Planning for Succession: The Needs of Business and Its Management

Planning for Succession:

The Needs of the Business and Its Management

Management Report
A Monthly Report About Management, Business and Organizational Development
Volume II Number III

The four key factors in effective succession planning are

The needs of the owner

The requirements of the business and its management team

The demands of ownership transition

Concerns about inheritance

The last Liebowitz Management Report focused on the needs of the owner and spouse. This issues explores the needs of the business and its management.

SHARING THE VISION

Sharing the vision of the business's future with management is a critical factor which is, astonishingly enough, often overlooked by owners in succession planning. "After all," says the owner, "it's my business and what I choose to do with it is my decision alone. My big concern is my family." A sentiment more detrimental to succession planning could not be deliberately crafted. Yes, the business belongs to the owner, who can do anything with and to it. But then the surprises begin to appear as goals for succession and transition become depressingly unattainable.

When the needs of the business and the management team are not considered, the purchase value of the business often diminishes; the problems facing a successor can be insurmountable; and inheritance is threatened. "Had the 'Old Man' still been in the saddle, the horse would have remained a contender!" is a frequent but questionable rationale for business failures during the reign of a successor or new owner. Perhaps what faced the new president were inherited management and business problems not solved by the original owner and not recognized as problems by the incoming president until too late.

BUSINESS STRUCTURE AND THE MANAGEMENT TEAM

The moral of the story can be stated at the outset: to provide a strong base for succession planning, the vision of the future of the business as a business entity must be shared by ownership and management. The notion of participatory management is only a small aspect of that vision. The process of sharing involves:

Setting corporate goals and defining specific action plans to achieve these goals:

Providing input about the future organizational structure; and

Clarifying career opportunities and incentives for all employees.

Management and employee participation in setting the course that the business will take enhances commitment and loyalty to, and identification with, the business and ownership. This is in sharp contrast to paternalistic ownership (either authoritarian or benign) that holds all decision-making responsibility and authority within the shadow it casts. The consequence of paternalistic ownership is that management and employees feel and act as if it's "we" vs. "he."

STRATEGIC GOALS AND ACTION PLANS

The proverbial five-year plan has become either notorious or laughable in many businesses. Some believe five years is too far off to even think about, or, useless because business conditions as a rule change suddenly and dramatically. The assumption is that a five-year plan, were it to be developed, would then be cast in stone, demanding to be followed exactly, and consequently not responsive to changing circumstances. However, that is not the purpose of a five-year plan.

Whether we own up to them or not, each of us has implicit or explicit assumptions about the future. The sales manager thinks that going into a new product line can increase sales dramatically. The operations manager believes that additional space and equipment is needed for efficiency. The comptroller knows exactly what expenses must be cut to increase net profit. To the extent that they don't know what the others have in mind for the future, much less what the president is thinking about, miscommunication, conflict and mistrust will result. Once a decision about any of these items is made in isolation from the others, it forces every one to reluctantly reframe his/her picture of the future.

The business owner of a large and growing firm died suddenly, leaving the business to his wife who, in turn, appointed their son to run the business. He had worked there for a long time and was generally acknowledged as the heir apparent. However, the son and the plant manager rarely agreed on goals, both in the past when the son had been the successful head of sales and currently in his role as president.

The father's view of the future had been to rein in growth. He had communicated this to the plant manager but not to his son who had thought that a move into new and more advanced product lines was supported by his father. Prior to his father's death, the son had continually criticized the plant manager as being behind the times and had wanted him replaced. The plant manager had seen the son as a young upstart. When it became apparent after the father's death what this lack of communication had caused, a mutual re-evaluation occurred and common goals could then be pursued.

When open communication was established, they discovered that the father had been very concerned about protecting his estate, the majority of which was the business itself. He had been afraid of spending money for equipment needed to compete in new markets, fearing that the debt load might adversely affect his estate. But since he had wanted his son to succeed him as president, he had promised him anything to keep him in the business.

A five-year strategic plan serves as a magnetic guide to the future, as a clearing house of ideas that forces communication. A 2 1/2 year plan then becomes a reality check: what would have to be accomplished within 2 1/2 years to serve as a realistic platform for achieving the five-year goals, and can this in fact be done? How attainable a 2 1/2 year plan could be can then be measured by what the management team considers is possible to accomplish in a one year plan. The goals and action programs of the three plans can be adjusted until they are realistic and attainable.

In the example above, this strategic planning process invited participation by each manager. Management was able to determine which new markets to enter, new customers to pursue and new products needed to compete in these markets. The management team coordinated this with a purchase plan for new equipment that fit the comptroller's ideas of prudent spending and satisfied cash flow requirements. Securing the necessary training, personnel, software systems, etc., was coordinated with the financial, production and sales requirements.

With managers discussing projected gross sales, gross profit, net profit, return on investment and assets, etc., each becomes aware of his or her responsibility for attaining those goals. Disagreements can surface and either be resolved or researched further until resolved. Management is then in a position to translate corporate goals into departmental goals and action plans, and these, in turn, into individual employee goals and action plans. Performance criteria, expectations and goals become clear for all individuals at all levels within the company.

The result is awareness and agreement that serve as an antidote to blaming, scapegoating and failure. In our example earlier, the plant manager emerged from under the son's label of "an incompetent has-been" to a progressive manager willing to experiment, provided he knew what was going on.

ORGANIZATIONAL STRUCTURE AND TEAMWORK

Given an accepted plan for the future, two questions become more easily reconciled:

What structure should the organization have in order to advance into the future?

Which people can carry the business into the future?

A very creative way of looking at how businesses are structured is contained in Robert Keidel's book, Game Plans: Sports Strategies for Business (E.P. Dutton, New York, 1985). All businesses, regardless of size, exhibit primarily one of three basic forms: football, baseball and basketball. Firms may exhibit one of the three in one part of their organization, while other divisions or departments exhibit different structures.

Winning football teams are characterized by tightly knot and coordinated platoons and special teams, where each player's role is carefully designed and programmed. The prototypical example of a football-type business is a manufacturing firm.

Competitive baseball teams are composed of individual players who interact as a team only periodically, such as when the ball is in play. Even then only several players are involved at any one time. A sales force can be characterized in this way.

Basketball requires continual, spontaneous and flexible teamwork, with little planning and integration from the coach. The creative department of an advertising firm is a good example. A great deal of emphasis has been placed on how ad hoc work teams composed of members from different departments are needed to ensure the success of total quality and continuous improvement projects in the workplace. One of the supports for re-engineering of businesses is basketball team structures.

Once a common vision of where a business is headed is developed and clearly communicated among the team, how to structure the organization becomes apparent. Maybe the various departments have functioned too independently of each other, causing a poor shipment record. Perhaps the sales force, whose compensation is based on individual performance, have been cutthroat with each other leaving a bad taste in customers' mouths and bad feelings towards each other. A new compensation schedule based on team effort and mutual support may be indicated. The manufacturing operations, in playing football too rigidly, may not have been able to get product out fast enough to suit customers and, therefore, need to be more basketball oriented.

Given the business form (football, baseball, basketball) required by the future goals of the company, the necessary personal and professional characteristics of the successor become more obvious. A football team needs a meticulous planner. The players on a baseball team appreciate a coach who is attuned to them as individuals. A successful basketball coach can tolerate and appreciate the need for flexibility and spontaneity. This is not to say that other qualities are not desirable and essential, but only that the features noted above are mandatory.

The son who succeeded his father at his death in the example cited earlier was, fortunately, very much a basketball coach. The father had acted the coach of a baseball team, with each department functioning through him; he was the only one who knew the performance, capacity and functioning of each department. Thus, if a new product came along, he made the decision whether to go ahead with it or not based on his knowledge of production capacity. The plant manager had never known ahead of time what new sales avenues the sales manger, the son, had wanted to pursue; the son really hadn't known what the capabilities of operations were. Under the new regime the department heads, in learning to play basketball, began to pool the necessary information needed to pursue growth.

Analyzing a business in this way provides more input for the future disposition of the business. Not only does the business management and ownership address the question of whether there is a family member qualified to become the successor, but also whether the business has the internal resources to proceed into the future. Perhaps personnel with specialized skills need to be added. Maybe an outright sale is in the best interest of the company, its employees and the family. A search for a strategic partner might be in order.

CAREER OPPORTUNTIES AND INCENTIVES

The loyalty of management and employees is often suspect in family owned businesses and, if they stay around, the reason offered is that they have no other place to go or are not qualified to obtain positions elsewhere. A frequent lament is that good employees are hard to find; if found, then their loyalty is questioned; and, if they stay, their abilities are denigrated -- and so it goes round and round.

Successful succession requires the loyalty of employees and management. When they are made part of the planning process, trained to perform their jobs, given the responsibility to contribute to the growth of the company, and evaluated, promoted and rewarded accordingly, their loyalty is rarely lacking. A succession plan that takes into account their needs and concerns receives their support.

In our example, not only did planning keep the management team intact, but it produced an even more loyal management crew. Each member expressed relief that the son had succeeded to the presidency and had engaged them in the planning process. Prior to the father's death, several people had thought that the business was beginning to stagnate and had presumed that the father was preparing to sell it, leaving them at risk. These people were the ones in whom the father had confided his concerns about the safety of his estate. They had translated his fears into the assumption that he wanted to sell. They, in turn, had slowly lost interest in doing more than a nine-to-five job.

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