Unlocking the Innovation Potential of Family Firms

The Role of Goals, Governance and Resources

Unlocking the Innovation Potential of Family Firms
Image via Pexels.com

Image source: Startup Stock Photos via Pexels

Engaging in successful long-term innovation is critical for family firms in order to break inertial paths and renew their competitive advantage through pursuing new market opportunities. Popular statistics suggest that families control more than 50% of Europe’s most innovative firms, yet this number could be much greater. While some family firms stand out for their innovative performance, too many family firms are caught by path dependency and follow conservative strategies that downplay innovation. Yet, recent studies show that family firms can “do more with less” and achieve remarkable results despite their inherent limitations. In the forthcoming special series of articles on “Secrets of Family Business Innovation”, we will explore how family firms can leverage their distinctive values, culture, and identity to ensure continuity while adapting to the demanding environment. Building on recent research evidence and case studies, we will present a Family-Driven Innovation strategy through which family firms can unlock their innovation potential by aligning their innovation decisions to their distinctive governance structures, goals, and resources.

Governance can be critical for innovation

First, decisions about governance can be critical for innovation. When the family takes an active role in governance, by introducing a family council and appointing family members as board members and managers, they enjoy greater authority and autonomy in decision-making. This can in turn decrease the level of formalization in the firm, enable creativity, and soften political resistance to new ideas. However, an excessive concentration of power within the family can limit the diversity of knowledge and perspectives in the boardroom, hence family firms need to rely on outsiders, such as professional managers and advisors who can provide different views and help identify valuable opportunities in distant and unrelated technological domains. Moreover, providing non-family managers and employees with opportunities to contribute to decision making appears critical to ensure their commitment to the implementation of new ideas. Family-Driven Innovation is not only about ensuring a balanced representation of family and non-family members on the board and management team but, perhaps more importantly, it is about designing appropriate processes to support participation of all members to decision making and integrate diverse perspectives.

Economic and non-economic goals do not always align

Second, family firms pursue economic goals as well as non-economic goals that focus on the fulfillment of the family’s social and affective needs, including the ability to exercise authority, act altruistically toward family members, fulfill desires for belonging, affect and intimacy, and perpetuate the family dynasty. Economic and non-economic goals do not always align. Family firms’ emphasis on non-economic goals can lead them to sacrifice opportunities for financial gain when this helps protect the family’s interests. This “loss aversion” leads many family firms to refrain from undertaking unrelated diversification, mergers and acquisitions and R&D investments. However, when family firms face a survival threat, they tend to reverse their preferences and engage in risky innovation projects. A Family-Driven Innovation strategy involves modulating the firm’s innovation investments in a way that reconciles economic and non-economic goals. This means focusing on exploitative innovation projects that reliably increase sales through incremental innovations when economic goals are met, but switching the focus on exploratory R&D investments that involve greater risk as well as potentially more disruptive innovation outputs when economic goals are at risk. By engaging aggressively in such preference reversals, family firms can maximize their innovation outputs while minimizing losses of their non-economic utility.

Human and social capital are key to innovation

Finally, the innovation potential of family firms critically depends on the unique resources embedded in the human and social capital created through interactions between the family and business systems. Family firms enjoy privileged access to some resources such as tacit knowledge, social capital, and reputation, but suffer limited access to other resources such professional managers, technical assets, and external financing. The focus of Family-Driven Innovation is on choosing and implementing innovation projects that attain a good fit with the resource advantages and restrictions of the family firm. In other words, family firms can achieve superior innovation performance if they design their innovation strategy in a way that leverages their resource strengths while overcoming their inherent limitations. This includes creating the informal communication channels and family norms that are necessary to forming bonding ties within the firm and bridging ties with external stakeholders, ensuring a fair treatment of family and non-family employees in order to maximize the quantity and quality of human resources, and minimizing potential conflicts between family and business demands in order to make efficient decisions regarding the deployment of organizational resources to innovation projects.

In conclusion, it is fundamental for family business leaders to evaluate the actual innovation potential of their firms and design innovation projects that fit their distinctive governance structures, goals, and resources. Often, achieving this fit requires diverging from the standard best practices that are typically prescribed by innovation management handbooks. Also, it requires opening the boundaries of the firm to non-family professionals and advisors who can provide fresh and independent perspectives. In the special series of articles on “Secrets of Family Business Innovation”, we hope to provide new insights on how a Family-Driven Innovation strategy can be developed to maximize the family firms’ innovation potential.

By Alfredo De Massis and Josip Kotlar.

This article was written with great support from Vittoria Magrelli at the 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

Chrisman, J. J., Chua, J. H., De Massis, A., Frattini, F., & Wright, M. (2015). The ability and willingness paradox in family firm innovation. Journal of Product Innovation Management, 32(3), 310-318.

Chrisman, J. J., Fang, H., Kotlar, J., & De Massis, A. (2015). A note on family influence and the adoption of discontinuous technologies in family firms. Journal of Product Innovation Management, 32(3), 384-388.

De Massis A., Di Minin A., & Frattini F. (2015). Family-driven innovation: Resolving the paradox in family firms. California Management Review, 58(1), 5-19.