Open innovation in Family Firms

Open innovation” is sometimes said to be the approach for effective innovation in the 21st century, as it allows firms to become more innovative as compared to the “traditional” approach of closed innovation. But does open innovation only work for high-tech companies and startups? Are family firms and open innovation antagonisms? No, not at all, HSG student Nathalie Lädrach and HSG assistant professor Nadine Kammerlander suggest. Based on an extensive literature review, they propose the following:

 

  • Typical family firm characteristics make family firms well prepared for outside-in open innovation. Outside-in open innovation means that the family firm uses external ideas and knowledge to fasten and smoothen the innovation process. This knowledge comes for instance from customers (user innovation) or suppliers, which freely share their improvement ideas with the family firm (i.e. nonpecuniary inbound open innovation). Family firms have the following advantages as compared to other firms:
    • Trust-based, long term relationships to members of their network, e.g., customers, suppliers, but also university centers. This allows them to quickly (and efficiently) access relevant external knowledge. While the breadth of their network might be limited, the depth of family firms’ ties to their network is quite huge, allowing for accessing reliable information.
    • Flexible organizational structures allow for efficient usage of external structures.
    • Implicit, tacit knowledge within the organization. This knowledge helps to assess the quality of the external knowledge and to use it in the organization.
    • Fewer inefficiencies in the knowledge absorption process if owners and managers are aligned in their goals that is when the CEO is a family member.

 

  • Typical family firm characteristics, however, impede inside-out (or: outbound) open innovation. Inside-out open innovation means that knowledge that family firms have created is commercialized by externals. The most important problem that family firms face with outbound open innovation is that successful outbound innovation requires substantial financial investments in R&D. However, past research has shown that family firms typically underinvest in R&D as compared to non-family firms.

 

  • Advice for family firms that want to build on open innovation
    • Get rid of the “not invented here” syndrome! Open innovation requires giving up some control!
    • Install useful knowledge management systems (including systems for patent management and other necessary platforms to share, assess and document ideas)! They help to effectively “absorb” and assess the external knowledge.
    • If the aim is to go for outside-in (inbound) open innovation: Also consider buying external knowledge (e.g., by licensing or by acquiring startups; labeled as pecuniary inbound innovation)
    • If the aim is to go for inside-out (outbound) open innovation: Make sure that enough resources are dedicated to research and innovation! (Typically family firms invest less in R&D than non-family firms do)

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