It has long been a cliché that family-owned firms are conservative, risk-averse, and less innovative than their non-family counterparts (Duran et al., 2016, Lorenzo, n.d., Gaskell, 2018). It’s nearly as common as the “shirtsleeves to shirtsleeves in three generations” claim (which was a claim that was addressed in the Fall 17 edition of the newsletter).
Why is this perception so widespread? It’s difficult to pin to one particular source, but it is influenced at least in part by popular media and news outlets. Companies like Apple, Amazon, Google and Tesla always seem to grab headlines as innovators, and even well-known family firms who do innovate on a large scale, like Walmart, Ford, and Samsung, are rarely referred to as family owned or controlled.
A second factor may the definition and perception of innovation itself. For many people the word “innovation” conjures ideas of “breakthrough” technology or splashy gadgets. In the previous examples we can point to the invention of the smartphone (Apple), revolutionizing online commerce (Amazon), reinventing how people access the internet (Google), or manufacturing the most popular electric vehicle in the world (Tesla). Less attention is paid to less flashy or incremental innovations put forth by family firms in the forms of new product development, patent registrations, or process improvement. (work in De Massis et al, 2015)
Beyond the media and perception issues, what does the research actually tell us about innovation and family firms?
Only relatively recently has family ownership and its direct impact on innovation been examined. This research has focused on three main areas: innovation investment (or innovation input), innovation activities, and the results of innovation activities (innovation output). With these in mind, here are a few ways in which family firms perform differently.
Investments in Research & Development
Research has been largely consistent on the question of family business investment on innovation; family businesses tend to invest less in innovation than their non-family counterparts do.
Behavior common to most family enterprises may explain why. First, because the wealth of family firm owners tend to be concentrated on one or few firms, they are more sensitive to uncertainty in how they invest capital (Duran et. al, 2016). This leads to vary careful due diligence before investing in innovation projects and avoiding projects deemed too risky or wasteful altogether (Kammerlander & van Essen 2017).
Second, innovation projects can be costly, in some cases requiring capital investment exceeding 10% of firm revenue (Duran et al., 2016). This may be more capital than is readily available to the family firm and owners are hesitant to seek outside investors for fear of relinquishing a degree of control over the business.
While the previous two factors are influential, researchers have identified additional reasons for a so-called “ability and willingness” paradox in family firm innovation. While family firm owners generally have discretion and means to set goals, select projects, allocate resources, and shepherd innovation activities through to completion, many choose not to do so. They often lack the willingness to invest in innovation. Why? Perhaps because they lack of required skills in the family, they don’t want to share control with nonfamily managers, or they have deep commitments to traditional product lines (Chrisman et al. 2015).
Low investment in R&D seems to track with the perception that family firms aren’t innovating, but how do they compare with following through on the innovation investments they do make?
Making Innovation Happen
The evidence is less consistent regarding the process of “doing innovation,” but some studies are pointing to key differences between family and non-family firms. One study of Italian family and nonfamily firms found clear differences largely due to variation in organizational structure. Two key examples from the research illustrate these points:
First, family firms tended to use a functional team approach to innovation (where employees remain in their respective functions like manufacturing, marketing, and sales and devote a portion of their time to the project). In these projects, a great amount of autonomy is given to project leaders (De Massis et al., 2015a, 2015b). Teams were able to adapt quickly to changing project requirements because existing organizational structures allowed them to be nimble and responsive to critical needs. In other words, fewer stakeholders and rigid processes were required to make decisions.
Nonfamily firms on the other hand tended to use a cross-functional team approach (where employees are temporarily removed from their regular working groups to work on a dedicated team for the duration of the project). In these cases there was less autonomy given to project leaders with a more structured and formal organization climate in place (De Massis et al., 2015a, 2015b). Project-level decisions often required passing through a “project stage or tollgate” process where input from multiple management stakeholders was required at regular intervals and decisions were often made by committee.
A second key finding of the study highlighted the role of outside entities in innovation. Family firms tended to collaborate more often and more openly with outside entities such as research universities, public research centers, vendors and clients. Family-owned firms leveraged their keen ability to nurture and develop long-term relationships with external partners. Knowledge and expertise flowed more freely between the family firm and collaborators. In contrast, nonfamily firms tended to rely more on internal capabilities and networks to complete innovation projects (De Massis et al., 2015a, 2015b).
Do these differing approaches to carrying out innovation activities results in better outcomes for family firms? More research is needed to draw a direct connection, but it does seem clear that family firms do more with less when it comes to innovation. The answer may lie in family dynamics and organizational climate.
Results Matter
Though family firms spend less overall on innovation and R&D investment, research indicates their close control over innovation processes, strong external collaborations, and willingness to closely monitor project teams and managers delivers stronger results (Duran et al., 2016; Kammerlander & van Essen, 2017). In other words, family firms can leverage their unique organizational structures to get more out of the dollars they do spend on R&D.
One major inefficiency in innovation work results from managerial activities that run counter to the stated goals of innovation projects. For example, a manager may have pet projects that he or she favors over more promising innovation projects, or they may not use granted resources efficiently to complete a project, or they may be embroiled in managerial politics. All of these can impede progress on innovation projects (Duran et al., 2016).
Family firms tend to mitigate these factors more efficiently due to closer control of management and decision-making.
There may be other family-level factors that influence innovation results in family firms, especially at the CEO level. When the CEO is a family member, firms tend to have better innovation outcomes. These positive results seem to be amplified when the family CEO is a member of a later generation. Surprisingly, when the CEO is the founder, innovation results are not as strong (Duran et al, 2016).
Why would Founder CEOs tend to have less success overall with innovation? The act of founding a business is an innovative activity in and of itself, and one that usually requires a high degree of risk of uncertainty. Perhaps that tolerance for risk and uncertainty, combined with an environment where fewer active family members have senior management roles (which is common in first-generation family businesses), means that founder CEOs are more willing and able to invest in risky innovation projects.
On the other hand, later generation family CEOs encounter other influences that may steer them toward more certain innovations. An increasing number of family shareholders may prioritize safe investments over risky ones, family members may desire to protect family ownership for the long-term legacy, or a growing group of managers or board members may temper risky or wasteful innovation decisions.
Conclusion
When family firms are labeled as not innovative, several characteristics are often held up to support the notion; family firms are conservative and afraid to spend on innovation. They are insular and unwilling to seek outside capital for fear of losing control. Family managers wield too much control over investment decisions and innovation processes.
Investment in innovation may be limited due to close family control of wealth, risk aversion, and social & family goals not motivated by profit. Ironically, these same limitations on the investment end of innovation may actually pay greater dividends in the form of more productive innovation results.
As the body of research on family firm innovation evolves it seems likely that old perceptions will begin to shift. Intriguing early research on the impact of generational roles on innovation (as referenced in the founder CEO vs. later generation CEO above) indicate that family and organizational dynamics often have a positive effect on innovation.
Sources
De Massis, A., Frattini, F., Pizzurno, E., Cassia, L. (2015). Product Innovation in Family versus Nonfamily Firms: An Exploratory Analysis. Journal of Small Business Management, 53(1): 1-36
De Massis, A., Di Minin, A., and Frattini, F., (2015). Family-Driven Innovation: Resolving the Paradox in Family Firms. California Management Review, 58(1): 5-19
Chrisman J., Chua, J., De Massis, A., Frattini, F., and Wright, M. (2015). The Ability and Willingness Paradox in Family Firm Innovation. Journal of Product Innovation Management. 32(3): 310-318
Calvert, D., Craig J., (2018). What It Takes for a Family Business to Innovate. Kellogg Insight, Kellogg School of Management at Northwestern University, https://insight.kellogg.northwestern.edu/article/what-it-takes-for-a-fam...
Gaskell, A. (2018). The Innovative Power of Family Firms. Forbes, https://www.forbes.com/sites/adigaskell/2018/03/01/the-innovative-power-...
De Massis, A., Frattini, F., Lichtenthaler, U. (2012). Research on Technological Innovation in Family Firms: Present Debates and Future Directions. Family Business Review, 26(1): 10-31
Lorenzo, D. (n.d.). Myth and Reality: Why are Family Firms Considered Less Innovative? Family Firm Institute Practitioner Blog, https://ffipractitioner.org/myth-and-reality-why-are-family-firms-consid...
Kammerlander, N., and van Essen, M. (2017). Research: Family Firms are More Innovative than Other Companies. Harvard Business Review, https://hbr.org/2017/01/research-family-firms-are-more-innovative-than-o...
Duran, P., Kammerlander, N., van Essen, M., Zellweger, T. (2016). Doing More With Less: Innovation Input and Output in Family Firms. Academy of Management Journal, 59(4): 1224-1264
Classen, N., Carree, M., Van Gils, A., Peters, B. (2014). Innovation in Family and Non-Family SMEs: An Exploratory Analysis. Small Business Economics, 42(3): 595-609
