own management team to gradually build people of the same generation who meet his/her values ​​as a management team for creating their own organizational system.

While accumulating management experiences, the successor often encounters friction with the previous CEO or conflict with previous executives, which is the opportunity to clarify his/her ideas. And his/her proactive effort to establish one’s own creed by joining a gathering of employers’ groups or summarizing one’s thoughts in the notebooks can be found at the same time as the process of the establishment of individuality.

The typical conflict between the previous CEO and previous executives is a different perspective toward business expansion. An example of a conflict with the pre-CEO case is as follows:

Another case is that of a conflict with the executive who supported the previous CEO:

From the examples of conflict mentioned above, it is clear that the successors tended to acquire business expansion in the first stage. At the same time, they deepened the confidence of management via the accumulated business experience and having the confidence to manage their companies. Successors sometimes successfully overcome the hardship or limitations confronted by the predecessors, and these experiences help the successors build their confidence. The preparation for debt guarantee is also seen as the determination of being prepared for succession.

Experience and acceptance of crises: experience phase

For the successors who gained certain confidence by overcoming the difficulty of the company, which was difficult for the predecessor, it will be inevitable for them to face new crises that are represented by external factors such as economic recession or internal factors such as strategic failure, one of the turning points for the successors.

The typical occurrence of crisis for successors is the demise of the previous CEO, and the successors recognize that they possess a weak social status and a heavy responsibility. There are external crises (stalemate in new market) caused by market changes, economic fluctuations, and technological shortages in the new markets. Or, the successors may face unjustified treatment from customers, such as unreasonable price reduction requests from customers, which can be seen as bullying. The successors can be overwhelmed by the harsh reality.

When they entered the new market, the effort to improve the quality of products is a countermeasure to tackle the crisis in the market. This is because the requirement from the customer is unexpectedly higher than the conventional customers. However, these experiences lead to an improvement in the company’s technological strength. However, in some cases, withdrawal from market is unavoidable because of the sudden decline in the market. In addition to such a market struggle, they also face difficulty in securing funds. Their assets should be collateral, or they face the challenge of the funding support being denied by their relatives. Another case of trouble is the difficulty in building good relationships with employees, such as letting go a trusted employee when the company is going through a difficult phase. These are the processes of response to crisis and accepting its effect.

After overcoming the crisis this way, they have an opportunity to reconsider customers and markets as a reviewing corporate strategy, such as reviewing the position in the market or focusing on profitability than sales. In addition, they use the experience of the crisis as an opportunity to learn about the reconfirmation of strengths of the company:

In the above example, the successor coined original phrases to redefine their business domain again after the succession. Thus, having a crisis experience confirms their original or strongest business domain.

Building uniqueness

After reviewing the strategy through the experience of the crises, the successors try to scaffold the existing resources to make future preparations for handling a crisis during a normal or peaceful occasion. They conduct institutional approaches such as establishing HR development policy or preparing long-term working environment, as well as share common values with employees about business ethics. The following example is the sharing of important values with employees as a company policy:

The successors expand new resources through the business network and enhance conventional in-house resources. Typical examples are acquiring new resources by merger and acquisition (M&A), utilization of external brains pertaining to financial support or improvement of the productivity in daily routine, and application of digital technology and internet, such as in-house digitization and utilization of e-commerce. Additionally, there are cases where collaborative market development with another group is undertaken with public institutions such as universities or large branded companies. While some are successful, the others are only a trial. However, these activities are derived from the successors’ interests and uniqueness toward the process of acquiring new resources.

After preparing the resource-based matters, the successors challenge to enter the new market by investing in the new market or going to the market as top management. Further, they emphasize direct communication with customers to increase the opportunities to hear the customers’ voices directly, even if they had utilized the internet and e-commerce channels. One example is that of the successor often making unannounced visits to the potential customers:

Experience and acceptance of crises: acceptance phase

However, the challenges posed by the new markets do not always go well, the sales do not grow as expected, and there are ups and downs because of the business cycle. The term of the presidency is around four or six years in general; however, the management of family-owned businesses continues their role a rather long time, around a couple of decades. This is because they seem to have an acceptance of repetitive crisis, such as economic or natural disaster, and even have strategic failures as the preconditions of business cycles.

After accepting the possibility of making failures or facing the market difficulties repeatedly, the successors not only respond to the crisis but also try utilizing the crisis so that their response aligns with the employees in the crisis to facilitate new market entry or improvement in the execution of daily activities.

For example, the successor experienced employees’ alignment for a new strategy after experiencing a couple of repetitive economic crises.

Another successor appreciated the crisis time because a period of crisis can clarify the weakness of a company:

Through the experience of the crisis, the successor will redefine the domain of the business and provide clarification on the company’s uniqueness to focus on the points of differentiation with the competitors. Besides, as a small and medium-sized enterprise with limited resources, the focus will be on a specific field, such as reviewing the variety of product and service lineups and limiting the sales’ geographical region. These are a part of the clarification of corporate characteristics, which is carried out during the last stage of tackling the crises.

Acquiring a higher perspective (core category)

As shown in Figure 2, the process of experience and acceptance of crises consists of two branches, which explains the reason why the recognition of crisis changed from the first stage to the experienced stage. Based on the scenarios of facing and recovering from the crisis, they acquired the viewpoint that the occurrence of the crisis is regarded as a “precondition” of management. It is a change of perspective from a passive to proactive handling of the crisis. This is the most unique point of successors who are aware of their predecessors’ past hardships and their own difficult experiences. Therefore, this process was determined as the core category in this research.

Perspective changes through human interactions

In Figure 2, the large loop between experience and acceptance of crisis and building uniqueness is shown. Between these processes, the successors experience human interactions inside or outside the company. This human interaction affects the mindset of the successors.

While overcoming such a crisis, they experienced conflicts with employees. However, at the same time, the remaining employees and long-term customers supported the critical situation. As a result, support from employee and customers lead to the supported experience in crises, or they may experience an unexpected approval from customers amidst a deadlock in the new market. Such an unexpected emotional experience might have a considerable influence on the feelings of the successors. One interviewee recalled the appreciation of the customers and employees who supported the company during the crisis:

The successor may also be affected by the encounter with the master or influence from another businessperson in management. For example, the successor reflects on the employees’ perspectives by meeting an honorable business person who cares about their employees. Another successor who inherited the family business was also inspired by the encountered businessperson who started the business in his favorite field and applied a unique perspective in developing a new business. It is often found that such social interactions with people inside and outside the company lead to the experience of being enlightened by human interaction. In one case, the successor was inspired by a certain founder of the business based on his interest or hobby, which is opposite to doing the business seriously:

Transformation of the management viewpoint

In the early stages of succession, the successors’ values were created in relationship with the preceding CEO. However, due to the experience of the crisis and the interaction with employees and customers via the business network, the successors’ new perspective on creations has come to be observed. As a typical example, the successors turned out to have long-term perspectives, have the intention to protect employees with the willingness to maintain employment, and uphold the element of pursuit of fun in business in the succeeded work or new business development to motivate themselves and employees. A successor did try to include enjoyment at the workplace even under the current crisis:

Other successors emphasized that the important factors for family business are unity and a long-term viewpoint:

As a long-existing company, preparing for the next generation is also an important theme. To stabilize the management as an owner company, training provided to the CEO’s successor or consolidation of shares in the owner-family are important preparations to have sustainable management. One interviewee shared with their successor the grave reality to help him/her understand the company’s total financial responsibility:

On the other hand, the successors have been considering future markets by being sensitive to social change. Furthermore, they prepare business succession to the next generation by having a perspective based on corporate social responsibility such as local contribution and social action. Finally, they reconsider the inheritance of basic values from the predecessor again, and such basic values are passed on to the next generation.

Limitations of the study

Our model is created based on the interviews with six persons, which is the methodological limitation of M-GTA. As a result, one should be cautious of making generalizations. Another limitation is the lack of comparison with other categories such as the manager of startups and the successor in service sectors, or another country case to clarify the uniqueness of the long-lived small and medium-sized manufacturing family businesses. This is also a limitation of M-GTA, which is focused on a specific group as an analytically focused person.

Underlying data

The interviews were conducted under the agreement of keeping the participants anonymous and their interviews private. Therefore, the raw transcript data are not openly available. Quotes in the manuscript provide intermediate data. Transcripts will be reserved for at least five years; any interested readers can contact the corresponding author (suzuki.hiroo.s5@nifty.com) to facilitate data access. Data will be shared under the following conditions: bona fide researchers with a proposal for how they wish to use the data.