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Family-Driven Innovation:
Resolving the Paradox in Family Firms

EXECUTIVE SUMMARY

 

Introduction

Family firms are the most ubiquitous form of business in the world. In the United States, one third of the companies in the S&P 500 are controlled or owned by the founding family, and family firms account for 80-90% of the businesses in the private sector. There can be no doubt that families play an important role in the modern business landscape. However, because many people have assumptions about how families work, they often have assumptions about how family businesses work as well. One central assumption revolves around the concept of innovation -- family firms are often perceived as being more conservative and path-dependent than traditional firms, making them less innovative.

Family firms are often perceived as being more conservative and path-dependent than traditional firms, making them less innovative.

Innovation in the context of family firms is characterized by a paradox. Research has demonstrated that while family firms are oftentimes more conservative, these firms actually have an inherent ability to innovate more than their competitors. In fact, more than 50% of Europe’s most innovative firms are family-owned. How can family businesses resolve this paradox?

Family-Driven Innovation

The Family-Driven Innovation (FDI) model sheds some light on two internally-consistent sets of contingency factors that can help family firms promote innovation. The contingency factors are “where,” “how,” and “what.”

Characteristics
When considering the characteristics of family firms, WHERE refers to the direction the firm wants to proceed in. Some families may be more interested in pursuing family-oriented goals, like building family harmony or identity. Others may be oriented toward the pursuit of non-family goals like pure profit maximization. The direction a firm chooses will largely dictate its growth trajectory. HOW refers to the family owners’ discretion to move forward in the chosen direction. It encompasses all family choices surrounding the strategic allocation or reallocation of resources necessary to meet its established goals. Finally, WHAT specifically captures the resources and capabilities necessary to lead the firm in the right direction.

Strategic Decisions
Similarly, strategic decisions in the innovation process can be aligned with the characteristics of the firm itself using the same three contingency factors. In this instance, WHERE refers to source of the firm’s knowledge (either within its own knowledge base, or by searching in new domains) and can inform decisions in innovation strategy. HOW refers to the firm’s unique approach to innovation. One example: would the firm benefit more for an open or closed innovation ecosystem? Finally, WHAT refers to specific types of innovation that the firm chooses to invest in -- for instance, innovation in products and services versus innovation in the core business model.

Implications

Only by ensuring an alignment between the characteristics of the firm and the strategic dimensions of its innovation process can family owners expect to become more innovative. With attention and management, family firms can become as innovative as other top firms.