How to Institutionalise Innovation
The words “family firms” and “innovation” seem
to be at odds. Family firms smack of tight control, risk aversion, lengthy CEO
tenure, existing in traditional industries and products. Some research has gone
as far as saying that family ownership harms innovation for these very reasons.
Others say it benefits innovation. But both arguments miss a fundamental
variable that determines the innovative edge of a family firm: its “family assets.”
Family assets can be defined as value-creating
resources, such as name, reputation, legacy, networks and cultural and family
values. As Nicolai Foss, professor of Strategic Management at Copenhagen
Business School, and I point out in our recent paper, Family
Assets and Liabilities in the Innovation Process, such assets are capable of attracting
employees, boosting motivation, increasing stakeholder loyalty and building valuable
networks.
This is why I argue that family firms have an
edge when it comes to innovation. Resources such as “family values” cannot be
controlled by non-family firms. They are also able to command loyalty from
suppliers less likely to drive hard bargains because of long-term
relationships. Their ability to base business and innovation strategies on
these kinds of resources is what makes them different.
What makes them innovative?
First, and particularly useful in an innovation
context, is network advantages. Family networks tend to have an edge over
non-family firm networks as they are able to combine their values and
reputation with their contacts. Family firms have a lot more at stake and
honest dealing for the long-term defines key relationships.
A concerted effort to put family members into
relevant circles also helps. Family members of German technology company,
Heraeus, for example, have a long family tradition of acquiring doctoral
degrees and holding high-level research positions in chemistry and physics,
which gives the firm privileged access to the latest scientific knowledge.
The second reason family firms are strong
innovators is loyalty. Family members are much less likely to sell or exit
their businesses, which means they are forced to innovate when faced with
industry roadblocks. Dutch trading company, Van Eeghen is one such example. In
the late 18th century when its trade in Western Europe was
affected by the French revolution and the campaigns of Napoleon, trade with
England was paralysed. Van Eeghen redirected trade to North America, using the
opportunity to buy land and put down roots there. The company continues with
this approach which it calls “functional adaptability”. The most recent
development is a new operating company founded in 1998, focused on nutritional
health and food fortifying ingredients. It has exited commodity markets of
coffee, cocoa, hides and tobacco.
Third, families have an edge when it comes to
motivation. Behavioural economists and social psychologists argue that work
motivation is highly context dependent. Research shows that coordinated efforts
can motivate people in complex situations, such as innovation, but this
motivation often decays over time unless strong supporting structures exist to
maintain it. Family orientation provides this, supporting knowledge sharing and
interrelating, easier among kin than unrelated individuals.
When assets become liabilities
However, the characteristics that make family
firms innovative early on can often become liabilities to continued innovation.
The loyalty of stakeholders mentioned earlier can mean a family firm has to be
too loyal to maintain conducive business conditions in the community where it
was founded. As part of its turnaround after 2004, Lego had to work hard to keep
a large part of its production facilities in Billund, Denmark, while other
companies outsourced to cheaper labour locales, gaining cost advantages.
Family firms can also find themselves tied into
suppliers that might be providing inferior products or inferior organisation.
They can also rely too much on each other, unwilling to let outsiders into the
circles of power, even if a non-family member might be a more effective change
agent.
Institutionalising innovation
So how can a company keep family assets from
becoming liabilities to their innovation? By institutionalising innovation
through family and corporate governance and incentivising key individuals.
For a look at this in practice, let’s look at
the Mulliez family, which founded Auchan in 1961 and has now become one of the
biggest supermarket chains in the world. It also owns more than 20 other retail
brands and has 800 family members, 550 of which are owners of the family’s
cluster of firms.
With such a rapidly increasing family size, the
Mulliez family invented a new organisational structure that, among other
things, would help new generations to be innovators, a crucial step to maintain
succession and longevity.
First, to finance new business ventures, the
family restructured ownership and created a private equity company within the
group. The fund received cash from operating companies. It then developed a
dual governance structure and gave a family board power over the boards of
operating companies, with a clear and transparent guideline for future generations
to follow. Third, a family pact was defined that outlined values to bind family
members together. Fourth, a formal educational system was developed that all
young members had to enroll in to be able to propose new entrepreneurial
ventures to join existing companies. Fifth, as a principle, all family members
hold shares in the holding company, not the operating companies to tie their
incentives together.
This approach enables the family to expand its
business without seeking external capital, transfer family assets across
generations and align incentives. Being able to identify and finance potential
innovators within the family increases the likelihood that the firm will keep
its innovative edge.
Morten Bennedsen, INSEAD Professor of Economics and Political
Science |
Read
more at
http://knowledge.insead.edu/strategy/how-to-institutionalise-innovation-4465?utm_source=INSEAD+Knowledge&utm_campaign=7f0a2d2905-18_Feb_mailer2_18_2016&utm_medium=email&utm_term=0_e079141ebb-7f0a2d2905-249840429#DkFvvEvYEweP0x6q.99
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