Businesses that were established around the time of the fall of Hungary’s socialist system and have since grown into medium-sized enterprises have generally faced the need for generational change and the challenges associated with founders’ retirement over the past decade. The Hungarian corporate culture, legal and tax environment did not, and to some extent still does not, provide the conditions and models for those involved to take advantage of. And while each company's journey is unique, the underlying theme of the problem is that both those who are slowly emerging from their active career years and seeking to place the business they have built with their life's work in good hands, and the new generation who are taking over and building the business, either as owners or as externally hired managers, face complex problems:
balancing stability and innovation, managing financial, legal and human resources, meeting internal and external challenges simultaneously.
These generational difficulties are in fact specific to Central and Eastern Europe, since almost all the current family businesses and the SMEs that have grown out of them were set up in the 1990s, with first-generation managers. There is no reference for generational change at either ownership or management level in the country, at least not as a matter of practice and routine. In addition, given the historical background, the Hungarian mid-enterprise culture (not including the presence of global companies in Hungary) is also in its infancy; the current players in the business world do not (and cannot) remember the capitalist culture before state socialism - which would have bared little relevance anyway, given its specific, partly feudal character - but their knowledge and business habits are all derived from their own experience, with no multi-generational tradition behind them - except in a few rare cases, such as the Zwack family. Consequently, what they can pass on to the next generation of leaders is also very personal and, as such, tied to a specific vision.
Some of the challenges that arise are strongly related to the founder’s personal and business relationships. What does it take to pass on a system of trust, often built on personal relationships, so that the new leader is accepted by senior employees whose loyalty contributes in no small way to the company? On the other hand, there is a quite sensitive relationship with customers, suppliers and clients. There are so many human, non-quantifiable, trust-based elements to the succession of a relationship that this part of a generational change in leadership is surely a gradual and difficult task that strongly relies on the cooperation of the old and the new manager.
Interpersonal relationships and bonds of trust are often specifically linked to the founder.
In other words, the new owner may know everything about the existing clients but may not be trusted in the same way as their predecessor, simply because they share a common past, while the new manager is a new partner in clients’ eyes, even if they come from the same family as the original leader.
Just how difficult it is for family businesses to change generations is shown by the fact that even in the US, where the economy has been based on (transferable) private property for quite a long time, only 1/3 of family businesses remain successful in the hands of the second generation, and the rate is even worse for the third generation. Those who have studied the issue extensively have found that the secret to success is the approach that focuses on transferring social and interpersonal capital along with the governance structures. If a Hungarian business has been able to grow successfully in the very rough terrain of the past decades, then that manager "knew something", and this knowledge is certainly not something to be discarded but to be passed on. However, the business environment, which is changing faster than we ever imagined and is more unpredictable than ever before, will certainly require more flexibility and faster innovation than the decades behind us. So let us now look at the process of generational change in terms of information transfer.
The International Association for Family Business Research believes that radical (digital) technological, social, economic and political changes require even greater flexibility and adaptability from family businesses, which, if we think about it further, could be the deciding factor in whether a business can survive the generational transition. The new manager, whether they are a family member or an externally hired leader, will certainly have plenty of ideas for modernization, but will also have to face the fact that the original owner will often want as few changes and as safe a transition as possible, and will therefore be potentially resistant to change. Among other things, this is known as the conflict of interest that arises during the transition period, and various solutions have been proposed. In any case, in order for the handover to be successful and for the new manager to be accepted by old colleagues - who have a personal relationship with the first-generation manager – have to be able to understand the situation of the company on all fronts and have to maintain existing business relationships, therefore, they’ll need information above anything else.
A new ERP implementation will help to do this, both by greatly modernizing company processes and by making transparent the decades of information accumulated by the previous manager. It is also a kind of assurance for the first generation of owners that their successor will take the company forward with the necessary information. Because in order to be able to pass on the massive amount of knowledge and experience that the founder has accumulated, a system is needed to organize, digitize, track, view and, above all, manage it. Of course, it is even more useful if all this is done with modern software optimized for SMEs, because it will pay off both financially and efficiently in the long run. The question may arise: what can be transferred, especially within an ERP framework, and what cannot?
And depending on this, how much does the investment in such software weigh?
Obviously, it cannot solve everything. However, let's turn the argument around. If we accept that there are and will be aspects of generational change that are inherently more unpredictable, let us at least keep a grip on those aspects that are not. These include the transfer of the data stack associated with running a business, finance, logistics, production planning, etc.
An ERP implementation will fundamentally reorganize the information structure of the company and give the new manager a "clean slate" to see processes and data from the start and make decisions based on real information.At the same time, it can force operational changes that will inevitably lead to changes within the company, giving the second-generation manager a clear platform to implement their own ideas, almost "unnoticed", in the run-up to the introduction of the new system. At the same time, it provides the opportunity to maintain the authority and confidence of the manager, because they do not have to start from an information disadvantage and, in the case of custom software, they can tailor the system and structure to their own needs.
Thus the new manager can take control naturally.
In short, everyone, whether customer or employee, expects the new manager to understand the company's processes and to be on top of the situation, and the implementation of a suitable ERP software can help in this, whether it is a question of ERP replacement or first-round digitization.
The process of generational change can seem a complex, sometimes paralyzing and uncomprehensive set of tasks. However, it can be implemented step by step, which is why we have put forward a new and practical aspect of successfully managing generational change, which may be a good starting point for anyone who is concerned and wants to take an active role in making this inevitable process in their company as smooth and trouble-free as possible.
