Tag Archives: strategy

Incremental vs. radical innovation (“Everything in moderation”)

Joe Schmieder
Joe Schmieder

Groundbreaking new products—like the iPhone or Viagra—rarely emerge from family businesses. Family-run enterprises tend to prefer smaller-scale, incremental innovation over radical changes, versus the publicly held Apples and Pfizers of the world, which have deep pockets for R&D funding. For most family enterprises, growing by incremental steps is preferable to advancing by giant leaps. This “incrementalist” approach dominates partly because family businesses are averse to taking large risks and taking on large debt. Not surprisingly, then, family businesses tend to be quick followers or quick improvers, rather than original innovators. But we can argue that incrementalism represents a form of innovation, as it focuses on steady improvement of offerings or ways of doing business through meaningful change.

Research suggests that successful, long-lasting family firms exercise moderation with regard to most key dimensions: planning, leverage, and innovation, among others. A 2013 research study conducted by Alfredo De Massis, Federico Frattini, Emanuele Pizzurno, and Lucio Cassia entitled “Product Innovation in Family versus Nonfamily Firms: An Exploratory Analysis,” highlighted how family businesses tend to take an incremental approach to new product development, as part of a broader objective of careful resource management. The moderation approach is related to the desire to maintain sufficient resources, financial and otherwise, for family shareholders. Thus, while venture capital firms talk about burn-rate, or the amount of cash a start-up venture plows through in early stages, and how quickly a given innovation can be brought to market and scaled, family businesses tend to talk about less exciting things, like self-funded developments or modifications to existing products. That prompts some to believe that observing family firms innovate is like watching paint dry. In reality, steady progress is the key to success and continuity for many family businesses and non-family firms. The paint may take time to dry, but it sets very well, with deeper, longer-lasting color.

The moderation approach to innovation has served most family businesses well: They evolve at a pace that fits them, based on collaborative thinking among family leaders and non-family executives who understand and adhere to the family’s guiding principles. At the same time, the incrementalist approach may not always be ideal, especially in fast-shifting markets. Family businesses that fail to adapt quickly enough to the changing landscape will struggle to perform. The print media industry, for example, has been a high-profile sector populated by many family-owned firms (such as newspapers). In the new millennium this market has undergone rapid transformation, mainly because of the rising popularity of non-traditional content-delivery channels, especially digital ones. Some family firms have adapted very well to the Digital Age, innovating digitally based strategies and offerings. Others have not adapted nearly as well, and are suffering greatly for it.

The highest-performing family businesses are those that have learned to be just innovative enough, like Goldilocks searching for the “just right” bowl of porridge in the bears’ house. They match their innovation speed to the requirements of their industry and the pace of their competition, moving more deliberately than many non-family peers, in part because they don’t face the same kind of pressure for short-term results.

The World Cup as Metaphor

Amy Schuman
Amy Schuman

The brightest oranges, whitest whites, deepest navy blues, sun-ray yellows: each World Cup game brings a different color combination to the field but that is just the surface excitement. Are the players tall, long-legged, loping and passing the ball in graceful arcs from toe to toe, using the entire length and breadth of the field? Or are they short and compact, firing the ball in focused staccato bursts shaped like tight triangles that keep mostly to the field just in front of the goal? Does the team wait until the final 5 minutes to unleash the full power of their athleticism, or do they hit the goal, hard, in the first 60 seconds of play? Who flips and flops on the field after the appearance of a foul, and who springs up for more play after being flung to the ground or elbowed in the face? Who lingers to clasp their opponent’s hand, to speak with them face to face, trading jerseys, and who falls to the ground, on their knees, in tears, in private pain?

The World Cup may be one sport, with one objective, but week after week it has served up a rich feast of group dynamics and individual drama. Innumerable variations were played on the themes of strategy and opportunism, physical power and mental command, supremacy and surrender and ultimately, victory.

Many paths to success. A lesson to inspire us all.

The Family Business Difference: Capitalizing on Family Innovation

Joe Schmieder
Joe Schmieder

Family businesses have unique strengths built on the overlap of family and business, in part because the family running the business has more at stake—including reputation, survival, and security—than the managers and employees of non-family firms do.

Innovation is one such strength at the family-business intersection. Innovation in a family business, like most other features, is different from that in non-family firms. A key dimension of difference is that innovation in family firms is driven and enhanced by several distinct factors that can ultimately yield greater business performance, and family harmony.  Family-business features that serve as innovation drivers include:

  • Personal attachments such as family bonds, customer relationships, and inter-family-business connections—all of which support innovation

  • An incremental approach built on exercising moderation with R&D spending and emphasizing small changes to offerings, rather than giant leaps

  • Longer time horizons that yield greater patience with the development time associated with innovation

  • Shared values including innovation itself, with several supporting elements such as innovation-focused objectives and cross-functional visibility

  • Low leverage, with an emphasis on reinvesting funds back into the business—and into innovation, specifically

  • Experimental tolerance, or a willingness to try new things, even when that means going against the conventional (in a calculated way)

  • Family leadership that supports innovation by generating high-value ideas and speeding the product development process

Family businesses are indeed different from non-family firms, and many of the differences cited above support their ability to innovate, which in turn supports their growth and profits and the family’s well-being.

A Surprising Benefit of Low Pay in Family Businesses

David Ransburg
David Ransburg

I recently met with a family business owner who is quite open about the fact that he consistently pays his employees at a below-market rate. Given that he also makes great efforts to ensure that his company delivered the very highest level of quality, I questioned him about his low pay strategy.

I thought – somewhat naively, it would now appear – that higher quality demanded higher employee wages. He believed that low pay helped him to find the right employees for his company – those who would be dedicated, hard working, and have a strong belief in the company’s vision and mission. In other words, offering low pay – and having a reputation for doing so – provided his company with employees who weren’t working solely for the money. And, he believed, an employee who works for reasons other than just the money is an employee who will ultimately deliver higher quality.

While I remained somewhat skeptical, his argument did move me slightly because it reminded me of the common refrain about the low pay received by teachers. Even though all agree that teachers are so important, we, as a society, want them to be passionate about their jobs and to see their work as meaningful – not to do it for the money alone.

Now, there’s some research that further supports this line of thinking. The Institute for the Study of Labor (IZA) in Bonn found that relatively few workers are motivated by their organization’s mission, BUT those who are so motivated provide substantially higher effort AND receive lower pay. Granted, higher effort does not guarantee higher quality… but, I would suggest that it’s a good start.

Have you found a similar benefit of low pay in your family business? Or, are there other surprising benefits of low pay that you’ve seen?

The Board’s Role in Strategic Development

Kelly LeCouvie
Kelly LeCouvie

Most organizations with fiduciary boards have a tradition of management presenting a prepared strategic plan to the board for approval. Management’s role has been to complete the plan before discussing it with the board. There is a clear distinction (and needs to be) between providing oversight of the business and running the business.

At the same time, reaping meaningful value from your board is typically a function of how well they understand the business. And one way to enhance that understanding is by further engaging the board in the strategic process. Some boards will participate in an annual two or three day strategic retreat, where management has developed the core elements of the plan but discusses it with the board as a work in progress, rather than a fait accompli. This engages directors in important discussions about future growth, capital needs, resource allocations, and risk management. The discussions at this earlier stage help shape the plan, and further ferret out the implications of strategic options. There are other ways of getting directors more engaged around strategy, such as interim discussions with individual directors, whose specific expertise can help develop elements of the plan. This is a great board agenda item  – if you think directors can add more value to strategic development, ask them how they feel they might do this moving forward, and develop a plan for their participation!

The Management of Change: Part 2 of 4

Kent Rhodes
Kent Rhodes

There seems to be so much written and discussed about change these days. From an increasing cultural acceptance of marriage equality to keeping up with the latest technology advances (that smart phone you bought last month is already outdated), change not only is a fact of life, it also challenges our thinking and sometimes our comfort level.

Even business schools are obsessed with trying to teach current and future managers about change – sometimes even with some success.  Interesting thing is, it’s not really the change itself that creates the need to talk about managing it, but the complexity that surrounds the change.

What is striking about all the hyped talk about change, is how most family businesses seem to most naturally thrive in it simply because of the complexities a multi-generational enterprise naturally bring to the table: Strategy certainly includes market considerations but in a family business will likely include a plan for how G3 will engaged in it’s implementation; Increasing shareholder value is still central, but the relationships across family branches of owners means a deeper set of goals and assumptions are likely in place.

This particular view of change and complexity is referred to, quite blandly, as organizational development.  OD, as it’s called, is a process to help organizations be more effective in everything from making profits to improving the quality of work life. “…the focus is on building the organization’s ability to assess its current functioning and to achieve its goals…in the context of the larger environment that affects them.”  – Cummings and Worley, (2001)

So, whether they realize it or not, many family businesses are naturals at OD thinking that might actually give them a “leg up” in effectively managing change and complexity.  That doesn’t mean that process will always easy, but it does mean that some of the best examples of successful OD in practice, happens to be the family enterprise.

Slothful, Indeed

David Ransburg
David Ransburg

The December 18, 2013 blog post on Freakonomics discusses recent research on family firms and draws the conclusion that non-family CEOs drive better performance for their companies for the simple reason that they work more hours than do family CEOs. Strikingly, the term they use to describe these family CEOs is “sloth.” While you’ll find no bigger fan of Freakonomics than me, their use of this term misses the mark by a wide margin.

My quarrel is not with the underlying research – it does come from Harvard, after all – but instead with the simplistic conclusion drawn from this academic paper. While the number of hours worked by a CEO may be one useful indicator of a CEO’s effectiveness, there is much more to consider when evaluating their performance. For starters, the old adage about “working smarter rather than harder” comes to mind. It is too often the case that activity is mistaken for productivity… and that seems to be part of the problem here.

I would also like to point out an often-overlooked element when considering the performance of any CEO, whether a family member or not: Do they understand the culture of the business. Culture is key. Perhaps the greatest authority on management practices, Peter Drucker, once said, “Culture eats strategy for breakfast.”

And, when it comes to a family business’s culture, who will understand it better, a family member who has grown up from childhood within that very culture, living it every single day… or a non-family CEO who has joined the family business from the outside?

Clearly, even a family member who “gets” the culture must also possess strong management skills… but, to look at two candidates for the CEO position – one who is a member of the family, and one who is not – and to assume that the non-family candidate is superior just because they might log more hours at the office would be not only simplistic and short-sighted, but it would also be potentially damaging to the family business long term. This is what the authors of the Freakonomics blog would seemingly have us believe, and there’s a term for that kind of thinking: sloth.

Three ingredients to multi-generational firm success

Drew Mendoza
Drew Mendoza

Over the last twenty-plus years of working with and observing multi-generational family businesses, three attributes common to the oldest, largest and best performing ones seem to present themselves repeatedly. 

First – the family shareholders are aligned around matters of vision, purpose and expectations of each other and the enterprise.  And, as often as not, they reach alignment through the use of family meetings or other such important forums for shareholder and family education, development, trust building and communication. 

Second, the output of those family meetings – their vision, purpose, sense of unity,  policies and agreements – these all serve as important contributors to strategy.  The outputs inform management of what is expected of them and the rules they’ll have to play by; what some may call the non-negotiables.

Third, their values implicitly or explicitly include transparency, accountability, stewardship, outside input and a responsibility to others.  These values usually guide them to establish appropriate and active governance – both for the family and the operating company.

At our website, www.efamilybusiness.com, you’ll find dozens of books, webinars and thousands of articles loaded with ideas about family meetings, governance and being an effective family firm shareholder.

Goal #1 Don’t Get Killed

Goal # 1 – Don’t Get Killed
Goal # 2 – Protect My Stuff

By Dana Telford

Let’s imagine that you, the business owner, lived 1,000 years ago in feudal Europe. You were a Lord or Lady of noble birth and had valuable assets – land, weapons, children, jewels, gold, servants. As such, your daily activities centered around two goals – 1) don’t get killed and 2) protect my stuff.

As part of your strategy for reaching these goals, you built a giant wall around your assets and hired sentries to stand guard. You trained them to shoot arrows at or pour any assortment of hot liquids on would be invaders.

Over the years you got better and better at protecting your life and your stuff. Instead of using wood for walls, you used rock and stone. Instead of just one you built 3 or 4 concentric walls, each getting higher and thicker as they got closer to your lair.

You built your castle near water – to make sure no enemy could starve you out. You dug a moat to keep invaders at bay. You then dug it even deeper, following the logic that attackers wearing heavy armor and carrying lead weapons don’t float. You built a drawbridge and portcullis and only allowed entry and exit from your castle through one door.

You succeeded in making your castle so ominous and defensible that would be attackers no longer bother to put your fortress on their short list of possible overthrows. Without the constant threat of invasion, your army became lazy, playing cards and drinking pints over scrambled eggs and bacon. You turned your focus to squeezing more margin out of castle operations – raising the rents for the blacksmith, the miller, the baker, the candlestick maker. You have prospered, at least until now.

Your comfort is your greatest enemy, whether Lord/Lady or business owner.

May I suggest that each of us take the time, every month, to stand on the highest walls of the castle and peer out into enemy territory. Ask yourself, and your key managers, “how defensible are we today compared to yesterday? What are our greatest strengths? Where are we most vulnerable to attack and invasion? Are there greener pastures nearby that provide better shelter, resources, value? Who poses the greatest threat to our peaceful and prosperous existence?”

The answers to these questions, asked consistently and considered carefully, may save you from being thrust through by a barbaric competitor seeking to seize your assets and steal your market share.

Family Business Advantage

by John L. Ward

Professor Morgan Witzel of Exeter Business School wrote a fascinating critique of “scientific management” in the FT (July 18, 2011, p 11). In it he argued that “the passion for metrics” meant too little attention to difficult to measure, yet invaluable, elements of success:

Culture
Customer loyalty
Creativity
Vision
Personal commitment
Ethical behavior

It seems to me these areas are just where family businesses excel and establish long-term competitive advantages – another example of “unconventional” family business strategy.