ADAPTING THE FAMILY BUSINESS WHY CHANGE IS IMPORTANT BUT CHALLENGING AND HOW TO MAKE CHANGE HAPPEN Mike Wright Professor of Entrepreneurship & Director of CMBOR Imperial College Business School © Imperial College Business School

Change is important to sustain performance & survival but is challenging What are the barriers to change? What can be done to effect change?

Themes 2 Areas Innovation Succession Influences Family culture, values, relationships Skills/knowledge

What are the main barriers to change? Innovation Family culture Board slow to react to structural decline Aim to keep status quo Entrenched founder Difficult for next generations to change trajectory Family firms most active innovators at early stage Problem if skills not transferrable to next generation Without new outside innovative experience opportunities not developed

What are the main barriers to change? Innovation Family culture Patient capital & “unchecked” family control allow experimentation but may tolerate low returns & ineffective innovation Value system to support family needs over generations can draw resources from R&D May be “creative self-destruction” family business groups don’t adopt innovations cannibalizing products of divisions led by family members, even when financial benefits to most shareholders positive

What are the barriers to change? Innovation Innovation Strategy Often ad hoc and non-sustainable Lack of processes and evaluation Innovation skills/knowledge Altruism relating to family succession can mean weaker skills developed Challenge of attracting people with innovative skills Advancement, remuneration….

What can be done to effect change? Innovation Family culture Achieve balance between family business’ “traditions” and “innovative” ideas and practices that enhance growth, profit & sustainability Change mindsets through developing an innovation dialogue to bridge different [generational?] mindsets

What can be done to effect change? Innovation Board skills/knowledge Professionalization & influential external board members give clarity on resource allocation …..But care in changing family board members with key tacit knowledge and contacts Influence of independent vs. family directors ….if non-family board members selected based on commitment to firm their (critical) contributions can be viewed in this light.

What can be done to effect change? Innovation Strategy Develop outward looking networks Traditional benefit from family networks Stimulate innovation by accessing new knowledge Develop alliances, acquisitions, venture capitalists.. But… may be contrary to family owners wishing to retain control [socioemotional wealth]

What can be done to effect change? Innovation Skills/knowledge Recruit highly skilled innovative workers [bottom-up] Not just small senior set with limited new ideas Innovation more likely if family and non-family values complementary Non-family manager as family manager mentor Remunerate non-family by bonuses & profit share

What are the barriers to change? Succession Family culture Lower performance if new CEOs related to ex-CEOs More radical changes with outside successor Successful succession impeded if new CEO brings leadership culture incompatible with family firm Conflicts if next generation not capable or not interested

What are the barriers to change? Succession Family culture Culture of expectation that next generation will take over and nothing will change Insufficient founder attention to next generation’s development Next generation may not take responsibility for their level of preparedness Next generation lacks autonomous business vision and do not see themselves as main driver of innovation.

What are the barriers to change? Succession Skills/knowledge Benefit of new outside skills be offset by: Loss of founder tacit knowledge and networks E.g. Management buyouts and buy-ins Loss of family’s tacit knowledge contributes to failure and family buyback

What can be done to effect change? Succession Family culture New generation gives opportunity to change culture, values & ways of doing things Does family culture allow reconfiguration into separate businesses for different members? How to deal with declining parts Skills/knowledge Next generation gain outside experience Skills and contacts

Take Aways & Further Research Innovation What factors influence development of a culture of accepting innovation as positive? How can innovation skills and processes be widely disseminated through the firm and not just the family How can family firm networks be widened to enable innovation beyond solely existing areas? How can boards be developed with skills to guide innovation? How should FFs be structured organizationally to ring-fence innovative activities Succession How can succession provide the catalyst for change? How can the next generation be prepared to introduce change?