Family firms – lessons in innovation

Family firms are traditionally badged the conservatives of the business world – unadventurous, slow to change, and too fond of familiar traditions and habits. However recent research reveals a very different picture - family firms are actually the more effective and aggressive innovators and other businesses could learn from them.

What makes the most successful and innovative businesses? According to management expert Peter Drucker it’s access to the best professionals and a high knowledge and skills pool. To Alfred Chandler it’s distributed ownership and professional management at every level. None of these are qualities generally associated with family firms limited by family loyalties. Instead family businesses have been understood to be successful because of the inherent trust and commitment involved, the stability built around hereditary wealth.

Since the 1990s, people have started to acknowledge that family firms can be surprisingly innovative. Our research suggests family firms display extremely diverse innovation behaviours and outcomes. In some cases, family firms are even more innovative. They do invest less in innovation, have smaller budgets for R&D, but have access to unique resources and manage to get more for their money when they do invest in new products and initiatives. But how do they manage it?

Letting the past help shape the future 

Some may think innovation is about dismissing the old to make way for the new. Hanging on to old knowledge leads to inflexibility and stagnation. But our study of the development of a group of long-lasting Italian firms points to the importance of looking to the past for guidance and inspiration for innovation.

Combining traditional materials with new ideas

Businesses with a long heritage have a source of competitive advantage. Take Apreamare for example. Established in 1849, the company utilises local carpentry and blacksmith skills once used to build fishing boats modelled on a Roman design, for its new luxury yachts. Coffee-maker Lavazza has grown to a billion euro business on the foundation of coffee-blending arts first practiced in its original grocery shop in 1895. The ability to combine traditional materials and techniques with the new can lead to products that simply can’t be imitated by competitors. And offers appealing propositions for consumers.

Investing in new technology at times of financial uncertainty 

Buying in new technology is key to successful product and process innovation. Sourcing technology externally helps reduce development time and costs, share risks, and provides access to expertise not available in-house. So looking at when and why firms choose to use R&D contracts is a useful way of gauging attitudes and behaviours around innovation more generally. We studied the decision-making of more than 1,500 Spanish manufacturing family and non-family businesses. Family firms are more cautious when it comes to acquiring technology from external sources, especially among the most senior family leaders where they fear losing control. But this changes when financial performance falls below aspirations. When times are looking and feeling difficult, family firms move quickly to find ways to provide new impetus - new products, diversification, ways to explore new markets.

Failure prompts an exploration of uncharted opportunities 

Family firms take failure personally. The threats are greater. It can affect family members and future wealth of generations to come. Working in an environment of decline is hard enough in non-family businesses, but is more acute and pervasive when among family members. Therefore they’re willing to take higher levels of risk, with greater potential for higher rewards over time.

An effective governance model is a key component to success

Family firms use their own, tailored approaches to new product development (NPD) in order to get the most lucrative outcomes. A study funded by the Institute for Family Business Research Foundation examined the governance of family SMEs in the UK, showing that designing an effective governance system is paramount for family firms to successfully engage in entrepreneurship and innovation.

Financial and promotion-related incentives led to lower performance

There was clear evidence for how differently members of family firms are incentivised to innovate and deliver results. Typical ‘success’ looks different when examining family and non-family run businesses. For the latter, there tends to be a focus on dedicated cross-functional teams and the use of financial or promotion-related incentives. But for family firms, this approach actually leads to lower rather than higher NPD performance. The standard model is inconsistent with family SME governance, emphasising structural weaknesses: unable to muster adequate levels of human or financial resources, and facing severe conflicts between innovation activities and everyday organisational routines.

Instilling a sense of personal satisfaction and creativity 

Instead, NPD works effectively in family SMEs with a re-design conducive to the particular structure and forms of management involved, for example, by keeping team members working within their own areas or departments, only contributing part-time to innovation projects. Instead of financial incentives, focus on how involvement in innovation schemes can bring a sense of personal satisfaction and opportunities for creativity. The companies we studied that adopted these kinds of approaches experienced NPD advantages by leveraging the particular strengths of family firms, the strong interpersonal bonds and stocks of shared knowledge. Similarly, in traditional NPD, project leaders have a key role in developing a vision, managing the programme and acting as the project champion. In family SMEs a single project leader can seldom handle all of them, because those who excel in managerial and technical skills aren’t likely to also have the necessary authority to be the lead champion, and vice versa. In our study the group of firms that saw the best NPD results adapted their programme design to take into account this challenge: separating the leadership and championing roles, and assigning the former to external (non-family) professionals and the latter to family managers. In this way they could compensate for any skill gaps and combine external support with the political clout and positive reputation of family members.

The important insight our study found is the rules are there to be broken. Evidence suggests that the careful planning of assorted professionals in non-family firms can’t always compete with the urgent motivation in family firms, a sense of personal mission and an ability to be free spirited when it comes to taking risks.

Professor Josip Kotlar is Associate Professor of Family Business in the Department of Entrepreneurship, Strategy and Innovation at Lancaster University Management School. He co-directs the LUMS Centre for Family Business, working on research, business engagement and executive education programs for family business owners and managers.