Alfredo De Massis ― Innovation through tradition

A common cliché in business circles is that family companies are inherently risk-averse and therefore less innovative than their non-family-owned counterparts. For Professor Alfredo De Massis, this is a gross oversimplification. “Many of the most long-lasting companies in the world are family businesses,” he points out, “and we know from research that it’s impossible to maintain a sustained competitive advantage without innovation.”

Alfredo holds the position of Professor of Entrepreneurship and Family Business at both IMD Business School in Lausanne and the Free University of Bozen-Bolzano in South Tyrol, Italy. His research focuses on the management and governance of family firms, and has demonstrated how family business leaders juggle economic and non-economic goals, whilst managing the delicate balance between tradition and innovation. “I study how they strategically use their history, their tradition, in order to make way for the future,” he says, speaking from his office in Lausanne. “A lot of my work is about how you can do innovation through tradition.”

Despite this, Alfredo is quick to acknowledge that family business owners think about risk and innovation in very different ways to CEOs at non-family companies. “They assess risks with a broader compass, which considers not just the financial risks, but also the risks for their family system,” he says. Family business owners simply have “more at stake”, because “besides losing money and financial wealth, when you are a family business, if things go wrong, you also risk losing socioemotional wealth.”

None of this means that focusing on governance is pointless; on the contrary, Alfredo believes that governance is more important than ever for family firms. “You need to work carefully, especially as a family business evolves over time, on the management and governance side,” he says. “Because if you put in place the right criteria, the right policies, the right structures, you can create the ideal situation where you leverage the advantages and circumvent the disadvantages of this type of business organisation.”

When it comes to innovation, Alfredo argues that preparing for the future often means, counter-intuitively, looking to the past. The family companies that do this best are those, he says, which are “very good at bringing the past, their history, very close to everyone within the organisation, from the highest senior executive to the lowest level of employees”. This is also the most effective way to reconcile the different temporal orientations that are found between the generations. It leads to a process that Alfredo refers to as “recombination”, which is “the ability to recombine past elements with new knowledge and to recontextualise the past and come to something new.” And this is truly the essence of what he calls “innovation through tradition”.

This term, “socioemotional wealth”, refers to a non-financial form of wealth, which includes intangible values such as family identity and emotional attachment to the business. Alfredo explains that family business leaders also tend to pursue a variety of “family-centred non-economic goals”, such as, for instance, “giving jobs to the next generation, keeping control in the hands of the family, or raising the family’s reputation in the communities where they operate”.

Family business owners therefore approach risk and innovation with these non-economic goals in mind, and with a great deal of socioemotional wealth invested. “Typically, when you innovate, you have to invest in something risky and uncertain,” says Alfredo. “Family business owners don’t take decisions if these decisions will threaten their socioemotional wealth.” This hesitancy might limit their willingness, for example, to partner with venture capitalists, banks or business angels, which can provide a path to innovation for other kinds of enterprise. This is often compounded by their unwillingness to spend freely – as Alfredo puts it, family business owners “make decisions with the wealth of the family, which means they are very parsimonious in the way they invest in innovation and R&D”.

So, given that they’re more hesitant to partner with certain types of investors and at the same time more careful with their spending, what does innovation look like within family companies? Crucially, it often takes into account a far longer time horizon. Family companies typically have a longer-term mindset and this is something that Alfredo has seen first-hand. “I once interviewed a family business owner, who was a grandfather, who said, ‘When I make a decision these days, I know that not even my grandchildren will benefit from it. It will be their children who benefit.’” While other firms might look more at how innovation could transform the company over a five or perhaps 10-year timescale, family businesses think across generations.

Family businesses also have an in-built mechanism for bringing about wholesale transformation, in the form of succession. Granted, succession often (and with any luck) only happens once per generation, so it’s hardly a regular injection of innovation – but it is nonetheless an important way in which family companies refresh their leadership and therefore their priorities. “Succession acts as a catalyst of innovation,” says Alfredo. His research has proven that during periods of succession, there is a higher level of “goal diversity” within family companies, meaning that family members and employees within the company express a broader variety of different objectives for the firm. “Naturally, when goal diversity is higher, it is much easier for the new leader to unfreeze the previous status of equilibrium and move the organisation to the next equilibrium,” Alfredo explains. This is why, he adds, advisors often say that “you have to exploit succession as an opportunity for innovation”.

That said, succession can also create periods of unrest and strife. “During generational transition, innovation is typically a reason for fights between generations,” says Alfredo. Broadly speaking, you tend to have a younger generation that is digitally native, has travelled a great deal and speaks multiple languages; and on the other side, an older generation that wants to protect what has been built, very often through huge effort. Alfredo describes this as “two generations with two different temporal orientations: the youngsters oriented more towards the future and the seniors oriented more towards the past”. So, yes, succession can be a time of innovation, but – as any storied family company knows – it can also be a time of tension.

This is potentially being exacerbated by a series of wider demographic trends. Higher life expectancy is, of course, a huge global achievement, but it does have implications for family companies. “You will have very old people with very young people cohabiting together in the family business, which means the potential for more conflict,” says Alfredo. At the same time, a reduction in birth rates globally might, for some family businesses, mean “a lower number of probable successors”. And then, of course, there are trends such as the exponential rise in the divorce rate and the increase in the number of multicultural families, which aren’t, of course, necessarily bad, but which nonetheless add a further layer of complexity. “Unfortunately, most of the knowledge that we have around how best to manage succession, to design governance for your family business, and to professionalise your firm, has been developed with the nuclear family in mind,” says Alfredo, who argues that a “profound rethink” of this academic field is required.