Entrepreneurial Essence in Family Businesses: Continuity in Family Capitalism (International Series in Advanced Management Studies) 3030637417, 9783030637415

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International Series in Advanced Management Studies

Bernardo Bertoldi

Entrepreneurial Essence in Family Businesses Continuity in Family Capitalism

International Series in Advanced Management Studies Editor-in-Chief Alberto Pastore, Sapienza University of Rome, Rome, Italy Series Editors Giovanni Battista Dagnino, University of Rome LUMSA, Palermo, Italy Marco Frey, Sant’Anna School of Advanced Studies, Pisa, Italy Christian Grönroos, Hanken School of Economics, Helsinki, Finland Michael Haenlein, ESCP Europe, Paris, France Charles F. Hofacker, Florida State University, Tallahassee, FL, USA Anne Huff, Maynooth University, Maynooth, Ireland Morten Huse, BI Norwegian Business School, Oslo, Norway Gennaro Iasevoli, Lumsa University, Rome, Italy Andrea Moretti, University of Udine, Udine, Italy Fabio Musso, University of Urbino, Urbino, Italy Mustafa Ozbilgin, Brunel University London, Uxbridge, UK Paolo Stampacchia, University of Naples Federico II, Naples, Italy Luca Zanderighi, University of Milan, Milan, Italy Assistant Editor Michela Matarazzo, Marconi University, Rome, Italy

More information about this series at http://www.springer.com/series/15195

Bernardo Bertoldi

Entrepreneurial Essence in Family Businesses Continuity in Family Capitalism

Bernardo Bertoldi University of Turin Torino, Italy

ISSN 2366-8814 ISSN 2366-8822 (electronic) International Series in Advanced Management Studies ISBN 978-3-030-63741-5 ISBN 978-3-030-63742-2 (eBook) https://doi.org/10.1007/978-3-030-63742-2 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To Dando and to what he really wants

Preface

One of the major concerns in the family business context is to identify the mechanism that successfully guides the continuity of the family business through generations. This is a main concern for practitioners and an important area of research for scholars. Different perspectives have been used through years: from the identification of the characteristics of the entrepreneur to the succession model implemented, to the better educational path for the next generations of entrepreneurs. In this context, this book focuses the attention on the link between different generations of entrepreneurs. In particular, it presents and analyzes the evolutive circle of the family business among generations. This will permit to present a holistic view of the intergenerational entrepreneurship within the entrepreneurial families and their businesses. The book is divided into six main chapters that present the relevant elements identified in the literature (entrepreneurial continuity, entrepreneurial virtues, entrepreneurial continuity, entrepreneurial essence, change and evolution effects, and leadership style) and analyze them considering different perspectives. In each chapter is presented a deeper analysis based on specific data collected through interviews and case studies’ analysis. Over the chapters, the book offers a complete, structured, and complex analysis on the entrepreneurial virtues and how they imprint the company in the founding phase. Two conceptual models, the entrepreneurial continuity model and the entrepreneurial essence model, are proposed to better understand the functioning and the evolution of a family business through generations. The leadership context and style are studied to understand which is the process to evolve a business organization, and, finally, a structured and detailed leadership style is proposed. The book guides the reader through a complex path that puts in evidence the important role of people involved in the continuity process of a family business. Some of the entrepreneurial characteristics are already present in family members’ DNA but others can be developed. The connection and relationship between

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different generations can add value to the family business helping the company to survive and adapt its business to the evolution changes, as well as the ability to choose the right leader for the family business (both external and internal to the family). Torino, Italy

Bernardo Bertoldi

Acknowledgments

What you will read in the following pages come from years of dedication to the family capitalism studies during which I analyzed hundreds of thousands of books and articles; however, the true learning came from discussion with outstanding scholars and exceptional entrepreneurs. To them I owe what you will find of interest in the following pages.

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Contents

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Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Entrepreneurial Essence in Family Businesses . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Trigger: Identification of Entrepreneurial Virtues . . . . . . . . . . 2.1 The Entrepreneurship Researches . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Definitions of Entrepreneurship . . . . . . . . . . . . . . . . . . . 2.1.2 Characteristics of the Entrepreneur . . . . . . . . . . . . . . . . . 2.1.3 Virtues, Character Strengths and Situational Themes . . . . 2.2 Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Discussion and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Family Business Continuity: Entrepreneurial Processes and Heuristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 A Step Toward Transgenerational Processes . . . . . . . . . . . . . . . . . 3.1.1 The Heuristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Heuristics in Management . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 The Heuristics as Entrepreneurial Processes . . . . . . . . . . . . 3.1.4 Heuristics Can Be “Second Hand” Imprinted to NextGen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.5 Imprinting Tend to “Block” the Future of the Company . . . 3.1.6 Heuristics Are Domain Specific; Therefore, Domain Specific Are the Entrepreneurial Processes . . . . . . . . . . . . . 3.1.7 Evolving the Entrepreneurial Processes Means Adapting the Set of Entrepreneurial Heuristics to a New Domain . . . 3.1.8 Some Entrepreneurial Processes Are Easier to Change, Other Less: It Depends on How They Are Built . . . . . . . . . 3.2 Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

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The Convergence: Entrepreneurial Essence . . . . . . . . . . . . . . . . . . . 4.1 How Decisions on Processes and Assets Are Taken in the Founding Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 The Creation of a Company . . . . . . . . . . . . . . . . . . . . . . . 4.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Honda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Disney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Ferrari . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Discussion and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Further Consideration on Entrepreneurial Essence and the Evolution of the Competitive Landscape . . . . . . . . . . . . . . . . . . . 4.6 Entrepreneurial Essence and Management: The Missing Link . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The External Effect: Change Is the Constant in the Evolution of Every Business, Including Family’s Ones . . . . . . . . . . . . . . . . . . 5.1 Markets Are Influenced by Continuous Changes . . . . . . . . . . . . . 5.1.1 The Dynamic Environment and Its Influence on Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Knowledge Leaders and Elements to Manage . . . . . . . . . 5.2 Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Evidences from the Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Leadership Style to Lead the Evolution of the Entrepreneurial Essence: A Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 The Leader: Between Theory and Sergio Marchionne Style . . . . . 6.1.1 Delegation and Trust: The Alchemy of Leadership . . . . . . 6.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 The Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 The FIAT Turnaround: The Foreword of the Chrysler Resurrection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 The Group Leadership Relational Contract . . . . . . . . . . . 6.3.3 The Leadership Group Functioning System . . . . . . . . . . . 6.3.4 The Delivery System . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.5 The Merge of Two Culture . . . . . . . . . . . . . . . . . . . . . . . 6.3.6 The Chrysler First 6 Months: Decisions Made . . . . . . . . . 6.3.7 Great Group Leadership and Entrepreneurial Essence Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Entrepreneurial Essence Evolution, Nextgen, and Management: The Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 6.5 Conclusion: What Is All This About? . . . . . . . . . . . . . . . . . . . . . . 150 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Chapter 1

Introduction

Abstract Since Schumpeter, scholars highlight the existence of unique qualities typical to entrepreneurial action and agree about the preponderance of certain qualities, strengths, and values, between entrepreneurs as a function of creating something new. These rare qualities are differentiating entrepreneurs and non-entrepreneurs and are relevant because entrepreneurship is key for every generation of an entrepreneurial family. The concept of transgenerational entrepreneurship is a quantum step in the theory, and it implies a number of hypothesis to be verified; they start from which are the traits of the entrepreneur as a person to which are the antecedents of becoming entrepreneur. The relationship between the founder and the founded must also be analyzed and how this evolves after the founding period. The existence of this link is important for the transgenerational entrepreneurship because to see if something can be transferred among generations, this “something” must exist and be deeply understood. This “something” is a set of entrepreneurial heuristics. Heuristics are precious especially when timescale for decision is shorting, and in general, when we have a scarcity of resources, these are exactly the context in which the founder and more generally the entrepreneur take decisions and informed his way of imprinting the company. They distinguish the firm in the industry vis-a-vis the competitors and are the key bricks to build the Entrepreneurial Essence, which is made of rare qualities, entrepreneurial processes, and assets. Evolution comes into equation, because it triggers changes and made adaptation necessary. To adapt leadership is a key component to the evolution of the Entrepreneurial Essence it constitutes the drive toward the adapted vision. This is the link between the Entrepreneurial Processes created in the founding phase and imprinted in the company and the evolution of the Entrepreneurial Essence in a competitive environment of continuous change.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_1

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1.1

1 Introduction

Entrepreneurial Essence in Family Businesses

One of the major concerns in the family business context is to identify the mechanism that successfully guides the continuity of the family business through generations. This is a main concern for practitioners and an important area of research for scholars. Different perspectives have been used through years: from the identification of the characteristics of the entrepreneur to the succession model implemented, to the better educational path for the next generations of entrepreneurs. In this context, the present study focuses the attention on the link between different generations of entrepreneurs. In particular, it presents and analyses the evolutive circle of the family business among generations. This will permit to present a holistic view of the intergenerational entrepreneurship within the entrepreneurial families and their businesses. Once the intergenerational entrepreneurship has been deeply described, two area in which the next generation must excel are analyzed: the external environment evolution and the leadership attitude. Scholars, since Schumpeter, highlight the existence of unique qualities typical to entrepreneurial action and they agree, over the evolution of the literature, about the preponderance of certain qualities, strengths, and values, between entrepreneurs as a function of creating something new. Personality characteristics, defined as stable and consistent structures of individuals, characterized by patterns of thoughts, feelings, and behaviors have been described as entrepreneurial, in the sense of proving to be innovative in their endeavors. These personalities shape behavior and influence outcomes, and some qualities that are more salient between entrepreneurs have been identified to better understand which traits contribute the most to the personality–outcome relationships. However, a study which identifies and structurally categorizes those qualities was not finalized and it is of utmost importance to understand which are and how can be transferred the key personal traits of an entrepreneur. The characteristics that may facilitate the process of achieving entrepreneurial success, the outstanding key characteristics of entrepreneurs in terms of core and rare qualities must be identified with the objective to understand if they are personal and not transmittable or personal and transmittable. Once they are identified, the context, system, and procedures with which they could be transferred have must be taken into consideration. To achieve this result, it is necessary to adopt a categorization of human qualities with a solid academic background and a mutually exclusive and collectively exhaustive structure to identify those unique characteristics that may reflect distinctive features between entrepreneurs and non-entrepreneurs. Scientific reasoning and intellectual inquiry, obviously, are crucial in analyzing potential entrepreneurs or potential non-entrepreneurs characteristics and evaluate their functioning from a scientific standpoint. There are several factors, which may either serve as the basis for such an analysis or could in time provide a rationale for identifying them based on the concepts and problems involved. Defining and describing a set of “rare qualities,” as per the definition of Schumpeter (which informed the following literature), it makes possible to

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distinguish entrepreneurs from non-entrepreneurs. This is the first step to understand if and how these traits are transferrable. This identification is the trigger to further analyzed if and how the transfer of entrepreneurialism is possible. Once the transfer enters into the discussion, the family business theory enters into the equation. Family business scholars are converging to the concept of transgenerational entrepreneurship which implies that families should have entrepreneurs in every generation and entrepreneurial families should be structured around simple rules imprinted by previous generations. This view is evolving in a small but significant way the theory of entrepreneurship informed since Schumpeter in describing what the entrepreneur does and not who the entrepreneur is. The concept of transgenerational entrepreneurship is a quantum step in the theory, and it implies a number of hypothesis to be verified; they start from which are the traits of the entrepreneur as a person, as seen before and discussed since the beginning of the scholar activity in the field, to which are the antecedents of becoming entrepreneur. The relationship between the founder and the founded must also be analyzed and how this evolves after the founding period. The literature on imprinting is particularly enlightening on explaining the relationship between the person who creates, the founder, and the thing which is created, the founded company. The existence of this link is important for the transgenerational entrepreneurship theory because to see if something can be transferred among generations; this “something” must exist and be deeply understood. Next entrepreneurs can imprint the company and, thus, they can also continue the imprinting of a previous entrepreneur. However, a structured field research on how the transgenerational transmission of entrepreneurial learnings occurs has not yet been proposed. This step can (must) be done exploring the concept of entrepreneurial processes which, on its turn, implies the understanding of the heuristics. Entrepreneurial learning among generations happens through heuristics, which are internalized and applied by the next generations. An analysis based on family business case studies is performed in the Chap. 3 proposing a set of defined and categorized next generations’ heuristics. Heuristics are the particles through which the transgenerational entrepreneurship takes place. Transgenerational entrepreneurship is nurtured by three activities: strategic education, entrepreneurial bridging, and strategic succession, and in all these steps, the previous generation (entrepreneur) transmits heuristics to the new generation (new entrepreneur). Strategic education is based on opportunity recognition and on other work experiences which are family focused; in the process, something is learnt that is not management competences, which could be learnt in standard management courses at standard business schools, and that is not practical capabilities, which can be learnt with management experiences in other companies. Entrepreneurial bridging is transgenerational collaboration of two generations of family members, or better two generations of entrepreneurs, which take place over years with the focus on entrepreneurship and not succession. Therefore, during the entrepreneurial bridging, the next generation (new entrepreneur) learns how to become entrepreneur and defines a renewed vision of the company which is compliant with the present competitive environment. At the end of this process, the formal transition of ownership and control happens, and the strategic succession

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takes place. This is a key, if not, the key process for the entrepreneurial family business continuity. However, as written, a structured field research on how this transgenerational transmission happens didn’t exist before the research presented in the Chap. 3. Borrowing the corpus of theory on heuristics is of utmost importance to have a clear understanding of the process. The heuristics approach is an alternative to the standard way of dealing with rationality, based on expected utility theory. Heuristics can be a more effective way of solving problems in a specific domain, namely the domain in which the heuristics were formed. Moreover, they are precious especially when timescale for decision is shorting, and in general, when we have a scarcity of resources, these are exactly the context in which the founder and more generally the entrepreneur take decisions and informed his way of imprinting the company. The characteristics of heuristics, more generally, fit well in the management decision process, and management scholars show an increasing interest: in the last 20 years, published articles on the topic in research focus management journals have risen from less than 50 to more than 200 per year. In this work, the analysis is, by the way, limited to the heuristics in entrepreneurship and family capitalism. The toolbox offered by the heuristic’s theory informed the entrepreneurial processes of the family and is the necessary link in a specific domain between the resources a firm has and the decision-making processes needed to harness those resources for profitable purposes. Entrepreneurial learning among generations happens through heuristics: the element through which human beings gain knowledge from an external domain. Entrepreneurial learning among generations through heuristics implies that the previous generation learns something significant which gives a competitive advantage to the family business; this learning can be embedded in the company processes and system, as demonstrated by the imprinting theory, and can be evolved from time to time reacting through adaptation to the competitive environment. Thus, the founder (or the imprinter) creates a set of processes which are based on his rare qualities and his understanding and actions in the competitive environment; these processes are based on a cognitive system which is, on its turn, based on heuristics and not on formal rational quantitative decision-making abstract models. These processes permit in the founding phase to the company to survive and thrive; thus, they are giving the possibility to successfully compete; therefore, they are entrepreneurial processes. In the Chap. 3 is demonstrated how these processes are source of competitive advantage and have some characteristics. The entrepreneurial processes are absorbed by the next generation through the learning of heuristics. They are understood, applied, and (only then) evolved by the new generation, the next entrepreneur; without the first phase of learning and application, there will be no evolution of the entrepreneurial processes, and the future of the family firm will be at stake. They are anchored in the family values. They distinguish the firm in the industry vis-a-vis the competitors. Therefore, it can be stated that the previous generation, i.e., founder or previous generation, imprints the business and the family in specific historical phases. This imprinting is strongly influenced by the personal traits (rare qualities) and history of the previous generation, the external competitive

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environment, and the entrepreneurial learning process (action in the environment). The final result is the creation of entrepreneurial processes, which are company idiosyncratic and a source of competitive advantage vis-a-vis competitors. Having defined the entrepreneurial qualities and processes and having illustrated the academic roots in which those concepts are grounded, the challenge is to converge these evidences from the literature and findings from the researches into a framework, as Porter defined them. In an interview at the Academy of Management (Argyres and McGahan 2002), he told his story as academic and defined the concept of framework: “On the Business School side of the river [the Charles river], ceteris paribus assumptions don’t work. Managers must consider everything. I concluded that we needed frameworks rather than models... So, I opted neither for the casestudy approach nor for the modeling/large-scale statistical testing approach. My main body of work is what I call frameworks. A framework tries to capture the full richness of a phenomenon with the most limited number of dimensions... In framework building, the artistry is in providing the smallest number of core elements that still capture the variation and the dimensionality of competition strategy. . . It’s a field where everything matters. Choices matter, the leader matters, the culture matters, the values matter, random events matter, and so on. Strategy is inherently an integrative subject that has to allow for complexity. What I tried to bring to the field in Competitive Strategy, and in my later work, was the notion that there are certain economic fundamentals on which everything else must rest. If you can master the fundamental economic grounding, that really helps you come up with the right strategy. With such a framework, skills, culture, causes, and so on can be integrated.” The framework making definition as artistry is quite challenging but it is of utmost importance to try to converge into a framework the broad literature and the research done for this work. The Entrepreneurial Essence developed in the Chap. 4 is the convergence framework. It is a framework which contains the fundamentals of the entrepreneur beliefs and actions toward the family, the business, and the environment. To frame the Entrepreneurial Essence, the previous discussed concepts, Entrepreneurial Virtues and Entrepreneurial processes, are key. They are discussed in details in the first part of the research. Adding a third element, assets, permits to converge to the Entrepreneurial Essence framework. Companies are made of assets created by entrepreneurial processes that arise from the rare entrepreneurial virtues. These three elements: rare qualities, entrepreneurial processes, and assets are the elements of the Entrepreneurial Essence which is created by a founder and must be protected and evolved by the following Entrepreneurial Family leaders. Companies compete in the market by recombining a huge amount of existing elements, from research and development, to production, to marketing and sales; to mix these ingredients, it takes a basic theory that represents a guide for all the choices and that explains which elements to add and which to remove, by foreseeing the result. Studying in detail the history of a company, it can be seen how a competitive advantage usually has to do with something, with the historical moment, the industry a person came out of, early clients, and ways of experiencing a problem. In that sense, there is a path by which insights emerge and choices get made.

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Entrepreneurial insight is much more about developing a hazy understanding of an opportunity. It’s about being in a better position to perceive the opportunity than someone else because of where you are and who you are. And then, success comes from whether you can translate that insight into something that works in the market. This “something that works in the market” means processes organized in a company which solve in a new and better added value way a need for a reasonable big segment of customers. In the founding period, a set of processes are organized in a structured organization which delivering an added value to the customers tend to grow. Even in this phase, there is some strategizing but in a very naïve and not-planned way. From the unstructured thinking of the founder, a small set of choices which optimally guide or force other choices toward sustained superior performance is created: a strategy has been born and it is there to stay as demonstrated by the imprinting theory. Imprinting is the process whereby, during a brief period of susceptibility, a focal entity develops characteristics that reflect prominent features of the environment, and these characteristics continue to persist despite significant environmental changes in subsequent periods. The framework fits in the previous researches on entrepreneurship creating a link between the rare qualities of the founder and the entrepreneurial processes of the company. The first step of the link is illustrated by the imprinting, which demonstrates how the founder imprints the company he found. The founder imprints the company leveraging and applying his rare qualities. Rare qualities are the mean through which he can create some processes which are better and different of others in the same time period and in the same competitive arena. This step is of utmost importance because not only leverage the Schumpeter’s definition but it also permits to operationalized it. Processes are the starting point from which a company makes in a different or better way; they explain how the competitive advantage is created in an intertwined way. They are linked, as said, to the rare qualities because they are created leveraging those qualities and they need those qualities to be performed. Every company is founding by one or a group of founders; therefore, it is straightforward to state that the quality of the founding team informs and imprints those processes; meanwhile, it is necessary the heuristics’ theory to explain how these processes, after the founding phase. The link with the rare qualities of the founders and the role in differentiating the company in the competitive environment are the reasons why these processes can be defined entrepreneurial. Entrepreneurial processes have three characteristics. They must contribute in providing something which creates added value to the customer, be difficult to imitate by other companies in the competitive arena, be based on qualities and capabilities imprinted in the company, usually in its founding phase. The Entrepreneurial Essence intertwines the processes and creates the assets. Giving their characteristics, the entrepreneurial processes could be referred as resources or competences of the company; it is, therefore, useful to align the model with the resource-based framework. Having analyzed the literature review on resources and capabilities in the Chap. 4, it can be stated that entrepreneurial processes are antecedents of both. Entrepreneurial processes are heuristics imprinted in the decision-making processes. Based on the division between world of cognition

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and world of action, it can be stated that entrepreneurial processes are in the first world and they inform capabilities and resources which are in the world of action. Resources are assets, key and strategic, but assets; their characteristics are sourced within the entrepreneurial processes in the cognition’s word of the company leaders and in the company, decision-making posture. Capabilities, also, are rooted in the entrepreneurial processes being activities of the world of action which are necessary to deploy resources. Therefore, being the Entrepreneurial Essence strongly linked with the cognitive part of the decision-maker and imprinted in the specific time and space, its evolution is key to maintain a dynamic balance in the interrelation between the company and the competitive environment through time and space. The Entrepreneurial Essence is imprinted in the company in the founding phase and inform the strategic posture of a company for decades; this very long-term approach must focus on more internal variables; thus, industry and competitive conditions will be very different through decades, therefore placing the focus on the ability of the company to adapt and evolve. Evolution is a process made of two elements: mutation and natural selection; it occurs each time there is a reproduction and a competition for scarce resources. In a context where there is no competition for external resources, each species can evolve freely and even a lower species can continue to live in its environment. In the case of non-monopolistic companies, competition leads to eliminating the lower mutations. It’s about understanding what it means being inferior in the specific economic competitive environment: it means less suitable. The competitive context changes are due to new technologies, the entry of new competitors, macroeconomic trends, and many other causes. Companies must adapt to fit in the new competitive environment. There is only one difference with biology: in companies, men can understand what is changing and act to be prepared accordingly. It’s necessary to learn from the outside world what is changing, learning it faster than competitors and deciding in time what to keep and what to evolve. The evolution of the Entrepreneurial Essence takes, again, the discussion toward the transgenerational entrepreneurship because the evolution is necessary, after the founding phase, in any other moment in time when the competitive environment changes. Therefore, to achieve the continuity of the family business, the leaders must adapt the Entrepreneurial Essence in face of the evolution of the external competitive environment and internal characteristics. It is not uncommon that these change processes fail, not only because the wrong approach that leaders have toward the company, the family, or the organization, but because of the absence of a change management framework which doesn’t help to think in a strategic adaptive way. Therefore, it is necessary to discuss how successful changes must be pursued. The execution of a constant change is the way for companies to eliminate inertia to change by strengthening the organizations ability to exploit and explore new opportunities, with positive effects on future strategies. This is the most concrete sign of an evolving Entrepreneurial Essence, which is, as stated before and analyzed in the Chap. 4 of the book, antecedent of competitive advantage, on one hand, and of resource and activities, on the other hand.

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The evolution is an equation taking into account four variables: vision, drive, speed, and direction. Vision is the set of values, ideals, and expectations for the long term. Drive is the ability to manage the process of change and to drive the whole organization toward the future. Speed is the rate of change of the external environment. “Direction,” the fourth variable, is where the leader decides to “drive” the company based on its “vision” and given the “speed” of the external environment. The Direction can be aligned or dis-aligned vis-a-vis the environment. The intersection between speed and direction generates four categories: implosion, decadence, evolution, and revolution. Implosion is when the company moves against an external change which is very fast. Decadence is when the speed of change of the external environment is low and the organizational change goes in the opposite direction. Evolution is when the company moves in the same direction of a low speed environment. Revolution is when the company moves in a synchronized way with an “high speed of change” environment. The direction in which the company moves depends on vision and drive. The intersection of these latter variables generates another four categories. When there is no vision and drive, Frustration emerges as follows: the evolution of the Entrepreneurial Essence is blocked. When there is vision and a lack of drive, Voyeurism emerges as follows: the evolution doesn’t happen because a leader observes the organization without acting. When there is drive and a lack of vision, Egotism emerges as follows: the leader leads only himself without a shared vision; in this case, the evolution of the Entrepreneurial Essence is made against the organization and the environment. When there is vision and drive, Elation emerges and the evolution of the Entrepreneurial Essence happens in the organization. Setting a vision is a very difficult task, and it has to do with strategy and with taking a few key decisions. Drive the organization trough change is a more granular job, which inform the leadership style of the family business leader. In setting the vision, the family leader is more a strategist, when he drives the organization is more a leader. Gardner defines a leader as follows: “as an individual who significantly affects the thoughts, feelings, or behaviors of a significant number of individuals. . . Leaders achieve their effectiveness chiefly through the stories they re-late. . . The way in which direct leaders conduct their lives – their embodiments – must be clearly perceptible by those whom they hope to influence. . . People who do not practice what they preach are hypocrites, and hypocrisy mutes the effectiveness of their stories.” The underlying assumption of the leadership theory is a link between the leader and the followers, a “one-to-many approach”; in the sixth chapter, a different approach is presented presenting the research made of a leader who impacted with is new approach the theory itself upon leadership. His approach was “one-to-group” or “group-to-target” instead of “one-to-many.” This approach doesn’t fit in the theory: it is not one-to-one; it implies leading the group as a whole, finding, forging, helping every member, and doing that, the group becomes the company leader and evolves the context in which it operates. Transforming a group of managers in a group of leaders faces one of the main issues with which scholars confront themselves is the lack of agility and capacity to

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adapt to new competitive environments of many companies because they are overmanaged and underlid. Merging leadership and management agility and capacity are simultaneous operated: the leader plans, problem solves, decides lively within the group, and in doing this, he led the group as a single entity. The leadership stops to be “one-to-many” and becomes more effective. This idea of the possibility of creating a great group dates back to the first researches of Bennis in 1966. The Group is the governing body of the company leadership system, and it works beyond the reach and competence of the leader and of the members. The Group is broader in leading the company than the sum of its part. To understand the intimate functioning of the Group, a detailed and close look at how it works is necessary; this is the reason why in this part of the research a deep analysis on one extraordinary case was chosen. To understand the detailed functioning of a group, delegation and trust are the categories to be leveraged. They are the two elements which forged the leadership style of a person, a group, and an organization. Since long time ago, scholars acknowledged that all leaders are confronted with this key choice in the moment in which the firm grows too large or complex to be managed individually. A bad and dysfunctional delegation of authority systems happens when different managers in different functions/business units pursue different objectives which are privately or specifically optimal but inconsistent with the organization ones. In these cases, the strategy of the company is put at risk, being the first objective of a strategy to be the smallest set of decisions which guide all the others in the company, when the set of decisions provided by the leadership team is disharmonious and follows different objectives the company falters. The delegation is, anyway, necessary when the leader cannot make all decisions himself and must handover some decision-making rights to others. This happens when time or knowledge is constraints arise. The allocation of decision-making power is linked to the relationship between the leader, the members, and the group itself which become a key and independent part of the organization. This kind of relationship becomes a network of informal relationshipbased net within the formal organization. Interestingly, as it will be analyzed in the case in Chap. 6, when the relationship-based leadership group is strong, the formal organization is more fluid. How this informal relationship is created and defined is one of the key elements to understand how different parts in the organization agree to work together, i.e., how the informal relational contract is signed. The relational contract is based and enforced not by law but by trust. Relational contracts can, therefore, be a powerful way in which leaders can encourage action rules that cannot be specified before and verified later on. This approach is usually enforced by culture and values of the company or specifically of the leadership team. As a consequence, the leader must have a visible leadership, that is, frequent personal interactions and communications with a wide variety of employees across all hierarchical levels which help clarify the terms of the relational contracts. The Bennis’ great group is making this very efficient, because every member of the group is acting in this way within the organization acting as a one leader being many.

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Great Group and the leadership style it requires are key components to the evolution of the Entrepreneurial Essence because they constitute the Drive toward the Vision. This is the link between the Entrepreneurial Processes created in the founding phase and imprinted in the company and the evolution of the Entrepreneurial Essence in a competitive environment of continuous change. This link is connected via other different links and will be deployed through the whole book leveraging different research works and methodologies. The Chap. 2 will describe the entrepreneurial qualities which distinguish the entrepreneur as a human being and permit the creation of the entrepreneurial processes. These are illustrated in the Chap. 3, leveraging the theory of the heuristics and of the imprinting. Entrepreneurial processes, as heuristics, can be transferred among generations. This is coherent with the transgenerational entrepreneurship theory, which can be explained in details through the heuristics’ approach. These two steps require a third one, which must define the objective of the transgenerational entrepreneurship, which cannot be the processes themselves. In Chap. 4, the framework of the Entrepreneurial Essence is described leveraging from different elements of different literature, from heuristics to imprinting, from entrepreneurship to family business. Once having defined the Entrepreneurial Essence, its evolution is factored in because it is a key element for the continuity of the business. The evolution is discussed in two chapter. In the fifth chapter, a framework to see and lead change as a constant is proposed. The change as a constant framework has four variables: direction, speed, vision, and drive. The first two are external variables, and the second are internal. Vision has to do with strategy and it has a rich literature; meanwhile, drive is a very detailed process that needs a deep analysis of how a leader acts. This is the objective of the sixth chapter. The drive of the change is the last link to the continuity: only with efficiently driving successors, either family member or not, can evolve the Entrepreneurial Essence assuring continuity to the family business.

Reference Argyres, N., & McGahan, A. M. (2002). An interview with Michael Porter. Academy of Management Perspectives, 16(2), 43–52.

Chapter 2

The Trigger: Identification of Entrepreneurial Virtues

Abstract Entrepreneurship scholars described how the founder imprints the company in the founding phase. The imprinting is based on unique virtues that the entrepreneur applied in his entrepreneurial posture or action and is influenced by the historical environment. A first review on the main entrepreneurial’ characteristics discussed in literature is presented. However, a unique categorization of these qualities has not been proposed by the literature. In this second chapter of the book, the human qualities categorization of two recognized psychologists is leveraged to define which are the qualities typifying the entrepreneur. A survey was made among entrepreneurs and non-entrepreneurs to identify the main virtues characterizing entrepreneurs. The virtues which emerged has typical of the entrepreneurs are presented and discussed.

This second chapter aims to identify differences between entrepreneurs with non-entrepreneurs by using the personality traits approach. Specifically, scholars since Schumpeter (1934) highlight the existence of unique qualities typical to entrepreneurial action. A classification scheme of human qualities (Peterson and Seligman 2004) was applied to differentiate entrepreneurs from non-entrepreneurs. Fifteen “core qualities” (i.e., predominant attributes) and nine “rare qualities” (i.e., distinctive features) highlight the existence of unique qualities typical to entrepreneurs. Because of their descriptive nature, the characteristics analyzed have a subjective logic—which results in the influence of the researchers’ point of view. Similarly, the analysis is limited to the positive aspects of the participants, thus ignoring the negative characteristics as in the Peterson and Seligman model (2004). This chapter offers three primary contributions to current entrepreneurship literature. First, and most importantly, it highlights the preponderance of certain qualities (strengths and values) among entrepreneurs as a function of creating something new. That is, the present study identifies those characteristics that may facilitate the process of achieving entrepreneurial success (i.e., new firm creation, development, and/or growth), by comparing two samples (entrepreneurs and non-entrepreneurs), in order to describe the most outstanding characteristics of entrepreneurs in terms of core and rare qualities (Peterson and Seligman 2004). Second, the theoretical © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_2

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foundation for the ideas presented is the character strengths’ classification framework (Peterson and Seligman 2004). In particular, the researcher integrates the above framework to study the rare qualities that distinguish the entrepreneur from the general population. Third, it offers practical implications for entrepreneurs and practitioners regarding the importance of entrepreneurial qualities.

2.1

The Entrepreneurship Researches

It is central to entrepreneurship research to identify different types of entrepreneurial personality characteristics (defined as stable and consistent structures of individuals, characterized by patterns of thoughts, feelings, and behaviors; Kendall and Hammen 1995), considering that the role of the entrepreneur has changed throughout the years (Miller 2014). Analyzing the previous literature, scholars identified a sort of “bifurcation” between those that asserted the existence of a relationship between personality traits and the fate of a firm and those who were against that way of thinking (Cooper and Gimeno-Gascon 1992). So, the extant academic entrepreneurship literature focuses on understanding the role of personality traits in the decision to start, sustain, and grow new firms (Rauch and Frese 2007). That is, personality traits serve as predictors for both entrepreneurial activity and firm performance. Neneh (2019) demonstrated a positive correlation between the entrepreneurial intention to proactive personality. Miller (2014) observes that positive personality traits—such as energy, passion, and need for achievement—support nascent and founding entrepreneurs, but that the negative personality traits—overconfidence, narcissism, aggressiveness, deviance, and obsessiveness—may have serious and detrimental personal and organizational outcomes (Klotz and Neubaum 2016). Despite some criticism against the use of the personality traits approach in explaining the phenomenon of entrepreneurship (Gartner 1989; Low and MacMillan 1988), some studies (Hisrich et al. 2007) suggest that certain characteristics differentiate entrepreneurs from non-entrepreneurs, such as inner locus of control (Green et al. 1996), need for achievement (Miller and Toulouse 1986), self-efficacy (Simon et al. 2000), risk propensity (Hayward et al. 2010), psychological capital (Hmieleski et al. 2015), and self-efficacy (Rauch and Frese 2007). Given the debate (Miller 2014; Klotz and Neubaum 2016) of whether entrepreneurs’ qualities (or personality traits) significantly correlate with entrepreneurial activity and behavior, i.e., business creation and/or business success (Van de Ven 1993; Wei and Ismail 2008), it is essential that entrepreneurship scholars understand the complex personality traits categories that represent entrepreneurs. The researchers contend that personalities shape behavior and influence outcomes; therefore, understanding the qualities that are more salient between entrepreneurs may help to better understand which traits contribute the most to the personality— outcome relationships. Hereby, following the advice of several scholars (Miller 2014; Klotz and Neubaum 2016), this chapter explores the role of personality in

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entrepreneurial phenomena. Specifically, highlighting the existence of unique qualities typical to entrepreneurs and not to the general population. In accordance with the traits approach, interpersonal characteristics may explain why some individuals and not others decide to engage in the process of entrepreneurship (Baum et al. 2007). Prior personality traits dimensions have received a good deal of attention and support in the personality literature (Klotz and Neubaum 2016; Miller 2014). These dimensions (self-efficacy, perseverance, risk propensity) may indeed serve as useful bases for studying entrepreneurial personality traits (Digman 1990); however, prior qualities fail to reflect the “rare virtues” that may distinguish entrepreneurs from the general population (i.e., non-entrepreneurs). These rare qualities may be quite relevant to entrepreneurial behavior because they can capture psychological processes or mechanisms that define character strengths and virtues. Following that line of inquiry, in this chapter a classification scheme of human qualities (Peterson and Seligman 2004) has been adopted to identify those unique characteristics that may reflect distinctive features between entrepreneurs and non-entrepreneurs. Ultimately, the researcher’s goal is to classify those characteristics that are typical to entrepreneurs and, in turn, which characteristics set them apart from the average population.

2.1.1

Definitions of Entrepreneurship

The present chapter analyzes the distinction between entrepreneurs and non-entrepreneurs. Unfortunately, entrepreneurship in the way it has been defined (Chua et al. 1999). Accordingly, scholars have expressed concern about this lack of universally acceptable definition (Zahra 1991). Some of the definitions refer to corporate entrepreneurship and consider this concept such as “multidimensional” and something that “incorporates a firm’s activities directed at product and technological innovation, risk taking, and proactiveness.” Entrepreneurship is highly heterogeneous and means different things to different researchers (McMullan and Long 1990). The historical development of the term “entrepreneurship” has been traced by Schumpeter (1934) who defined the entrepreneur as an individual who exploits market opportunities through technical and/or organizational innovation. That is, the entrepreneur is a force of “creative destruction” characterized by rare virtues. These virtues help entrepreneurs to create something new in a national economy, to employ a new method of production and manufactures, to sell a new product, and/or to open a new market. On that point, the entrepreneur’s essence consists in creating something new that may result in a benefit or real profit—i.e., entrepreneurial activity (Schumpeter 1934). From the constitutional work of Schumpeter (1934), others build upon in defining the entrepreneur. For example, Drucker (1985) states that entrepreneurship is the process of extracting profits from new, unique, and valuable combinations of resources. Similarly, some other scholars (Stevenson and Jarillo 1990) highlight

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that entrepreneurship is the pursuit of opportunity beyond resources controlled. Richard Cantillon’s work (1997) elaborating on McMullan and Long (1990) defined entrepreneurship as the willingness of individuals to carry out forms of arbitrage, involving the financial risk of a new firm. Accordingly, scholars belonging to other fields of research—including economics (Parker 2004), history (Landes et al. 2012), psychology (Baum and Locke 2004), and sociology (Granovetter 2000)—studied the entrepreneurship’s concept from different points of views. Whereas any of the above definitions of entrepreneurship have merit, it should be clear that despite each one covers a somewhat different territory, all overlap in that the individual who plants the seed of entrepreneurship is the entrepreneur. Thus, the essence of entrepreneurship is the entrepreneur who is in charge of the carrying out of new product or process innovations that may result in the creation of a new firm. Likewise, the creation of a new firm may involve a new combination of personality traits, organizational, and environmental factors (Lee and Tsang 2001; Baum et al. 2007). The debate about what entrepreneurial characteristics best predict entrepreneurial success, i.e., creation of new firms, has been for a long a central topic of discussion (Aldrich and Wiedenmayer 1993). The main criticism leveled at the traits approach results from the selection of attributes. That is, there is little theoretical validity and, often, contrasting empirical results (Gartner 1988; Wei and Ismail 2008). Despite the criticism, some elements are recurring among the personal traits approach that it is worth mentioning. As explained below, this chapter will present definitions that do include what has been termed the most salient entrepreneurial qualities (traits) and are most likely to cover those aspects of entrepreneurship.

2.1.2

Characteristics of the Entrepreneur

Through a deep literature review in many fields, a first list of characteristics of the entrepreneur has been defined. They are listed in the following paragraph. Later in the chapter, this literature review will be leveraged to create a more structured categorization of the entrepreneur. Internal Locus of Control Internal locus of control is often linked to individual’s propensity to engage in entrepreneurial activity (Mueller and Thomas 2001; Diaz 2003). Perceived internal locus of control refers to the personal belief that one has influence over outcomes through ability, effort, or skills, whereas external locus of control is the belief that external forces control outcomes (Kaufmann et al. 1995). In other words, locus of control concerns the way in which an entrepreneur believes that the events of her/his life are produced by her/his behavior or actions, that is, the degree of perceived control on life events rather than by independent external factors beyond entrepreneurs’ control.

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Since the theory of social learning, an extensive body of research has been developed surrounding the central construct of locus of control. Some of that research has linked internal control to an individual’s propensity to engage in entrepreneurial activity (Shaver and Scott 1991). Propensity to Risk Propensity to risk is used to a central dimension for defining entrepreneurial behavior (Carland et al. 1995; Cox and Jennings 1995; Shane et al. 2003; Miner and Raju 2004) and refers to propensity to risk as the degree to which an entrepreneur is willing to take chances with respect to risk of loss. In the process of entrepreneurship, an entrepreneur’s financial risks and personal well-being, career opportunities, and family relations (Liles 1974) it all comes down to the “willingness to become an entrepreneur.” For entrepreneurs, risk is a central element in a variety of decision contexts, including those dealing with entry into new ventures or new markets (Dickson 1992), and new product introductions (Devinney 1992). Indeed, most entrepreneurial decisions make consideration about risk as an everyday task for most entrepreneurs, as well as for investors whose funds make possible entrepreneurs’ pursuit of their dreams (Riquelme and Rickards 1992). Decision-Making The capacity to take decisions involves how entrepreneurs think and make strategic choices (Cox and Jennings 1995; Townsend et al. 2010). Prior studies (Busenitz et al. 1997) show that entrepreneurs use heuristics more extensively than managers in larger organizations. The term “heuristics” refers to simplify strategies that entrepreneurs use to make strategic decisions, especially in complex situations where less complete or uncertain information is available (Guercini 2012; Artinger et al. 2015). Thus, decision-making is important in facilitating and cutting decision times and to create routine decisions’ processes that can create a competitive advantage (in the following chapter this concept will be deepened). In particular, “decision making is among the most important activities that top managers undertake (Eisenhardt and Zbaracki 1992). Second, strategic decision making processes have been shown to vary considerably in new ventures (Smith et al. 1988), and such variations have been shown to influence various other aspects of how managers think. For example, Janis (1983) observed that when groups made strategic decisions in accordance with a “groupthink” model, which is characterized by a strong emphasis on unanimity and the avoidance or discouragement of perspectives or information that conflict with the group’s preferences, members tended to develop a belief in their own invulnerability. Finally, unlike individual background characteristics, decision making is a malleable phenomenon and subject to constructive intervention (Russo and Schoemaker 1992)” (Forbes 2005). Effective Leadership Entrepreneurship studies suggest that there is a significant relationship between leadership and entrepreneurship (Vecchio 2003; Ensley et al. 2006; Hmieleski and Ensley 2007). By using their influence on co-workers and subordinates, transformational leaders shape employees’ identification with shared goals, value internalization, emotional bonding, and social contagion processes (Shamir et al. 1993). As a result, transformational leaders are more likely to sacrifice

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their own personal interests for the achievement of a collective goal and to perform beyond expectations (Bass 1985). Gupta et al. (2004) related leadership to the process of instilling in others shared vision, creating valued opportunities, and building confidence in the realization of the shared values and opportunities. Leadership essentially involves a relationship of mutual commitment between a leader and a group of followers in pursuit of a collective goal. Effective leaders are able to realize outstanding group performances, such as the founding and growing of successful entrepreneurial firms in the face of competitive shocks. Such outstanding leaders operate through symbolic behaviors, such as frame alignment, empowering, role modeling, image building, and supportive behaviors, and are adept at cognitively oriented behaviors, such as versatility and environmental sensitivity (House and Aditya 1997). Need for Achievement Need to achieve goals, or need for achievement, refers to an entrepreneur’s desire for significant accomplishment, mastering of skills, control, or high standards (McClelland 1961; Davidsson 1991; Collins et al. 2004). Achievement is based on entrepreneurs’ perceptions of risk. That is, individuals tend to avoid both high risk and low risk situations; in contrast, they are motivated by accomplishments in the workplace and an employment hierarchy with promotional positions. McClelland et al. (1958) argued that high need for achievement people are more likely than low need for achievement people to engage in energetic and innovative activities that require planning for the future and entail an individual’s responsibility for task outcomes. Moreover, “McClelland (1961) argued that high need for achievement people should also prefer tasks that involve skill and effort, provide clear performance feedback, and were of moderate challenge or risk. He also argued that entrepreneurial positions have more of these characteristics than other types of positions. Holland’s (1985) vocation choice model suggests that individuals will be most attracted to careers that offer the environmental characteristics that match their personality. Holland (1985) also argued that performance and career satisfaction are higher when there is a good fit between work environment characteristics and personality. Therefore, as was suggested by McClelland (1961), it seems likely that individuals high in need for achievement should be attracted to and perform well in entrepreneurial jobs” (Collins et al. 2004). Self-Efficacy Self-efficacy, or the self-confidence, is considered a necessary skill to succeed in creating a business (Chen et al. 1998; Markman et al. 2002; Wilson et al. 2007; McGee et al. 2009). Its effects are relevant in running such entrepreneurial activities. Self-efficacy reflects an individual’s thoughts on her/his perceived abilities to perform a task, as well as the belief on her/his ability to effectively convert those skills into an outcome (Bandura 1994). Accordingly, people form attitudes toward performing a given behavior based on beliefs that performing the behavior will result in certain consequences, as well as normative beliefs about the behavior (Fishbein and Azjen 1975). Boyd and Vozikis (1994) wrote that “according to Ryan (1970), self-perception, or the way in which a person perceives his or her abilities and tendencies, plays a role in the development

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of intentions. Similarly, self-efficacy affects a person’s beliefs regarding whether or not certain goals may be attained. Choices, aspirations, effort, and perseverance in the face of setbacks are all influenced by the self-perception of one’s own capabilities (Bandura 1991). If a certain behavior is perceived to be beyond the ability of a person, he or she will not act, even if there is a perceived social demand for that behavior. Self-efficacy is acquired gradually through the development of complex cognitive, social, linguistic, and/or physical skills that are obtained through experience. Thus, the acquisition of skills through past achievements reinforces selfefficacy and contributes to higher aspirations and future performance (Herron and Sapienza 1992).” Therefore, “a person will only initiate entrepreneurial actions when self-efficacy is high in relation to the perceived requirements of a specific opportunity. In addition, the individual will assess the psychological costs of failure such as personal embarrassment, the loss of self-esteem, and the fear of having to find alternative employment (Campbell 1992). Bird (1988) suggests that it may be possible to distinguish entrepreneurs from potential entrepreneurs (those with entrepreneurial intentions that never take action) on the basis of how such concepts as career, work, risk, rewards, and family align with the venture concept. Self-efficacy may be the underlying construct that brings about this psychological alignment” (Boyd and Vozikis 1994). Opportunity Recognition Ability to recognize opportunities is widely viewed as a key step in the entrepreneurial process—maybe the most significant one (Stevenson and Jarillo 1990; Shane 2000; Shane and Venkataraman 2000; Brown et al. 2001; Ireland et al. 2003; Baron 2006). “Entrepreneurs use cognitive frameworks they have acquired through experience to perceive connections between seemingly unrelated events or trends in the external world” (Baron 2006). In other words, they “connect the dots,” through mental processes, between changes in technology, demographics, markets, government policies, and other factors (Baron 2006). “Previous work has examined many different factors that play a role in the recognition of opportunities for new business ventures (Baron 2006).” According to Baron (2006), “three have been identified as especially important and received most attention: engaging in an active search for opportunities; alertness to opportunities (the capacity to recognize them when they emerge); and prior knowledge of a market, industry, or customers as a basis for recognizing new opportunities in these areas. Past research suggests that all three are indeed important.” Perseverance Perseverance has been associated with entrepreneurial success and higher firm performance (Van Gelderen 2012). Peterson and Seligman (2004) refer to perseverance as the voluntary continuation of a goal-directed action despite obstacles, difficulties, or discouragement. So, it is an essential characteristic an entrepreneur must have to successfully run his business and to catch opportunities. Because starting a new venture is a daunting task (Aldrich 1999), launching a new venture may require a high level of conviction in one’s ability to overcome challenges. Accordingly, “perseverance influences individuals’ courses of action, the level of effort they put forth while pursuing their endeavors, the length of their

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endurance and their resilience in the face of setbacks and repeated failures (Eisenberger and Leonard 1980). Perseverance also influences how much stress individuals can endure while they cope with setbacks, and the level of accomplishments they eventually realize (Bandura 1997). For instance, perseverant people discover ways to circumvent constraints or change them by their actions, whereas less resilient people are easily discouraged by impediments and unexpected challenges (Bandura 1997; Eisenberger et al. 1992)” (Markman et al. 2005). Perseverance may be crucial for one’s success in entrepreneurial settings, which are notoriously challenging (Baron and Shane 2004). Social Skills Social skills—such as the ability to read others accurately, first impressions—refer to specific competencies that help entrepreneurs to interact effectively with others. Social skills have also been thought to play an important role in the success of entrepreneurial firms (Greve and Salaff 2003). A favorable reputation, relevant previous experience, and direct personal contacts often assist entrepreneurs in gaining access to venture capitalists and potential customers. “Social capital refers to the actual and potential resources individuals obtain from knowing others, being part of a social network with them, or merely from being known to them and having a good reputation. In a sense, social capital provides individuals with social identity that can be converted into significant tangible benefits” (Baron and Markman 2000). The benefits of social skills include enhanced access to information—the more people one knows, the more information—and the more accurate information one receives—increased cooperation and trust from others. After all, social capital has been found to translate directly into financial outcomes; it is positively related to the compensation received by both managers and CEOs (Belliveau et al. 1996). In addition, entrepreneurs possessing high social capital based on networks, status, personal ties, and referrals are more likely to receive funds from venture capitalists than entrepreneurs who are lower on this dimension. Honesty Honesty and ethics are topics that have recently attracted the attention of entrepreneurship scholars (Kriger and Hanson 1999; Hannafey 2003; Brenkert 2009). One of the reasons is because entrepreneurs continually face unique and complex moral problems—e.g., issues related to fairness between personnel and customer relationships. The commitment an entrepreneur has toward his stakeholders is essential for a successful business. Entrepreneurs are thought to have two central features, independence and egoism (Longenecker and Gioia 1988). Certainly, entrepreneurs are involved in creating new business regardless of high levels of uncertainty and risk. Therefore, it would be expected that entrepreneurs place their business success and continuity above all else. However, some scholars believe that long-term success is at the core of ethics (Clarke and Aram 1997). As shown, a budding entrepreneur needs to have some special characteristics (or attributes) in order to run his business and to improve the learning process. To that end, Miller (2014) and Klotz and Neubaum (2016) highlighted how personality

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and psychology scholars amassed a great deal of knowledge regarding how personality traits influence entrepreneurs.

2.1.3

Virtues, Character Strengths and Situational Themes

This paragraph borrows from psychology theory, through a specific analysis of personal traits, and builds an entrepreneurial traits categorization: after a presentation of the main characteristics of an entrepreneurs, an analysis of the character strengths and virtues’ is necessary to operationalize a hierarchical classification through the features described as “positive traits of character” (Peterson and Seligman 2004). To do this, the classification scheme by Peterson and Seligman (2004) is used. The scheme is not only horizontal but also vertical, specifying different conceptual levels in a hierarchical model. Accordingly, the researchers distinguish three different conceptual levels: virtues, character strengths, and situational themes (Table 2.1). Virtues are six broad categories (wisdom, courage, humanity, justice, temperance, and transcendence) and represent the most abstract or universal classification of values. Character strengths are the psychological processes or mechanisms that define the above virtues. That is, the virtue of wisdom can be achieved through strengths, such as creativity, curiosity, love of learning, open-mindedness, and perspective. These strengths are similar in that they all involve the acquisition and use of knowledge. Situational themes are the specific habits that lead people to manifest character strengths in any given situation. They differ from character strengths because they refer to specific situations. Individual personality is influenced by external conditions, such as education, job opportunities, family cohesiveness, sense of security, availability of mentors and/or role models, support network. According to Peterson and Seligman (2004), these external conditions do not predispose individuals for each one of the character strengths; on the contrary, individuals make their own life choices (i.e., free will). Situations (environment) shape people’s characters—everyone takes something from it—however, everyone brings something to the situation too. In this chapter, that “something” in the entrepreneurship context is the character strengths of the entrepreneur. For the researchers, studying that “something” means to investigate which qualities (or personal traits) are more frequent among entrepreneurs.

2.2

Method

As mentioned above, the purpose of the second chapter is to identify if there is a preponderance of certain character strengths in an entrepreneurs’ sample. To do this, the presence (or absence) of character strengths in the entrepreneurs’ sample has been measured. If the strength is present, then it is assigned the value of one. If it is absent, the assigned value is zero. In this way, the study can measure the presence of

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Table 2.1 Virtues, character strengths, and situational themes Level 1: Virtues Wisdom and Knowledge Cognitive strengths that entail the acquisition and use of knowledge

Justice Civic strengths that underlie healthy community life Level 2: Character strengths Creativity Thinking of novel and productive ways to conceptualize and do things

Citizenship Sense of membership or bounciness to a social group or team; being loyal to the group

Level 3: Situational themes Curiosity Taking an interest in ongoing experience for its own sake; finding subjects and topics fascinating; exploring and discovering Fairness Treating all people equally according to notions of fairness and justice; not letting personal feelings bias decisions about others. Open-mindedness Thinking thoroughly; not jumping to conclusions right away; being able to change oneself mind in light of evidence; weighing all evidence fairly

Courage Emotional strengths that involve the exercise of will to accomplish goals in the face of opposition, external or internal Temperance Strengths that protect against excess

Bravery Not shrinking from threat, challenge, difficulty, or pain; speaking up for what is right even if there is opposition; acting on convictions even if unpopular. Forgiveness and mercy Forgiving those who have done wrong; accepting others; giving people a second chance

Humanity Interpersonal strengths that involve tending and befriending

Transcendence Strengths that forge connections to the larger universe and provide meaning Love Valuing close relationships, caring; closeness

Appreciation of beauty and excellence Noticing and appreciating beauty, excellence, and/or skilled performance in various domains of life, from nature to art; to mathematics to science; to everyday experience

Persistence Finishing what oneself starts; persisting in a course of action despite obstacles; “getting it out the door”

Kindness Doing good deeds for others; helping others; taking care of others

Humility and modesty Letting oneself accomplishments speak for themselves; not seeking the spotlight.

Gratitude Being aware of and thankful for the good things that happen.

Integrity Speaking the truth; presenting oneself in a genuine way; acting in a sincere way; taking responsibility for oneself actions

Social intelligence Being aware of the motives and feelings of other people; knowing what to do in order to fit into different social situations (continued)

2.2 Method

21

Table 2.1 (continued) Leadership Encouraging a social group to get things done; maintaining good relations within the group Love of learning Mastering new skills; tendency to add systematically to what oneself knows

Self-regulation Regulating oneself feelings and emotions; being disciplined

Prudence Being careful about oneself choices; not taking high risks; not saying or doing things that might later be regretted Vitality Approaching life with excitement and energy; not doing things halfway or halfheartedly; living life as an adventure; feeling alive and activated Humor Liking, laugh, and tease; bringing joy to other people; seeing the bright side

Hope (optimism) Expecting the best in the future and working toward a future goal. Perspective Being able to provide wise counsel to others; making sense of the world and people

Spirituality Having coherent beliefs about the higher purpose and meaning of the universe; having beliefs about the meaning of life that shape behavior and provide comfort

Source: author’s adaptation from Park et al. (2004)

the different character strengths as a percentage—i.e., sum of the number of individuals who own character strength divided by the total number of individuals. By doing so, it is possible to create a rank of the most relevant characteristics—i.e., selecting those above the average. Therefore, it is possible to narrow down the “core qualities” of entrepreneurial behavior. The survey was conducted on two samples: 90 entrepreneurs and a control group of 90 randomly chosen non-entrepreneurs. This second sample was used to check that the presence of certain character strengths has different values than the same character strengths in the entrepreneurs’ sample. In fact, if both samples have similar results, this study indicates that the examined character strengths are similar across samples. For the entrepreneurs’ sample, data were collected through direct interviews, surveys, bibliography study, public statements, and company website. Since that was difficult to obtain a direct interview with all the 90 entrepreneurs, it has been necessary to integrate the information taking into consideration biographies and other sources of information considered as official (website of the company, television’s interviews, etc). For each characteristic was identified a common definition and a practical example so to avoid—as much as possible—subjectivity. When an interview was not possible, the process of assign a specific characteristic was checked and discussed with two other senior scholars in order to double-check the assigned characteristic. For the second sample (non-entrepreneurs), the information was collected through direct surveys. Each respondent was requested to indicate if a specific characteristic represents or not him/herself. For each characteristic, there was a concrete example of the meaning so that the respondents were able to interpret the

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qualities in the same way (the example used was the same considered for the entrepreneurs). Once the two datasets were finalized, a T test was performed with a satisfactory result, i.e., 0.000184864. Nevertheless, it must be acknowledged that this is a first step in trying to define in a structured way the characteristics of an entrepreneur. The important result, in term of research methodology, it is not only the result in itself but also having demonstrated that it is possible to leverage the Seligman and Peterson architecture to further research in this field. The results shown in the following section are encouraging and hopeful will trigger new research streams.

2.3

Results

Overall, the qualities presented in the entrepreneurs’ sample represent a percentage higher than the average of the character strengths identified—which is about 65%. Accordingly, it is possible to select fifteen core qualities which are as follows: hope, vitality, kindness, leadership, open-mindedness, love, appreciation of beauty and excellence, fairness, humility, and modesty (see Fig. 2.1). Following, the entrepreneurs’ sample was compared with the sample of non-entrepreneurs, that is, to check for correspondences, similarities, and discrepancies. This comparison helps ensure that the qualities identified in the entrepreneurs’ sample are actually the so-called “rare qualities.” More specifically, the researchers measure the presence (or absence) of the character strengths in the non-entrepreneurs’ sample. A reclassification was made in order to make

Fig. 2.1 Core qualities of entrepreneurs. Source: author’s elaboration

2.3 Results

23

Table 2.2 Character strengths measurements and delta calculation between entrepreneurs and non-entrepreneurs’ samples

Creativity Vitality Leadership Persistence Hope Fairness Citizenship Love Humility and modesty Kindness Bravery Integrity Love of learning Gratitude Social intelligence Curiosity Appreciation of beauty and excellence Prudence Open-mindedness Forgiveness and mercy Humor Perspective Spirituality Self-regulation Average of all character strengths

Entrepreneur sample

Not entrepreneur sample

(A) (%) 80.00 70.00 70.00 82.22 76.67 66.67 64.44 67.78 65.56 70.00 81.11 81.11 86.67 58.89 61.11 83.33 67.78 50.00 67.78 28.89 43.33 62.22 28.89 37.78 64.68

(B) (%) 34.80 35.50 35.60 54.50 50.00 41.10 40.00 45.60 43.30 48.80 61.20 61.10 67.80 41.10 46.70 70.00 60.00 44.40 64.40 28.90 46.60 66.70 33.40 45.60 48.63

Delta (A– B) 0.45 0.35 0.34 0.28 0.27 0.26 0.24 0.22 0.22 0.21 0.2 0.2 0.19 0.18 0.14 0.13 0.08 0.06 0.03 0 –0.03 –0.04 –0.05 –0.08 0.16

Source: author’s elaboration

comparable data in both samples. As such, if a strength was present in the entrepreneurs’ sample, then, it was assigned a value of one. On the contrary, if a strength was absent, then, the researchers assigned a value of zero. The results obtained were then transformed into percentage values, to allow a quick comparison. Finally, a delta value was calculated by subtracting to the score obtained in the “entrepreneurs” sample with the corresponding score was assigned in the non-entrepreneurs’ sample. The higher the delta value obtained, the greater the difference to the corresponding character strength between the entrepreneurs’ sample and the non-entrepreneurs sample. For example, the character strengths presented in the entrepreneurs’ sample exhibit the following percentages: love of learning (87%); curiosity (83%); persistence (82%); courage and integrity (81%); and creativity (80%) (Table 2.2).

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2.4

2 The Trigger: Identification of Entrepreneurial Virtues

Discussion and Conclusion

As shown in Fig. 2.2, the analysis of both samples indicates that on average, all of the character strengths within the entrepreneurs’ sample is 65%, while in the case of non-entrepreneurs is approximately 49%. That means that entrepreneurs score higher than non-entrepreneurs with respect to the character strengths. Overall, the difference between the two average values (i.e., deviation) has a value of (0.16). The deviations between same character strengths for both samples are as follows: creativity (0.45); vitality (0.35); leadership (0.34); persistence (0.28); hope (0.27); fairness (0.26); citizenship (0.24); humility, modesty, and love (0.22); and kindness (0.21). Accordingly, these character strengths are part of what it is called the “core qualities” of the entrepreneur. Similarly, the analysis found that some characteristics are prevalent in the entrepreneurs’ sample; these strengths are as follows: creativity,

Fig. 2.2 Character Strengths graphic comparison. Source: author’s elaboration

2.4 Discussion and Conclusion

25

Fig. 2.3 Core qualities and rare qualities. Source: author’s elaboration

vitality, leadership, persistence, hope, fairness, humility and modesty, love, and kindness. These unique characteristics are classified as “rare qualities.” Therefore, there are two categories. Core qualities, e.g., curiosity, are present in the entrepreneurs’ sample as in the not-entrepreneurs one. These are core qualities (i.e., predominant attributes) which mean these characteristics are present to a greater extent than the others in entrepreneurs but also in the other sample. The rare qualities, e.g., creativity, are distinctive features and are specific elements that highlight the existence of qualities necessary to be entrepreneurs. Rare qualities not only are strong in the entrepreneurs’ sample but are not highly present in the not-entrepreneurs one; therefore, they are defining the entrepreneur. The Fig. 2.3 represents the two different sets of the qualities identified. The “rare qualities” presented in this study (i.e., creativity, vitality, leadership, persistence, hope, fairness, humility, modesty, love, and kindness) distinguish entrepreneurs from the general population. As already mentioned, the key contribution is the identification of entrepreneurial traits building on the character strengths (Peterson and Seligman 2004). The classification provides a clear vision of which characteristics are typical to entrepreneurs and which ones set them apart from the average population. These qualities can be useful in various ways. First, may serve to evaluate, at the beginning of a project, whether a person has those qualities necessary to start a new venture. That is, these characteristics may be useful to all those who analyze business plans (such as incubators, venture capitalists, and public institutions), and it can help business owners to evaluate managers of their company, i.e., capability to act entrepreneurially (Covin and Slevin 1991; Stevenson and Jarillo 1990) or his potential. That point may indicate which qualities to cultivate in order to improve performance. Similarly, this result is instructive for family businesses because these unique characteristics may help founders to take decisions about the next-generation leadership (the book will discuss in-depth this point in following chapters). In that same logic, it offers insights into the personal areas that the entrepreneur is lacking.

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Chapter 3

The Family Business Continuity: Entrepreneurial Processes and Heuristics

Abstract Family business scholars converged to the concept of Transgenerational Entrepreneurship which implies that entrepreneurial families should have entrepreneurs in every generation and entrepreneurial families should be structured around simple rules imprinted by previous generations. However, a structured field research on how the transgenerational transmission of entrepreneurial learnings occurs has not yet been proposed. In this third chapter, how the entrepreneurial learning between generations happens through heuristics is explained. Heuristics are simple rules which are internalized and applied by the next generations. An analysis based on family business case studies was performed, and next generations’ heuristics were defined and categorized.

After the review and identification of the qualities of entrepreneurs, this third chapter has the objective to explore the concept of entrepreneurial processes understanding the role of heuristics. It is well known that family business scholars are converging to the concept of transgenerational entrepreneurship which implies that family should have entrepreneurs in every generation and entrepreneurial families should be structured around simple rules imprinted by previous generations. However, a structured field research on how the transgenerational transmission of entrepreneurial learnings occurs has not yet been proposed. A first review of the major papers is proposed as well as an overview of heuristics’ original field literature. Moreover, a preliminary investigation on the entrepreneurial learning process and heuristics between generations is presented. The analysis was made on twenty-five cases of next generations’ leadership where heuristics were defined and categorized using different approaches and sources. Heuristics were also evaluated by the adaptability in evolving competitive environments, inferring the likelihood of surviving the original entrepreneurial competitive advantage. A first conceptual model is proposed to understand how the transmission and the evolution of the set of heuristics take place. Understanding how heuristics are created by previous generations and how they are absorbed and adapted by next generations can definitely contribute to define the cause–effect which informs the successful continuity of family businesses over generations. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_3

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3.1

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

A Step Toward Transgenerational Processes

Family capitalism scholars analyzed how the succession among generations happens, how is balanced tradition with innovation through generations and in different context (Giacosa et al. 2016, 2017; Vrontis et al. 2016; Bresciani et al. 2015; Bertoldi et al. 2011), but it is not still clear how next generation learns from the preceding one (Barach and Ganitsky 1995; Cabrera-Suárez et al. 2001; Cadieux 2007; Woodfield and Husted 2017). In this context, Jaskiewicz et al. (2015) introduced the concept of transgenerational entrepreneurship: “We introduce entrepreneurial legacy, which we define as the family’s rhetorical reconstruction of past entrepreneurial achievements or resilience, and theorize that it motivates incumbent and next-generation owners to engage in strategic activities that foster transgenerational entrepreneurship.” The transgenerational entrepreneurship is nurtured by three activities: strategic education, entrepreneurial bridging, and strategic succession (Jaskiewicz et al. 2015). More specifically, strategic education is based on opportunity recognition (Shane 2000; Baron and Ensley 2006) and in other education and work experiences which are family focused; therefore, in the process something is learnt that is not management competences, which could be learnt in standard management courses at standard business schools, and that is not practical capabilities, which can be learnt with management experiences in other companies. Entrepreneurial bridging is transgenerational collaboration of two generations of family members which take place over years with the focus on entrepreneurship and not succession (Bettinelli et al. 2017), during this phase the younger generation pushes for company and organization renewal, i.e., adaptation to the new competitive environment. Therefore, during the entrepreneurial bridging, the next generation (NextGen) learns how to become entrepreneur and defines a renewed vision of the company which is compliant with the present competitive environment. However, how this happens has still not been analyzed. At the end of this process, the formal transition of ownership and control happens; the strategic succession takes place: at this point, it’s the show of the NextGen. During this process of transgenerational handover, the entrepreneurial processes of the family are transmitted usually as tacit knowledge, which is difficult to transfer because it is situation (domain in heuristics theory) specific (Jones 2001; Bhalla et al. 2009; Nayak and Maclean 2013) and is gained through experience (Grant 1996; Cabrera-Suárez et al. 2001; Steier 2001; Memili et al. 2010). What is transferred has a key role in value creation: if only generic, unspecialized, replaceable knowledge, and resources were transmitted, the future of the family firm would be fated (Coff 1999; Chrisman et al. 2005; Zellweger et al. 2010; Memili et al. 2010; Basco and Rodríguez 2011; Giachino 2012; Giacosa et al. 2014; Giachino and Bertoldi 2016; De Massis et al. 2016). It has been demonstrated that influence of the family ownership group within this process, suggesting that entrepreneurial learning in a transgenerational family firm is embedded at the family group level and reproduced

3.1 A Step Toward Transgenerational Processes

33

and co-created as a result of resilient entrepreneurial behavior (Clinton and Gamble 2019). Present literature recognized the importance of the time spent together, e.g., the entrepreneurial bridging, but what happens between the two generation in that time of bridging, i.e., from the birth of the NextGen and the leave of the Previous Generation (PrevGen), it hasn’t been studied yet. How the NextGen can stand on the shoulders of giant receiving and continuing the entrepreneurial processes of the family has not been analyzed. Therefore, in this chapter we will analyze how Entrepreneurial Processes are transmitted from generation to generation.

3.1.1

The Heuristics

A set of heuristics is a class of “rules of thumbs” that embeds knowledge about a specific domain and that guides problem solving and decision-making in it (Ippoliti 2015). The formal literature on heuristics shows that the heuristics approach is an alternative to the standard way of dealing with rationality, based on expected utility theory (EUT) and, in particular, the Fast and Frugal tradition (F&F) (Gigerenzer and Goldstein 1996) argues that heuristics can be a more effective way than EUT of solving problems in a specific domain, namely the domain in which the heuristics were formed, or better the one that have certain features that match the features of the heuristics. It is in this sense that a heuristic is ecologically rational, but can be transferred across domains if they are similar. As a consequence, the effectiveness of a specific heuristics strictly depends on the characteristics of the domain. A paramount example is the compensatory or no compensatory nature of a specific domain’s information structure. Moreover, heuristics are precious especially when timescale for decision is shorting, and in general, when we have a scarcity of resources. The spill-over effect of time on decision-making is often better handled by means of heuristics: in that case, a heuristic offers a straight competitive advantage over the standard approach. A stock example of heuristics is Take-the-Best (TTB) (Gigerenzer and Goldstein 1996). TTB states that, starting with the most important attribute, a decision-maker will see if this attribute discriminates between given alternatives. If so, he will choose the alternative that is favored by the attribute. If it is not the case, he will move on to the next most important attribute. Such a heuristic is ecologically rational for domain where a) cue validities vary highly, b) with moderate or high redundancy, and c) scarce information (Hogarth and Karelaia 2005; Martignon and Hoffrage 1999). The previous description can be defined as representative of the environment in which entrepreneurs find themselves. A remarkable case study is voting (Graefe and Armstrong 2012). In this case, TTB’s forecasts outperform forecasts over methods that incorporate substantially more information (namely econometric models and the Iowa Electronic Markets). More in detail, multiple regression analysis performs best when calculating in

34

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

sample forecasts, but when we employ cross-validation to predict data that had not been used to build the model, TTB is most accurate. Moreover, the advantage of TTB is higher when there are fewer observations per predictor variable. In addition, Martignon and Hoffrage (1999) proved in a formal fashion that a linear model cannot outperform TTB when the implicit importance weight of a variable is greater than the sum of the weights of all less important variables. So here we have a straight result about the comparative effectiveness of F&F heuristics and optimizing rationality. The TTB heuristics are intervening tools, since it can be employed to provide fast advice on which issues a candidate should stress in her campaign. In order to determine the most important attribute (variable), or a rank of them, polling data can be employed, as they are.

3.1.2

Heuristics in Management

Management scholars showed an increasing interest in heuristics, and in the last 20 years, published articles on the topic in research focus management journals have risen from less than 50 to more than 200 (Loock and Hinnen 2015). They show that many managerial decision-takings are put forward by the use of heuristics. Most of these decisions are shaped by a heuristic that is qualitative and verbal in nature (Manimala 1992). Stock examples of such heuristics are verbal protocols such as: “start small, grow big organically”; “minimize initial investments”; “repeat successes to take full advantage of them”; “sharing is the way to loyalty and prosperity. Give everyone his due”; “focus on keeping it simple and understand what are the fundamental things you have got to get right.” Of course, these verbal rules offer only “a large unstructured body of very specific heuristics without stating when and why they perform well” (Artinger et al. 2015). This lack raises a problem of systematization and theoretical cogency: without specifying its ecological rationality, a heuristic is hard to be put in use properly. Accordingly, several attempts to structure this corpus have been advanced by using different criteria (Bingham and Eisenhardt 2011; Reijers and Mansar 2005; Gigerenzer and Gaissmaier 2011). In any way, this corpus of verbal rules of thumb can be traced back to the well-known F&F heuristics. In particular, a large amount of managerial employment of verbal heuristics can be categorized by means of five basic F&F heuristics: satisficing, tallying and 1/N, similarity, recognition, and Lexicographic strategies (Artinger et al. 2015). For instance: “start the first venture on a small scale”: satisficing; “don’ t put all your eggs in one basket”: 1/N heuristics; “only enter English-speaking markets”: similarity; “choose tried and tested products”: recognition; “sequence new product introductions by country”: lexicographic strategy. In turn, all these heuristics, which are selective (they select between given option) and not generative (they produce new options), build upon the primitive heuristics that are analogies and inductions (Ippoliti and Cellucci 2016).

3.1 A Step Toward Transgenerational Processes

35

Moreover, a remarkable finding of the study of managerial heuristics is that they can bridge the individual–organizational divide (Artinger et al. 2015), since their application is driven by its ecological rationality, that is, the match of a heuristic with a given domain. The reason for this interest is the efficiency with which entrepreneurial and management behavior is explained by the structured theory corpus of the heuristics. The managerial decision-making process based on heuristics has been academically demonstrated superior in some cases. Wübben and Wangenheim (2008) measured the accuracy of a one-reason decision-making process (e.g., “classify a customer who did not purchase from the company for more than 9 months as inactive”), against an optimization model (the Pareto/NBD model that integrates more information) and found the same or better performance for the heuristic. The hiatus heuristic, which relies only on one good reason, is much simpler than an optimization technique. In the case analyzed, dropping customers from the active list was decided simply based on whether they had passed the threshold of 9 months of inactivity; all other available information about the customers was ignored. The relative young literature of heuristics in management presents a quite wide number of cases of successful application: in portfolio investing (Ortmann et al. 2008), in corporate finance decisions (Mousavi and Gigerenzer 2014; Agliardi et al. 2016), in banking marketing (Persson and Ryals 2014), in pricing decisions (Hinterhuber 2015; Bertoldi et al. 2016), in stock exchange brand equity (Çal and Lambkin 2017), in buyers’ decision-making (Moser 2016), in internationalization processes (Bingham and Eisenhardt 2011), in partner selection for alliance (Heimeriks et al. 2015), in CEO evaluation (Graffin et al. 2013). Knight (1921) introduced three categories of probability: a priori probability, statistical probability, and estimate; the first two categories correspond to measurable risk, and the third occurs when the decision-maker deals with uncertainty, which isn’t probabilistically measurable. Gigerenzer, the father of heuristics, affirms as follows: “One main point in the business world is that entrepreneurs can generate profit in the markets, à la Knight, precisely because they intelligently deal with immeasurable, irreducible uncertainty. We argue that the study of heuristics provides a descriptive and normative framework to model how entrepreneurs and others deal—and should deal—with uncertainty” (Manimala 1992; Mousavi and Gigerenzer 2014). It can be inferred that entrepreneurs when decide under uncertainty, i.e., quite often, do not rely on estimating probabilities but on search rules, aspiration levels, lexicographic rules, and other heuristic principles (Busenitz and Barney 1997; Gigerenzer et al. 2011).

3.1.3

The Heuristics as Entrepreneurial Processes

The toolbox offered by the heuristic’s theory characterizes the Entrepreneurial Processes of the family and is the necessary link in a specific domain between the resources a firm has and the decision-making processes needed to harness those

36

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

resources for profitable purposes (Bingham et al. 2007; Freiling et al. 2008; Chua et al. 2015; Roundy et al. 2018). These processes shape how the entrepreneurial family is going to evolve and respond through times to the environmental changes and competitive pressure. The toolbox is tacitly and implicitly passed to the NextGen (Grant 1996; Cabrera-Suárez et al. 2001; Steier 2001), but, of course, it is at stake as the enterprise keeps working in an ever-changing environment. The Entrepreneurial Processes are the outcome of the interaction of the creativity and initiative of a particular generation (PrevGen) with the opportunities and constraints of the founding context, and it is imprinted in the firm (Eisenhardt et al. 2010) and resulted from adaptation to a historically determined environment (Jones 2001; Bhalla et al. 2009; Nayak and Maclean 2013). The imprinting hypothesis (Stinchcombe 1965) is that characteristics of an entity shaped during a sensitive moment of its existence can persist for decades, in spite of subsequent environmental changes (Marquis 2003). Sensitive moments have been identified by different academic contributions in discontinuities in product and markets (Dixon et al. 2007; Kriauciunas and Kale 2006), new market entries (Benner and Tripsas 2012; Klepper and Simons 2000), periods of poor performance (Baker et al. 2010), and/or major shifts in senior executive ranks. These imprinting moments were analyzed to understand how imprinting happens, i.e., when learning occurs and how it is embedded in the processes of the company, becoming entrepreneurial processes. Entrepreneurial learning in the founding phase remains imprinted in the company and in the family (Boeker 1989; Kimberly 1979; Driel and Dolfsma 2009; Eddleston 2008; Baron et al. 1999; Schein 1983; Simsek et al. 2015) defining for years to come the strategic decision-making process and the competitive advantage (Harris and Ogbonna 1999; McMahon and Ford 2013; Vuori and Vuori 2014; Irava and Moores 2010). The imprinting research field considers founders or previous generation (PrevGen), as a source of imprinting for organizations (Beckman and Burton 2008; Gruber et al. 2008; Leung et al. 2013) given their unique vision and background (Kimberly 1979; Ainamo 2005) and their personal traits (Jensen and Luthans 2006; Fauchart and Gruber 2011). Evidence shows that imprinting is pervasive in the firm, permeating organizational structures (Johnson and Redish 2007), strategies (Boeker 1989), visions (Harris and Ogbonna 1999), and policies (Burton and Beckman 2007; Simsek et al. 2015) and can take different form: processes of recombination (Powell and Sandholtz 2012), development of structures, transfer and application of resources and capabilities (Colombo and Piva 2012), and past significant personal experience (Zheng 2012). It can, therefore, be inferred that the PrevGen’s imprinting is pervasive for the company and for the family and effects can be seen in many aspects and areas of the company: what remains to be analyzed is the root cause of this widespread and pervasive influence. This knowledge is idiosyncratic, i.e., the entrepreneur and its organization adopt distinct heuristics based on their unique experience (Bingham and Eisenhardt 2011; Loock and Hinnen 2015); therefore, researchers in strategy examine heuristics which

3.1 A Step Toward Transgenerational Processes

37

share a common structure even if their content is unique. This is a key difference from the original heuristics theory which focuses on universal heuristics (Gigerenzer et al. 2011). Heuristics can also be transferred to the organization and vice versa, because being their application based on their ecological rationality, i.e., the match with a given environment (Gigerenzer and Todd 1999), when central environmental features are shared, heuristics can be shared as well (Artinger et al. 2015). The imprinting phase leverages the entrepreneurial processes, a set of heuristics created in the specific founding environment (domain) but in the transition from PrevGen to NextGen, this process of testing, learning adaptation is “forgotten” and the NextGen simply continues to adopt this set of heuristics. The same set of heuristics which are imprinted in the company, as defined by Artinger et al. (2015): “No matter if the agent who makes a decision changes, the underlying functional mechanism and its interaction with the environment should remain the same.” NextGen keeps it for granted and uses it as a guiding principle to approach and solve problems. This process is coherent with the imprinting theory principles which proved that organizations may survive far into the future with their founding structures largely intact (Marquis and Tilcsik 2013; Simsek et al. 2015) because the latter continue to be efficient, or because of inertial forces such as tradition, vested interests, ideology, or because of a lack of competition (Stinchcombe 1965).

3.1.4

Heuristics Can Be “Second Hand” Imprinted to NextGen

The transfer of heuristics happens during the entrepreneurial education and bridging (Schein 1983; Eddleston 2008; Jaskiewicz et al. 2015; Woodfield and Husted 2017), and this is coherent with the principle of “secondhand imprinting,” i.e., the way in which new members—not part of the founding events—are influenced (Marquis and Tilcsik 2013). Therefore, also the NextGen can be entrepreneurially imprinted even if it wasn’t present in the imprinting first period. Entrepreneurs are personally imprinted before the beginning of their entrepreneurial career, and this is true for every entrepreneur, either the founder (PrevGen) or the NextGen, which is an entrepreneur as well. Mathias et al. demonstrated that entrepreneurs come either from an entrepreneurial family or are inspired by an activity or hobby they mastered, or from their career profession. Therefore, NextGen can be an entrepreneur of the first category which decides to dedicate their entrepreneurial effort to the family business. In this case, they have to bring new blood in the company by choosing what to change (Boeker 1989) and how to engage (Sharma and Manikutty 2005; Memili et al. 2010; Chrisman et al. 2016; Minola et al. 2016). The family has a significant influence on the imprinting of the “would be entrepreneur” of whichever generation (Mussolino and Calabrò 2014), and often this imprinting happens very early in life, i.e., before the first 10 years (Bandura

38

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

1989). Usually, role models and mentors, being family members or not, play a significant role in guiding individuals’ development and career selection (Keller and Whiston 2008; Ozgen and Baron 2007). No doubt that interests and aspirations can change between the age of ten and the time one pursues a profession but the phases through which the NextGen chooses the life calling are quite structured and start very early. For other professional activities, such as pianists, swimmers, tennis players, sculptors, mathematicians, and research neurologists, the phases of the competence growth are three. The first phase, of play and romance, is a period of interest, involvement, stimulation, freedom to explore, immediate rewards. The second phase, of precision and discipline, is where skills, techniques, and accuracy are practiced. The third phase, of generalization and integration, is when the development of the individuality insights and realization happens (Bloom and Sosniak 1985). The same growing process can be applied to the entrepreneurial growth of NextGen. This is the reason why growing in an entrepreneurial family increases the likelihood of becoming an entrepreneur either founding a new venture or continuing the family business (Crant 1996; Scott and Twomey 1988). Therefore, NextGen entered the family business with the imprinting they received in the early years by their entrepreneurial family, role models, and mentors. The process through which they receive the imprinting and the imprinting itself will be critical to future decision-making and opportunity selection. This process of entrepreneurial education starts the entrepreneurial capability building of the NextGen while the PrevGen legacy motivates the NextGen to be involved: entrepreneurial young family members are, indeed, influenced by family history and myths even when they hadn’t met the ancestors (Copeland and White 1991; Jaskiewicz et al. 2015; Hamilton et al. 2017). Recently, it has been found that family members employed in the family business positively react to spiritual leadership better than non-family member (Tabor et al. 2019). From the above, we can infer that transgenerational entrepreneurship (Jaskiewicz et al. 2015) happens through entrepreneurial education in the early years as a form of secondhand imprinting. Therefore, both the company and the family members receive an imprinting by the PrevGen (Pieper et al. 2015). However, the detailed process of how this happens has not been in-depth analyzed.

3.1.5

Imprinting Tend to “Block” the Future of the Company

Imprinting creates entrepreneurial processes which tend to stick both in the family company and in the family members, possibly taking to an “escalation of commitment” (Beckhard and Dyer 1983; Harris and Ogbonna 1999), i.e., the tendency of decision-makers to continue courses of action (e.g., strategies) even when evidence suggests that such courses of action may be failing. Such strategic inertia characterized many organizations which remain loyal to their original entrepreneurial processes and do not respond to environmental changes and pressures failing to adapt

3.1 A Step Toward Transgenerational Processes

39

strategy and renew competitive advantage (Boeker 1989; Jarzabkowski and Kaplan 2015; Barros et al. 2016). The commitment to the entrepreneurial processes is not bad in itself; it depends on the flexibility of the vision and on how this can avoid the inertia of adapting to the competitive environment changes (Kellermanns et al. 2012). Harris and Ogbonna (1999) have defined a “legacy,” a founder vision which is flexible and adaptable to subsequent environmental conditions and an “hangover” a not adaptable vision which being fixed and specific cannot be adapted to the changing competitive environment. Only the NextGen can evolve the PrevGen entrepreneurial processes adapting it to the incoming changed competitive environment. Being the Entrepreneurial Processes of the family characterized by a set of heuristics, how they are adapted would determine the continuity of success in the NextGens. This process of adaptation is more and more recognized in the family business literature as a process through which the Nextgen has to deal with the past imprinting (Sasaki et al. 2020).

3.1.6

Heuristics Are Domain Specific; Therefore, Domain Specific Are the Entrepreneurial Processes

The ecological rationality of the heuristics forming the entrepreneurial processes reflects its degree of adaptation to the structure of the competitive environment. A heuristic is not simply a shortcut that avoids extra effort at the expense of reduced accuracy. It is a strategy that effectively matches the structure of the competitive environment, and, in that specific environment, it is ecologically rational, i.e., efficient. The effectiveness of this ecological match has nothing to do with mimicking the structure of the competitive environment in terms of its complexity, as it can be done with quantitative modeling. Heuristic strategies ignore some of the complexity of the environment in order to reduce both the estimation error and effort. Heuristics are created in a specific domain, i.e., competitive environment, and this is where they are efficient in finding and solving entrepreneurial problems (Bingham et al. 2007; Bingham and Eisenhardt 2011; Eisenhardt et al. 2010), and this is coherent with the imprinting theory (Felin et al. 2012). Afterward, given the structural inertia (Hannan and Freeman 1984) created by the imprinting, the NextGen builds upon these heuristics until the domain will pose new problems, challenges, and will display one or more limits of the heuristics content or temporal wise. These limits are better detected when heuristics have some characteristics, e.g., they are simple and clear (Brown et al. 1998; Vuori and Vuori 2014; Pieper et al. 2015). The structured explanation of the causal link between the heuristics efficiency and its domain explains, better than any other theoretical approach, the relationship between the entrepreneur learning process and the environment (Bingham et al. 2007; Brown and Eisenhardt 1997; Rindova and Kotha 2001), highlighting the

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3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

idiosyncratic link between the entrepreneurial processes created and how this is efficient in the specific domain.

3.1.7

Evolving the Entrepreneurial Processes Means Adapting the Set of Entrepreneurial Heuristics to a New Domain

Heuristics which form the entrepreneurial processes can be used unconsciously and intuitively to take entrepreneurial decisions; therefore, if intuitions are based on heuristics (Knight 1921; Gigerenzer 2007; Mousavi and Gigerenzer 2014), identifying the latter provides insight into the intuitive decisions. This is why NextGens are a key resource: they can change the routines, learning the heuristics, decoding the entrepreneurial intuition, and adapting it to the new environment, forcing, at the end, the change in the organization; i.e., they can force the change being the “new entrepreneur.” The decoding phase is necessary to read the PrevGen entrepreneurial processes in the light of a changed environment, and PrevGen heuristics are born as individuals; therefore, they are often implicit and need to be formalized before they can be adapted. This adaptation effort will take to a more codified set of heuristics (Heimeriks et al. 2015). Evolving the imprinting, it is far from easy, being the entrepreneurial processes and its set of heuristics imprinted by the PrevGen and being difficult to tell which part of the successfully set must be changed to continue the company success story (Lei et al. 1999; Lumpkin and Lichtenstein 2005). Imprints can, indeed, be transformed either suddenly in radical moment (Tushman and Anderson 1986; Gersick 1994; Hannan et al. 2006) or throughout an orchestrated change of the company organization (Zyglidopoulos 1999). Regarding the difficulty in what to change, this is the challenge of the NextGen and it is what they have to do once they stand on the giants’ shoulders. It is important to consider that NextGen has to show entrepreneurial mindset as the PrevGen (Woodfield and Husted 2017). Even if there is no theory guiding the adaptation process, clarifying the structure of the entrepreneurial processes and its heuristical nature will help the NextGens in the process. Heuristics are generated or evolved through reinforcement learning, with the unit of learning being heuristics rather than behavior as explained by the strategy selection learning theory which describes how heuristics are selected based on individual reinforcement learning (Rieskamp and Otto 2006). In general, heuristic selection can be guided by individual reinforcement learning; social learning, as in medical training in which physicians are instructed on what cues to look up in what order; and evolutionary learning, as with rules of thumbs for predation and mate search in animal species (Hutchinson and Gigerenzer 2005). It has been demonstrated through experiments that people tend to check the ecological rationality of a heuristic from trial to trial before they eventually apply it routinely; this process is

3.1 A Step Toward Transgenerational Processes

41

consistent with the entrepreneurial process of testing and doing small experiments when pursuing new opportunities in uncertain environment (Czerlinski et al. 1999; Gigerenzer 2008; Wübben and Wangenheim 2008) even if more research is needed to define how this happens at an interpersonal and at an organization level (Loock and Hinnen 2015).

3.1.8

Some Entrepreneurial Processes Are Easier to Change, Other Less: It Depends on How They Are Built

The adaptation process the NextGen has to undertake must start from the existent: being on the giants’ shoulders, therefore, they can’t start from scratch. It has been demonstrated that the PrevGen entrepreneurial processes can be more or less flexible (Harris and Ogbonna 1999) but which is the root cause of the level of flexibility has not been scrutinized. It is not a matter of how strong the imprinting is: the imprinting is by definition deeply embedded in the company processes and organization. Imprinting is both a diachronic and synchronic process, and its flexibility involves these two parameters, i.e., time and space. As concerns the space parameter, the notion of ecology of a heuristic tool helps shedding light on what flexibility really means. The effectiveness of a specific heuristics strictly depends on the characteristics of the domain; in this sense, it is spatial, synchronic. In general, heuristics show to be superior to algorithmical approach or utility theory when the domain shows the following three conditions: greater predictive uncertainty, relatively small sample size, and less stable environment (Artinger et al. 2015). Under these conditions, even with a high data availability, a simple heuristic performs better. A consequence of this finding is that we have to appraise the ecological rationality of a strategy whenever we wish to put it in use. This requires to spot the characteristics of the target domain and to define the logical and temporal steps of a strategy carefully. As concerns the time parameter, a heuristic is intrinsically a positional object (i.e., located in time) and it is implicitly transmitted from PrevGen to NextGen. As such, it must be adapted by NextGen through the evolution of the domain of birth or to a new domain, e.g., a new industry. The level of adaptability of the heuristics is measured by its temporal generalizability, i.e., how much its application lasts through time. As Duncan (1972) shows, the dynamic dimension of a domain (how far the factors that potentially affect a decision remain constant over time or are in a continuous process of change) is the main cause of uncertainty. And uncertainty is just what a heuristic is capable of handling better than the standard approaches.

42

3.2

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

Method

To analyze, the 25 cases were adopted a research method based on theory building from multiple cases (De Massis and Kotlar 2014; Eisenhardt 1989; Eisenhardt and Graebner 2007; Yin 2003). Thus, it was possible to structure an explicative theory about the transmission of entrepreneurial capabilities from generation to generation, a subject which is not been deeply explored from consistent patterns of data using replication logic, in which a series of case studies functions as a set of experiments that each serve to confirm or disconfirm an emergent theory (Eisenhardt 1989; Numagami 1998; Yin 2003). The entrepreneurial families for this study were identified through the Italian Association for Family Business (AIDAF) members’ database, universities’ network, and networking with other family business researchers in Italy. Given the research question, the principal interviewees were not a founder and belong to a next generation, from the second to the sixth, and is the present leader of the family with a relevant active role in the family business, e.g., Chairmen, CEOs, or top managers, e.g., marketing, commercial, operations, finance VP, etc. Having had the access to family leaders in top positions assure that the real entrepreneurial processes and wisdom have been analyzed, being them the most knowledgeable on the firm’s history, having roles as entrepreneurs, executives, owners, and contemporary, given the top role in the family business, they provide a clear understanding of key management and organizational processes. It can be stated that in terms of professional managers, the 25 cases present different situations. Being the unit of analysis of this chapter, the NextGen with a leading role in the family company, the management variable has not been taken into account. The management variable will be discussed from Chap. 4. In keeping with purposive sampling, the researcher selected cases that differed in generations and size to enhance contemporary insights either from the way in which heuristics passed through generations and from how heuristics evolve with the management complexity of the family business management structure. Starting from the huge database of potential cases provided by the extent networks, cases were selected on size, age, generation, and industry with the purpose of having the broader set possible to understand how entrepreneurial wisdom, knowledge, and education are transferred among generations applying the logic toolbox on heuristics. Table 3.1 provides a description of interviewees in each company, industry in which company operates; the generation; and the approximate size of the company. Every family leader was requested to write a letter to the previous generation leader describing how he was leading the entrepreneurial family and its business in the future. No specific subjects to be covered or guidelines were given, with the only advice to focus on relevant entrepreneurial issues being related to the family, the company, the industry, etc. In parallel, the researcher reviewed websites, public press reports, and industry analyses to understand the business, its industry, and its competitive dynamics. Many industry and management experts were interviewed in order to be able to spot relevant points contained in the letters regarding the

Founded 1894

1956

1925

1960

1930

1927

1938

Name Bartoli

Bonfiglioli

Canclini

Carraro

Ceretto

SolGroup

Erg

Table 3.1 Cases analyzed

Aldo Fumagalli e Giovanni Annoni Edoarno Garrone

Riccardo Ceretto

Giuseppe Canclini Antonio Carraro

Founder Giuseppe Bartoli Clementino Bonfiglioli

Edoardo Garrone

Aldo Fumagalli Romario

Roberta Ceretto

Simone Canclini Marcello Carraro

NextGen Giorgio Bartoli Sonia Bonfiglioli

Chairman

Chairman and CEO

Board Member—VP Marketing

CEO

CEO

Chairman

Role CEO

Alessandro Garrone (ViceChairman),

Luisa Lunardi (ViceChairman), Luciano Bonfiglioli (Board Member) Mauro Canclini (consigliere) Liliana Carraro (direttore uff. pubblicità), Massimiliano Carraro (Innovaz. Prodotto e marketing manager) Roberta Ceretto (MKTG VP), Federico Ceretto (export manager), Lisa Ceretto (CFO), Alessandro Ceretto (oenologist) Marco Annoni (ViceChairman)

Family members involved –

Energy

Industrial and medical gas

Piemontese wines

Agricultural machinery, tractors

Shirting fabrics

Power transmissions for industrial applications

Industry Cardboards

944

674

32

76

45

760

Revenues M€ 14

96

32.4

0.8

1

35

Profit M€ 0.6

(continued)

666

3001

180

310

250

3700

Employees 54

3.2 Method 43

Founded

1948

1919

1931

1895

1902

Name

Inaz

Giovanardi

Giuffrè Editore Lavazza

Ferrari

Table 3.1 (continued)

Giulio Ferrari

Arnardo Giovanardi Antonino Giuffrè famiglia Lavazza

Valerio Gilli

Founder

Massimo Giovanardi Antonio Giuffrè Giuseppe e Marco Lavazza Matteo Lunelli

Linda Gilli

NextGen

Chairman and CEO

General Director Vice Chairmens

Chairman

Chairman

Role

Gino Lunelli (Honorary Chairman), Marcello Lunelli (ViceChairman and oenologist), Camilla Lunelli (Marketing VP), Alessandro Lunelli (Finance VP), Franco Lunelli, Mauro Lunelli, other NextGen board members.

Giovanni Mondini (ViceChairman), Vittorio Garrone (ERG Renewable CO Chairman) Ludovina Busnach (Product Manager), Valeria Busnach (Area Manager) Vittorio Giovanardi (Executive Director) Giuseppe Giuffrè (Chairman) 6

Family members involved

Wine and beverage

Coffee

Publishing

Support for stores

Software

Industry

57

1.4

53

15.2

38.9

Revenues M€

0.36

Profit M€

220

3000

152

60

500

Employees

44 3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

1972

1948

1828

2003

1949

Sabelt

Toscotec

Gruppo Grendi

Epta

Raccortubi Group Inoxfucine

1963

1959

Marcegaglia

PierGiorgio Pentericci Pietro Pugassi

Luigi Nocivelli

Marco Antonio Grendi

Piero and Giorgio Marsiaj Giovan Battista Mennucci

Steno Marcegaglia

Luca Pentericci Lorenzo Pugassi

Marco Nocivelli

Costanza Musso

Alessandro Mennucci

Massimiliano Marsiaj

Antonio Marcegaglia

Chairman and CEO

Chairman

Chairman and CEO

CEO

CEO

ViceChairman

Chairman and CEO

Luca Pugassi (ViceChairman), Marco Pugassi (commercial executive), Alessandro

Giovan Battista Mennucci (Chairman), Lorenzo and Armando Mennucci (board member) Antonio Musso (MD), Bruno Musso (Chairman), Eugenio Musso (board member) Mariaserena Nocivelli (board member), Alessandro and Enrico Nocivelli (board members), Luca Ballerio (ITC Manager)

Emma Marcegaglia (ViceChairman and CEO) Gregorio Marsiaj (board member)

Oil & gas applications Forged steels

Food & Beverage

Logistics

Engineering

Belts and seats for sports cars

Iron and steel

35.4

56.5

767

38

110

35

4.1B

4.5

29

3.7

8

1.2

218

(continued)

57

220

>4000

100

180

150

6500

3.2 Method 45

1953

1963

2003

1968

1906

1963

Fratelli Rossetti

The Eco-Ethical Company

Aura Holding S.p.A.

Gruppo Cividale

Zambon

Zoppas Industries

Luigi Zoppas

Gaetano Zambon

Aldo Bernardino e Adalberto Valduga

Fulvio Traglio

Mauro Saviola

Renzo Rossetti

Founder

Source: author’s elaboration

Founded

Name

Table 3.1 (continued)

Federico Zoppas

Elena Zambon

Chiara Valduga

Maurizio Traglio

Alessandro Saviola

Diego Rossetti

NextGen

CEO

Chairman

Chairman

Chaiman and CEO

Chairman

Chairman

Role

Matteo Zoppas, Tullio Versace

Antonio Valduga (commercial VP), Alberto Valduga (Supply chain and purchasing VP) 4

Capellini (production VP), Giorgio Cappellini Luca Rossetti (CEO), Dario Rossetti (board member) Lea Grazzi (board member), Alfredo Saviola (board member), Stefano Saviola (CEO) Carlo Traglio (board member)

Family members involved

Pharmaceutical, chemical, and house assistance electric resistances, heating systems, white appliances

Luxury goods, real estate, transports, finance, venture capital, automotive, renewables, restaurants Steel and cast iron

Wood and chemical materials

Footwear and leather goods

Industry

450

670

322

52.5

552

49.6

Revenues M€

13

0.25

0.9

Profit M€

700

2811

1316

64

1377

293

Employees

46 3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

3.3 Results

47

competitive environment, the industry practices, the entrepreneurial approach, etc. Letters writers were frank, concrete, and specific in describing to their previous generation’s leaders the company, family, and industry situation. Additional research and analysis were useful to check and be able to verify it. The letters were written between March 2015 and July 2016. In total, this study produced over 300 pages composed by family business leaders and 1000 pages of additional analyses based on public speeches and articles’ quotes. It was used within-case and cross-case methods to analyze the case data (Eisenhardt 1989; Eisenhardt and Graebner 2007). A qualitative data and a crosscase analysis approach were applied; therefore, it was possible to determine if there were consistent patterns of relationships across all cases (Eisenhardt 1989). As it is common in qualitative case research, no a priori hypotheses were defined. Following the approach suggested by Miles and Huberman (1994) and relying on general frameworks of key players in the among generation entrepreneurial processes transmission, a set of tables and graphs were developed to facilitate cases’ comparisons. Different dimensions and categorizations were developed to analyze the case inputs either stand alone, randomly paired, and paired based on similarity (e.g., generation, industry, size etc). Emerged insights were discussed applying the Eisendhardt approach (1989), e.g., devil’s advocacy, to test different explanations. Alternative explanations were created also by an external researcher who was blind to the initial cases analysis effort. An outsider researcher drawn into a research project provides more objective review of the inductive process. The outsider had limited knowledge of family business, a philosophical background, and a huge knowledge on heuristics and logic of research structuring. This outsider contribution enabled a rigorous probing of the emerging conceptual framework from many vantage points. Cases were compared, frame-worked, categorized, and logically systematized through an iterative process until a theoretical saturation was achieved; such an emerging theory provides a consistent and robust explanation on how Entrepreneurial Processes is transmitted from generation to generation. Highly explicating quotes defining single heuristics are provided and analyzed in the Findings section. Theoretical contributions emerged from relationships between the categories and the inductive theoretical model proposed. A logical structure and connections to several theoretical domains emerged and were formed consistently producing a theoretical template which represents a satisfactory explanation (Langley 1999) and is presented in the Theory Proposition section.

3.3

Results

The analysis illustrates that NextGen learns from the PrevGen a set of heuristics and apply them in their entrepreneurial activity. The learning phase viewed through heuristics’ theory helps in explaining the entrepreneurial education and the entrepreneurial bridging (Jaskiewicz et al. 2015), as the application phase does for the

48

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

strategic succession. The sequential phases of learning and applying illustrate the process of the NextGen in rise and stand on the shoulders of giants, i.e., the PrevGen. The hypothesis arising from the cases analyzed is that entrepreneurial learning between generations happens through heuristics: a philosophical theory element through which human beings gain knowledge from an external domain. Hypothesizing that entrepreneurial learning between generations happens through heuristics implies that the PrevGen learns something significant which gives a competitive advantage to the family business; this learning can be embedded in the company processes and system and can be evolved from time to time reacting through adaptation to the competitive environment. From the twenty-five cases analyzed, five emergent evidences arose. The researcher defined the rules as Entrepreneurial Heuristics (EHs) (Manimala 1992) meaning that they are entrepreneurial learnings generated in a specific domain. They are verbal rules of thumb that shape the entrepreneurial strategies. Some of them can be traced back to the basic F&F heuristics, while some of them are more specific and simply add more content to the basic heuristics. From the Entrepreneurial Heuristics (EHs) inferred by the analysis, we find five general patterns, reported in the Fig. 3.1 and following described.

3.4

Discussion

The Entrepreneurial Processes Are Absorbed by NextGen Through the Learning of Heuristics The Entrepreneurial Processes (Bingham et al. 2007; Freiling et al. 2008; Chua et al. 2015; Roundy et al. 2018) are absorbed by NextGen through the learning of heuristics. The following cases synthetize statements affirmed by the NextGen of learnings coming from the PrevGen and can clearly be understood how these learnings, in the form of heuristics, are absorbed and actioned by the NextGen. The Calcini NextGen affirms the luxury shirt niche is “home” for the company, where the PrevGen decided to establish the firm, and today, the NextGen can face competitors who are trying to enter the niche because there is a difference between being native or immigrants in the niche market. Calcini highlights the two sub-heuristics learned: “Client come first” and “choose the best suppliers and create a strong partnership with them”; leveraging these two decisions-making rules, the company remains a high-end producer. The same learning process through heuristics from the PrevGen can be seen in the Lunelli case where the NextGen defines the key element of the success that must be preserved: distributing in the best Italian restaurants started in the 70s, the decision to focus on the excellence in production and the decision of create a strong local suppliers’ base. The Marcegaglia heuristics have been learnt working and observing the PrevGen: the “obsession” to grow, the willingness to look beyond linked with the gradualness

5

4

3

3

3

2

2

1

1

1

1

1

4

2

1

1

1

Leverage our homeland heritage in every business

CERETTO

Curiosity and going beyond the limits

SAVIOLA

Winning Together

BONFIGLIOLI

Leverage Family’s values to strength the Company

MARSIAJ

look at all the alternatives and then reduce them to two

FUMAGALLI

Focus on the excellence in production and in the local suppliers’ base

LUNELLI

producing is key to keep a high standard quality

ROSSETTI

choose the best suppliers and create a strong partnership with them

CALCINI

Fig. 3.1 Findings. Source: author’s elaboration

Keep investing especially during cyclical crisis

VALDUGA

leverage the family credibility and the M&A capability to grow with international JVs

GARRONE

Respect

BONFIGLIOLI

Accountability

BONFIGLIOLI

Challenge

BONFIGLIOLI

always pursue innovation

GIUFFRE’

Be tormented to grow and look beyond

MARCEGAGLIA’

Delegate and control

SAVIOLA

Loose some sales never some clients

ROSSETTI

Act understanding the cyclicality of the industry

MUSSO

Client come first

CALCINI

we live a niche

CALCINI

Entrepreneurial Heuriscs

5

3

3

5

4

2

2

1

1

1

3

Explore new horizons having clear which strength leveraging and which synergies obtain

FUMAGALLI

Do “nice looking” tractors

CARRARO

React to the crisis: looking forward, creating alliances, having faith and being empathic

LAVAZZA

Build the brand through the distribution

LUNELLI

Be gradual in the execution

MARCEGAGLIA

the world topples first on one side then the other

CARRARO

think thoughtfully every decision and evaluate the topical moment for the “swerves”

PENTERICCI

Evolve through artists and culture initiatives and internationalize

CALCINI

5

4

3

2

Specific/Generic Heuristics influenced adaptation to the environment changes

Heuristics distinguish the firm in the industry vis a vis the competitors

Heuristics are anchored in the family values

Heuristics are understood, applied and (only then) evolved

The Entrepreneurial Essence is absorbed by NextGen through the learning of heuristics

1

Findings

3.4 Discussion 49

50

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

of the execution. Even in an industry so strongly changed as the steel production, the PrevGen heuristics are leading the international growth of the family business. The shipping industry is another case of strong changes where the PrevGen heuristics remain valid and have been learnt by the NextGen. In the Musso family case, the heuristics are based on ability and willingness to plan for the long term in a cyclical industry. The PrevGen heuristic of the Pentericci family is described by the NextGen as follows: “every decision must be thoughtfully reasoned considering also the firm dimension and historical situation and then, after the thoughts, if necessary, a U-Turn must be undertaken.” This heuristic leads NextGen to partner with a Private Equity firm to continue the growth. In every case analyzed, heuristics can be found confirming the learning process. For the Rossetti NextGen: “producing is key to keep a high standard quality”; Saviola NextGen based the business reorganization focused on simplification on the PrevGen heuristics: “delegate and control”; Carraro NextGen faced the crisis basing it decision-making on the heuristic: “the word overturns on one side and then on the other one.” Heuristics Are Understood, Applied, and (Only Then) Evolved To face the evolution of the family business, the NextGen has first to understand, internalize, apply PrevGen heuristics, and then to evolve them. Without the first phase of learning and application, there will be no evolution of the entrepreneurial processes and the future of the family firm will be at stake. Starting from the niche position, the Calcini NextGen evolved the heritage and the Italian style creating a continuous exchange with the art and creative environment giving new strength to the capability of creating unique products grounded in the Italian flavor. Without having interiorized the niche position as the home of the business, this will not happen. The Lunelli NextGen evolves the PrevGen heuristics taking international wines; they create exquisite restaurants experience in airports’ duty free to replicate at international level the Italian finest restaurants focused on the PrevGen. The Lunelli NextGen reaffirms the link with the Trento area to present it as differentiating to the global customers. The Fumagalli NextGen evolved the PrevGen decision-making method: “Well we have followed this adding some from our own: involve the top managers in the process on top of our six family top executives.” This evolution was necessary given the increased presence of top managers in the family business after the IPO. The Giuffrè NextGen evolved the “always pursue innovation” heuristic which took the family company to be the Italian leader in professional legal publishing. The PrevGen created the first professional database for lawyers, and the NextGen moved from books to services giving instant digital updates of laws, verdicts, and verdicts’ comments. Heuristics Are Anchored in the Family Values The third finding shows how the family business continuity can’t be assured if heuristics are not strongly linked to family values.

3.4 Discussion

51

Bonfiglioli, Lavazza, and Marsiaj NextGen openly affirmed that PrevGen values have become company values. In the Bonfiglioli case, these values are Challenge, Respect, Accountability, Winning Together, and the NextGen can clearly remember examples of application of these values in the PrevGen. Respect was, for example, demonstrated in not starting the green field construction of the Indian plant before having the approval of the local religious authority, the Challenge in presenting a very difficult market situation to banks, the Accountability in removing an Engineering not performing, etc. In the Lavazza case, the values of the PrevGen became the four drivers to face the economic crisis: forward-looking, secure alliances, and partnerships, having confidence in the future and being empathic and defending the Earth we live. Marsiaj NextGen affirms as follows: “The family values are reflected in the family firm values.” Carraro family values of being sensible to culture and arts are leveraged to produce, as defined by the PrevGen, “beautiful tractors.” Aiming to produce a capital good, as a tractor, which is beautiful is quite counterintuitive, and it is also a key differentiation strength of the family business. Heuristics Distinguish the Firm in the Industry vis-a-vis the Competitors The fourth finding emerged from the cases is leveraging heuristics, learnt, applied, and evolved, to differentiate the family business vis-a-vis the competitors. The “beautiful tractors” of the Carraro family are an insightful case of heuristics which distinguished the family firm from the competition: beautifulness is not a strength in the industrial capital good competitive arena. The Garrones leveraged the family credibility and the M&A capability to grow with international JVs. The PrevGen focused on joint ventures with American, Russian, French, Spanish corporations, while the NextGen embraced a bold diversification in the renewable wind-energy after having finalized with the Russian Lukoil a brilliant sale of the oil business. The bold and successful diversification, which made ERG, the family business, the first European wind-energy producer, was possible given the entrepreneurial heuristic of developing the oil and energy business with high-profile partnership with international industry leaders. This is clearly stated in the records the Nextgen has of the PrevGen entrepreneurial development: “. . .And we focus on the joint venture with the foreign giants, American, French, Spanish and on the shopping, with acquisition of the ELF Italian web, then the Chevron’s one.” and in the conjoint decision process used to take the transformational decision to create a partnership with the put option necessary to sell the entire oil business to the Russian: “Me, Alessandro and our cousin Giovanni are talking with the big chief of the Russians, Vagit Alekperov, they don’t want a joint venture, they want everything. We need to decide this with you. We owe you this. And we decide together that we don’t give them all but that the agreement needs to be secured. . . .” The Garrone family is the only European family in the oil business who successfully leave the refining and marketing to boldly move to the renewable energy production industry thanks to the heuristic of having systematically and historically

52

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

high-profile relationships and partnership with global leaders in the industry. When the Russian players came in the market with the willingness of investing in oil refining, for the Garrone was embedded in the heuristic decision-making to approach them and find a way to partner with; they did the same with the French oil giant Total in the oil marketing field. In the Saviola family case, the heuristics which distinguished the firm from the competitors are as follows: “there is no one that knows everything, there is always something to learn from others: from the curiosity, that comes from the awareness of one’s limits and from the continued research of new horizons, of new goals to achieve and overcome.” The curiosity and the willingness to learn create the ecological energy panel, which in the words of NextGen: “today this product characterizes our company in the world, making it unique.” Specific/Generic Heuristics influenced the NextGen adaptation to the environment changes. Some heuristics have a broad field of application, i.e., they remain effective when the domain, in which they were formed, changes, others not. Inferring from the previous work of Harris and Ogbonna (1999), it can be stated that a more flexible heuristic is better. Generality of an Entrepreneurial Heuristics can be defined as the applicability out of the domain in which it has been learnt and created. These higher generality heuristics enter in the literature categorization. In the set of Entrepreneurial Heuristics (HE) of the Fumagalli family, two general heuristics can be found which meet the Gigerenzer standards. The first one is as follows: “The launch of a new initiative must be a fast but well thought out process; look at all the alternatives in play and then cut them down to two; for the latter, write down the pros and cons to choose the best. Pursue the chosen solution without vacillations or regrets” This HE meets the satisficing condition (Simon 1955): search through alternatives, and choose the first one (two in this case) that exceeds your aspiration level. The second one: “Don’t become too big in a single market without first laying the foundations for growth in new markets. Otherwise, you will find you are too weak.” This HE meets the 1/N equality heuristic: allocate resources equally to each of N alternatives; this heuristic work for domain with high unpredictability, small learning sample, large N; as in the competitive environment in which entrepreneurs, both PrevGen and NextGen, take strategic decisions and they outperform optimal asset allocation models. In the Fumagalli HE’s set, there are heuristics domains specific as: “Prefer the BRICS for new development opportunities.” In this case, it is much more complex for the NextGen to apply the EH in other industry, times, and geographical areas; therefore, this sort of EHs are less flexible and can take to an entrepreneurial hangover (Harris and Ogbonna 1999). Generic Heuristics are better because of their intrinsic adaptability to the evolving competitive environment. Even generic heuristics are created in a specific domain but they come up not being strictly domain dependent, giving to the NextGen better chance to adapt them. The Cameron Stores case proposed by Harris and Ogbonna (1999) highlights the risk of the escalation of commitment on a specific set of heuristics: “The founder, Mr Cameron, stressed the stores growth over any other goals; the overriding objective to have a store in every town was continued by

3.4 Discussion

53

successive family owners, resulting in the rapid growth of the company in terms of stores. However, the branches of Cameron Stores tended to be small and investment was targeted at buying new stores rather than refurbishment and modernization. The consequences of this strategic hangover were reduced profitability and company crises which forced the company eventually to close non-profitable stores and downsize by over 60%, or face collapse” (Harris and Ogbonna 1999). Generic entrepreneurial heuristics (EH) can maintain their validity in years and can be adapted by NextGen. The Bonfiglioli EH: “Prefer the acquisition of new skills (and company) greenfield to enter in a new manufacturing sector,” e.g., is applicable in different industries, times, and geographies. The Nocivelli EH: “Delegate to have more time as resource” is even applicable in different management activities. The Valdunga EH: “Buy troubled companies where it is possible to optimize costs, rationalize structures and achieve potential synergies” can forge a growing strategy keeping the flexibility of where, when, and in which industry to invest in. Commonalities of this heuristic can be found, e.g., in the beer industry where the transformative force of the Lemann entrepreneurial family has completely changed through consolidation the competitive landscape (Nolan and Zhang 2003; Howard 2014; Ashenfelter et al. 2015). Specific heuristics not being adaptable to changes can put at stake the survival of the family firm given their imprinting in the company processes and in the NextGen entrepreneurial approach. Being the transgenerational transfer of the Entrepreneurial Processes tacitly and implicitly (Grant 1996; Cabrera-Suárez et al. 2001; Steier 2001), the NextGen could not be able to adapt and evolve a specific heuristic. Generic Entrepreneurial Heuristics, being flexible and open, give to the NextGen the huge responsibility of interpreting them given the evolution of the competitive environment, i.e., the EH domain. The process of interpretation has two building blocks: analogies and inductions and permits to expand the effect of the heuristics from solving specific domain strategic problems to finding new problems in an evolving domain. Analogy is a process of problem solving executed by applying to a new domain a set of logic structures valid in a different but similar domain. Some of the Generic Entrepreneurial Heuristics found in the research can provide analogy process optionality to the NextGen. The Zoppas family EH: “Through acquisition accelerate both the process on applications and on technologies,” or the Giovanardi family EH: “Transfer know-how and technical knowledge in new sectors that show signs of growth,” e.g., can bring the NextGen to consider acquisitions in new industries or new geographical areas taking new entrepreneurial growth in the family business. Something similar can be true for the Lavazza EH: “Consider the entire European market as an internal one”: when a new product will be launched, e.g., the NextGen will create the product for the European market and not for Italy only, or similarly, when considering a strategic plan, the entire Europe will be the playing field of the company. Induction, on the other hand, is a process of problem solving executed by adding new observations which can transform the existing decision-making logic

54

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

framework; therefore, induction can change the understanding of the domain in which Entrepreneurial Heuristics were created. The Zoppas family EH: “Focus on application, rather than technologies” and the Saviola family EH “Change the rules where necessary to go beyond obsolete activities, even if they have been around for decades,” e.g., force the NextGen to continuously scan the internal and external environment finding new inputs to review and evolve the operations. In order to be successful in this process, the NextGen has to feed inductively with new inputs the original set of heuristics. Something similar can be found in the Marcegaglia EH: “Choose alliances that facilitate the access to primary steel with a qualify participation in steelworks, minimizing risks,” where the NextGen has to scan the external environment (i.e., induce from the domain a lot of information) to find potential partners which can enhance the company leading position. Applying the aforementioned EHs in the strategic decision-making processes will force the NextGen to apply analogy and induction logic reasoning from the original domain to a new one, forcing an adaptation of the PrevGen original set of heuristics; therefore, the NextGen will find new problems to be creatively solved through an evolution of the original Entrepreneurial Processes. This subcategory of the generic Entrepreneurial Heuristics enables the NextGen in finding new problems to be entrepreneurially solved.

3.5

Conclusion

The wealth of heuristics found in the research and the inductive reasoning and categorization structure which has been aforesaid could be conceptualized in an integrated framework to provide an actionable and discussable research product and to guide to logic proposition. The Fig. 3.2 represents the tentative to synthetize the huge research effort in a conceptual framework. The results of the study suggest that the PrevGen, i.e., founder or previous generation, imprints the business (Stinchcombe 1965) and the family (Schein 1983; Eddleston 2008; Jaskiewicz et al. 2015; Woodfield and Husted 2017) in specific historical phases. This imprinting is strongly influenced by the personal traits and history of the PrevGen (Bingham et al. 2007; Brown et al. 1998; Rindova and Kotha 2001), the external competitive environment (Jones 2001; Bhalla et al. 2009; Nayak and Maclean 2013), and the entrepreneurial learning process. The final result is the creation of an Entrepreneurial Processes, which are company idiosyncratic and a source of competitive advantage vis-a-vis competitors (Harris and Ogbonna 1999; McMahon and Ford 2013; Vuori and Vuori 2014). However, different sources of literature have explained single parts of this process; there wasn’t a holistic and logic consistent approach to the whole process. Connecting the theoretical dots, a holistic approach has been designed and proposed in Fig. 3.2. The holistic framework contributes to answer the proposed research

Family Values

learns heuristics

Evolved inputs and feedback

2 Heuristics are understood, applied and (only then) evolved

5 Specific/Generic Heuristics influenced adaptation to the environment changes

NextGen

3 Heuristics are anchored in the family values

PrevGen

personal traits and history

Imprints

1 The Entrepreneurial Essence is absorbed by NextGen through the learning of heuristics

Family Firm

4 Heuristics distinguish the firm in the industry vis a vis the competitors

The Family Firm must adapt to the evolved competitive environment

testing, learning adapting heuristics

Inputs and feedback

Environment

Fig. 3.2 Evolution of the heuristics. Source: author’s elaboration

A heuristic is a strategy that effectively matches the structure of the competitive environment Influences through the specific historical phases

entrepreneurial learning process and heuristics testing Imprints

Transfer heuristics

learns heuristics

Applies and adapt evolved heuristics

Influences Adapted Heuristics testing The NextGens can change the routines, learning the heuristics, decoding the entrepreneurial intuition and adapting it to the new environment, forcing the adaptation of the family firm;

3.5 Conclusion

55

56

3 The Family Business Continuity: Entrepreneurial Processes and Heuristics

question posed at the beginning of the chapter: how Entrepreneurial Processes resulting from the learning of the PrevGen is transmitted to the NextGen? The entrepreneurial learning between generations happens through heuristics. The research demonstrated that the NextGen has knowledge, shaped as a set of heuristics, which is transmitted by the PrevGen, and is formalized as simple rules to be followed in entrepreneurial decision-making. The PrevGen declared that these heuristics were learnt from the PrevGen. In some cases, the heuristics weren’t created by the PrevGen but learnt from the previous PrevGen, this third-tier learning process reinforces the idea that heuristics can be shared (Mousavi and Gigerenzer 2014; Loock and Hinnen 2015) and transmitted through more than one generation. In conclusion, this chapter leverages the theoretical structure of the heuristics, which is accepted and spreading between management scholars, to understand how the entrepreneurial processes are created by PrevGen and transmitted to NextGen. Heuristics’ theory seems well positioned to give a new observation point on how decisions are taken in a complex environment with a fast and frugal approach; these characteristics are proper of the entrepreneurial mindset. A way to analyze and understand how entrepreneurs learn and imprint the company is key to define how and what must be transferred to the future entrepreneurs, and heuristics seem to be a good option in defining how NextGen must be educated. This is a contribution in studying the entrepreneurial education of the NextGen and, more generally, the period two generations spend learning and working together. Seeing the PrevGen legacy as a set of heuristics creates a structured theory on how to change and evolve that legacy; therefore, the heuristics theory gives a contribution on how to evolve the family business given the next leading generation and the changing competitive environment in which the family business operates. Considering the evolution of the business and the environment and considering the dominion specific concept of heuristics, it has been inferred that generic and flexible heuristics are better positioned to sustain the business continuity guaranteeing a more reactive adaptation. This implies that PrevGen should focus on transmitting to NextGen generic heuristics which can be adapted to future and, potentially, inconceivable competitive environments. The diffusion of the heuristics theory between family business scholars will create a lot of future research opportunities. How heuristics are formalized and transmitted could be analyzed to better understand how the PrevGen gave birth to the success of the firm. Moreover, understanding how heuristics are adapted by the NextGen to the evolved competitive landscape can give important insights in understanding the competitive behavior of family business. Finally, heuristics can be the base to analyze the culture and the simple rules which guide the entrepreneurial family in decision-making at the shareholder level. The heuristics theory corpus fits better than the quantitative analytical one to the entrepreneurs’ decision-making and competitive behavior; therefore, developing and studying the reality with these lenses will definitely get closer the scholars and the practitioners’ views increasing the potential impact of scholar researches’ results.

References

57

The model presented in this chapter will contribute with the rare and core qualities identified in the second chapter in better defining the Entrepreneurial Processes. This will be the content of the fourth chapter.

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Chapter 4

The Convergence: Entrepreneurial Essence

Abstract The fourth chapter leveraged on the findings of the previous two (Entrepreneurial Virtues and the Entrepreneurial Family continuity model) adding a third element (assets) to converge to the Entrepreneurial Essence model. How companies are made of assets created by entrepreneurial processes that arise from the rare entrepreneurial virtues will be explained. These three elements: rare qualities, entrepreneurial processes and assets are the elements of the Entrepreneurial Essence which is created by a founder and must be protected and evolved by the following Entrepreneurial Family leaders. The evolution happens through a continuous innovation leveraging traditional processes.

In the previous two chapters, entrepreneurial qualities and heuristics as entrepreneurial processes have been presented. In this fourth chapter, a third element, assets, will be added to converge to the Entrepreneurial Essence model. It will be analyzed how companies are made of assets created by entrepreneurial processes that arise from the rare entrepreneurial qualities. These three elements: rare qualities, entrepreneurial processes, and assets are the elements of the Entrepreneurial Essence which is created and imprinted by a founder and must be protected and evolved by the following Entrepreneurial Family leaders. The evolution happens through a continuous innovation leveraging traditional processes.

4.1

How Decisions on Processes and Assets Are Taken in the Founding Phase

Building on the review of the imprinting theory, made in the previous chapter, it can be stated that the imprinting is a process made by a founder in a founding phase, which is of utmost importance. Porter asked about how companies achieve success leveraging some sort of competitive advantage, answered: “Well, that usually has to do with something, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_4

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with the history, the industry a person came out of, early clients, and ways of experiencing a problem. In that sense there is a path by which insights emerge and choices get made. Entrepreneurial insight is much more about developing a hazy understanding of an opportunity. It’s about being in a better position to perceive the opportunity than someone else because of where you are and who you are. And then success comes from whether you can translate that insight into something that works in the market” (Argyres and McGahan 2002). “Something that works in the market” means processes organized in a company which solve in a new and better added value (Brandenburger and Stuart 1996) way a need for a reasonable big segment of customers. In the founding period, a set of processes are organized in a structured organization which delivering an added value to the customers tend to grow. Even in this phase, there is some strategizing but in a very naïve and not-planned way. In this reality, who manages the company has some power and a lot of bounds on his rationality: he acts to change the organization but within realistic limits (Cyert and March 1963; Bertoldi and Giachino 2016). The elements that make up a strategy become less plastic with the time while the search for rationally and for a strategy becomes more available. Founders in the founding phase have a too hazy understanding of their environment to search rationally for an effective strategy before their firms have the necessary structure to exploit that understanding (Gavetti and Rivkin 2007). The broad literature on entrepreneurship (in part illustrated in Chap. 2) has analyzed the characteristics and the determinants of being or becoming an entrepreneur; however, few has been methodically analyzed on the hazy process of founding a company.

4.1.1

The Creation of a Company

Creating a company and making it grows is a difficult task. Statistics on the survival rate of new companies say that about one in ten survives and only a small part of these grows and flourishes. Therefore, it’s not surprising that the founders are exceptional entrepreneurial figures, heroes of capitalism as Schumpeter has painted them referring to the Hegelian hero. Schumpeter when describes the entrepreneurial behavior: “This realization of something new in the economy is not a routine job, indeed for certain peculiar characteristics it’s its opposite: it represents a particular task and has all the particular difficulties and risks that are proper to every action that does not follow the traces of the experience tested by the practice; it requires other qualities of both intellect and will. These are rare qualities and who has them, manages to be the first, or one of the first ones, to make something new in the national economy, use a new method of production, manufacture and sell a new article, open a new market, and initially he also manages to escape the pressure of competition... The essence of the

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entrepreneur consists in performing the function of realizing something new; the profit that derives from it is the real profit of this function.” Rare qualities allow the founder to be the first to do something new that slowly becomes a company. All stories about the birth of companies seem to contain fortuitous events, guided by chance. Every entrepreneur knows it’s not so. It is about applying in the world where you live the rare qualities that you possess with obstinacy, until you succeed or fail. In the first case, a company is created, and in the second one, you are forgotten. Since, almost always, only the stories of successful companies are told, a high importance is given to the casual event that ignited the first flame; the spark achieved following tests, failures, and more tests. Walmart is the largest store chain in the world and has based its strategy on large, well-stocked commercial areas located just outside of medium-sized US cities. A great strategy given the result produced, but let’s give a look on how Sam Walton’s entrepreneurial path began (Roberts and Berg 2012). Walton originally wanted to build his second store in Memphis, thinking that a larger city could support an equally large store. But he ended up opting for the smaller town of Bentonville, Arkansas, for two reasons. Legend has it that his wife said clearly that she wouldn’t move to Memphis. He also realized that having its second store close to the first one would allow to easily share transports and deliveries and gain advantages over other logistical efficiencies. This ultimately taught Walton the brilliant strategy of opening his department stores only in small cities, thereby precluding the competition from other discount retailers. Walmart’s strategy emerged differently from how it would have been planned by its founder (Mintzberg and Waters 1985). Was it a casual event that gave life to the largest chain of stores in the world? It was the application of the rare qualities of Sam Walton to the distribution sector (Akerlof and Kranton 2005; Besley and Ghatak 2005). Companies compete in the market by recombining a huge amount of existing elements, from research and development, to production, to marketing and sales, to knowledge; to mix these ingredients, it takes a basic theory that represents a guide for all the choices and that explains which elements to add and which to remove, by foreseeing the result. This theory is not explicit in the hazy founding phase, and it became little by little clearer and more structured with the process of creation of the organization. Therefore, companies that enjoy a long-lasting success are typically based on a coherent theory of value creation. Too often these companies go into crisis when the successors of the founders lose sight of this theory, when turnarounds are faced, they often involve a return to the initial theory (Zenger 2013). This applies even more to family companies that have a seamless continuity with the founder. The culture of a family company —affirm—is largely the result of the values and norms of a founder and is rooted in the family and its history (Hall and Nordqvist 2008). This concept of a theory of the company created in the hazy process of understanding how to provide value for a segment of customers is evident; however, it is less clear what this concept is and what creates in the company. Michael Porter is again useful to have a starting point. The interview at the 2002 Academy of Management is particularly useful to our purpose because the founding father of

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the strategy frameworks discussed freely about unstructured things outside his frameworks approach to strategy, discussing, also, about the convergence of other theories to its frameworks. “I don’t think—Porter said—there is any dichotomy between the positioning view and the skills-based view. The positioning view says that in order to have a competitive advantage, the company has to do something unique. It must deliver some different kind of value to some different group of customers. To do so, a company must be good at its way of competing. It needs to develop a unique set of skills that other organizations don’t have. The value chain helps clarify this one step deeper into positioning is a set of unique activities, which depend (in part) on unique skills. Skills aren’t valuable per se; they are only valuable in the context of a particular positioning that makes them valuable. This point applies to the resource-based view of competition as well. The value of a particular resource is only manifested if you have a particular strategy which realizes that value.” This link between “doing something different” for a “different group of customers” and the “skills” needed must be further analyzed to have clear the link between rare qualities (seen in Chap. 2), the entrepreneurial processes (seen in Chap. 3), and assets (which will be added in this chapter). When links will be created, the convergence of the three pieces in the entrepreneurial essence will be finalized. In the unstructured thinking of the founder resounds his definition of strategy and strategic frameworks: “Strategy is the creation of a unique and valuable position, involving a different set of activities” (Porter 1996) and in the following up operationalization of his theories by one of his apprentice : “Strategy is the smallest set of choices to optimally guide (or force) other choices towards sustained superior performance” (Van Den Steen 2017).

4.2

Methodology

Building on the theories and findings presented in the previous two chapters, the objective here is to introduce the third element that complete the overview on the Entrepreneurial Essence: assets. In order to achieve the objective, a multiple case studies approach has been used (Yin 2013). Data were gathered from different sources to gain an in-depth understanding of the context and, more specifically, public sources, books, and reports were analyzed (Yin 2013; Algozzine and Hancock 2016; Verschuren 2003). Moreover, it has been possible to interview the top managers of one of the company and the CEO as well; the interviews were essentials to observe the evolution of the company through the know-how and perception of different people involved in the company at different level. The cases analyzed belong to different sectors and each one showed how rare qualities, heuristics/entrepreneurial processes, and/or assets represent the heart of the company ensuring survival through generations.

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All the three companies—Honda, Disney, and Ferrari—are multinational companies founded by well-known entrepreneurs and whose businesses were developed for decades building on the competences and skills of the founding entrepreneurial family. Some information about the three companies selected is here presented: Honda is a Japanese company founded in 1946 by Sochiro Honda and operates in the automotive sector; Disney is an American company founded in 1923 by Walt Disney and his brother Ron and operates in the entertainment sector; Ferrari is an Italian company founded in 1947 by Enzo Ferrari and operates in the automotive sector (sports). In the following paragraphs, the story of the companies is presented and, according to the evidences gathered, rare qualities, entrepreneurial processes, and/or assets are made explicit as they were identified in the different sources used to build the history of companies. The overview on the companies identified gives the possibilities to better understand the role of the elements of the Entrepreneurial Essence. From the analysis of the cases, a comprehensive framework that groups together the three elements (rare qualities, entrepreneurial processes, and/or assets) is built and, finally, a discussion on the role of evolution is given.

4.3 4.3.1

Findings Honda

In the Honda case, it is useful to understand how the rare qualities of the entrepreneur (discussed in Chap. 2) are key to form the company imprinting. Therefore, this confirm the fundamental idea behind imprinting which goes back to Stinchcombe (1965) “can be defined as a process whereby, during a brief period of susceptibility, a focal entity develops characteristics that reflect prominent features of the environment, and these characteristics continue to persist despite significant environmental changes in subsequent periods” (Marquis and Tilcsik 2013). Honda entered into the United States in 1959 and perhaps was the most striking case of randomness (Pascale 1996). The company was nothing more than a small Japanese company founded in 1946 and driven by Soichiro Honda’s belief that technology would be the key to Japan’s post-war relaunch. Soichiro started his business by buying used military engines and readapting them for civilian uses. The story is not so different from many “beginnings” of Italian entrepreneurs, think for example to Ferruccio Lamborghini who began turning into tractors war remnants of post-war Italy (AA. VV. 2010). Soichiro’s belief in technology meant that the Honda Technical Research Institute was created from day 1. At the beginning, it was nothing more than a small corner of a hangar where Honda sat with his few employees to think about how to better adapt the engines; with time, it became the heart and the DNA of the company itself.

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Honda achieved success by selling small-displacement scooters in post-war Japan; these replaced the bicycles and constituted a cheap means of transport in an economy where few could afford a car (even here the resemblance to Italy is surprising). In 1959, Kihachiro Kawashima was commissioned by Soichiro Honda to evaluate the entry into the American market. The founder was sure he could compete commercially with the Americans and European importers and he thought that California, considering the presence of a strong Japanese community, was a good starting point. The idea was to attack the competitors in the 250cc and 305cc segments, the handlebars of these motorbikes recalled Buddha’s eyebrows and this was, for Honda, a strong element of differentiation. In less than a decade, Honda prevailed in America as a motorcycle manufacturer, beating off the competitors and decreeing the decline of the great American (Harley Davidson) and European (Triumph) brands. Kihachiro Kawashima became president of Honda America and led it through an incredible growth process. His success and skills were such that he succeeded Soichiro Honda in the company’s leadership. The success was so resounding that a few years later, at the beginning of the 1970s, the British government, in an attempt to save the British motorcycle industry, commissioned a study to the Boston Consulting Group to understand how Honda had managed to annihilate European and American competitors. In a large, 500-page study, BCG explained that Honda had adopted a perfect growth strategy based on the minimization of unit costs pursued through the growth of volumes and economies of experience, the specialization of work and large volumes of investment in machinery, research and development, mass marketing, which had been possible thanks to a sophisticated communication policy that accelerated the virtuous circle of the increase in volumes, the lowering of unit costs and therefore of greater investments in machinery. For the UK industry, the only remedy would have been the nationalization. The case study was taken as a best practice at least until Richard Pascale thought of interviewing Kihachiro Kawashima (Pascale 1996). The story of Kawashima is interesting to read still today for scholars and management. The study trip that preceded Honda’s entry into the United States was disheartening: the country was very rich, so much so that the Japanese manager wondered how he could have been so stupid as to declare war to it. Everyone was driving a car and the motorcycle industry was just a little more than a small group of enthusiasts who drove, provide maintenance and, lastly, sold motorcycles. Furthermore, European competitors were very appreciated. The maximum that could be hoped to be achieved was a small market share; if the initiative had been a success, it could have reached 10%. The year after the Kawashima trip, 1959, Honda decided to start penetrating the United States without any strategy: “In truth, we had no strategy that was not to see if anything could be done in the United States. We did it because it was a new frontier, a new challenge, and this was consistent with the culture that Mr. Honda had instilled in the company: to succeed against any forecast” (Pascale 1996). In April 1960, just a year after launching the project, Kawashima was facing disaster. He and the other three Honda managers had managed to sell very few motorcycles and only of large displacement, no dealer was interested in their

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product. In addition, the few motorcycles that were sold were returned because the engine was leaking oil: in the United States, the motorcycles were driven at high speeds for too long stretches for the endurance of the Honda technology. The money allocated for the initiative was finished. Without money, Honda managers used the small cc 50, the Supercub, to move to Los Angeles. One day they received a call from the Sears warehouses who wanted to try to sell the Supercubs. Kawashima knew that this would definitely destroy the image of the powerful Honda engine in the eyes of the American motorcyclists, macho and with leather jackets and utmost it was against the company strategy of not selling through powerful distributors. He had no other choice: based on the founder’s vision: Honda managers have to success against the odds. The Supercubs were a success; they were sold by retailers of sports equipment and bicycles to non-motorcyclist clients. Kawashima used the earned money to continue the strategy on bigger motorcycles, 250cc and 305cc, and increased his investments in specialized magazines for motorcyclists. The structured marketing strategy of Honda was not based on detailed management planning but it was an emergent strategy (Mintzberg and Waters 1985; Mintzberg 1987; Grant 1991). In 1963, a student from UCLA prepared, as a assigned work for his marketing course, an hypothesis of advertising of the Supercub. The payoff was as follows: “You meet the nicest people on a Honda.” The idea was to contrast the image of the hard and macho motorcyclist with that of the normal people who used the Supercub in everyday life to move around in the mild climate of California. The professor of the course urged the student to propose the idea to an agency, which, in turn, presented the campaign to the Honda managers. At the end of 1964, half of the motorcycles sold in the USA were Honda: not as a result of a planned strategy but as the restless effort to follow the founder’s vision imprinted in the company in the early days.

4.3.2

Disney

The Disney case, where Walt himself design the company core processes and assets, demonstrated how strategy has to do with company activities and decision-making processes which are operated on specific resource and which create company’s assets. The image below shows the important assets for Disney in the vision of its founder: TV, music, merchandising, theme parks, comics, and other publications. The company’s creative motor is at the center: the creative studios; they generate the content, stories and characters, that makes the company different from the others (Fig. 4.1). Each of us can still notice it today. Entering a Disney park, you can feel the magic and the world created by Walt; the difference with any other amusement park is palpable. The characters that live in the park have been seen in movies, in comics, and on television; the fairy tales told us about their life and the music, remind us of the movies. It’s the set of connections that Walt magically created when he designed

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Fig. 4.1 The assets for Disney. Source: Bernardo Bertoldi, “una stellare lezione d’impresa,” 2016

the essence of his company that makes the feeling and the experience of the consumer different. Entrepreneurial essence makes a company different from a competitor and is imprinted by the founder. Such imprinting applies to all companies because all companies are created by one founder. When the company moves away from the entrepreneurial essence, it loses its competitive edge and when, with time, its knowledge is lost, the company risks making decisions that may destroy itself. This is why every founder should, like Walt, design his business essence. A competitor, who wants to compete with Disney without fully understanding its business essence, may think that having creative studios is the key to success. This is partially true but the essence that creates the advantage is much more complex. It’s the intertwining of all the entrepreneurial processes and assets that generates the competitive advantage. Having the creative engine is not enough if you can’t create music, distribute the content with movies, TV, comics, have parks where you can make the characters live and have them meet with customers etc. It’s enough to see the number of links that join the various parts of Walt’s drawing to understand that it’s not enough to excel in just one of the processes or activities to

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be Disney. Walt has created all this by applying his rare qualities: the passion for magic, the desire to innovate, the desire to dream, the talent for detail, the zest for life, kindness. These are the rare qualities that, when applied, gave rise to the process of creating characters and stories that are the motor that creates the assets. The prime engine and the core of every entrepreneurial initiative are the rare qualities; Disney would have not become so if Walt had not had these rare qualities and had not decided to apply them to an entrepreneurial activity. In applying his rare qualities to his entrepreneurial activity, Walt Disney has created key processes for the company that, repeated over time, have given life to the company’s culture. For example, Disney has always paid close attention to being attractive to creative talents; it always wanted to be a coveted workplace, and it always managed the relationships with potential collaborators very carefully. Walt’s kindness and passion were the qualities that generated this process and the process made sure that the best creative talents aspired to work at Disney. Attracting talents is a key process for Disney and having repeated it over time has made sure that the best characters and the best stories were invented in Disney. The key processes, generated by rare qualities, create the company assets. The external observer tends to see only the assets, which are the most tangible and most evident element of the entrepreneurial essence, but the real driving forces are qualities and processes. What has been asserted in Chap. 3 is that every founder impresses an entrepreneurial DNA to his company; this DNA arises from his entrepreneurial rare qualities. Entrepreneurial qualities are the basis of key processes that, repeated in time, create business assets. Once the founder has spent his whole life to realize his entrepreneurial idea, these qualities remain imprinted in the DNA of the company and companies enter in crisis when the founder’s successors forget the business essence and fail to perpetuate the set of rare qualities and entrepreneurial processes.

4.3.3

Ferrari

The deep analysis of the Ferrari’s case shows perfectly the role that the Entrepreneurial Essence has in a company: it is possible to clearly identify the rare qualities of the entrepreneurs, the entrepreneurial processes, and the assets. The Ferrari case illustrates how the rare qualities of a person, the founder, are impressed in the company essence through entrepreneurial processes that are created through the continuous application of the qualities to an entrepreneurial initiative. In 1930, a young man who sold cars and had been a brilliant sports manager of Alfaromeo presented himself to the Notary Levi with the idea of founding a company and calling it Mutina, the Latin name of Modena. The notary convinced him to call the start up with the name of the founder: Ferrari. Since that day, Enzo Ferrari has impressed in the Scuderia its DNA; making it the most famous brand in the world and one of the, if not the most, fascinating company.

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The rare qualities of Enzo Ferrari, the entrepreneur who created the Scuderia are (Turrini 2002): passion, rigor, recklessness, fervor for innovation, ability to listen, gratitude, humanity, dexterity, rapidity, and willingness to create a family company. Passion can be easily seen in the Enzo’s words: “I found men who undoubtedly loved cars like I do, but perhaps I never found anyone with my obstinacy, animated by this dominant passion in life that took away from me time and taste for almost everything else. I don’t have any interest other than racing cars. I have never done a real tourist trip, I never went once in my life on vacation; for me the best holidays are to stay in my mechanical workshop when there are few employees left; it’s the moment when you can concentrate on programs of installations, modifications, etc., which then make you enjoy the surprise of those who return there.” (Turrini 2002). Rigor is found in the way he experienced his difficult marriage with Laura, without ever denying it and formally protecting it until the end. Temerity came from the serious illness contracted during the First World War: “There were nights when Enzo, awakened by the heavy hammering of the workers, imagined that they were preparing the wooden box that would welcome him. There were nights when death was there, in the bed next to him.” The fervor for innovation is evident in the masterpieces that he gave to the automotive industry: “And so it was also towards his car: he was never happy because he knew that in mechanics there is always something else that you can find out, in spite of logic or of the most exact calculation.” The ability to listen, as well as the change in the name of the company suggested by Levi, can be found in his own words: “It is up to my collaborators, on certain occasions, to stop me: they are the ones who invite me to reason, to understand that it’s necessary to grade interventions and improvements, because a factory has its times, its needs.” The importance of gratitude was so clear to him that he even had it toward a bank: “I often receive business proposals from financial institutions of national interest... but I usually reply that my signature is known only by the great Banco San Geminiano... which demonstrated that human values can also be considered capital and guarantee and many other things.” In fact, the bank granted without any guarantee the first substantial loan to the young Ferrari in his beginnings. Humanity is not an easy quality to glimpse in men who have to make difficult decisions in their profession, but there are many more hidden behaviors and decisions in which this quality can be seen, when it exists, even in these men. In the last tragic Millemiglia of 1957, Ferrari promised Piero Taruffi’s wife that her 50-year-old husband would win; it was necessary for the pilot to stop running. Taruffi won. The dexterity and speed are not, however, difficult to find in the life of the Drake, a little known but amusing episode is about the negotiations for the renewal with Shell: “The objective: to obtain about half a million from Shell. Imagine the surprise when the Italian branch director of the oil company opens the conversation... the top management of Shell have fixed the maximum ceiling to a million and three hundred thousand. Take it or leave it, there are no negotiation margins. At this point Ferrari makes the big scene... he declares with an offended expression [that] he is mortified by a proposal that he considers unacceptable and detrimental to the credibility of the Scuderia. And he is so effective in playing the role of the man of Shell, fearing to find

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the symbol of another oil company on Enzo’s cars, that he raises the allocation to a million and five hundred thousand lire. Ferrari, proclaiming to sacrifice himself in the name of loyalty and their consolidated collaboration, reluctantly accepts. Even making the interlocutor feel guilty.” Ferrari today would be a brand existing only in history books or merged into some great conglomerate of the automobile industry if Ferrari had not lucidly and with determination intended to turn its business venture into an institution. The desire to create an entrepreneurial family is evident in how he involved his sons Dino, before his death, and Piero in the business activity. His rigor made the cohabitation of his two families difficult, but it did not prevent him from making Piero enter in his mechanical workshop and then leaving him a part of the company. However, the desire to make his company become an institution that would have survived him was clear; he said as follows: “I don’t want to end like Bugatti. The idea that Ferrari could become extinct with the physical end of its founder was intolerable to Ferrari.” The way in which the foundations were laid to make the Scuderia Ferrari an institution well explains how an entrepreneur sells his business: he doesn’t sell it; he delivers it into the hands of someone who can continue it. Henry Ford II, the founder’s grandson, tried for a few years to buy the Maranello company, sending many of his managers to analyze, understand, evaluate it. In the end, he was ready and made an astronomical offer; the general manager of Ford Italy discussed at length with Ferrari the terms of the agreement. No deal was made. Ferrari wanted absolute freedom on the racing area, and the administrative managers of the big American company could not fit this desire into the processes of the big corporation. At that point, Enzo Ferrari returned to deal with FIAT. With Valletta, chairman and director of the company before Giovanni Agnelli he had already had some meetings in which the topic was raised, but nothing definitive. The times were now ripe. A few years had passed, and so in 1969, Ferrari asked for a meeting with Agnelli, who was immediately available. Ferrari himself wrote about the meeting: “I told about my yesterday, my today, the tomorrow of the factory and I was able to expose my thought to the end, as never before. Then Agnelli spoke. I felt the strength of the modern man, of a politician and a diplomat in business, of the lively and concise observer....” Turrini (2002) tell us the rest: “A handshake sanctioned the entrance of the Scuderia del Cavallino in the Fiat orbit. Agnelli who had not admitted his closest collaborators to the meeting had them enter only at the end. Perhaps to prevent the grumble of the managers who thought that the concessions granted to Ferrari were excessive, Agnelli kept the last word for himself: ‘I think, dear Ferrari, that perhaps this agreement could have been reached even earlier.’ Then, he turned his eyes on the general managers, the top of the staff. And he added as follows: ‘gentlemen I invite you to make up for the time we have lost.’” This is how Fiat acquired Ferrari; a share was guaranteed, even after Enzo’s death, to his son Piero and a manager, that Enzo deeply appreciated, was called to manage the operational activity.

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Passion, rigor, recklessness, fervor for innovation, ability to listen, gratitude, humanity, dexterity, and speed were the rare qualities of the Ferrari entrepreneur and could have been applied to various initiatives. Enzo tried to work as a mechanic at Fiat, he was a discreet driver, he animated the Alfa Romeo racing team for years, and he was the dealer of Alfa Romeo in the Modena area; if Alfa Romeo had not decided to abandon racing, the Scuderia Ferrari would never have existed and Ferrari would have applied its rare qualities successfully to something else: but this was not what happened. The application of the rare qualities to the initiative has created the entrepreneurial processes that even today make Ferrari: the Ferrari. These entrepreneurial processes are as follows: starting from the ideas of a small team, the “Scuderia,” to get to the racing car and then to the passenger car, to be always at the cutting edge of competition technology, to communicate the Ferrari spirit through victories never with advertising, to “shake” men. These are four heuristics that informed even today the way in which the company operates and were imprinted by Enzo in the founding days: theoretically this is a further demonstration on what presented in Chap. 3 as the rare qualities are of what presented in Chap. 2. Starting from the “Scuderia” is the cornerstone of Ferrari’s entrepreneurial essence. At Ferrari, the “Scuderia” represents what the Studios represent for Disney and the Technical Research Institute represents for Honda. Ferrari has left us his written theory of the company, as Disney designed it: “Gobbato [President of AlfaRomeo] did not conceive things like me, he did not believe, as I did, in improvisation, in the immediacy of decisions. As a great organizer on the industrial level, he was worried that everything was preordained and rigidly foreseen down to the smallest details. He didn’t understand those sudden changes of formula, that adherence to immediate necessities, which were, instead, my religion. And he believed that the race car had to create the product, the synthesis of the products, the best product of all the departments of a large factory. Instead, I believed that the race car was to be the compendium of the work of a small auxiliary workshop, equipped with excellent means and its particular and ductile chief of staff, to quickly translate the technicians’ project and ideas into a living mechanics.” From his experience in the racing team of Alfa Romeo, Ferrari has created, by difference, his image of the company, still in his words: “Alfa Romeo never saw in Ferrari a competitor, an embryo of future industry. Instead, it recognized that Ferrari offered it the opportunity to participate in numerous competitions and to keep the reputation of the name alive through an agonistic activity that it didn’t want to continue doing... Thus, the “Scuderia” became a small, detached department of Alfa’s highly loyal customers, bound together, as well as by competitive interests, also by technical and financial interests.” To create and guide the ductile small group against the giants of the car, recklessness, passion, dexterity, and speed are needed; the rare qualities that have been applied have given life to the entrepreneurial process. The second process of Ferrari is to always be at the cutting edge of competition technology; even in this case it’s Ferrari himself who explains to us: “Racing stimulates technological progress... Of course, technical progress can be slowed

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down by mass production: I also understand that a large company can’t block an assembly line to insert a technical suggestion resulting from a race experience. But these suggestions, derived from competitions, will be used for setting up and designing new cars... The hardest work, for me and for those like me, consists in deriving from car races all those indications, all those teachings that can be usefully and quickly transferred in the series production” and again: “You will also wonder why I prefer that my Ferrari factory will remain in the future of the same current proportions and why I have never tried to turn it into a big factory. I don’t know. I don’t think I can be an industrial manager, I have always believed that I have to be a car manufacturer, because the mass industrial production has needs that I can’t assimilate because they are antithetical to my temperament as a promoter of innovations... That’s why I consider races, that bring such a decisive advantage in the evolution of quality products, quickly beneficial to a factory of not great proportions. Customers benefit directly from this dual activity; all the innovations, in fact, that Sunday competitions suggest, can find practical application in normal-production cars in a relatively short period of time precisely because the numerically low production allows them to be included in the network....” The reason of the exclusivity of the Ferrari brand has been identified in the small number produced by many scholars (Phau and Prendergast 2000; Kapferer 2012; Atwal and Williams 2017); this is at least partially true or, better, incorrect. The small numbers are one of the core entrepreneurial processes of Ferrari. Enzo, in person, explains that small numbers and exclusivity are the consequence of his entrepreneurial essence: at larger numbers, Ferrari simply would not exist; it could not “apply in a relatively short period of time the innovations of Sunday competitions.” To be always at the forefront, it takes passion, speed, fervor for innovation; these are the rare qualities that have given life to the entrepreneurial process. The third entrepreneurial process is to communicate the spirit through victories never with advertising; in the words of Ferrari himself: “I am the one who races, my clients have only to know this.” If bringing quickly the innovations of the races on the sedans is one of the components of the entrepreneurial essence, the way to enhance it and remind it to consumers is only the following: win the Grand Prix races. Enzo Ferrari has always done this, even when he was the Alfa Romeo dealer for the Modena area: “In 1927—he writes in his diary—I started racing again for sports enthusiasm and due to technical and commercial interests.” Racing, winning and taking out of the circuits the technology and the taste of victory is the key: first he did it to sell cars of others, the AlfaRomeos, then he stamped it into his company’s essence. Probably being a sports enthusiasm is a half lie: in reality the desire to consolidate the business prevailed... initially he became a racer to attract customers. The marketing and communication strategy is the logical next step of the entrepreneurial essence, even in this case Ferrari himself masterfully summarizes it: “There will always be those thousand or two thousand fans willing to spend money to own a unique product. Mine... Who wants a Ferrari must desire it, wait for it. If we delivered our cars to whatever guy comes along, whoever he is, where

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would our credibility end up?”...“these fifty-year-olds [target customers] are men who want to reward themselves for their own economic ascent, satisfying an old dream, and taking a long moment of youthful passion to life. At the end of a week of work, they sit behind the steering wheel of this powerful car, nervous, nippy, equipped with a special mechanics, in the physical joy of dominating it, they feel a psychic distraction, a beneficial relaxation of the nerves, a relaxing emotion, which brings back past-year sensations. Add the fact that this car, with its instantaneous acceleration, gives a great sense of safety especially when overtaking: as we know, on today’s roads, the large number of cars that march at almost the same speed make any overtaking too long in space and time. Ferrari is one of the few cars that can solve this problem by allowing a serene driving.” Just read the words of Ferrari to understand that there is only one way to communicate to Ferrari’s passionate customers: win important races. The fourth entrepreneurial process is to “shake” men to make them perform over their limits. Ferrari has always defined himself: a shaker of men. This process of “shaking” to lead to superior performance is necessary to push a small, wellequipped group against large automotive corporation, but also take them to the most extreme border of innovation, experimentation, and audacity. In this case, even more, it is crystal clear the link between the rare qualities of the entrepreneur (passion, rigor, recklessness, fervor for innovation, dexterity, rapidity) and entrepreneurial processes impressed in the company’s operating essence. Without this “shaking force,” Ferrari would have been a mediocre racer and a good manager of the Alfa Romeo racing team until this remained operational; then, he would have been a dealer in Modena: while... The single decision that best summarizes the shaker of men was the appointment of Mauro Forghieri as head of the Racing Department. Forghieri was the most brilliant and legendary character in the racing circuits for more than half a century. Ex-post it was a perfect choice, but it was taken under circumstances that are interesting to analyze. In 1961, Ferrari fired his eight top managers, all together and suddenly. In his diaries, he does not write the reason, but his biographers are inclined to think that the reason was related to the tensions that his wife Laura created in the company and the request of the Ferrari’s top managers to end them requiring the wife not to enter in the company anymore. Ferrari’s rigor could never have accepted such a request. No matter how sad, was his marriage, a commitment was taken and Laura was the woman who had been close to him since the beginning, who had pawned all her jewels for the company and who gave birth to Dino. A small company, based on technology and men, who suddenly loses its top management team is in serious danger; everyone in the industry had expected from that moment onwards the slow decline of the Scuderia and of the entire company. Under these circumstances, an over 60-year-old Ferrari appointed a 27-year-old at the head of the Racing Department, the core of the company. Then, all the external observers started to think: the Ferrari starts slowly to decline and does it in a soft way. Ferrari, instead, knew everything about Forghieri, he had always followed him, his father Reclus had been his employee, he knew the family, the boy’s character, and potential; Ferrari knew that he could “shake” him: from 1961 to 1984 that guy

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wrote the history of racing as we know it today and he made Ferrari win literally every racing competition. The same men’s shaker approach explains why Ferrari never engaged a pilot who had already been a world champion. The only one was Juan Emanuel Fangio, for a year and he didn’t do well; he chose him because in 1956, he absolutely wanted to beat Maserati and did not want Fangio to race for the competitor. There was a lot of discussion about the relationship between Ferrari and his pilots and a lot about why he had never engaged an (already) champion. Understanding Ferrari’s entrepreneurial processes, it’s crystal clear and simple: the entrepreneurial process of Ferrari foresees that a man is “shacked” and someone who is already a champion is more difficult to “shake.” The men’s “shaker” approach applies to all the staff, in Ferrari’s words: “... Anyone who has come out of Ferrari has brought with him everything he has learned in an environment that has never placed any limitation on any designer, an environment in which every designer has always been able to see his ideas translated into a living mechanics, or the development of the agreed themes through long, cordial, though sometimes animated and passionate, discussions.” In these words, it can be understood well the logic of the shaker, which is not just a guide nor a manager; he is someone who brings together a group of people with exceptional qualities and makes them work together performing beyond their limits; without this entrepreneurial process, it wouldn’t have been possible to create the staff that had to “quickly translate the technicians’ project and ideas into a living mechanics” and, in the last analysis, it would not have been possible to create the Ferrari as we know it. The deep analysis of the Ferrari’s case shows how a competitive advantage it is not being better in doing one activity but having created a complex set of unique processes intertwined between them (Rivkin 2000) and only understanding the root cause–effect relationship of this intertwining permits to see the essence of a company and create a framework made on sounding theory (Christensen et al. 2002; Christensen and Carlile 2009). The framework proposed to explain the Entrepreneurial Essence in the Ferrari’s case is illustrated in Fig. 4.2. The rare qualities of the entrepreneur enable the entrepreneurial processes which applied and repeated in the competitive environment build the assets. Alfa Romeo could have continued with its racing team, Fiat could have hired the young Ferrari, and the Scuderia would never have been born, but the rare qualities of Ferrari would have been applied elsewhere and would have created something else, certainly less exceptional, but Ferrari would have behaved in the same way, making his rare qualities flourish. Those who analyze the company from the outside, without knowing and understanding the rare qualities and the entrepreneurial processes, tend to see the assets first: the brand, the reputation, the strength in merchandising, the innovative factory, the distribution network, the large number of fans and enthusiasts, and are naturally led to think that this is the company’s core assets. The assets are, instead, the result of

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Fig. 4.2 The entrepreneurial essence for Ferrari. Source: Author’s elaboration

the application of entrepreneurial processes created by rare qualities to an entrepreneurial initiative. This step is crucial because when it becomes necessary to make the entrepreneurial initiative evolve, the assets can be changed, sold, bought, but the entrepreneurial processes must remain in its core and interconnected between them and interrelated whit the external competitive environment, as demonstrated in Chap. 3.

4.4

Discussion and Conclusion

From Honda, Disney, and Ferrari’s cases, a general path can be inferred. We know from what has been illustrated in Chap. 2 that entrepreneurs have rare qualities that are applied to an initiative in a specific competitive environment which is influenced by the historical moment (“domain specific” as said in the heuristics’ theory seen in Chap. 3). From what has been illustrated in Chap. 3, we know that this “application” repeated in time creates processes which are the entrepreneurial way to solve in a new and better way a need of a segment of customers. These processes are based on

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Fig. 4.3 The entrepreneurial essence framework. Source: Author’s elaboration

heuristics decision-making method. Assets, as seen in the cases illustrated in the first part of this chapter, are the results of this qualities and processes (Fig. 4.3). The figures refer to the different frameworks which have been presented in the previous chapters: Rare Qualities in Chap. 2 and Entrepreneurial Processes in Chap. 3. Assets are the results of the entrepreneurial processes as illustrated in the previous cases. It is not unusual that one of the important assets is the company brand, which is usually the family name or communicated as a family business brand (Botero et al. 2019) (Fig. 4.4). The model fits in the previous researches on entrepreneurship creating a link between the rare qualities of the founder and the entrepreneurial processes of the company. The first step of the link has been illustrated through the imprinting literature review of Chap. 3, which demonstrates how the founder imprints the company he found. This evidence has been confirmed by the case method approach applied to the presented case of this chapter. The founder imprints the company leveraging and applying his rare qualities. Rare qualities are the mean through which he can create some processes which are better and different of others in the same time period and in the same competitive arena. This first step permits to operationalize the theory of entrepreneurship dating back in Schumpeter’s definition. Processes are the starting point or the base from which a company makes in a different or better way; they explain how the competitive advantage is created in an intertwined way. They are linked, as said, to the rare qualities because they are created leveraging those qualities and they need those qualities to be performed. Every company is founding by one or a group of founders; therefore, it is straightforward to state that the quality of the founding team informs and imprints those processes; meanwhile, it is necessary the heuristics’ theory to explain how these processes, after the founding phase, are applied in the company and learnt by next generations in the case of family businesses, as demonstrated in Chap. 3. In this chapter, also to generalize the model, the three cases presented are about business which were strongly imprinted by a charismatic founder (as usually happens) but

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Fig. 4.4 Rare qualities, entrepreneurial processes and assets. Source: Author’s elaboration

which are no more led by a founder’s heir or owned the founding family (a part from the 10% owned by the founder’s son in the case of Ferrari). The link with the rare qualities of the founders and the role in differentiating the company in the competitive environment are the reasons why these processes can be defined entrepreneurial. To discern all the company processes between those which are a key contributor to the company performance and those which are common and not differentiating, a three-check test must be performed. Processes must contribute in providing something which creates added value to the customer. On purpose following Brandenburger and Stuart (1996), the term added value has been used in order to distinguish it from the financial term value added. The added value is defined as the value created by all the players in the vertical chain minus the value created by all the players except the one in question. Processes must be difficult to imitate by other companies in the competitive arena. Following Rivkin (2000), the intertwined set of processes is the unit of analysis of what is or it is not imitable. This approach wipes out all the very common, widespread, and pernicious “best practice” approach which is largely used by big consulting firms and in thousands of so-called business books. Thus, to imitate a set of entrepreneurial processes, an external competitor must recreate the same set and not only one of them. As it has been illustrated in the Ferrari case, where if you want to be Ferrari you need to be a small quantity cars maker because you need a flexible factory to transfer quickly the innovation from the racing effort at the Scuderia to the

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commercial car. With a small and flexible factory, you have a lot of variable costs and you cannot leverage automotive typical economy of scale; therefore, your cars must be premium. To be premium, you must be differentiated, and you cannot leverage huge advertising spending; therefore, you need to win races and make victories talk for you. To win races, you need technology and research but you cannot leverage immense number of engineers in your big automotive factories; therefore, you need a small, highly qualified mechanics and engineers, i.e., the Scuderia, and they must be so good they win against the huge and lavish big automotive team. The Scuderia creates the innovation you need to put quickly in the commercial car and so the intertwined round is there again. If you change even only one of this process, you end up to be another company. Probably, Ferrari could sell more cars enlarging the product mix; then, it must produce more cars, invest in an economy of scale based factory, invest in huge production chain with 5–7 years of depreciation, wait for that period to introduce innovation from the racing to the commercial cars, invest in adverting to differentiate, keep the “premiumness,” and sell more car. Ferrari could probably embark in this strategy, once succeeded Ferrari will be another Mercedes having lost its entrepreneurial essence and having embraced the entrepreneurial essence of someone else. As seen in Chap. 3, the founding phase, or every other imprinting phase, is the moment in which the intertwined set of processes is created and the creation happens in a primordial phase where those qualities are leverage in the creation and in the imprinting. Giving their characteristics, the entrepreneurial processes could be referred as resources or competences of the company; it is, therefore, useful to link the model with the resource-based framework. The resource-based is a framework in the strategic management field to study the competitive advantage of a firm. According to resource-based theorists (e.g., Barney 1991), bundles of resources, rather than the product market combinations chosen for their deployment, lie at the heart of a firm’s competitive advantages. Of course, not all firm resources provide companies with a sustained competitive advantage. The Resource-Based framework asserts that a resource must have specific attributes for an advantage to be gained from it. Barney (1991) has identified four such attributes with supporting descriptions: “1) it must be valuable, in the sense that it exploits opportunities and/or neutralizes threats in a firm’s environment, 2) it must be rare among a firm’s current and potential competition, 3) it must be imperfectly imitable: the ability of a firm to obtain a resource is dependent on unique historical conditions, the link between the resources possessed by a firm and a firm’s sustained competitive advantage is causally ambiguous, the resource generating a firm’s advantage is socially complex 4) there cannot be strategically equivalent substitutes for this resource that are valuable but neither rare or imperfectly imitable.” On the framework, Porter said as follows: “For example, the resource-based view just cannot stand on its own. Yet there are elements of real insight there. If you could hook the resource-based view to the value chain, to strategic choices, and ultimately to profit, then you could build a more robust role for resource/capability thinking.”

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(Argyres and McGahan 2002). It can be inferred the necessity to differentiate the resource from the capability and the differentiation, in 2002, was already in the process of happening between scholars. Summarizing it can be made this differentiation. A firm’s resources are defined as stocks of available factors that the organization owns or controls (Amit and Schoemaker 1993). “Resources are converted into final products or services by using a wide range of other firm assets and bonding mechanisms, such as technology, management information systems, incentive systems, trust between management and labor, and so on (. . .) Thus, capabilities refer to a firm’s capacity to deploy resources, usually in combination and applying organizational processes, to a desired end. Capabilities are information-based, tangible or intangible processes that are firm specific and developed over time through complex interactions among the firm’s resources. Unlike resources, capabilities are based on developing, carrying, and exchanging information through the firm’s human capital” (Amit and Schoemaker 1993). A long discussion has been made about categorization and differences of resources and capabilities. At the beginning, scholars interpreted resources as becoming before capabilities which, in turn, represented the way in which managers were able to leverage resources (Barney 1986, 1991). Later, probably following the Porter’s view of linking the theory with the value chain, the capabilities were seen as coming first, being the capabilities that dynamically reconfigure the resources (Teece et al. 1997; Eisenhardt and Martin 2000). Having analyzed, briefly, the literature review on resources and capabilities, it can be stated that entrepreneurial processes are antecedents of both. Entrepreneurial processes are heuristics imprinted in the decision-making processes. Based on the division between world of cognition and world of action (Gavetti and Rivkin 2007), it can be stated that entrepreneurial processes are in the first world and they inform capabilities and resources which are in the world of action. Resources are assets, key and strategic, but assets (stocks in the world of action based on Gavetti and Rivkin definition, 2007); their characteristics (Amit and Schoemaker 1993) are based on entrepreneurial processes in the cognition’s word of the company leaders and in the company, decision-making posture. Capabilities, also, are rooted in the entrepreneurial processes being activities of the world of action which are necessary to deploy resources (Teece et al. 1997; Eisenhardt and Martin 2000).To better analyze this part of the model, a dynamic and evolutionary view should be analyzed. The dynamic and evolutionary view requires to enrich the components of the analysis because it implies a step from the founding phase, seen in this and in previous chapters, and the evolutionary phase, when the entrepreneur once imprinted the company and the family decides to make his company a family company. This step implies that the founder’s roles are divided into three. In the founding phase, the founder is the entrepreneur, the sole owner, and the manager. These three roles or entities are split after the founding phase (Tagiuri and Davis 1996). In the next section, the evolutionary phase will be analyzed. For the scope of this work, the focus will remain the entrepreneurial essence and the imprinting of the

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founder, but the subject of analysis will be enlarged from the unique entity (the founder) to two of the three entities of the evolutionary phase: the entrepreneur and the manager. In order to keep the focus of the present work, the shareholding will not be taken into account and the manager will only be considered in how it interacts with the entrepreneurial essence and its imprinted processes.

4.5

Further Consideration on Entrepreneurial Essence and the Evolution of the Competitive Landscape

The evolution of the company imprinted processes and its literature review have been discussed in Chap. 3. Having described the Entrepreneurial Essence framework, what illustrated there is leveraged to discuss its evolution. The evolution of the Entrepreneurial Essence is key to maintain a dynamic balance in the interrelation between the company and the competitive environment through time and space. The Entrepreneurial Essence is imprinted in the company in the founding phase and, as illustrated in the cases, informs the strategic posture of a company for decades, both entrepreneurially and managerially. This (very) longterm approach must focus on more internal variables, industry and competitive conditions will be very different through decades, therefore placing the focus on the ability of the company to adapt and evolve (Porter 1991). To better study this long-term adaptation and evolution, the Disney case previously presented is useful because it highlights how a manager, which is not owner or family member, can or cannot follow the entrepreneurial processes imprinted by the founder, in this case Mr. Walt. In the late 1970s Disney, applying even after the death of Walt, one of its entrepreneurial processes analyzed more than 10,000 curricula with the aim of finding and attracting the best creative talents: 150 were chosen, of which 45 would then be entering definitively the Walt Disney Feature Animation division, the one dedicated to cartoons. It was so that John Lasseter began his career in Disney. While working on some short films about Mickey Mouse, Lasseter, between 1980 and 1981, began to be interested in an innovative technology that consisted of the possibility of drawing with the computer; the first experiments were interesting but seen today they make us smile: they were colored circles that moved on a grainy screen of a few pixels; changing color was the only thing that could be done. Lasseter continued to be interested in this primordial technology, which he considered promising especially after having seen the first experiments applied to a real movie: Tron. The evolution was clear to Lasseter: one could go from analogical and two-dimensional cartoons to digital and three-dimensional cartoons, something Walt himself was very interested into (Paik and Iwerks 2007). So, a first test was started at Disney Studios: the production of a movie with digital techniques: Where the Wild Things Are. During the production, Lasseter

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presented the new technology to the top management of Disney Studios, with the intention of expanding the experiment and investing in this new technology. The project was canceled: the top management could not see any economic advantage in mixing traditional animation with the computer one. This management decision, which might be rational and financially sounding, was contrarian to the Walt’s entrepreneurial processes of being innovative in everything which can enrich the consumer experience of the stories and characters the company creates. In a company in which creating stories and characters is an entrepreneurial process, a supporting technology is worth to be tested. At the end of 1983, Lasseter had to leave Disney Studios, the only company he would want to work with. In 1983, computers were craft devices with black and green screens on which it was necessary to type lines of code after the beginning of the C:\DOS line, but Lasseter was convinced that drawing with the computer was the future. A few months later, the first Apple Macintosh was launched: the era of personal computing began, windows and simple interaction between man and machine. Lasseter began collaborating with Lucasfilm, the company of George Lucas, the creator of Star Wars, with Ed Catmull, a computer expert who tried to apply computer graphics to special effects. Lucas’ financial difficulties and the great need for investments that required computer graphics forced Catmull to look for other investors. Lucas was convinced to spin off the graphic research activity from the rest of the activities and accepted the offer of a new majority investor: Steve Jobs, who had been recently removed from Apple, the company he founded. It was 1986; the new company was called Pixar: it would take 10 long years to bring Toy Story, the film that changed the film industry forever, to the market. Lasseter’s story describes how the entrepreneurial essence must adapt to evolution. The founder has built the business essence in a particular historical moment applying his rare qualities to the specific needs of consumers, often not yet satisfied optimally, adopting existing technologies. When the outside world evolves it can happen that part of the business essence must adapt to it: this is what has not happened in Disney with the advent of digital design. Disney’s managers, who did not have understood Walt’s entrepreneurial essence, thought it was not worth investing in something that could improve the Studios, the base on which the whole company had been built, and so Lasseter had to go elsewhere, and Disney inc. went into crisis so much that in 1984, some financial market’s raiders tried to scale up the company, break it up, and sell its assets separately. It was the most rational choice, without the interconnections between them and the Studios in the center, the single parts of the company had no added value in being together (Rivkin 2000); Disney’s business essence had been forgotten. It could be asked what if the Disney family would still be an owner and a leading entrepreneurial force of the company. Maybe the family ownership, the Walt’s imprinting in the family, and a nextgen entrepreneur from the family with the rare qualities and the imprinting would have led to different decisions. The Disney’s case is interesting exactly because in the evolutionary phase, the family wasn’t present,

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and the imprinting and the evolution of the heuristics, which are the base of the entrepreneurial processes, can be analyzed. The Disney’s case is the perfect “experiment” in the Popper’s view of the theory of science, because has only one element to be tested: the entrepreneurial essence in a company which has not the family involved in the evolutionary phase. The experiment clearly highlights that the management of Disney Inc was unfit with the company entrepreneurial essence and had not learnt and understood the Walt’s heuristics, at least until the appointment of Eisner. It was Eisner who rediscovered it and just after being named CEO, he started to reinvest in the studios giving life to new masterpieces, the nourishment for Walt’s drawing system; The Lion King, The Little Mermaid and The Beauty and the Beast are from this period. However, these masterpieces were based on an old technology and could not compete with Pixar. This is how Eisner began a partnership with Pixar to develop new characters and new stories, which is the role of the Disney’s creative studios in the company entrepreneurial essence. The first thing that his successor, Robert Iger, did was to buy Pixar for 7 billion dollars, bringing Lasseter back home and giving back to Disney one of his most important entrepreneurial processes: having the best talents in the world and developing with these the best characters and the most beautiful stories with the best technology available in a given historical moment. The entrepreneurial essence, made of rare qualities, entrepreneurial processes, and assets, lives in a competitive and evolving environment and must adapt. Adapting to evolution is difficult because it is about changing something that has been successful and, above all, deciding what to change. The example of Disney and Pixar shows that evolution is necessary for companies, even for those that are successful, perhaps especially for them, which, given their success, are not driven to change by competitors, customers, or an internal crisis. Evolution is a process made of two elements: mutation and natural selection; it occurs each time there is a reproduction and a competition for scarce resources. In reproduction, a species has the goal of giving itself continuity by generating exact copies of itself, but it often happens that it gives life to something that is not exactly the same; it’s different, changed with respect to the reproducer. The “mutant” can be inferior or superior to its parents and here comes natural selection, illustrated for the first time by Darwin in 1909. In a context where there is no competition for external resources, each species can evolve freely and even a lower species can continue to live in its environment. In the case of non-monopolistic companies, competition leads to eliminating the lower mutations. It’s about understanding what it means being inferior in the specific economic competitive environment: it means less suitable. The competitive context changes due to new technologies, the entry of new competitors, macroeconomic trends, and many other causes. The new generation of the species faces a new environment. The combination of the new characteristics of the mutant and of the changed competitive context will tell whether the new generation will prosper or become extinct.

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Fig. 4.5 Mutation. Source: Wright (1932)

Therefore, the competitive context plays a key role in the evolution process, as illustrated in Chap. 3 for the management literature review. In biology, Sewall Wright (1932) described the context as the landscape in which evolution takes place, it’s made up of hills and valleys and in its highest areas, the peaks, station the most suitable forms to flourish in that particular landscape (Vidgen and Wang 2006; Forster 2010; Harford 2011). Some landscapes have a morphology that drives evolution, others a morphology that maintains status quo. Those which maintain the status quo have few, small, isolated peaks, which are far from each other. In these landscapes, even large mutations generate small changes in the context, because they can’t spread over the other peaks, which are isolated and far away. This is the case A of the figure (Wright 1932). Consider, for example, the automotive, oil, and infrastructure industries; even if the consumer drives a car on a highway, consuming gas, the three sectors are functionally different and far from each other. When a mutation occurs in one of these areas, it’s difficult for something to change in the other two. The consequence is the low, if not none in this case, competition between these industries (Fig. 4.5). In the landscapes that push toward evolution, peaks are many, high, unrelated to each other and near: when a mutation occurs, it spreads easily over the other hills. It is the case F in the figure. Think, in this case, about the media, telecommunications, computers, publishing, and advertising industries. The consumer seeks for news and entertainment using different devices at different times of the day. The arrival of Internet has represented an external change in the landscape and has generated great

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mutations in the species of these industries: the hills and peaks will change through the mutation of the species that live on the different peaks. In this case, there will be a process of landscape change, mutation, and species selection. This process will change both the landscape and the species living on the peaks of the landscape itself. The Entrepreneurial Essence of Ferrari may represent an interesting case of adaptation to the changed external landscape and of evolution. In this case, the evolution happens under the leadership of the founder. In 1984, aerodynamics appeared on the grand prix scene. The innovative and exasperated research of Formula 1 had found a new field of application, which gave a considerable advantage. Cars were transformed into overturned planes. Enzo Ferrari was 86 years old and had a life of success behind him: he was a living legend for the racing circuit. Notwithstanding, Ferrari was among the first to understand the change of the external environment and was also aware that the competence of the Scuderia was mainly based on machine and engine design. Other Ferrari managers didn’t spot the weakness timely, confirming that even in the same company, it is difficult to share best practices and successful entrepreneurial approach (Szulanski 1996; Zahra and George 2002). Ferrari contacted John Barnard, the designer who conceived Mc Laren cars who had won the Grands Prix of 1984 with Niki Lauda and of 1985 and 1986 with Prost. The designer replied that he was honored to work for Ferrari, but that it would be necessary for the development site to be in England because there were no skills, know-how and people to develop modern cars in Modena. The Englishman gave this answer to the founder of the most successful “Scuderia” in history, a “Scuderia” that just by chance happened not to be called Mutina, in honor of Modena, and to the man who had always affirmed that Modena environment had something special and unique in the world in creating men and skills for cars. Ferrari’s managers already imagined the outburst of their boss, and they expected the right punishment that he would have inflicted on the shameless Englishman. Well, the 80-year-old Ferrari told his collaborators: “tell him it’s okay” and removed Forghieri from the head of the team, which he himself had chosen when he was a little over 20 years old and made of him in the next 30 years, through the men shaking process, a myth of the automobile industry. Enzo Ferrari had understood that the external landscape had changed and that he had to modify part of his entrepreneurial processes, he understood it better and before all his (younger) managers, and he, most of all, had the humility and the courage to decide accordingly. There is only one difference with biology: in companies, men can understand what is changing and act to be prepared accordingly (De Geus 2002). It’s necessary to learn from the outside world what is changing, learning it faster than competitors, and deciding in time what to keep and what to evolve (Grant 2003; MacKay and McKiernan 2004). Non-family businesses cases were used to define a more general model of Entrepreneurial Essence because when the family is no more involved in ownership and leadership, it can be inferred it is much more difficult to transfer the rare qualities. As demonstrated in Chap. 3, the transgenerational entrepreneurship (Barach and Ganitsky 1995; Cabrera-Suárez et al. 2001; Cadieux 2007; Woodfield

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and Husted 2017) is key in transferring the qualities through strategic education and entrepreneurial bridging (Jaskiewicz et al. 2015). Therefore, it can be stated that an educated heir will be equipped with rare qualities of the entrepreneurial family if and when the transgenerational entrepreneurship has been successful. In non-family businesses, rare qualities necessary to lead the business and to execute the entrepreneurial processes are maintained explicating the company values and hiring and promoting through the career ladder people alike the present leaders.

4.6

Entrepreneurial Essence and Management: The Missing Link

The three cases presented demonstrate that the initial heuristic approach was insufficient over time and the contribution of external managers with competences and rational methods ensured the continuity of success. The focus of this work is the Entrepreneurial Essence and its role in the family business continuity but to understand its dynamicity in the evolution phase it is needed a broad view in the family capitalism system. Stating which is the link between the entrepreneur and the manager is a key question which must be discussed here, taking the risk of deviating from the storyline of the research presented here. Entrepreneurship and Managerial Skills are not mutually exclusive categories: only if they coexist, they make companies thrive. This coexistence is not a dichotomy but an enantiodromy (a Greek word which means a run of opposites) and this coexistence does not exist in the founding phase where the founders are both entrepreneur and manager. On top of this, they are also sole owner, collapsing in one human being the three circles of the family business system (Tagiuri and Davis 1996) (Fig. 4.6). After the founding phase, the three elements are split in different roles and human beings. This is more to do with the governance stream of the academic literature which is outside the scope of this work. However, to cover the potential missing link among the entrepreneur and the manager, a dynamic view of the family business system will be discussed here. The synthesis between entrepreneurship and managerial skills it’s all about finding balances, ways of working together and spaces for discussion. Entrepreneurial families and managers must understand that they are not two mutually exclusive categories, rather their synthesis creates the strength of the company and the best expression of the entrepreneurial essence. To find a synthesis between entrepreneurship and managerial skills, it’s necessary to understand where the antithesis between entrepreneurship and management arises from. The vision of the entrepreneur as an heroic figure (unique and able to do everything by himself) is the vision of the early nineteenth century imprinted in the academic theory by Schumpeter. This vision

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Fig. 4.6 The family business system in the post founding phase. Source: Author’s elaboration

doesn’t combine with the professional manager vision that governs complex and international structures. This vision of the professional manager was born from Alfred Chandler, after Schumpeter. Managerial capitalism was historically born in the first half of last century, when large companies began to grow and prosper, creating a new profession: the manager. At its birth, this profession has had great beneficial effects on companies. The managerial theory has therefore built the dogma of the manager as the key to the professional management of modern corporations. Berle and Means (1932) have shown that shareholders are different from the management and are focused on the return on capital; consequently, it’s necessary that someone manages the company. Alfred Chandler1 has established that the best manager is a rational human being who leads a complex organization. Eugene Fama2 has therefore stated that he does so in the interests of the shareholders only if economically incentivized.

1

Alfred Dupont Chandler, The Visible Hand: The Managerial Revolution in American Business, Belknap Press, 1977. 2 Eugene F Fama, Agency Problems and the Theory of the Firm, The journal of political economy, 1980.

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Alfred Chandler drew the conclusions of the dogma, establishing the superiority of the professional manager over any other company manager. He asserted that the reason for the decline of the United Kingdom’s economy, compared to that of the United States, was the relative prevalence of family companies in the United Kingdom. He asserted that the professional, non-proprietary, employed manager, who was the norm in the United States, had a greater incentive to act rationally as opposed to those managers who inherited both ownership and leadership from previous generations of the family, since the founder had earned his status, while the managers of the family had inherited it (Hall, Nordqvist3). This subdivision is dichotomous and excludes that the owner can have a specific role in company management, taking care of a part of the management, for example, and leaving the rest to professional managers. Therefore, it does not contemplate the possibility that entrepreneurial essence and managerial skills can both coexist in the management of a company. Chandler himself affirms as follows: “When they observed the development of the American economic system, historians were more interested in the continuity of family (i.e., entrepreneurial) capitalism or financial capitalism than in the spread of managerial capitalism... As a matter of fact, since 1950 managerial companies have become the standard form of modern company in the major sectors of the American economy. In these sectors where the modern company structured by business units has become predominant, managerial capitalism has spread at the expense of family or financial capitalism”.4 Chandler wrote in the 1970s, and for the first time, he points out a reality which at that time was not obvious: the role of management in the development of nineteenth century companies. Illustrating the role of the manager in modern enterprises, Chandler has contributed decisively but has also created a dichotomous view between entrepreneur and manager. The relationship between the two is not dichotomous but enantiodromous (from the Greek word: enantiodromia, the run of two opposites), i.e., they must coexist in a complex and balanced system after the founding phase. Managerial skills are one of the three constituent components of family capitalism; there can’t be a family company that thrives and grows without the owner family having learned to take care of the management. Business continuity needs three elements that in a great entrepreneur are fused together: Entrepreneurial Essence, managerial skills, and shareholder robustness. It’s necessary to rethink these three elements, better if not in a single person, to guarantee the continuation of the success of the family company. The focus of this work is the Entrepreneurial Essence and its role in the family business continuity but to understand its dynamicity in the evolution phase it is needed a broad view in the family capitalism system.

3

Annika Hall, Mattias Nordqvist, Professional Management in Family Businesses: Toward an Extended Understanding, Family Business Review, vol. XXI, no. 1, March 2008. 4 Alfred Dupont Chandler, The Visible Hand: The Managerial Revolution in American Business, Belknap Press, 1977, p. 493.

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It has been illustrated in this chapter that the entrepreneurial essence is made up of three elements: rare qualities, entrepreneurial processes, and assets. The shareholder robustness allows to guarantee stability in the company, an element of fundamental importance contributing to the competitive advantage. The solidity of the property must be maintained also with the increase in the number of shareholders. The property must be united “as one man”; this allows the speed of decision-making and the long-term vision that are the strength of companies owned by families. In family capitalism, the shareholder robustness is composed of three elements: a similar culture between the family members, structured rules to be represented at different decision levels, and a clear and explicit approach to investment. A similar culture among family members is maintained by having clear in mind the founder’s rare qualities and how these must be taught and handed down to the new generations. It’s not about having a sense for business or possessing economic skills, it’s about human qualities and adherence to certain values. This affinity between relatives allows to have a common vision when undertaking decisions as shareholders and requires effort and dedication to be maintained. The second element of shareholder robustness is based on the rules for representation. In essence, it’s necessary for every family member to know how he and his family branch are represented in the shareholder base, how they are informed, and how they participate in the decisions. The third element is the approach to investment. The fragmentation must be managed in such a way that the investment may be considered rational, and at the same time, the attachment of family members to the company is maintained. It is natural that with the increase of family shareholders and the consequent decrease in the percentage of ownership, we move from the idea of ownership to that of investment, and it is therefore the responsibility of the head of the family to decide and communicate how he intends to make the family investment. The third necessary element of the family capitalism system is the intelligence of attracting, growing, and maintaining the necessary managerial skills linked to the company. Management capacity can be found outside the family, even though this is not so easy. Successful managers in family businesses are different from successful managers of public companies; they have different sensitivities and skills and usually have lower salaries but they have the belief of participating in something bigger and more enduring than themselves. Making them become full citizens of the family company requires attention, experience, and the application of some techniques. Coming back to family businesses, as discussed in Chap. 3, the task of every new generation, after the founding one, in family companies is to evolve the business (Astrachan 2010). As illustrated before, this evolution implies that the three elements unified in the founder entrepreneur: entrepreneurial essence, shareholder robustness, and management are split in different roles and human beings. This structure of the family business system implies that from now on, the management area must be taken into account because the evolution of the

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entrepreneurial essence is discussed and in the evolution phase, the one which followed the founding phase, three different elements are at play.

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Chapter 5

The External Effect: Change Is the Constant in the Evolution of Every Business, Including Family’s Ones

Abstract To achieve the continuity of the family business, leaders must adapt the entrepreneurial essence in face of the evolution of the external competitive environment and internal characteristics. It is not uncommon that these change processes fail, not only because the wrong approach that leaders have toward the management, but also because of the absence of a change management framework that, in addition to being constant, even shows a positive track record. Therefore, it is necessary to identify a leadership style that could lead to successful changes. In this fifth chapter, the objective is to analyze a set of real cases that lead to the creation of a management framework easily applicable in different organizations when change processes have to be launched. An analysis of real cases was performed to indicate that the successful continuity of a business is inextricably linked to the managers’ ability to acquire, handle, and diffuse knowledge within the organization.

To achieve the continuity of the family business, the leaders must adapt the Entrepreneurial Essence in face of the evolution of the external competitive environment and internal characteristics. This is especially important for next generations which receive from the founders or predecessors the task to continue the business. It is not always clear that the business must change in face of the evolution of the external environment and, moreover, that this change is a constant in the competitive capitalistic word. It is not uncommon that these change processes within the family business fail, not only because the next-generation leaders don’t get the urgency of the change or don’t get what they should change, but also because of the absence of a change management framework which doesn’t help to think in a strategic adaptive way. This means that for NextGens to evolve the Entrepreneurial Essence, it is not sufficient; they must also have a deep understanding on how to lead and manage the evolution. To do this, a management framework is needed. Selected portions of this chapter have been previously part of the paper “Bertoldi, B., Giachino, C., Rossotto, C., & Bitbol-Saba, N. (2018). The role of a knowledge leader in a changing organizational environment. A conceptual framework drawn by an analysis of four large companies. Journal of Knowledge Management.” © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_5

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Therefore, it is necessary to identify a leadership posture which could lead to successful changes. In this chapter, a set of real cases will be analyzed that lead to the creation of a leadership framework easily applicable in different organizations when change processes have to be launched. An analysis of real cases was performed to indicate that the successful continuity of a business is inextricably linked to the leaders’ ability to frame and drive the necessary change. The framework proposed is not peculiar of the family capitalism field; it could be applied in any generic leadership situation. The reason why it is of particular importance for the family firms is because nextgen family leaders find themselves in the challenging situation of deciding how to evolve and adapt a successful business in face of a changing environment. As presented at the end of Chap. 4, from this chapter on, the link between the Entrepreneurial Essence and management of the family company must be taken into consideration. The scope of the monography is to study the Entrepreneurial Essence, its constituency, and its dynamics. As shown in the Fig. 4.6 of the previous chapter, the Entrepreneurial Essence is connected both with the family and with the business. This is due to the fact that the Entrepreneurial Essence is created by the founder which is both an entrepreneur and a manager (in addition to be the owner), and he imprints both the family and the company (see Fig. 3.2 in Chap. 3). The limit of this study is analyzing the Entrepreneurial Essence in the business sphere of the Fig. 4.6 of Chap. 4, trying to separate the link to the family. This implies that when it comes to the issue on how the Entrepreneurial Essence should evolve, management frameworks are required. This chapter has, thus, the objective to analyze how the Entrepreneurial Essence needs to evolve according to the external environment but, at the same time, to consider its internal characteristics. Through the analysis of some real cases, a framework to understand the companies’ reaction to external changes and their influences on the organization of the companies is proposed.

5.1

Markets Are Influenced by Continuous Changes

Companies have always lived epochal changes of every type and scope: social, economic, needs, consumer habits, business models, internationalization, etc.: a company which is “hostile” to change is likely to exit the market more easily than a company more inclined to change (Todnem By 2005; Kotter 2012; Bertoldi et al. 2018). The internationalization and the new markets were probably one of the most common changes required to companies (Resciniti and Matarazzo 2012; Francioni et al. 2015) in the last economic cycle. The successful adaptation to a continuously changed environment is determined by the capability of the company to encompass the knowledge management strategy to business strategy (Snyman and Kruger 2004; Iasevoli and Massi 2012) so as to understand the nature of the changes in the competitive environment and manage the company considering the information and knowledge transfer from the external

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environment to the company and vice versa (Bertoldi et al. 2012; Dayan et al. 2017). Therefore, it is essential to have the ability to adapt business models and products to the new requests through the management of both knowledge and innovation (Bresciani 2017; Giacosa et al. 2017; Santoro et al. 2017; Franceschelli et al. 2018; Ferraris et al. 2019). Considering those events, the ability of the management in identifying the right process to channel changes and knowledge in the company strategy is essential. Change, by nature, having taken place, has created further additional changes, giving rise to a real domino effect: “each shift in practice creates the conditions for further breakdowns, unanticipated outcomes, and innovations, which in turn are met with more variations. Such variations are ongoing; there is no beginning or end point in this change process” (Orlikowski 1996). For this reason, several scholars conceptualized the concept of a change that is constant over time. The constant change requires organizations to perform daily incremental changes to reach improvement and develop their level of knowledge, without necessarily changing the core identity. The execution of a constant change is the way for companies to eliminate inertia to change (Graetz and Smith 2010) by strengthening the organizations ability to exploit and explore new opportunities, with positive effects on future strategies (Meyer and Stensaker 2006). Companies that are responsive to change can successfully acquire and implement knowledge (Rusly et al. 2015) that is a fundamental source for the improvement of business performance and the achievement of sustainable competitive advantage (Prusak and Davenport 1998; Schiuma 2012) because it is the way to understand the external evolution of the competitive environment and to act on the internal processes and resources. This is the most concrete sign of an evolving Entrepreneurial Essence, which is, as described in the previous chapter, antecedent of competitive advantage, on one hand, and of resource and activities, on the other hand. The first step happens in the cognitive world through an accumulation of information, data points, and observation which become through the heuristics process knowledge. After this first step the way in which knowledge is searched, absorbed, and elaborated has to be analyzed. The process of search, absorption, and elaboration happens in both worlds, of cognition and of action; thus, both areas must be taken into consideration (Gavetti and Rivkin 2007). Therefore, the constant level of cognitive knowledge must be cultivated through the commitment of the entire organization, as constant small adjustments created by all units in the company lead to the creation of a substantial change (Weick and Quinn 1999), becoming a core competence for the success of the organization (Deeg 2009; Todnem By 2005). This status can be reached only when the leader, or the leading team, has clear where and how to lead the organization. The ultimate leader, in a family business, is the family leader which is the expression of the entrepreneurial family. This is the reason why change must be the responsibility of the entrepreneurs representing the family. Effective managers should act as knowledge leaders competent to provide strategic visions and communicate effectively the goals of knowledge management in order to cope with the company’s values and future objectives (Singh 2008).

The External Effect: Change Is the Constant in the Evolution of Every Business,. . .

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5.1.1

The Dynamic Environment and Its Influence on Companies

Understanding and internalizing are composed by different elements, and they can represent a source of sustainable competitive advantage in a dynamic environment (Grant 1996; Prusak and Davenport 1998). Find out how to transfer expertise and knowledge among people in the company is the key to achieve success (Hinds et al. 2001), above all in a changing context where those people have to change how things have done before. Some studies indicate the importance of top management in implementing an effective information and knowledge system to keep up with rapid changes (Wiig 2003) as well as the importance and the effective methods of knowledge creation and communication through an organization (Singh 2008; Bollinger and Smith 2001; Choo 1996; Rusly et al. 2015). The problem is that managers often underestimate the organizational and interpersonal context as well as the individual characteristics of people involved in the process (Voelpel et al. 2005). This is evident, usually, in a lack of leadership which take a lack of drive toward the organization. In this context, the organization fails because of several reasons: lack of ambition in achieving multiple objectives, inability to involve and support employees, executives, or employees who are reluctant to modify their habits (Brown 2014; Hughes 2011), presence of resistance to change (Kotter and Schlesinger 2008; Mishra 1996), cynicism that can disrupt the relationship between organizational learning and successful organizational change (Imran et al. 2016), the unpreparedness to share knowledge (Rusly et al. 2014), the lack of motivation to share tacit knowledge (Trusson et al. 2017), the absence of manager support to the knowledge sharing culture (de Almeida et al. 2016), or managers that do not consider the presence of bankruptcy costs resulting from the change (Isern and Pung 2007). Many of these causes are evident and rooted in some family businesses’ failures. In their work, Prusak and Davenport (1998) describe knowledge as a mix of “framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the minds of knowers. In organizations, it often becomes embedded not only in documents or repositories but also in organizational routines, processes, practices, and norms.” These are the adaptation of the Entrepreneurial Essence starts; it has to do with how the company and its owners’ family manage the knowledge creation and implementation. Bailey and Clarke (2000) contribute describing knowledge management as something created by managers. Wang and Noe (2010), following the definition of Alavi and Leidner (2001) and Bartol and Srivastava (2002), consider knowledge as the sum of information that is including “ideas, facts, expertise, and judgments relevant for individual, team and organizational performance.” Other scholars distinguished between the role of internal and external knowledge in open innovation, for example (Ferraris et al. 2017).

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Considering the importance of the organization’s ability to exploit and explore knowledge, managing organizational knowledge has become a significant issue in the knowledge management discipline (Alavi and Leidner 2001). Organizational knowledge can be explicit or tacit: both kind of knowledge are important and can lead company toward success (Singh 2008). Explicit knowledge can be defined, articulated, and stored, and it is easily communicated through an organization; it is a tool that can be used to intervene in the organizational knowledge. On the contrary, tacit knowledge is difficult to articulate because it is the set of personal knowledge, skills, and experiences, and for this reason, it is complicated to transfer through the organization. The key to the knowledge creation is to convert tacit into explicit knowledge (Singh 2008; Bollinger and Smith 2001) because it is the first step to act on change. An organization that successfully integrates and manages knowledge, tacit, and explicit is able to perceive and to adapt to changes in the external environment, to process adequately the information for effective decision-making, and to create new knowledge both tacit and explicit (Choo 1996). The key to knowledge integration is the positive attitude of top leadership toward the acquisition and the interaction of knowledge (Rusly et al. 2015; Donate and de Pablo 2015; Alavi and Leidner 2001) but the ability to reach success depends on the leader’s attitude to retain and handle knowledge inside the company (Dayan et al. 2017; Singh 2008) and adapt it to the external environment.

5.1.2

Knowledge Leaders and Elements to Manage

If some decades ago was sufficient to have one knowledge leader in an organization, today the knowledge must be present at all levels (Singh 2008). The knowledge leader is “the one who indicates how to go” (Wang and Slotine 2006) and has a strong influence on the company adaptation to changes. The dynamics of the leadership group will be analyzed in the following chapter, when leadership posture will be analyzed. At this stage, it is important to analyzed how knowledge is gathered from outside and manage inside. The leader has the responsibility to motivate, communicate, and give the vision to the company during a changing context (Singh 2008). The vision is the set of expectations, ideals, and values for the long-term goals, which are defined to implement an action plan for internal decision-making, following an economic forecast (Hermarij 2016; Ozdem 2011). In the absence of clear objectives, it is impossible to drive the company toward a future scenery (Oakland and Tanner 2007). The vision alone is not enough, because an organization needs a knowledge leader who has the talent to drive the change by involving all levels and being able to communicate the objectives to be achieved (Taylor 1999). Drive is the ability to manage the process; once the vision is defined, a leader should know what needs to be done to change (Bailey and Clarke 2001; Singh 2008), and he can drive the whole organization toward the future.

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Moreover, the importance to depict the speed of change and its direction is fundamental. The speed can be low or high. Referring to Darwinian and Neo-Darwinian theory, speed is defined as the rate of change of the external environment (Darwin 1859). When a company keeps up with the speed of change, i.e., moves at the same rate of change, the leader will be able to adapt the organization to the external environment. The absence of such ability, however, will declare the extinction, exactly as if it were a species existing in nature. The adaptation of a company to the external environment “high-speed” changes implicates not only the examination of the practices that lead to competitive advantage but also the embracement of organizational learning, to wit the effective knowledge acquisition and the new knowledge creation (Del Giudice et al. 2014). The exploration and exploitation of knowledge turn to be indispensable for the organizational development in a high-speed environment (Choo 1996). As explained by Russell (1925) illustrating the relativity theory, when someone shouts on a train running very fast, if a person is on the train, he will hear the voice simultaneously, but, if the person is on the ground looking at the train, he will hear the voice with some delay. In this contest, a “high speed” indicates that a company is faster than the environment; therefore, it will grasp and absorb in its knowledge system the inputs of change before they have an impact in the competitive arena; on the contrary, a “low speed” indicates that a company is slower than the competitive environment and therefore will receive evolution inputs later. The “direction” is represented by a leader that leads the organization, either in the same direction in which the external environment is evolving, or in the opposite one. A knowledge-oriented leadership stimulates the creation, transfer, and application of new knowledge improving company’s capabilities and innovation performance (Donate and de Pablo 2015). Hence, a knowledge-oriented leader will be capable to keep pace with the external changes in order to accumulate new knowledge stemming from the external environment. When a company performs a rapid change in line with the direction of the external environment, it will keep being successful in the competitive arena; when a company is unable to detect the direction or to keep the rhythm of change, especially if it has low knowledge accumulation capability, it will risk being kicked out from the competitive arena.

5.2

Method

The research design was developed through the analysis of real cases, that mostly occurred during the career of a single manager in many corporations, and the comprehensive study of the existing literature with the aim to identify important elements to manage knowledge and change in organization. Yin defines case study as “an empirical inquiry that investigates a contemporary phenomenon (the “case”) in depth and within its real-world context, especially when the boundaries between phenomenon and context may not be clearly evident” (Yin 2014). The collection of data from different resources, namely triangulation method,

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could provide most accurate and high-quality results (Yin 2014; Hancock and Algozzine 2017; Verschuren 2003). For the purpose of the research, the method of case studies is selected to evaluate and explore real-life cases over time through observation, documentation, reports, and the interviews to a manager who worked in the companies die in order to investigate in-depth the organizations’ reaction to change process (Creswell and Poth 2016). The access to a variety of data (manager’s personal documents, e-mails, minutes of meetings, and other internal documents) was possible thanks to the interviews with the operation manager that worked in all the companies citied. The cases were selected representing different reactions to external change that leaded to different results in order to examine the top management methods in handling the internal change and the organizational knowledge. Also, the organizations mentioned in case studies derive from different market industries, in different industry evolution moments and with different dimension: this allows a more boarder examination. Another criterion of the case selection is that the organizations are medium or large companies which have a robust top management system in place and a well-organized organizational knowledge system. Choosing a single manager as a unit of analysis is necessary to have a single deep and inside view on different reactions to different changes. The manager is the constant which permits the same prosody to very different cases. Having lived the different situations of the different cases personally, the manager is a stable point of observation to situations which are incredibly different. It must be acknowledged that this approach limits the possible choices of real cases to the ones the unit of analysis had experienced of. All the organizations have been chosen because they underwent an internal impact caused by the changes occurred in the external environment. These organizations react differently to the challenge of change, determining the positive or negative result of their internal transformation. The organizations’ diverse perspectives to the internal change and the relative results were described in detail and compared so as to identify and elaborate both the correct or inadequate practices of the organizations. Through the analysis of the cases, a new framework that can be deployed to maximize the understanding of the situation in the change planning phase and of the effectiveness of the leader in the execution phase was proposed. The framework is explained by two diagrams: the speed/direction for the planning and the vision/drive for the execution. While the first diagram is the key to decide how to manage the knowledge assimilation process, the second diagram provides the managerial profiles of the knowledge leader. On the other hand, real cases investigating the consequences of speed and direction of change in relation to companies that have managed changes in the past in different contexts were analyzed. The second diagram, drive-vision, was created through the literature, taking into consideration the “direction” factor of the first diagram, in order to underline the importance of a knowledge leader profile

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The External Effect: Change Is the Constant in the Evolution of Every Business,. . .

Evidences from the Cases

The manager interviewed worked in four companies during their organizational changing phase. The four cases analyzed are General Motors (GM), Chrysler, FCA Capital, and RAI. The first one, General Motors, is based in Detroit (Michigan) and operates in the automotive sector; Chrysler is another American automobile manufacturer based in Auburn Hills (Michigan); FCA Capital is a joint venture between FCA and Credit Agricole Consumer Finance that operates mainly in the automotive financing sector; and RAI is an Italian public broadcaster that operates in television channels and radio stations. One of the first important information to have is the period during which the four companies are analyzed: – GM: 2000–2009, the period of the crisis that takes to the bankruptcy – Chrysler: 2008–2012, the period of crisis and the bought out of FIAT – FGA Capital: 2010, the period of the joint venture between FCA and Credit Agricole Consumer Finance – RAI: 2012–2016, changing of clients’ behaviors toward television and listing in the Italian financial market A brief sum-up on the case selected—General Electric, Chrysler, FCA, and RAI—is presented in Fig. 5.1. All the four companies faced with a period of transition due mainly to external changes and were requested to react to maintain their position on the market. The ability of an organization to response to external changes could lead to a sustainable competitive advantage (Graetz and Smith 2010; Rusly et al. 2015); however, different scenarios can be faced according to the speed and direction of change. More specifically: – GM: 2000–2009, the company remained focused and dependent on US SUV and light trucks segment. No investments were done in technologies or new segments

Fig. 5.1 The selected cases. Source: Author’s elaboration

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to serve while the industry was moving toward small cars, for example. In the years, GM lose his power and leadership in the industry and went toward bankruptcy. – Chrysler: 2008–2012, Chrysler invested in new products and programmed to launch the products in 2010 but did not consider the external environment and the company collapsed with the crisis. – FGA Capital: 2010, the company was operating in a slow competitive environment and had the ability to take advantage of its ability in the sector and the opportunity on the market to set up a Joint Venture in order to gain a competitive advantage. In particular, the company was able to raise money in the financial market and a deep knowledge of the car market. – RAI: 2012–2016, the company did not react timely to the digital revolution and for a Tv broadcaster was an issue, it did not follow and adapt the business to the new consumers’ behavior (e.g., use of tablet, smartphone). The slow reaction of the management allowed new entrants—such as Netflix—to enter in the industry and give to customers a new experience, however, the slow change permitted to the company to have enough time to change strategy and regain positions on the market. On the other hand, the decision of the company to create RAI Way, a spin-off, was made at a very high speed; Ray Way was also listed in the Italian Stock Exchange in few months. Also, the execution was very fast and the final result was to reach the position of the key player in the consolidation of the broadcasting infrastructure (Table 5.1). From the information gathered and analyzed, a first diagram that explains organizational change through the correlation between the speed of events (speed) and the direction of change (direction) is emerged. The two axes of the diagram are the Speed (Y axis)—that represents the speed of changes and its level, low or high—and the Direction (X axis)—that represent the direction that the knowledge leader decides to give to the company (the same direction of the external environment or the opposite direction). The zero point represents the situation of an organization that operates in a context in which there is no change, complete balance, but there are few possibilities to operate in this context. An example of “high speed” is a car company launching a complete product mix of full electric cars, much in advance that an industry standard is established. A “slow speed” company, on the contrary, would launch old fashioned diesel engine cars product line. Considering the direction, companies can proceed in the same direction of the external change either through inertia, i.e., without a leader’s drive as it is possible to see in the following matrix, or understanding and embedding in the company’s knowledge system the inputs of the change and acting proactively. Proceeding in the opposite direction of the external environment means going backward. On the other hand, a knowledge-oriented leadership stimulates the creation, transfer, and application of new knowledge improving company’s capabilities and innovation performance (Donate and de Pablo 2015). Hence, a knowledge-oriented leader will be

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The External Effect: Change Is the Constant in the Evolution of Every Business,. . .

Table 5.1 Change and direction—contexts Scenario Implosion

Decadence

Brief description change/direction The internal change is slow or against the direction of the external change, which is occurring at high speed, i.e., the company will tend to implode and eventually fail

The external environment is following a low change, and the organizational change goes in the reverse direction; then, there is a deterioration, a decadence, i.e., the process through which the enterprise is found in a condition less advantageous with respect to the one previously occupied

Case Chrysler

General Motors

Context In 2009, the company managers were focused on growing and launching new products for the coming year while the external environment was entering in a financial and economic severe crisis. Chrysler managers didn’t spot the competitive environment direction and speed of change and were surprised by the abrupt market collapse of the coming year. In a market that was contracting from 14M to 10M cars in a year, managers were planning to grow: i.e., they were going backward the market direction and the external environment was moving fast From 2000 to 2009, the company didn’t push to new market segments and to new technology in the automotive industry, remaining substantially dependent from the US SUV and light trucks segments. The industry was moving toward a more polarized segmentation in the luxury cars and SUV and in the smaller car segments, i.e., A and B segments. GM didn’t follow the competitive environment trend and in less than ten

Knowledge leader Chrysler was led by an outstanding knowledge leaders team assembled with a mix of knowledge from the industry and outside and with a calibrated mix of competences. Unfortunately, the vision on the industry and on the coming competitive environment was completely wrong

The GM knowledge leaders created a frustration situation keeping managing the carmaker as the old times and with a low capability to drive the complex organization somewhere. The company stuck and, unable to react to the 2009 crisis, entered the bankrupt process

(continued)

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Table 5.1 (continued) Scenario

Brief description change/direction

Case

RAI

Evolution

The process of change leads to a slowly improvement, or evolution, i.e., a situation in which the company engages in a slow and incremental process of change, which often brings the same to

FGA Capital

Context years lost its technical and product leadership and in the verge of the 2009 financial crisis entered the bankruptcy process RAI as a public company and the Italian leader TV broadcaster hasn’t reacted timely on the digital revolution. In few years, the audience switch from TVs to tablets and smart phone and from a traditional consume of standard TV programs to a more complex consumer experience. New entrants as Netflix and Perform suddenly changed the way in which the consumer experiences movies, series and sports and other live events. The RAI management was slow in reacting to the market environment and launching its proprietary tablet application. In this case, the relative low speed of the competitive forces gave the time to managers to change their strategy and to starting the execution FGA Capital was an avant-garde strategic move in a slow speed competitive environment. The sophistication of these carmakers financial institutions and the extension of services offered by

Knowledge leader

After the reorganization and the financial turnaround of the company, a new MD took the role and launched the digital knowledge transformation. The vision was coherent with the competitive environment, but the drive was jeopardized by the complexity of the structure and the lack of an entrepreneurial approach

Having the vision of creating a JV between a bank and a carmaker was avantgarde and creative, i.e., in more than 80 years nobody tried something similar. The drive necessary to merge the (continued)

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Table 5.1 (continued) Scenario

Brief description change/direction

Case

become more complex, different

Revolution

Radical change in the organizational structure changing completely the competitive paradigm

RAI

Context

Knowledge leader

commercial lending and consumer finance banks created the conditions to set up a Joint Venture. The competitive advantages of this JV are, on one hand, the ability of the traditional bank to efficiently raise money in the financial markets and taking in the JV the banking approach and processes; on the other hand, the knowledge of the car market and the remarketing capability of the carmakers. The JV was the first agreement between a bank and a carmaker and it remains the only 50/50% JV in the competitive landscape, demonstrating the forward-looking approach and the capability of sharing knowledge of the two entities and of their knowledge leaders The RAI spin-off of RAI Way was toward the future direction of the competitive environment and was made at an incredibly high speed. Given the level of competition and the increasing number of national and international competitors, the industry undertook a sudden change in structure. RAI Way was spin offed and

management and strategic differences of the two JV participants was key in creating the success

On top of the vision, necessary to get the right strategic decision, the drive to execute the management and knowledge changes was essential

(continued)

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Table 5.1 (continued) Scenario

Brief description change/direction

Case

Context

Knowledge leader

listed in the Italian Stock Exchange in less the 5 months, repositioning the business in the new competitive environment as a private and efficient company with a strong balance sheet. The high-speed forward-looking decision was executed with an extraordinary knowledge effort: the company knowledge system had to move from an internal service to an external service, from a fully owned subsidiary to a listed company with a very sophisticated governance, from a non-competition environment to a free market approach. The strategic move positioned RAI Way as one of the key player in the consolidation of the broadcasting infrastructure Source: Author’s elaboration

capable to keep pace with the external changes in order to accumulate new knowledge stemming from the external environment. When a company performs a rapid change following the direction of the external environment, it will remain successfully in the competitive arena; when a company is unable to detect the direction or to keep the rhythm of change, especially if it has low knowledge accumulation capability, it will risk being kicked out from the competitive arena. The four cases analyzed are positioned in the diagram in different positions. The intersection between speed and direction generates four situations: implosion, decadence, evolution, and revolution. The implosion represents the case of a slow internal change or the case in which the company is moving against the external change that is very fast: in this case, there is the risk to fail for the company (example of Chrysler). The decadence

5

The External Effect: Change Is the Constant in the Evolution of Every Business,. . .

SPEED

108

High

IMPLOSION

Low

Crisis-testing time

DECADENCE

Backwards

REVOLUTION

EVOLUTION

Forward

DIRECTION

Complete balance

Fig. 5.2 Diagram speed/direction of change. Source: Bertoldi et al. (2018)

represents the case in which the speed of change of the external environment is low and the organizational change goes in the reverse direction: the position of the company can be worse than before (example of GM and RAI). The evolution is a change that leads to a slowly improvements of the company (example of FCA Capital). Finally, the revolution is the situation in which the company changes radically and completely (example of RAI Way) (Fig. 5.2). Beside the direction and speed of change, there is a second diagram to consider that derives from the direction factor, since that the direction in which the company moves depends directly on how the knowledge leader leads the process and share both the vision and the knowledge information that permeates the organization. Therefore, the simultaneous presence of a high level of vision and an execution driven knowledge leader can lead to a situation of overcoming possible crises in a changing context. The direction of change followed by the company, compared to the one used by the external environment, will depend on the ability to drive it and the ability to create and share common vision within the organization. If the knowledge leader is able to have a high drive level and vision, to wit knowledgeoriented manager, organizational change will follow the external change, with a high probability of success for the enterprise; if, however, the company is moving in the opposite direction, it will risk exiting the market. There are two axes: vision and drive (Fig. 5.3). Vision (Y axis): is the set of long-term goals, ideals, and expectations, which project into the future the company within the target market (Rusly et al. 2012). The

109

High

VOYEURISM

ELATION

Low

VISION

5.3 Evidences from the Cases

FRUSTATION

EGOTISM

Low

High

DRIVE

Fig. 5.3 Diagram vision/drive. Source: Bertoldi et al. (2018)

knowledge leader knows where he wants to go and invest time and resources to make sure that the vision is shared at all levels. Drive (X axis): style that is put in place by the knowledge leader and that depends on his characteristics (Todnem By 2005). It’s the ability to manage the process (Bailey and Clarke 2001; Singh 2008) and the ability to drive the whole organization toward the envisioned future. Knowledge leader’s drive and vision mix, communication of vision, and knowledge sharing will determine the different scenarios of the change process outcome. The first one is the frustration or the situation in which the knowledge leader is not able to create a common vision to be transmitted to the entire organization and has no energy and personal leadership to lead the company. In this situation, frustration is generated within the organization given the absence of an envisioned future destination and of leader’s energy to get the organization there (example of GM). The GM knowledge leaders created a frustration situation keeping managing the carmaker as the old times and with a low capability to drive the complex organization somewhere. The company stuck and unable to react to the 2009 crisis, entered the bankrupt process. The second one is the voyeurism: the vision in this case is very strong and has been passed, but the knowledge leader is not able to support the company in the management of change and in the absorption of the new knowledge, because he believes that it can be handled by others. In this case, the manager is reluctant to share and to make actionable his knowledge related to the future vision (example of RAI). The RAI case exemplified the voyeurism case when, after the reorganization

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and the financial turnaround of the company, a new MD took the role and launched the digital knowledge transformation. The vision was coherent with the competitive environment, but the drive was jeopardized by the complexity of the structure and the lack of an entrepreneurial approach. The third one is the egotism: there is the absence of a clearly defined vision associate with a knowledge leader with a strong drive and personal execution capability. Even if he discharges a huge amount of personal energy to drive the company toward the future he envisioned, the organization will not follow and the knowledge system will not change in the entire organization (example of Chrysler). The Chrysler case exemplifies the egotism approach. Chrysler was led by an outstanding knowledge leaders team assembled with a mix of knowledge from the industry and outside and with a calibrated mix of competences. Unfortunately, the vision on the industry and on the coming competitive environment was completely wrong. Finally, the elation is when the vision has been clearly defined and passed through the entire organization and the knowledge leaders know how to manage the journey toward the future driving the entire organization. The elation is that state of joy, success, resulting from a manager who has a good vision, the willingness, and the capability to create and share knowledge and good management skills (example of FCA). The Fiat Group Automobile Capital exemplifies the Elation case. Having the vision of creating a JV between a bank and a carmaker was avant-garde and creative, i.e., in more than 80 years nobody tried something similar. The drive necessary to merge the management and strategic differences of the two JV participants was key in creating the success. The JV success proved the competitive advantage of merging the two capabilities but nobody in the industry had the drive to replicate the 50/50% JV, which to operate need a lot of management and knowledge leadership.

5.4

Conclusion

Through the analysis carried out, it was possible to identify the characteristics that should have a leader who is in charge of managing a company given a context of continuous change in the competitive environment, being a family or a non-family business. The study showed that a careful analysis of the change in the external environment can safeguard the durability of the company over time. The analyzed cases have confirmed what has been described by the first diagram: the organizations that have undertaken the changes following a direction opposite to that followed by the change that was taking place in the external environment have failed to maintain their competitive position in the market. On the contrary, the companies that have been able to understand the exact direction and have involved the top management in all activities (de Almeida et al. 2016) have achieved success regardless of the speed of the process. Indeed, the companies that interpreted correctly the direction of change of the external environment were able to drive innovation processes through the creation of effective management regardless their gradually incremental speed of

References

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change. The research has also individuated the ideal status of an organization, namely, the revolution in which the organization experiences a radical structural change through the successful acquisition, integration, and communication of knowledge following the trends of the external environment. The organization’s capacity to change depends on leader’s ability to create and communicate common vision, to participate in the process of change, and to promote the organization’s development together with his personal development. This is key for the new leaders of the next generation in family business. The research also confirmed the need, previously investigated by other studies (Ewenstein et al. 2015; Kotter 2009; Kotter 1995; Schiemann 1992), that the implementation of a change in which there is a clear vision, an excellent level of communication, and a good knowledge sharing is important as well as the involvement of people at all levels (Isern and Pung 2007); this is essential to avoid misalignment of goals within the organization (Taylor 1999). Misalignment can block the adaptation because different people and areas act in different directions even if the leader has a clear vision; this is due to a lack of drive and will be further analyzed in the following chapter. This study has designed a theoretical framework through the analysis of case studies. More empirical studies are needed to investigate and consolidate the theoretical framework that could be used in practice to determine the optimal managerial characteristics and behavior for the successful implementation of the organizational change process. These empirical studies would be even more needed in the family capitalism context, where this kind of change is more difficult. Leveraging a framework generated in a professional management environment is a strength. Having a blue print for change doesn’t assure the successfully execution of it, but it helps clarify the responsible of the change and how and where things can go wrong. This is the case of the responsible of the evolution of the Entrepreneurial Essence which is the one who have to succeed the founder or the previous leader. This follower can be a family member, as cases analyzed in Chap. 3, or a non-family leader working in a family business or in a business which was once a family business. Based on the framework presented in this chapter, how to lead and drive the organization is the prerequisite for a successful evolution. This will be discussed in the next chapter.

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Chapter 6

The Leadership Style to Lead the Evolution of the Entrepreneurial Essence: A Proposal

Abstract The leadership scholars proposed a number of leadership styles either by multiple case based or by organizational questionnaires methodology. Other sources to deeply understanding the leadership style in change management are biographical reports. However, there is no analysis of a successful changing organization leader based on a deep understanding of the single elements of the leadership style. In this sixth chapter, it is presented the leadership style and the management processes of a well-known leader—Sergio Marchionne—that operates in a family business context. The case is based on in-depth personal observation of the leader during the changing and resurrecting of the Chrysler company.

To deeply understand the leadership style in change management can be used the biographical reports. In this chapter, an analysis of a successful changing organization leader based on a deep understanding of the single elements of the leadership style will be proposed. A leadership style and the management processes of a wellknown leader, Sergio Marchionne, that operated in a family business context will be presented. The information gathers in the chapter is based on in-depth personal observation of the leader during the changing and resurrecting of the Chrysler company. About his leadership style, Sergio Marchionne stated as follows: “My job as CEO is not to make decisions about the business but to set stretch objectives and help our managers work out how to reach them. . . a business like FIAT is far too large and complicated for one man alone to lead” (Marchionne 2008; Bertoldi et al. 2015). His approach innovates present theory. The difference is in “managing groups” in addition to “leading people.” The leadership theory is based on the role model leader, his one-to-one relationship with others, and his inspiring role in the organization. The military structure, upon which the leadership theory largely borrows, is based on the commander in chief, his colonels, and the pyramidal structure that reports to them. Marchionne’s approach is based on the management of the Carabinieri local station, which he learnt from his father, and not on a big military department led by a general in command. The men in a Carabinieri local station must live in a very small and flat organization. Everyone must be multitasking, and the entire small team must do whatever it takes to serve the local community. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. Bertoldi, Entrepreneurial Essence in Family Businesses, International Series in Advanced Management Studies, https://doi.org/10.1007/978-3-030-63742-2_6

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6.1

6 The Leadership Style to Lead the Evolution of the Entrepreneurial Essence: A. . .

The Leader: Between Theory and Sergio Marchionne Style

Gardner (2011) defines a leader: “as an individual who significantly affects the thoughts, feelings, or behaviors of a significant number of individuals. . . Leaders achieve their effectiveness chiefly through the stories they relate. . . The way in which direct leaders conduct their lives—their embodiments—must be clearly perceptible by those whom they hope to influence. . . People who do not practice what they preach are hypocrites, and hypocrisy mutes the effectiveness of their stories.” “I deliberately use the terms story and narrative rather than message or theme. In speaking of stories, I want to call attention to the fact that leaders present a dynamic perspective to their followers; not just a headline or snapshot, but a drama that unfolds over time, in which they—leader and followers—are the principal characters or heroes. Together, they have embarked on a journey in pursuit of certain goals, and along the way and into the future, they can expect to encounter certain obstacles or resistances that must be overcome. Leaders and audiences traffic in many stories, but the most basic story has to do with issues of identity. And so, it is the leader who succeeds in conveying a new version of a given group’s story which is likely to be effective. Effectiveness here involves fit—the story needs to make sense to audience members at this particular historical moment, in terms of where they have been and where they would like to go.” The underlying assumption of the leadership theory is a link between the leader and the followers, a “one-to-many approach” (House and Aditya 1997; Hogg 2001; Avolio and Gardner 2005). The “Marchionne approach” is “one-to-group” or “group-to-target” approach (as it will better present in the following paragraphs). One of the Gardner examples is Ghandi, he was a pacifist, and his behavior was nonviolent; he was coherent with “his story” when he told the Indians to peacefully march against the British and he inspired his team. If Ghandi had followed Marchionne’s approach, he would have said as follows: the task is to free India, let’s work together as a group and find a way to fight the British; I will help you to reach the target. Based on the “one-to-many” approach, six basic leadership styles have been defined based on the direct relationship between the leader and his subordinates: coercive, authoritative, affiliative, democratic, pacesetting, coaching (Goleman 2000). The leadership style is considered influenced by the context in which the leader operates (Hersey and Blanchard 1969) and by the relationship between the leader and the set of people, manager, and/or employees (Chen and Silverthorne 2005). Marchionne’s approach however doesn’t fit in the theory: it is not one-to-one, and he manages the group as a whole, finding, forging, helping every member, and doing that the group changes the context in which it operates. The distinction between leadership and management is evident either in theory building (Bennis 1966; Hill et al. 2010; Kotter 2012) or in businesses’ functions. Leadership is linked with change and, more specifically, means setting direction, motivating, inspiring, and aligning persons. On the other hand, management’s

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concept is linked with complexity and includes activities like planning and budgeting, organizing and staffing, controlling and problem solving. Cognitive change as well as strategic action is essential to take successful decisions (Barr et al. 1992). One of the main issues with which scholars confront themselves is the lack of agility and capacity to adapt to new competitive environments of many companies because they are overmanaged and underlid. Again, a difference with the Marchionne’s approach, which consists in the merger of leadership and management: operating the group he planned, problem solved, decided lively within the group and in doing this he led the group. Warren Bennis says about Great Groups (Bennis and Biederman 2007): “our tendency to create heroes rarely jibes with the reality that most nontrivial problems require collective solutions. . . in our constantly, global, highly technological society, collaboration is a necessity. The Lone Ranger, the incarnation of the individual problem solver, is dead. In his place, we have a new model for creative achievement: The Great Group. Great Groups don’t exist without great leaders, but they are much more than lengthened shadows of them. . . A classic example is Michelangelo’s masterpiece the ceiling of the Sistine Chapel. In our mind’s eye, we see Michelangelo, looking remarkably like Charlton Heston, laboring alone on the scaffolding high above the chapel floor. In fact, thirteen people helped Michelangelo paint the work. Michelangelo not only was an artist, he was. . . the head of a good-sized entrepreneurial enterprise that collaboratively made art that bore his name.” Bennis and Biederman (2007) illustrating and summarizing a literature stream which started with Bennis (Bennis and Shepard 1956; Gersick 1988; Zaccaro et al. 2001) create a synthesis of the group leadership through six deeply analyzed cases from Disney’s Animation to the Manhattan project. The key characteristics of a great group, its members, and its leader are reported in Fig. 6.1. Bennis’ approach considers the Group itself a part of the leadership environment and defining the relationship between Group, Members, and Leader differs from the “one-to-many” literature. The Group is the governing body of the company leadership system, and it works beyond the reach and competence of the leader and of the members. The Group is broader in leading the company than the sum of its part. This concept has already been briefly presented in the Chap. 4, when the Ferrari entrepreneurial process of “shacking men” was presented. In the Ferrari case, the “great group” approach was necessary not only to make the Scuderia, which is a prototype of a great group, functions but also because the “broader than the sum of the part” was necessary for the small group to compete with big carmakers in the racing field. The three elements, Group, Leader, Members, to work need a mix of delegation and trust. The only two elements which are exclusively used by the leader.

talented staffers usually accepted his suggestions, not just because he is the boss, but because every time he recommended something, he was always right. He has the talent to draw out of guys what they didn’t have. He stewards the group. He didn’t micromanage. He intervened after the experts had solved most of their own problems. He inspires, communicates, and choose. This gives the members the sense of being autonomous. “Don’t look to me for the answers. All I want you to use me for is approval.”

3)SMARTEST GUY IN THE ROOM. Even the most

kind of leader who recruits only people like herself. There is another, beer kind of leader who realizes you can only accomplish extraordinary things by involving excellent people who can do things that you cannot. He has eyes for talent; he has to be willing to hire people good enough to replace him.

2)HIRE MEN BETTER THAN HIM. There is a certain

recruits the other, by making the vision so palpable and seductive that they see it too, and eagerly sign up. Usually he is a scientifically minded person with poetry in his soul.

1) PRAGMATIC DREAMER. Leader is the one who

Fig. 6.1 The great group DNA. Source: Bennis and Biederman (2007) synthetized by the author

life outside the project. Who has me for real life, when you are making history?

3)COMMITTED. Members of Great Group tend not to have a

know they couldn’t do it, so they do it. Time teaches many things, including limitations, so be young or new in the role helps. They see connections. Often they have specialized skills, combined with broad interests and multiple frames of reference. They tend to be deep generalists, not narrow specialists. They are able to identify significant problems and to find creative, boundary busting solutions rather than simplistic ones. The have hungry, urgent minds. Many have expansive interests and encyclopedic knowledge.

2)BEGINNERS. The have the beginner’s mind. They don’t

part of the group. In the recruiting process is clear how much is difficult to get in: so when you are in, you know you are part of an elite. Single member of Great Groups are the best in what they did.

1)VOLUNTARY. To be Recruited is an honor; you want to be

Being part of a group of superb people has a profound impact on every member. Participants know that inclusion is a mark of their own excellence. Respect is critical. Great Groups are voluntary associations. People are in them, not for money, not even for glory, but because they love the work. People who are engaged in groundbreaking collaborations have high regard for people who challenge and test their ideas.

ARISTOCRATIC

Great Group Leader

Great Groups tend to be structured, not according to title, but according to role. The person who is best able to do some essential task does it. But Great Groups are rarely true democracies. They almost always have strong leadership. Great Groups are communities based on merit and passion

Great Groups think they are on a mission from God. Without a meaning, labor is time stolen from us. They need a genuine challenge, a problem perceived as worthy of a gifted person’s best efforts. Money doesn’t maer, career doesn’t: the project is all. This is a mission carried out by people with fire in the eyes

Great Group Members

NONPYRAMIDAL

MEANINGFUL

The Great Group DNA

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Delegation and Trust: The Alchemy of Leadership

Delegation and Trust are the two elements which forged the leadership style of a person, a group (in the Bennis view), and an organization. Since long time ago, scholars acknowledged that all leaders are confronted with this key choice in the moment in which the firm grows too large or complex to be managed individually (Barnard 1938; Moe 1984; Brown et al. 2012). Delegation is the process of releasing the decision power, i.e., empowering others, withholding the responsibility of the final results (Aghion and Tirole 1997). It is one of the more complex decisionmaking processes of a leader. It must be executed taking a constant balance between costs and benefits (Tushman and O’Reilly 1997). On one side, CEOs retain too much control when certain tasks could and should be effectively delegated to other individuals to leverage their time, skills, and capabilities. On the other side, CEOs, instead, underestimate the costs of delegation—such as the loss of oversight and control over the firm’s activities and distribute decision rights that should instead be optimally retained by the CEO. A bad and dysfunctional delegation of authority systems happens when different managers in different functions/business units pursue different objectives which are privately or specifically optimal but inconsistent with the organization ones. In these cases, the strategy of the company is put at risk, being the first objective of a strategy to be the smallest set of decisions which guide all the others in the company (Steen 2017), when the set of decisions provided by the leadership team is disharmonious and follows different objectives the company falters. This can happen because managers haven’t really understood the company strategy, the limits of their delegated power, or aren’t good at communicating to others. Therefore, it is not at all necessary to have selfish managers to incur in this issue, even the best willing manager who firmly wants to follow the leader inputs and remain in its delegated authority can contribute in a terrible delegation system. Managing conflict means, as a consequence, balance the fundamental trade-off between initiative, the “intelligent, honest, diligent, imaginative pursuit of individual goals and responsibilities” and cooperation, the “behavior that advances others’ interest of overall organizational success as opposed to contributing to one’s own assigned responsibilities.” The delegation is, anyway, necessary when the leader cannot make all decisions himself and must handover some decision-making rights to others. Delegation is especially necessary when time or knowledge is constraints (Jensen and Meckling 1979; Schanze 1987). Time is quite straightforward reason to delegate and is usually easier to accept by the principal. This happens usually when the company grows from being a small business into a successful medium, and then, great company (Lewis and Churchill 1983; Scott and Bruce 1987; Churchill and Lewis 2000; Mazzarol et al. 2009). Knowledge-based delegation is quite common but much more complex to structure because it implies a good (self) assessment of the principal and an (structured) assessment of all the potential agents. This is the moment in which the leadership style is key to forge an effective organizations with consistent and reinforcing structure, systems and processes and, even more

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important of the efficacy of the company, implicit norms of behavior that foster the alignment of individual behavior to company short and, again more important, longterm goals (De Long 1997; Gold et al. 2001; Dobrajska et al. 2015; Lee and Edmondson 2017). A balanced delegation of authority cannot be achieved only with formal contractual level, either compensation incentive or career promotions; a common view of the company, its vision, and its competitive environment is necessary. Here, the importance of common values, same vision, and a group (as defined before by the Bennis description) is key (Baker et al. 2002; Benabou and Tirole 2003; Lazzarini et al. 2004; Gil and Zanarone 2017). Therefore, the leader must delegate decision rights to other individuals levering their times and knowledge and avoiding or minimizing unnecessary conflicts and create and sustaining relational contracts. Delegation is a contingent decision rather than a best practice. Therefore, the perfect level of delegation varies tremendously according to the specific context faced by the firm: there is no optimal solution, i.e., always delegate or always centralize, and optimality varies dramatically from industry to industry, and from firm to firm within an industry. Delegation is beneficial when the leader operates in an environment in which local knowledge, i.e., knowledge that is hard to codify and transmit, really matters. In these cases, delegation allows the leader to effectively match decision rights with specific expertise, potentially improving the speed and the quality of decisionmaking, and freeing his/her time to do other activities. This will be a key point of the discussion upon the Marchionne’s leadership style. Delegation can also be beneficial to the firm in that it may motivate people to whom decision rights are allocated in contexts in which the use of formal contractual solutions, e.g., monetary incentives or career promotions may be precluded (Prendergast 1999; Benabou and Tirole 2003). Delegation, however, bears costs in terms of the potential loss of control. Such costs are heightened in situations in which managers to whom decision rights have been allocated may use such rights to pursue activities that are privately beneficial, but organizationally suboptimal. Potential loss of control is the reason why leaders retain too much control, even when it would be optimal to delegate authority to others. Leaders may overestimate what they can do on their own, i.e., be overconfident, (Malmendier and Tate 2008; Graham et al. 2013) mistrust others, i.e., they assign a large probability to the possibility that delegated powers will be abused or the delegated task will be failed (Bloom et al. 2012) or have strong preferences for control, i.e., they may be willing to sacrifice performance for other non-monetary benefits associated to “being the boss” (Fehr et al. 2013). Delegation balance must be in continuous evolution because costs and benefits of delegation may change over time, according to the evolution of the firm or the external environment in which it operates. Failure to adapt the level of delegation to the new context may create a lack of fit between organizational structure and firm needs and ultimately harm firm performance. It is thus important for leaders to take into account not only static but also dynamic considerations when distributing decision rights.

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Fig. 6.2 Trustworthiness. Source: Maister (2012)

Finally, the effectiveness of delegation crucially depends on the skills and motivations of the people to whom powers are delegated. More generally, in order to be effective, the distribution of decision rights across the firm needs to be embedded in a leadership management model in which individuals take actions that are consistent with the pursuit of organizational objectives. The allocation of decision-making power is linked to the relationship among the principal and the leader (Hitt and Duane 2002) and, in the Bennis’ great groups approach, between the leader, the members, and the group itself which become a key and independent part of the organization. This kind of relationship becomes a network of informal relationship-based net within the formal organization. Interestingly, as it will be analyzed later in the case, when the relationship-based leadership group is strong, the formal organization is more fluid, changing and adapting easily and fast, i.e., twice a year in the big corporation. How this informal relationship is created and defined is one of the key elements to understand how different parts in the organization agree to work together, i.e., how the informal relational contract is signed. The informal contract is based and enforced not by law but by trust. The trust components are credibility, reliability, intimacy, and self-orientation (Maister 2012). Credibility is competence based: being credible mean being knowledgeable about something, having the authority based on what one has done or one know about something. Reliability is the attitude to execute in an effective and efficient way what has been said. Being intimate means taking care of the other’s objective and feeling, working, and acting in the other’s best interest. Credibility and reliability tend to be transferrable qualities, meaning that if B thinks A is a credible or reliable manager and C trust B, C evaluates B as credible and reliable. This is not true for intimacy, which requires time spent together and it is relationship based. This is the reason why duration has an effect on the leadership teams (Krishnan 2005; Yahaya and Ebrahim 2016). The last part of the equation, self-orientation, diminishes the total amount of trust someone has in someone else, because of the feeling that this someone else is acting for his personal objective and not in the interest of the other, or in the Bennis’ great group view, in the interest of the group itself (Fig. 6.2). Relational contracts can, therefore, be a powerful way in which leaders can encourage action rules that cannot be specified before and verified later on. This

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approach is usually enforced by culture and values of the company (Bolton et al. 2013) or specifically of the leadership team. To do so, the leader has to excel as both a strategist and an organizational designer (Roberts 2007; Smith 2014) given that behavior and execution supporting internal collaboration and the pursuit of organizational goals are often hard to specify ex-ante, monitor, and reward ex-post. Formal contracts, therefore, are necessary but not sufficient to inform the leadership team efficacy, i.e., they cannot specify what is to be done in every possible contingency. Only relational contracts may help overcome the challenges posed by the incompleteness of formal contracts in the management of the multi-business organization. Gibbons and Henderson (2012) define relational contracts as “understandings that the parties share about their roles in and rewards from cooperating together, but understandings so rooted in the details of the parties’ relationship that they cannot be shared with a court.” This kind of understanding is the engine of the Bennis’ great group, and relational contracts are a key way that managers get organizations to get things done including enabling the adoption of managerial practices that are competitively superior, but hard to implement and making possible the execution of overstretch strategic plan (Pinho et al. 2014; Amit and Zott 2015). The difficulty with relational contracts, however, is that they need a base of trust in an organization. Leaders must build these informal agreements and they have to nurture credibility, reliability, and intimacy within a leadership team. These kinds of relational contracts contribute to competitive and corporate advantage and must be at the top of the leader’s agenda. The leader must have a visible leadership; that is, frequent personal interaction and communication with a wide variety of employees across all hierarchical levels help clarify the terms of the relational contracts. The Bennis’ great group is making this very efficient because every member of the group is acting in this way within the organization acting as a one leader being many. The leadership must be true to itself and consistent, i.e., showing the willingness to forego short-term profit opportunities to sustain the credibility of the long-term, trust-based agreement. Being authentic is key to act as a leader in the long term (Gardner 2011), and it is essential to convince people that leaders will not take advantage of their effort and will pursue mutual long-term interests rather than personal short-term gains. Leadership must be horizontal, that is, a participative rather than authoritarian approach (Bennis and Shepard 1956; Bennis and Biederman 2007). This contributes to the creation of the group by permitting managers to actively and tangibly participate in shaping their workplace environment and some critical aspects of the firm strategy. The deliberate intent of the leader to follow a participative approach implies a lower reliance on formal authority relationships. These approaches to leadership are hard to implement in practice for a variety of reasons: for example, consistency can be threatened by the emergence of profitable opportunities that benefit individual business units; horizontal approaches to leadership are orthogonal to the traditional command and control approach that is often associated with senior management tasks and may be in contrast with a personal

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preference for control; and visible leadership clearly imposes high costs on the already busy agenda of the leader, as the Marchionne’s case will clearly testify. The tangible and intangible costs that relational contracts impose on leaders, the difficulty to replicate them for other companies, the clarity, and the credibility of these informal agreements are also what make them a possible source of competitive advantage. This advantage in the Marchionne’s case was also a corporate advantage; thus, it permitted to create three different companies out of the old Fiat: Fiat Chrysler Automobile, CNH Industrial, and Ferrari. It contributes to the company advantage also in creating the merge with Chrysler; thus, it was clearly stated in the contract between the US government and Fiat that 20% of Chrysler was given to Fiat because of the contribution of management competence. Probably, the first case in history in which a parent company competence was officially recognized and quantitative and financially measured as a contribution in a merge.

6.2

Methodology

In order to describe and understand the leadership style that can be adopted during a change management, the case study method is used. The method adopted is useful to investigate complex dynamics and context: the leadership style adopted to manage a change management in a family business company has all the characteristics of a complex setting (Yin 2009). Researches in family businesses are often realized through the analysis of case studies that allow to deeply understand the mechanism (Chrisman et al. 2012). According to some authors, it is possible to analyze a single case study when the case is unique and representative enough to understand the matter under investigation (Patton 1990; Stake 1995; Yin 2003). For the purpose of this chapter, the case of FIAT has been identified. The FIAT case can be considered the ideal setting for several reasons: it is a family business company, with an international exposure; it was passing a period of change and needed to adapt its structure to the new market opportunities; it needed as well a new leader after that Giovanni Agnelli and, a couple of years later, Umberto Agnelli died. During a period of few weeks between March 2014 and October 2014, the author had the opportunity to follow some meetings organized by Sergio Marchionne. Moreover, in the same period, the author had the chance to interview 18 managers which worked directly with Sergio Marchionne and had the chance to spend time in Auburn Hills, the Chrysler headquarter. Since that, some relevant aspects linked to the leadership style of Marchionne were identified and, after a number of observations, they were discussed directly with the CEO and, in a second moment, shared for comments and confirmation with the managers. The author had some colloquium with Marchionne discussing his leadership style, his company vision, and commenting his way of acting as a leader.

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In addition to personal observation, interviews with managers and colloquium with the CEO, a huge amount of company materials had been consulted to have a more complete overview on the company situation and the profile of the CEO. Materials range from strategic plans, company financial data, top management presentations, automotive task force resolutions, contracts etc.

6.3 6.3.1

The Case Study The FIAT Turnaround: The Foreword of the Chrysler Resurrection

Form 2002, While Marchionne was the CEO at SGS, a swiss company controlled by the Agnelli family holding company, FIAT was experiencing the most desperate period in its century-long history. The Agnelli family lost its leader, Giovanni Agnelli, in January 2003. His brother Umberto took over as chairman of the company, called for a huge injection of capital from the family and other shareholders, and tried to perform a turnaround. Meanwhile, FIAT ran through four CEOs in less than a year. On May 27, 2004, Umberto abruptly died; John Elkann, Giovanni’s 28-year-old grandson, became the family leader. After a showdown with the incumbent CEO, Elkann appointed Marchionne as CEO on June 1. The company was in dire straits: it was heavily indebted, had suffered huge losses, and was running out of cash (Bertoldi et al. 2011; Davis et al. 2012). Eight weeks later, Marchionne presented a revised 2003–2007 plan. Projecting a 1.6 billion € net loss in 2004, the plan aimed for net profit of 1.4–1.8 billion € in 2007. A number of fundamental changes were also announced: from an engineeringbased culture to a brand-driven culture, from push to pull market tactics, from a dysfunctional and unaccountable organizational structure to a flat and accountable matrix structure. The new organizational structure would also promote some young high potentials to senior management. A key issue for FIAT was its relationship with General Motors. In 2001, FIAT Group and GM had entered into a partnership: the contract gave FIAT Group a put option to sell its remaining 80% of FIAT Group Automobiles to GM in February 2004. The deadline had been postponed due to the two companies’ inability to reach agreement. The put option had blocked FIAT’s strategic development; managers and employees were effectively waiting for the Americans to arrive and watching the company lose its developmental capabilities. Over the weekend of February 12–13, Marchionne agreed with Rick Wagoner, GM’s CEO, to renounce the put option for 1.5 billion €. GM was in effect agreeing to pay that huge sum not to buy FIAT, stark evidence of FIAT’s desperate situation. In 2007, FIAT reached 2 billion € in net profits, higher than ever before in the company’s 100-year history. The FIAT 500, presented in July 2007, signaled new life for FIAT. The car embodied the company’s product-development capabilities

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and the new market-oriented approach that Marchionne had adopted. The appointment of Marchionne had had several effects: settlement of the put option; a new mindset within management; a massive launch of new products; and exploitation of FIAT’s dynamic capabilities in engineering and engines. Marchionne was the driving force behind all these changes (Kaplan and Bertoldi 2015). To exploit FIAT’s capabilities in engineering and engines, Marchionne had created FIAT Powertrain Technologies (FPT) in 2005. FIAT Group’s collective engineering skill base was brought together with a very ambitious objective: to create strategic partnerships and to sell powertrains and related technology to other automakers. FIAT Group subsequently forged several strategic alliances on the strength of its technology, notably with Ford (2005), Tata (2006), SAIC (2006), Daimler Chrysler Truck (2007), Chevrolet (2007), and Severstal Auto (2007). These partnerships were to be the prelude to FIAT’s 2009 partnership with Chrysler. Between 2004 and 2008, Marchionne executed an extraordinary turnaround of FIAT. Revenues increased from 46.7 billion € in 2004 to 58 billion € in 2008; net income increased from 1.6 billion € in losses in 2004 to 1.8 billion € in 2008. But the worldwide financial crisis of 2008 created a severe discontinuity for the company and for the entire automotive industry. The crisis forced the US government to bail out the automotive industry and to look for a partner for Chrysler. President Obama issued a statement on March 30 bestowing his blessing on the deal that FIAT and Chrysler had to close before the end of April: “Recently, Chrysler reached out and found what could be a potential partner the international car company FIAT, where the current management team has executed an impressive turnaround. FIAT is prepared to transfer its cuttingedge technology to Chrysler and, after working closely with my team, has committed to building new fuel-efficient cars and engines right here in the United States. We’ve also secured an agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before FIAT is allowed to take a majority ownership stake in Chrysler. . . . I’m committed to doing all I can to see if a deal can be struck in a way that upholds the interests of American taxpayers” (Rattner 2010). The president’s statement was also a benediction on Marchionne’s efforts in the preceding couple of years to find a partner for FIAT. In Marchionne’s words, one consequence of the new situation created by the crisis in the industry was that “I cannot continue to work on cars on my own. I need a much larger machine to help me. I need a shared machine” (Ciferri 2008). The search for the “shared machine” had already begun in the second half of 2007 with the backing of John Elkann, chairman of FIAT and chairman and CEO of EXOR, the Agnelli family investment company that controls FIAT. As Elkann explained, “In a consolidation scenario, finding the right partner and the right combination would be the priority; the level of the shareholding would be secondary to the competitive position and the value any new combination would produce” (Kaplan and Bertoldi 2015). Marchionne and Thomas LaSorda, Chrysler’s COO, first met in spring 2008; the occasion was Chrysler’s willingness to sell FIAT a plant in Brazil. Subsequently Marchionne and Robert Nardelli, Chrysler’s CEO, repeatedly discussed possible ways to collaborate. Marchionne kept asking Chrysler’s management how they

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planned to survive if the U.S. market dropped to ten million cars per year; they repeatedly dismissed that scenario as impossible (Vlasic 2011). When the scenario progressed from impossible to probable between the end of 2008 and the beginning of 2009, FIAT was ready to close the deal. But the situation was desperate, and even the automotive task force wasn’t unanimously supportive of the decision. Ultimately, the automotive task force had to decide. The basic elements of the agreement were announced by FIAT Group on April 30, 2009: in exchange for providing small-car technology and management competence, FIAT would receive a 20% stake in the new entity, Chrysler NewCo, with a further 15% proportionally allocated to FIAT upon reaching a set of targets: producing FIAT’s FIRE engines in the United States, selling Chrysler vehicles outside of NAFTA, and producing a Chrysler model based on FIAT technology. Finally, FIAT would receive an option to buy a further 16% of Chrysler, exercisable between 2013 and 2016. Chrysler would issue 55% of its equity to an employee benefit association formed to provide health-care to Chrysler retirees, and 10% to the U.S. and Canadian governments. Chrysler NewCo would also benefit from a $6.5 billion U.S. government loan, and a new collective-bargaining agreement with the United Auto Workers union. After closing the deal, Marchionne had his “machine.”

6.3.2

The Group Leadership Relational Contract

Marchionne signs a relational contract with this leadership team based in a recurring path based on three actions: define the key challenge, set an ambitious target, and manage a great group of managers to achieve the target completing the challenge. Once signed, the members of the group are committed to the execution. The commitment is toward the company, the leader, but, most important, to the group itself, which is a constitutional element of the leadership system. The ambitious target is leading the group, and it is giving the meaning the group needs (Bennis and Shepard 1956; Bennis and Biederman 2007). Marchionne, being a pragmatic dreamer, creates a target that is ambitious (dreamer) and that solves the key challenge of the situation (pragmatic). He creates the group, hiring and involving outstanding managers, and helps them to reach the ambitious target being “the smartest guy in the room” (see the great group DNA figure above). First step: he defines the key challenges of the specific situation. Examples of key challenges were as follows: the need of focusing on market and competition instead on engineering and product for FIAT in 2004, the need for dimension for FIAT in the 2009 crisis, the need to move to higher market segments for FIAT in 2010, the need to define quickly full-line product portfolio for each brand for Chrysler in 2009, etc. His assessment of the car industry situation in December 2008 is a clear example (Ciferri 2008). The speed of the decision-making shown in these cases was due to his capability to logically synthetizing the reality and prioritizing the analysis; he focused only on key things and can act before the others. He was simply seeing the reality in a different way, and this helps him to see the key challenge in a specific

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situation. To think about the solution to be achieved, it is necessary to frame the competitive landscape and define the challenges. In defining the key challenges, the capability of synthesizing the complexity and candidly assesses the hard reality. Defining the key challenge is the way in which the Great Group find the complication to overcome and the meaning for the mission; as Bennis says: the Great Group is “on a mission from God” (Bennis and Shepard 1956; Bennis and Biederman 2007). This process of create a tension within the specific situation having a clear key challenge is the way in which the leader creates a vision and a mission for the group (Gardner 2011). Second step: set ambitious targets. The target setting is a vital component to make the Group work. Without this drive, the group cannot come into life and the entire leadership system lacks the necessary pressure. In Marchionne’s words: “I had to get people energized around a clear and ambitious target. When I announced in late July 2004 that we would make 2 billion € in 2007, everybody thought I was out of my mind. But I’d been sitting in a room with 20 or so people for three days without getting anywhere., and I knew that we’d get no decisions unless I imposed one.” (Marchionne 2008). The target is what leads the group, Marchionne is helping the group to be rigorous in getting there, and when someone needs help, he is there, accessible 24/7: so, the rhythm of the company never slows down. The ambitious targets are deployed in budgets and short-term objectives. The time setting is one of the tasks of the leader of a great group; in Walt Disney words: “a dream with a deadline” and in Steve Jobs words: “real artists ship” (Bennis and Biederman 2007). “If you are a credible leader, Marchionne said, you can set the timing and the objective; the management team will follow you” (Marchionne 2012). He didn’t do plans; he set long-term targets and short-term budgets. On the budgets, he stresses the team. In May 2010, for example, the title of the first Chrysler results presentation to the analysts and the public was: “One down, Nineteen to Go,” stressing the number of quarters remaining to reach the long-term ambitious target. Another example is the first remarks to the Chrysler’s employees where he stated: “Within 90 days we’ll have defined a full-line product portfolio for each brand that will line up with the best in the world—from the smallest world-class sub-compact cars to the largest hybrid Ram pickups. . . .and within 36 months we’ll have a new Chrysler that meets its financial, moral and ethical obligations . . . and establishes itself as the best car company in North America” (Marchionne 2012). Marchionne is credible in setting very ambitious targets, because applying his approach he reached them before and is incomparable in stressing the short-term achievements necessary to meet the target (Marchionne 2008). In defining and keeping the timing, he is a role model, and his credibility is based on professionalism, commitment, and moral authority. Third step: manage the group in achieving the ambitious target needed to complete the key challenge set to overcome a specific situation. In this step, the role of the leader is to inspire and transmit the meaning of the achievement. This is the most operative component of the leadership system, and it is where delegation and trust enter in the equation.

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The relational contract in the Marchionne case presents a set of rules which inform the way in which the Great Group decide to behave and they are following from the three-step situation analysis explained (see the upper part of Fig. 6.3). Great Group leader and members have their own assignments based on the relational contract. The leader has to create and nurture the group, operate the group, and focus on result (in the mid of Fig. 6.3). The Members have to apply voluntary with a “youngster” mind, exceeding personal best, commit to the results (in the lower part of Fig. 6.3). The framework was inferred by the case interviews and direct observation of different meetings of the Great Group. It refers to the 16 axes of the leadership valuation model applied by the leadership teams of the companies Marchionne led. All of them are continuing using the valuation model. This proves how this has been imprinted in the companies’ systems. Some inputs were added based on the direct observation of the group functioning and discussed with the leader to validate the leadership system.1 The 16 axes are reported with examples in Figs. 6.4, 6.5, and 6.6. Having the situation defined, the leader and the members are in place are not enough to perform. To understand delegation and trust, the functioning model of the leadership system must be detailed studied with a clear evidence of processes.

6.3.3

The Leadership Group Functioning System

A pressure cocker is the best analogy to explain the leadership system Marchionne operated in driving the group to achieve the ambitious targets. The term pressure cooker can be seen as not too much academic but it has been approved by Marchionne2 and has been used by many of the Great Group members during the interview. It can be inferred that the pressure cocker was an analogy understood and applied by the entire leadership system (Liang and Konsynski 1993) and which become public discussed after the research (Vlasic 2015). The pressure cocker approach requires some key activities. The first one is a source to heat the cocker, and this is the target setting process deeply describe before (Fig. 6.7). The second necessary element is the water to put in the cocker. The water is the “best kind of manager” and can be defined by the 16 leadership behaviors, the axes presented before. The Performance Leadership Management (PLM) process provides the water for the cooker. “Heated” by the targets, the managers transform themselves from “water to steam.” The water is vital for the pressured cooking system, and this explains the focus in creating and nurturing the group of managers and the talents bench (Fig. 6.8).

1 2

Author’s private conversation with Sergio Marchionne, September 1, 2014. Author’s private conversation with Sergio Marchionne, September 1, 2014.

Fig. 6.3 The relational contract. Source: author’s elaboration

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Fig. 6.4 Leading change and leading people rules. Source: company documents

Fig. 6.5 Examples of 16 leadership characteristics. Source: company documents

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Fig. 6.6 Leading people. Source: company documents

Fig. 6.7 Heat the cooker. Source: author’s elaboration on research’s interviews

In few days, Marchionne met the first, second, and third line of the Chrysler management and defined the leadership team that created the November 2009 plan; 90% of that team was still there 5 years later. In the Marchionne leadership approach, the group is the “management tool.” Since the first days as FIAT CEO, back in 2004,

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Fig. 6.8 The work pressure cooker needs water. Source: author’s elaboration on research’s interviews

he created a matrix organization with more than 20 direct reports that is quite similar to the one created in Chrysler (see Fig. 6.9). To an external viewer and based on an academic point of view, this is a matrix with too many reports; in the Marchionne approach, it is the Group he will operate to execute the turnaround. As in the Bennis Great Group approach, the Group is non pyramidal, but based on passion and merit. According to his great group approach (Bennis and Shepard 1956; Bennis and Biederman 2007), he has the talent to draw out of guys what they didn’t have. He stewards the group. He didn’t micromanage. He intervened after the experts had solved most of their own problems. He inspires, communicates, and chooses. This gives the members the sense of being autonomous. When your management tool is the group, you need to be sure to have future managers who grow with the necessary values and traits needed to be part of a Great Group: voluntary, beginners, committed. This cannot be only an HR manager task; it is the most important task in the company (in the “House,” as Marchionne refers to the company): lacking a talent bench to nurture the group is like lacking the money for investments or the machinery in the plant. Therefore, it is not surprising that Marchionne said as follows: “I spent two months a year to evaluate 2.000 managers in the House. The most important thing we have in the House are the people who follow me. They must be good. . . the only two rights I have as CEO is to choose the people to work with and the values that drive the company.”3

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Author’s private conversation with Sergio Marchionne, May 29, 2014.

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Fig. 6.9 The matrix. Source: FCA internal material presented in 2004

Less than 2 months in his role as CEO of FIAT, July 2004, he presented the method he will use. Every manager in the “House” is evaluated by his direct report twice a year, June and December; Marchionne himself is reviewing a talent bench of 2000 managers. The same method has been applied in Chrysler (Fig. 6.10). The nurturing process and the group management leadership philosophy create a strong culture in the “House.” Very few, if no one, join the higher management positions without having spent a substantial number of years in the “House” growing within the culture and the process. Great Groups are aristocratic, being accepted is an honor and you must apply voluntary having deserved to join. In Marchionne words: “The culture is more important than the strategy, and the organization must be modeled to business requirements.”4 Considering Marchionne’s group management approach, risk taking, outward looking, and self-confidence are more important than in a standard leadership approach: people must solve problems and take decisions together; they must be ready to challenge and be challenged. If someone has a personal focus, he is not able to work in the group. The approach in creating the group is felt by the people: “He is a genius in human resources—a team member said during the research interview—after he talks for 30 minutes with someone, he can assess a person. He spent more time on people 4

Author’s private conversation with Sergio Marchionne, May 29, 2014.

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Fig. 6.10 Evaluation process. Source: FCA internal material presented in 2004

development than any CEO.” He is a genius because he knows what he is looking for and he has to spend more time than other CEOs to create and nurturing the group: because the group is the unit with which he manages the company. The characteristics he is looking for and the leadership approach based on the group ask for a breech with the past leadership team. People who had spent an entire career in the company and are at the top since a long time don’t work in groups. They participate in the leadership team, and they are the leader of their function/area; they are used to follow the company’s politics, not the ambitious target. This explains why in Fiat in 2004 and in Chrysler in 2009 almost no one of the old senior leadership team remained. “They had a long career—Marchionne explained—and grew up in the organization. They are part of the organization. It is not a matter of how much they are good at their job, it is a matter of change. I can spend twelve months arguing with them what and how to change, but this will not work and will take a lot of time. I look for the “youngsters,” they don’t have seniority, they don’t play the corporate habits, they are pure.”5 The “youngsters” to whom he refers to are not young in age, not necessarily, they are the “beginners.” Time spent in growing in the company career ladder teaches many things, including limitations, so be young or new in the role helps to see new connections. Beginners often have specialized skills, combined with broad interests and multiple frames of reference; they tend to be deep generalists, not narrow specialists. They are able to identify significant problems and to find creative, boundary busting solutions rather than simplistic ones.

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Author’s private conversation with Sergio Marchionne, April 15, 2014.

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Once the steam is created within the cooker, pressure is needed. Continuing the analogy, the combination of steam and pressure makes the pressure cocker an efficient kitchen tool. Together they cook food in no time. The pressure is created by Marchionne himself. The increase in pressure “forces” heat into the food. Think of the pressure as an invisible hand pushing the extra hot steam into the very core of the food (Fig. 6.11). He really “operates” the group: the group takes the decisions, works together, and everything happens live in the meeting, and it is not precooked in informal pre-meetings following unwritten company habits. He leads from behind more than leading from the front: “I don’t use the word empowerment; I don’t know what it means.”6 Marchionne explained his interactions with the managers (2008): Our engagement is mostly informal. I’m always texting my people or calling them at odd hours to talk about the business or about their career. They know that I care about what happens to them. If the organization can feel that kind of connection with its leadership, you’re going to get a pretty sound culture aligned around strongly held common values. . . If you set what people think is an unrealistic target, you have to help them to reach it. . . Helping them doesn’t mean doing the job for them. I immerse myself in the business, not so that I can make decisions in my corner office but so that I can guide the folks on the ground to make the right decisions. I don’t know what those will be, going into a meeting, but I think my involvement makes it more likely that we will get the right ones coming out. Marchionne (2008) also described his management style by invoking the 500 (Cinquecento) project at FIAT: “A lot of what I do is challenge assumptions—which often looks like you’re asking stupid questions. That’s how we got our time to market for the Cinquecento down from four years to just 18 months. . . I asked our designers and engineers why we need 48 months. They told me it was because they had to have this or that input. Then I asked, “What would happen if you didn’t get a particular input?” Sometimes they told me it wouldn’t actually make much difference.” Marchionne attributed7 the success of the 500 project in part to the team members’ youthful enthusiasm and inexperience: “All the 500 team members were below forty. They accomplished the task because they didn’t know it was impossible. My job was to assure they don’t do stupid things and to protect them from the naysayer corporate culture.” The new committees’ regular, high-intensity meetings introduced a new rhythm in the way a company is managed. Marchionne made decisions at these meetings in real time, live. He didn’t read preparatory material beforehand, to avoid prejudgment (Garvin 1998; Garvin and Levesque 2006). This approach to leadership made Marchionne’s engagement with managers continuous and granular, and his involvement in the processes they managed intermittent but intense; as he put it, he was “part of the process in bits and pieces.”

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Author’s private conversation with Sergio Marchionne, May 29, 2014. Author’s private conversation with Sergio Marchionne, May 29, 2014.

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Fig. 6.11 The pressure. Source: author’s elaboration on research’s interviews

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The Delivery System

To really understand the leadership approach and, utmost, the delegation-trust balance upon with the relational contract is based, a closer look to how the group, its leader, and its member work together is needed. This really detailed description helps to understand how results are delivered making the company get the defined results. The pressure creating process is the ecosystem in which delivery happens. In term of delegation, managers have a lot of freedom to find the way to achieve results. If any issue arises, the leader is available 24/7 for help and decision-making. This is especially demanding for the leader, especially at a global level: “I live in planes; I don’t have Home. In one year, I spend 43 24 hours days flying. I wear a black sweater because it is simpler. I buy them over the internet in batches of 50 so that I can have a set of clothes in every place. I need as much simplicity I can in the complex life I live.”8 The approach requires a lot of bandwidth from the leader, but as a result the system is always “on and connected,” it never stops. Delegation is really the instrument to leverage the time constraint of the leader and to leverage as much as possible, not only single members of the management team in a “one-to-many” but in “one-to-group” leadership system. Managers in the system cannot stop waiting for some inputs, and decisions are always there. Managers in the system have not to prepare, wait for, and perform progress reviews: they just have to “perform” results; i.e., time savvy usage contributes to have a constant pressure in the cocker. Committees are the moment in which the group gather together and decide collectively. In the Marchionne leadership system, three workgroups were set up: the commercial, product, and industrial committees. Meetings lasted 1 or 2 days and were typically held on Saturdays and Sundays once or twice a month. Everything else was managed live and immediately in direct communication. Committee membership was fixed, and Marchionne was always present at meetings. The intervals between meetings were devoted to operations, but the meetings served as deadlines that pervaded the rhythm of the organization. In Marchionne’s words: “When Tuesday is pizza day, people want to see the pizza! Where’s the pizza?”9 (Fig. 6.12). In Chrysler’s new organization set up on his arrival, for example, the brand managers sit in the leadership team (the Group), with the aim to represent directly the customer and to be accountable for market results. This increased the customer intimacy and the accountability. The “operational leadership” seems to be a key mantra, and the mantra is executed with the “two hats” approach. Many top managers have two roles in the “House.” This approach has two key advantages in the big corporate organizations: first, managers remain linked to the day by day operations not being lost in big 8 9

Author’s private conversation with Sergio Marchionne, May 29, 2014. Author’s private conversation with Sergio Marchionne, September 1, 2014.

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Fig. 6.12 The management of a group of leaders. Source: author’s elaboration on research’s interviews

offices of the top floor of the building where you are detached from the operations. Second, managers are operative in the company and can more quickly and easily spread the new culture in the organization; if you are, e.g., the brand manager responsible for brand X, you can easily spread the new vision of the brand if you are also responsible for the product planning or for the marketing of the entire company. To be successful, this approach needs not only good experts but outstanding leaders: you cannot be expert in both roles, so in one of the two you must compensate with an outstanding leadership. This leads to the concept of the “portable leadership,” which means that you, as a top manager, must be able to transport your leadership capabilities in field different from your own. To be successful, you must be deep generalists, not a narrow specialist: a “beginner.” The operational role is all about execution; you must stretch yourself and the organization to meet requirements and deadlines. You must be focused on things to be done and work hands on. You must be totally committed. The functional role is all about coordination of different groups, culture, and strategy. You must be focused on few very important decisions. Single members of the group stand a lot of pressure as the result of the ambitious targets to be met and the group dynamics, in which everyone needs to over perform. Marchionne himself, reasoning on mistakes in choosing group members, says as follows: “People under stress it happens perform differently. The instinct of survival and self-preservation overcome the willingness to sacrifice themselves for the group in order to reach the target.”10 10

Author’s private conversation with Sergio Marchionne, September 1, 2014.

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Fig. 6.13 Cooking time is the key for a perfect result. Source: author’s elaboration on research’s interviews

The pressure cocker approach is very sophisticated and needs to be regulated by two key functions: Finance and HR. Both organization figures have a key role in the Group. The CFO checks the time in order to provide the product to the customer using the best combination of investments and cash flow. Timing is key in achieving the set target (Fig. 6.13). The HR keeps the right level of pressure exactly as the valve and the rubber ring do in the pressure coked. The rubber ring is necessary to keep the pressure inside the cooker. If the rubber ring is too loose, the pressure will be to low and the cooking process not perfect. The valve on the contrary allows the unnecessary extra pressure to leave the cooker (Fig. 6.14).

6.3.5

The Merge of Two Culture

An additional complexity in managing the group in the FIAT—Chrysler alliance— was the different cultures to be merged. This was clear in the previous experience; thus, culture clashes are referred to be the main reason for the failure of the Daimler Chrysler alliance (Badrtalei and Bates 2007). Marchionne thought the “domination approach” adopted by Daimler was the cause of the merger failure; therefore, he was very careful in not creating a culture clash. He took from Italy very few managers, some of them with a very global curriculum. They were expected to transfer to Auburn Hills and not come back over the weekends, as the German managers were

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Fig. 6.14 The pressure inside the pot is controlled by a rubber ring and a valve. Source: author’s elaboration on research’s interviews

used to. They were also expected to speak English even between them. “If you want to be a global house, Marchionne said, you must be a global citizen and you cannot impose your root. FIAT succeeded in Brazil because we are Brazilian in Brazil. This is the most difficult topic in management: be connected with the culture.”11 This mix of culture is key for the group to be formed, if there is no open access to the membership, the creating leaders from within will not work. At the industrial level, the main issue in the Daimler Chrysler alliance was the fear to merge. The main reason was that by mixing products, platform, and marketing strategies, the Mercedes brand could be hurt. In keeping the brands far, the entire companies didn’t merge, platforms weren’t merged, distribution networks weren’t merged, and products plan wasn’t put together in a coherent way. The reason could be that both companies were competing in the same segments of the market but in different geographical areas and with slight differences, Mercedes more in the luxury cars and Chrysler more in the SUV and Minivans. This approach led to the domination approach executed by Germans versus the Americans. In this context, a leadership group mixed from the two culture wasn’t possible. In FIAT Chrysler, after a couple of years, the cultures mixed up creating a completely new one and people were happy to work together because they see the new culture coming live and be of mutual benefit. Beyond the management by group, that is peculiar of the Marchionne approach, a leader of 300,000 workers needs to be a role model to all of them. “All the 300.000 11

Author’s private conversation with Sergio Marchionne, April 15, 2014.

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people at FIAT Chrysler watch the leaders all the time. The leader must be honest in his working for the best of the organization and be an example. If you betray them once, it’s done. You lost the trust you inspired.”12 To reinforce the concept, Marchionne makes an example: “We produced all the transmissions for the group at the Kokomo plant in Indiana. If the plant stops: I’m done; all the cars production will be stopped. Once a storm seriously damaged the plant. From 11 pm to 5 am the workforce repaired the roof and the production continued. I didn’t ask them to do it. They did it because they trust the leadership and they know how much what they do is important and deserves their commitment.”13 The Chrysler first 6 months and the decisions taken in that period are a clear explanation of how the great group leadership system can be successfully applied.

6.3.6

The Chrysler First 6 Months: Decisions Made

On June 10, 2009, 1 day after the sale of the old Chrysler Corporation’s assets to Chrysler Newco was approved by the U.S. Supreme Court; Marchionne gave a speech to Chrysler employees. His remarks expressed his vision of the company’s future, his approach to leadership, and his initial objectives. Morale was low, as Marchionne later acknowledged in a televised interview: “I remember when I came here in 2009. There’s nothing worse for a leader than to see fear in people’s faces. . . [They were afraid] of not being here. Alright? It’s that simple. This was really a question of existence. There’s nothing worse in life than to sit there and be the victim of a process that’s outside your control” (Kroft 2012).14 A number of initiatives were immediately undertaken to demonstrate caring to the company and its employees: millions were invested in renovation, of cafeterias at Auburn Hills and restrooms at the plants, and in long-deferred maintenance and repairs. The new CEO chose an office in the industrial engineering department on the fourth floor of the company’s Auburn Hills headquarters. This decision sent a clear message to the organization: Marchionne was accessible and wanted to be where the cars were created. During the Daimler era, the German top managers had been quartered atop the fifteen-story tower, an emblem of the gulf between the two cultures. Under Marchionne, the fifteenth-floor boardroom was made available for operational meetings but the CEO’s corner office remained empty. Marchionne spent his first days on the job meeting the first, second, and third lines of Chrysler management and selecting the leadership team that was to create and execute the 2010–2014 plan scheduled for presentation to the public by early November 2009. Marchionne’s interviews with managers were deliberately

12

Author’s private conversation with Sergio Marchionne, April 15, 2014. Author’s private conversation with Sergio Marchionne, September 1, 2014. 14 Sergio Marchionne, interview by Steve Kroft, 60 Minutes. CBS. March 27, 2012. 13

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Fig. 6.15 Managerial matrix instituted at Chrysler by Marchionne (2009). Source: Chrysler internal material

unstructured. He explained as follows: “When I meet someone, I don’t have a checklist or a magic recipe. Competences and functional knowledge are a given. I want to know what he fears; I like risk takers. I ask what he is really proud of in his career and what he hates. I want to know his vision about competitors and markets; it is important that someone is not detached from the market and doesn’t insulate himself within the routines of the company.”15 As at FIAT in 2004, at Chrysler in 2009 almost no one from the previous senior leadership team remained. Marchionne explained as follows: “They had long careers and grew up in the organization. It is not a matter of how good they are at their jobs; it is a matter of change. I can spend twelve months arguing with them about what and how to change, but this won’t work and will take a lot of time. I look for the youngsters: they don’t have seniority; they don’t play the corporate habits; they’re pure.”16 The team was assembled immediately, see Fig. 6.15. The number of reports defines the perimeter of the Great Group; brands/countries CEOs have a double role being the evidence of the portable leadership approach.

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Author’s private conversation with Sergio Marchionne, April 15, 2014. Author’s private conversation with Sergio Marchionne, April 15, 2014.

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A few managers with global backgrounds came from FIAT; they were expected to move their families to Auburn Hills and not to return to Europe on weekends as the German managers had done. They were also expected to speak English even among themselves and to integrate themselves fully into the new managerial team and help create a new culture. This was, as previous discussed, key to avoid the culture clash which arms the previous merge with Daimler. The majority of the team was composed of young second- and third-line Chrysler managers. Four members of the team later described Marchionne’s decision process: “He was looking for three characteristics: first, people with the willingness to risk and to participate in genuinely open communication; second, people with “operational leadership,” managers able to lead but also able to operationally do things; and third, people with less focus on their personal agendas than on the more general company agenda. He’s a genius in human resources. After he talks for 30 minutes with someone, he can assess a person. He spent more time on people development than any CEO.” Marchionne created an executive team of 23 people to replace the 5 or 6 of the previous team. A lot of them had little senior executive experience, and they had to face a very critical situation. The message here is as follows: “We have to come out of this together and we need to decide quickly.” In an executive team of this kind, every participant gets to know a lot of other executive decisions and to agree on the overall strategy. If you want to change the mindset of a company, forging together 23 top managers as a responsible team and using them to spread the new mindset is a powerful tool. It is the advantage of setting up a great group of leaders instead of a one-to-many leadership system. A member of the leadership team in Chrysler explain how things had changed: “Before if you said for this project I need $10 million, 10 people, and 10 months, you received $5 million, 5 people, and 5 months. In the new management approach, we were recognized for knowing what to do and how to do it: I had been at Chrysler for 20 years, and for me the new approach was a huge relief: I can have an impact on the company.” Marchionne promoted nearly 80% of the new management team two or three levels above their previous positions (the beginners). Five members of the team had either been appointed to functions that were new to them or moved to Chrysler from FIAT. Under Marchionne, the number of first-level reports to the CEO increased from 7 to 23. The team’s average age in 2009 was 48; average length of tenure at Chrysler was 16 years. Given that most members of the leadership team were new to their jobs, they tended to do things differently than their predecessors had. In their previous jobs, these managers had had to seek approvals from the various company committees; now they were members of those committees. The result was a genuinely flat organization, broader responsibility, less office politics, and a focus on getting things done. Approvals of capital and operational expenditures were reduced fivefold; people had to explain why they wanted to spend money. The group of 23 managers was organized as a matrix forging the group. Each manager had clear roles and responsibilities, but matrix members were jointly accountable for delivery, because they had to think and act as a group. Numbers

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and targets were key to making informed decisions and to the accountability of every member of the matrix. The brands drove the organization, and the noncommercial components of the structure were purely and completely at the service of the commercial segment; the sole job of quality, manufacturing, supply chain, engineering, and development was to make sure that the commercial and brand segments of the organization had what they needed. Brands were the company’s link with the customer and the market. Thus, it was crucial for those responsible for the brands to participate in every decision affecting the customer. Previously, the brand managers had reported to sales and marketing; in the new organization, the brand manager reported to the CEO. Thus, decisions were not mediated and the CEO could see every detail. Previously, the head of sales and marketing, as the functional head, had decided, after lengthy deliberation and politicking; now Marchionne decided quickly, live during the group meeting, and in the absence of politics. Furthermore, as members of the same management team, the brand managers were aware of and expected to understand each other’s requests. This situation created more team spirit and minimized politics and time wasting. A multiple-hats approach was also introduced to the management team: each brand manager was assigned a separate functional responsibility—sales, product planning, or marketing—transcending all the brands; the management structure thus created interrelationships that required brand managers to look beyond their own brands and to integrate their decision-making with that of other brands. This approach was not limited to brand managers; it applied to all 23 managers, on the assumption that a good leader can also exercise leadership outside his or her comfort zone. Marchionne explained as follows: “Portable leadership has some advantages: one is testing that you are able to manage the complexity in life. It induces efficiencies. The worst thing about leadership is to have free time, because if you have free time you will go around screwing up the life of someone who works for you. The wider the span, the less time you have, the more freedom they will have, and the better the outcome will be.”17 Portable leadership does not seem to overwhelm the managers: “Having two, or three in my case, hats,” one team member said, “required me to add no more than a couple of hours per workday. It is a matter of delegation and empowerment of the team.” Another elaborated: “I didn’t change my management style. I was always very collaborative, since the beginning of my career. I put myself in the shoes of other team members. The big change I perceived was in the people Marchionne put together. We work well together and we act as a coherent team. Before, it was too territorial and political. People tend to be defensive and act in the best interest of their area; this is not always in the best interest of the entire company.” Once the great group was set up and functioning, the group start to make tough decisions. In the Chrysler turnaround, the essence of the decision was timing and balance between short (next 18 months) and medium term (the remaining period of the 2009–14 plan). In Marchionne words: “What do I need to do to the product 17

Author’s private conversation with Sergio Marchionne, May 29, 2014.

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portfolio to survive the next two years? Do I have enough time to launch the new products I need to launch or will I just burn cash faster?”.18 The financial situation of the company was desperate. Cost savings, even if it was applied, wouldn’t have saved Chrysler from the cardiac arrest. Some bold decisions were necessary. Marchionne increased prices and launched a triage for the current products. The first decision was counterintuitive: increase prices. This decision can kill volumes, sales, and working capital, generating big cash absorption. Previous management at Chrysler, as in other car companies, was so scared about volumes that it never stopped manufacturing and trying to sell, even if this meant stuffing the dealers’ and company’s inventories. He realigned pricing to market, reduced discounts, found “real” market share. Market share went down, but profitable market share was defined. In Marchionne’s words: “I was losing money when I was giving discounts. I would lose less money if I sell less at a better price.”19 If the prices’ increase was a bold decision, the triage was the true leadership effort of the first months: “I decided to launch 16 all significant new refreshed products by the Detroit auto show of January 2011. I presented a completely different Chrysler to the marketplace. Which was a series of corrective actions, some major some minor, on the current fleet. The only new two cars we had were Grand Cherokee and [Chrysler] 300. . . I needed to live on what I had and so I had to make them acceptable. . . We worked like mad men to clean up all the problems that we knew were with those cars: interiors, the noise, the vibration, the handling; we worked on the powertrain. We did a variety of things to make those things acceptable, not excellent, but acceptable.”20 The triage is summarized in the product plan presentation of November 2009 (Fig. 6.16). The search for “real” market share, the triage on the products, and the huge effort on the manufacturing explain how much the Marchionne approach was to save Chrysler for the long term and investing in its core competences. A separate and contextual track was the development of the medium-term product portfolio: “The execution was simultaneous.—Marchionne said—Those two parts were crucial (short term products and industrial triage and long-term plan): what will guarantee me survival for the next 24 months and separately what product portfolio I need to compete in the long term.”21 The simultaneous execution on a very short-term and a medium-term turnaround was possible because of the simultaneous and synchronized work of the 23 leadership group members. The group execute the 2010–2014 plan that was presented in November 2009.

18

Author’s private conversation with Sergio Marchionne, May 29, 2014. Author’s private conversation with Sergio Marchionne, May 29, 2014. 20 Author’s private conversation with Sergio Marchionne, May 29, 2014. 21 Author’s private conversation with Sergio Marchionne, May 29, 2014. 19

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Fig. 6.16 Product plan presentation. Source: Company documents

6.3.7

Great Group Leadership and Entrepreneurial Essence Evolution

In the past paragraphs, the Great Group leadership approach was presented through a detailed case description. As discussed in Chap. 5, change is a constant in the competitive environment and the leader of the company must understand speed and direction of the change and, successively, define a vision and drive the organization toward the future. The first part, “understand speed and direction,” requires a lot of knowledge gathering and sharing within the organization; to be effective, the role of a group of leaders is key. In the family business context, this is still more important because the next generation has frequently to succeed to a very charismatic leader; he needs, therefore, to have all the possible help from the managers of the company. The great group leadership style has this function. This is valid both when the succession is among family members or among non-family members leading a family company. The group leadership style is also the mean to be effective in defining vision and to executing drive. The vision, once defined, is concretized in the three steps of the situation assessment of the leadership approach, as illustrated in Fig. 6.3 of this chapter: frame the context, define the key challenges, inspire and transmit the meaning of the achievement.

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The drive is executed through the pressure cooker leadership style. This permits the family leader to be effective and to avoid frustration and voyeurism. A family leader who is able to understand, through it group of leaders, the external situation in term of speed and direction and is able to lead the company with a clear and communicated vision and an effective drive, a leader alike will be able to adapt the Entrepreneurial Essence through a changing competitive environment. An ever-evolving Entrepreneurial Essence which is adapted to an ever-changing competitive environment is the way in which a family business reaches the continuity over the generations.

6.4

Entrepreneurial Essence Evolution, Nextgen, and Management: The Synthesis

The case presented in this chapter, as the framework presented in the previous one, is rooted in the rigorous management field. The Change framework defines important decisions in key moments, therefore is more strategic; leading a group of leaders’ approach presented here is even more operational. Its operability is key because explain, or at least propose an approach, to operationally lead toward a change, and change is the base for adaptation which is necessary to evolve the Entrepreneurial Essence. However, a synthesis is needed, to connect the heuristics unstructured approach illustrated in Chap. 2 with the rigorous methodology presented in this chapter and Chap. 5 through management frameworks. How rigorous managerial approaches are connected with the heuristics in entrepreneurship and family capitalism? To answer, three logic steps are needed and can be represented with three figures of the present work. First, the Fig. 3.2 in the third chapter. The bottom of the figure represents the rare qualities the founder transmits to the NextGen and the heuristics the founder transmits to the family firm. As clarified by Porter, this is a hazy phase which implies unstructured processes and methods. In the economy of this book, the second and third chapters are devoted to investigate this hazy phase based on rare qualities and heuristics. Second, the Fig. 4.2 in the fourth chapter. The Entrepreneurial Essence being born in the hazy period by the founder trough rare qualities and heuristics become an imprinted system within the company. The NextGen received the Entrepreneurial Essence as a living system. This Entrepreneurial Essence is imprinted in the company; thus, the last component is the assets, which are concrete and company’s related. The existence of the Entrepreneurial Essence as an independent system has been illustrated through cases which represents companies that weren’t (or weren’t any more) owner by the family of the founders. Entrepreneurial processes and assets are imprinted in the company and require professional management to be managed.

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Rare qualities remain related to the family and to the necessary education to be transmitted as illustrated in Chap. 3. Similar qualities can be owned by manager which are not family members. If this happen, a new area of research is opened: the relationship between the ownership and the business, which is, as stated, outside the scope of this work. Once build, through Chaps. 2 and 3, and become an independent entity from the founder, the Entrepreneurial Essence must be analyzed with a dynamic view; to do this, it is necessary to move from the family and the entrepreneur to the business and the manager. Third, the Fig. 4.5 in the fourth chapter. This figure is rooted in the Davis’s three circles model (Family, Ownership, and Business) and evolved with the three elements which make the family capital system dynamic (shareholder robustness, management capabilities, and Entrepreneurial Essence) which were briefly illustrated at the end of Chap. 4. The scope of this work is limited to the Entrepreneurial Essence, and the other elements were presented in Chap. 4 to highlight the logic flow of the work. The Entrepreneurial Essence is crossing two circles: family and business. This happens in the founding phase and in the following phases. In the founding phase because the founder creates heuristics based on his rare qualities and which are imprinted in the entrepreneurial processes. Afterward, the founder imprints both the family (and the nextgen) and the business (and the management). In the phases which follow the founding one, the Entrepreneurial Essence is present in both the family and the business and involved both the family and the business leaders no matter if the latter are or not family members. For this reason, the present work is focused on rare qualities and heuristics in the founding phase but, after having proposed the Entrepreneurial Essence framework in Chap. 4, shift the focus on the business and the management. These are key for the evolution of the Entrepreneurial Essence once imprinted. It can be inferred that there is no need for a company to remain a family business after the founding phase, given the indifference in term of Entrepreneurial Essence. This is a very limited assertion and the entire literature on family business is there to revert this assertion, especially the part on the family as owner. It is true, by the way, that this is a limit of the present work, which is focused on the Entrepreneurial Essence (one of the three components of the Fig. 4.5 in Chap. 4) and with this limit the work tries to focus only on entrepreneur and manager and their relationship in the Entrepreneurial Essence. To partially overcome the declared limit and explain the necessary synthesis between the NextGen and the management, the Marchionne case is enriched with the analysis of the EXOR Entrepreneurial Essence. Being the investment company of the Agnelli family, the Entrepreneurial Essence is focus on the business of investing in businesses and this helps to understand how the framework presented in this chapter (and also the one of Chap. 5) can be connected to the Entrepreneurial Essence even being structured and professional and not heuristics and entrepreneurial. Figure 6.17 presents the EXOR Entrepreneurial Essence.

6.4 Entrepreneurial Essence Evolution, Nextgen, and Management: The Synthesis

149

Fig. 6.17 The EXOR entrepreneurial essence. Source: author’s elaboration

The Essence is gathered from a set of documents of the company. The first one is reported in Fig. 6.18. Values can be seen and interpreted as rare qualities. The Purpose of the company is reported in Fig. 6.19 and can be interpreted as the entrepreneurial processes. Within this Entrepreneurial Essence, the managerial action of Marchionne was possible. The rigorous management system described in this chapter is an operational tool which permits the application and the evolution of the Entrepreneurial Essence of the owner family. As an example, we can take the entrepreneurial process of: “foster a culture with clarity of purpose and shared values.” This is coming from long ago, it was a heuristic of the founder of FIAT, Giovanni Agnelli the Senator, and has been evolved by his heirs and leveraged by Marchionne. The Group of Leaders approach is the operationalization of this entrepreneurial process. It was not by chance that this happened, but because of the synthesis between the owner, John Elkann, and the manager, Sergio Marchionne. It can be inferred, and probably demonstrated, that having a family as owner was necessary to the manager to execute its extraordinary work and that having being entrepreneurially educated was instrumental to Elkann to act as owner and to evolve the Entrepreneurial Essence. As said, however, the ownership circle is outside of the scope of this work.

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Fig. 6.18 EXOR values

Fig. 6.19 EXOR purpose

6.5

Conclusion: What Is All This About?

The introduction was devoted to academic scholars with the aim of presenting the overall storyline of the research presented. Therefore, I would dedicate the conclusion to the practitioners answering to the typical practitioner’s question: What is all this about.

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With a pragmatic approach, I will synthetize the answer in bullet points: 1. Entrepreneurs are characterized by rare qualities. These qualities come from their education and early experience, therefore family as a say in creating entrepreneurs. 2. The entrepreneur exploits market opportunities through technical and/or organizational innovation. He is a force of “creative destruction” characterized by rare qualities. These virtues contribute to create something new. 3. Heuristics are rule of thumb which synthetized the learning of the entrepreneur in a specific industry and historical moment and are imprinted in the decisionmaking processes of the company, even after the disappearance of the founders or imprinters. 4. An entrepreneurial process is based on a capability without which it cannot be performed. They have three defining characteristics: Producing something which creates added value to the customer, are difficult to imitate, are based on qualities and capabilities imprinted in the company 5. Rare qualities, entrepreneurial processes, and company assets constitute the Entrepreneurial Essence of a company. 6. The Entrepreneurial Essence must be adapted in an ever-changing and evolving competitive environment. 7. To evolve the Entrepreneurial Essence, it is needed to face the change. The change is characterized by direction and speed. You need to understand both to act. To act, you need vision and drive. You need both to be successful in changing something. 8. Vision and drive are the bricks and mortars of the leadership and you need a leadership system to be effective. 9. If you are a NextGen, make sure before evolve the Entrepreneurial Essence to have understood and execute the Essence you received from whom forerun you. 10. If you are a professional manager, be sure to understand the Entrepreneurial Essence of the company in which you are working and feel like if you have an owner family which is helping in the evolution.

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