It's called 'The Peter Principle' in management-speak. You reward a star employee by promoting him to a managerial position and he proves to be an inept manager. Those over whom he was promoted and whom he now manages are irritated, and he is demoralised and discouraged.
There are two ways around this. One is to provide sufficient managerial training and support for the newly promoted employee. The other is to promote an experienced manager from outside the organisation. There are pros and cons to both.
In small businesses, internal promotions are often seen as a way of rewarding good and loyal staff. But they can create conflict and jealousy with other employees or, worse, the newly appointed (and untrained) manager might leave because of the stress of their new managerial position.
On the other hand, making an outside appointment can cause just as much resentment - and be both costly and time-consuming.
There is no golden rule here. As a business owner you have to use your discretion and consider each appointment on a case-by-case basis. But at the end of the day a dispirited or disharmonious workforce has to be avoided at all costs.