7 minute read 28 Mar 2018
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Why family businesses are the natural home of innovators

Keeping their founders’ innovative vision alive helps family businesses to thrive. What can we all learn from their success?

When family businesses thrive across generations, it’s often because they have a spirit of innovation at the heart of their culture. This helps them to keep up with a fast-changing world and to create and seize new opportunities.

And while this “innovative spirit” isn’t easy to quantify, there are three key elements that truly innovative family business often share, which many non-family businesses would be wise to replicate:

  • They have an inbuilt entrepreneurial culture: this can be seen from the start-up phase of these businesses, as driven inventors and innovators became family business founders, turning new ideas and advances into the start of long-lasting family businesses. Two examples are Mads Clausen of Denmark’s Danfoss, who in the 1930s designed valves and other components for refrigerators, and New Zealand’s Bill Gallagher, who invented a new type of electric fence for controlling livestock.
  • Innovation is, however, is more than just about invention. It’s also about responsiveness to change in the marketplace, as well as finding and responding to new opportunities. The most successful family businesses are willing to move away from traditional opportunities in order to forge fresh ideas and to identify — and then capitalize on — previously unseen gaps in the market.
  • While the ability to react quickly is important for family businesses, so is the vision required for long-term thinking, as manifested in a commitment to R&D. Innovation is often a struggle, full of setbacks and wrong turns, requiring a patient investment of time and money. And having this patience is something that sets many family businesses apart.

For our Family Business Yearbook 2017, we talked with the leaders of some of the world’s most successful family businesses, and they shared their insights on how they keep the spirit of innovation alive.

1. Entrepreneurial culture

Entrepreneurial culture is what gives many family businesses an edge over their competitors. That’s certainly the opinion of Georges Bougaud, head of Colombian cosmetics firm Recamier. “Being a family gives us the ability to take fast decisions and innovate with more confidence,” he says.

And as Guido Vanherpe, the CEO of La Lorraine Bakery Group, says: “Entrepreneurship and innovation are synonymous. You don’t have one without the other.”

But while most businesses start from a flash of entrepreneurialism, sustaining an entrepreneurial culture in the long term can be a serious challenge.

It is an area where family businesses can have an advantage, because the second and subsequent generations are immersed in their family’s entrepreneurial culture from an early age.

This was certainly true of Vesa Mäenpää, now commercial director of Finnish retailer Tammer-Tukku. “From the age of seven, I started working in the business. Back then, I was cleaning the warehouse. And pretty much from then until I took a full-time job at the family business, I was working evening and weekends for the company.”

It was also the case with Trisha Lemery, third-generation family member and CEO of Winsert, a metal alloy specialist. She worked part-time on the shop floor when still at high school and later on at college.

Growing up close to the business gives many family business members a taste for entrepreneurialism, an emotional connection to the business and a personal commitment to the values of the founder.

Being immersed in the business can be an excellent preparation for spotting new ideas. And it also helps young family business members to develop the courage and commitment required to make these new ideas a reality.

As Peter Rejlers of Sweden’s Rejlers says: “You must never be afraid to do things you believe in, and you must put everything into it, all your effort.” In Rejlers’ case, their own innovations are in areas they are truly passionate about: energy efficiency and sustainability.

2. Responsiveness to change

Innovation is also about responsiveness, which means listening to customers and suppliers and taking note of their observations.

As Robyn Eddy of the Eddy Group, a Canadian construction business, points out: “We innovate in our processes and by making sure our business is flexible in meeting the demands of our suppliers and customers. It is a lot about relationships, and we need to be constantly responsive to these relationships.”

Family businesses also have to be responsive to the many opportunities afforded by new technologies. Ana Maria Igel, a director of Brazilian energy firm Ultrapar, has no doubts on this point. “Innovation is fundamental,” she says. “[Our] company is always seeking new technologies, especially in IT.”

“Without innovation, we would not be able to keep pace with our global competitors,” says Barbara Strašek Mirnik of Slovenian motor component manufacturer KLS Ljubno. “We are focused on product innovation, process innovation, reinventing and innovating the business model to face up to market changes, and using advanced production and IT.”

Franci Bevci of KLS Ljubno working in the company facilities

German firm Dachser’s early commitment to streamlining its business through the use of IT made the company a pioneer in the application of the latest technology to logistics.

Responsiveness to market change is also essential for John Honan of Australian agribusiness Manildra. “Through our focus on the innovation and sustainability of Australian manufacturing and agricultural industries, we have adopted a truly global outlook,” he says. “This constant innovation has been necessary to maintain a competitive edge and meet the ever-changing demands of the export market.”

3. Investing seriously in R&D

One of the core strengths of many successful family businesses is their commitment to investing in innovation. This may be an informal commitment or, as with Swiss conglomerate the Schurter Group, a formal aspect of family governance.

“I made it clear that the family all agree that a certain percentage of the company’s revenues are set aside for innovation every year, and this needs to be in the constitution,” says Hans-Rudolf Schurter, CEO and Chairman of the group. “In fact, I would say this is the number-one most important thing in our constitution. If we don’t have enough money for innovation, we will eventually disappear from the market.”

This focus on investing in innovative R&D is something the Schurter Group shares with Anton Paar, an Austrian manufacturer of precision instruments. Just like the Schurter Group, Anton Paar has a commitment to research funding, written into its constitution.

The company spends 20% of its annual revenues on R&D. “It fuels our business and gives us our technological advantage,” says CEO Friedrich Santner.

This high level of spending is made possible by Anton Paar’s status as a foundation-owned family business. “Under our foundation structure,” says Friedrich, “the profits are all reinvested in the business. There are no shareholders taking profits out of the company. Most listed businesses would not be allowed by their shareholders to invest so much of their revenue in R&D.”

Sir William Gallagher, second-generation leader of the Gallagher Group in New Zealand, has a similar view. Sir William believes that the Gallagher Group’s high level of investment is made possible by being a privately controlled business. “Listed businesses would not tolerate that level of R&D expenditure,” he says. Today, the company has 120 R&D specialists, and they are a crucial part of the group’s efforts to build on their legacy of innovation and to stay ahead of their competitors.

Woman examining motherboard in Gallagher's production facilities

Many of the other family business leaders we interviewed for the Family Business Yearbook 2017 spoke of the importance of R&D to their companies.

Trisha Lemery described how Winsert’s R&D department had grown from a one-person office to a new purpose-built 10,000 square foot facility with 12 members of staff, headed by a renowned metallurgist.

“Innovation is the reason why Winsert has remained world-class and relevant,” she says. “It has become our core competency.”

Trisha Lemery, Winsert President & CEO, at the Winsert facilities

The connection between R&D and innovation is made clear by Denis Lambert of French family business LDC. He says that innovation is in the company’s genes.

LDC has an R&D team of 100, backed by the 1% of company revenues earmarked for R&D every year. The result is that about 30% of LDC’s turnover is generated by products that did not exist just five years ago.

Keeping the entrepreneurial tradition alive

Leonard Lauder of Estée Lauder has focused on innovative sales initiatives and marketing programs to respond to customers’ needs. Under his leadership, the company has launched such well-known brands as Aramis, Clinique and Origins.

Jørgen Clausen of Danfoss, who is the founder Mads Clausen’s grandson, talks about the concept of “the man on the moon” within the company’s entrepreneurial culture. Innovation led to the first moon landing, but it also required meticulous planning.

“Innovation should be risky, but not too risky,” he says. “It is all right to come up with wild ideas, but they should be feasible.”

This realism encourages the kind of innovation that delivers products and services that customers want to buy.

The view of the many global family business leaders we spoke to for our Family Business Yearbook 2017 was that innovation in family business is precisely about keeping the entrepreneurial culture of the founder alive through the efforts of subsequent generations.

It also depends on listening to staff, customers and suppliers, being responsive to new markets and technologies, and investing in R&D and creative ideas.

Only through efforts in these areas can family businesses deliver the innovative strategies, products and services that will enable them to reach their true potential.

And by following their lead, non-family businesses can capture the commitment to innovation that characterizes today’s leading family businesses.

Summary

Family businesses are successful innovators due to their entrepreneurial nature, responsiveness to change, and commitment to R&D.

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EY Global

Multidisciplinary professional services organization