In the competitive global economy, Family Businesses stand as bastions of endurance and legacy through the ups and downs of market dynamics and generational shifts with a unique blend of tradition and innovation. Today we explore the strategies that underscore their longevity.

The Interplay of Tradition and Innovation

Central to the sustainability of family businesses is the intricate balance between preserving tradition and fostering innovation. The agility to adapt in a rapidly changing market landscape, while staying true to core values, defines their competitive edge. Families usually have a longer-term outlook. This leads families to forego short-term profitability for long-term growth. Integrating new technologies and practices demands a deep understanding of the legacy and potential future directions.

Navigating Governance and Succession

The evolution from founder-centric models (organising governance structures around family members, mutual trust and ad-hoc decisions, etc.) to structured governance frameworks (introducing processes, boards with external advisors, etc.) signifies a pivotal phase in a family business’s lifecycle. This shift, often highlighted by the adoption of formal boards and the inclusion of non-family executives, marks the maturity of the enterprise and its readiness for future challenges. It raises intricate questions about leadership identity as younger generations, equipped with fresh visions, take the helm.

This transition accentuates the significance of psychological ownership, where a strong sense of belonging and investment in the business’s success motivates innovation and commitment across generations. Psychological ownership needs to be entrenched in the family from a young age. This comes through engagement with business, education, exposure, attitudes and behaviors notes research by Rau, Werner and Schell (2019). If you’re interested in the role psychological ownership plays in succession, read our previous piece “Navigating the Complexities of Family Business Transition”.

However, this sense of ownership can also impose a significant burden, as successors navigate the legacy’s weight while steering the company toward new frontiers. Anderson & Reeb (2003) illuminate this dynamic, stating that families often add value to a firm over a longer time horizon, especially when they secure a position on the board of directors after partially selling the company. If you’d like to learn more about the importance of professionalism in Family offices, read our article “The Need for Professionalism Over Socioemotional Wealth in Family Businesses”

Innovation as a Double-Edged Sword

Innovation can serve as a growth catalyst and a risk source within family enterprises. While novel ventures and technologies can access new markets, they bring financial variability and potential core value dilutions. Financial variability here means that the profitability of a family business becomes less “planable” and more reliant on good years compensating for worse years (i.e. more fluctuations). The discussion emphasised strategic risk-taking, where innovation aligns with the business’s long-term vision. Supporting this, Kotlar, De Massis, Fang & Frattini (2014) found that family businesses are generally less active in R&D investments but are willing to increase risk under certain conditions, such as a decline in profitability below a certain threshold. Families likely attempt “one last throw of the dice” to protect the family business from falling under external control.

Innovation can be challenging, as they juggle preserving tradition with embracing novelty. A concept that comes into play here is Socioemotional Wealth (SEW), defined as “non-financial aspects of the firm that meet the family’s affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty”. (Gomez-Mejia & Herrero, 2007). To learn more about SAW and its relation to innovation, read our previous article “Harnessing Innovation in Family Businesses: Understanding and Navigating Heterogeneity”.

In cases where the family business is ultimately held in a trust, the beneficiaries will need to navigate not just the market forces putting pressure on the family business, but also a trustee’s tendency to have a myopic view that is less nuanced and, unfortunately, less focused on the overall Socioemotional Wealth of a family.

The Role of External Influences

Incorporating external perspectives is vital for nurturing innovation and ensuring longevity. Engagements with non-family executives and advisors, along with the adoption of modern collaboration tools, can bring fresh ideas and perspectives. This openness, balanced with respect for the family’s legacy, ensures that new strategic directions resonate with the company’s foundational values and objectives. James (1999) highlights the sustainability derived from lower personnel turnover in family businesses, attributed to a long-term view rooted in personal ties and altruism within the family. If you wish to explore the importance of lasting relationships and outside influences in Family Business, read our article  “The Role of Most Trusted Advisors in Bridging Logic Gaps”.

Conclusion

The longevity of family businesses reflects their adaptive, innovative capacity and cohesive vision maintenance across generations. Insights from research underscore the importance of psychological ownership, tradition and innovation balance, and strategic external perspective integration. As they manoeuvred through modern economic complexities, these principles illuminate the path toward a durable legacy, blending past wisdom with future innovation in a legacy that withstands time’s test.

References

Rau, S.B., Werner, A. and Schell, S. (2019) ‘Psychological ownership as a driving factor of innovation in older family firms’, Journal of Family Business Strategy, 10(4), p. 100246. Available at: https://doi.org/10.1016/j.jfbs.2018.03.001.

Anderson, R.C. and Reeb, D.M. (2003) ‘Founding-Family Ownership and Firm Performance: Evidence from the S&P 500’, The Journal of Finance, 58(3), pp. 1301–1328. Available at: https://doi.org/10.1111/1540-6261.00567.

Kotlar, J. et al. (2014) ‘Strategic reference points in family firms’, Small Business Economics, 43(3), pp. 597–619. Available at: https://doi.org/10.1007/s11187-014-9556-6.

Gómez-Mejía, L.R. and Herrero, I. (2022) ‘Back to square one: The measurement of Socioemotional Wealth (SEW)’, Journal of Family Business Strategy, 13(4), p. 100480. Available at: https://doi.org/10.1016/j.jfbs.2021.100480.

James, H.S. (1999) ‘Owner as Manager, Extended Horizons and the Family Firm’, International Journal of the Economics of Business, 6(1), pp. 41–55. Available at: https://doi.org/10.1080/13571519984304.