Editorial by Dr Paola Rovelli
Now more than ever, entrepreneurship is of key importance for family firms’ competitive advantage, growth and survival – a vital component of long-term prosperity. Through corporate entrepreneurship, firms can innovate, set up new businesses and transform themselves by actively exploiting the opportunities they identify. To succeed at corporate entrepreneurship, it is not only essential to recognise both valuable and viable opportunities, but also take action to effectively exploit them – that is, deploying the necessary resources and investments to take these opportunities as soon as they have been identified.
The Corporate Entrepreneurship Gap
Unfortunately, the evidence suggests that family firms sometimes hesitate at this critical juncture, exploiting fewer opportunities than their non-family counterparts. This trend is supported by the idea that family firms are sometimes more risk-averse, conservative, reluctant to change or focused on preserving their wealth. So, how can family firms keep up with their non-family peers in addressing the challenge of corporate entrepreneurship?
The answer is: by leveraging organisational design. Organisational design captures the structure and coordination of a firm, including elements associated with delegation, incentives, coordination, communication, formalisation and size. To ensure good strategic decision-making and performance, efficient structures are needed, especially at the level of Top Management Team (TMT). Firms are indeed reflections of their TMT, which coordinates the firm’s strategic decision-making, including those decisions related to corporate entrepreneurship.
Family Firms are Different
Family firms are often characterised by a different way of communicating, setting compensations or formalising work. Our recent, more comprehensive analysis based on unique data collected from a sample of 224 Italian firms reveals that family firms adopt different organisational configurations for their TMT compared to non-family firms. As suggested by other organisational design research, looking at configurations of organisational design elements, instead of individual elements separately, is of key importance.
In other words, fully understanding the impact of organisational design on the firm’s behaviours is possible only by simultaneously considering the design of its interdependent elements. The six most important organisational elements are the delegation of decision-making authority within the TMT, the use of incentives, coordination, and communication, the size of the team, and the level of formalisation. From examining these elements, we’ve identified three different organisational configurations: CEO-centric TMT, integrated TMT, and incentive-based TMT.
Three Organisational Design Models
The former configuration depicts a more centralised organisation, while the latter two are more participative. In the CEO-centric TMT configuration, the CEO controls the majority of decisions, and, consequently, there is less delegation, use of incentives, coordination, communication exchange and formalisation.
The two participative TMT configurations are instead characterised by shared control and decentralised decision-making; all members are involved in decision-making processes. However, the two participative configurations differ in the way that the individual goals of the TMT members are aligned with those of the firm. In the integrated TMT configuration, this alignment is achieved through reliance on coordination and communication mechanisms, while in the incentive-based TMT through reliance on incentives (in the form of variable compensation).
While non-family firms tend to prefer the two participative TMT organisational configurations, family firms tend to adopt the CEO-centric model: decision-making authority is centralised, and the firm is managed in a less formalised way. Family firm CEOs often prefer to exercise complete authority, dictate strategy, and choose the developmental path of their firms with little participation from others – a model that might have its benefits, but can also be detrimental for corporate entrepreneurship.
A more participative TMT configuration, on the other hand, promotes opportunity exploitation. Decentralisation gives managers the discretion to transform opportunities into action. Formalisation streamlines processes and provides a roadmap of tasks to help firms successfully realise new opportunities. Coordination and communication or the use of incentives favour coordinated actions towards the exploitation of opportunities. Moreover, a more participative TMT configuration leverages TMT members’ specific knowledge and external connections, encouraging collaboration, information exchange and knowledge integration – essential components of entrepreneurial strategy.
In summation, family firms’ organisational design tendency to concentrate decision making in the hands of the CEO accounts for the opportunity exploitation gap between family firms and their non-family peers; it’s not the firms’ family status per se. Therefore, family firms can fill this gap in corporate entrepreneurship by organising their TMT in a participative way.
Actionable Suggestions for Family Firms
- Organisational design is a key lever to boost corporate entrepreneurship in family firms.
- Some family firms should re-think their TMT organisation to exploit opportunities as non-family firms do.
- Interdependencies among organisational design elements should be considered, not just individual elements.
- Family firm leaders should resist the instinct to organise the TMT around them (i.e., avoid CEO-centric TMT organisational configurations).
- Family firms should opt for participative TMT configurations (either integrated or incentive-based), to empower and motivate top executives, use their knowledge, and assure coordinated actions.
Paola Rovelli is an Assistant Professor at the Free University of Bozen-Bolzano (Faculty of Economics and Management), working at the Centre for Family Business Management. Previously, she was a post-doc research fellow at Politecnico di Milano School of Management, where in 2017 she got her PhD summa cum laude with a thesis on the allocation of decision authority at the top of firms’ hierarchy. She carries out research on the organisational design of firms and their top management teams, with particular attention towards family firms, delegation of decision authority, narcissism and gender issues.
De Massis, A., Eddleston, K. A., & Rovelli, P. (2020). Entrepreneurial by Design: How Organizational Design Affects Family and Nonfamily Firms’ Opportunity Exploitation. Journal of Management Studies. In press. DOI: http://doi.org/10.1111/joms.12568.