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Resources and innovation in family businesses
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PAGE TITLE HERE
Resources and innovation in family
businesses:
The Janus-face of family
socio-emotional preferences
Danny Miller, Mike Wright,
Isabelle Le Breton-Miller and
Louise Scholes
ERC Research Paper No.34
June 2015
Resources and innovation in family businesses
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Resources and innovation in family
businesses:
The Janus-face of family
socio-emotional preferences
Danny Miller
HEC Montréal and University of Alberta
[email protected]
Mike Wright
Imperial College Business School and University of Ghent
[email protected]
Isabelle Le Breton-Miller
HEC Montréal and University of Alberta
[email protected]
Louise Scholes
Durham University Business School
[email protected]
The Enterprise Research Centre is an independent research centre which
focusses on SME growth and productivity. ERC is a partnership between
Warwick Business School, Aston Business School, Imperial College
Business School, Strathclyde Business School and Birmingham Business
School. The Centre is funded by the Economic and Social Research
Council (ESRC); the Department for Business, Innovation & Skills (BIS);
Innovate UK; and, through the British Bankers Association (BBA), by the
Royal Bank of Scotland PLC; HSBC Bank PLC; Barclays Bank PLC and
Lloyds Bank PLC. The support of the funders is acknowledged. The views
expressed in this report are those of the authors and do not necessarily
represent those of the funders.
Resources and innovation in family businesses
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ABSTRACT
Family business socioemotional preferences are often J anus-faced: Some
strive to create a strong business they can pass on to offspring by building
innovation-promoting resources such as human, relational and financial
capital. Other family firms cater to family desires for unqualified nepotism,
altruism towards undeserving kin, and appropriation of firm assets to fulfill
parochial desires that erode these resources. We explore how some such
preferences, together with their impact on resources and the innovation
demands of their markets, shape the approach to innovation.
Resources and innovation in family businesses
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CONTENTS
ABSTRACT ...................................................................... 3
INTRODUCTION ............................................................... 5
A TYPOLOGY OF FAMILY BUSINESS INNOVATION .... 5
Quadrant 1: Entrepreneurial innovators ...................... 11
Quadrant 2: Conservative innovators ......................... 11
Quadrant 3: Tardy innovators .................................... 13
Quadrant 4: Turnarounds – successful and not .............. 17
DISCUSSION .................................................................. 18
CHALLENGES AND LESSONS FOR MANAGERS ....... 22
Conditions for Innovation and Famil y Resources ......... 23
10 Constructive Steps ............................................... 25
APPENDIX ...................................................................... 30
REFERENCES ................................................................ 33
Resources and innovation in family businesses
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INTRODUCTION
Family businesses are a diverse collection of organizations. Yet most are
distinguished by their socio-emotional preferences – namely, non-
economic objectives that cater to family desires such as keeping the firm in
the family, providing jobs for kin, and establishing reputation in the
community. Such preferences are J anus-faced however: some build
resources that facilitate innovation, others do exactly the opposite. For
example, family firms that wish to create a robust business to pass on to
their relatives have unusually long investment time horizons and are willing
to sacrifice in the present in order to develop human resources,
relationships with stakeholders, and financial reserves. These resources
and motivations can promote and facilitate innovation. On the other hand,
other family firms embrace socioemotional objectives such as family-
directed altruism, perquisites and jobs for incompetent family members, the
use of business resources for personal purposes, and the entrenchment of
undeserving family executives. These preferences and practices erode
human, relational and financial resources, and stifle innovation.
We show that some businesses succeed over the long run via innovations
that exploit the resource advantages arising out of some family
preferences, whereas others falter because of their attachment to
resource-eroding, innovation-killing family practices
1
, particularly in volatile
environments. The cases we present illustrate these scenarios and enable
us to extract lessons for family firms wishing to sustain their
competitiveness. The rationale for the case selection and the sources of
data are described in the Appendix.
A TYPOLOGY OF FAMILY BUSINESS INNOVATION
Our proposed framework juxtaposes the non-financial or “socioemotional
wealth” (SEW) goals of family businesses with the level of innovation
needed to compete effectively in the different sectors in which they
operate. Some family business owners are preoccupied with including
Resources and innovation in family businesses
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family members in the firm, using resources for parochial family purposes,
and bequeathing the company to offspring
2
. They use the firm to
propagate family-centric interests, and are risk averse. That can hinder
their ability to innovate which might deny opportunities to the next
generation
3
by threatening firm survival. At the other extreme the family
may desire to build a robust business: they invest in the firm and its
stakeholders, and build the social and human capital resources that enable
them to innovate and thrive
4
. This allows them to keep the firm in the
family for generations to come.
We dichotomize these SEW objectives as “feeding parochial family desires”
and “creating an evergreen organization”. The former is family-centric in
its objectives, and caters to the personal interests, emotions and legacies
of the family. It may encompass nepotism and managerial entrenchment,
and using business resources simply to fulfill family preferences – for jobs,
perquisites, and kinship harmony
5
. That orientation often robs a firm of the
resources needed to innovate.
By contrast, the objective to create an evergreen organization is far more
encompassing as it is aimed, ultimately, at building a healthy, enduring
business. That will require investing in a broader array of stakeholders and
resources that can support innovation – talented employees, social and
financial capital, relationships with external parties, and effective
governance mechanisms. These two rather different types of SEW
objectives will tend to be mutually exclusive. Certainly, these are not the
only SEW objective a family may have: considerations of community
contribution, family reputation, social status and the like may also be
relevant
6
. We have focused on the family desires and evergreen polarities
as these connect especially directly to the issues of family firm innovation.
Strategic environments can be characterized as high or low velocity. A high
velocity environment is unstable; one of rapid, disruptive change. Such
changes may arise in the technologies of the industry, the nature and
degree of competition, and in patterns and preferences in customer
Resources and innovation in family businesses
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demand. An environment of low velocity is more stable and evolves more
predictably and in a less threatening fashion. In high velocity
environments, entrepreneurs and managers must be flexible, adaptable
and innovative
7
. Although family businesses are often portrayed as
competing in mature, low innovation markets, many do operate in turbulent
and competitive sectors that demand significant innovation in products,
markets and processes. Again, for expositional purposes, we dichotomize
family business markets as high versus low velocity, each of which requires
a different set of resources and capabilities with which to compete and
innovate
8
.
These resources and capabilities concern firstly, the innovative expertise
embodied in the family firm’s human capital, an asset some family firms
have unusual access to due to family emotional commitment to the
company and its staff, and a willingness on the part of family members to
work with initiative and devotion for little compensation
9
. Second, is the
social capital derived from enduring family business’ personal networks
that help facilitate innovation
10
. Some families build especially strong ties
with stakeholders because of their long time horizons, which make them
generous and responsive business partners. Third, many family firms are
known for their patient financial capital – which may be needed given the
risks and lags in revenue generation entailed by many innovations. Finally,
some family businesses may shine at minimizing agency costs and
establishing effective governance mechanisms because incentives are
aligned both among family owners and between family owners and
managers
11
. All of these potential resource advantages provide the
wherewithal to endow firms with superior innovation capabilities
12
.
However, the degree to which such resources are abundant relies on the
intention among some family owners and managers to create an evergreen
organization.
Unfortunately, although some family firms possess such resource
advantages, others, with more family-centric, parochial and conservative
preferences suffer resource disadvantages. Preferences such as nepotism
Resources and innovation in family businesses
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may rob a firm of managerial talent
13
and parental altruism may cause
undeserving family employees to shirk their managerial and stewardship
responsibilities
14
. A desire for family perquisites from the business may
drain capital needed for innovation, as would the financial conservatism
stemming from a reluctance to jeopardize family control by issuing debt or
equity
15
. Moreover, cronyism born of some kinship and family ties may
constrain the broader network of talent and the knowledge resources
required for innovation. Family firms confronting such resource
disadvantages tend to innovate too little and too late. And a lack of
innovation in a high velocity market will lead to performance difficulties.
Even where such difficulties trigger a belated innovative initiative to keep a
viable firm in the family, the shortage of resources may doom the project.
Our SEW and environmental dichotomies allow us to differentiate four
distinct approaches to innovation by family businesses, their resource
implications, and the outcomes expected. These are illustrated in Figure 1.
Our framework highlights the resources that family firms in each quadrant
typically lack or have in abundance and which give rise to special
innovation advantages or disadvantages. We develop this framework in
the pages that follow.
The evergreen objective aims to provide a robust long term future for the
family in the business, and perhaps even to make a social contribution.
Our firms in Quadrants 1 and 2 are motivated by that purpose. By contrast,
the objective of catering to parochial family desires and maintaining risk-
avoiding tradition constitutes maintaining family control, meeting personal
perquisites, sacrificing firm resources to achieve family peace, engaging in
nepotism, and installing managers in entrenched positions. Those priorities
are reflected in Quadrants 3 and 4.
Resources and innovation in family businesses
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Figure 1: Innovation and family SEW objectives
Strategic
Environment
SEW Objectives
Creating an evergreen
organization
Feeding parochial famil y desires
High velocity Quadrant 1:
Entrepreneurial
Innovator
Inculcate innovation as
part of the inter-
generational culture
Resources:
Human:
. long term investments in
people (family and non-
family)
. cohesive corporate
culture
. ample mentorship by
previous generation
Social:
. long term relationships
and networks established
with resource-suppliers
and distributors
Finance:
. cautious financial
management to build war
chest to fund innovation
. longer term innovation
projects than rivals
(patient capital);
Governance:
. assiduous stewardship
over intangible assets
. focused board to ensure
innovative ethos
maintained
Case example: Corning,
Maison Louis Latour
Quadrant 4: Turnarounds
Failure to keep up with innovation means that
when it eventually occurs it is necessary to
turnaround the company with too few
resources. Innovation can’t exist in isolation
and badly handled succession can impact on
an otherwise innovative firm
Quadrant 4a
re-
turnaround
Quadrant 4bost-
turnaround
Resources:
Human:
. First generation
innovative but lack of
planning over
departure loses
.innovative human
resource
. next generation
sleepy or
.incompetent to
innovate (nepotism,
entrenchment) or
absent
Social:
.lack of maintenance
of existing social
networks
. failure to build new
social networks
Finance:
. lack of innovation
erodes profitability
and funding for
innovation
. lack of financial
control over
innovation.
Governance:
. family politics
leading to stagnation
. Lack of formal board
with outside directors
Resources:
Human:
. non family human
resources don’t
share same values
. psychological
ownership of the
business,
Social:
. Social capital a
critical part of
turnaround to identify
turnaround expertise
. resurrection of
family values / strong
traditions reasserted
Finance:
. financial control of
innovation
implemented
Governance:
. professional’ board
created including
family and non-
family members
Case example:
Eaton’s; Linn
Resources and innovation in family businesses
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Figure 1: Innovation and family SEW objectives (continued)
Low velocity
Quadrant 2:
Conservative Innovators
Diversifying innovation
ring-fenced as a
subsidiary within the
group. Balanced
approach to innovation
Resources:
Human:
. “kids” interested and
capable of starting new
and innovative venture
. apprenticeships and
training encourage
children of non-family
employees to get
involvement from an early
stage to maintain family
culture.
Social:
. existing social capital
may be of limited
relevance for new activity
. Networking difficult due
to intense competition for
IP
Finance:
. Conservative parent firm
preserves capital from a
cash cow business and
stays safe from
bankruptcy, also provides
slack to fund innovation.
Governance:
. parent risk insulated
through separate
subsidiary
. parent family board
involvement in innovating
new subsidiary may
provide monitoring but
constrain innovation
Case examples: Wates
Group; HMG Paints
Quadrant 3:Tardy Innovators
Hyper-conservatism
Too little innovation
Resources:
Human:
. nepotism and selection from too small a
management pool
Social:
. stick with existing, longstanding networks
Finance:
. appropriation of assets by greedy family
members
Governance:
. family conflict
. abandonment of long-term view
. entrenchment
Case examples: Eaton’s (Canada)
Resources and innovation in family businesses
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Quadrant 1: Entrepreneurial innovators
Family businesses in Quadrant 1 embrace innovation in a high velocity
environment. They inculcate innovation as part of an inter-generational
culture in order to create an evergreen organization. Succeeding family
generations are mentored, often from early life, to become enthusiastic
about and capable at progressive approaches to continual product-market
innovation. These businesses frequently have an advantage in developing
resources that facilitate innovation: these include a long term perspective
that induces them to invest in enduring relationships with internal and
external stakeholders, to contribute patient capital, and to forego quick
returns. Most successful companies in this quadrant develop enduring
associations and solid networks with resource-suppliers and distributors
who can facilitate and adapt to innovation. Their patient capital, typically
provided by family members, enables them to undertake innovation
projects with longer payoff periods than rivals are willing to accept. Their
cautious financial management builds war chests to fund innovations
internally that might otherwise be risky in an uncertain environment with its
inevitable challenges and unexpected roadblocks. Such reserves may be
especially critical to family businesses, which often are reluctant to dilute
control by seeking outside funding. Internal funding and authoritative
decision making by family leaders allow innovation projects to be decided
upon swiftly, and with less comprehensive data. At the same time, concern
for evergreen objectives such as family reputation exerts extra pressure on
some firms, in the course of their innovation initiatives, to exercise
assiduous stewardship over company image, quality of offerings, and
ongoing relationships with stakeholders.
The examples of Corning and Maison Louis Latour are illustrative of highly
successful entrepreneurial innovators (see Appendix table). Corning has
been producing glass related products for well over a century. Founded
and for much of its history controlled and managed by members of the
Houghton family, Corning has led its industry in innovation almost since its
inception. It created the first radio tubes for Marconi, the first television
Resources and innovation in family businesses
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picture tubes for General Sarnoff at RCA, the first heat resistant Pyrex
glass, the first fiber optic cable, and numerous special types of glass for
computer digital devices. The family’s objective was to remain forever at
the forefront of the industry in which it operated, consistently investing in
projects with very long term payoff horizons, while being cautious to fund
these bold ventures with its older, cash cow products. The family was
deeply embedded in the community of Corning, New York, where its civic
contributions are legendary. For example, after a catastrophic flood,
Corning helped to rebuild the entire town and kept staff on the payroll even
while its plants were idle. Employee turnover was extremely low and
promotion from the inside was the norm. Corning also excelled at forming
very long term partnerships, some of many decades duration, with
inventive firms with which it engaged in its projects of innovation, some of
which could help in the design and production of complex devices. In
short, at Corning human, social, and financial capital born of family values
and discipline helped to create an innovation success story and a firm that
has, despite some serious bumps, proved to be evergreen.
16
Maison Louis Latour is an eleventh generation wine producer based in the
Burgundy region of France, with the current CEO being the seventh Louis
Latour. The firm has inculcated innovation over multiple generations. A
family culture of stewardship assures that the business will be innovative
throughout successive tenures, and will be in a position to bequeath a
robust organization to future generations. The current CEO and his father
have taken the initiative to expand from the traditional Burgundy region and
acquire vineyards elsewhere in France, for example, in less fashionable
Ardeche, Var, Chablis and Beaujolais. They also have pioneered varietal
wines, which are quite new to France. In Var they are developing a quality
Pinot Noir styled as a Burgundy but with more stable costs of production
compared to the Burgundy Pinot Noir. Maison Louis Latour makes use of
both human and social capital resources in the newer regions in which it
operates. In Ardèche, as in the Var, they develop relationships through
long term and comprehensive contracts with local growers. In Chablis and
Beaujolais they are working with local growers to build the reputation of
Resources and innovation in family businesses
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certain domains as quality wine producers. Maison Louis Latour does not
always purchase the land itself but forms partnerships with skilled local
growers to create a balance of power with the growers. This avoidance of
takeovers reduces the financial demands needed to fund expansion. Latour
has also evolved long term partnerships with other family businesses, such
as the fourth generation wine freighting company Porter and Laker, who
have developed innovative ways to transport wine in bulk. The father of its
current CEO is the president of Latour.
Latour’s governance policy dictates that the previous generation act as
shareholders, while the current CEO reports to them during the first ten
years of tenure to ensure that the two generations run the company
together and reinforce the innovative ethos. Subject to the requirement of
competency and a desire to take the reins, the business is typically passed
from father to eldest son without involving brothers and sisters in the
business, although they may be equal shareholders. That policy prevents
sibling battles that might detract from the company’s ethos. According to
the current CEO: "The biggest advantage of having only one family
member [in charge] is that you are in a position to hire the best people that
you can. When you start to have a lot of family members it is difficult to
have [talent] from outside to come in. Because I was the only one, and my
father was the only one, it [helped] attract the best [and most innovative]
people in the wine industry in Burgundy". Unitary family leadership also
enables the courageous decision making required for bold innovations. As
the Marketing Director of Latour’s partner, Taylor-Wakefield expressed it
“There is a healthy willingness to discuss and to investigate and make a
fast decision on whether [we are] going to do something or not … without
having to have it proved in endless research."
Quadrant 2: Conservative innovators
Family businesses in Quadrant 2 (Q2) also strive to create an evergreen
venture, but operate in low velocity environments. Often, to achieve that
objective, they seek to move beyond their sometimes limiting, slow growth
Resources and innovation in family businesses
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domains into more thriving, sometimes more competitive, market sectors,
typically by setting up a financially independent subsidiary to undertake the
boldest and riskiest renewal projects. Family may also use the new venture
to fill positions for young, inexperienced family members who are motivated
to innovate, and, importantly, to insulate the family reputation and the old
business from the risks associated jeopardizing the firm as a whole. For
example, Q2 firms may protect their core business by establishing arms-
length subsidiaries in which the next generation plays a key innovative
role
17
. If the subsidiary turns out not to be profitable and has to be shut
down, this can happen without capital, war chests, and a long-term
orientation towards relationships – also apply here in Q2. The capital from
the cash cow business of the parent may protect the subsidiary from
financial distress and fund innovation. Typically, family officers involved in
the parent may serve on the board of the new venture. A potential
downside of such involvement is that although it may provide useful
counsel, it may also constrain innovation. Moreover, the social capital of
the parent may be of limited relevance for the new subsidiary, so attempts
to build new networks may be difficult.
The examples of HMG Paints and Wates Group are illustrative of
successful risk averse innovators (see Appendix table). HMG Paints is a
third generation family business based in the UK. The company operates
in a location and sector where many volume paint manufacturers have
been squeezed out by low cost foreign producers, and it competes mostly
through moderate product and process innovation in the specialty paints
segment of the market. Product innovations include biocidal antifouling for
boats, flexible paint for commercial truck sides, PVC finishes for
architectural coatings, temporary grass markings for sports grounds, and
anti-graffiti coatings for buildings. The fourth generation is currently
developing an online marketing business to bring the firm’s products to a
wider consumer audience. Apprenticeships encourage children of non-
family employees to be involved from an early stage to maintain the family
culture; they also reduce outsider domination. The company boosts its
reputation by supporting local community enterprises. Networking with
Resources and innovation in family businesses
15
other producers is difficult as competition for intellectual property is fierce in
some slow moving sectors. Rather, social capital is mainly focused on that
derived from close networks with distributors, some of them other family
firms. The company refuses to recruit outside non-executive directors to
avoid constraints that might compromise innovative initiatives.
According to the CEO “our modus operandi is to pursue a sort of organic
growth within the core business and to be carrying out a few “outer edge”
projects that could be very big, very exciting or crash and burn!” Some of
these new initiatives have been ring-fenced to protect the core activities.
For example, whereas the brother of the current CEO is on the board of
HMG, he has also established a separate spin-off business in the
chemicals sector, Byotrol, which is now listed on the secondary tier stock
market, the Alternative Investment Market. This arrangement avoids
exposing the parent company to the unusual risks involved in Byotrol.
According to entrepreneur Stephen Falder, (brother of HMG CEO J ohn
Falder), “Faced with a family business that’s got stability, security, don’t bet
the farm… so [in Byotrol] we have a small PLC which is completely
divorced [from HMG and] a listed company the Falder family owns 7%
of….Yes spun it out, the right thing to do with innovation”. Thus, in effect, a
conservative family has isolated its bolder innovation initiatives in a
separate business – preserving security for the main company, and
providing the family with opportunities for riskier rich innovative initiatives in
a growing niche of the chemicals sector. As the CEO stated “..the future of
170 people and their families is at stake in making the right choices”.
The Wates Group, one of the largest construction groups in the UK, has
also developed innovative activities, often involving the next generation,
which are ring-fenced in innovative subsidiaries. The company has
diversified into sectors such as residential development, housing,
education, local authority work, heritage projects, responsive maintenance,
and retail and interiors. Family owners position themselves as professional
stewards who ensure that from the CEO on down, the business will be
focused on attracting the very best talent and being around for the long
Resources and innovation in family businesses
16
term: as they proclaim on their website: “[Our] values, long term vision and
financial independence have enabled us to thrive throughout the economic
ups and downs of more than a century”.
Wates’ approach to supply chain management is to work in partnership and
form strategic alliances with a few like-minded sub-contractors with whom
they have been working for many decades, in part cemented by family
connections. This has produced a strong track record in shortened delivery
times, improving standards in health and safety, superior quality, more
effective processes, cost savings and reliability. As a family-owned
business, Wates demonstrates unusual respect for its people, communities
and the environment, embedded and celebrated as values in the rituals of
the organization. It has a strong social ethos and long record of
philanthropy, making deep, long lasting connections within communities
through its Building Futures program supporting the long term unemployed,
and via low carbon sustainability programs. The company maintains a
strong financial base with superior levels of liquidity, a commitment to long
term investment, and rigorous financial management. Its financial stability
is underpinned by a diversified portfolio of operations which help insulate it
from the macroeconomic challenges of the construction sector.
The Wates Board reinforces its emphasis on external relationships and
innovation. It consists of the Chairman, Chief Executive, Chief Financial
Officer, Chief Operations Officer, four Family Directors and three
independent Non-Executive Directors. This keeps the firm open to outside
perspectives for renewal and opportunity and avoids family parochialism.
The board also is committed to achieving the highest standards of
corporate governance, conducting its business responsibly, and in
accordance with all laws and regulations to which Wates’ business
activities are subject. It delegates authority for all day to day management
of the Group’s activities to the Executive Committee which consists of
Directors responsible for the strategic business units and key functions.
Resources and innovation in family businesses
17
Quadrant 3: Tardy innovators
Family businesses in Quadrant 3 resist change and innovate relatively little.
Their operating in low velocity environments often allows them for many
years to maintain family traditions and legacy strategies. Thus SEW
objectives often take the form of providing jobs and perquisites for
relatives, and are family- rather than business-centric. A penchant for
nepotism causes managers to be drawn from too small and shallow a pool
of talent. Although these firms tend to stick with long-standing networks,
they are too often inward looking, subject to cronyism, and inflexible.
Family shareholders not running the business may appropriate assets so
that funds for renewal are lacking for strategic initiatives and long term
investments. Such problems may be exacerbated by family conflicts,
especially where those in charge are reluctant to prune unproductive
members. Where the firm is large and established and enjoys preferential
relationships with stakeholders, a lack of competition can enable these
firms to survive for quite a long time. Ultimately, however, they do tend to
founder.
The example of Eaton’s is illustrative of this dearth of innovation (see
Appendix table). Eaton’s was a century old Canadian dry goods
department store that operated in major cities across the country. Owned
and mostly run by members of Toronto’s Eaton family, the firm was known
for its judicious selection of quality goods, middle range prices, excellent
service (satisfaction or money refunded, and home delivery of merchandise
when those were rare policies). The firm grew to substantial size and the
family became wealthy members of the Canadian “commercial aristocracy”.
By the 1980s, however, the velocity of the environment changed. Eaton’s,
began to be squeezed from below by discount merchandisers and from
above by luxury department stores catering to a growing wealthier class.
At the same time, the company had begun to rest on its laurels, allowing
some of its stores to become stodgy, its famed service ethos to erode, and
its selection of merchandise to be perceived as quaint and passé, in part
because its information systems were behind the times and because the
Resources and innovation in family businesses
18
later generations of the family had become complacent. Innovation in store
design and merchandising was nowhere to be found. The family, it
seemed, had become less interested in the business and more interested
in the rewards it produced for them. Family centric preferences had begun
to override the needs of the business, in the process eroding human,
reputational and financial capital. Margins began to decline. We shall return
to the fate of Eaton’s in the next section.
Quadrant 4: Turnarounds – successful and not
Firms in Quadrant 4 have similar family-centric SEW objectives to those in
Q3, which are especially damaging – usually fatal -- in these high velocity
environments. Thus a scenario most relevant to this quadrant is that of the
failure or turnaround. Sometimes the history of these companies is one of
an entrepreneurial founder failing to provide the next generation with the
attitudes and skills needed to innovate. The departure of that person
leaves the firm without the talent or motivation to renew the company. The
result is that the business needs to be turned around by the reassertion of
an innovative ethos, either through re-entry by the founder, or via the
recruitment of competent new executives from within or outside the family.
Quadrants 4a and 4b relate to unsuccessful and successful turnarounds,
respectively, and we shall deal with them in turn.
Turnarounds can be risky, especially when a firm lacks a talented family
successor. Bringing in outside managers, or unsuited family members,
during a leadership vacuum may sacrifice the benefits of the longer term
family investment perspective, and evoke a short term orientation focused
on quick results. As we shall see, this departure from a family’s traditional
approach can lead to inefficiencies and excessive costs. Moreover, a
failure to maintain business and family relationships and build new ones
may deprive the firm of useful innovation partners. In what is a vicious
circle, a lack of effective innovation ultimately erodes profitability and thus
funding for future innovation. This problem is exacerbated where financial
control systems have not been established or governance is weak. Finally,
Resources and innovation in family businesses
19
conflict and family politics triggered by the crisis may plague the board, as
may the arrival of an unskilled new generation.
A continuation of the Eaton’s story from above exemplifies such a risky
turnaround. At Eaton’s the passing of the old generation and the
unwillingness of the more talented family members to take part in the
business left the firm in hands of an inexperienced and whimsical scion of
the family – a former race-car driver. More interested in his hobbies than in
the business, George Eaton hired a slew of consultants to help renew the
company. But he lacked the talent to know which advice to take and the
dedication and know-how to implement a coherent revitalization program:
The result was a very incomplete grafting of new ideas onto an old ideology
and infrastructure. Eaton’s implemented an “everyday low price” policy that
precluded the profitable discount sales which enabled the store to recoup
its investments on merchandise that did not sell well -- an inevitability in
fashion goods industries. Eaton’s also created some “prestige” outlets to
compete against higher end competitors – but it did so in a half-hearted
way and located the stores in less affluent neighborhoods, thus failing to
attract wealthy customers and also alienating traditional clientele.
Customers no longer knew what to expect in pricing, merchandise
selection, or décor and layouts, which now varied from store to store.
Eaton’s had lost its identity, and its clients. Due to the absence of
managerial resources, a demotivated workforce, and an ever more
precarious balance sheet, the turnaround effort failed and the firm declared
bankruptcy.
Contrast this experience with the successful turnaround dynamics exhibited
by Linn (Quadrant 4b). Linn is a manufacturer of high end music systems
for the home, operating within a very competitive and innovative sector.
The firm was highly successful in developing novel products under the
founder (Quadrant 1) but then lost its way when the founder became ill in
2003 such that by February 2007, the need to change had become
imperative as the company had slipped into Quadrant 4. After 2003 there
had been two succession attempts that were not successful. Succession
Resources and innovation in family businesses
20
attempt 1 (2003-5) involved giving non-family senior managers control of
their own divisions but this ultimately led to a somewhat fragmented
organization. Succession attempt 2 (2005-7) involved the appointment of a
non-family CEO from inside the company, but by February 2007 the bank
refused to extend the company’s overdraft or support the CEO. The
company was carrying debt which suddenly became unacceptable for its
bank, partly due to the 2007 recession. The bank then appointed a
turnaround specialist in 2007, the company doctor, who worked with the
founder to restore the company to financial health. The turnaround was
completed by 2009. The son of the founder had been working in the
business since 2003 as R&D director and was appointed CEO in 2009
once the turnaround had been completed and the debt had been paid off
(succession attempt 3). The son was at the forefront of the turnaround
effort and designed a new technology platform which was launched in
August 2007. This platform addressed the growing customer demand for
streaming music from hard drives and the internet. It delivered higher
performance and quality than any other product on the market and thus
allowed Linn to establish a leading position in their industry, which they
have since retained. The new platform therefore played a significant part in
the turnaround, offering something highly innovative to the market, and
helping Linn to repay the bank. “I had a very clear understanding of the
kind of company he [father] wants Linn to be [more innovative] … and was
clear of what I needed to do”. The turnaround thus “restored the company
back to my father’s original vision”. According to the current CEO the non-
family managers involved in the two previous succession attempts “were
just doing what they thought was the right way to grow the company and
they maybe didn’t share the same values [as those that are] much more
attributable to owner-managed family businesses” and “The company was
not in shape, innovation had not progressed at the rate it ought to have
done in those intervening years [since 2003].
Governance at Linn was altered in the process of each succession attempt.
The founder created the group structure in 2003 (phase 1) and the board at
that time consisted, in essence, of the most senior people in the company.
Resources and innovation in family businesses
21
When the non-family CEO was appointed in 2005 (phase 2), the board
became a formal ‘family’ board made up of family members and the non-
family CEO. This board did not support the management adequately as its
objectives tended to be dominated by family objectives. In 2009 (phase 3),
under the son and current CEO and after the turnaround, Linn transitioned
from a family board to a professional board where a more effective,
objective, governing body was established, with three non-family outside
directors selected because of their experience: a turnaround specialist
(operations), a marketing consultant (marketing) and a chief technology
officer from one of the suppliers (technology). In other words, the outside
directors covered the three main areas of the business. The current Linn
board now has significant independence, more balanced objectives and
extensive business experience. Many of the board own Linn products so
they understand and support the company’s innovative culture. “What we
have today is a board that …challenge but they support, they’re an
effective way of formalising the relationship between me and my father.”
The current CEO states about Linn’s innovation process that “if your values
are clear then everybody can understand...innovation is continuous...a lot
of our innovation is grass roots… because the engineers/everyone can
understand the company values therefore that allows the engineers to
innovate from a grass roots level”. Moreover, the new management is in
the process of successfully aligning opportunities with the emerging
innovative capabilities. “[capabilities] they’re always growing…. we’re
building on them …adding capability all the time”. Financial resources are
sometimes ring fenced for new business ideas, some of which have their
own 3/5 year plan. The renewed presence of family technical and
managerial talent, combined with good governance, and continuous
innovations, has helped to get the company back to Quadrant 1 where it
was in 2003, before the founder became ill. Linn remains today one of the
most innovative companies in its industry.
Resources and innovation in family businesses
22
DISCUSSION
Certainly, firms are by no means “stuck” within any of our quadrants. The
altering influence of family and the changes in leadership as different family
members get involved may be important sources of transition. Eaton’s was
never the same in its approach to strategy and innovation after its last
succession in family leadership. Linn moved from a creative approach
with its founder (Quadrant1) to a troubled situation after several failed
succession attempts, financial problems and weak governance (Quadrant
4a). The company finally resolved its problems with the help of a
turnaround specialist, several product introductions, and a new family
successor (Quadrant 4b) and is now firmly back in Quadrant 1. Another
source of transition may be the changing environment such that an older
approach no longer works and there develops a mismatch between family
governance and the demands of the market, as was the case at Linn. In
other words, our quadrants represent common configurations rather than
fixed boundaries
18
.
It is important, moreover, to recognize that families can be as different as
their socio-demographic characteristics and the personalities of their
members. As such it is dangerous to postulate any one influence of
families on innovation. For example, where there are numerous family
members who share power but cannot get along because of childhood or
parental friction, then concerted innovative action may be very difficult.
Similarly, where an incompetent successor takes over simply because that
person is a favorite child of the founder, that too augurs poorly for the
success of the innovative effort. In short, the human element of the family
looms large in these businesses, and so often the very best clues as to
their innovative potential lies not so much in a firm’s systems and
structures, but in the talents, motivations and interactions of the family
members involved. These familial factors shape the SEW priorities that
we have highlighted, along with the nature of the resources they enable or
inhibit. Indeed, we see from our examples how family SEW priorities are
by no means uniform: those concerned with longevity and a multiplicity of
Resources and innovation in family businesses
23
stakeholders act for the benefit of innovative family businesses, while the
more parochial family-centered priorities can hobble innovation.
CHALLENGES AND LESSONS FOR MANAGERS
For expositional purposes we have simplified the array of choices facing
family firms and their innovative missions in order to emphasize the J anus-
face of family SEW preferences. For example, we have shown how family
preferences regarding nepotism despite successor incompetence (the
Eaton’s example) can impede innovation, whereas an emphasis on family
traditions of quality and pioneering can serve to enhance innovative efforts
(the Linn example). It remains important to ask what family businesses
must do – and what must they avoid doing – in order to choose the right
side of this dichotomy?
Our analysis suggests that above all it is vital for them to embrace an
attitude of stewardship. One family CEO told us he viewed the business
not as something he owned, but as a precious asset of which he was the
caretaker. He saw his job as keeping the business healthy for the benefit of
later generations and the larger community. But given the inevitable
changes in his business environment he stated that innovation was a
necessity, not an option, in order for the business to remain evergreen.
Clearly, family principals must foster stewardship to develop resources in
which family firms have an advantage, and which bestow superior
innovation capability.
At the same time, family firms must avoid the pitfalls of hyper-conservatism
-- governance structures that sap resources, spoiling family members, and
favoring nepotism – especially where the managerial task is complex. For
example, as suggested by the case of Latour, a desire to continue father-
to-son succession can work well only if the son is appropriately motivated
and competent at innovation. Other enemies to innovation include glass
ceilings for non-family managers, resistance to change, intolerant cultures,
and personal loyalties that mire firms in old technologies and inappropriate
Resources and innovation in family businesses
24
locations.
Our analysis enables us to draw some general lessons regarding the
different resource configurations that need to be developed to sustain
innovation, contingent on the environment in which the family business
operates.
Family firms seeking to develop evergreen innovative family businesses in
high velocity environments need to make long term investments in family
and non-family human capital involving the development of a cohesive
corporate culture and ample mentorship by the previous generation,
establish long term relationships and networks with resource-suppliers and
distributors, prudently manage finances to build a war chest to fund longer
term innovation, and build a focused board to ensure that the innovative
ethos is maintained.
Family firms seeking to develop evergreen innovative family businesses in
low velocity environments need to make long term investments in the next
family generation interested in and capable of starting new and innovative
ventures, develop mechanisms to involve the next generation of non-family
employees to maintain the family culture; build new social capital to enter
new innovative areas, utilize capital from cash cow businesses to fund
innovation, and perhaps insulate risk to the parent by conducting
innovation through a separate subsidiary with a board that provides
monitoring but does not constrain innovation
19
.
In short, it will be necessary for the family to distinguish among those
socioemotional preferences and objectives that spawn the creation of
resources needed to ensure innovation, evergreen survival and superior
relationships with stakeholders, and those oriented towards parochial
family benefits that curtail resource-building, curb innovation, and threaten
long-term survival.
Resources and innovation in family businesses
25
Conditions for Innovation and Family Resources
Effective organizational action -- innovation in products, markets and
processes included
20
-- can only take place when three conditions are
present jointly: awareness of the need to act, the motivation to undertake
the action, and the capability to act effectively.
21
Family resource
advantages play a role in either facilitating or impeding each of these
conditions. For example, awareness of opportunities and shortcomings
that suggest the need for innovation may be enhanced via strong
relationships that families build with partner organizations or key clients.
Social capital and trust may strengthen those relationships. By the same
token, family members’ psychological ownership of the firm may provide
them with the motivation and incentive to innovate, despite the costs and
risks such innovation might entail. Because there are frequently strong
personal ties between family members and their employees, some family
firms are able to create cultures in which there are powerful reciprocal
loyalties among the family and its staff (this was exemplified at HMG
Paints). That can create energized and highly productive human capital
resources that non-family firm rivals that are more formalized, bureaucratic
and impersonal would find difficult to imitate
22
. Finally, the capability to
innovate may be enhanced by long term investment horizons, patient
capital and loyal stakeholders
23
. In short, the resources which family firms
have an advantage in building may all contribute to effective innovation
outcomes.
Unfortunately, family resource disadvantages can prevent effective
innovation by acting on these three conditions, and this again relates to the
more parochial, insular and family centered socioemotional family priorities
we have discussed. Awareness may be hobbled when family executives
who tend to have long tenures and are entrenched in their jobs for decades
grow stale and unresponsive. Motivation may be lacking where later
generation family members, often passive owners, wish to draw capital
from the enterprise instead of investing it for the future benefit of the
business. Family conflict can have a similar effect. Finally, capability to
Resources and innovation in family businesses
26
innovate may be hobbled by weak managers selected via nepotism and by
the extraction of funds from the business by family members who are
alienated from the family or the firm.
10 Constructive Steps
There are a number of ways a family can facilitate innovation by nurturing
the positive resources and avoiding the forces of resource erosion. First,
they must foster attitudes favorable to innovation across the generations: to
transmit the passion and creativity of many founders to the many who
follow them. This not only involves the family members who will take over
the company but also other next generation family members who will
become influential shareholders. That may be achieved by passing on
values and legacies that celebrate innovation and renewal, even beginning
in the family hearth, by regularly recalling past achievements in innovation
and the courageous quests required, and by encouraging a firm culture of
creativity through meritocratic promotion. This may mean that cherished
practices involving, say, father-to-eldest son succession may need to be
altered if the eldest son in a particular generation does not possess the
competences or motivation required for innovation
24
. The process of
deciding whether the eldest son is the best potential innovative successor
needs to begin early in case alternative candidates need to be identified
and mentored. A climate of innovation may also be aided by flat
organization structures and excellent cross functional and vertical
communications, by welcoming experimentation, and by tolerating errors.
Second, because innovation, especially in more volatile environments,
demands significant managerial and often technical and creative human
capital, expertise and motivation are essential. This can sometimes be
fostered via formal education, having family members garner work
experience at innovative firms outside the family company, and by
mentoring later generation family members in various roles in the family
firm.
Resources and innovation in family businesses
27
Third, where there is too little innovative talent in the family, it will be
essential to hire outside experts, and often to eschew nepotism in high
level management positions. Moreover, where, in competitive
environments family managers lose touch with the market or become
obsolete in their competences, their kinship must not promote
entrenchment, and the board must act to replace them. Indeed, as noted,
because of the personal nature of family firms and the freedom of family
owners and managers to take a long-term view, they may be able to
develop enduring win-win relationships with their employees by taking the
time to hire very selectively, mentor assiduously, and reward generously.
Although the initial costs of such an approach might be significant, the long
term benefits may make such “culture-building” worthwhile.
Fourth, it will be useful to develop governance through expertise and
independent judgment on boards of directors that is consistent with
delivering the kind of innovation needed for firm survival and success.
Outside management and board members with innovative experience, or
even turnaround experience, may be recruited to provide added expertise
and fresh perspectives on market opportunities. There must also be an
attitude of commercial objectivity and independence from management
such that the board is able to oust poorly performing family members.
Boards also will have to be able to evaluate and be willing to approve the
significant investments often needed for projects of innovation. At the
same time, they will have to have the independence from family politics
needed to deny parochial requests from family members that rob the firm of
financial resources or saddle it with inferior human capital. Family firms with
‘family boards’ may be able to pre-empt problems by approaching their
accountants, lawyers or banks in order to find suitable candidates for their
boards
25
.
Fifth, there is a need for innovative family firms to develop networks of
long-term partners who share their innovative ethos and who can be
adaptive and help co-create innovation. And because innovation is
dynamic, board development involving outsiders can also help extend the
Resources and innovation in family businesses
28
social networks needed to facilitate innovative activity in new areas beyond
traditional activities. This makes it especially useful to recruit board
members for both their independent expertise and their contacts.
Sixth, decision making and implementation processes must be developed
that facilitate innovation compatible with different SEW goals, and which
meet the needs of the competitive environment. In other words, it is
important to achieve an appropriate match between family objectives and
environmental demands. Sometimes a family is so dominant that an
ideology of innovation runs rampant and the firm innovates far more than
their environment would reward. More likely, they may be entrenched in
past ways and innovate too little. Furthermore, the time horizon of family
objectives needs to be consistent with the demands of the market if an
innovation is to be successful. Too short a time horizon will not allow for
the funds, planning, or human resources required for innovation; too long a
time horizon may drain firm resources and tax family funds due to the long-
delayed payoffs.
Seventh, although we focused for expositional purposes on distinguishing
two aspects of SEW goals of particular salience for innovation, in practice
there can be a grey area where there are gradations between these poles.
Further, SEW-related goals may co-exist with other goals and will probably
change over the life-cycle of the firm
26
. The statistic that few family firms
are handed down to the grandchildren of the founder is one possible
indicator of the changing goals of the family over time
27
. As a result, there
is a need for careful negotiation among owners and managers to resolve
potential conflicts between goals that may compromise the need for
innovation if the family business is to be able to continue to compete
effectively or even survive. If conflicting objectives compromise survival it is
important for this to be recognized, and acted upon, as soon as possible,
and for alternate plans to be set in motion, for example, the possible sale of
the company to the management team or to a commercial buyer.
Resources and innovation in family businesses
29
Eighth, our examples also indicated that the velocity of the competitive
environment may change over the life-cycle of the family business. Such
changes call forth a need for family businesses to adopt governance and
managerial processes that anticipate environmental changes and facilitate
requisite changes in resources and capabilities.
Ninth, as illustrated by our contrasting cases, there is a need for prudent
financial management. Careful husbanding of financial resources is crucial
if the family firm is to reconcile the need to be innovative on the one hand,
and maintaining family control of the firm by eschewing external finance on
the other.
Finally, it will be essential to introduce mechanisms that ensure that
parochial initiatives compromising long term SEW and commercial
aspirations will be terminated. All businesses face the problem of
abandoning the pet projects of key personnel. In family businesses this
may be a particular challenge wherever it uproots family members involved
in such activities. Therefore procedures must be in place to redeploy
these employees elsewhere in the firm. In short, there is a constant need
to be vigilant in reconciling family-centric SEW objectives with the resource
and innovation requirements of the business.
It is encouraging that in an age in which short-termism has dominated
many non-family firms, the family firm, if managed properly to exploit its
preferences and the natural resource advantages they bring, may be an
especially productive fount of significant innovation for many decades to
come. The framework we have developed provides a new typology of
innovation in family businesses based on different goals and environments.
It shows that different family goals, in isolation, offer a partial understanding
of innovation in family firms. Clearly, environmental velocity is an important
moderator of the performance consequences of family firm innovation, and
thus family firm goals. All of these factors must be considered in order to
have a more complete picture of innovation in family businesses.
Resources and innovation in family businesses
30
APPENDIX
Case Data
We have selected our cases in order to illustrate all of the different
segments of our typology and to include firms where information could best
be accessed on their histories and teams. We have used multiple and
varied sources to collect data on the cases presented. We employed face-
to-face interviews, company websites and other secondary sources such
as financial and business reports, presentations, press releases, magazine
articles and books. For some of our cases, interviews were conducted with
both CEOs of the family businesses as well as with other family and non-
family members and stakeholders involved in the firms. For those cases,
interviews lasted between one and three hours.
Resources and innovation in family businesses
31
APPENDIX
Family related innovation resource advantages and shortcomings from our case
examples
Resource
Categories
Background Human Social Finance Governance
Corning Founded
1851; glass
related
products;
public; New
York, USA
Productive long
term investments
in people
Cohesive
corporate culture
Ample
mentorship
across the
generations
Favorable
relationships
and networks
established with
resource-
suppliers and
distributors
Family deeply
embedded in
community
Cautious financial
management to build
war chest to fund
innovation
Longer term
innovation projects
than rivals (patient
capital);
Assiduous
stewardship over
intangible assets
Maison Louis
Latour
Founded
1797;
eleventh
generation;
wine
producer;
private;
France
Utilize expertise
of local growers
in areas they
have expanded
into.
Win-win
contracts and
relationships
with distributors
and other wine
producers
Long-term
partnerships
with other family
firms
Ample internal funds
Economies in
innovation by using
relationships/contract
s in new areas rather
than takeovers
Energized family
culture of
stewardship
Eaton’s Founded
1869; dry
goods
department
stores;
public until
bankruptcy
Canada;
70,000
employees
prior to
failure
Older generation
owners and
managers sleepy
and complacent
(nepotism,
entrenchment) or
absent as
effective retailing
executives
Costly failure to
maintain good
relationships
with clients due
to stodgy stores
and
merchandise
Increasing
discontent
among staff who
see decline in
Eaton’s quality
image
Lack of innovation
and failure to keep
up with emerging
competition and
changing fashions
erodes profitability
Decreasing
psychological
ownership of the
business by the
family in charge
Family politics
contributes to
stagnation
Non-family
managers favor
short term focus
Linn
During
Phase 2
Founded
1973; now
second
generation;
High end
music
systems;
private;
Scotland
Two succession
plans failed
leading to crisis
(along with the
recession).
Company doctor
(bank appointed),
founder and
second
generation family
restore the firm
Social capital
used as a critical
part of
turnaround to
identify
turnaround
expertise, find
NEDs.
Innovative, but
company debt
becomes
unacceptable to
bank during
recession
Turned around by
‘external’ company
doctor with help from
new innovations
Lack of formal
board or
subjective ‘family
board’
Turnaround
involves setting
up a new
professional
board with more
objective NEDs
Resources and innovation in family businesses
32
Family related innovation resource advantages and shortcomings
from our case examples (continued)
Wates group Founded
1897;
Construction
and related
sectors;
private; UK
based but
worldwide
offices; 2,500
employees
Inexperienced
“kids” interested
and capable of
starting new and
innovative
venture
Long-
standing
strategic
alliances with
few like-
minded sub-
contractors in
core area,
Existing
social capital
may be of
limited
relevance for
new activity
Conservative parent
firm preserves capital
from a cash cow
business and stays safe
from bankruptcy, also
provides slack to fund
innovation.
Family directors
strong presence
on main board
but includes
outside directors
Parent family
board
involvement in
innovating new
subsidiary
provides
monitoring but
constrains
innovation
Parent risk
insulated
through separate
subsidiary/spin-
off
HMG Paints Founded
1930; Third
generation;
Speciality
paints;
private;
England
Apprenticeships
encourage
children of non-
family employees
to get
involvement from
an early stage to
maintain family
culture.
Operations board
made up of non-
family and family
employees
Offspring given
challenging
projects abroad –
new markets
Networking is
difficult due to
intense
competition
for IP
Ample provision of initial
finance for new
projects/subsidiaries
Ultimately finance the
spin-offs by listing on
stock exchange (AIM)
Parent risk
insulated
through separate
subsidiary/spin-
off
No desire to
have outside
NEDs
Eaton’s -
During
Turnaround
Founded
1869; dry
goods
department
stores; public
until
bankruptcy
Canada;
70,000
employees
prior to failure
Inferior family
executive enters
the firm to try to
save the day
Nepotism and
selection from
too small a
management
pool
Stuck with
dated,
longstanding
networks
Appropriation of assets
by greedy family
members
Abandonment of
long-term view
Executive
entrenchment
Resources and innovation in family businesses
33
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Lessons in Competitive Advantage from Great Family Businesses,(Boston,
MA: Harvard Business School Press, 2005); Margaret Graham, and Alec
Shuldiner, Corning and the Craft of Innovation, (Oxford University Press:
New York, 2000).
17
This is also a strategy of many Quadrant 1 firms.
Resources and innovation in family businesses
36
18
Unfortunately, too little is known about how changes in family
governance influence the receptiveness to and nature of family firm
innovation. Research into that question might explain the movement of
family firms between the quadrants of our framework. Similarly, although
we have highlighted different attitudes towards innovation across the
generations, we need to know more about the extent to which succeeding
generations alter family objectives in response to evolving environmental
conditions, and the implications for the nature and success of innovation.
19
Thomas Zellweger, Robert Nason, R., and Matthias Nordqvist, “From
Longevity of Firms to Transgenerational Entrepreneurship of Families:
Introducing Family Entrepreneurial Orientation,” Family Business Review,
25 (2012): 136-155.
20
For expositional purposes we have not explored the distinction between
evolutionary and revolutionary innovation. This is an area for further
research in the family business context and for comparison between family
businesses and other ownership forms.
21
Ming-J er Chen, “Competitor Analysis and Inter-firm Rivalry: Toward a
Theoretical Integration,” Academy of Management Review, 21(1996): 100-
134; Ming-J er Chen, and Danny Miller, “Competitive Attack, Retaliation and
Performance: An Expectancy-Valence Framework,” Strategic Management
Journal, 15 (1994): 85-102. This approach has been termed the AMC
model.
22
Yannick. Bammens, G. Notelaers, Anita Van Gils, “Implications of Family
Business Employment for Employees’ Innovative Work Involvement,”
Family Business Review, (2014) DoI 0894486513520615.
23
These insights suggest that the capabilities required for innovation and
the willingness to undertake innovation may be contingent on the nature of
firm ownership, and hence an area for further research is to compare
innovative capabilities in these different ownership contexts.
Resources and innovation in family businesses
37
24
The example of Maison Louis Latour illustrates how this has been
successfully achieved over several generations but further studies are
needed of the processes involved when a change from the initial intended
successor needs to be made.
25
There remains a need to explore how much operations boards and
boards in subsidiaries of family firm groups have the discretion to decide
upon and implement innovation. Such research might clarify the
relationship between main and operations/subsidiary boards and how
these relationships vary across different types of ownership.
26
J ames Chrisman, J ess Chua, Alfredo de Massis, Federico Frattini and
Mike Wright, “The Ability and Willingness Paradox in Family Firm
Innovation,” Journal of Product Innovation Management, (2014). Our cases
hint at the effects on innovation of changing goals over the life-cycle of the
family businesses, however this is an area where further studies are
needed.
27
Khai Lee, Guan Lim, Wei Lim (2003). Family Business Succession:
Appropriation Risk and Choice of Successor. Academy of Management
Journal, 28(4), 657–666.
Resources and innovation in family businesses
38
Centre Manager
Enterprise Research Centre
Aston Business School
Birmingham, B1 7ET
[email protected]
Centre Manager
Enterprise Research Centre
Warwick Business School
Coventry, CV4 7AL
[email protected]
doc_377883927.pdf
The Enterprise Research Centre is an independent research centre which focusses on SME growth and productivity.
Resources and innovation in family businesses
1
PAGE TITLE HERE
Resources and innovation in family
businesses:
The Janus-face of family
socio-emotional preferences
Danny Miller, Mike Wright,
Isabelle Le Breton-Miller and
Louise Scholes
ERC Research Paper No.34
June 2015
Resources and innovation in family businesses
2
Resources and innovation in family
businesses:
The Janus-face of family
socio-emotional preferences
Danny Miller
HEC Montréal and University of Alberta
[email protected]
Mike Wright
Imperial College Business School and University of Ghent
[email protected]
Isabelle Le Breton-Miller
HEC Montréal and University of Alberta
[email protected]
Louise Scholes
Durham University Business School
[email protected]
The Enterprise Research Centre is an independent research centre which
focusses on SME growth and productivity. ERC is a partnership between
Warwick Business School, Aston Business School, Imperial College
Business School, Strathclyde Business School and Birmingham Business
School. The Centre is funded by the Economic and Social Research
Council (ESRC); the Department for Business, Innovation & Skills (BIS);
Innovate UK; and, through the British Bankers Association (BBA), by the
Royal Bank of Scotland PLC; HSBC Bank PLC; Barclays Bank PLC and
Lloyds Bank PLC. The support of the funders is acknowledged. The views
expressed in this report are those of the authors and do not necessarily
represent those of the funders.
Resources and innovation in family businesses
3
ABSTRACT
Family business socioemotional preferences are often J anus-faced: Some
strive to create a strong business they can pass on to offspring by building
innovation-promoting resources such as human, relational and financial
capital. Other family firms cater to family desires for unqualified nepotism,
altruism towards undeserving kin, and appropriation of firm assets to fulfill
parochial desires that erode these resources. We explore how some such
preferences, together with their impact on resources and the innovation
demands of their markets, shape the approach to innovation.
Resources and innovation in family businesses
4
CONTENTS
ABSTRACT ...................................................................... 3
INTRODUCTION ............................................................... 5
A TYPOLOGY OF FAMILY BUSINESS INNOVATION .... 5
Quadrant 1: Entrepreneurial innovators ...................... 11
Quadrant 2: Conservative innovators ......................... 11
Quadrant 3: Tardy innovators .................................... 13
Quadrant 4: Turnarounds – successful and not .............. 17
DISCUSSION .................................................................. 18
CHALLENGES AND LESSONS FOR MANAGERS ....... 22
Conditions for Innovation and Famil y Resources ......... 23
10 Constructive Steps ............................................... 25
APPENDIX ...................................................................... 30
REFERENCES ................................................................ 33
Resources and innovation in family businesses
5
INTRODUCTION
Family businesses are a diverse collection of organizations. Yet most are
distinguished by their socio-emotional preferences – namely, non-
economic objectives that cater to family desires such as keeping the firm in
the family, providing jobs for kin, and establishing reputation in the
community. Such preferences are J anus-faced however: some build
resources that facilitate innovation, others do exactly the opposite. For
example, family firms that wish to create a robust business to pass on to
their relatives have unusually long investment time horizons and are willing
to sacrifice in the present in order to develop human resources,
relationships with stakeholders, and financial reserves. These resources
and motivations can promote and facilitate innovation. On the other hand,
other family firms embrace socioemotional objectives such as family-
directed altruism, perquisites and jobs for incompetent family members, the
use of business resources for personal purposes, and the entrenchment of
undeserving family executives. These preferences and practices erode
human, relational and financial resources, and stifle innovation.
We show that some businesses succeed over the long run via innovations
that exploit the resource advantages arising out of some family
preferences, whereas others falter because of their attachment to
resource-eroding, innovation-killing family practices
1
, particularly in volatile
environments. The cases we present illustrate these scenarios and enable
us to extract lessons for family firms wishing to sustain their
competitiveness. The rationale for the case selection and the sources of
data are described in the Appendix.
A TYPOLOGY OF FAMILY BUSINESS INNOVATION
Our proposed framework juxtaposes the non-financial or “socioemotional
wealth” (SEW) goals of family businesses with the level of innovation
needed to compete effectively in the different sectors in which they
operate. Some family business owners are preoccupied with including
Resources and innovation in family businesses
6
family members in the firm, using resources for parochial family purposes,
and bequeathing the company to offspring
2
. They use the firm to
propagate family-centric interests, and are risk averse. That can hinder
their ability to innovate which might deny opportunities to the next
generation
3
by threatening firm survival. At the other extreme the family
may desire to build a robust business: they invest in the firm and its
stakeholders, and build the social and human capital resources that enable
them to innovate and thrive
4
. This allows them to keep the firm in the
family for generations to come.
We dichotomize these SEW objectives as “feeding parochial family desires”
and “creating an evergreen organization”. The former is family-centric in
its objectives, and caters to the personal interests, emotions and legacies
of the family. It may encompass nepotism and managerial entrenchment,
and using business resources simply to fulfill family preferences – for jobs,
perquisites, and kinship harmony
5
. That orientation often robs a firm of the
resources needed to innovate.
By contrast, the objective to create an evergreen organization is far more
encompassing as it is aimed, ultimately, at building a healthy, enduring
business. That will require investing in a broader array of stakeholders and
resources that can support innovation – talented employees, social and
financial capital, relationships with external parties, and effective
governance mechanisms. These two rather different types of SEW
objectives will tend to be mutually exclusive. Certainly, these are not the
only SEW objective a family may have: considerations of community
contribution, family reputation, social status and the like may also be
relevant
6
. We have focused on the family desires and evergreen polarities
as these connect especially directly to the issues of family firm innovation.
Strategic environments can be characterized as high or low velocity. A high
velocity environment is unstable; one of rapid, disruptive change. Such
changes may arise in the technologies of the industry, the nature and
degree of competition, and in patterns and preferences in customer
Resources and innovation in family businesses
7
demand. An environment of low velocity is more stable and evolves more
predictably and in a less threatening fashion. In high velocity
environments, entrepreneurs and managers must be flexible, adaptable
and innovative
7
. Although family businesses are often portrayed as
competing in mature, low innovation markets, many do operate in turbulent
and competitive sectors that demand significant innovation in products,
markets and processes. Again, for expositional purposes, we dichotomize
family business markets as high versus low velocity, each of which requires
a different set of resources and capabilities with which to compete and
innovate
8
.
These resources and capabilities concern firstly, the innovative expertise
embodied in the family firm’s human capital, an asset some family firms
have unusual access to due to family emotional commitment to the
company and its staff, and a willingness on the part of family members to
work with initiative and devotion for little compensation
9
. Second, is the
social capital derived from enduring family business’ personal networks
that help facilitate innovation
10
. Some families build especially strong ties
with stakeholders because of their long time horizons, which make them
generous and responsive business partners. Third, many family firms are
known for their patient financial capital – which may be needed given the
risks and lags in revenue generation entailed by many innovations. Finally,
some family businesses may shine at minimizing agency costs and
establishing effective governance mechanisms because incentives are
aligned both among family owners and between family owners and
managers
11
. All of these potential resource advantages provide the
wherewithal to endow firms with superior innovation capabilities
12
.
However, the degree to which such resources are abundant relies on the
intention among some family owners and managers to create an evergreen
organization.
Unfortunately, although some family firms possess such resource
advantages, others, with more family-centric, parochial and conservative
preferences suffer resource disadvantages. Preferences such as nepotism
Resources and innovation in family businesses
8
may rob a firm of managerial talent
13
and parental altruism may cause
undeserving family employees to shirk their managerial and stewardship
responsibilities
14
. A desire for family perquisites from the business may
drain capital needed for innovation, as would the financial conservatism
stemming from a reluctance to jeopardize family control by issuing debt or
equity
15
. Moreover, cronyism born of some kinship and family ties may
constrain the broader network of talent and the knowledge resources
required for innovation. Family firms confronting such resource
disadvantages tend to innovate too little and too late. And a lack of
innovation in a high velocity market will lead to performance difficulties.
Even where such difficulties trigger a belated innovative initiative to keep a
viable firm in the family, the shortage of resources may doom the project.
Our SEW and environmental dichotomies allow us to differentiate four
distinct approaches to innovation by family businesses, their resource
implications, and the outcomes expected. These are illustrated in Figure 1.
Our framework highlights the resources that family firms in each quadrant
typically lack or have in abundance and which give rise to special
innovation advantages or disadvantages. We develop this framework in
the pages that follow.
The evergreen objective aims to provide a robust long term future for the
family in the business, and perhaps even to make a social contribution.
Our firms in Quadrants 1 and 2 are motivated by that purpose. By contrast,
the objective of catering to parochial family desires and maintaining risk-
avoiding tradition constitutes maintaining family control, meeting personal
perquisites, sacrificing firm resources to achieve family peace, engaging in
nepotism, and installing managers in entrenched positions. Those priorities
are reflected in Quadrants 3 and 4.
Resources and innovation in family businesses
9
Figure 1: Innovation and family SEW objectives
Strategic
Environment
SEW Objectives
Creating an evergreen
organization
Feeding parochial famil y desires
High velocity Quadrant 1:
Entrepreneurial
Innovator
Inculcate innovation as
part of the inter-
generational culture
Resources:
Human:
. long term investments in
people (family and non-
family)
. cohesive corporate
culture
. ample mentorship by
previous generation
Social:
. long term relationships
and networks established
with resource-suppliers
and distributors
Finance:
. cautious financial
management to build war
chest to fund innovation
. longer term innovation
projects than rivals
(patient capital);
Governance:
. assiduous stewardship
over intangible assets
. focused board to ensure
innovative ethos
maintained
Case example: Corning,
Maison Louis Latour
Quadrant 4: Turnarounds
Failure to keep up with innovation means that
when it eventually occurs it is necessary to
turnaround the company with too few
resources. Innovation can’t exist in isolation
and badly handled succession can impact on
an otherwise innovative firm
Quadrant 4a
re-turnaround
Quadrant 4b
ost-turnaround
Resources:
Human:
. First generation
innovative but lack of
planning over
departure loses
.innovative human
resource
. next generation
sleepy or
.incompetent to
innovate (nepotism,
entrenchment) or
absent
Social:
.lack of maintenance
of existing social
networks
. failure to build new
social networks
Finance:
. lack of innovation
erodes profitability
and funding for
innovation
. lack of financial
control over
innovation.
Governance:
. family politics
leading to stagnation
. Lack of formal board
with outside directors
Resources:
Human:
. non family human
resources don’t
share same values
. psychological
ownership of the
business,
Social:
. Social capital a
critical part of
turnaround to identify
turnaround expertise
. resurrection of
family values / strong
traditions reasserted
Finance:
. financial control of
innovation
implemented
Governance:
. professional’ board
created including
family and non-
family members
Case example:
Eaton’s; Linn
Resources and innovation in family businesses
10
Figure 1: Innovation and family SEW objectives (continued)
Low velocity
Quadrant 2:
Conservative Innovators
Diversifying innovation
ring-fenced as a
subsidiary within the
group. Balanced
approach to innovation
Resources:
Human:
. “kids” interested and
capable of starting new
and innovative venture
. apprenticeships and
training encourage
children of non-family
employees to get
involvement from an early
stage to maintain family
culture.
Social:
. existing social capital
may be of limited
relevance for new activity
. Networking difficult due
to intense competition for
IP
Finance:
. Conservative parent firm
preserves capital from a
cash cow business and
stays safe from
bankruptcy, also provides
slack to fund innovation.
Governance:
. parent risk insulated
through separate
subsidiary
. parent family board
involvement in innovating
new subsidiary may
provide monitoring but
constrain innovation
Case examples: Wates
Group; HMG Paints
Quadrant 3:Tardy Innovators
Hyper-conservatism
Too little innovation
Resources:
Human:
. nepotism and selection from too small a
management pool
Social:
. stick with existing, longstanding networks
Finance:
. appropriation of assets by greedy family
members
Governance:
. family conflict
. abandonment of long-term view
. entrenchment
Case examples: Eaton’s (Canada)
Resources and innovation in family businesses
11
Quadrant 1: Entrepreneurial innovators
Family businesses in Quadrant 1 embrace innovation in a high velocity
environment. They inculcate innovation as part of an inter-generational
culture in order to create an evergreen organization. Succeeding family
generations are mentored, often from early life, to become enthusiastic
about and capable at progressive approaches to continual product-market
innovation. These businesses frequently have an advantage in developing
resources that facilitate innovation: these include a long term perspective
that induces them to invest in enduring relationships with internal and
external stakeholders, to contribute patient capital, and to forego quick
returns. Most successful companies in this quadrant develop enduring
associations and solid networks with resource-suppliers and distributors
who can facilitate and adapt to innovation. Their patient capital, typically
provided by family members, enables them to undertake innovation
projects with longer payoff periods than rivals are willing to accept. Their
cautious financial management builds war chests to fund innovations
internally that might otherwise be risky in an uncertain environment with its
inevitable challenges and unexpected roadblocks. Such reserves may be
especially critical to family businesses, which often are reluctant to dilute
control by seeking outside funding. Internal funding and authoritative
decision making by family leaders allow innovation projects to be decided
upon swiftly, and with less comprehensive data. At the same time, concern
for evergreen objectives such as family reputation exerts extra pressure on
some firms, in the course of their innovation initiatives, to exercise
assiduous stewardship over company image, quality of offerings, and
ongoing relationships with stakeholders.
The examples of Corning and Maison Louis Latour are illustrative of highly
successful entrepreneurial innovators (see Appendix table). Corning has
been producing glass related products for well over a century. Founded
and for much of its history controlled and managed by members of the
Houghton family, Corning has led its industry in innovation almost since its
inception. It created the first radio tubes for Marconi, the first television
Resources and innovation in family businesses
12
picture tubes for General Sarnoff at RCA, the first heat resistant Pyrex
glass, the first fiber optic cable, and numerous special types of glass for
computer digital devices. The family’s objective was to remain forever at
the forefront of the industry in which it operated, consistently investing in
projects with very long term payoff horizons, while being cautious to fund
these bold ventures with its older, cash cow products. The family was
deeply embedded in the community of Corning, New York, where its civic
contributions are legendary. For example, after a catastrophic flood,
Corning helped to rebuild the entire town and kept staff on the payroll even
while its plants were idle. Employee turnover was extremely low and
promotion from the inside was the norm. Corning also excelled at forming
very long term partnerships, some of many decades duration, with
inventive firms with which it engaged in its projects of innovation, some of
which could help in the design and production of complex devices. In
short, at Corning human, social, and financial capital born of family values
and discipline helped to create an innovation success story and a firm that
has, despite some serious bumps, proved to be evergreen.
16
Maison Louis Latour is an eleventh generation wine producer based in the
Burgundy region of France, with the current CEO being the seventh Louis
Latour. The firm has inculcated innovation over multiple generations. A
family culture of stewardship assures that the business will be innovative
throughout successive tenures, and will be in a position to bequeath a
robust organization to future generations. The current CEO and his father
have taken the initiative to expand from the traditional Burgundy region and
acquire vineyards elsewhere in France, for example, in less fashionable
Ardeche, Var, Chablis and Beaujolais. They also have pioneered varietal
wines, which are quite new to France. In Var they are developing a quality
Pinot Noir styled as a Burgundy but with more stable costs of production
compared to the Burgundy Pinot Noir. Maison Louis Latour makes use of
both human and social capital resources in the newer regions in which it
operates. In Ardèche, as in the Var, they develop relationships through
long term and comprehensive contracts with local growers. In Chablis and
Beaujolais they are working with local growers to build the reputation of
Resources and innovation in family businesses
13
certain domains as quality wine producers. Maison Louis Latour does not
always purchase the land itself but forms partnerships with skilled local
growers to create a balance of power with the growers. This avoidance of
takeovers reduces the financial demands needed to fund expansion. Latour
has also evolved long term partnerships with other family businesses, such
as the fourth generation wine freighting company Porter and Laker, who
have developed innovative ways to transport wine in bulk. The father of its
current CEO is the president of Latour.
Latour’s governance policy dictates that the previous generation act as
shareholders, while the current CEO reports to them during the first ten
years of tenure to ensure that the two generations run the company
together and reinforce the innovative ethos. Subject to the requirement of
competency and a desire to take the reins, the business is typically passed
from father to eldest son without involving brothers and sisters in the
business, although they may be equal shareholders. That policy prevents
sibling battles that might detract from the company’s ethos. According to
the current CEO: "The biggest advantage of having only one family
member [in charge] is that you are in a position to hire the best people that
you can. When you start to have a lot of family members it is difficult to
have [talent] from outside to come in. Because I was the only one, and my
father was the only one, it [helped] attract the best [and most innovative]
people in the wine industry in Burgundy". Unitary family leadership also
enables the courageous decision making required for bold innovations. As
the Marketing Director of Latour’s partner, Taylor-Wakefield expressed it
“There is a healthy willingness to discuss and to investigate and make a
fast decision on whether [we are] going to do something or not … without
having to have it proved in endless research."
Quadrant 2: Conservative innovators
Family businesses in Quadrant 2 (Q2) also strive to create an evergreen
venture, but operate in low velocity environments. Often, to achieve that
objective, they seek to move beyond their sometimes limiting, slow growth
Resources and innovation in family businesses
14
domains into more thriving, sometimes more competitive, market sectors,
typically by setting up a financially independent subsidiary to undertake the
boldest and riskiest renewal projects. Family may also use the new venture
to fill positions for young, inexperienced family members who are motivated
to innovate, and, importantly, to insulate the family reputation and the old
business from the risks associated jeopardizing the firm as a whole. For
example, Q2 firms may protect their core business by establishing arms-
length subsidiaries in which the next generation plays a key innovative
role
17
. If the subsidiary turns out not to be profitable and has to be shut
down, this can happen without capital, war chests, and a long-term
orientation towards relationships – also apply here in Q2. The capital from
the cash cow business of the parent may protect the subsidiary from
financial distress and fund innovation. Typically, family officers involved in
the parent may serve on the board of the new venture. A potential
downside of such involvement is that although it may provide useful
counsel, it may also constrain innovation. Moreover, the social capital of
the parent may be of limited relevance for the new subsidiary, so attempts
to build new networks may be difficult.
The examples of HMG Paints and Wates Group are illustrative of
successful risk averse innovators (see Appendix table). HMG Paints is a
third generation family business based in the UK. The company operates
in a location and sector where many volume paint manufacturers have
been squeezed out by low cost foreign producers, and it competes mostly
through moderate product and process innovation in the specialty paints
segment of the market. Product innovations include biocidal antifouling for
boats, flexible paint for commercial truck sides, PVC finishes for
architectural coatings, temporary grass markings for sports grounds, and
anti-graffiti coatings for buildings. The fourth generation is currently
developing an online marketing business to bring the firm’s products to a
wider consumer audience. Apprenticeships encourage children of non-
family employees to be involved from an early stage to maintain the family
culture; they also reduce outsider domination. The company boosts its
reputation by supporting local community enterprises. Networking with
Resources and innovation in family businesses
15
other producers is difficult as competition for intellectual property is fierce in
some slow moving sectors. Rather, social capital is mainly focused on that
derived from close networks with distributors, some of them other family
firms. The company refuses to recruit outside non-executive directors to
avoid constraints that might compromise innovative initiatives.
According to the CEO “our modus operandi is to pursue a sort of organic
growth within the core business and to be carrying out a few “outer edge”
projects that could be very big, very exciting or crash and burn!” Some of
these new initiatives have been ring-fenced to protect the core activities.
For example, whereas the brother of the current CEO is on the board of
HMG, he has also established a separate spin-off business in the
chemicals sector, Byotrol, which is now listed on the secondary tier stock
market, the Alternative Investment Market. This arrangement avoids
exposing the parent company to the unusual risks involved in Byotrol.
According to entrepreneur Stephen Falder, (brother of HMG CEO J ohn
Falder), “Faced with a family business that’s got stability, security, don’t bet
the farm… so [in Byotrol] we have a small PLC which is completely
divorced [from HMG and] a listed company the Falder family owns 7%
of….Yes spun it out, the right thing to do with innovation”. Thus, in effect, a
conservative family has isolated its bolder innovation initiatives in a
separate business – preserving security for the main company, and
providing the family with opportunities for riskier rich innovative initiatives in
a growing niche of the chemicals sector. As the CEO stated “..the future of
170 people and their families is at stake in making the right choices”.
The Wates Group, one of the largest construction groups in the UK, has
also developed innovative activities, often involving the next generation,
which are ring-fenced in innovative subsidiaries. The company has
diversified into sectors such as residential development, housing,
education, local authority work, heritage projects, responsive maintenance,
and retail and interiors. Family owners position themselves as professional
stewards who ensure that from the CEO on down, the business will be
focused on attracting the very best talent and being around for the long
Resources and innovation in family businesses
16
term: as they proclaim on their website: “[Our] values, long term vision and
financial independence have enabled us to thrive throughout the economic
ups and downs of more than a century”.
Wates’ approach to supply chain management is to work in partnership and
form strategic alliances with a few like-minded sub-contractors with whom
they have been working for many decades, in part cemented by family
connections. This has produced a strong track record in shortened delivery
times, improving standards in health and safety, superior quality, more
effective processes, cost savings and reliability. As a family-owned
business, Wates demonstrates unusual respect for its people, communities
and the environment, embedded and celebrated as values in the rituals of
the organization. It has a strong social ethos and long record of
philanthropy, making deep, long lasting connections within communities
through its Building Futures program supporting the long term unemployed,
and via low carbon sustainability programs. The company maintains a
strong financial base with superior levels of liquidity, a commitment to long
term investment, and rigorous financial management. Its financial stability
is underpinned by a diversified portfolio of operations which help insulate it
from the macroeconomic challenges of the construction sector.
The Wates Board reinforces its emphasis on external relationships and
innovation. It consists of the Chairman, Chief Executive, Chief Financial
Officer, Chief Operations Officer, four Family Directors and three
independent Non-Executive Directors. This keeps the firm open to outside
perspectives for renewal and opportunity and avoids family parochialism.
The board also is committed to achieving the highest standards of
corporate governance, conducting its business responsibly, and in
accordance with all laws and regulations to which Wates’ business
activities are subject. It delegates authority for all day to day management
of the Group’s activities to the Executive Committee which consists of
Directors responsible for the strategic business units and key functions.
Resources and innovation in family businesses
17
Quadrant 3: Tardy innovators
Family businesses in Quadrant 3 resist change and innovate relatively little.
Their operating in low velocity environments often allows them for many
years to maintain family traditions and legacy strategies. Thus SEW
objectives often take the form of providing jobs and perquisites for
relatives, and are family- rather than business-centric. A penchant for
nepotism causes managers to be drawn from too small and shallow a pool
of talent. Although these firms tend to stick with long-standing networks,
they are too often inward looking, subject to cronyism, and inflexible.
Family shareholders not running the business may appropriate assets so
that funds for renewal are lacking for strategic initiatives and long term
investments. Such problems may be exacerbated by family conflicts,
especially where those in charge are reluctant to prune unproductive
members. Where the firm is large and established and enjoys preferential
relationships with stakeholders, a lack of competition can enable these
firms to survive for quite a long time. Ultimately, however, they do tend to
founder.
The example of Eaton’s is illustrative of this dearth of innovation (see
Appendix table). Eaton’s was a century old Canadian dry goods
department store that operated in major cities across the country. Owned
and mostly run by members of Toronto’s Eaton family, the firm was known
for its judicious selection of quality goods, middle range prices, excellent
service (satisfaction or money refunded, and home delivery of merchandise
when those were rare policies). The firm grew to substantial size and the
family became wealthy members of the Canadian “commercial aristocracy”.
By the 1980s, however, the velocity of the environment changed. Eaton’s,
began to be squeezed from below by discount merchandisers and from
above by luxury department stores catering to a growing wealthier class.
At the same time, the company had begun to rest on its laurels, allowing
some of its stores to become stodgy, its famed service ethos to erode, and
its selection of merchandise to be perceived as quaint and passé, in part
because its information systems were behind the times and because the
Resources and innovation in family businesses
18
later generations of the family had become complacent. Innovation in store
design and merchandising was nowhere to be found. The family, it
seemed, had become less interested in the business and more interested
in the rewards it produced for them. Family centric preferences had begun
to override the needs of the business, in the process eroding human,
reputational and financial capital. Margins began to decline. We shall return
to the fate of Eaton’s in the next section.
Quadrant 4: Turnarounds – successful and not
Firms in Quadrant 4 have similar family-centric SEW objectives to those in
Q3, which are especially damaging – usually fatal -- in these high velocity
environments. Thus a scenario most relevant to this quadrant is that of the
failure or turnaround. Sometimes the history of these companies is one of
an entrepreneurial founder failing to provide the next generation with the
attitudes and skills needed to innovate. The departure of that person
leaves the firm without the talent or motivation to renew the company. The
result is that the business needs to be turned around by the reassertion of
an innovative ethos, either through re-entry by the founder, or via the
recruitment of competent new executives from within or outside the family.
Quadrants 4a and 4b relate to unsuccessful and successful turnarounds,
respectively, and we shall deal with them in turn.
Turnarounds can be risky, especially when a firm lacks a talented family
successor. Bringing in outside managers, or unsuited family members,
during a leadership vacuum may sacrifice the benefits of the longer term
family investment perspective, and evoke a short term orientation focused
on quick results. As we shall see, this departure from a family’s traditional
approach can lead to inefficiencies and excessive costs. Moreover, a
failure to maintain business and family relationships and build new ones
may deprive the firm of useful innovation partners. In what is a vicious
circle, a lack of effective innovation ultimately erodes profitability and thus
funding for future innovation. This problem is exacerbated where financial
control systems have not been established or governance is weak. Finally,
Resources and innovation in family businesses
19
conflict and family politics triggered by the crisis may plague the board, as
may the arrival of an unskilled new generation.
A continuation of the Eaton’s story from above exemplifies such a risky
turnaround. At Eaton’s the passing of the old generation and the
unwillingness of the more talented family members to take part in the
business left the firm in hands of an inexperienced and whimsical scion of
the family – a former race-car driver. More interested in his hobbies than in
the business, George Eaton hired a slew of consultants to help renew the
company. But he lacked the talent to know which advice to take and the
dedication and know-how to implement a coherent revitalization program:
The result was a very incomplete grafting of new ideas onto an old ideology
and infrastructure. Eaton’s implemented an “everyday low price” policy that
precluded the profitable discount sales which enabled the store to recoup
its investments on merchandise that did not sell well -- an inevitability in
fashion goods industries. Eaton’s also created some “prestige” outlets to
compete against higher end competitors – but it did so in a half-hearted
way and located the stores in less affluent neighborhoods, thus failing to
attract wealthy customers and also alienating traditional clientele.
Customers no longer knew what to expect in pricing, merchandise
selection, or décor and layouts, which now varied from store to store.
Eaton’s had lost its identity, and its clients. Due to the absence of
managerial resources, a demotivated workforce, and an ever more
precarious balance sheet, the turnaround effort failed and the firm declared
bankruptcy.
Contrast this experience with the successful turnaround dynamics exhibited
by Linn (Quadrant 4b). Linn is a manufacturer of high end music systems
for the home, operating within a very competitive and innovative sector.
The firm was highly successful in developing novel products under the
founder (Quadrant 1) but then lost its way when the founder became ill in
2003 such that by February 2007, the need to change had become
imperative as the company had slipped into Quadrant 4. After 2003 there
had been two succession attempts that were not successful. Succession
Resources and innovation in family businesses
20
attempt 1 (2003-5) involved giving non-family senior managers control of
their own divisions but this ultimately led to a somewhat fragmented
organization. Succession attempt 2 (2005-7) involved the appointment of a
non-family CEO from inside the company, but by February 2007 the bank
refused to extend the company’s overdraft or support the CEO. The
company was carrying debt which suddenly became unacceptable for its
bank, partly due to the 2007 recession. The bank then appointed a
turnaround specialist in 2007, the company doctor, who worked with the
founder to restore the company to financial health. The turnaround was
completed by 2009. The son of the founder had been working in the
business since 2003 as R&D director and was appointed CEO in 2009
once the turnaround had been completed and the debt had been paid off
(succession attempt 3). The son was at the forefront of the turnaround
effort and designed a new technology platform which was launched in
August 2007. This platform addressed the growing customer demand for
streaming music from hard drives and the internet. It delivered higher
performance and quality than any other product on the market and thus
allowed Linn to establish a leading position in their industry, which they
have since retained. The new platform therefore played a significant part in
the turnaround, offering something highly innovative to the market, and
helping Linn to repay the bank. “I had a very clear understanding of the
kind of company he [father] wants Linn to be [more innovative] … and was
clear of what I needed to do”. The turnaround thus “restored the company
back to my father’s original vision”. According to the current CEO the non-
family managers involved in the two previous succession attempts “were
just doing what they thought was the right way to grow the company and
they maybe didn’t share the same values [as those that are] much more
attributable to owner-managed family businesses” and “The company was
not in shape, innovation had not progressed at the rate it ought to have
done in those intervening years [since 2003].
Governance at Linn was altered in the process of each succession attempt.
The founder created the group structure in 2003 (phase 1) and the board at
that time consisted, in essence, of the most senior people in the company.
Resources and innovation in family businesses
21
When the non-family CEO was appointed in 2005 (phase 2), the board
became a formal ‘family’ board made up of family members and the non-
family CEO. This board did not support the management adequately as its
objectives tended to be dominated by family objectives. In 2009 (phase 3),
under the son and current CEO and after the turnaround, Linn transitioned
from a family board to a professional board where a more effective,
objective, governing body was established, with three non-family outside
directors selected because of their experience: a turnaround specialist
(operations), a marketing consultant (marketing) and a chief technology
officer from one of the suppliers (technology). In other words, the outside
directors covered the three main areas of the business. The current Linn
board now has significant independence, more balanced objectives and
extensive business experience. Many of the board own Linn products so
they understand and support the company’s innovative culture. “What we
have today is a board that …challenge but they support, they’re an
effective way of formalising the relationship between me and my father.”
The current CEO states about Linn’s innovation process that “if your values
are clear then everybody can understand...innovation is continuous...a lot
of our innovation is grass roots… because the engineers/everyone can
understand the company values therefore that allows the engineers to
innovate from a grass roots level”. Moreover, the new management is in
the process of successfully aligning opportunities with the emerging
innovative capabilities. “[capabilities] they’re always growing…. we’re
building on them …adding capability all the time”. Financial resources are
sometimes ring fenced for new business ideas, some of which have their
own 3/5 year plan. The renewed presence of family technical and
managerial talent, combined with good governance, and continuous
innovations, has helped to get the company back to Quadrant 1 where it
was in 2003, before the founder became ill. Linn remains today one of the
most innovative companies in its industry.
Resources and innovation in family businesses
22
DISCUSSION
Certainly, firms are by no means “stuck” within any of our quadrants. The
altering influence of family and the changes in leadership as different family
members get involved may be important sources of transition. Eaton’s was
never the same in its approach to strategy and innovation after its last
succession in family leadership. Linn moved from a creative approach
with its founder (Quadrant1) to a troubled situation after several failed
succession attempts, financial problems and weak governance (Quadrant
4a). The company finally resolved its problems with the help of a
turnaround specialist, several product introductions, and a new family
successor (Quadrant 4b) and is now firmly back in Quadrant 1. Another
source of transition may be the changing environment such that an older
approach no longer works and there develops a mismatch between family
governance and the demands of the market, as was the case at Linn. In
other words, our quadrants represent common configurations rather than
fixed boundaries
18
.
It is important, moreover, to recognize that families can be as different as
their socio-demographic characteristics and the personalities of their
members. As such it is dangerous to postulate any one influence of
families on innovation. For example, where there are numerous family
members who share power but cannot get along because of childhood or
parental friction, then concerted innovative action may be very difficult.
Similarly, where an incompetent successor takes over simply because that
person is a favorite child of the founder, that too augurs poorly for the
success of the innovative effort. In short, the human element of the family
looms large in these businesses, and so often the very best clues as to
their innovative potential lies not so much in a firm’s systems and
structures, but in the talents, motivations and interactions of the family
members involved. These familial factors shape the SEW priorities that
we have highlighted, along with the nature of the resources they enable or
inhibit. Indeed, we see from our examples how family SEW priorities are
by no means uniform: those concerned with longevity and a multiplicity of
Resources and innovation in family businesses
23
stakeholders act for the benefit of innovative family businesses, while the
more parochial family-centered priorities can hobble innovation.
CHALLENGES AND LESSONS FOR MANAGERS
For expositional purposes we have simplified the array of choices facing
family firms and their innovative missions in order to emphasize the J anus-
face of family SEW preferences. For example, we have shown how family
preferences regarding nepotism despite successor incompetence (the
Eaton’s example) can impede innovation, whereas an emphasis on family
traditions of quality and pioneering can serve to enhance innovative efforts
(the Linn example). It remains important to ask what family businesses
must do – and what must they avoid doing – in order to choose the right
side of this dichotomy?
Our analysis suggests that above all it is vital for them to embrace an
attitude of stewardship. One family CEO told us he viewed the business
not as something he owned, but as a precious asset of which he was the
caretaker. He saw his job as keeping the business healthy for the benefit of
later generations and the larger community. But given the inevitable
changes in his business environment he stated that innovation was a
necessity, not an option, in order for the business to remain evergreen.
Clearly, family principals must foster stewardship to develop resources in
which family firms have an advantage, and which bestow superior
innovation capability.
At the same time, family firms must avoid the pitfalls of hyper-conservatism
-- governance structures that sap resources, spoiling family members, and
favoring nepotism – especially where the managerial task is complex. For
example, as suggested by the case of Latour, a desire to continue father-
to-son succession can work well only if the son is appropriately motivated
and competent at innovation. Other enemies to innovation include glass
ceilings for non-family managers, resistance to change, intolerant cultures,
and personal loyalties that mire firms in old technologies and inappropriate
Resources and innovation in family businesses
24
locations.
Our analysis enables us to draw some general lessons regarding the
different resource configurations that need to be developed to sustain
innovation, contingent on the environment in which the family business
operates.
Family firms seeking to develop evergreen innovative family businesses in
high velocity environments need to make long term investments in family
and non-family human capital involving the development of a cohesive
corporate culture and ample mentorship by the previous generation,
establish long term relationships and networks with resource-suppliers and
distributors, prudently manage finances to build a war chest to fund longer
term innovation, and build a focused board to ensure that the innovative
ethos is maintained.
Family firms seeking to develop evergreen innovative family businesses in
low velocity environments need to make long term investments in the next
family generation interested in and capable of starting new and innovative
ventures, develop mechanisms to involve the next generation of non-family
employees to maintain the family culture; build new social capital to enter
new innovative areas, utilize capital from cash cow businesses to fund
innovation, and perhaps insulate risk to the parent by conducting
innovation through a separate subsidiary with a board that provides
monitoring but does not constrain innovation
19
.
In short, it will be necessary for the family to distinguish among those
socioemotional preferences and objectives that spawn the creation of
resources needed to ensure innovation, evergreen survival and superior
relationships with stakeholders, and those oriented towards parochial
family benefits that curtail resource-building, curb innovation, and threaten
long-term survival.
Resources and innovation in family businesses
25
Conditions for Innovation and Family Resources
Effective organizational action -- innovation in products, markets and
processes included
20
-- can only take place when three conditions are
present jointly: awareness of the need to act, the motivation to undertake
the action, and the capability to act effectively.
21
Family resource
advantages play a role in either facilitating or impeding each of these
conditions. For example, awareness of opportunities and shortcomings
that suggest the need for innovation may be enhanced via strong
relationships that families build with partner organizations or key clients.
Social capital and trust may strengthen those relationships. By the same
token, family members’ psychological ownership of the firm may provide
them with the motivation and incentive to innovate, despite the costs and
risks such innovation might entail. Because there are frequently strong
personal ties between family members and their employees, some family
firms are able to create cultures in which there are powerful reciprocal
loyalties among the family and its staff (this was exemplified at HMG
Paints). That can create energized and highly productive human capital
resources that non-family firm rivals that are more formalized, bureaucratic
and impersonal would find difficult to imitate
22
. Finally, the capability to
innovate may be enhanced by long term investment horizons, patient
capital and loyal stakeholders
23
. In short, the resources which family firms
have an advantage in building may all contribute to effective innovation
outcomes.
Unfortunately, family resource disadvantages can prevent effective
innovation by acting on these three conditions, and this again relates to the
more parochial, insular and family centered socioemotional family priorities
we have discussed. Awareness may be hobbled when family executives
who tend to have long tenures and are entrenched in their jobs for decades
grow stale and unresponsive. Motivation may be lacking where later
generation family members, often passive owners, wish to draw capital
from the enterprise instead of investing it for the future benefit of the
business. Family conflict can have a similar effect. Finally, capability to
Resources and innovation in family businesses
26
innovate may be hobbled by weak managers selected via nepotism and by
the extraction of funds from the business by family members who are
alienated from the family or the firm.
10 Constructive Steps
There are a number of ways a family can facilitate innovation by nurturing
the positive resources and avoiding the forces of resource erosion. First,
they must foster attitudes favorable to innovation across the generations: to
transmit the passion and creativity of many founders to the many who
follow them. This not only involves the family members who will take over
the company but also other next generation family members who will
become influential shareholders. That may be achieved by passing on
values and legacies that celebrate innovation and renewal, even beginning
in the family hearth, by regularly recalling past achievements in innovation
and the courageous quests required, and by encouraging a firm culture of
creativity through meritocratic promotion. This may mean that cherished
practices involving, say, father-to-eldest son succession may need to be
altered if the eldest son in a particular generation does not possess the
competences or motivation required for innovation
24
. The process of
deciding whether the eldest son is the best potential innovative successor
needs to begin early in case alternative candidates need to be identified
and mentored. A climate of innovation may also be aided by flat
organization structures and excellent cross functional and vertical
communications, by welcoming experimentation, and by tolerating errors.
Second, because innovation, especially in more volatile environments,
demands significant managerial and often technical and creative human
capital, expertise and motivation are essential. This can sometimes be
fostered via formal education, having family members garner work
experience at innovative firms outside the family company, and by
mentoring later generation family members in various roles in the family
firm.
Resources and innovation in family businesses
27
Third, where there is too little innovative talent in the family, it will be
essential to hire outside experts, and often to eschew nepotism in high
level management positions. Moreover, where, in competitive
environments family managers lose touch with the market or become
obsolete in their competences, their kinship must not promote
entrenchment, and the board must act to replace them. Indeed, as noted,
because of the personal nature of family firms and the freedom of family
owners and managers to take a long-term view, they may be able to
develop enduring win-win relationships with their employees by taking the
time to hire very selectively, mentor assiduously, and reward generously.
Although the initial costs of such an approach might be significant, the long
term benefits may make such “culture-building” worthwhile.
Fourth, it will be useful to develop governance through expertise and
independent judgment on boards of directors that is consistent with
delivering the kind of innovation needed for firm survival and success.
Outside management and board members with innovative experience, or
even turnaround experience, may be recruited to provide added expertise
and fresh perspectives on market opportunities. There must also be an
attitude of commercial objectivity and independence from management
such that the board is able to oust poorly performing family members.
Boards also will have to be able to evaluate and be willing to approve the
significant investments often needed for projects of innovation. At the
same time, they will have to have the independence from family politics
needed to deny parochial requests from family members that rob the firm of
financial resources or saddle it with inferior human capital. Family firms with
‘family boards’ may be able to pre-empt problems by approaching their
accountants, lawyers or banks in order to find suitable candidates for their
boards
25
.
Fifth, there is a need for innovative family firms to develop networks of
long-term partners who share their innovative ethos and who can be
adaptive and help co-create innovation. And because innovation is
dynamic, board development involving outsiders can also help extend the
Resources and innovation in family businesses
28
social networks needed to facilitate innovative activity in new areas beyond
traditional activities. This makes it especially useful to recruit board
members for both their independent expertise and their contacts.
Sixth, decision making and implementation processes must be developed
that facilitate innovation compatible with different SEW goals, and which
meet the needs of the competitive environment. In other words, it is
important to achieve an appropriate match between family objectives and
environmental demands. Sometimes a family is so dominant that an
ideology of innovation runs rampant and the firm innovates far more than
their environment would reward. More likely, they may be entrenched in
past ways and innovate too little. Furthermore, the time horizon of family
objectives needs to be consistent with the demands of the market if an
innovation is to be successful. Too short a time horizon will not allow for
the funds, planning, or human resources required for innovation; too long a
time horizon may drain firm resources and tax family funds due to the long-
delayed payoffs.
Seventh, although we focused for expositional purposes on distinguishing
two aspects of SEW goals of particular salience for innovation, in practice
there can be a grey area where there are gradations between these poles.
Further, SEW-related goals may co-exist with other goals and will probably
change over the life-cycle of the firm
26
. The statistic that few family firms
are handed down to the grandchildren of the founder is one possible
indicator of the changing goals of the family over time
27
. As a result, there
is a need for careful negotiation among owners and managers to resolve
potential conflicts between goals that may compromise the need for
innovation if the family business is to be able to continue to compete
effectively or even survive. If conflicting objectives compromise survival it is
important for this to be recognized, and acted upon, as soon as possible,
and for alternate plans to be set in motion, for example, the possible sale of
the company to the management team or to a commercial buyer.
Resources and innovation in family businesses
29
Eighth, our examples also indicated that the velocity of the competitive
environment may change over the life-cycle of the family business. Such
changes call forth a need for family businesses to adopt governance and
managerial processes that anticipate environmental changes and facilitate
requisite changes in resources and capabilities.
Ninth, as illustrated by our contrasting cases, there is a need for prudent
financial management. Careful husbanding of financial resources is crucial
if the family firm is to reconcile the need to be innovative on the one hand,
and maintaining family control of the firm by eschewing external finance on
the other.
Finally, it will be essential to introduce mechanisms that ensure that
parochial initiatives compromising long term SEW and commercial
aspirations will be terminated. All businesses face the problem of
abandoning the pet projects of key personnel. In family businesses this
may be a particular challenge wherever it uproots family members involved
in such activities. Therefore procedures must be in place to redeploy
these employees elsewhere in the firm. In short, there is a constant need
to be vigilant in reconciling family-centric SEW objectives with the resource
and innovation requirements of the business.
It is encouraging that in an age in which short-termism has dominated
many non-family firms, the family firm, if managed properly to exploit its
preferences and the natural resource advantages they bring, may be an
especially productive fount of significant innovation for many decades to
come. The framework we have developed provides a new typology of
innovation in family businesses based on different goals and environments.
It shows that different family goals, in isolation, offer a partial understanding
of innovation in family firms. Clearly, environmental velocity is an important
moderator of the performance consequences of family firm innovation, and
thus family firm goals. All of these factors must be considered in order to
have a more complete picture of innovation in family businesses.
Resources and innovation in family businesses
30
APPENDIX
Case Data
We have selected our cases in order to illustrate all of the different
segments of our typology and to include firms where information could best
be accessed on their histories and teams. We have used multiple and
varied sources to collect data on the cases presented. We employed face-
to-face interviews, company websites and other secondary sources such
as financial and business reports, presentations, press releases, magazine
articles and books. For some of our cases, interviews were conducted with
both CEOs of the family businesses as well as with other family and non-
family members and stakeholders involved in the firms. For those cases,
interviews lasted between one and three hours.
Resources and innovation in family businesses
31
APPENDIX
Family related innovation resource advantages and shortcomings from our case
examples
Resource
Categories
Background Human Social Finance Governance
Corning Founded
1851; glass
related
products;
public; New
York, USA
Productive long
term investments
in people
Cohesive
corporate culture
Ample
mentorship
across the
generations
Favorable
relationships
and networks
established with
resource-
suppliers and
distributors
Family deeply
embedded in
community
Cautious financial
management to build
war chest to fund
innovation
Longer term
innovation projects
than rivals (patient
capital);
Assiduous
stewardship over
intangible assets
Maison Louis
Latour
Founded
1797;
eleventh
generation;
wine
producer;
private;
France
Utilize expertise
of local growers
in areas they
have expanded
into.
Win-win
contracts and
relationships
with distributors
and other wine
producers
Long-term
partnerships
with other family
firms
Ample internal funds
Economies in
innovation by using
relationships/contract
s in new areas rather
than takeovers
Energized family
culture of
stewardship
Eaton’s Founded
1869; dry
goods
department
stores;
public until
bankruptcy
Canada;
70,000
employees
prior to
failure
Older generation
owners and
managers sleepy
and complacent
(nepotism,
entrenchment) or
absent as
effective retailing
executives
Costly failure to
maintain good
relationships
with clients due
to stodgy stores
and
merchandise
Increasing
discontent
among staff who
see decline in
Eaton’s quality
image
Lack of innovation
and failure to keep
up with emerging
competition and
changing fashions
erodes profitability
Decreasing
psychological
ownership of the
business by the
family in charge
Family politics
contributes to
stagnation
Non-family
managers favor
short term focus
Linn
During
Phase 2
Founded
1973; now
second
generation;
High end
music
systems;
private;
Scotland
Two succession
plans failed
leading to crisis
(along with the
recession).
Company doctor
(bank appointed),
founder and
second
generation family
restore the firm
Social capital
used as a critical
part of
turnaround to
identify
turnaround
expertise, find
NEDs.
Innovative, but
company debt
becomes
unacceptable to
bank during
recession
Turned around by
‘external’ company
doctor with help from
new innovations
Lack of formal
board or
subjective ‘family
board’
Turnaround
involves setting
up a new
professional
board with more
objective NEDs
Resources and innovation in family businesses
32
Family related innovation resource advantages and shortcomings
from our case examples (continued)
Wates group Founded
1897;
Construction
and related
sectors;
private; UK
based but
worldwide
offices; 2,500
employees
Inexperienced
“kids” interested
and capable of
starting new and
innovative
venture
Long-
standing
strategic
alliances with
few like-
minded sub-
contractors in
core area,
Existing
social capital
may be of
limited
relevance for
new activity
Conservative parent
firm preserves capital
from a cash cow
business and stays safe
from bankruptcy, also
provides slack to fund
innovation.
Family directors
strong presence
on main board
but includes
outside directors
Parent family
board
involvement in
innovating new
subsidiary
provides
monitoring but
constrains
innovation
Parent risk
insulated
through separate
subsidiary/spin-
off
HMG Paints Founded
1930; Third
generation;
Speciality
paints;
private;
England
Apprenticeships
encourage
children of non-
family employees
to get
involvement from
an early stage to
maintain family
culture.
Operations board
made up of non-
family and family
employees
Offspring given
challenging
projects abroad –
new markets
Networking is
difficult due to
intense
competition
for IP
Ample provision of initial
finance for new
projects/subsidiaries
Ultimately finance the
spin-offs by listing on
stock exchange (AIM)
Parent risk
insulated
through separate
subsidiary/spin-
off
No desire to
have outside
NEDs
Eaton’s -
During
Turnaround
Founded
1869; dry
goods
department
stores; public
until
bankruptcy
Canada;
70,000
employees
prior to failure
Inferior family
executive enters
the firm to try to
save the day
Nepotism and
selection from
too small a
management
pool
Stuck with
dated,
longstanding
networks
Appropriation of assets
by greedy family
members
Abandonment of
long-term view
Executive
entrenchment
Resources and innovation in family businesses
33
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976-997; Alfredo De Massis, Federico Frattini and Ulrich Lichtenthaler,
“Research on Technological Innovation in Family Firms: Present Debates
and Future Directions. Family Business Review, 26(1)(2013): 10-31; J osip
Kotlar, H. Fang, Alfredo De Massis and Federico Frattini, “Profitability
Goals, Control Goals, and the R&D Investment Decisions of Family and
Non-family Firms. Journal of Product Innovation Management, (2014) DOI:
10.1111/jpim.12165.
7
Kathleen Eisenhardt, “Making Fast Strategic Decisions in High Velocity
Environments,” Academy of Management Journal, 32 (1989): 543-76.
8
Velocity can be high or low at any point in the life cycle of a firm and may
change over the life-cycle (Alfredo De Massis, F. Chirico, J osip Kotlar and
Lucia Naldi, “The Temporal Evolution of Proactiveness in Family Firms:
The Horizontal S-Curve Hypothesis,” Family Business Review,
27(4)(2014): 35-50). Certainly, liabilities of newness may be greater in the
early years when the firm is run by a first generation or founder. But it is
possible for the early years to be placid, and for the environment to alter
more rapidly and unpredictably in later years as technologies evolve and
competition grows. Such a scenario is illustrated in our example of Eaton’s.
9
J oseph Astrachan, and Thomas Kolenko, “A Neglected Factor Explaining
Family Business Success: Human Resource Practices,” Family Business
Review, 7/3 (1994): 251-262.
10
J ean-Louis Arregle, Mike Hitt, David Sirmon, and Philippe Very, “The
Development of Organizational Social Capital: Attributes of Family Firms,”
Journal of Management Studies, 44/1 (2007): 73-95.
Resources and innovation in family businesses
35
11
Yannick Bammens, Wim Voordeckers, and Anita Van Gils, “Boards of
Directors in Family Firms: A Generational Perspective,” Small Business
Economics, 31 (2008): 163-180; Yannick Bammens, Wim Voordeckers,
and Anita van Gils, “Boards of Directors in Family Businesses: A Literature
Review and Research Agenda. International Journal of Management
Reviews, 13/2 (2011): 134–152; Guido Corbetta, and Carlo Salvato, “The
Board of Directors in Family Firms: One Size Fits All?” Family Business
Review, 17/2 (2004): 119-134.
12
J ay Barney, Mike Wright, and Dave Ketchen, “The Resource-based View
of the Firm: Ten Years After 1991,” Journal of Management, 27/6 (2001):
625-641.
13
Margaret Padgett, and Kathryn Morris, “Keeping it "All in the Family":
Does Nepotism in the Hiring Process Really Benefit the Beneficiary?”
Journal of Leadership and Organization Studies, 11/2 (2005): 34-45.
14
William Schulze, Michael Lubatkin, and Rich Dino, “Toward a Theory of
Agency and Altruism in Family Firms,” Journal of Business Venturing, 18
(2003): 473–490.
15
Maximiliano González, Alexander Guzmán2, Carlos Pombo, and María-
Andrea Trujillo, “Family Firms and Debt: Risk Aversion versus Risk of
Losing Control,” Journal of Business Research, 66/11 (2012): 2308-2320.
16
Danny Miller, and Isabelle Le Breton-Miller, Managing for the Long Run:
Lessons in Competitive Advantage from Great Family Businesses,(Boston,
MA: Harvard Business School Press, 2005); Margaret Graham, and Alec
Shuldiner, Corning and the Craft of Innovation, (Oxford University Press:
New York, 2000).
17
This is also a strategy of many Quadrant 1 firms.
Resources and innovation in family businesses
36
18
Unfortunately, too little is known about how changes in family
governance influence the receptiveness to and nature of family firm
innovation. Research into that question might explain the movement of
family firms between the quadrants of our framework. Similarly, although
we have highlighted different attitudes towards innovation across the
generations, we need to know more about the extent to which succeeding
generations alter family objectives in response to evolving environmental
conditions, and the implications for the nature and success of innovation.
19
Thomas Zellweger, Robert Nason, R., and Matthias Nordqvist, “From
Longevity of Firms to Transgenerational Entrepreneurship of Families:
Introducing Family Entrepreneurial Orientation,” Family Business Review,
25 (2012): 136-155.
20
For expositional purposes we have not explored the distinction between
evolutionary and revolutionary innovation. This is an area for further
research in the family business context and for comparison between family
businesses and other ownership forms.
21
Ming-J er Chen, “Competitor Analysis and Inter-firm Rivalry: Toward a
Theoretical Integration,” Academy of Management Review, 21(1996): 100-
134; Ming-J er Chen, and Danny Miller, “Competitive Attack, Retaliation and
Performance: An Expectancy-Valence Framework,” Strategic Management
Journal, 15 (1994): 85-102. This approach has been termed the AMC
model.
22
Yannick. Bammens, G. Notelaers, Anita Van Gils, “Implications of Family
Business Employment for Employees’ Innovative Work Involvement,”
Family Business Review, (2014) DoI 0894486513520615.
23
These insights suggest that the capabilities required for innovation and
the willingness to undertake innovation may be contingent on the nature of
firm ownership, and hence an area for further research is to compare
innovative capabilities in these different ownership contexts.
Resources and innovation in family businesses
37
24
The example of Maison Louis Latour illustrates how this has been
successfully achieved over several generations but further studies are
needed of the processes involved when a change from the initial intended
successor needs to be made.
25
There remains a need to explore how much operations boards and
boards in subsidiaries of family firm groups have the discretion to decide
upon and implement innovation. Such research might clarify the
relationship between main and operations/subsidiary boards and how
these relationships vary across different types of ownership.
26
J ames Chrisman, J ess Chua, Alfredo de Massis, Federico Frattini and
Mike Wright, “The Ability and Willingness Paradox in Family Firm
Innovation,” Journal of Product Innovation Management, (2014). Our cases
hint at the effects on innovation of changing goals over the life-cycle of the
family businesses, however this is an area where further studies are
needed.
27
Khai Lee, Guan Lim, Wei Lim (2003). Family Business Succession:
Appropriation Risk and Choice of Successor. Academy of Management
Journal, 28(4), 657–666.
Resources and innovation in family businesses
38
Centre Manager
Enterprise Research Centre
Aston Business School
Birmingham, B1 7ET
[email protected]
Centre Manager
Enterprise Research Centre
Warwick Business School
Coventry, CV4 7AL
[email protected]
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