Managing Intellectual Capital in Small-medium Family Business Succession: an Integrated Framework

Small and medium enterprises (SMEs) represent wide-world a fundamental factor in economic development and wealth. In a similar manner, family business is one of the most frequent organisational and managerial typology. The Family Firm Institute published data concerning the number of family business in industrialised countries. As such, in North America family businesses account for some 80- 90%, while in the U.K. some 75%. In Germany two third of SMEs are family owned and managed, while in Italy they reach 80% (Marseguerra, 2004). One of the cause of business termination is the conclusion of ownership by one generation and the failure of the following generation to assume ownership. A recent European Commission’s study conducted by the Best Project Expert Group (2002) estimated that 1/3 of European SMEs will experience an intergenerational transfer in the next 10 years: on average, this would mean some 600.000 SMEs per year. The literature suggests that 30% of firms survive into the second generation of family ownership, and just 15% survive into the third generation (Kets and Vries, 1993; Ward, 1987). The economic and social consequences of this data are relevant. Despite the importance of the issue, there is still wide areas for theoretical development (Sharma, Chrisman and Chua, 1996). The main assumption of this paper is that business transfer in small-medium family firms is mainly a matter of maintaining the intellectual capital (IC) embedded in the entrepreneurs’ expertise, skills and experience. Indeed, Petty and Guthrie (2000: 159) suggest that “knowledge management is about the management of the intellectual capital controlled by a company”, conversely in small businesses most of the IC is controlled and owned by the entrepreneurs as form of tacit knowledge, work-related knowledge, work-related competencies, entrepreneurial spirit, and so on. The entrepreneur represents not just the main source of strategic human capital, but also of relational capital, such as customer relationships, business partnerships, distribution channels. Given this assumption, during the business transfer process, most part of the organisation’s IC is at risk and needs to be adequately managed. IC management can be conceptualised using two different perspectives: the stock and flow approaches (Guthrie et al., 1999). The paper refers to the latter, since managing IC in small-medium family business succession (FMS) is a matter of understanding “the creation and development of value” (Mouritsen, 2004: 261), and making sure it remains with the new generation. The aim of this paper is to develop an integrated theoretical framework for managing knowledge in FMS. In doing so, the paper draws from literature related to family business succession and the knowledge management one. FMS, in this sense, is perceived as a process of knowledge transfer to preserve the organisation’s future value creation capacity. The theoretical model is then used as an hermeneutic device to understand how tacit knowledge is created, accumulated and transferred in some case studies of SMEs experiencing a business succession process. Twelve small family firms, from different economic sectors and located in the same economic area, voluntarily joined to the project. The research is longitudinal and adopts a mixture of methods, structured and unstructured interviews, document analysis and observations. The paper will be structured in the following fashion. The first section discusses the international and national relevance of the business succession process in family firms. The second and third sections present the literature analysis, while the fourth section describes the theoretical framework adopted. The final section describes the research design methodology and methods.