The Significance of Innovation for Family Businesses

Significance of Innovation for Family Businesses

By Sebnem Elif Kocaoglu Ulbrich, LL.M., MLB, Founder, Contextual Solutions

“Business Innovation:” Which Businesses Should Feel Addressed?

We hear “business innovation” almost daily, but do we know what “innovation” really means?

Most of the official definitions of innovation synopsize the topic as the introduction of something “new.”

  • (The use of) a new idea or method <Cambridge Dictionary>
  • The introduction of something new <Merriam-Webster>
  • Innovation is the introduction of new ideas, methods, or things <Collins>

Can we conclude that all new business ideas are innovative, though? Of course, new ideas can be interesting and exciting. However, a theory must aim (process or cost) for efficiency, speed, originality, and novelty to qualify as innovation.

Was this explanation clear enough? Probably not. In fact, the definition of innovation makes the goal hard to achieve. The term itself is very vast, and the description is relatively abstract. Therefore, only corporates and businesses with significant influence consider themselves addressed when discussing the perks of business innovation, whereas SMEs feel they “need to be bigger” to innovate. However, the very reason they are not “bigger” could also be explained by the lack of innovation – a paradox, if you will. Innovation is relevant and needed for all sizes of companies.

SMEs usually disregard the need for a new idea or originality, mainly if they produce centuries-old and loved recipes, models, designs, or provide classical services. However, innovation can even be an added value in small things that make an impact.

For instance, how managers introduce and represent themselves can be improved using LinkedIn QR codes or NFC-based business cards. How businesses accept payments can be diversified with contactless POS devices or crypto payments. Finally, how companies operate can be revised with automated and systematic processes. All these small interactions make an impact, changing the way customers or partners feel and talk about businesses and, therefore, “innovate” the business cycle. The less something is expected, the more “innovative” it would seem in the business context.

Family-Owned Businesses and Innovation

Family-owned businesses face the most notable challenges when it comes to business innovation. In reality, family-owned businesses are the integral cogs of the European economy. Yet, they usually face specific challenges due to the emotional components of the business, and the constant technological changes make it even harder to keep up.

Family businesses generally have two sets of dominant cultures: the family culture and the business culture. If the necessary structures and strategies are not put in place at the right time, balancing these two cultures take up most of the time for daily operations. Initiating a third culture (aiming for innovation) can, therefore, create an additional layer of complication.

Sometimes family businesses have an existing innovation culture thanks to the efforts of the new generation of family members. However, the family culture that has been passed on for generations might not reflect the values and needs of the successors in these cases. Therefore, an interconnection between the family and innovation cultures is required when initiating the innovation agenda.

Nowadays, businesses consider new ways, witnessing the staggering growth of innovative business models and tech platforms. They, too, want to be a part of the conversation. That’s why family businesses with visions belonging to the past need to be updated and revised. Any structure that has been used for years without any revision, including the revenue models, management structures, decision-making hierarchies, or even how they handle asset and customer management, point to a “lack of innovation.”

Researchers believe that family businesses pattern and emotional connection to the past can hamper innovation.

“Surrounded by all external and/or internal factors, the family business faces one very difficult obstacle: taking risky decisions regarding future innovation. This could affect not only a current negative balance sheet, but also the future assets threatening future existence of the family business” – “Innovation in Family Business” by Adriana CIOCA, Kassam WEHBE, Delia POPESCU, Constanța POPESCU

Some common practices that risk the family business in the long run include:

  • Using decades-old operational structures and not implementing new-generation bookkeeping, client, or project management software > losing precious time or missing opportunities due to lack of agility
  • Using family-only decision-making structures and hierarchies > creating a decision bias and not letting fresh ideas enter the board room
  • Capitalizing in similar fields > carrying all the eggs in the same basket
  • Not investing in marketing, branding, PR, or not refreshing the old brand position with today’s values > missing out on new generation customers or being a part of the conversation
  • Using the same product lines > new customer segments neglecting these brands as they don’t feel addressed or included
  • Limiting digitalization to simple landing pages > giving an outdated image
  • Resisting high-tech wealth management tools > missing out on the potential gains and financial diversity
  • Relying merely on their long-term troops or partners for specific topics > looking at the topics from the same angle and letting innovation slip

What’s Next for Family Businesses?

The family businesses that heirs take over with Ivy League educations or VC/start-up experience are already giving the facelift to their heirlooms. What about the ones being passed over to heirs that do not possess the necessary know-how or sufficient interest?

Decades-old organic growth can indicate a proof of concept for the past and today’s world; however, it doesn’t guarantee resilience. Here are some sector-agnostic tips to future-proof the business for family businesses:

  • Assessing the Past: Most family businesses start future-proofing their businesses by setting up a quick family office and initiating rapid start-up investments. However, most successful business ideas start by looking into the past and doing an evaluation of values & mission vision. This step is especially crucial for family businesses due to the potential gap between the values and mission of the different generations in management. Identifying the values and mission will also allow the connected family offices to allocate and manage the wealth better. Additionally, running “post-mortem” workshops and identifying the strengths and the weaknesses is proven helpful before starting with other areas.
  • Optimizing Today: The fiscal summaries for 2022 might look good, but it doesn’t mean there is no room for improvement. Optimizing today might mean fixing a part of the business (e.g., marketing, sales, production) that is underperforming or undervalued or improving the existing standards. Family businesses can improve and “innovate” many if they allocate time and budget for rethinking and reimagining the following areas:
  • The way the business keeps track of orders and production,
  • The way (physical or digital) products are produced,
  • The way the production residues are handled, utilized, or commercialized,
  • The way the business positions itself in the market and in the media,
  • The customer segments the business targets,
  • The way the business operates in foreign markets,
  • The way the company keeps track of its finances and accounting,
  • The way decisions are made and announced,
  • The operational or marketing costs of the business,
  • The relationship between the family and non-family layers of the company and the team efficiency and spirit,
  • The existing revenue channels,
  • Existing pricing strategy,
  • Existing payment and finance options and costs,
  • Physical office, store, and warehouse costs, and structures,
  • The way the business is represented online,
  • The way the company contributes to the environmental or social goals.

There are multiple (and endless) ways to innovate a business, and encouraging curiosity and questioning, even the small things, can create habits that lead to original and groundbreaking ideas.

  • Preparing For the Future: Preparing for the future means predicting future needs and remaining relevant for businesses. Once family offices assess where they stand today, they are encouraged to initiate brainstorming and creative, innovative activities to see how they can improve in the future. Preparing for the future might include new products, distribution channels, sales or marketing methods, or different lines and areas of business. As long as the “change” makes the processes or outcomes more efficient, pleasant, relevant,

Family businesses should never forget that today’s most essential corporations started as small family businesses but excelled due to their success in balancing culture, adaptation, innovation, and curiosity. “The combination of tradition and innovation” is the secret formula to bringing a legacy business to a level the first-generation founders couldn’t have imagined. In cases where relevant strategy, business development and innovation know-how is missing in-house, outsourcing the processes or getting a second opinion from experienced strategy consultancies can be an option.


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