This article is a summary of a paper with the same title, which I wrote together with Marc van Essen and was published in the Harvard Business Review (Jan, 2017). Research shows that family firms, perhaps surprisingly, are more effective innovators than other companies. This article explores why this creative efficiency may be in place. It seems clear that the first step to become even more an effective innovator, is to better understand why one was effective in the first place!
Family firms are often mistakenly thought of as risk-averse, traditional, and rigid. A recent study, by me and my co-authors published in the Academy of Management Journal, shows that family firms, quite on the contrary, get more innovative output for every dollar invested in R&D compared to both public firms and private firms that aren’t family owned.
There are four main explanations for this perhaps surprising finding:
* Entrepreneurial families tend to concentrate their wealth on one or few firms, which, in turn, allows them to use their powerful shareholder positions to ensure that managers stay focused on innovation.
* The family owners’ long relationship with the firm and deep industry knowledge ensures a higher likelihood that money is invested effectively.
* Family members usually have strong relationships with key stakeholders and partners, from suppliers to customers, which helps provide invaluable feedback for innovation.
* When family owners are leading the company, there are fewer conflicting interests between the owners and managers regarding risk appetite and the time horizon for investments in innovation.
The findings show differences among family firms. It turns out that family controlled companies lead by later-generation family members are more innovative than family firms led by the founders. The data is also surprising for some, yet can be explained. It goes without saying that family firms build up their competitive advantages and cultures over an extended period of time. Furthermore, in firms that have passed on to the second, third, or forth generation, leadership responsibilities are often shared by teams rather than by the entrepreneur alone. It seems that team decision-making may be conducive to more effective innovating, i.e. lead to less time wasted on the sometimes misguided projects championed by strong-willed entrepreneurs.
Our research also shows that family firms can leverage their innovativeness in three ways:
* Being a committed and informed owner: Owners can have a positive impact on innovation by being informed about their organizations and industries, supporting and promoting innovation, leveraging their personal networks, allocating budgets to innovation, being champions for internal entrepreneurship, and by sharing industry knowledge with employees.
* Using the family firm’s culture to empower employees: Owners can influence the firm’s culture by fostering an open culture for new ideas, accepting failure, and encouraging a direct interaction between owners and employees, between management and customers, and by empowering teams to try new things and be allowed to make some mistakes.
* Leveraging trust-based external network: Owners can form small, diverse groups of internal and external networks of managers, customers, professors, and even politicians to discuss ideas for the future.
The data is clear: The productive, supportive involvement of family owners in their businesses will, more often than not, put in place the right infrastructure for new ideas and empower employees to seek out new and entrepreneurial solutions. The result: more effective innovation!
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