Succession Planning in Multi-Faceted Small Business Enterprises

Executive Summary and Background

Experience in organization management triggered this research interest in succession planning and management in multi-faceted enterprises and organizations. Further research confirms that multi-faceted enterprises and organizations lag behind other businesses and industries in the development of robust and successful succession planning and management programs. Through numerous inquiries, the anticipation is that best approaches will emerge that are applicable to both organizations and multi-faceted enterprises.

This will lead to improvement in leadership within these entities and stimulate further research on how to preserve gains and continue improving the process. From an in-depth review of the literature, it is apparent that multi-faceted enterprises and organizations require enhanced succession planning programs in order to counteract the dynamism of market forces and trends. For this reason, managerial leadership is a fundamental element for the success of such organizations. Leadership transition is necessary in order to counterbalance the challenges faced by large enterprises that govern various entities. With multi-faceted organizations expanding in both size and number, good leadership becomes essential.

Effective succession planning — particularly in terms of good leadership — is a major deficit affecting large enterprises and organizations. To help enterprises embrace successful leadership transitions, this study focuses on planning for executive succession in both small and large business enterprises. Succession planning receives extensive interest in the for-profit business literature (Beatty & Zajac, 1987; Brady & Helmich, 1984; Dalton & Kesner, 1985; Kesner & Sebora, 1994; Lynn, 2001; Vancil, 1987). The concept of succession planning spans a spectrum from basic efforts to plan for leadership change to a comprehensive view of organized internal talent development. Some level of succession planning is imperative, as succession plans are linked with higher organizational performance. Evidence further indicates frequently insufficient succession planning; smaller organizations especially may perceive inadequate resources to allocate to such planning and are challenged by thin ranks of internal talent from which to groom a successor (Ip & Jacobs, 2006).

Research interest in small business enterprises is very limited (Allison, 2002; Austin & Gilmore, 1993; Fletcher, 1992; Herman & Heimovics, 1989; Richie & Eastwood, 2006; Santora, Caro, & Sarros, 2007). Succession planning is also difficult in the large enterprise sector because of a shortage of proficient executive directors in the job market (Allison, 2002; Tierney, 2006), lower remuneration, poor organizational infrastructure, an increasing demand placed on executive roles (Tierney, 2006; Von Bergen, 2007), and attributes that make large organizations unappealing to entrepreneurs (Kunreuther, 2003; Von Bergen, 2007).

This study examines succession planning in multi-faceted enterprises and organizations through a variety of questionnaires and interview questions directed toward executive directors and entity leaders. Initial findings indicate that large organizations are more likely to embrace succession planning because they have more resources to apply to this strategy. However, even when succession planning is viewed as significant, organizations are doing little about it. Findings indicate that there is a need to replace executive leaders proactively if enterprises are to remain going concerns in the business world.

The organization examined in this study is an umbrella company that governs six operating entities, each at a different stage of development. The six entities are:

Signature Financial Services — a bookkeeping and accounting firm that specializes in offering customized solutions for home-based, small, and medium-sized organizations that do not require full-time bookkeeping staff.

Ottawa House — a co-working space that allows home-based businesses to take advantage of the amenities associated with having regular office space, without the overhead. This co-working space also facilitates collaboration between business professionals and creates networking opportunities.

Zoom Courier — a locally based day courier specializing in professional appearance, timed guaranteed delivery, and environmentally conscious "green" initiatives.

Organizational Description and Problem Statement

Granite Towncars — a solution for local transportation needs that fall between limousine service and taxis, offering the flexibility and professionalism of a limousine service without the inconveniences associated with waiting for taxicabs or buses.

Frank Training — a "to the point" business training firm offering team building, management training, leadership development, customer service courses, and a broad array of business-related programs. Frank Training also specializes in the LEGO Serious Play methodology.

Update — a social media company that allows business owners to manage their online social media presence without the cumbersome task of handling it internally.

As an entrepreneur in a multi-faceted enterprise, there is a strong interest in succession planning. There are many concerns with the kind of management found in multi-faceted organizations, and unless leadership transitions are planned, these organizations will continue to suffer from poor management. There is no distinct, well-communicated succession planning effort across this organization. While various management and leadership development classes and opportunities exist within the organization, employees are uncertain where to look and whom to consult for guidance on advancement. In large organizations, there is often no synchronized or communicated effort to track high performers toward specific management positions. This deficiency of coordination and planning leads to uncertainty and speculation each time a senior leadership vacancy occurs, and this uncertainty permeates both middle and lower management positions.

The pool of candidates for senior leadership positions comes from these ranks, yet there is no coordinated effort to develop lower-level employees into tomorrow's leaders. If this trend continues, organizations will suffer from job dissatisfaction and lose high-potential personnel to competitors. Therefore, introducing succession planning in multi-faceted organizations is necessary to allow for structural changes as entities experience growth through various stages of development.

The purpose of this study is to examine succession planning efforts at a multi-faceted organization. By identifying the different entities and the succession planning efforts that should be in place, this research seeks to address the barriers and challenges that impede successful implementation. Researching the different entities is essential to developing a solid model for effective succession planning in multi-faceted organizations of all sizes and geographic regions.

Based on projection scenarios, the Canadian labour force was expected to grow to between 20.5 and 22.5 million people by 2031, up from 18.5 million in 2010. The general workforce participation rate was projected to fall from 67.0% in 2010 to between 59.7% and 62.6% by 2031 — a level not seen since the 1970s. This means that by 2031, the 55-and-over segment of workers would have grown to 19.1%, with an annual increase thereafter of 4.1%. Most people in this growing population segment hold senior-level positions in organizations. The result of this workforce decline is that it will become increasingly difficult for organizations to recruit and retain proficient employees for middle and senior management positions. Arnone (2006) identified some of the top concerns from business and industry: availability of talent, talent management, retention of key employees, and preserving intellectual capital. Data from Cutting Edge Information's report "Succession Planning for Results" indicates that 67% of organizations surveyed lack a formal succession planning and management process.

In addition, 45% of the world's largest organizations lack a formalized and meaningful strategy for developing their next generation of senior executives. This research study investigated the substantial lack of confidence organizations have in their ability to adequately staff senior leadership positions within the next five years, given assumptions that the required leadership skill sets will become considerably more diverse. According to Arnone (2006), nearly one in five Canadians aged 65 and over remains employed. As this population grows, organizations need to create mechanisms to attract and retain older workers as one strategy for addressing the anticipated labour deficit caused by mass retirements. Multi-faceted organizations may need to apply this approach as part of developing their succession planning and management programs.

According to Norm Devine, consultant for Development Dimensions International (DDI) (personal communication, May 10, 2007), approximately 38% of multi-faceted organizations have formal succession plans. It is apparent that many multi-faceted organizations are treating succession planning as an alternative or supplementary activity rather than focusing on long-term strategies for developing leadership competencies, educational programs, and desirable personality traits. Understanding the dynamics of business enterprises and creating a strategic plan for identifying the essential skills to cope with change will be crucial for the continued strength of the organization. Organizations also need to create growth opportunities to retain competent employees by leveraging their skills and offering more opportunity than they would find elsewhere (Corporate Training and Development Advisor, 2006).

When a service-based small business grows through backwards integration, what are the effects on the succession plan as compared to product-based industries or large organizations?

A literature review was conducted encompassing academic literature currently available on: (a) succession planning, (b) backwards integration, and (c) the operational and structural differences between small businesses and large organizations.

Literature Review: Succession Planning and Leadership Theories

There is a substantial body of literature on the benefits of succession planning and management. For this review, the scope was deliberately limited. There is an expectation that operational efficiency will improve as directors streamline operations and implement frameworks, plans, goals, and timelines for succession. Most of the available literature addresses what succession planning and management is, which types of programs tend to be most successful, and how to create effective programs. Literature specifically addressing the root causes of succession planning deficiencies in multi-faceted enterprises was sparse.

For the purposes of this research, inclusion of literature was limited to works containing theoretical underpinnings and material on small enterprise administrative leadership. This review provides background on what succession planning and management entails, the types of programs currently in existence, and descriptions of best practices. Particular attention is given to the experiences organizations have with generating and maintaining succession planning programs. The review also examines leadership theories and their connection to succession planning and management. The literature often focuses on the "how" rather than the "why," and by considering leadership theories in relation to succession planning, there is an opportunity to develop more effective programs and ensure genuine leadership engagement.

Succession planning and management programs focus on an efficient approach to developing individuals to move into key positions within the organization (Harrison, McKinnon & Terry, 2006; Michaels, Handfield-Jones & Axelrod, 2001). These positions may be limited to the most senior executive roles or may apply to a broader plan covering several levels of management within the organization. According to Harrison, McKinnon & Terry (2006, p. 22), succession planning refers to a systematic process of developing individuals to fill key roles in an organization. When an organization has a well-planned succession planning and management program, a number of qualified people are available and ready to transition into a range of leadership responsibilities (Harrison, McKinnon & Terry, 2006; Bonczek & Woodward, 2006). The literature emphasizes the significance of developing diverse types of succession planning and management programs to counterbalance the challenges of coming years.

According to Rothwell (2001), succession planning and management is imperative for several reasons:

(a) The continued existence of the organization depends on having the right people in the right places at the right times. (b) Recent economic restructuring limits the pool of internal candidates eyeing top positions. (c) Succession planning and management is necessary to advocate for diversity and multiculturalism and to avoid "homosocial reproduction" by managers. (d) Succession planning forms the foundation for communicating career paths, establishing development and training plans, and defining individual job progression.

In developing successful succession planning programs, common themes emerge throughout the literature. Harrison, McKinnon & Terry (2006) assert that succession planning criteria should include evidence of prior success in key operational experiences, together with consistent demonstration of specific behaviors that organizational leadership identifies as vital for success. Succession planning extends its functionality into developing candidates for success, rather than simply filling key positions (Harrison, McKinnon & Terry, 2006; Murphy, 2006; Larson, 2005; Gaffney, 2003; Cannella & Lubatkin, 1993).

Developing prospective leaders from within the organization, when done appropriately, offers a number of advantages: increased organizational loyalty, intrinsic knowledge of organizational culture, and greater likelihood of acceptance by colleagues who have built strong relationships with internal candidates (Harrison, McKinnon & Terry, 2006; Christie, 2005; Bonczek & Woodward, 2006). Byham, Smith & Paese (2002) discuss the concept of developing "talent pools" within organizations. These pools comprise recognized high-potential employees. Senior management collaborates with Human Resources to identify these individuals and determine the specific competencies needed in management positions. The benefit of talent pools is that a group of employees is ready to step into a wide range of leadership positions — particularly valuable in large organizations that manage numerous entities under central leadership. If individuals leave their positions, this approach also reduces the impact on succession planning by enabling the organization to identify others with similar potential (Byham, Smith & Paese, 2002).

According to Larson (2005) and Kesner & Sebora (1994), the concept behind succession planning is not confined to documents but is about developing an environment where future leaders can grow and flourish. It also means sustaining leadership awareness of the importance of identifying future leaders. When succession planning and management programs are informal, managers tend to appoint individuals most similar to themselves into leadership positions, impeding change and creativity (Byham, Smith & Paese, 2002; Rothwell, 2001).

A significant factor in succession planning is that those responsible for developing and monitoring the program should have well-defined roles and responsibilities. The plan and its effectiveness require regular review with strong support from senior leadership and human resources (Harrison, McKinnon & Terry, 2006; Byham, Smith & Paese, 2002). Organizations, particularly multi-faceted ones, should develop mechanisms for measuring employees' core and leadership competencies. It is essential that organizations clearly identify the competencies required to fill higher-level positions, not only currently but also in the future (Murphy, 2006; Christie, 2005; Bruce, 2001; Nadler & Tushman, 1999). All leaders within the organization need to work in harmony to conduct the succession planning process effectively and communicate its goals across the organization (Christie, 2005).

The literature describes quality practices that organizations use to build strong succession planning and management programs. For best-practice organizations, senior-level support is imperative (Fuller & Goldsmith, 2001; Rothwell, 2001). Integrating performance evaluation, employee development, feedback, coaching, and succession planning into one unified system is another key factor in developing strong programs (Gandossy & Verma, 2006; Christie, 2005; Fuller & Goldsmith, 2001; Rothwell, 2001).

According to Haworth (2005), organizations that succeed at succession planning share the following practices: they know their business; they understand their employees; they build confidence; they allow time for reflection; they identify viable opportunities; they embrace win-win approaches; they let go when necessary; they invest in the future; they use creativity; they take calculated risks; they encourage their people; and they establish a coaching culture. Kotter (2003) asserts that preparing people for leadership demands more effort from senior executives than most people realize. It is important to identify individuals with high leadership potential early in their careers and systematically promote the skills and competencies needed to develop them over time (Kotter, 2003; Kelloway & Barling, 2000).

Several major theoretical frameworks play an important role in succession planning and management development. For this research study, the following theories are particularly significant in ensuring successful succession planning in multi-faceted enterprises and organizations: trait theory, behavioral theory, situational theory, transformational leadership theory, and chaos theory. According to Holdford (2003), key questions include: What should one consider when selecting an effective leader? What traits should one develop to improve leadership effectiveness? And under what circumstances do diverse leadership behaviors work best?

Trait theory suggests that the most reliable predictors of a leader's effectiveness and success are the characteristics that individuals possess from birth or develop early in life (Holdford, 2003). In a general review of the literature on trait theory, the most important traits identified are drive, enthusiasm, integrity, self-confidence, aptitude, and knowledge (Holdford, 2003). Research on trait theory shows that the link between these characteristics and ultimate leadership success is weak and inconsistent. Despite this weak link, trait theory is not without value. While it may not explain all features of succession planning and management on its own, it remains a meaningful piece of the theoretical puzzle.

Behavioral theory explicitly identifies two basic categories of leader behavior: task orientation and follower orientation (Holdford, 2003). Leaders with a task-oriented approach focus on achieving the assigned task while giving less attention to follower concerns. This leadership style brings organization and direction by setting objectives, providing training, defining expectations and behavioral boundaries, and establishing rules and procedures (Holdford, 2003). While such behavior can create structure, it may become restrictive for lower-level staff. Follower-oriented leaders, by contrast, show greater concern for followers as people rather than as means to an end, demonstrating respect, building trust, and being sociable and approachable (Holdford, 2003). The ideal objective is to develop and promote leaders who balance both types of behavior.

Situational theory attempts to build understanding of how leaders adapt to the dynamics of different leadership contexts. As the theory asserts, the most important predictor of leadership effectiveness is the specific situation in which leaders find themselves (Holdford, 2003). The following mechanisms, adapted from Holdford (2003, p. 1783), describe the key situational factors:

Nature of the job: Jobs may be routine, non-routine, structured, or unstructured. A higher level of commitment is necessary in proficient work environments where employees work autonomously to solve complex problems.

Follower characteristics: Some followers are highly motivated and require little direction, while others are less enthusiastic and require close supervision.

Relationship between leader and followers: Trust is a prime factor in a leader's success. Good organization fosters confidence and loyalty toward leadership.

Organizational constraints: Many organizations impose numerous constraints on leadership, including restrictions on the ability to recruit, dismiss, discipline, and reward employees.

The leader's capacities: Some leaders have more experience and ability in handling leadership situations than others. Adaptability is also key. The major element in situational leadership theory is the leader's ability to adapt to varied situations rather than attempting to change them (Holdford, 2003). Kenney, Blascovich & Shaver (1994) further illustrate the link between leaders and their subordinates by explaining situational contingency as a significant determinant of a leader's efficacy.

Transformational leadership theory also integrates into the succession planning and management equation. This theory explains the key ways in which an organization influences its employees by developing meaningful work (Purvanova, Bono & Dzieweczynski, 2006). Transformational leaders are inspiring and offer individualized consideration to followers, attending to employees' personal needs for growth and development (Bass, 1985). Transformational leadership should create a more engaged, more committed, and less self-concerned workforce — employees who perform their duties well above the level anticipated (Purvanova, Bono & Dzieweczynski, 2006). In essence, transformational leadership is associated with results that exceed expectations, making it a potentially powerful component of succession planning and management.

As Remer (2006) confirms, chaos theory is about patterns — the way they develop and change. This may relate to phenomena at particular levels of application or draw on concepts from different disciplines (Remer, 2006, p. 56). Merry (1995) identifies five key ideas of chaos theory: trigger points, order in chaos, order from chaos, chaotic transition, and self-organizing process. These concepts are explained as follows:

(a) Trigger points are an urgent recognition that a change in conditions has occurred and that action is necessary if adequate adaptation is to follow. (b) Order in chaos is the notion that order is maintained within chaos through individuals' behavioral responses. (c) Order from chaos is the concept that order can emerge and that a new level of functioning is achievable. (d) Chaotic transition is the period of transformation in which a person experiences ambiguity, unpredictability, and uncertainty. (e) Self-organizing process occurs when a system moves from a state of equilibrium through chaotic disequilibrium and ultimately emerges into a new way of functioning (Merry, 1995, p. 85).

Additional elements of chaos theory include: phase spaces (conceptualizations of the potential states of a system); strange attractors (core points of attraction that generate patterns in dynamical, chaotic systems); fractals (representations of complexity, conveying that what a person perceives depends largely on their vantage point); self-affinity (the tendency for recursive processes to produce recurring patterns at different scales); bifurcation (the splitting of patterns into greater complexity); recursivity (the self-reflexive feeding of data from a system's patterns back into the process of producing them); randomness (the inability to predict the next or previous state of a system given knowledge of its current state); self-organization (the intrinsic tendency for systems in disordered states to form new consistent patterns); and resonance (the synchronization of a system's constituent elements, leading to reciprocal effects) (Remer, 2006, p. 57).

Chaos theory plays a significant role in many research studies and scientific disciplines and is now demonstrating applicability to social research. Most social systems are in a continuous state of flux. Change occurs on a daily basis, and the outcome of change is disruption. As confirmed by Remer (2006), all dynamical mechanisms — human or otherwise — are recursive and change through feedback loops (Remer, 2006, p. 56).

In essence, creating and maintaining successful succession planning and management systems in multi-faceted enterprises requires clear knowledge of the above discussed theories, their implications for the future of the organization, and the management framework. If succession planning is implemented without grounding in underlying theory, the plan is likely to fail.

Trait Theory involves identifying desirable behaviors and characteristics for leaders, which is significant in succession planning. When developing talent, there must be particular qualities that employees are expected to demonstrate. Behavioral Theory explains which behaviors leaders should embrace, distinguishing the traits that are most essential in leadership roles. Situational Theory focuses on how organizational leadership adapts to changing environments. When a succession planning system places emerging leaders in diverse and challenging environments, it creates opportunities for both subordinates and senior staff to evaluate readiness for greater responsibility. Transformational Leadership Theory holds that leaders should influence employee productivity by offering meaningful work — a principle that is critical in succession planning when managing multiple entities and developing employees alongside management. Chaos Theory affirms that disruption is an essential condition that drives change in social systems, fitting naturally into succession planning in multi-faceted organizations with their ever-changing workplace needs.

The organization is in an almost constant state of change, and it is essential for its leadership to recognize that disruption is an enduring and conventional part of multi-faceted organizational life. It is also significant to review current succession planning and management programs in order to identify best practices and discover further opportunities for improvement.

Conclusion

Succession planning is a critical part of business operation, and one that is often overlooked as day-to-day operations and entrepreneurial tasks arise. This study will allow for increased awareness of the importance of a proper succession plan and exit strategy, with a focus on the small business entrepreneur of a multi-faceted entity. Using the research methods described above, it is anticipated that the organization will streamline operational efficiency through the implementation of a proper succession plan.