Family Business heterogeneity in innovation: opportunities and challenges
Family businesses still represent the backbone of the economy worldwide despite ongoing uncertainties. These businesses do not represent a homogeneous group of organizations as they have distinctive…
Family businesses still represent the backbone of the economy worldwide despite ongoing uncertainties. These businesses do not represent a homogeneous group of organizations as they have distinctive characteristics mainly relative to their size. Where do they stand in terms of innovation and what practices could they learn from each other to foster innovation in increasingly competitive markets?
INNOVATION IN FAMILY BUSINESS: what do we know?
Looking into the output of innovation as being the usage of new systems, policy, service, or product, makes us question to what extent it is the product of more R&D expenditures in family businesses. Broekaert et al., (2016) found that family businesses are less involved in R&D. However, the family business’ particular structure enables to develop new products taking advantage of their organization flexibility. Moreover, scholars in family business investigated the innovation factor as a determinant of growth and economic development in a company (Nieto et al. 2015; De Massis et al. 2015). Alberti and Pizzurno (2013) show that innovation has a positive impact on firms’ long-term performance, while De Massis et al. (2016) show that beyond the performance aspect the rate of innovation in a company ensures its survival against competitors.
Within the same vein, Werner et al. (2018) investigate the innovation factors in both family and non-family businesses in Germany. Using a large sample of 1 870 SMEs their results highlight that long-term perspective positively affects innovation output in small family business. Their findings are also interesting when it comes to succeeding generations of family firm leaders; the authors provide evidence that innovation’s output continuously decreases from generation to generation. The last result seems a little puzzling regarding the literature related to family businesses and innovation. It is well documented that family businesses have specific characteristics that make their business much more complex than any other form of businesses (Neubauer & lank, 1998). This being said, the past studies lack to explain the innovation within the family businesses with respective to their size.
TAKING INTO ACCOUNT THE BUSINESS SIZE EFFECT
It is the dream of every family business to grow and flourish, however there is a dark side related to the size of the business. When new market opportunity emerges, innovation could be the key of success to satisfy the demand of the market. Having a solid and rigid infrastructure may act as a barrier to innovation. In this sense, small businesses will have the advantage of quick decision-making as a response to market changes especially in a world of uncertainty.
In contrast, large family businesses may be affected by the agency costs problems, especially when the CEO is an outsider. In such a situation, the CEO may have short-term value creation strategies unlike the business shareholders who have a long-term vision. This particularly reflects the complexity of large family businesses with weaker governance mechanism.
Better corporate and family governance is one way to balance interests. While the CEO may implement daily operational decisions, the board of directors lead strategically the decision-making in line with the shareholders’ interests including the family. Having a large board of directors may decrease the innovation output due to the complexity of the organization or voting on new procedures or systems implementations. More recently, De Massis et al. (2018) focused on family firms governance and their involvment in control to show that family involvement in the board of directors have a negative impact on innovation, adding an additional dimension of complexity. The innovation output may be therefore viewed a proxy for better governance in family businesses. Large family businesses should be enticed to implement flexible units with decision-making power to deal with the new market opportunities (products, services, systems) in addition to good family and corporate governance practices, which will increase their competitiveness in the market.
To illustrate, De Massis et al. (2018) investigate the German Mittelstand businesses, owned and controlled by families, and their implication in innovation. They observe that Mittelstand firms generate more patents than German non-Mittelstand firms. Building on the above discussion, PWM, world leading manufacturer of the price signs used by gas stations, illustrate the Mittelstand’s focus on innovation. Despite its relatively small size, the family business company succeeded to innovate from generation to generation applying the family governance with a long-term investment view. Another success story of the entrepreneurial spirit is the case of MANE Group, a 4th generation family business, which was founded in 1871 by Victor Mane. Starting as a small French producer of fragrant materials from regional flowers and plants, the family business grew successfully to become one of the leading companies worldwide and has been run continuously by the Mane family. A key point for the MANE Group governance vision and objectives relies on the intense investment in R&D by having 40 different R&D centres all across the World (PwC, 2016). In the same vein, Jahn (2016) found a positive link between the presence of Mittelsland firms and patent activity, highlighting the importance of Mittelstand firms to the country’s innovativeness.
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PwC Family business survey report 2016, available at: https://www.pwc.com/gx/en/services/family-business/family-business-survey-2016/innovation-and-internationalisation-in-france.html
Rondi E., De Massis A., and Kotlar J. (2018). Unlocking innovation potential: A typology of family business innovation postures and the critical role of the family system, Journal of Family Business Strategy, forthcoming
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