Issues in Growing a Family Business: A Strategic Human Resource Model

Transcription

1 Journal of Small Business Management (1), pp Issues in Growing a Family Business: A Strategic Human Resource Model by Sandra W. King, George T. Solomon, and Lloyd W. Fernald, Jr. The conceptual literature on family businesses suggests that family businesses have difficulty managing their human resources, especially when it concerns a family member or the transition from the founder to the successor. The authors empirically examined the assumptions raised in the conceptual literature regarding whether family businesses were experiencing human resource problems in growing their business and what factors enabled or constrained the ability of their businesses to grow. The authors used in-depth interviewing to collect data in order to emphasize the depth of the issue. Using content analysis with subject matter experts coding the data, the authors sought to mine the richness of data. Finally, the authors analyzed the data using Elliot Jaques Stratified Systems Theory as a model to examine the strategic human resource issues and to draw some tentative conclusions. In today s business environment, organizations must find ways to enhance their competitive advantage through effective use of their resources (Senge and Fulmer 1993). Maximizing an organization s effectiveness requires strategic planning of its financial, technological, and human resources. Although financial and technological resources are important, Ulrich and Lake (1990) suggest that an organization s human resources may be its most important and enduring asset. They therefore suggest that a great deal of attention must be placed on the management of this asset. Since strategic management of human resources has proven important for businesses in general, researchers in small and medium-sized businesses have begun to examine whether differences exist between family and non-family businesses in the management of their human resources. For example, Welsch (1996) found that when a family business made a personnel decision, it was more likely to be influenced by family values and personality issues than by a standardized set of performance criteria. Other researchers in family business suggest that the family s values and culture create a level of complexity in strategic planning of human resources not seen in the human resources planning of a non-family business (Dyer and Gibb 1988; Ibrahim and Ellis 1994; Ward 1996). Astrachan and Kolenko (1996) have suggested that family businesses may suffer from a limited organizational capability as a result of inadequacies and/or complexity in the planning of human resources. They argue that improper management of personnel may be one of the main reasons for the failure rate in family businesses. In their study, they found several human resource management practices that were significantly correlated to improved organizational performance in family businesses. Their research, along with that of others, supports the proposition that in KING, SOLOMON, AND FERNALD, JR. 3

2 order to increase the capability of the family business, it is necessary to implement a management strategy for its human resources. Pickett (1998) reports that the current and future success of an enterprise is a reflection of the effectiveness of the senior management team, its vision and leadership, and the combined knowledge and skills of the organization s workforce. This means that the identification of critical management and specialist competencies, which will enable the enterprise to meet the demands of the future, has assumed an even more important place as a key responsibility of senior business executives. Furthermore, to be effective, the development of workplace and managerial skills must reflect both the current and projected needs of the organization. It is a critical responsibility of senior management to identify the core competencies of the enterprise and to ensure that the competencies required by managers, specialists, and the workforce are adequate and appropriate. Competent people are the key to success and offer organizations their only sustainable competitive advantage (Pickett 1998). A predominant objective in managing an organization s personnel is to maximize the capacity of each individual within the organization. Unfortunately, it has been difficult for businesses, and especially difficult for family businesses, to find a meaningful definition of managerial capability, as well as valid methods for assessing it (Dyer and Gibb 1988; Ibrahim and Ellis 1999). To address this difficulty, Jaques and Cason (1994) have suggested a possible capability construct potential capability (PC). As defined by Jaques and Cason, PC is the highest level of complexity in which a person can process information and solve problems. Because one of the primary roles of a manager is to make decisions and solve problems, a manager s PC is the maximum level at which he or she can successfully perform that kind of work. Jaques and Cason have validated a method of measuring an individual s PC by observing how he or she formulates a solution to a complex problem. Jaques (1989) also developed a method of evaluating the level of difficulty of required tasks at different managerial levels in order to match a manager s PC with the role s level of complexity. Based on fifty years of observation, Jaques (1989) asserts that individuals will successfully perform their managerial roles if the required tasks are aligned with their PC, assuming they have acquired the necessary skills and knowledge and assuming that they value their work. Because Jaques theory and its associated measurement of PC has been used successfully for strategic human resource planning in a number of private and public organizations, the authors were interested in exploring its application to familyowned businesses. Consequently, this study was designed to test a method of measuring a manager s PC and to explore the feasibility of using Jaques Stratified Systems Theory as a model for human resource planning in a family business. The proposition examined in this study is that a significant positive relationship exists between researchers assessments of a manager s PC based on observed mental processing and the supervisor s judgment of the manager s PC based on actual work performance. To provide a framework for the study, the following section briefly describes Jaques Stratified Systems Theory. Stratified Systems Theory Jaques Stratified Systems Theory is based on an organizational system with a hierarchy of managerial layers. Jaques proposes that an organization should be structured so that the task complexity of managerial roles and the incumbent managers PCs are aligned. According to Jaques (1996, p. 35), the managerial accountability hierarchy is an organizational system in which to employ people and to deploy their talents to get work done. A manager is defined as a person who is 4 JOURNAL OF SMALL BUSINESS MANAGEMENT

3 held accountable for the output of others, for sustaining a team capable of producing those outputs and for giving effective leadership to that team (p. 35). Managers must therefore be able to add value to the work of their subordinates. They should moderate the complexity of the subordinates role requirements to match their capabilities. To do this, the managers must have the requisite capability to deal with their own, more complex, role requirements. Jaques (1996) found a universal underlying pattern of stratification in managerial hierarchies. The number of accountable managerial layers required for an organization is based on role complexity and the number of business functions to be delegated. For example, an owner-manager may be able to handle all but a few functions of the business when the business is small. As the business grows and becomes more complex, the demand for role specialization and the number of required managerial layers increases, as does the complexity of the managerial roles. Role Complexity According to Jaques (1996), role complexity is the level of difficulty of the required tasks. He states that the true source of difficulty in any problem lies in its complexity and the complexity in a task lies not in the goal but in what you have to do in order to get there (p. 64). Complexity is defined in terms of the number of variables that have to be dealt with in a given time in a situation, the clarity and precision with which they can be identified, and their rate of change (p. 64). Jaques research has shown that within an accountability hierarchy, there is (or should be) a progression of complexity from one level to the next higher...a series of higher and higher levels of inherent complexity in work [at different managerial layers] which corresponds to the levels of capability in individuals (1996, p. 12). Jaques suggests that people carry out tasks of different levels of complexity depending on the type of mental processing and order of information complexity that they are capable of using. Mental Processing Jaques further states that mental processing is the individual s mental working processes by which you [an individual] take information, pick it over, play with it, analyze it, put it together, reorganize it, judge and reason it, make conclusions, plans and decisions, and take action (1996, p. 18). According to his theory, there are four types of mental processing: declarative, cumulative, serial, and parallel. These four types can be observed in each of two different orders of information, symbolic and abstract, used by adult subjects; they are recursive and maintain their hierarchy of complexity (Jaques and Cason 1994, p. 61). Complexity of Mental Processing For Jaques (1996), an individual s PC (capacity to perform work or managerial potential capability ) is determined by the level of complexity involved in the required mental processing. This depends on the type of mental process and the level of information complexity that an individual uses when solving problems. Therefore, assessing the complexity of a given mental process is a two-part procedure requiring observation of the type of mental process used and the order of information complexity. Table 1 summarizes the complexity of mental processing associated with each managerial level in Jaques Stratified Systems Theory. Potential Capability (PC) According to Jaques (1996), PC represents a person s highest current level of mental complexity. It is the maximum level at which someone could work at the present time, given the opportunity to do so provided that the work is of value to him/her, and given the opportunity to acquire the necessary skilled knowledge KING, SOLOMON, AND FERNALD, JR. 5

4 Table 1 Level of Complexity of Mental Processing Associated with Managerial Role in Jaques Managerial Accountability Hierarchy Logic Pattern of Explanation of Order of Explanation of Jaques Mental Mental Information Information Managerial Process Process Complexity Complexity Level or-or Declarative Unconnected Symbolic verbal Thoughts used as 1 arguments symbols and- Cumulative Linked Symbolic verbal Thoughts used as 2 and arguments symbols if-then- Serial Cause/effect Symbolic verbal Thoughts used as 3 then sequences symbols if-and- Parallel Cause/effect Symbolic verbal Thoughts used as 4 only-if sequences symbols linked & interwoven or-or Declarative Unconnected Abstract Thoughts refer to 5 arguments conceptual other thoughts and- Cumulative Linked Abstract Thoughts refer to 6 and arguments conceptual other thoughts if-then- Serial Two or more Abstract Thoughts refer to 7 then cause/effect conceptual other thoughts sequences if-and- Parallel Two or more Abstract Thoughts refer to 8 only-if cause/effect conceptual other thoughts sequences linked & interwoven (p. 18). This is the level of work to which people aspire and feel satisfied with if they can attain it. When people work at their current PC, they believe they have an opportunity to fully express their capability. However, Jaques asserts that whether individuals actually live up to their PC will also be determined by their levels of commitment, skills, and knowledge. Jaques (1996) assumes that a person s PC matures at a broadly predictable rate throughout life into old age as the complexity of mental processing increases, thereby enabling individuals to assume higher levels of role complexity as they mature. To the extent that this assumption is correct, measurement of PC at a given age permits predictions about the rate at which the complexity of that person s mental processing will increase and about the upper limit of complexity the individual is likely to attain. PC Measurement Jaques and Cason (1994) developed a procedure for assessing the complexity of a person s mental processing using taperecorded interviews during which a subject is engaged in discussing a problem. This methodology is based on the assumption that when conversing about a problem, an individual will use and thus reveal his or her highest level of mental processing. 6 JOURNAL OF SMALL BUSINESS MANAGEMENT

5 In one study, Jaques and Cason (1994) compared their estimates of the complexity of an individual s mental process with the supervisor s assessment of the maximum managerial level at which that individual would be effective. The correlation between the average of the researchers assessments and the supervisor s assessments was high (.97) and significant. They concluded that their measurement process is a valid and reliable method of measuring an individual s PC to perform managerial work at a specific organizational level. Research Design The purpose of this study was to use Jaques Stratified Systems Theory as a framework for analyzing the data collected to see whether the theory can be applied to strategic human resource planning in a family business, as well as to explore the application of this methodology to measuring an individual s PC. Thus, the study was designed to test whether the managers PC level correlates with their job performance, and then to explore the application of Jaques theoretical framework to a particular family business. The critical test, therefore, was the relationship between the researchers PC assessments of the chosen firm s managers, based on the researchers observations of the complexity of the managers mental processing, and the supervisor s judgment of the maximum managerial level at which the managers could work, based on actual job performance. Study Sample A successful second-generation familyowned business was chosen for the study. In the last few years, this fifty-three-yearold family business has been experiencing significant external and internal changes as several new competitors have entered the market. For the most part, the new competition is aggressive and has the competitive advantage of size. If the familyowned business is going to compete with these large publicly-owned companies, it must keep pace with the sophisticated competition by formulating a successful human resources plan. The CEO s concern is whether his long-term employees are capable of handling the managerial difficulties present in the changing environment. Uniform Inc. 1 was formed with one plant in 1947 to lease and service uniforms for industrial businesses. For fifteen years, the founder s son (George) was the president and his father was CEO. When the founder retired as CEO in 1981, George became the CEO, and a close friend of the family (Jim) was hired as the new president. The new president s managerial philosophy was very similar to that of the firm s founder. When Jim was ready to retire in 1992, none of the family members was interested in the position (as had been the case when Jim was hired), and the next president (Geoffrey) was selected based on his managerial experience. Currently, George is the chairman of the board of directors and CEO, Jim is the vice-chairman, and Geoffrey is the president. The firm has seven plants and three branch operations. Four of the plants were chosen for this study. Each plant has a similar managerial structure and role requirements, with a general manager (GM) responsible for running the plant s operations, including sales, service, and production. Working at the home office, five vice-presidents act as consultants, rather than supervisors, to the GMs. The vicepresidents provide support in various specialized functions, including marketing, engineering, finance, and human resources. The seven GMs and the five vicepresidents report directly to the president. The CEO, acting as the builder and the gatekeeper between the family and the 1 To provide anonymity, the company and its employees names were disguised. KING, SOLOMON, AND FERNALD, JR. 7

6 business systems, is actively involved in assuring that the president continues to personify the values that both he and the founder have espoused. In addition, the CEO acts as a sounding board and shares information with the president regarding changes in strategy and structure. The president is accountable for strategic planning and managing the business. The vicechairman works part-time as needed, mentoring and advising the president. During the early 1990s, the company experienced marginal increases in gross revenues, and profit rates declined. The reduction in profits resulted from the competition s sophisticated technology and financial resources that constrained industry prices and reduced Uniform Inc. s sales growth and profit margins. The new president is aware of the changes that are required for the business to remain competitive. Consequently, Uniform, Inc. is starting to professionalize its operations with the active use of formal systems and procedures. In addition, the president has developed a strategic plan, which includes modernizing the existing plants and adding plants in new markets. Both the president and the CEO are concerned that the firm may lack the human resources to implement the strategic plan. Specifically, they are concerned that some of the existing general and senior middle managers, who have grown up with the company, may not be capable of managing their existing plants in the new, highly competitive market. The CEO has spent a large amount of money to train the managers, but in some cases the managers have shown no improvement. Consequently, the CEO is beginning to question some of the managers capabilities. In addition, the company has not made a concerted effort to hire employees with the capabilities needed to move up into more complex jobs as the business expands. Previously, when a management position was open, the person next in line was usually given the position. As a result, very few middle managers were hired from the outside. Since several general and middle managers are near retirement age, there is an increased demand for capable individuals to fill those roles. The president has recently gone outside the organization to find capable individuals, which represents a philosophical change for the company. The president is attempting to change the culture in other ways as well. For example, until recently, the GMs were relatively autonomous with little, if any, accountability. Many of the long-term employees are upset with the changes that are occurring. The new president, supported by the CEO, is trying to implement a formalized structure that is fair to all of the employees. Thus, these managers were interested in whether Jaques model might provide them with a useful framework for the implementation of their strategic plan. It should be noted, however, that although the model may be used in the future for this business, the researchers were not acting as consultants for the president, and all of the results from the study were kept confidential. Description of the Sub-Sample For this study, four plants in North Carolina were chosen for the present study. These plants have been in operation for at least three years. All of the general managers, the functional managers, and a random selection of the first-line managers from the four plants were interviewed, along with all five of the vice-presidents and the president, for a total of 29 subjects. The CEO, who was also the owner, was excluded from the data analysis to minimize bias due to the fact that no one was in a position to evaluate his performance. Each plant can be studied as a small business, with approximately the same number of managerial levels and services. Procedure After selecting the sample, two interviewers observed and rated each subject. The subject was asked, What is the single 8 JOURNAL OF SMALL BUSINESS MANAGEMENT

7 most exasperating business problem you are aware of, and what kind of solutions should be considered? Next, each person was asked, What should be done to solve the welfare problem in the United States? This question was used because the welfare issue is of general concern in the U.S. and thus likely to engross the subjects. Furthermore, it was thought that a topic unrelated to business would be less threatening to individuals who might be apprehensive about discussing disturbing business issues. The subjects were assured that their discussions were to be used for research purposes only and would be kept confidential. In addition, each subject was asked his/her date of birth, and all of the interviews were taperecorded and transcribed. Measures The interview transcripts were scored to determine each subject s evident PC, based on the criteria shown in Table 1, using a method similar to the one used by Jaques and Cason (1994). Each subject s predominant type of mental process was identified as declarative, cumulative, serial, or parallel and was rated as high, medium, or low in that category. In addition, the observed level of information complexity was also identified as symbolic or abstract. Thus, for example, a manager might be rated as having a medium capability in the third level of metal complexity, and be categorized as 3M. It was not unusual for individuals to exhibit mental processing that was characteristic of two different levels, and accommodation was made for such cases. For example, some participants used primarily declarative symbolic verbal reasoning (Level 1), but as the conversation developed, they brought together in a tentative way two or more linked arguments, which indicates the beginning of cumulative symbolic verbal reasoning (Level 2). In such a case, they were marked as Level 1 /2 to indicate potential maturation across the boundary to the next level. To reduce the possibility of assessor bias, the researchers rated the subjects independently, only comparing the ratings after the data had been collected. After the ratings were analyzed, the reliability of the researchers ratings of the subjects PC was determined. The resulting rater-rater correlation was.98, confirming the adequacy of the assessments. Results Figure 1 represents the distribution of the sample subjects PC level based on the Figure 1 Distribution of Managers Potential Capability (PC) KING, SOLOMON, AND FERNALD, JR. 9

8 interviewer s assessments of the complexity of their reasoning. As shown, five subjects were considered to operate at the High end of their category, ten were rated as Medium, four processed at a Low PC level, and ten fell on the borderline between categories. The intended complexity level for each job type, based on the supervisor s assessment of the job s task requirements, is shown in Table 2. For example, the complexity of a general manager s responsibilities was judged to be at Level 4 of Jaques hierarchy. Based on these PC requirements, a distribution model was generated to articulate the manpower needs of the company. Figure 2 represents the number of managers at each level of PC that are necessary to operate the four plants. After rating the subjects and determining the PC level required at each organizational level, validation of the interviewers assessments of the subjects PC was sought. This analysis consisted of correlating the subjects PC ratings, based on the interview, with the supervisors assessment of the subjects, based on their actual performance. The correlation coefficient was.92 between the interviewers ratings and the supervisors assessment of the managers performance. Additional Analyses Having found a high positive correlation between the subjects PC and the supervisors assessment of the managers performance, additional analyses were conducted to determine which subjects had a PC rating that did not align with the complexity of their assigned roles. Table 3 shows the results of this analysis. Counting those on the borderline between categories, almost half (15 out of 29) of the managerial roles are being occupied by individuals whose observed PC level was incongruent with the requirements of their current job position. With a few exceptions, the borderline individuals are functioning at levels lower than or barely equal to the complexity level of their position. Thus it appears that the organization is not effectively managing its human resources. Specifically, managers are not placed in positions for which they qualify. Discussion and Conclusions Based on these results, the CEO is now faced with a serious problem. What should Table 2 Summary of the Managerial Role within the Organization Role Jaques PC Levels President 5 Vice President 4 General Manager 4 Sales/Service Manager 3 Production Manager 3 Office Manager 2 Sales Supervisor 2 Service Supervisor 2 Production Supervisor 2 Production Workers 1 10 JOURNAL OF SMALL BUSINESS MANAGEMENT

9 Figure 2 Distribution of Managers by Levels of Potential Capability (PC) Needed to Operate the Firm be done with the managers who are in roles beyond their potential? Alternatives range from replacing almost half of the managers to hiring additional managers to fill in for the individuals who are unable to perform in their assigned roles. Since the business culture, influenced by the family, has been one in which employees are rarely fired and have little accountability for their performance, a complete change may be extremely difficult. An analysis of the subjects PCs and thefamily svaluessuggeststhattheceo needs to gradually implement a strategic plan for the firm s human resources. Early retirement could be offered to some of the older managers whose performance is questionable, and Jaques framework could be used to guide future hires. On the other hand, for the managers who are young and will be maturing in the next few years to a PC that matches their assigned roles, it may be better for organizational morale to hire several regional vice-presidents who would provide a bridge between the current managers level and the short-term needs of the business. In conclusion, the study offers some support for Jaques proposition that an individual s observed level of mental processing corresponds with his or her ability to perform successfully in a given managerial role. The high positive correlation (.92) between the supervisors assessments of the managers actual performance and the raters evaluations of the subjects level of applied mental processing supports the conclusion that evaluating the complexity of a manager s mental processing is a valid measure of his or her PC. The study illustrates how Jaques theoretical framework can be useful for familyowned businesses in assessing the current and future potential of their organization s effectiveness. It also reveals some of the structural changes that might be necessary KING, SOLOMON, AND FERNALD, JR. 11

10 Table 3 PC Ratings versus Required PC for their Managerial Level Subject PC Ratings Based on Levels Required Cognitive Current of Reasoning Capability Level Organizational Rater A Rater B Structure 1 5M 5 /6 5 President 2 4 /5 4H 4 Vice Presidents and General Managers 3 4H 4M 4 4L 4M 5 3L 3L 6 3M 3M 7 3 /4 3 /4 8 3 /4 3 /4 9 3 /4 4L 10 3M 3L 3 Functional Managers 11 2 /3 2 /3 12 3L 2 / /3 2 / /3 2H 15 3H 3H 16 2H 2H 17 3H 3M 18 3M 3M 19 2 /3 2M 20 2H 2M 21 1 /2 1 / /3 2H 23 3L 3L 2 First Line Managers 24 2M 2M 25 2M 2M 26 2M 2M 27 3M 2 / /3 2 / /2 1 /2 1 Production Workers to implement a strategic human resources plan, along with some potential problems that must be solved by the family business. As demonstrated in this case study, it is extremely difficult to introduce a new structure if the culture of the family business has been one in which the employees have been treated as family members (Dyer and Gibb 1988). Therefore, implementation of Jaques Stratified Systems Theory to enhance the organization s effectiveness should be considered as a longterm solution, rather than as a quick-fix instrument. 12 JOURNAL OF SMALL BUSINESS MANAGEMENT

11 The study also supports using Jaques methodology as a tool for hiring new individuals and for developing succession plans for current employees. It also suggests that Jaques Stratified Systems Theory provides a strategic human resource model for defining managerial roles and a method for measuring an individual s PC to ensure adequate human resources for the family business. As this case has illustrated, anticipating and becoming aware of the limitations of the organization s managerial capabilities should help business owners in planning the future growth of their businesses. Lastly, the findings provide a baseline for future research using Jaques Stratified Systems Theory. We have three suggestions for future studies: (1) a duplication of the present study to test its reliability and validity; (2) a longitudinal study using the existing business, designed to observe the long-range ramifications of Jaques theoretical framework on the performance of the business; and (3) an exploration into whether the differences between predecessors and successors PCs are related to changes in the performance of a familyowned business following a succession. References Astrachan, J., and T. Kolenko (1996). A Neglected Factor Explaining Family Business Success: Human Resource Practice, in The Best of FBR: A Celebration. Ed. Richard Beckhard. Boston, Mass.: Family Firm Institute, Dyer, J., and W. Gibb (1988). Culture and Continuity in Family Firms. Family Business Sourcebook. Ibrahim, A., and W. Ellis (1994). Family Business Management: Concepts and Practices. Dubuque, Iowa: Kendall/ Hunt Publishing Company. Jaques, E. (1989). Requisite Organization: The CEO s Guide to Creative Structure and Leadership, first edition. Arlington, Va.: Cason Hall. (1996). Requisite Organization: The CEO s Guide to Creative Structure and Leadership, second edition. Arlington, Va.: Cason Hall. Jaques, E., and K. Cason (1994). Human Capability. Falls Church, Va.: Cason Hall. Lewis, P., and T.O. Jacobs (1992). Individual Differences in Strategic Leadership Capacity: A Constructive/Developmental View, in Strategic Leadership: A Multiorganizational-Level Perspective. Ed. R.L. Phillips, and J. G. Hunt. Westport, Conn.: Quorum Books. Pickett, L. (1998). Competencies and Managerial Effectiveness: Putting Competencies to Work, Public Personnel Management 27(1), Senge, P. M., and R. M. Fulmer. (1993). Simulations, Systems Thinking and Anticipatory Learning, Journal of Management Development 12(6), Ulrich, D., and D. Lake (1990). Organizational Capability: Competing from the Inside Out. New York: Wiley Publishers. Ward, J. (1996). The Special Role of Strategic Planning for Family Businesses, in The Best of FBR: A Celebration. Ed. Richard Beckhard. Boston, Mass.: Family Firm Institute, Welsch, J. (1996). The Impact of Family Ownership and Involvement on the Process of Management Succession, in The Best of FBR: A Celebration. Boston: Family Firm Institute. Ed. Richard Beckhard. Boston, Mass.: Family Firm Institute, KING, SOLOMON, AND FERNALD, JR. 13