The thinking that family businesses have a conservative and traditional attitude toward innovation is dated. In fact, research shows that the innovativeness of family firms is greater than that of non-family firms. Family businesses are more familiar with the dynamics of the industry in which they operate. As a result, they are able to identify innovation opportunities earlier and invest more decisively and carefully in response than non-family companies.
Less budget for innovation at family business but more effective
Accounting firm PwC conducted a study in 2017 on the innovative strength of family businesses. For this, the company conducted a survey of more than 100 Dutch family businesses with revenues between €100 million and €500 million.
The research shows that family businesses are indeed innovative. However, on average, they spend a smaller proportion of their turnover on innovations than non-family companies. The majority of family businesses spend between 1% and 5% of their turnover on innovation. In contrast, one in five non-family firms invest more than 10% of their turnover in innovations (“Technological innovation among family firms,” PwC, 2017).
However, this does not imply that family businesses are less decisive when it comes to investing in innovation. Family firms prefer so-called “incremental innovations,” where a product or service improves gradually over a period of time. Non-family companies, on the other hand, are more likely to apply disruptive innovations. In contrast to family businesses, they less often take existing products and services as the starting point for the innovations to be introduced.
As a result, family firms invest less money in innovation on balance, but their innovative output is higher than non-family firms. This is partly due to the fact that family businesses have years (and generations) of knowledge of their specific sector and are more involved. As a result, family firms invest their money more carefully than non-family firms.
Financing with equity
In general, family businesses show a strong preference for using their own financing to bring about innovations. Innovations and growth are less dependent on the business cycle for the average family business. They focus more on the long term. More than 43% of family businesses report having invested more in innovative technologies during the recent crisis years than before 2008 (Harvard Business Review, research by Marc van Essen and Nadine Kammerlander, 2017).
Business Succession and Innovation
Business succession is an important issue related to decisive innovation within the family business. Previous research done in 2017 by Prof. Dr. Roberto Flören, professor of family businesses at Nyenrode Business University, shows that incumbent management fears innovation when the business passes to a new generation. Our own experience at Clifton Finance is contrasted with this. A large proportion of family businesses actually see business succession as an opportunity to increase the innovative capacity of the company. The thinking is that the new generation is better prepared for innovations. This generation often has a fresh perspective on the business and an up-to-date feel for current and new developments in innovation. After the business succession, the new generation is in a better position to set a new course and continue a more innovative trend.