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Resources and Innovation in Family Businesses: The Janus-Face of Socioemotional Preferences

EXECUTIVE SUMMARY

 

Introduction

Family firms are a diverse group of organizations, but all have a certain set of “socio-emotional” preferences -- namely, the pursuit of non-economic goals that cater to family desires like maintaining family control, providing jobs for relatives, and maintaining reputation within their communities. But these preferences within family firms are Janus-faced. Some firms strive to create strong businesses that will leave a legacy and can be passed down, and are highly focused on innovative investment. Others fall into the trap of being too altruistic -- providing jobs to undeserving members of the family, or misappropriating firm resources. As a result, the particular socio-emotional preferences of a family firm can have a big impact on its direction, growth, and longevity.

Socio-Economic Wealth and Innovative Environments

Socio-economic wealth (SEW) captures the non-financial goals that drive many decisions within family firms. It is critical for family owners to examine SEW goals in relation to the level of innovation necessary to compete in the different economic sectors in which the firm operates. Without discretion, it can be easy to over-emphasize non-financial considerations while becoming risk-averse and stifling the firm’s ability to innovate. By contrast, firms that prioritize innovation could be called “evergreen organizations,” in that they seek to promote the long-term growth and viability of the company. The environment that the firm is operating within also makes a difference. Competitive and turbulent (high-velocity) markets demand high levels of innovation to remain competitive, but even firms operating in relatively stable (low-velocity) markets cannot afford to stagnate.

It is critical for family owners to examine SEW goals in relation to the level of innovation necessary to compete in the different economic sectors in which the firm operates.

Family Approaches to Innovation

There are four primary approaches to innovation taken by family firms. They can be categorized on the basis of the firm’s SEW goals and the velocity of its strategic environment.

Quadrant 1: Entrepreneurial Innovator
Family businesses in quadrant one embrace innovation in a high velocity environment. By establishing enduring relationships with key resource suppliers and by relying heavily on internal sources of funding, these firms can actually become more innovative than many other types of business. One example is Corning, the glass manufacturer, which has been owned and operated by the Houghton family for over a century. Since its founding, Corning’s stated goal has been to operate at the forefront of its industry, and the firm released the first TV picture tubes, pioneered Pyrex glass, and now makes many essential glass components for the computer industry.

Quadrant 2: Conservative Innovators
Family businesses in quadrant two also strive to create an evergreen business, but they operate in low-velocity environments. These firms may choose to expand beyond their slow-growth markets into new areas of opportunity through subsidiaries and partnerships. An example is HMG Paints, a third-generation family business based in the UK. Threatened by low-cost foreign paints, HMG remains competitive by selling innovative new products like anti-graffiti finishes and coatings for buildings, and temporary grass-paint for sporting events.

Quadrant 3: Tardy Innovators
In the third quadrant, family businesses tend to resist change and innovate relatively little. Because they operate in low-velocity strategic environments, these organizations are more prone to following family traditions and legacy strategies. Nepotism is a common problem. One example is Eaton’s, a Canadian department store that came to prominence during the early half of the 20th century. The success of the business propelled the Eaton family was into an aristocratic lifestyle, but also resulted in stagnation: Eaton’s was slow to adapt to the rise of discount merchandising and by the 1980s their margins were in steep decline.

Quadrant 4: Turnarounds -- Successful and Not
Firms in the fourth quadrant share the SEW goals of firms in quadrant three, though they operate in high velocity environments. But the reliance on preserving family-oriented goals can be particularly damaging under such conditions. These businesses often fail, requiring a risky turnaround. Turnarounds usually sacrifice direct family benefits in favor of short-term business goals focused on quick results. The riskiness of such a maneuver can be seen in Eaton’s attempt to turn the business around. Faced by falling revenue, the family brought in consultants and tried to divide the brand in two: one emphasized “everyday low value” while the others presented an experience tailored to higher spenders. But the brand lost its identity and Eaton’s eventually filed for bankruptcy.

Implications

It is important to realize that no firms are “stuck” in any of the four quadrants. By recognizing the key dimensions and channels of family firm innovation, senior leaders can guide their businesses by making the types of long-range innovative decisions that characterize “evergreen” organizations, and avoiding the pitfalls of those firms that over-privilege family-oriented goals.