Myth and Reality: Why are family firms considered less innovative?
Family firms are usually considered more conservative, averse to taking risks and hardly innovative, as compared to non-family firms. This cliché is present not only in street conversations but also in the academic field, even though solid arguments to cast aside this notion have appeared in recent years.
Some realities and some myths:
- One characteristic of family firms is their long-term orientation, which is a consequence of the will of the business family to leave a solvent business to the next generation. However, for a business to grow and develop over time, renewal and reinvention are essential. The aspiration to maintain the grandfather’s business just as he ran it and left it to his descendants is simply not feasible, especially with unforeseeable economic conditions such as those that appeared in the last decades.Innovation, therefore, is an indispensable condition to meet the goal of passing on the firm to future generations. Without that spirit of innovation, old family firms such as Spanish Codorníu (founded in 1551) or Osborne (since 1772), would not have become the international models they are today.
- But there are more reasons that reinforce the innovative nature of family firms. In a non-family firm, when the time comes to replace people in the higher executive positions, a slightly younger person who has a similar professional profile usually follows the person retiring.In the case of family firms, however, there is often a generational shift as well, i.e., the person retiring is often followed by a person from the next generation. This implies an important change of mindset, since the new person in charge can be 30 years younger than the previous one and therefore have almost all of his or her work and personal life ahead.
- Moreover, the people who follow the previous generation usually have a profile different from their retiring relatives. Often the succeeding generations have a higher education than the previous ones. In the case of family firms, it is increasingly frequent for the successors to face a demanding selection process in order to move into executive positions. The education of the successor usually includes a solid academic formation and work experience outside of the family sphere, which adds up to the years of training in the key aspects of the family firm under the guidance of the previous generation.
- Likewise, the successors receive an important legacy through the family firm’s own values, such as effort, persistence, austerity, excellence, long term orientation and entrepreneurial spirit, as basic foundations of their understanding of business activities, to name just a few.Taking into account these facts, when members of the next generation move into senior management, they have the ability to develop their own ideas but they are usually aware of the need to keep the entrepreneurial drive of their forerunners so as to keep strengthening the family firm. That is, the new managers are in an excellent position to reinvent the business, since they know it from the inside and they also have the new vision of a person with his or her whole work life ahead.
- Another factor that benefits the innovation drive of the following generation is the family’s support for a long-term tenure for the new executive. This support will not be determined by short term results.
Ending the cliché:
The cliché discussed in the opening of this article should thus be put to rest with the arguments presented. There are suitable conditions in family firms to maintain the founder’s entrepreneurial and innovative nature through the following generations. Consequently, family firms can, and must, be at least as innovative as non-family firms, if not more.
About the contributor:
Daniel Lorenzo is Santander Family Business Chair at the University of Cádiz. He can be reached at [email protected].