Family firms and disruptive technological change: The family innovator’s dilemma

Every once in a while industries become disrupted. Newcomers from outside the industry begin to commercialize products that are based on a novel technology, have fundamentally different product features or are built on a distinct business model. Established companies typically have problems with adopting such new technologies. As a consequence, they often lose market shares when the innovation becomes mainstream. Look back on Kodak’s prior dominance in the photography market, for instance. Or the prosperity of the book and music retailer Borders before online shopping began to prevail. There are indeed numerous examples of fallen giants.

To help firms overcome those challenges, Harvard professor Clayton Christensen wrote the bestselling books “The innovator’s dilemma” and “The innovator’s solution”. Yet one might ask: How valuable are those insights for family firms? Are challenges for family firms the same as for non-family firms? And can the advices given in the book be transferred to the family business context?

The family innovator’s dilemma

Family influence makes the situation even worse and brings about new challenges for established firms. First, many family firm owners and managers are reluctant to involve outsiders in their strategic decision making. As radically new technologies often emerge outside the industry’s boundaries, family firms run the risk of overseeing or misinterpreting environmental changes. Second, a successful adoption of a new technology often requires substantial upfront resource investments. Family firms now face a dilemma: They could either take (additional) outside money from banks or investors and thereby dilute their control and influence over the firm. Or they could re-allocate existing money from the old to the new technology, thereby risking to harm long-standing relationships to employees, suppliers, customers, and other important stakeholders. Both options appear as non-desirable for many family firm owners and managers – consequently, they often decide to invest only cautiously into the new technology. Third, long tenures of executives and employees impede a radically flexible implementation of the new technology. While tacit knowledge, experience, and loyalty – frequent implications of long tenures – can be a real asset in normal times, they can turn into a liability when radical change emerges. Most disruptive technologies require a fundamentally different set of routines and capabilities to be successfully adopted.

 

The bright side

Should family firms thus throw in the towel and hope that radical changes will spare their industries for a long time? No! The challenges associated with family influence are only one side of the truth. A second glance reveals various strengths that family firms can build on in such situations of turmoil.

First and foremost, adoption of radical innovations is often challenged by “on-off-investment patterns” of the firms: The short-term planning horizon of those firms requires them to re-allocate their resources on a frequent base and to change their adoption strategies again and again. This problem gets reinforced by the resistance of various middle-managers. Family firms do not face this challenge. Once they decided to invest into the new technology, they can stick to this decision and thus drive the technology adoption in a very efficient way. Their long-term horizon allows them to make persistent investments that pay off in mid/long-term future. And if the power is concentrated in the hands of few family members and those individuals are committed to implement the radical changes, then political resistance among middle-managers is mostly low. Many family firms are largely independent of outside investors and financial analysts. While this brings about some disadvantages when it comes to deciding for investing in the new technology, it provides huge leeway once the decision is taken: Family firms can use this leeway to adopt the technology in a way that best fits the firm – and not the expectations of outsiders.

 

Summary

What are the implications for family firms? Family businesses face different challenges as compared to non-family firms when radical changes emerge. Consequently, owners and managers of family firms should become conscious of their strengths and build on them to achieve competitive advantages. In particular, they need to make the best of their independence and leeway in action, which are incredibly valuable assets in times of radical change. A reliance on “gut feeling” and quick decisions for persisting adoption can turn out advantageous.

Moreover, family firms need to find ways to alleviate their weaknesses in the context of radical change. This refers to finding ways of financing the adoption of radical technologies with sufficient intensity, finding ways to incorporate outside perspectives, and also points to dismantling emotional barriers that might affect decision making.

Following all those advices appears to be the recipe of success for the German family-owned retailer Otto Group: Over the last two decades the established family firm retailer managed to turn into the second biggest e-commerce provider in fashion and lifestyle worldwide. This success story shows that the threats associated with radical change can be turned into a valuable opportunity for family firms.

 

This is a repost of an article I posted on familybusinesswiki.com It summarizes findings of a paper published by Andreas König, Albrecht Enders, and myself.

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