Innovation and family firms
10 August, 2018 / Articles
For businesses, change is a necessity for survival, whether it’s through new products, new business models or new ways of doing things.
And so, we ask whether in Asia where family firms are a prominent feature of the business landscape, are such firms better at innovating to survive? Or, because of the way they are run as a family concern, are they more likely to lag behind?
Family firms are generally poorly positioned to innovate because frugality and conservatism tend to be their hallmarks. Owner-managers may prefer to have a tight rein over decisions and expenses rather than be experimental and creative.
My interactions with young family members of such businesses suggest that they feel their firms are so traditionally run that they fear they would never improve their business. They may have great ideas for renewal but there are constraints impeding implementation especially when their parents are still around.
Unlike professional managers where there is job mobility, owner-managers have long tenure. Such long tenures can result in rigidity and prevent any significant overhaul of the business. Asian patriarchs are usually reluctant to retire and, having grown up in a different era, they may be resistant to new technologies or understand and accept consumer trends. These are potential impediments to growth.
Additionally, top management and boards usually consist of owners and trusted insiders with similar experiences and ideas, which often lead to group-think, further thwarting any real innovation.
But, could there be another side to the story? I argue that because of the way they are run, family firms are in fact much better positioned to be truly innovative.
As entrepreneurs, these owners seek new opportunities and are willing to take risks. Family leaders, especially majority shareholders, can also have the power and time needed to implement a consistent long-term strategy, something hired chief executive officers may lack.
Second, the next generation of family members may come into positions of influence at a younger age. This may encourage faster adoption of new ideas.
Particularly in Asia, family owners are usually deeply involved in many if not all decisions, resulting in extraordinary insights into the business and the wider industry. Armed with this knowledge, they are more likely to understand where to best spend their scarce resources to remain current. Such direct involvement also means they can better monitor how resources on innovation are being spent.
This leads to a so-called “ability-willingness paradox” affecting innovation in family firms. When owners invest in innovation, they are much better at converting their inputs into tangible results. However, research suggests they are less likely to invest in new initiatives.
Several of the family firms compete fiercely on price without being able to stand out with any appreciable unique market offerings. As the pace of economic growth slows, they face declining margins and turn to an intense focus on cost controls.
To keep prices low, firms may eschew environmental sustainability, good governance, high quality, or a fun working environment — qualities younger generations of family members prefer to be associated with.
Indeed, many of them have little interest in their parents’ line of business. Some successors even say privately they would rather leave the firm altogether.
Breaking the cycle of price competition requires innovation that focuses on producing higher-value offerings and a different mindset. Instead of simply battling for market share, this calls for conscious strategic choices on how to position the firm.
Many family firms are unprepared for this transition. The organisation is too lean to try new things and, while entrepreneurial energy and capital may be spent on new initiatives, they do not add significant value.
Instead, the next generation of family leaders is stuck in what they perceive as a dated business without the ability to reposition the family firm as a trailblazer.
Yet, if family firms are able to innovate more effectively, how can they capitalise on it for greater business success
One strategy is to take a proactive approach to the infusion of new ideas. Many business owners receive a stream of experts presenting new projects, usually seeking funding. They should appoint these industry innovation experts to the firm’s board so that their objectives are aligned with those of the family business. These experts should be selected for diversity of ideas, not familiarity with the owners.
To counter the loss of control, owners could consider forming an innovation advisory council that regularly reports on how to stay current. The progress of “future-ready” investments should feature as a separate item in the strategic planning cycle.
Pushing new ideas is challenging, especially in a traditional Asian business environment characterised by top-down decision-making.
For this reason, another lesson is to appoint both mentors and champions for new initiatives. Innovations need mentorship from owners to ensure the transfer of industry knowledge and guidance. Also, new generation family leaders may champion to experiment with new ideas and models using the family’s resources. These could be structured as a separate entity to avoid being marginalised by a “legacy business”.
If family firms can tap into their deep industry knowledge, greater monitoring skills, and entrepreneurial drive, they are well positioned to do well in their respective industries.
When they succeed, family businesses are also more likely to attract passionate next generation leaders, increasing the firm’s chances of survival across generations.
The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.
