Innovation in Family Business
Certain characteristics of family firms can work against business innovation. They include:
Limited exposure to innovative ideas from other industries, particularly in families where business leaders have not worked anywhere else
Lack of willingness to adopt outside ideas due to a feeling that family members, who may have been in the business for decades, know more than anyone else about what it takes to succeed
Limited desire to take risk because all of the family’s eggs are in one basket: the business
Despite such factors, many family-owned businesses are among the most innovative in their industries. Consider Herr’s Potato Chips. Herr’s is a small player in an industry of giants (think Lay’s) that can spend much more than Herr’s on product development and have much less to lose if they pursue an idea that doesn’t work. Even so, Herr’s is the 11th-largest potato chip producer, introducing five to ten new snacks a year and continuously expanding its 375-product line. True to its hometown of Philadelphia, one of its newest products is Philly Cheese Steak chips.
How does Herr’s take on the giants in its industry? According to Richard George, food-marketing professor at St. Joseph’s University, “Their key is [that] they are small and agile. Their point of difference is focusing on unique products.” Family businesses can leverage the fact that decisions can be made quickly in an environment where management and ownership generally overlap to bring innovations to market quickly.
Another example of innovation is an industry giant, not a niche player. Enterprise Rent-a-Car is the largest rental car company in the world ($9 billion in revenue), and it is owned and operated by the Taylor family. Enterprise is innovative in many ways; for example, it is known for picking customers up at home. The most impressive innovation may be its human resources practices. In a business where many employees are not college graduates, Enterprise hires only graduates and then puts them to work washing cars. In fact, Enterprise hires more than 7,000 college graduates each year. This is more than any other company in the U.S. Incentive compensation is one tool that attracts college grads. Each Enterprise branch is run as a profit center. Branch managers’ compensation is highly tied to performance, providing opportunities for talented managers to increase their compensation significantly. This compensation scheme moves up through areas, regions and groups, providing upward mobility for college grads who enter at the ground floor. Branch performance is measured by a customer satisfaction index, not just by sales. If a branch does not meet the company average, the manager of that branch cannot be promoted.
These examples show that innovation in family business does not need to be tied to size of company as much as the management’s knowledge and creativity and the owners’ passion to succeed. A long time horizon that allows for investments that may not pan out in the next year helps, as does the desire to keep the business going—which may mean that ideas are evaluated not purely on an economic basis. So, next time you assume that family-owned enterprises are home to the “not-invented-here” syndrome, think again. The family business culture can breed innovation if harnessed in the right way.
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