Innovation and Performance in Family-Oriented Business Organisations - Essay Example

Innovation and Performance in Family oriented Business Organisations

• Introduction

In family oriented business organisations, ownership of the business entity mainly lies in the hands of the members of the family (Wilson, Wright and Scholes, 2013; Anderson and Reeb 2003). Some of the world’s most successful business organisations are seen to begin as family businesses such as the business entities of the Walton’s, Koch Brothers, the Ambani family and many more (Wilson, Wright and Scholes, 2013). However, running the family business and ensuring the brand name’s survival for long is nonetheless a challenging aspect (Hoy and Verser, 1994). Over time, with passing generations, the manner in which the business activities are carried out becomes altered, thus leading to a number of conflicts and many at times breaking the business entity (Casillas, Moreno and Barbero, 2010; Chua, Chrisman and Steier, 2003). The present study aims to evaluate how family businesses are able to remain innovative and successful despite many challenges. Although a number of factors are seen to act as limiting aspects for the growth of family owned businesses; with suitable strategies and the ability to remain flexible with the changing industry conditions, family businesses are able to succeed.

• Shortcomings in Performance and innovation

A major shortcoming in family oriented businesses is that inclusion of outside members on the board and top organisational executive positions becomes limited (Cassia, Massi and Pizzurno, 2011). These positions are held by organisational members themselves on succession basis. Such a strategy limits the inclusion of talented personnel in important organisational positions. Since the talent pool in family based business entities is limited, performance is seen to be less significant in comparison to the non family business counterparts. Similarly, the shortage in talent leads to less efforts taken towards innovation and development (Kellermanns and Eddleston, 2006; Chrisman, Chua and Sharma, 2003).

The example of Peugeot family business in comparison with Renault has been presented in this part. The disparity in strategic choices made by the ailing manufacturer PSA Peugeot and the successful Renault offers an explicit example of the interface between strategy and ownership. The failure of Peugeot to internationalise while paying generous dividends has been criticised and the blame was put on the Peugeot family. Peugeot family was held responsible as it owns 25% and controls 38% voting rights which has significant influence on the firm’s strategy, ability to control, maintain and benefit financially and could efficiently minimize the detriment of long-term health of the firm (Kellermanns et al., 2006). In comparison, Renault internationalised is performing better in comparison to Peugeot family owned business. The firm has diluted the control to improve its fortune, hence entered into equity partnership with Nissan and then with Daimler which in turn has facilitated Renault to tap new markets and achieve new skills and consequentially paid substantial financial dividends Kellermanns et al., 2006.

In particular, the French government was considered the largest shareholder of Renault during the time of entering a partnership with Nissan, and hence went along the proposal of management to internationalise the firm, having full awareness that its influence as well as stake will be diluted. However, at PSA the Peugeot were clearly weighed against the such an active move for a very long time (Kellermanns et al., 2006).

Hence, it can be evaluated that the rise of individualism within the society, is creating a significant challenge in family firms. Hence, family oriented business like that Peugeot must be proactive in passing the value of collective goals and working in collaboration. As per the reports Peugeot family will not sell its stake in PSA, however it periodically reviews its other investments and also aims to remain as a long-term shareholder in the family oriented business. Despite the long term commitment of Peugeot family towards its automobile business (Westhead and Howorth, 2006). The shares of PSA Peugeot went substantially down after the cut in stances introduced by Morgan Stanley on French carmakers from “Overweight” to “equal weight”. As per the investment bank, the sales of PSA has not stabilized as anticipated in the European market during the second part in 2006, as well as their overall sales recovery is likely to take much longer time to materialize (Westhead and Howorth, 2006).

Consequentially, the Peugeot patriarchs are down for the count, hence the board decided to cede in the early 2014. As a result the owners reduced the rate of holdings thereby introducing the French government and Chinese companies to step into the power.

Fig 1: Difference between market share in PSA (Peugeot) and Daimler

(Kellermanns et al., 2006, p. 310)

Fig 2: Performance of PSA Peugeot in comparison to German car makers.

(Westhead and Howorth, 2006, p. 301)

Banco Espírito Santo which had been Portugal’s second biggest bank was seen to collapse in the year 2014, majorly due to internal fraud and lack of succession planning. The ownership of the firm was seen to go into the wrong hands, leading to lack of internal control. This had ultimately drawn the organization into a number of scandals and legal disputes, finally bringing it to a complete shut down (The Wall Street Journal, 2014). Alternatively organisations such as Bank of East Asia in China have been able to perform well and emerge as one of the most important banks in the economy of the nation. Over the last few yeas Bank of East Asia has been able to expand rapidly in the Chinese banking industry and possess over 150 branches across the nation (Family Capital, 2014).

The research work of Miller, et al., (2007) and also that of Zahra, Hayton and Salvato (2004) signify that innovation in family businesses become conservative and inflexible with the passage of time. Since such organisations try to develop a board structure consisting of family members only, overtime they lose being flexible to fresh talent and skills that are developed in the industry (Colli, 2003; Villalonga and Amit, 2006).

Dyer (2006) had pointed out that, another crucial aspect impacting the performance of family business houses is the generation to which the board belongs. If the board is composed of young individuals, then it is most likely that innovation related activities can be undertaken. Alternatively, if the board is composed of older members, they would be more conservative and thus, resist change (Craig and Dibrell, 2006). Additionally, the family culture is also an aspect which strongly impacts the orientation towards innovation and performance (Del Giudice, et al., 2011; Habbershon, Williams and MacMillan, 2003). Performance and innovation in family oriented businesses can only take place if there are sufficient talented members (Dyer, 2006; Westhead and Howorth, 2006; Gratton and Jones, 2010).

• Overcoming the shortcomings

Family businesses in general are seen to lack the ability to innovate and change themselves according to the industry conditions (Brockhaus, 2004). However, there are many successful organisations such as Walmart and Koch Industries etc. which are flexible with the market conditions (Hall, Melin and Nordqvist, 2001). Most business organisations are also started in the form of family businesses before they are converted into non- family or a conglomerate of the two. However, numbers of family business organisations which are successful are seen to be much lower than the non-family category of firms (Hoopes and Miller, 2006). Wilson, Wright and Scholes (2013) had provided the insight that successful family business entities have put into practice strong governance and management practices that have aided them to remain flexible to changes and emerge successful.

Family organisations such as the Waltons have adopted a professional approach while structuring their board. This is considered to be important by most family businesses; hence, careful succession planning is undertaken (Harris, Martinez and Ward, 1994). At Walton’s it is essential that family businesses keep their personal interests separate from the interest of the business as a whole (Carrasco-Hernández. and Jiménez-Jiménez, 2013; Gerybadze, 2010). Additionally, it is observed that in firms such as Walmart, the board is composed of not just the family members but also external individuals (Janszen, 2000). Similarly, non family members are also appointed at senior management levels. Therefore, it becomes essential to allocate tenure not on the basis of relationship, instead on the basis of performance and knowledge as followed at Walmart (Brockhaus, 2004; Morck and Yeung, 2003).

Long term planning in family business organizations is supported by a number of scholars such as Zahra, Hayton and Salvato (2004). Family businesses want their businesses to be continued by their subsequent generations as well. Walmart is seen to incorporate innovative strategies in their business model so that they remain a competitive industry for a long duration (Litz, and Kleysen, 2000; Huang, Ding and Kao, 2009). The success of most family business organisations is based upon the quality of strong leadership. Family businesses are seen to pass down essential and strong leadership qualities from one generation to the other (Kellermanns, et al., 2008; Kenyon-Rouvinez, 2001; Kuratko and Hodgetts, 2001).

Family versus non family businesses

Although non-family businesses are seen to achieve much success in the market, the comparison between Walmart and Tesco PLC reveals that, family businesses can supersede their non-family counterparts.

Walmart (family business)

Tesco PLC (Non-family business)

The largest retailer in the world

The fourth largest retailer in the world.

The degree of innovation and growth is much higher and spans globally.

Innovates mainly based on the market conditions in Europe and North America.

Wider range of products than Tesco

Comparatively smaller range of products.

Largest retail database on a world wide scale

Retail database is comparatively smaller

Retention of talented human resource is higher due to greater employee satisfaction

Employee satisfaction is satisfactory.

Management efficiency is high due to well established organizational structure

Mismanagement and internal issues are frequently witnessed, hampering competitiveness.

(Source: Poutziouris, Smyrnios and Goel, 2013)

Walmart being a family business has been successful at keeping the family interest and coalitions separate from the organization (Poutziouris, Smyrnios and Goel, 2013). Succession planning is carefully undertaken so as to ensure that the company’s future is secured in the hands of the right family members. In this respect, right members of the family indicate those having strong knowledge regarding the business, industry conditions and sound knowledge about making the firm perform effectively (Carrasco-Hernández and Jiménez-Jiménez, 2013).

The Target Corporation, a non family based retail firm is identified to be a potential competitor of Walmart, especially in the U.S. The financial performances of both the firms have been compared to assess the capabilities of family organization.

Figure 1: revenue comparison of Walmart and Target Corporation

(Source: Morningstar, 2016a)

Figure 2: Asset turnover comparison of Walmart and Target Corporation

(Source: Morningstar, 2016b)

The financial performance of Walmart is seen to be much superior to Target Corporation. The success of Walmart indicates that family firms are able to perform well if proper management initiatives such as careful success planning, board structuring, innovation related initiatives and flexibility with the industry conditions are taken into consideration (Littunen and Hyrsky, 2000).

• Successful innovation and stewardship

One third of the companies amongst the S&P 500 firms are family based institutions (The Economist, 2014). If these firms did not have undertaken adequate innovative strategies, then perhaps they never would have entered the list of S&P 500. Accurate strategies combined with right leadership have been the secret to success for most of these firms. Companies such as Volkswagen and Ford are amongst the worlds most renowned automobile companies which are essentially family based companies (Naldi, et al., 2007).

Despite being a family run business, the administrative panel at Ford Motor Company have never remained traditional. Alongside of changes in the external environment, they have undergone many changes. The company is seen to undertake independent projects in different nations as an initiative towards innovation. Additionally, the senior level executives at Ford are seen to value the risk-reward relationship, whereby it is believed that only when adequate risk is undertaken, innovation gets implemented. Hence, openness to risk becomes essential (Naldi, et al., 2007). It is due to the successful innovation drive adopted by the company that it has been able to develop approximately 30,400 technology patents. Eco-Innovation has been a priority for Ford, whereby cars with less CO2 emissions are built. Taking risks and moving alongside of technological changes has been the prime focus for Ford (Ford Motor Company, 2014).

Figure 4: Market share of different automobile manufacturers across the globe

(Source: International Business Times, 2014)

The above figure shows that Ford’s market share was high compared to a number of key market players such as Toyota and Hyundai. Innovation has played a strong part in enhancing the overall market share of the firm. The firm launches new models of cars and SUV’s at greater rate than Toyota and other leading car manufacturers. It has also been successful at bringing in revolutionary technology in the automobile industry facilitating greater efficiency and safety in driving (Ford Motor Company, 2014).

In the world of mobile devices, Samsung has emerged as a successful player and have beaten the market share of other strong firms such as Apple Inc. and Microsoft. Much of the success has been due to innovation. In the year 2014, it was observed that Samsung had invested approximately KRW 15 trillion in their industry innovations.The firm continued to expand their global research and development and also recruited top industry talent for effecting successful innovation (Samsung, 2014).

Figure 3: Market share of Smartphone manufacturers

(Source: IDC, 2015)

Despite being a family firm, Samsung has successfully performed and outdone many of the key players of the smartphone industry. It is such revolutionary innovation measures that facilitated Samsung to come up with the world’s first smartphone with curved display and wearable devices such as Gear VR and Gear S.

Samsung follows a sustainable strategy of innovation which involves, developing those products and services that open up the potency to further innovate and develop more products in the future (Schuman, Ward and Stutz, 2010; Gerybadze, 2010). Innovation in Samsung is also seen to be successful due to the strong ties among shareholders, suppliers, employees and other stakeholders. The organizational model rests upon dedication and loyalty; as a result, crucial talent is preserved for long. Additionally, training and up gradation of skills and competencies facilitate in keeping the employees ahead and inspire them to be creative (Poutziouris, Smyrnios and Goel, 2013; Carlock and Ward, 2001).

Stewardship has also been one of the most important aspects influencing the growth of firms such as Samsung and Walmart. The administrators of successful family businesses such as Ford have remained observant of the market situations and have been developing strong roots for the organization (Sorenson, 2013). Sustainability in strategies and long term growth has been the core objectives for Walmart. For instance, when Walmart enters a new market, it not only forecasts the revenue additions, but also the strategic resource inputs which it is likely to obtain (Wilson, Wright and Scholes, 2013; Rogoff and Heck, 2003).

• Conclusion

The resources and the capabilities of family owned business enterprises are seen to provide them with numerous advantages. However, it becomes essential that such qualities are well exploited. This requires the existence of a strong management team (SuLian and Lili, 2009). Also, the executive authorities of the organisation need to be capable enough of taking innovative and growth oriented decisions frequently so that they remain competitive. Hence, family oriented organisations are required to not only remain restrained to the family members, but also to executives appointed externally so that the competitive abilities of the organisation can be maintained for a long duration (Rogoff and Heck, 2003: Ward, 2011).

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