Actionable Tactics to Encourage Family Business InnovationApril 3, 2013

In simple terms, innovation describes the process of improving something that already exists. Family owned companies, like any other business, need constant innovation to compete within their markets for future growth and success.

Two common hurdles that often stifle innovation in family owned businesses are resistance to change from the current controlling generation and the fear of initiating new ideas from the next generation.

Understanding that innovation from the next generation and other key employees does not always happen automatically, the company culture should provide an environment that fosters this creative process. And logically, changes to the company culture usually must begin at the top – with the controlling generation. Below are some actionable tactics that that family business owners can take to encourage innovation.

Set the Right Reward System
Small and sometimes subtle changes often have a tremendous impact. Acknowledging smaller innovations and contributions as they occur may encourage more creativity and innovation. One way to accomplish this is by setting up a reward program. However, it’s important to think strategically and consider the company’s overall goals, when creating this process. For instance, be aware that rewarding only the biggest ideas can set up a competitive atmosphere that might discourage smaller, less dramatic improvements. In addition, poorly designed incentive programs may also hamper inter-department collaboration. For example, in the case of a fairly large computer equipment sales and service company, we found that service revenues had spiked while sales seemed to slow. After some investigation, we discovered that the service team shifted its focus away from scheduling jobs that resulted in incentive rewards for the sales team only, in order to prioritize jobs that resulted in incentive rewards for their own team.

Companies that successfully foster a culture of innovation often do so by designing rewards that reinforce this culture. For example, an organization that requires integrated solutions should not compensate team leaders based solely on unit productivity. On the other hand, a company that values long-term leadership development should not base rewards solely on short-term performance.

Embrace Smaller Scale Risk [or Foster Innovation]
In order to innovate and improve, a firm’s next generation should be provided with the latitude to implement ideas – even if they might fail. A pilot program failure may pay dividends in future endeavors, especially in light of the expected long-term nature of the next generation’s tenure with the family business.

A personal example: During my college years, I had a summer job, working for my uncle, which took me to Alaska to work in the salmon fishing industry. A small number of us were made part of a new freezer technology pilot-program. While our actual throughput was initially disappointing, our small program provided necessary data that helped grow production from four million pounds to nearly eight million in the following year, all on the same 300-foot factory ship.

Set Clear Direction
Setting a clear sense of direction from the top will help harness the next generation’s creativity. A well-defined mission can encourage the next generation to focus on innovations that deliver the greatest value. One way to elicit this focus is to charge them with developing a strategic plan for the entire business or a segment of the business operation. On a periodic basis, request that the next generation meet, bringing several ideas on specific topics; for example, customer service improvements or new ways to incorporate technology.

Maintain a Sense of Ownership
An ownership mentality creates powerful incentive for innovative thinking. When the next generation are clearly aware of how their future economic interests are aligned with those of the company, they have strong reason to “go the extra mile” to further the mission. It’s often not enough for the next generation to be told that they will someday be an owner of the business.

Maintain Incremental Innovation
The need for constant reinvention is a given in today’s business environment. And while a breakthrough product or concept can catapult an organization ahead of its competitors, in these fast-paced times, that advantage is often short-lived. While major products or service breakthroughs make headlines, it is the regular, incremental, innovations that provide sustained growth.

Tolerating a certain degree of failure as a necessary part of growth is an important part of encouraging innovation. Innovation always involves risk, and the next generation won’t take chances unless they feel secure that they won’t be punished for failure. Assign innovation as a part of the next generation’s business development responsibility. When evaluating their performance, consider the quality and quantity of the new ideas they have brought to the table.

To learn more about how family businesses can encourage innovation, please contact me with questions at rkvalo@curchin.com or 732-747-0500.