Today, family firms represent from 80 up to 98 per cent of all companies globally and reach between 64 and 75 per cent of individual countries’ GDP, depending on the development level of economies in which they operate (Schwass and Glemser 2016). Due to globalisation and the resulting increase in competition, innovation is becoming ever more important, and is a particular challenge in family businesses.
I’m from Lustenau in Austria, and currently studying for QMU’s MBA Family and Smaller Enterprises. My objective for signing up the course was to gain a more detailed understanding of family business innovation, governance and succession planning, as in the future I’m keen on joining my family’s 78-year-old family business, a label printing company.
Of what I’ve learned on the course, the challenge of innovation in family businesses is something that has particularly caught my attention. Every family firm is different, and has its own particular challenges and visions: this is exactly what makes the topic of family business innovation fascinating.
I’m struck by two major reasons for the challenge that family firms face in relation to innovation, and what can be done to mitigate associated risks.
Reason 1: risk adversity.
"Most innovations fail. And most companies that don’t innovate die."
This quote by Henry Chesbrough, an American organisational theorist, who is well known for coining the term ‘open innovation’, implies that taking risks is strongly linked to innovation. Because family firms are often regarded as risk averse, the question arises of how this large group of organisations can master innovation. As every firm is different in its culture and structure, no general suggestions can be given. But we can consider how risk and reward should be apportioned in order to ‘guarantee’ a firm’s long-term viability.
Reason 2: when family loyalty trumps qualifications and skills in employment decisions
This is when employing family members is solely based on altruism rather than qualifications and skills. Such an approach increases the possibility of making unsound decisions, potentially with far-reaching consequences, which in turn threatens innovation. In order to mitigate the likelihood of occurrence of this particular problem, family businesses need good corporate governance, i.e. a clear system of practices and rules by which the firm is directed.
Despite the factors set out above, family driven innovation is always achievable and can create long-term competitive advantage. But this can only be achieved in an environment in which good corporate governance, open, honest communication and mutual respect is established.
SCHWASS, J. and GLEMSER, A.C., 2016. Wise family business: Family identity steering brand success. Springer