Innovation in family firms: A missed opportunity?

Every business needs to change in order to survive, whether it’s through new products, new business models or new ways of doing things.

Here in Asia, family firms are a prominent feature of the business landscape, but are they better at innovating; or, because of the way they are run, are they more likely to lag behind?

Some might argue that because they tend to be more frugal and conservative, family firms are often poorly positioned to innovate. For example, owner-managers may prefer tight controls on decisions and expenses, rather than giving room for experimentation and creativity.

Students who come to my family business classes sometimes recount their own experience of firms run so traditionally that they fear never being able improve themselves as professionals. They may have great ideas for renewal, but find themselves constrained in implementing them while their parents are around.

On top of this, the frequently long tenures of owner-managers can lead to rigidity and prevent any radical overhaul of the business. Asian patriarchs (it is usually men) are usually reluctant to retire and, having grown up in a different era, they may not grasp the power of new technologies or consumer trends.

Moreover, top management and boards are frequently composed of owners and trusted insiders with similar experiences and ideas, often leading to groupthink and further thwarting any real innovation.

Opportunities and risks

But might there be another side to the story? It could also be argued that, because of the way they are run, family firms are actually much better positioned to be truly innovative.

Family owners, especially in Asia, are usually deeply involved in all decisions, resulting in extraordinary insights into the business and the wider industry

Entrepreneurial owners seek out 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 CEOs may lack.

In addition next generation family members may come into positions of influence at a younger age, which can lead to faster adoption of new ideas. If the different generations can come together productively, this can work exceptionally well.

Family owners, especially in Asia, are usually deeply involved in 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.

Direct involvement also means they can better monitor how resources on innovation are being spent, so the learning curve is steeper.

Ability versus willingness

This leads to a so-called “ability-willingness paradox” affecting innovation in family firms.

In cases where owners do invest in innovation, they are much better at converting their inputs into tangible results. But research suggests they are less likely to invest in new initiatives.

Breaking the cycle of price competition requires innovation that focuses on producing higher-value offerings and a different mindset

As a result, several of the family firms I have worked with find themselves competing fiercely on price without being able to stand out with unique market offerings.  As the pace of economic growth slows, they face declining margins and turn to an intense focus on cost controls.

Not only is competing on price difficult to sustain, family successors often lack the passion to run such businesses. To keep prices low, firms may eschew environmental sustainability, good governance, high quality, or a fun working environment – all attributes younger generations of family members prefer to be associated with.

Indeed many of my students have told me they have “zero interest” in their parents’ line of business, and some successors 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. It calls for conscious strategic choices on how to position the firm, rather than simply battling for market share.

Many family firms are unprepared for this transition. The organisation is too lean to try new things and, whilst entrepreneurial energy and capital may be spent on new initiatives, they are not of the high-value type.

It is often the next generations of family leaders that experience the frustration of being stuck in what they perceive as a dated business, without the ability to position the family firm as a trailblazer commanding respect in society.

Future-ready family firms

Yet if, as research suggests, family firms are able to innovate more effectively, how can they capitalise on it for greater business success?

One useful strategy is to organise the infusion of new ideas proactively. Many business owners receive a stream of people presenting new projects, usually seeking funding. But these idea-generators pursue their own interest, and the process is unstructured.

A better option would be to appoint 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.

If fear of losing control is holding owners back, they 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 hard, 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 and a motivated champion, such as a new generation family leader, to deliver execution. Mentorship ensures the transfer of industry knowledge and guidance, while the champion can experiment with new ideas and models using the family’s resources, perhaps structured in a separate entity to avoid being marginalised by a “legacy business”.

If they can tap into their deep industry knowledge, greater monitoring skills, and entrepreneurial drive, family firms are well positioned to be trailblazers in their respective industries.

When they succeed in being at the forefront of innovation, they are also more likely to attract passionate next generation leaders, increasing the firm’s chances of survival across generations.

This article was first published on Think Business, the official knowledge site of the National University of Singapore (NUS) Business School, in February 2018