How Family Businesses Can Lead The Charge On Innovation

Notable examples include Herr’s Potato Chips, a small family business that introduces five to 10 new snacks annually, and W.L. Gore, maker of Gore-tex and other technical materials, which gives employees one afternoon per week to come up with new ideas.

Researchers view the family business innovation advantage as something that accrues over time. Since family businesses are managed and operated with a long-term perspective, later-generation family firms tend to be more innovative than other firms.² This “innovation efficiency” has given family businesses a competitive edge, even as they address new business challenges such as technological changes, major health threats, and heightened scrutiny of diversity and inclusion.

Innovation efficiency does not mean family businesses are immune to disruption, however. As family businesses grow and evolve through this unprecedented business environment, how can they continue their legacy and differentiate themselves through innovation? Recent insights from Russell Reynolds Associates 2021 Global Leadership Monitor survey, which included 225 global family business leaders, suggest that they may need to reconsider how they bring new offerings to market, from revisiting investments and processes to taking a fresh look at diversity and inclusion.

Multi-faceted drivers of innovation

One way to continuously advance innovation is to align it with digital transformation, particularly in today’s pandemic-affected world. Organizations are increasingly embarking on the digital transformation journey, evaluating new digital technologies to help transform their business models. Yet this is an area where family business leaders appear to be somewhat behind. Less than a third (31%) of family businesses use digital technologies to launch new operational processes or new ways of working, compared to a 40% global average across all organizations.³

More generally, our data suggests that family businesses are less likely than others to take a continuous improvement approach to business. Currently, only 28% of family businesses are considering new ways to improve upon existing operations, compared to a 35% global average.⁴ This may stem from some of the unique characteristics of family businesses, such as deep appreciation for the founder’s vision, loyalty to tradition, and sharpened focus on the long-term journey.

Family businesses along the innovation journey

31% use digital technologies to launch new operational processes or new ways of working

28% are considering new ways to improve upon existing operations

Source: Russell Reynolds Associates, 2021 Global Leadership Monitor, base n = 225 global family business leaders

To advance innovation, organizations also need to ensure their cultures support it. Research increasingly shows that the ability to build diverse teams to encourage cross-pollination of different experiences and progressive perspectives is crucial to innovation outperformance. Ethnically diverse executive teams are 36% more likely to see top financial performance, according to recent McKinsey & Company research,⁵ and management teams with above-average diversity see innovation-related revenue that is 19 percentage points higher than leadership teams with below-average diversity, according to BCG.⁶

Here, too, family business leaders see their businesses as somewhat behind others. Just under half (45%) of family business executives report that their organization actively works to identify and amplify the voices of those with a different point of view, compared to 51% of executives across all organizations.⁷

Innovation pathways for family businesses

Three key approaches for family businesses to build up innovation capabilities for the next wave of change include redefining technology leadership capabilities, building an inclusive culture, and considering potential external investment partners.

01. Redefine technology leadership capabilities:

To support innovation through new digital and data capabilities, it is important to have a designated executive to help the business think strategically about its technology needs. Beyond the designated technology leader, the executive team should also be comprised of leaders who have an informed perspective on digitizing core functions such as finance, human resources, and supply chain. Having multiple tech-savvy board directors will help bolster efforts as well.

02. Build an inclusive culture:

Innovation thrives amidst diversity and multiplies within an inclusive culture. Important elements of an inclusive culture include cross-functional collaborations and data-driven decision-making processes. These characteristics can be quantified using climate, structure, and leadership metrics, to increase transparency and benchmark the organization’s levels of inclusion and belonging (see Figure 1)

Assessing the organization’s culture will be an ongoing, continuous journey, one that strategically evolves alongside the business model, to create the right foundation for new talent and capabilities.

 03. Consider external investment partners:

One way to catalyze innovation is to bring in external viewpoints. For many family business leaders, taking on outside investors is a growing consideration. In a recent poll of middle-market family business owners, 87% expressed interest in this option.⁸ To the extent these investors include private equity firms, family businesses may see an innovation boost as well as a financial infusion.⁹ Partnering with private equity would bring family businesses exposure to new business perspectives and a faster pace of change, as 72% of private equity-backed executives say their leadership helps the organization adapt to disruptions in the industry, compared to just 58% of family businesses.¹⁰ It would also give family businesses the opportunity to develop digital capabilities – more than half (55%) of private equity-backed portfolio companies use digital technologies to launch new operational processes and/or ways of working, compared to just under a third (31%) of family businesses.¹¹

Family businesses inherently possess an innovative nature. In order to capitalize on this and continue being competitive in the market, however, family businesses will need to re-examine their innovation capabilities with a fresh lens and identify forward-looking strategies to enable change and transformation.

Author

Joy Tan is a member of Russell Reynolds Associates’ Center for Leadership Insight. She is based in New York City.

References

_{1, 2  Research: Family firms are more innovative than other companies. Kammerlander, Nadine and Marc van Essen. Harvard Business Review, January 25, 2017.}

_{3, 4, 7, 10, 11 2021 Global Leadership Monitor: Leadership Preparedness for the Road Ahead. Crookes, Jemi, Tom Handcock, PJ Neal, Alix Stuart. Russell Reynolds Associates, May 4, 2021.}

_{5 Diversity wins: How inclusion matters. Dixon-Fyle, Sundiatu, Kevin Dolan, Vivian Hunt, Sara Prince. McKinsey and Company, May 19, 2020.}

_{6 How Diverse Leadership Teams Boost Innovation. Lorenzo, Rocío Nicole Voigt, Miki Tsusaka, Matt Krentz, and Katie Abouzahr. Boston Consulting Group, January 23, 2018.}

_{8 How to partner with a private equity firm. Weinberg, Andrew. Forbes, February 25, 2021.}

_{9 From trust to impact: why family businesses need to act now to ensure their legacy tomorrow. Bartels, Peter and Peter Englisch. PricewaterhouseCoopers, 2021.}