Succession by the Second Generation: The Costliest Tuition

Cases where enterprises decline after the second generation takes over are common. Many founders therefore tell their children: “No need to rock the boat. What we have built is enough for you to live securely.” This is no casual remark; such examples abound. Quite a number of second-generation heirs have no wish to take over the business at all. They turn to art or academic research, pursuing personal fulfilment in fields they love — and there is nothing wrong with that. What merits close analysis is why those who do intend to inherit the enterprise often pay an exorbitant tuition.

Many incoming successors have studied overseas. Broad-minded and bold, they rush to launch reforms the moment they step into office, frequently throwing the business into disarray. The problem lies not with reform itself, but blind reform: they target areas that are not the real source of trouble.

One typical scenario: upon taking office, they spend hundreds of thousands rolling out ERP systems, setting KPIs, mandating clock-ins and daily reports for all staff. As a result, senior shop-floor technicians stop work for two hours just to fill in system forms. Salespeople shift focus away from clients toward paperwork to hit metrics. Administrative costs surge while operational efficiency plummets. This is using heavy artillery to attack minor flaws: standardization degenerates into empty formalism. With annual revenue merely tens of millions, the company adopts workflows modelled on Fortune 500 firms, dragging an originally agile, lean organization into rigid, futile bureaucracy.

Another common case: they dismiss the legacy business built by their parents and pour capital into new brands, livestream commerce and R&D. The direction may not be wrong, yet they fail to grasp the cash flow rhythm of the existing business. Massive funds are siphoned off for new ventures. Though framed as internal entrepreneurship, these are essentially draining investments. Eventually, before new lines turn profitable, the cash chain of the original business snaps first. Worse still, senior veterans grow resentful watching the second generation spend freely. Internal cohesion collapses. The Nanjing Zhang family case illustrates exactly this pitfall.

There is a third pattern: they set out to overhaul procurement and replace factory directors, overlooking one critical fact. These long-serving veterans hold supplier ties, key client relationships and proprietary craft know-how. If mishandled, they may leave with their teams, launch competing firms and directly challenge their former employer. Such botched successions triggering internal defections unfold nearly every year across Zhejiang.

A viable succession path follows this sequence: integrate first, make incremental adjustments next, then pursue expansion.

Whether graduated from Imperial College or Harvard, for the first six months on site, they should not sequester themselves in private offices. Their proper station is to walk the factory floor daily alongside the most respected factory manager, or sit beside senior technicians and observe how they negotiate with customers. The goal is simple: act first as an interpreter. Listen carefully to the unarticulated pain points of veterans, then translate those insights into actionable plans using modern frameworks they learned. To serve as an apprentice and understand real demands — that is the core task for Year One.

In Year Two, reforms may begin, but avoid touching the legacy business. It is the founders’ core asset and the domain where senior stakeholders hold vested interests. Instead, allocate a sum of capital “affordable to lose”, to build a brand-new line of business unfamiliar to the older generation and beyond the veterans’ expertise: cross-border independent e-commerce sites, for instance, or custom small-batch orders for emerging brands. Within this experimental unit, they may freely test standardization and digitalization. Success earns achievements and the credibility to shape decisions. Failure leaves the main business intact; veterans have little ground to criticize and may view it as necessary tuition and training. Sustained setbacks call for sober self-reflection on whether one possesses the business judgment required.

Only after proving track record and earning respect can they take stewardship of the legacy business. Personnel changes demand extreme caution at this stage. If bringing in professional managers, do not assign them to directly replace family members. A safer approach is creating new roles dedicated to merging legacy operations with new digital tools. Meanwhile, offer the sidelined family members dignified titles such as Senior Advisor. Their energy can focus on interpersonal networks and external connections — resources that ground many Zhejiang enterprises. In this arrangement, new managers oversee digital systems and processes; old guards maintain relationships and social capital. Two teams operate separately yet in harmony, each settled into suitable roles.

At its heart, second-generation succession hinges on humility, prudence and well-calibrated pacing. Founding parents survived brutal market competition and possess sharp instincts for risk. For the second generation to inherit smoothly, the proof needed is not “I am newer than you”. It is “I understand your legacy, and I can add new capabilities to it.”