When you think of the most innovative companies, you probably think of the nimble startup or the Silicon Valley based tech giant. What you probably don’t think of is a family firm. Indeed, family firms are usually thought of as anything but innovative, with long traditions an aversion to risk and a reluctance to change.
A recent study suggests that it’s a perception that might need adjusting. The authors conducted a meta-analyses of over 100 studies from 42 different countries between 1981 and 2012 to explore not only the investment made in innovation by family firms, but the relative success of that investment.
The analysis found that on one hand, family firms were living up to their conservative image but it came with a surprising twist. It revealed that family firms were typically spending less on R&D than non-family firms of a similar size, but what they are able to do is get more bang for their buck. Indeed, for every dollar spent on innovation, they secured more patents, more new products and higher revenue from those new products than their peers.
More productive
So why are family firms more productive than their non-family owned peers? Insight might come from a second study, published in 2015. It found that family owned firms tend to elicit not only higher employee engagement levels from staff, but as a result of this, they also secure higher productivity levels as well.
The researchers believe their findings provide a crucial insight into the differences in engagement between family and non-family firms. They believe that the data provides a crucial support for the virtues of family firms, both in terms of employee engagement and long-term performance.
“Our results show that corporate culture systematically differs by firm type and that it matters for subsequent firm performance,” they conclude. “There is an old Dilbert cartoon about the saying, ‘Employees are our most valuable asset.’ We can’t tell whether money, employees or carbon paper matter the most, but our results suggest that more satisfied employees create more value for the owners of the firm.”
The ability to think for the long-term was also emphasized in a third study looking at the mentality of CEOs in family and non-family firms. The analysis revealed that the more family orientated the company was, the greater focus it had on its stakeholders. So, for instance, if it was a choice between paying a dividend to shareholders or making employees redundant, they would generally choose to protect the jobs.
Picking winners
This manifests itself in the way family firms invest in innovation. Research suggests that family owners are exceptional at picking the right innovations to back. Not only do they have deep knowledge of their industry, and indeed their firm, but they also tend to spend considerable time with the organization, and communicate frequently with employees. This allows them to get more bang for their buck when it comes to innovation spending.
I spoke recently with Francois Botha, CEO of +Simple, an innovation and brand management consultancy that specialize in family firms. He said that a key part of ensuring family firms continue to innovate is the communication between the original founders and the next generation of leaders. It was a finding replicated in the previous studies, which found that second generation leaders were much less efficient innovators than their forefathers in terms of innovation expenditure.
“With many family business empires launching in the first half of the 20th century, they are now faced with an ever-increasing disconnect between the original founders and the incoming generation of leaders. The strength in family business lies in keeping the family together; It is therefore crucial to ensure future generations find their unique place within the business,” Botha says.
Getting the branding right
The brand is a fundamental part of the success of family firms, and the company name is one of the more visible aspects of a company’s brand. A recent study from Duke University found that the name of the family firm had a profound impact on its success. It emerged that companies that were named after their founder, or largest shareholder, performed better than their peers. Their return on assets was a significant 3% higher than other companies.
They suggest that this occurs because owners have a greater reputational stake in their business if it bears their name. If you feel strongly enough about what you offer that you’re willing to put your own name and reputation to it, then you’re more likely to put the work in to make sure it’s a success.
This phenomenon was particularly strong when the name of the company was unique. When the name was relatively common, it was less clear that the company was named after the founder, and therefore the market rewarded them less than companies with rarer names where the signal was much stronger.
“Apart from the obvious benefits of keeping the family together and making a space for future generations, families also need to ensure that they are top-of-mind when it comes to their area of business. This way they ensure that they can be competitive by attracting the right kind of people, partners and investments,” Botha continued.
The modern business world increasingly revolves around talent, and the brand of the company can be crucial in ensuring that the firm can secure the best talent. Everything else flows from that, the best projects to work on, the best innovations. It becomes a virtuous circle.
Family firms are perhaps not the first place you look to for examples of innovation, but the evidence suggests that, with the right ingredients, they can be among the most innovative companies in the market. Taking a long-term view of the world and investing heavily in your staff are lessons we can all observe however, regardless of whether we’re in a family firm or not.
