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Innovation - the key to successful family business

Special Report : Entrepreneurialism In Europe

Andrea Chipman is a freelance journalist based in the UK.

When Anthony Karibian and his brother set up their online office supplies business, Euroffice.co.uk, they knew that they would have to compensate for their small size by adapting to market pressures more quickly than their rivals. "When we didn't have enough funding, we focused on automating as much as we could," he said. Rather than increasing the number of employees as the business grew, the company centralised its customer service online, giving clients a guarantee that problems would be solved within two hours if they used its online self-help tool. 

The founders also maintained a policy of hiring employees from outside the office supply sector in the belief that outsiders would have a less hidebound approach to the industry.  Several years ago, Euroffice.co.uk topped the worldwide efficiency index for the industry.

Global pressures
As the number of rivals and the pace of change intensifies the pressures on business, innovation and entrepreneurialism have never been more important. Certainly, innovation has always been a key feature of successful companies. But globalisation has changed the playing field significantly in many industries, says Grant Gordon, director general of the Institute for Family Business in London.

"Business life cycles have been shortened under the pressure of globalisation, outsourcing and the brutal force of competition across most product and service markets," he says. "Even niche players, who might have had a cosy situation, have nowhere to hide and can only differentiate their firms by staying one step ahead through constant innovation."

Unsurprisingly, the trend is most notable in the fastest-paced sectors such as IT or telecommunications. Where a San Francisco software company might once have faced competition primarily from other Silicon Valley firms, rivals are now springing up in Eastern Europe and India. And while competitiveness from global rivals may be less pronounced in older industries, many traditional companies face increasing competition within their local markets.

People power
A recent study by UK consultancy Grant Thornton found that the main difference between fast-growing and static businesses was a focus on high customer retention through recruitment of the most talented staff and quick adaptation to changing markets, rather than an emphasis on price reduction and customisation of goods and services.

The structure of family businesses gives them greater long-term security, which enables them to consider innovations that might take longer to show results, says Howard Hackney, head of family business at Grant Thornton.
"A family can invest for the long-term, rather than looking for the short-term share price," he says. "Listed family companies have [market] pressures to worry about, but in the main they will still have the majority of shares and will call the shots, so they will still be able to take a longer term view."

And some family businesses believe that having a small group of decision-makers also gives them an advantage.

"The typical family business is under funded," Karibian says. "You're always in a survival mode compared with a well-funded corporate environment. At the same time," he adds, "the stronger sense of ownership and absence of the need to put all issues before a board of directors means decisions can be made on the fly. I think it helps you take risks. Ultimately it's you that pays if you fail."

Communication and foresight
Businesses approach innovation and entrepreneurialism in a variety of ways, depending on their sector, size and structure. A report on the challenges faced by successive generations in family firms by the BDO Centre for Family Business in London and the London Business School cited one case study involving a financial services business owned by three non-related family groups, with an annual turnover of £500 million. The owners viewed education of the family members on a variety of business topics as a core value, and even created a website where they could keep in touch online.

Indeed, those firms that concentrate their innovative efforts on their management structure and staff can reap rewards, says the IfB's Gordon.

"Family businesses are innovating their management practices," he explains. "They are adopting best practices in terms of governance and leadership selection and retention strategies. These practices are helping them to attract the best talent available. Non-family executives who have worked in family firms often find that the satisfaction and rewards of working in long-term family firms can be a better alternative to career opportunities in the PLC world."

For other family companies, foresight about the likely evolution of their industry has been key to survival. Timpson, the five-generation UK shoe repair and locksmith company, was founded as a shoe and boot maker in the late 19th century and developed over the next century into a major shoe manufacturer and retailer in the north of England and Scotland.

By the late 1960s, facing competition from retail chains selling inexpensive footwear, Timpson introduced a new customer care code of practice that helped to increase sales and modernise shops. Amid the threat from cheap imports and higher retail rents, the company shed its retail operation in 1987, retaining the shoe repair business and expanding into new areas such as locksmiths and dry cleaning.

Meanwhile, other family businesses have concentrated on constant innovation or enhancement of a groundbreaking product. Entrepreneur James Dyson started experimenting with products such as wheelbarrows as a student at London's Royal College of Art in 1970, where he noticed how the air filter in the spray-finishing rooms for one of his innovations continually clogged with powder particles. His observation led him to design an industrial tower that removed the particles by exercising centrifugal forces more than 100,000 times those of gravity, an innovation that he applied to the creation of the bagless vacuum cleaner that bears his name.

The need for growth
Ultimately, however, even the most fleet of foot need to grow their businesses, and this process often involves bringing in outsiders which, in turn, eliminates some of the structural simplicity that helps to support innovation.

"Up to a certain size, a small group of people can control the business," says Grant Thornton's Hackney. "When a larger bureaucracy takes over, you have to start reinventing, and breaking up into different business units."

Euroffice.co.uk determined after two years that it needed more than £1 million in extra funds to grow the business. The company brought in a venture capital investor in order to prepare for an IPO that could come as early as this year.

"We gave up a substantial share in the company with the hope that we could grow the pie," he reveals. Nevertheless, Karibian is adamant that the change in management structure doesn't have to be an obstacle to the entrepreneurial culture fostered at both Euroffice.co.uk and a telecommunications business he subsequently launched.

"Employees are continually rewarded for coming up with better ways of doing their work," he says. "If you glorify it and reward it, you can create a culture of innovation."

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