Promoting Family: A Contingency Model of

Family Business Succession

Susanne Royer, Roland Simons, Britta Boyd, Alannah Rafferty

Succession is a challenge to family businesses for a number of reasons, including the need
to address the issue of intergenerational handover. This article focuses on one aspect of
succession in family business by investigating when family members are preferred as
successors. Results from 860 family businesses indicate that specific (tacit) knowledge
characteristics combined with a favorable transaction atmosphere, in certain contexts,
make a family member the most suitable successor. A conceptual model is presented that
outlines when inside-family succession is preferred.

Introduction family insider may be against the interest of the

An increasing number of family businesses are
facing succession-related concerns (e.g., Astra-
chan, Allen, Spinelli, Wittmeyer, & Glucksman,
2003). At the same time, succession is often not
effectively conducted, especially not during the
lifetime of the founder (e.g., Fox, Nilakant, &
Hamilton, 1996; for an overview, see Stavrou,
2003). It is not surprising, therefore, that the legal,
financial, and personnel implications of business
succession are widely discussed in the literature
(e.g., Lewis, 2000; Morrow, 2001; Rothwell, 2003;
Sharma, Chrisman, & Chua, 2003).
One key question when considering succession
planning is to decide for or against a family
member as a successor. Nepotism is suggested to
be one reason that succession within the family
occurs (Gersick, Davis, Hampton, & Lansberg,
1997). Pollak (1985, p. 587) argues that certain
dangers are associated with internal successions
and suggests that “nepotism may prove a serious
problem for the family firm.” Barach, Gantisky,
Carlson, and Doochin (1988) investigate the entry
of the next generation into family businesses from
a strategic perspective and report that choosing a
group of family firm shareholders. Yeung (2000)
describes how to deal with nepotism as a limita-
tion to growth by investigating cooperation and
training potential in Chinese family firms.
However, researchers have not provided clear evi-
dence that nepotism is a dominant reason for
handing down family firms to other family
members. Bjuggren and Sund (2002) and Lee,
Lim, and Lim (2003) even come to the conclusion
that valuable idiosyncratic knowledge of family
members as a relevant factor is a much neglected
topic of discussion in this context. This is the point
of reference for this research. An issue that has yet
to be addressed in this context is whether family
succession is more or less appropriate in different
industries since family firms seem to be especially
profitable in sectors such as construction or dif-
ferent kinds of crafts (e.g., Klein, 2000).
In summary, an initial review of the literature
reveals that while the literature on succession in
family firms has made great strides in the recent
past (e.g., Barach & Gantisky, 1995; Cabrera-
Suárez, De Saá-Pérez, & Garcia-Almeida, 2001; Le
Breton Miller, Miller, & Steier, 2004; Sharma &
Irving, 2005), it is still unclear whether a family

FAMILY BUSINESS REVIEW, vol. XXI, no. 1, March 2008 © Family Firm Institute, Inc. 15
Royer, Simons, Boyd, Rafferty
member successor is more (or less) appropriate in
different industry contexts. We address these
issues here.
In this article, we focus on family businesses
that are called family firms because of the owner-
ship structure of the company and the type and
level of influence the family has on the firm. In
Davis’s (2001) terminology, we take family-owned
and managed as well as family-owned and led
businesses into account. Regarding business suc-
cession, we focus on the situation where a new
individual is placed in charge of managing and
leading a family business. This person may be a
family member or a “family-outsider” chosen
from the external labor market.
Several factors are likely to affect family busi-
ness succession, including the intentions or per-
spectives of the next generation (Handler, 1994;
Stavrou & Swiercz, 1998). A number of recent
studies have found that the quality of interper-
sonal relationships inside the family influence
successful business processes (Cabrera-Suárez,
2005; Yan & Sorenson, 2006). However, we identify
the ability to acquire the predecessor’s key knowl-
edge and skills as well as the commitment to the
family firm (Bjuggren & Sund, 2002; Brockmann,
Hoffmann, & Dawley, 2006; Cabrera-Suárez, 2005;
Cabrera-Suárez et al., 2001; Lee et al., 2003;
Sharma & Irving, 2005) as key factors affecting
whether family business succession occurs.
However, to date there has not been a theoretical
framework available in the literature that consid-
ers the influence of knowledge, the quality of
interpersonal relationships, and the sector in
which a firm is located on family business succes-
sion. This article addresses this limitation of
current research by developing a contingency
model of business owners’ orientations in succes-
sion choice linked to different types of relevant
knowledge. Our objective is to clarify the reasons
for an internal versus an external succession deci-
sion. We do this by systematizing particular busi-
ness situations and linking them with different
types of knowledge that a potential successor
possesses.
This article focuses on the potential of transac-
tion cost theory to give insights into the costs
16
associated with transferring valuable knowledge
to successors from within the family versus from
external successors. To differentiate succession
situations, different kinds of relevant knowledge
are categorized with regard to associated transfer
costs. The result is a model linking contingent
factors with successor choice (see the next
section). The third section of the article describes
the empirical investigation conducted to test the
conceptual model. A discussion of the results and
conclusions follow.
Transaction Costs and Knowledge
Transfer in Family Businesses:
The Contingency Model of Family
Business Succession
Transaction cost theory identifies family busi-
nesses as one part of the economy of family
organizations (Williamson, 1989). The principal
assumption of transaction cost economics (Coase,
1937, 1984; Williamson, 1975, 1985) is that indi-
vidual behavior is governed by bounded rational-
ity and opportunistic self-interest. Transaction
economic concepts suggest that information can
be asymmetrical and that transactions are not
costless. In transaction cost research, the appro-
priateness of different organizational forms and
modes of governance is analyzed and the role
importance and difficulty of contracting as well as
the importance and implications of the unique-
ness of assets (e.g., specific knowledge) is demon-
strated. The objective is to select the governance
mode for a transaction that causes the lowest
costs, taking the economic use of scarce resources
as an efficiency criterion.
Therefore, transaction cost theory is an appro-
priate tool to analyze different situations of suc-
cession in family firms and derive conclusions
regarding the person with the lowest transaction
costs regarding the transfer of relevant knowl-
edge. Knowledge transfer in this context has to be
imagined as a process “in which an organization
recreates a complex, causally ambiguous set of
routines in new settings and keeps it functioning”
(Szulanski, 1999, p. 5). The problems associated
with such a process of knowledge transfer are
 Promoting Family: A Contingency Model of Family Business Succession
often referred to as being “sticky” (Szulanski,
1996; von Hippel, 1994). “Stickiness in knowledge
transfer, by definition, hinders knowledge from
transferring” (Jensen & Szulanski, 2004, p. 509).
The Value of Internal Family Succession
Pollak (1985) discusses the advantages and disad-
vantages of family businesses from a transaction
cost perspective and identifies a number of advan-
tages of family firms, including incentives, control,
altruism, and loyalty. Pollak suggests that family
firms are most appropriate in uncertain environ-
ments or societies where nonfamily members are
not expected to behave in a reliable and honest
way, as well as in sectors with relatively simple
technologies.
A relevant aspect in the transaction cost eco-
nomic framework lies in the construct of knowl-
edge idiosyncrasy, which is caused by tacit or
implicit knowledge. Polanyi introduced the term
“tacit knowledge” to acknowledge that “we can
know more than we can tell” ([1966] 1997, p. 136).
This statement implies that some knowledge can
be acquired only by “learning by doing.” Bjuggren
and Sund (2002) show from a transaction cost per-
spective that the selection of a family insider as a
successor is not only preferable in an uncertain
environment but also when so-called idiosyn-
cratic knowledge is considered highly relevant to
the successful operation of the business.
Lee et al. (2003) use a transaction cost and game
theoretical framework to analyze the impact of
specific human capital in the form of idiosyncratic
knowledge, as well as capabilities of internal
family successors, on succession decisions. One of
the central results of their study is identifying the
problem that as soon as a family selects an out-
sider as the successor, this individual appropriates
a major share of profitability, which increases with
his or her assessed ability. Choosing a family
member as successor may protect a business from
this danger and make the transfer of success-
relevant idiosyncratic knowledge easier.
Further, a high level of mutual trust and
honesty can often be observed inside family firms
(e.g., Dyer & Handler, 1994; Pollak, 1985). Mutual
trust and honesty lead to a favorable transaction
atmosphere. The transaction atmosphere consists
of all sociocultural and technical factors that
affect the transaction costs of different coordina-
tion and motivation instruments (Picot, Dietl, &
Franck, 2005, p. 61). Communication processes
are a relevant basis of interaction between human
beings (Habermas, 1981, 1984). Picot et al. (2005)
show that Habermas’s “lifeworld” concept can
help in analyzing and understanding communica-
tion processes. A particular lifeworld implies a
specific form of living that impacts the thinking
and communication adopted by actors. The com-
plete background knowledge that makes commu-
nication possible is specific to a lifeworld. The
interpretation of statements and information
depends on the contextual lifeworld. Actors from
different lifeworlds thus may have difficulty when
communicating. When internal succession occurs,
family members usually have a similar lifeworld,
which simplifies communication processes and
enhances trust building. Social control and long-
term relations between family members often lead
to situations where a favorable transaction atmo-
sphere exists. This is of special relevance in envi-
ronments where opportunistic behavior may be
hard to detect. In addition, it has been suggested
that larger and older family companies “have
developed formal mechanisms for ensuring
family health and maintaining family stability”
(Astrachan, 2003, p. 2). Such mechanisms can
include family councils or assemblies, as well as
family constitutions or regular family meetings
(Aronoff, Astrachan, & Ward, 1998; Aronoff &
Ward, 1992).
In summary, combining the outlined knowl-
edge elements and the transfer costs associated
with external succession with the likelihood of a
favorable transaction atmosphere in family firms,
it seems reasonable to argue that family members
or internal family successors have advantages
compared to outsider successors. Family culture
in this context can be a valuable resource (Zahra,
Hayton, & Salvato, 2004). For example, a clan
structure can be an efficient organizational form
that reduces transaction cost compared to
markets and hierarchies (Ouchi, 1980; Ouchi &
17
Royer, Simons, Boyd, Rafferty
Price, 1978; Wilkins & Ouchi, 1983). Some family
cultures generate the congruence of goals and
shared assumptions and values that create the effi-
ciency of organizational clans in a highly insecure
environment. If family culture is transferred to the
family firm, the family becomes the organizational
clan.
Different Types of Knowledge
Knowledge can be differentiated into a number
of different types, including general, technical,
and experiential knowledge. Although general
knowledge (e.g., knowledge such as how to add
numbers) is relatively cheap to communicate and
transfer to others, that is not necessarily the case
for technical knowledge, which can be easily
transferred to scientists from a particular field but
bears a cost with regard to the transfer to others.
The knowledge of the chemical structure of a new
pharmaceutical would, for example, be difficult to
explain to someone without the relevant technical
knowledge of pharmacy and chemistry (e.g.,
Huang, 1999; Jensen & Meckling, 1992). The kind
of knowledge that is associated with the highest
transfer cost is experiential knowledge, which can
be defined as “that intuitive knowledge, based
upon training and experience, which is incapable
of translation into written form” (Williamson,
1975, p. 35; see also Bonus, 1986, p. 328). For
example, colors can be experienced only by people
who are able to see them and cannot be explained
to a person born blind. Experiential knowledge
forms the basis for craftsmanship or the building
of musical instruments as well as the develop-
ment of certain software.
Idiosyncratic knowledge cannot be readily for-
malized and relates to specific conditions of place
and time. For example, idiosyncratic knowledge is
seen as essential with regard to many agricultural
tasks (e.g., Dietl, 1993, p. 178), such as the knowl-
edge of when exactly to start harvesting wine. This
knowledge takes into account location- and
weather-specific conditions. Idiosyncratic knowl-
edge can also be related to the skills of certain
individuals, handling of certain materials, or the
preferences of certain customers (e.g., William-
18
son, Wachter, & Harris, 1975, pp. 256–257). Longe-
necker and Schoen (1978) give a good illustration
of how idiosyncratic knowledge may be acquired,
showing the different stages of a father-son suc-
cession. In the first stage, the son becomes aware
of some facets of business and is then exposed to
family members as well as the family-specific
jargon. Later, the son works part time in the
family business before starting to work full time
in the business at nonmanagerial jobs. After
awhile, the son works as manager to finally
achieve the stage of a de facto leader (for a similar
example, see Handler, 1989). One crucial facet of
experiential knowledge in family businesses lies
in exploiting the specific business networks that
often form one essential pillar of successful busi-
ness activities.
Lee et al. (2003) suggest that idiosyncratic
knowledge in family firms is often more person
specific than firm specific and, therefore, is only
accessible to family members or trustworthy
agents. The success of a family firm in terms of
its profitability often depends on idiosyncratic
knowledge that the managing family members
possess. This knowledge consists of important
personal contacts and networks and the ability
to motivate employees to cooperate, as well as
knowledge about local conditions and internal
processes in the family firm. An insider can
acquire this knowledge by learning by doing and
observation.
The Contingency Model of Family
Business Succession
The arguments in the previous section suggest
that a family member as a successor is beneficial
in terms of the strategically relevant transfer of
knowledge. However, one potential problem is
that an inside-family successor may not possess
the capabilities, competencies, and talent to
manage the firm adequately. A potential internal
successor has to have the experiential know-
ledge learned in the lifelong process of being a
family (business) member as well as the general
knowledge of how to manage a business and rel-
evant technical industry-specific knowledge. As
 Promoting Family: A Contingency Model of Family Business Succession

Relevance of general and technical industry-specific knowledge

Relevance of experiential family business-specific knowledge

LOW HIGH

Outside option has higher

Inside and outside option
have same probability to
be success promising
LOW
(I = O)
I (I < O)
Inside option has higher pro-
bability of being success pro-
mising because of access to
HIGH
probability of being success
promising because of the
greater range of talents with
general/technical knowledge
available on the market
II
Inside option is preferable
(I > O), if:

experiential knowledge
ISGKI + ISTKI + FSEKI ≥
(I > O) ISGKO + ISTKO

III IV
Figure 1 The Contingency Model of Family Business Succession.

soon as an external manager has an advantage relevance of experiential family business-specific

with regard to industry-specific general manage- knowledge and situations with high or low rel-
ment and technical knowledge, the outside evance of general and technical industry-specific
option has to be further analyzed. Or, in a more knowledge, resulting in the four-field matrix
formal way, the “inside-family option” is at least depicted in Figure 1.
as suitable as the “outside-family option” only as Square I of Figure 1 describes situations where
long as: the relevance of industry-specific, general, and
technical knowledge, as well as family business-
ISGK I + ISTK I + FSEK I ≥ ISGK O + ISTK O , specific experiential knowledge, is low. Examples
of firms fitting into this category are a kiosk at an
where: airport or a petrol station next to the highway. For
ISGKI = Industry-Specific General Knowledge of these businesses, it can be assumed that all out-
“inside-family successor”; lined kinds of knowledge are of rather low
ISTKI = Industry-Specific Technical Knowledge of relevance with regard to realizing competitive
“inside-family successor”; advantage. In such businesses, an insider or an
FSEKI = Family Business-Specific Experiential outsider are both suitable and selling the business
Knowledge of “inside-family successor”; would be possible. From this reasoning, a first
ISGKO = Industry-Specific General Knowledge of hypothesis can be derived.
“outside-family successor”;
ISTKO = Industry-Specific Technical Knowledge Hypothesis 1. In Low (FSEK) Low (ISGK + ISTK)
of “outside-family successor.” conditions (low relevance of industry-specific,
Who the preferred successor is depends on the general, and technical knowledge as well as family
difficulty of transferring relevant knowledge business-specific experiential knowledge), there
within a business in a specific industry environ- will be no difference in preference for internal or
ment. We differentiate situations with high or low external successor.

19
Royer, Simons, Boyd, Rafferty
Square II of Figure 1 is characterized by high
relevance of industry-specific general and techni-
cal knowledge and low relevance of family
business-specific experiential knowledge. In this
situation, it is more probable that a suitable suc-
cessor is found outside the family because of the
greater range of talents with relevant knowledge
available on the external labor market. This does
not suggest that family members per se are infe-
rior with regard to technical and general knowl-
edge; if there is a successor from within the family
with all relevant knowledge at hand, that would be
optimal. However, since the outside market for tal-
ented human resources is much larger than the
family internal market for such persons, it is sug-
gested that there is a higher probability of finding
a fitting successor externally than internally.
Firms in industries such as biotechnology or
information technology would fit into this cat-
egory. The relevance of general and technical
industry-specific knowledge is so crucial that
family-firm- or even person-specific experiential
knowledge disappears into the background. From
this reasoning, a second hypothesis can be
derived.
Hypothesis 2. In Low (FSEK) High (ISGK + ISTK)
conditions (i.e., high relevance of industry-specific
general and technical knowledge and low relevance
of family business-specific experiential knowl-
edge), external will be preferred to internal
successors.
Square III of Figure 1 illustrates situations
where a high relevance of family business-specific
experiential knowledge is combined with low rel-
evance of industry-specific general and technical
knowledge. These situations may imply a prefer-
ence for internal successors. Firms fitting in this
category can be found in the area of construction
(empirical studies show that construction family
firms realize 100% more turnover per employee
than nonfamily businesses) (Klein, 2000) or firms
engaging in different crafts (empirical studies
show that in this sector, family firms realize 300%
more turnover per employee than nonfamily
firms) (Klein, 2000). These firms are typically
20
small and medium-sized enterprises that are
handed down from generation to generation.
Often, the relevance of the experiential knowledge
is so central that such firms die when no offspring
is ready to take over. It often is impossible to sell
such businesses since the valuable resources can
hardly be recognized from outside and it becomes
difficult to attract external buyers. For the same
reason, it may be difficult to take an outsider as
an employed successor if this outsider has not
already worked in the firm for quite a while and
thereby achieved the status of a quasi-family
member. Building on this chain of arguments, a
third hypothesis can be derived.
Hypothesis 3. In High (FSEK) Low (ISGK + ISTK)
conditions (i.e., high relevance of family business-
specific experiential knowledge combined with the
low relevance of industry-specific general and
technical knowledge), internal successors will be
preferred to externals.
Finally, Square IV of Figure 1 displays the com-
bination of high relevance of industry-specific,
general, and technical knowledge as well as family
business-specific experiential knowledge. As long
as the family member has more knowledge than
the outsider, an internal successor will be prefer-
able. It is also important that the offspring is
expected to act less opportunistically than an out-
sider and that the family has better information
about his or her qualifications. However, if the
internal successor brings less knowledge than an
external candidate or there is no offspring avail-
able, the problem is how an outsider can achieve
the relevant experiential knowledge. Some evi-
dence suggests that it is possible to transform an
outsider into a quasi-family member. Examples
of firms fitting into Category IV are companies
building special machines or designing and/or
manufacturing musical instruments on a larger-
scale basis, often operating in certain market
niches as specialized medium-sized suppliers.
From this reasoning, Hypothesis 4 is derived.
Hypothesis 4. In High (FSEK) High conditions
(ISGK + ISTK) (i.e., high relevance of industry-
 Promoting Family: A Contingency Model of Family Business Succession
specific general and technical knowledge as well as
family business-specific experiential knowledge),
the equation will hold true. That is, the internal
successor will be preferred to an external one as
long as the family member has more knowledge
than the outsider.
Empirical Evidence From
Australian Family Firms
The transaction-cost-based framework developed
above systematizes and clarifies relations between
knowledge specificities and successor selection
taking into account other contributions by Lee
et al. (2003) and Bjuggren and Sund (2002). The
next step is to test this model in an applied setting.
Hypotheses 1 to 4 reflect the suggested relations
between knowledge factors and preference for
internal successors. These hypotheses were tested
in order to contrast the theoretical model with
empirical data. As such, the theoretically derived
propositions regarding succession are tested on
860 Australian family businesses. The results of
this empirical study are outlined below.
Methodology
Sample. A questionnaire was sent to 4,471
family firms in eastern Australia and 73 family
firms in Tasmania. In total, 1,108 surveys were
returned, representing a 24% response rate. Of the
879 surveys that were completed by family firms,
some firms had changed their ownership struc-
ture since creation of the mailing list. Initial
screening of the data resulted in the removal of 19
cases due to the presence of multivariate outliers,
leaving 860 firms in the study. The data were ana-
lyzed to determine whether firms that responded
versus that those that did not respond differed in
terms of company size (i.e., small, medium, and
large), geographic location (i.e., Queensland, New
South Wales, Victoria, and Tasmania), or national
location (i.e., metropolitan, provincial, rural, and
remote). Analyses revealed no significant differ-
ences between respondents and nonrespondents
in terms of company size [F(2, 4280) = 3.02,
p > 0.05], geographic location (state [F(3,
4278) = 1.82, p > 0.05], or national zone [F(3,
4278) = 2.44, p > 0.05].
Preference for an internal or external
successor. In addition to a range of questions
regarding the demographic nature of the CEO,
company, and the availability of internal succes-
sors, two successor preference questions were
asked. The first question asked: “If you had to
choose a successor for your company today would
you choose a family or non-family member?” The
second question asked the business owner: “When
you step down, would you prefer to appoint a
family member as successor to your firm?” The
second question was used in this study based on
respondent feedback that the first question was
somewhat unclear.
Low and high knowledge industries. In
determining whether a firm fell into low or high
categories along the dimensions general/technical
versus experiential knowledge, we used two allo-
cation approaches. The first approach involved
using two industry experts. One expert was an
insolvency expert while the other expert was a
venture capital investment manager. Each expert
coded each industry that provided information
for the study into the various quadrants of the
model based on the expert’s own perception of
the types of knowledge relevant to business per-
formance. The industry experts were blind to the
hypotheses being tested in the study. We found a
94% concurrence in allocations by the two
experts. In cases where industries were not simi-
larly allocated in relation to the types of knowl-
edge relevant to business performance, we asked
the experts to discuss the industry with each other
and decide whether they could reach agreement
regarding the primary knowledge demands in that
industry.
We also generated a set of items to assess dif-
ferent types of knowledge by drawing on the
theoretical literature. A range of items to assess
the different types of knowledge studied were
21
Royer, Simons, Boyd, Rafferty
selected. To measure the relevance of general/
technical knowledge, we created a scale based on
11 items drawn from the existing empirical litera-
ture. An example item is: “This business needs a
manager with lots of technical knowledge.” To
measure experiential knowledge relevance, we
created a scale based on 15 items.An example item
is: “A manager of this business requires a lot of
specific knowledge not easily picked up outside
the firm.”
Prior to conducting this study, an initial test
of the knowledge items was conducted. A
sample of 22 Australian MBA students rated their
employing organizations in terms of the types of
knowledge used in that organization. The item
reliabilities were acceptable for the general knowl-
edge items (Cronbach alpha = 0.74), the technical
items (Cronbach alpha = 0.76), and the experien-
tial items (Cronbach alpha = 0.80). Based on these
early findings, the items were then presented to a
set of academic experts. These experts were asked
to allocate the items into three groups assessing
general knowledge, experiential knowledge, and
technical knowledge. All items except for two were
grouped in the expected way, indicating a 92%
agreement between item and concept, suggesting
a high degree of face validity.
We asked the two industry expert raters to con-
sider each of the industries studied using the
general/technical knowledge and the experiential
knowledge scales that we developed and described
above. Using the industry experts’ ratings, we used
median splits on the two scale scores to identify
firms that could be considered as “low” and “high”
on general/technical knowledge and experiential
knowledge. This procedure allowed us to maxi-
mize cell size similarity so as to ensure the greatest
possible statistical comparisons.
Comparing the two allocation systems (the
qualitative judgment of knowledge requirements
in industries and a quantitative assessment of
industry knowledge requirements) revealed a
70% agreement on placement of the firms into
the quadrants using the two measures. We ran the
results using both allocation systems to determine
which method was more accurate. Table 1 summa-
rizes the allocation process of knowledge factors
22
to knowledge types. Based on the empirical data,
general knowledge (GK) had an alpha reliability of
0.83 (five items), while technical knowledge (TK)
had an alpha reliability of 0.93 (six items). Expe-
riential knowledge had an alpha of 0.80 (15 items).
Test of Hypotheses
A preliminary exploratory factor analysis of
all survey questions indicated that a common
method factor was not likely to be present as all
the items were not found to load on a single domi-
nant factor. Based on these findings, no further
steps to control for common method variance
(CMV) were taken. Apart from the multivariate
outliers indicated in the above, no further chal-
lenges to statistical assumptions (e.g., normality,
linearity) were found.
An exploratory factor analysis with an oblique
rotation was conducted on the knowledge items
to determine whether the initial literature review
and expert opinions were supported. With the
exception of two items, a simple structure was
identified, with items loading on only a single
factor at 0.3 or above. The two items—“Drive to
Generate a Profit” and “Preservation of Family
Financial Interests”—were removed and the
analysis was rerun. This analysis revealed a
three-factor solution (using an eigenvalue of 1.00
or greater) that accounted for 69.5% of the
variance.
The first factor comprised technical know-
ledge items and accounted for 31.4% of the
variance. The second factor comprised general
knowledge items and accounted for 24.0%
of the variance. The third factor comprised
experiential knowledge items and accounted
for 14.1% of variance. Table 2 shows the detailed
results of this analysis. These results suggest that
with the exception of two items, the overall allo-
cation of items to knowledge types provided by
the academic experts was supported by the data.
Intercorrelations between factors were calculated
and significant, although low. A small correlation
was identified between general and technical
knowledge (r = 0.14), but no other significant cor-
relations were identified between the factors
 Promoting Family: A Contingency Model of Family Business Succession

Table 1 Allocation of Knowledge Factors to Knowledge Types

Item Step 1 Step 2 Step 3 Step 4

Literature/ Experts Exploratory Confirmatory
Authors (EFA) (CFA)

G T E G T E G T E G T E
q6a Understanding of relationship with clients/ X X X X
customers
q6b Understanding of relationship with suppliers X X X X
q6c Understanding of relationship among employees X X X X
q6d Understanding of competitors X X X X
q6e Understanding of business context X X X X
q6f Understanding business philosophy/strategy X X X X
q6g Understanding how to manage relationships X X X X
between all stakeholders
q6h Demonstrated commitment to business/values X X X X
q6i Demonstrated understanding of product/services X X X X
q6j Demonstrated ability to extract above average X X X X
returns
q6k Drive to generate a profit X X D D
q6l Previous management experience X X X X
q6m Based on degree of business ownership X D D D
q6n Prior legal knowledge X X X X
q6o Prior marketing knowledge X X X X
q6p Prior industry experience in other firms X X X X
q6q Prior experience in the same firm X X X X
q6r Clear vision for the future X X X X
q6s Loyalty to the family structure X X X X
q6t Tradition of handing the business down X X X X
q6u Preservation of family financial interests X X D D
q6v Understanding of business processes that aren’t X X X X
documented
q10a Knowledge gained at university or other X X X X
educational institutions (e.g., MBA)
q10b Social competence X X X X
q10c Intercultural competence X X X X
q10d General work experience X X X X
q10e Knowledge gained in other firms in the same X X X X
industry
q10f Knowledge gained in this particular firm in the X X X X
form of documented, formalized knowledge
q10g Knowledge gained in this particular firm in the X X X X
form of knowledge acquired in a
learning-by-doing process
G = General
T = Technical
E = Experiential
X = Unique Loading
D = Dropped from the analysis
Shaded = Modification from previous step

23
Royer, Simons, Boyd, Rafferty

Table 2 Item Loading from Unforced Oblique Rotation Factor Analysis

Q# Item Technical General Experiential

q10a Knowledge gained at university or other educational 0.891
institutions (e.g., MBA)
q10e Knowledge gained in other firms in the same industry 0.881
q6l Previous management experience 0.850
q6p Prior industry experience in other firms 0.841
q6o Prior marketing knowledge 0.668
q6n Prior legal knowledge 0.561
q10d General work experience 0.830
q6j Demonstrated ability to extract above average returns 0.821
q6r Clear vision for the future 0.759
q10b Social competence 0.748
q10c Intercultural competence 0.643
q6c Understanding of relationship among employees 0.772
q10g Knowledge gained in this particular firm in the form of 0.738
knowledge acquired in a learning-by-doing process
q6b Understanding of relationship with suppliers 0.737
q6g Understanding how to manage relationships between all 0.724
stakeholders
q10f Knowledge gained in this particular firm in the form of 0.721
documented, formalized knowledge
q6q Prior experience in the same firm 0.703
q6i Demonstrated understanding of product/services 0.688
q6e Understanding of business context 0.669
q6d Understanding of competitors 0.660
q6h Demonstrated commitment to business/values 0.634
q6f Understanding business philosophy/strategy 0.632
q6a Understanding of relationship with clients/customers 0.630
q6s Loyalty to the family structure 0.610
q6v Understanding of business processes that aren’t 0.581
documented
q6t Tradition of handing the business down 0.426
Eigenvalue 8.8 7.1 4.5
% Variance 31.4 24.0 14.1

scores. These findings, combined with the reli-
ability data, support the argument that the
three factors were not only discernible but
were also reliable. Although some modest rela-
tionships were apparent between the measures,
they appear to share very little variance with one
another.
Industry expert allocations to quadrants. To
test whether there was any significant difference
in preferences for internal/external successors
across the four conditions of general/technical
and experiential knowledge relevance (High –
Low) a 2 ¥ 2 multivariate analysis of covariance
(MANCOVA) was conducted. A number of factors
were controlled for in the analysis, including the
degree of business ownership by the current CEO,
the availability of family members for succession
selection, the previous experience of family
members in management roles, and the stage of
the business life cycle (i.e., new, young, growing,
mature). The analysis was conducted twice, once
for each allocation system (qualitative expert
ratings and quantitative ratings).
In the next step, the expert allocation of firms
to the four conditions took place. Results of
MANCOVA indicated a significant interaction
between general/technical relevance and experi-

24
 Promoting Family: A Contingency Model of Family Business Succession

Empirical Allocation - Low Idio/Experiential

Empirical Allocation - High Idio/Experiential
100%

Likelihood of Employing Internal

Expert Allocation - Low Idio/Experiential
Expert Allocation - High Idio/Experiential

80%

Successor
60%

40%
Low High
General/Technical Relevance

Figure 2 Empirical/Expert Allocation of Conditions.

ential relevance [F(4, 855) = 32.09, p < 0.001, knowledge industry conditions. Figure 2 summa-
r2 = 0.23]. Results indicated that the low general/ rizes these results.
technical industry conditions combined with a Taking only those firms that fell in the high/
low need for experiential business-specific knowl- high category we assumed that if ISGKI = ISGKO
edge resulted in a higher than 50% likelihood and ISTKI = ISTKO, then the likelihood of employ-
chance of selecting an internal successor. These ing an internal successor should be correlated
results do not support Hypothesis 1 where an with FSEKI. This was supported by a multiple
equal chance of selecting an internal or external regression of the knowledge factor scores on the
successor was predicted. likelihood of employing an internal successor for
Similarly, when high general/technical industry those in the high/high group. Only the experien-
conditions were combined with low need for tial factor scores were predictive of the likelihood
experiential business-specific knowledge, it was of employing an internal successor [F(1, 213) =
hypothesized that outside successors would be 16.81, p < 0.001, r2 = 0.14]. These results support
preferred over internal successors. This was not Hypothesis 4.
found; therefore, Hypothesis 2 was not supported.
However, the orientation toward outsiders was
stronger under these conditions than seen for Quantitative allocation of industries to
Hypothesis 1, which suggests a similar pattern of knowledge quadrants. We also examined
results, as was hypothesized. results based on the allocation of firms to knowl-
Analyses indicated support for Hypothesis 3, in edge quadrants using the median split approach.
which internal successors would be favored under Results of MANCOVA indicated a significant
conditions of high need for experiential business- interaction between general/technical relevance
specific knowledge. Additionally, comparing low and experiential relevance [F(4, 855) = 45.74,
and high general/technical industry conditions p < 0.001, r2 = 0.32]. The same pattern of statistical
(when there was high need for experiential results was found as for expert allocation, in
business-specific knowledge) revealed that the which Hypotheses 1 and 2 were not supported and
mean likelihood of selecting an internal successor Hypothesis 3 was supported.
was not significantly different. However, a higher Taking only those firms that fell into the high/
mean likelihood for selecting internal successors high category, experiential knowledge scores
was noted for high general/technical industry were predictive of the likelihood of employing
conditions compared to low general/technical an internal successor, using multiple regression

25
Royer, Simons, Boyd, Rafferty
[F(1, 213) = 15.46, p < 0.001, r2 = 0.14]. These
results support Hypothesis 4.
Discussion
This research aimed to address some major
research gaps in the succession literature. In
particular, we proposed that whether it is better
to have an internal or external successor depends
on the features of the situation as well as on the
characteristics of the potential successor. We
built on the work of Lee et al. (2003) as well as on
that of Bjuggren and Sund (2002). We extended
the perspective of Bjuggren and Sund on legal
institutions, which sought to explain succession
in Sweden, and systematize Lee et al. sugges-
tions by suggesting greater specificity in the
analysis of knowledge types and industry con-
texts. Further, we developed an innovative
empirical design to generate empirical data on
this relevant topic.
Our theoretical and empirical analysis indicates
that in situations where family business-specific
experiential knowledge is highly relevant, family
members are the preferred choice for succession
in family businesses. If no appropriate internal
successor is available, there is a need to transform
an outsider into an insider-substitute or, in other
words, to select a quasi-family member, such as a
long-term employee, as a successor.
An important contribution of this study was the
decision to use a transaction cost perspective.
This approach enabled an in-depth modeling and
analysis of systematic situation features as well
as actor characteristics and the inherent conse-
quences for family succession. Our primary aim
was to argue that selection of family successors is
due, at least in part, to functional characteristics,
in contrast to a purely nepotistic explanation. The
theoretical model that we developed was empiri-
cally tested with data from 860 Australian family
firms.
We argued, in Hypothesis 3, that when the rel-
evance of family business-specific experiential
knowledge is high and the relevance of industry-
specific general/technical knowledge is low, inter-
nal family successors are preferred. This was
26
identified as being a 77–86% average likelihood,
depending on the method of allocation of firms to
industry conditions (expert or empirical alloca-
tion, respectively). Results of our empirical study
suggest that when the relevance of family
business-specific experiential knowledge is low
and the relevance of industry-specific general/
technical knowledge is also low, there was a lower
preference for internal successors (67% and 58%
for expert and empirical allocation, respectively).
Therefore, the first hypothesis was not supported;
however, these likelihoods were noticeably higher
than the anticipated 50% likelihood. When the
relevance of family business-specific experiential
knowledge is low and the relevance of industry-
specific general/technical knowledge is high, an
external successor is the most likely to be pre-
ferred (Hypothesis 2). This hypothesis was not
supported as external selection was not statisti-
cally significantly different from internal selection
(49% and 43% for expert and empirical allocation,
respectively).
Despite the lack of support for Hypothesis 2, a
reinterpretation of the results could be made in
relation to the situation where relevance of family
business-specific experiential knowledge is low
and the relevance of industry-specific general/
technical knowledge is low (Square I of Figure 1).
In this case, we hypothesized that the chance of
selecting internal and external successors should
be equivalent, yet we did not find this. Instead, we
found a tendency to prefer internal successors.
Based on our argument, we might then conclude
that there is yet another factor or set of factors at
play that account for the difference of some 17%
or 8%, depending on the allocation system used.
We assume, therefore, that our model, although
more advanced than previous conceptions, may
benefit from further investigation in future
research.
These results could potentially be explained by
drawing on the idea of nepotism. That is, this
result suggests that a nepotistic or sentimental
influence may also have been evident in the study.
It is possible that this influence was present in all
tested conditions, leading to an inflation of the
likelihood of selecting an internal successor in all
 Promoting Family: A Contingency Model of Family Business Succession
squares of the model. Although no attempt was
made to assess this inflation factor, visual inter-
pretation of the results suggests that it could be as
large as a 17% or 8% bias (for expert and em-
pirical allocation, respectively) toward family
members across the sample if we use the results of
Square I firms (see Figure 1) as the basis of our
estimation. Such an inflation factor was not pre-
dicted prior to the development of the hypotheses
and appears to account for discrepancies between
hypothesized likelihoods and the data received.
With the assumption of an overall bias toward
family members, the model proposed appears to
have been fully supported and works as intended.
Specifically, the firms in Squares III and IV of
Figure 1 are more likely to prefer internal candi-
dates to a greater degree than firms in Square I,
and firms in Square II are statistically less likely to
prefer internal candidates than firms in Square I.
Alternatively, the bias identified could be due to
other relevant factors not currently incorporated
into the model; further research is recommended
to clarify this possibility.
The findings of this study illuminate situations
where nonfamily successors are suitable. That is,
external successors are often appropriate in situ-
ations where educational skills, work experience,
and success in other firms of the same industry
are demanded. This does not mean that family
insiders lack these relevant skills. However, when
technical and general industry-specific knowledge
is of high relevance, family members should be
compared to external applicants and go through
the same assessment process as external candi-
dates. Situations that require an internal succes-
sion candidate are characterized by a need to
understand the relationships among employees
and the internal firm knowledge acquired in a
learning-by-doing process. These results support
the rationale underlying the hypotheses of this
study and the literature that suggests that idiosyn-
cratic knowledge and stakeholder relationships
are important in order to achieve competitive
advantages in family businesses. Furthermore, as
predicted, internal succession was preferred when
experiential knowledge was considered important
to the firm. Similarly, when firms required less
experiential and more general/technical knowl-
edge, outsiders were more likely to be preferred.
We also found that when the relevance of family
business-specific experiential knowledge is high
and the relevance of industry-specific general/
technical knowledge is high, internal family suc-
cessors are preferred only when the candidate is
regarded as having more combined knowledge
(either internal or external). In other words, insid-
ers and outsiders were considered on their merits
or as equally valuable.
The contingency model that was developed in
this article suggests that family members are
better successors in situations where family
business-specific experiential knowledge is essen-
tial to gain competitive advantage. This model was
partially supported in the empirical study. The
results suggest that the context does affect suc-
cession preferences and choice. Furthermore, it
appears that there are some contexts in which
there is a rational reason for retaining and lever-
aging family business-specific knowledge. In such
circumstances, there appears to be an advantage
associated with the selection of family members
or long-term employees as successors. The results
demonstrate consistency even when the alloca-
tion of firms to high/low importance of general/
technical and idiocyncratic/experiential knowl-
edge was conducted using a qualitative alloca-
tion procedure or a quantitative procedure using
expert ratings to allocate firms to low and high
industry groups. There was a high degree of
overlap in the results obtained using the two allo-
cation systems, suggesting that both approaches
may be useful in future research.
Concluding Remarks
Japan’s family businesses have a longer life span
than family businesses in many other countries.
One reason for that may not only be the long-term
orientation of these businesses but also the clear
preference for internal successors or at least quasi-
family members, such as sons-in-law who are
transformed into family insiders (Kondo, 1990;
Lee et al., 2003). This attitude to succession could
be identified as a relevant aspect of success in this
27
Royer, Simons, Boyd, Rafferty
study. The possibilities for transforming an out-
sider into an insider substitute, therefore, need
to be further investigated. This transformation
would especially require an understanding of all
stakeholder relationships and internal firm pro-
cesses. To acquire this idiosyncratic knowledge,
the external successor needs time, but work and
industry-specific experience could accelerate this
process.
Family firms often show extremes—they
appear to be either very successful or very unsuc-
cessful and only rarely do they fall into the ranks
of mediocrity. This suggests that family firms are
able to realize sustainable competitive advantages
if they have the relevant family business-specific
tacit kinds of knowledge and are able to effectively
transfer them to the next generation. If they do not
possess the relevant knowledge or are not able to
transfer it successfully, no competitive advantages
can be reached.
So why do so many family firms fail? Although
it is still unclear, the answer may lie in the correct
identification and utilization of the tacit experien-
tial knowledge. Perhaps an individual is selected
who has the correct knowledge but is relatively
unaware of the reasons for her or his succession or
perhaps is unaware of how to utilize this knowl-
edge to full effect. This ongoing lack of awareness
is further compounded in subsequent successions.
Unsuccessful family internal successions are thus
a problem of the society and economy as much
as a problem of the involved family. More support
could be given to family firms in this relevant
phase of transition after the identification and
empirical test of aspects that show an economic
reasoning for internal succession in certain con-
texts. Legal preferences for internal compared to
external succession, for instance, can be justified
on the basis of the findings.
Future research in the area should investigate
the possibilities of improving communication and
awareness of knowledge types and reasons for
succession, as well as the possibilities of trans-
forming family outsiders into insider-substitutes.
An alternative route of equal relevance for family
firms in practical terms would be to think about
possibilities to more effectively prepare family
28
insiders for their tasks in the family business, as
well as to consider ongoing succession.
With regard to future research, it would be
interesting to analyze the reaction of stock prices
to the announcements of successions within or
without the family for family businesses in the
form of an event study from different areas to get
more insights into industry-related differences
between the success probability of internal and
external successors.
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