Family Business

How to Institutionalise Innovation

Lessons for building a culture of constant innovation may be learned by studying family businesses.

“Family companies” and “innovation” may sound like opposites. Family-owned businesses are often conservative, safe bets with long-tenured CEOs that focus on tried-and-true product lines and markets. In fact, some studies have even shown that keeping a business in the family inhibits creative problem solving. There are many who argue that it really encourages creative thinking. While all of these points are true, they fail to account for the most important factor in determining a family business’s innovative edge: the nature of its “family assets.”

How to Institutionalise Innovation
Lessons for building a culture of constant innovation may be learned by studying family businesses

Name, reputation, heritage, networks, and cultural and family values are all examples of things that provide value to the world that may be considered family assets. In our new study, Family Assets and Liabilities in the Innovation Process, Nicolai Foss, professor of Strategic Management at Copenhagen Business School, and I argue that such assets may recruit personnel, enhance motivation, increase stakeholder loyalty, and construct useful networks.

I submit that this advantage gives family businesses an edge in the marketplace. Resources like “family values” cannot be owned by companies that are not family-run. And because of the trust built up through time, long-term suppliers are less likely to try to take advantage of the company. What sets them apart is their ability to use such resources as the foundation for business and innovation strategy.

What makes them innovative?

The first is the benefits of having a network, which are especially relevant when talking about innovation. When family networks combine their beliefs and reputation with their contacts, they have an advantage over non-family company networks. Because of the greater stakes involved, family businesses place a premium on maintaining trustworthy, long-term connections.

Similarly beneficial is making an attempt to include family members in appropriate groups. Heraeus, a German technological corporation, for example, benefits from having many employees with doctorates and senior research positions in the fields of chemistry and physics inside its ranks.

Loyalty is the second factor that makes family businesses so innovative. In order to overcome industrial hurdles, family firms are less likely to sell or be sold by their owners. Van Eeghen, a Dutch trade firm, is a good example. Trade with England froze in the late 18th century as a result of the French Revolution and Napoleon’s conquests in Western Europe. Van Eeghen shifted his business focus to North America, where he eventually settled down and made a home purchase. This strategy, which the firm dubs “functional flexibility,” is being maintained. The most recent improvement is the establishment, in 1998, of a new business entity devoted to the manufacture and sale of nutritional health and food strengthening substances. It is no longer involved in the coffee, chocolate, hides, and tobacco commodities markets.

Finally, when it comes to inspiration, families have an advantage. Social psychologists and behavioural economics both agree that the factors that inspire people to work hard change depending on the circumstances. Cooperative efforts can inspire individuals to take on challenging tasks like innovation, according to the literature, but this enthusiasm tends to fade without solid maintenance mechanisms. This is made possible by a focus on family, which makes it simpler for relatives to learn from one another and form bonds than it would be with strangers.

When assets become liabilities

But the very traits that make family businesses so unique when they first start out can become their downfall when it comes to sustained creativity. Given the importance of maintaining positive economic conditions in the community of origin, a family business may be compelled to show excessive devotion to its stakeholders. In order to achieve its turnaround after 2004, Lego had to fight hard to maintain the majority of its production facilities in Billund, Denmark, even while competitors moved production to countries with lower labor costs.

Family businesses may also be stuck with unreliable vendors that provide subpar services or products. They can become overly dependent on one another, refusing to admit non-family members into positions of authority even though they would be more effective agents of change.

Institutionalising innovation

If a corporation has family assets, how can they ensure that they don’t become a burden on the company’s ability to innovate? With familial and corporate governance and the incentive of important individuals, creativity may be institutionalized.

As an example, consider the Mulliez family, who, in 1961, established what is today one of the world’s largest grocery chains: Auchan. The company includes 800 family members, 550 of whom are proprietors in the family’s network of businesses, and owns more than 20 different retail brands.

Read more: Five Obstacles That May Derail a Succession Plan

The Mulliez family’s numbers were fast growing, so they developed a new organizational structure to ensure their legacy would be carried on for generations to come.

First, the family reorganized its ownership and established a private equity firm within the organization to facilitate the financing of future commercial projects. Money was contributed to the fund by operational businesses. Thereafter, it established a dual governance system, wherein a family board exercises authority over the boards of operational enterprises, providing a visible and legible blueprint for future generations to follow. Finally, a set of shared values that would serve to bring the family together was established in the form of a contract. The fourth step was the establishment of a comprehensive educational program that all members under the age of 25 were required to participate in if they want to join existing businesses as entrepreneurs. Finally, in order to align the interests of all family members, the rule of thumb is for them to own shares in the holding company rather than the operational firms.

By using this method, the family may grow its business without having to raise money from outside sources, as well as facilitate the transfer of assets between generations and the alignment of incentives within the family. The possibility of the company maintaining its unique edge rises if family members can be identified and funded to pursue their inventive ideas.

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