strengthen strategy implementation and control,
favouring succession
Culasso Francesca
, Giacosa Elisa
, Manzi Luca Maria
,
Dana Leo-Paul
Ricevuto il 13 maggio 2015 Accettato il 24 gennaio 2018
Abstract
Professionalization and management succession represent relevant research topics in family business. Our main aim is to highlight the importance of professionalization in positively supporting a management succession process in family firms (FFs), by strengthening and standardizing the processes of strategy formulation, implementation and control, with the goal of achieving long-run value creation and guaranteeing the survival of the firm. We have carried out an explanatory single case study, which is quite representative for this research topic.
Relying on Simons’ levers of control framework (1995, 2000) and on the work performed by Acquaah (2013), we explain how the entrance of professional managers and the adoption of Diagnostic Control Systems (DCSs) and Interactive Control Systems (ICSs) impact FFs’ strategy formulation, implementation and control, favouring the management succession process. The importance of the professionalization phenomenon as a tool to positively support management succession emerges.
Formal Performance Management Systems (PMSs) have several positive effects on management succession. In particular, the Management Control System (MCS) contributes to the emersion of new opportunities and creativeness within the business and makes it possible to capture strategic initiatives that arise from the bottom of the structure.
Keywords: family business, management succession, generational handover,
professionalization, Management Control Systems Control Systems.
University of Turin, francesca.culasso@unito.it.
University of Turin, elisa.giacosa@unito.it (corresponding author). University of Turin, luca.manzi@unito.it.
1. Introduction
The subject of family firms (FFs) is covered extensively by international literature (Astrachan and Shanker, 2003; Claessens et al., 2000; Culasso et
al., 2013 and 2016; Faccio and Lang, 2002; La Porta et al., 1999; Morck
and Yeung, 2004; Ramadani and Hoy, 2015), as family businesses phenomenon dominates the global economy and it is the backbone of socioeconomic development (Kamei et al., 2017; Poutziouris et al., 2006; Ratten and Dana, 2017; Ratten et al., 2017a; Wach, 2014). Indeed, the vast majority of publicly traded companies in Europe, Asia, Africa and Latin America are family businesses (Acquaah, 2013; Ramos and Garcìa-Olalla, 2011). Within this context, micro and small-family-owned businesses are so frequent and the synergy between the ownership and the management is so strong (Gill et al., 2014).
Considering Italy, the economic context is characterized by the presence of numerous small and medium-sized companies, which are often family firms (Mediobanca, 2013). Therefore, researchers stress the role of family businesses as they represent a dominant form of company in the world, counting a relevant proportion of listed companies (Breton-Miller et al., 2015).
Most family businesses are characterized by a synergy between owners and managers (Calabro and Mussolino, 2013; Ratten et al., 2017b; Shi and Dana, 2013). Therefore, management succession and the generational handover represent an important research topic in family businesses (Chua
et al., 2003), with the focus on issues such as professionalization, defined
as the phenomenon during which professional managers become part of the management in a family business (Giovannoni et al., 2011), and/or the implementation of formal Management Control Systems (MCSs) to support the managerial decision-making process. Not so many researchers focus on the topic of how professionalization could support management succession and how the implementation of MCSs affects professionalization (Amat et
al., 1994; Giovannoni et al., 2011).
Considering the suggestions of Salvato and Moores (2010), the purpose of our research is, therefore, to highlight the importance of professionalization in favouring a successful management succession process in FFs, with the aim of achieving long-run value creation and guaranteeing the survival of the firm. In particular, we try to understand if and how extensive professionalization, characterised by the entrance of professional managers into the family business, in conjunction with the adoption of formal MCSs, impacts FFs’ management succession.
On the basis of the research goal, the following hypothesis has been developed.
HP1: professionalization in a FF strengthens the processes of strategy formulation, implementation and control and, consequently, it positively supports management succession and the generational handover.
To verify this hypothesis, we present a theoretical framework drawing on the concepts of Simons’ (1995, 2000) levers of control and on Acquaah’s (2013) work. We adopt an explanatory case study, focusing on Vega Tools International, a small Italian FF, purchasing and selling technical components and services for the machine tools sector. The company was involved in a generational handover some years ago and it went through a process of professionalization both with the entrance of professional managers and with the adoption of formal MCSs.
The remainder of this paper is structured as follows. In the second section, we present our theoretical framework. Then we outline the research method in the third section. In the fourth section, the discussion of the results is presented together with the conclusions. In the last section, implications of the study are given, along with the limitations of the research.
2. Theoretical framework
First, we assume that the management succession in FFs is the process through which leadership passes from a managing or incumbent owner to a successor, who could be either a family or a non-family member (Beckhard and Dyer, 1983). As a family business could build a strong goodwill for a long time due to its social capital (Lehrer and Schmid, 2015), researchers focused on how human resources – considered as an asset (Craig et al., 2014) - can be used to increase the global competitiveness (Ratten et al., 2017a).
Miller et al. (2003) assume that management succession transfers firm leadership from one family member to another or, in the absence of a competent family contender in the short-term, to a bridge manager between family tenures. When the management succession happens between members of the same family, it is defined as a generational handover. Scholars state that responsibilities and experiences inside the family business enable the successor to understand the culture of the firm and to
develop relationships within the company (Tirdasari and Dhewanto, 2012). Management succession is a long process, which can begin in childhood (Longenecker and Schoen, 1978), and it is a multiple-stage process (Handler, 1990).
An increasing amount of literature focuses on the impact of both incoming family heirs and professional managers on company performances after a management succession (Bennedsen et al., 2007; Cucculelli and Micucci, 2008). Some studies consider management succession as a traumatic event, especially in cases of entrance of bridge managers, due to the overlap between executive and ownership positions in a family firm (Gomez-Mejia et al., 2001), which negatively impacts longer investment horizons and reputational concerns. In addition, some authors claim that a destruction of value may occur when the family business is managed by the second or third generation (Villalonga and Amit, 2006; Pérez-Gonzàlez, 2001; Smith and Amoako-Adu, 1999). Only a small number of family businesses survives management succession to the second generation, with many intergenerational transitions failing after the second generation takes control (Davis and Harveston, 1998; Handler, 1990, 1992; Morris et al., 1997; Sonnenfeld, 1988; Ward, 1997; De Massis
et al., 2008). Furthermore, when a CEO succession occurs, it may
aggravate capital structure decisions in FFs (Amore et al., 2011). Some authors highlight how the highest economic performances are achieved by listed or non-listed family companies led by their founders and not by their successors (Barontini and Caprio, 2006; Adams et al., 2003), showing the superior performance of FFs when primarily driven by their founders (Miller et al., 2007). The decrease in post-succession performance may be due to several factors, such as the founder’s superior talent (Cucculelli and Micucci, 2008), an inefficient selection of successors (Burkart et al., 2003; Caselli and Gennaioli, 2003) or their poor training (Pérez-González, 2006).
Many researches indicate the antecedent conditions in the family sub-system (Tagiuri and Davis, 1982) to facilitate a management succession (Songini et al., 2013). The family’s attitude (Birley, 1986) is of considerable importance, together with personal relations among family members (Davis, 1986). To have a positive impact on company performances, the successor should enjoy the confidence of the family (Goldberg and Woolridge, 1992; Horton, 1982). Commitment to business is a dominant condition to achieve positive management succession, and is more important than gender and order of birth of family members (Chrisman et al., 1998). Nevertheless, the level of junior generation members’ interest (Stavrou, 1999) in the business influences the results of
succession (Handler, 1989; Ward, 1987). Some authors analyse the best age that the successor should have. It emerges that the eldest family member may not be always the best solution for the company, and that sons may not necessarily be better than daughters. Nevertheless, choosing a younger son or a daughter as successor may still not necessarily be a good solution (Tirdasari and Dhewanto, 2012).
Some studies focus on the factors that influence the results of a management succession process in addition to those concerning the family sub-system (Chua et al., 2003; Sharma et al., 2001; Venter et al., 2005): among these factors, the characteristics of the business and the dominant coalition in the ownership are considered (De Massis et al., 2008).
There are also a few researchers who highlight the importance of professionalization to positively influence the management succession process, as a tool for achieving better post-succession performances. Some authors indicate that management successions outside the family are generally associated with an increase in operating returns (Amore et al., 2011). Indeed, non-family managers can have superior skills, new ideas and propensity for innovation (Chua et al., 2003; Bennedsen et al., 2007; Caselli and Gennaioli, 2005; Perez-Gonzales, 2006), improving attractive growth opportunities after the transition. In any case, there is an evident lack of literature on how professionalization influences the management succession process, favouring the achievement of better post-succession performances (Songini et al., 2013).
In order to understand how this can positively support the management succession in a FF, we focus on its definition and features. We assume that professionalization is “the process through which professional managers become part of the family business at management or ownership level. This process entails the adequate formal training and education of individuals (regarded as professional managers), but it may also result in an increasing adoption of formal mechanisms and systems inside the family firm to support the business” (Giovannoni et al., 2011). Professionalization can, therefore, be meant as the entrance of an external subject, not belonging to the family, into the business, but it also happens that the same members or employees of the family become more “professional” through specific educational processes (Dyer, 1989; Hall and Nordqvist, 2008). To be considered as a “professional manager” in a FF, it is necessary for a subject to combine the perception of the culture of the family business with a formal knowledge and skills concerning managerial systems. Professionalization in FFs can be also achieved through the implementation of operative mechanisms inside the firm, in order to support a more rational
and conscious decision-making process: MCSs are typical operative mechanisms, although it is not so clear in literature how they could be implemented and work in order to improve the performance of professionalization (Songini, 2006).
We focus on MCSs and assume that they are “the formal, information-based routines and procedures used by managers to maintain or alter patterns in organizational activities” (Simons, 2000). Literature considers MCSs as indispensable to support both the implementation and the monitoring of the deliberated top-down strategies in a firm and, at the same time. to shape the emergence of new and creative bottom-up strategies (Brusa, 1983 and 2012; Coller et al., 2012; Collini, 2001; Collini and Frigotto, 2001; Collini et al., 2013; Kaplan and Norton, 1992; Marasca et
al., 2009; Paolini, 2004), also in terms of a good managerial accounting
strategy (Cinquini and Tenucci, 2010; Garrison et al., 2012).
According to Simons’ performance measurement and control systems framework (Simons, 1995 and 2000), formal MCSs can be classified in four different groups – belief systems, boundary systems, diagnostic control systems (DCSs) and interactive control systems (ICSs). In particular, DCSs and ICSs represent the performance management systems (PMSs) adopted by firms to implement and monitor strategic intentions over time. We focus on these two systems because they are consistent with our research hypothesis, which sees professionalization as instrumental for developing the strategy formulation, implementation and control processes.
MCSs use DCSs to formally identify specific goals for the whole company and for each responsibility centre, considering both the current and the strategic period of time. These goals are useful to make more rational and conscious decisions, in order to correctly implement the deliberated strategy of the company. At the same time, DCSs adopt feedback mechanisms to inform managers with reports on the variations between original goals and achieved results, in order to implement corrective actions (Mancini, 2011; Marchi, 1988; Marchi and Branciari, 1998; Marchi and Mancini, 1999). DCSs are implemented to make managers responsible and to motivate them towards achieving organisational goals, in a conservatism framework and within the deliberated strategy of the company.
ICSs, on the other hand, are formal systems adopted by top managers to encourage innovative and emergent bottom-up strategies in a company. The most important feature of ICSs is that the information, which emerges through the interaction between top managers and managers at all levels of the organisation, is an important source of competitive advantage.
Managers should use this information through face-to-face meetings with superiors, peers and subordinates, with the aim of continuously challenging and debating the deliberated strategy of a company, underlying new opportunities and new risks (Simons, 2000).
When DCSs and ICSs are joined together in a firm, a dynamic tension is created that opposes control versus innovation and profitability versus growth, complementing the benefits of each of the MCSs (Simons, 1995). The simultaneous use of DCSs and ICSs has a positive effect on the implementation of business strategy, both in terms of cost leadership and in terms of differentiation (Porter, 1980, 1985; Simons, 2000).
According to Acquaah’s framework (2013), which is important to our research as it applies Simons’ levers of control within the context of FFs, DCSs have a greater effect on the implementation of business strategy for non-family businesses than for family businesses, especially considering a cost leadership strategy, while ICSs have a greater influence on the implementation of a differentiation business strategy for family businesses than for non-family businesses. In any case, the dynamic tension created by a concurrent adoption of DCSs and ICSs has a greater influence on the implementation of business strategy (both cost leadership and differentiation strategy) for family businesses than for non-family businesses.
Through this consideration, Acquaah (2013) affirms that the indirect effects of DCSs on performance are greater for non-family businesses than for family businesses, while the indirect effects of ICSs on performances are exactly the opposite, greater for family businesses than for non-family businesses. Furthermore, the indirect effects on performance of DCSs and ICSs combined together in a dynamic tension are higher in family businesses than in non-family businesses. The implications of Acquaah’s work (2013) underline how formal MCSs are important in supporting strategic activities of FFs to create competitive advantage, especially when DCSs and ICSs are used simultaneously.
3. Methodology
The main scope of the research is to underline how the entrance of professional managers and the implementation of MCSs can positively support the management succession process in FFs.
The research methodology is structured around a qualitative method (Bonoma, 1985; Creswell, 1994; Eisenhardt, 1989; Glaser and Strauss,
1967; Van Maanen, 1982): despite criticism in terms of trustworthiness (Atkinson and Shaffir, 1998; Guba and Lincoln, 1998), we chose this method for its accuracy both in understanding the dynamics of the observed phenomenon and in applying the theories to the analysed context (George and Bennett, 2005; McKeown, 2004). As quantitative method often restricts the opportunity to study context and environment both in terms of the company and the entrepreneur, a non-quantitative research approach would understand some pertinent and critical factors relating to the observed phenomenon (Dana and Dana, 2005). In particular, flexibility and interaction of the qualitative strategy in research permits a thorough study of the observed phenomenon for the following reasons. First, our research starts with a research plan as a basis for its analysis, which has been constantly modified for follow the observed environment; for instance, questions formulation could be based on each respondent’s willingness and experiences. Second, the relationship between an entrepreneur and the environment of the company may be observed also by returning to previous steps of observation and modify them at any time. This is possible by developing a “loose-evolving framework” (Patton, 1987) according to the research goals in different phases, such as the following: the pre-testing on the field of the project viability, the inclusion in data-collection of any observation resulted from interaction and interviews, the exclusive and exhaustive coding of emerging categories, the analysis and interpretation of results, the triangulation of theories, and the validity of the analysis (Dana and Dana, 2005). Consequently, the used qualitative method generates an effective personal observation of events, situations, persons, transactions and interactions, along with document analysis and open-ended interviews. In addition, thick description (Geertz, 1973) and direct quotations from individuals in terms of their thoughts, attitudes, abilities, intentions and experiences favour our analysis.
Among qualitative approaches, we used the case study method, as it is the most suitable mean to fulfil the research aims (Gillham, 2001; Gummesson, 2000; George, 1979; George and McKeown, 1985; Merriam, 1988; Miles and Huberman, 1994; Stake, 1995), emphasising words rather than figures about specific situations and involved people (Maxwell, 2012). With particular reference to small businesses, the strategy of using case studies brings to a thorough study - both in depth and detail - of a certain number of individuals, objects or environments (Dana and Dana, 2005). Indeed, multiple qualitative aspects have been observed by recording interactions, attitudes, verbal and non-verbal communications, facial expressions, etc. Thanks to a combination of several aspects, we tried to
understand the entrepreneur’s perception of opportunities and motivations, along with his constraints in a given context (Dana and Dana, 2005). Quantitative data has been naturally used for verifying and confirming our findings.
Researchers frequently adopt the case study method in family businesses researches (De Massis et al., 2012), as it allows an understanding of the family sub-system (Chrisman et al., 2012) and comparisons between FFs and non-family firms (De Massis et al., 2014). In addition, FF heterogeneity, due to an intersection of family and business (Tagiuri and Davis, 1992; Chua et al., 2012), requires multiple theoretical perspectives and levels of analysis, and the case study is useful to achieve multidimensionality (Chiucchi, 2009, 2012 and 2014).
We used an explanatory case study (Johansson, 2002; Kotlar and De Massis, 2013), which allows an understanding of how the investigated phenomenon took place. Thanks to more specialised instrumentation and different strategy than classical research applied to the family businesses phenomenon (Bherer et al., 1989), the explanatory case study allows us to verify how professionalization can be effective and efficient in the succession of family businesses, by opening up the black box (De Massis et
al., 2015).
We observed a single case study, i.e. Vega Tools International (henceforth Vega), since it is relevant for the following reasons:
- it is a typical Italian small-sized FF, and succession and professionalization topics in Italian FFs are particularly interesting for researchers (Prencipe et al., 2008);
- over the last five years it has been involved in a professionalization process, with a significant change in managerial roles, the entrance of non-family members, and the adoption of formal MCSs. Concurrently, the company has undergone a succession process and a generational handover;
- it guaranteed us unusual research access for an extended period of time and, in addition, extensive collaboration by management. We were given several in-depth interviews and provided with extensive information and data (Yin, 2012).
Therefore, Vega can be considered as an extreme, representative and leading case study (Patton, 1990; Stake, 1995; Yin, 2012), and it is particularly suitable for revealing a phenomenon and for identifying relationships and logic among variables (Eisenhardt, 1989; Graebner and Eisenhardt, 2004).
Data were collected from multiple sources. The technique of being a participating observant permits us to understand both the entrepreneurship
and its social context, favouring a comprehension of human behaviour and the catalysts to various company activities. In addition, this approach allows us a phenomenon observation by interacting with its players and recording their behaviours, thanks to which we can better understand both motivations and reactions to stimuli (Dana and Dana, 2005).
Twenty-nine in depth interviews were conducted with actors directly or indirectly involved in the professionalization process within the firm. We adopted the interview tool, thanks to its attitude to observe a phenomenon at various levels (Alvesson, 2003; Eisenhardt and Graebner, 2007; Potter and Wetherell, 1987). In the selection of informants, participatory observation involves information from different sources and not limited to entrepreneurs. In particular, we found for helpful informants for identifying both entrepreneurs behaviour and their role in the community, along with the entrepreneurial activities (Dana and Dana, 2005).
In the initial stage (December 2011), three preliminary unstructured telephonic interviews were conducted twice with the CEO and once with the CFO. These interviews aimed to illustrate the research goal, and obtain access to various case-related material and key actors engaged in professionalization and management succession. When the key actors to be interviewed were identified, the second stage began (March-June 2012) and ten face-to-face interviews were conducted with the founder, the CEO, the commercial director, the technical area manager, one external consultant and five product managers. In addition, six employees operating at the lower level of the organisation (two warehouse employees, an accounting employee, a quality employee and two sales employees), an associate partner and two sales agents were interviewed in order to consider the perception about professionalization also at the bottom of the structure and by external subjects.
The interviews conducted in the second stage were semi-structured one-to-one (Alvesson and Deetz, 2000) and they were targeted and characterized by a rich articulated scheme. They lasted between 20 and 125 minutes and were structured in several parts: a first part had an introductory role, describing the sector in which the company operates, the history of the company, the organization of the firm, the family features and the role of each family member in running the business; a second part focused on the recently introduced professionalization, with a particular focus on MCSs and on the strategy formulation, implementation and control processes; a third part was finalized at better understanding the management succession characteristics and criticisms from the point of view of respondents. The interviews’ findings were autonomously analysed by the authors to avoid
influence by each other’s interpretations (Atkinson and Shaffir, 1998; Jönssön and Lukka, 2005). A comparison between authors’ interpretations was made.
In the third stage (October 2012-March 2013), some informants were re-interviewed (the founder, the CEO, the CFO, the commercial director and the technical area manager were interviewed for a second time, while the external consultant was interviewed twice more), with the purpose of following up on previously collected evidence, to clarify some important topics raised during the analysis of information and to capture changes in their opinions over time.
We deliberately asked the various respondents similar questions, with the aim of detecting inconsistencies and bias. We used retrospective interview methodologies with the scope of analysing the past and its influence on the present situation (Wolfram Cox and Hassard, 2007). In addition, each statement made by the various respondents was compared with the aim of finding any inconsistencies or distortions.
Other secondary sources were adopted, such as documentary material, including internal reports, documentation taken from websites and other published material. We triangulated the interview material with the documentary information and converged data to understand the case study in its complexity, avoiding separate considerations. Internal validity of our research (Yin, 2012) was improved by identifying some plausible logical causal relationships between variables and findings; external validity required an analytical generalisation of the phenomenon (Yin, 2012) rather then a statistical generalisation of the results. We tried to avoid subjective judgments, preferring a well-considered set of measures. We then sent the draft paper to the various informants, with the purpose of verifying our interpretation.
4. Case study
Vega is a company that imports and distributes the products of some of the most famous international brands in the machinery industry, exclusively in Italy. The company is based in Santena, a few kilometres from Turin, in the North-West of Italy, an area with a strong manufacturing culture. A 1000-square metre shed is used as a warehouse and also as the centre of customer service and product repairs.
Established in 1973 in Turin by two entrepreneurs, Enrico Vergnano and Bartolomeo Gattino, Vega had 20 employees operating at its Santena
headquarter in 2015, as well as various agents and associates working all over the country. The firm was involved in a severe economic crisis from 2008 to 2013 but its sales volume started growing again in 2014, and by 2015 was equal to 8.4 million, with a return on investment (ROI) of 3.22% and a return on equity (ROE) of 4.40%.
The past few years have witnessed considerable growth by Vega and significant changes in governance, strategies, organizational structures and management systems. After the exit of one of the two founders of Vega, in 2011, Giuseppe Gattino (Bartolomeo’s son) decided to join the firm, having previously been a journalist. He began training with the company to allow his predecessor to retire from his place as head of the firm and ultimate decision maker. Giuseppe Gattino tried to bring young people into the company and establish a new model of governance, based primarily on meritocracy. In particular, he convinced his father to undertake a professionalization process by delegating the management of specific functions to some non-family managers. The company hired a chief financial officer (CFO), sales director and, subsequently, a technical area manager. Bartolomeo Gattino and his son opened the doors to intervention from outside, co-operating with an independent management consultant. Nevertheless, the guidelines for the governance of the company continue to come from the Gattino’s family, which leads the company with centralized power, assisted by non-family managers.
Both the entrance of non-family members as managers and the training of the founder’s son outside the firm, before officially entering as CEO, represented the first dimension of the professionalization phenomenon involving Vega. As a consequence of this first step of professionalization, with the commitment of the family and with the support of an independent consultant, a change was made in the firm’s structure. The new management redefined the organization of business processes, reinforcing the matrix structure, at the beginning of 2012. This structure has streamlined the company, clarifying the cross-functionality of processes, without losing the division of the critical areas guided by the various managers. The four main functional areas (Finance, Control and Accounting; Sales; Logistics and Warehouse Management; Information and Communication Technology) have been crossed with the five business units corresponding to the five product lines. The customer care and the repair service coincide with the product business units, while quality management crosses all the areas.
In addition, a formal DCS was implemented in the first semester 2012, consisting of basic technical and financial tools, such as budgeting, cost
accounting methodologies and financial reporting for managers. With the support of these tools, the CEO, together with the non-family managers, was able to identify shared short-term goals, financial measures and plans of action in a more rational and conscious way, in keeping with the implicit strategy of the company. Subsequently, the availability of data and information on the business and its own success factors has led to the alteration of some patterns in the organizational activities and shaped the emergence of new and creative business ideas. The continuous interaction among managers and family members in face-to-face meetings underlined new opportunities and, at the end of 2012, a third stage of professionalization was begun. This was represented by the introduction of more explicit strategy formulation, implementation and control processes, merging the more traditional approach to business, typical of the Gattino family and of the founder of the firm, with a more formalised, informed and managerial approach.
At the beginning of 2013, the company was able to formulate and implement a new turnaround strategy, redefining critical success factors and key processes, and expanding targeted markets. In addition, due to the critical market conditions, the family sustained a substantial outlay to recapitalize the company, injecting liquidity. At that time, some shareholders left the company and sold their shares to the Gattino family. The Board of Directors was reorganised to comprise a Chairman (Bartolomeo Gattino, the founder), CEO (Giuseppe Gattino, Bartolomeo Gattino’s son) and a non-family member (Marco Sanpietro, CFO). In 2014, the tangible effects of professionalization began to be felt and economic-financial balance was achieved. In addition, the company was able to make investments in order to regain the revenues lost over the previous five years.
Retrospectively analysing the evolution of the firm, we can affirm that, before the professionalization process, the company was perceived as a pyramidal structure headed by the founder. Furthermore, at the beginning of the professionalization process in 2011, the non-family managers and the founder’ son were seen as an appendage, taken on by the founder out of kindness. Here are some of the comments made by the people we interviewed:
“The head of the company is Mr. Gattino, followed by Mr. Gattino’s son
“The organization is divided into three levels: the owner and founder of
the company, the product managers and the other employees” (accounting
employee)
The role of the founder’s son, who joined the company in 2011, was not fully understood by the employees at every level at the beginning, as declared by some of them:
“I really appreciate Mr. Giuseppe Gattino’s contribution but I think that
Mr. Bartolomeo Gattino is still the boss here” (product manager #1)
“When Mr. Bartolomeo Gattino asks me to do something, I stop doing
what I am doing in order to do what he wants. I act this way because he is the company’s boss and because we’ve always worked like this, and I can’t understand the role of his son” (quality employee)
The founder managed the company informally, with his mere physical presence and through his role as decision-maker and problem-solver.
“When there is any kind of problem, either in fulfilling an order or in warehouse management, I intervene personally to find the most timely and economic solution and the structure follows me in its practical implementation” (Mr. Gattino, the founder)
The absence of formalisation, in terms of procedures, goals, measures and plans of action, imposed visual management of the activities by the founder, but did not allow the coordination of everyday behaviour toward common processes, across the various departments of the company. In a specific question about the readiness of horizontal processes in the firm, many interviewees replied:
“I don’t know who the internal customers of my activities are. We don’t
have a real job description, procedures for process management and shared common goals. We work as always, using common sense and putting effort into our work. We don’t know what are our goals and measures of these goals” (sales employee)
A broken down nature of the activities prevailed and the impact of the single employee’s performance was never clear. They never understood how these performances affected the ability of the business to achieve stated objectives. There was a lack of formal analytical instruments, which
could have been useful in order to describe and summarize thoroughly and yet promptly the most critical performance issues.
These are the Commercial Director’s words: “nowadays, a company has
to reinvent itself in order to compete in a very aggressive market in which competitors have reduced average prices. Being able to measure our results as fast as possible is part of this change”.
The processes of strategy formulation, implementation and control were not formalized by Vega until the end of 2012. CEO Giuseppe Gattino tells us “strategy formulation and strategic planning were never a formalized
process inside the company” and one of the product managers in charge of
the cutting tools line says “a real corporate strategy never existed”. The CFO says “we always trusted the owner’s vision when it came to making
short- and medium-term predictions, observing the market just on the field. An explicit mission never existed and if we asked what the company strategy was, the answer would be - surviving”. Strategic planning was an
obscure subject inside the company and employees saw this process as useless or even counter-productive. In other words, a loss of time.
The members of the sales team reported “it will be nice having a
general strategic framework in order to organize work in the long term”,
and “unfortunately, the lack of strategic objectives causes conflicts and
misunderstandings”, and again “we may need team building sessions in order to learn how to work together to create long-term value”. The issue
was that the interviewees never reasoned in terms of strategic common goals nor fully understood the meaning of the company’s strategy. They never faced the problem of figuring out whether common values and goals existed and if they were aligned with individual ones. The founder’s values were implicitly transferred by just trying to act as an example and to build trusted relationships in the long term. The values that emerged in the opinion of employees were honesty, dedication and loyalty. Almost all the interviewees said that they believed in the owner’s vision of the future even if they were unable to explain it, saying that “Mr. Gattino knows what to
do” or “I trust Mr. Gattino, I don’t ask too many questions”.
One of the issues that came out was the quality of the communication between the owner, management and the rest of the structure. Nevertheless, there still were communicative obstructions inside the company due to cultural reasons and traditions consolidated over the years. The company has built itself around the founder, who never felt the need to communicate his purposes and his vision of the future. The respondents felt that, due to
the fact that the company had reached considerable dimensions, the formalization of the vision had become critically necessary and should be communicated in order to inspire employees. The strategy was trapped in the owner’s mind, without being shared with all the employees.
During the first semester 2012, the CFO proceeded with promoting the implementation of some of the DCS tools, including launching a budgeting process for sharing objectives and identifying goals for each of the company’s responsibility centres, considering the implemented strategy. The budgeting process was launched in January 2012 and a first master budget 2012 was approved in March for the year 2012. All the responsibility centres of the firm were involved and every manager had their own objectives and resources. Simultaneously, the accounting area developed a simple cost accounting system in order to measure the profitability of each product line and of each market segment. Overheads were allocated to the products in consideration of the corresponding revenues. Furthermore, additional non-financial indicators were detected using the company’s management information system, above all to monitor customer satisfaction concerning technical assistance and the quality of repairs.
At the end of 2012, the CEO, together with the non-family managers, tried, during frequent meetings and interactive discussions, to analyse the data and information provided by the recently implemented DCS and to formalize a new strategic planning process, starting with the identification of values, vision and mission. Through inter-functional work groups and regular meetings, also attended by CEO Giuseppe Gattino, the managers tried to reconstruct and formalize the innovative business strategy in six tangible steps:
- stronger penetration of the industrial segment; - international market extension;
- product line extension; - focus on niche products; - introduction of new products;
- integrated offers and premium prices.
As the Commercial Director explains, “Vega’s business strategies are
based on the choice of the best available product on the market and on the production of tailor-made offers for our most profitable customers”.
Therefore, a differentiation strategy, correlated to the company’s ability to store the products according to the request, emerged. Basically, it was necessary to maintain a stock of products that can be ordered and shipped on time. With regard to business strategy planning, solid supports for the
quantitative analysis of orders were required as well as a strong forecast about future machining market trends.
After the formalization of the strategic intentions and initiatives, the need to measure performances related to the main critical success factors was felt, establishing the realization of a preliminary PMS, capable of respecting the logic-casual relations identified, coherently with the Balanced Scorecard (BSC) model (see table 1).
Table 1
CEO Giuseppe Gattino says: “In order to compete we need to measure
our long-term performance with reproducible, reliable and measurable key performance indicators. Our competitors are structured companies with standardized processes and high operational efficiency. We need some indicators in order to support the strategy”.
Some critical success factors were selected in order to test the performance of the core processes, i.e.: the sales process and the logistics process. Then some performance indicators were selected, for consideration during periodic planning and monitoring of the strategic goals. The
concurrent control of the strategy was supported by the progressive introduction of a typical PMS, based on a feedback mechanism.
The creation of a PMS made the firm aware of its capabilities and encouraged it to honour progressive behaviours leading to enhanced cooperation among employees. At the same time, the presence of the founder’s son was perceived as increasingly necessary and useful for the entire firm, down to the lowest levels of the organizational structure. This ensured the continuity with the past that was necessary to a successful generational handover, as the CEO affirmed in 2013:
“Finally, I would say that I no longer feel like a stranger in my
company. People are starting to understand my role and trust my decisions”.
5. Discussion
Vega was created as a micro-enterprise. The success obtained during the ‘80s and ‘90s led to the company’s growth. However, its increase in size did not generate a reciprocal adaptation in the managerial system. The interviews clearly reveal how, prior to 2011, Vega did not implement any form of professionalization, either with regard to the entrance of professional managers or the adoption of PMSs. These factors did not invalidate the growth of the company during the years of greatest success. However, they created issues of goal orientation during the period from 2011 to 2013, characterized by the presence of a financial crisis all over the world.
The company has always been a family-owned firm. In this context, activities have rarely been undertaken with a critical eye and a spirit of innovation by the employees at the bottom of the organisation. The absence of an explicit vision, mission and common goal caused the organizational structure to become accustomed to a style characterized by inactivity, due to prior success and trust in the founder.
In 2011, the founder realised that it was necessary to prepare his succession in the company and launched a professionalization process, opening entry by his son and other non-family members to management, using the skills of an independent consultant. He assessed the possibility of assigning the role of CEO to his son, who had had significant training and experiences outside the company.
The new management (the founder’s son and external managers) decided to deal with some new challenges. They tried to collect data and
information on the firm and its responsibility centres, measuring both financial and non-financial indicators, by implementing an elementary DCS. In order to maintain leadership in a strongly reshaped marketplace in terms of volume and turnover, they identified new performance oriented values, a new mission and vision, strategic goals and new strategic initiatives, adopting an interactive model among managers, typical of an ICS. The organization, reflecting a participative leadership style and a real decentralization process, through inter-functional work groups and meetings, recognized some values in order to integrate them into the mission for the future strategy. These included co-operation, sharing, passion and success. They became the basic principles of the company’s way of working, and an essential part of the organizational mission and vision.
In this way, management arrived at the formal definition of new strategy processes, based, on one hand, on the strategic initiatives deliberated by the family and, on the other, on the perception of emerging opportunities and risks by the operative managers in the firm. The CEO (the founder’s son) was supported, by the simultaneous effects of the implementation of a DCS and an ICS, in the strategy formulation and monitoring processes (Acquaah, 2013; Simons, 2000). To avoid the economic crisis in which the firm was involved, these systems permitted top management to handle strategic uncertain situations and to achieve an economic and financial balance in 2014, as proven by the results in the financial statement.
The implementation of an ICS in the company permitted managers “to personally involve themselves in decision-making activities” (Acquaah, 2013; Simons, 2000), influencing the formulation of a differentiation strategy. Indeed, the perception of customers’ needs and the identification of new ideas and product innovation were fostered by the ICS introduced into the firm. In addition, the tangible realization of improvement programs depended on management’s desire for a feedback mechanism and goal orientation, which could move the company towards dynamic and modern business management. DCSs serve “to review and monitor outcomes, and correct deviations from present measures of organizational goals; they are mechanistic systems used to tightly control actions and discourage opportunity-seeking behaviour, which are perceived as deterrents to creativity and innovation” (Acquaah, 2013; Simons, 1995). The DCS was initially introduced to monitor the level of efficiency, in order to ensure that financial resources were not wasted, but successively invested in supporting the differentiation strategy.
PMS, together with the entry into the firm of professional managers, are typical aspects of professionalization, and they were used to support and permit the founder’s son to really take the reins of the company, through strategy formulation, implementation and control processes, and to make everybody understand how generational handover and management succession were the key for the return to economic value generation.
6. Conclusions, implications and limitations
In short, and according to Simons (1995, 2000), DCSs and ICSs work together at Vega, and “the information and learning generated by ICSs can be embedded in the strategies and goals that are monitored by DCSs”. Acquaah (2013) affirms that FFs are “likely to achieve a balanced used of DCSs and ICSs to implement their business strategy, as they want to preserve socio-emotional wealth, in addition to their interest in both economic and non-economic benefits”. ICSs and DCSs, jointly provide the family owners and managers, as well all the employees of the firm, with “the advantage of establishing broad constraints within which employees are expected to operate, balancing those constraints with an enabling environment to exploit innovative opportunities and facilitate the development of the capabilities required for the successful implementation of the strategy” (Acquaah, 2013). At Vega, managers work together in an interactive environment in order to capture emerging opportunities and innovation (ICS), but at the same time, they are supported by DCS to avoid misunderstandings and opportunistic behaviours that could preclude the achievement of the strategic goals of the firm.
ICS and DCS and their dynamic tension, introduced by Vega when the succession process began, thanks to the entry of new managers, were useful to make the generational handover successful. On one hand, they enable the transfer of power from the founder to the CEO (the son of the founder), but they also enable passage from independent managers and the consultant to family members, reinforcing the professionalization process.
Concluding, we can say that professionalization in a FF strengthens the
processes of strategy formulation, implementation and control and positively supports management succession and generational handover (HP confirmed). Indeed, the entrance of professional managers together
with the introduction of formal MCSs represented a considerable change at Vega, which was useful to improve the strategy formulation,
implementation and control process and, consequently, to support management succession.
This article can be considered as a development in the research studies of family business management and, in particular, it contributes to literature concerning the effects of the implementation of MCSs in FFs during a management succession. Using an explanatory case study, this research proves that formal PMSs can be sustained with positive effects on succession and strategy implementation. Indeed, DCSs and ICSs, and their dynamic tension, represent a positive solution to maintain competitiveness, above all when the founder of the firm is preparing his succession. ICS contributes to the emersion of new opportunities and creativeness within the business and enables the top manager, usually a member of the family as in our case study, to capture emerging strategic initiatives that arise from the bottom of the structure, usually represented by non-family members. In this way, the ICS supports the succession process, creating the conditions to “substitute” the competencies and skills of the founder with the competencies and skills of all the people involved in the firm. At the same time, DCSs ensure that the strategic goals of the company deliberated by the family are well understood by all employees, avoiding opportunistic behaviours. We have underlined how the dynamic tension between ICS and DCS is fundamental to reinforce the competitive advantage in a FF, especially when it is involved in succession processes.
We have strengthened the assumptions of Acquaah (2013), who sustained that one of the functions of MCS in FFs is to support the implementation of business strategies. Furthermore, we have reinforced the conclusions of Giovannoni et al. (2011), according to which MCSs can be formalized to enable the reproduction of the founder’s values, culture and skills relating to the business, in a way that can be understood by the family members, managers and employees. In addition, we have underlined how MCSs, professionalization and succession are intertwined in FFs and how it is important that their interplays are jointly observed.
One limitation of the paper is represented by the presence of just one case study, which makes it hard to uncritically generalize our conclusions. In this research, we chose to adopt an explanatory case study method, focusing on a small FF, which purchases and sells technical components and services for the machine tools sector. Although our case study is representative, it could be useful to extend our research data analysis using a multiple-case study method, with the purpose of comparing strategic approaches and MCSs adopted by each company, both in the same sector and in other sectors.
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