Tharawat Magazine

3 Best Practices for New Product Development in Family Firms

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Family business governance can substantially influence the family firms’ ability to cope with novelty, uncertainty, and complexity, and thus play a key role in either enabling or impeding innovation processes in family firms. Family firm governance stems from the concentrated position of family owners, which leads to more centralized authority structures, non-economic incentives, and asymmetrical accountability norms. Unconstrained centralized decision-making reduces pressures for disclosure and transparency but, at the same time, supports informal decision-making process. The pursuit of family-centered goals creates distinct incentives that transcend pure profit or growth maximization. The altruistic treatment of family members complicates accountability norms within the firm, with family members being often evaluated on different criteria than other managers and employees.

In this article, we outline a suitable strategy for putting family governance “at work” and boosting the innovation performance of family firms by leveraging three dimensions of new product development (NPD), namely NPD teams, project leaders, and incentives.

New Product Development Teams

The NPD team is a central aspect of designing a successful NPD project. The composition of NPD teams and the quality of interactions, both among team members and between them and other departments, are widely seen as key success factors. However, where traditional NPD research suggests that creating dedicated “task force” teams leads to superior innovation outputs, this may not always be the case in family firms. There is often a tendency in family firms to select team member based on altruistic criteria rather than merit or project requirements. Low transparency about selection criteria can result in the rivalry and resentment of department colleagues who are excluded from NPD projects, leading to a lack of external support and difficulties in circulating relevant information between NPD teams and other departments. Moreover, we have often observed family managers dispose freely of team members, reallocating them to their departmental roles as they see fit. This can create distractions, reduce the pace of NPD projects, and raise the project costs. Family firms can avoid these issues and achieve better innovation performance if they design NPD teams using the existing departmental structures and giving team members more autonomy to work on innovation projects while continuing their day-to-day jobs. By doing so, family firms can leverage informal information flows, preserve the cohesion within the existing departments, and allow sufficient autonomy to accomplish project goals.

New Product Development Project Leaders

The selection of NPD project leaders plays a key role as well, as they act as bridges between teams and senior management. Project leaders not only need the skills to manage the project, but they must also ensure support for the project by lobbying for resources, protecting teams from outside interference, and managing relationships with senior management. Unfortunately, family firms face a difficult dilemma in selecting project leaders. On the one hand, family members often take leadership roles in NPD projects but lack the technical background to fill those roles successfully. On the other hand, “professional” project managers often experience difficulty in gaining the acceptance of family managers and employees. Family firms can get the best of both worlds by separating the project leadership and championing roles. Assigning championing roles to family members appears to be a superior design choice in that it allows NPD programs to leverage their authority and political power in order to deal with the uncertain and long-term nature of the NPD process. At the same time, assigning project leadership responsibilities to professional managers helps overcome the lack of skilled professional managers in family firms.

New Product Development Incentives

Finally, incentives are important to foster motivation and commitment among team members and project leaders. But while this is typically attained through the provision of monetary rewards directly linked to NPD performance, the less transparent accountability norms in family firm combined with their centralized authority structures makes these incentives problematic. Family business leaders often describe such incentives as redundant and ineffective. In extreme cases, they can damage the informal working environment and the relationships between family owners/managers and other employees by replacing the relational contracts with transactional ones. What is more, monetary rewards tend to aggravate the rivalry and envy existing between the employees involved in NPD projects and those excluded, and this, in turn, can reduce goal commitment and collaboration during NPD projects. Successful family firms tend to use more intrinsic, non-monetary incentives, such as nominating NPD team members and leaders as “family ambassadors” or giving them opportunities for increasing their public visibility and linking their name to that of the company. These incentives reinforce rather than damage the relational contracts between the family and nonfamily employees and help maintain a high commitment to NPD goals without the negative spillovers among nonfamily personnel who are not chosen to participate in the NPD projects.

In sum, family governance, with centralized decision-making, family-centered goals, and altruistic behavior, poses unique challenges in product innovation in family firms. Managers of family firms must assess the positive and negative impact of family governance on innovation activities and put family governance at work to the advantage of NPD projects. Universal prescriptions about NPD design should be considered with caution in family firms, as a more tailored approach to designing NPD teams, project leadership and incentives can lead to superior innovation performance.

By Alfredo De Massis and Josip Kotlar.

This article is part of the special series of articles on “Secrets of Family Business Innovation” and it was developed with the great support from Feranita Feranita at Lancaster University Management School’s Centre for Family Business and researchers at the Free University of Bozen-Bolzano’s Platform on Family Business Management.

Further readings

De Massis, A., Frattini, F., Pizzurno, E., & Cassia, L. (2015). Product Innovation in Family vs. Non-Family Firms: an Exploratory Analysis. Journal of Small Business Management, 51(1), 1-36.

De Massis, A., Kotlar, J., Frattini, F., Chrisman, J. J., & Nordqvist, M. (2016). Family Governance at Work: Organizing for New Product Development in Family SMEs. Family Business Review, 29(2), 189 – 213.