Innovation and family businesses

Some family businesses have a long and valued heritage, but do they have a future? A long history suggests stability and success in sticking to what one knows is the best business formula for survival. However, closer analysis of each story often suggests it is a tale of adaptation, perhaps with a constant direction of travel in mind. If family businesses do not incrementally develop, change will come to them in any event like Airbnb challenging the traditional bed and breakfast hostelry model or Amazon eroding the market share of independent bookshops. Therefore, it is important for family businesses to be aware of the importance of being able to adapt. This involves family owner-managers recognising when adaptation is needed and the context in which it is happening. Equally important is the ability to successfully implement that change without taking the essence of the character of the business away.

This requires regular review of the business environment by family managers to avoid any innovation being unduly late or the business being directed down cul de sacs. The timing of such reviews may be highlighted through good liaison with the business’ value chain. This may also come from monitoring the trade and business media or the education sector, which may report the challenges to and opportunities for particular business sectors.

Recognizing trends and the timing of trends is important. Airships never become the mainstay of air travel. The 1980s BAe/Rolls Royce HOTOL project for commercial orbital space travel may have been conceptually sound, but it was too far ahead of its time to have been a practical proposition for the airline industry. With a transgenerational perspective, family businesses are in a strong position to identify and cater for long term trends and support concepts that foster exploiting these opportunities.

In doing so, the relationship between family business heritage and business operations needs assessing. The risk for family businesses is that they become too comfortable with their socioeconomic wealth providing their existing goods or services to their customers in an unchanging manner and enjoying the associated position in society. Nevertheless, it can be the implementation of innovation with its new technology, working practices, performance requirements and cost that can be the tricky – even fatal – bit.

Changes in knowledge requirements may need openness to greater non-family management power in order to obtain relevant ‘new’ expertise. A loyal workforce at a family business can contribute to that decision making and its implementation. This is particularly so for incremental change of existing offerings of products and services. This requires a business that is run in such a way that employees stay long enough to gain expertise to be able to contribute and are motivated to do so. When more radical change is needed, the existing expertise within the workforce may not be helpful as radical change may be tantamount to a new game with new rules that disorientates existing players.

Family businesses, often as small and medium sized businesses, are decision making entities that ought to be quicker in their decision making than larger businesses, even if decisions need to be taken based on incomplete information. This is akin to the OODA loop considered by military strategists (observe–orient–decide–act); the belligerent with the quicker OODA loop is likely to be more agile and thus successful. If the business has little debt or no external investors, this process can be particularly fast as the power of non-family financial stakeholders is low. This quick decision-making capacity assists family businesses in navigating change.

With the advantages and disadvantages of the nature of the family business mentioned above, it is not given that a family business will thrive when facing the need for change simply because it is a family business. Innovation may require raising finance for financial investment in plant and technology, employee training and recruitment of new personnel. What is more fundamental is that the quality of leadership is vital to harness the advantages of the agility of the family business. Around good leadership the advantages of the nature of family business can be accentuated to bring successful outcomes for family businesses adapting to changing or new markets. My colleagues and I at Nexa are able to help with matters arising from innovation and business adaptation more generally through documentation as a foundation for improved business management. We look forward to discussing these matters with you as your family business adapts for the future.

For more information please contact Henry Clarke using henry.clarke@nexa.law

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