Reliving Tradition and Embracing Innovation in Family Businesses [by Eugene Foo]

In 2014, Small and Medium-Sized Enterprises (SMEs) in Singapore constituted 99% of the businesses in Singapore and employed 66% of the total workforce.[1] The Singaporean government’s renewed emphasis on productivity and innovation in the Budget 2015, especially towards SMEs, has made many business owners realise that innovation is vital not only for their businesses but for the national economy as a whole. In the face of growing international competition, Singaporean SMEs must innovate to remain competitive in the global business landscape.

Differences Between Invention and Innovation

In a recent survey conducted on 2,836 SMEs by DP Information Group (DP), there are positive signs that SMEs are embracing change to remain more competitive. In the last 12 months of 2014, 64% of SMEs have invested in strengthening their in-house technology, up from 58% a year ago. 93% of those that invested in technology chose to upgrade their hardware and software. However, only 12% engaged consultants, technical experts or professionals and only 7% purchased technology know-how or inventions.

Nevertheless, SMEs should understand the clear distinction between invention and innovation, bearing in mind that not every invention is destined for innovation. Innovation involves tapping into more efficient and effective ways of processing materials, utilising new technology to develop and manufacture products and coming up with creative and sophisticated distribution channels and business models. It also involves convincing customers to use existing products in different ways before launching new products. Firms who have successfully cultivated an innovative culture typically have established and sophisticated processes, thus allowing them to scan the market for upcoming trends. They are then able to familiarise themselves with new technologies and product features which enable them to develop new products from the prototype stage to commercialisation.

Source: News Release, SME Development Survey, www.dpgroup.sg

Source: News Release, SME Development Survey, http://www.dpgroup.sg

Source: News Release, SME Development Survey, www.dpgroup.sg

Innovation in Family-Owned SMEs

Innovation can be a challenging process as firms must undergo the necessary process of transitioning into a more established, mature business aiming for long-term success. Many SME owners often wonder if the path to innovation is worth pursuing. Additionally, many SMEs are family-owned and may have limited resources, and can therefore be resistant to change.

In this first of a two-part series, let us take a look at the challenges of family-owned SMEs and how these factors could be mitigated to address such challenges.

 

Overcoming Factors Inhibiting Innovation

Family business owners have to acknowledge that family-owned firms are different from non-family firms. This is due to their unique organisation structure and governance, resource availability, goals and, most importantly, their history. There are several factors that are unique to family-owned firms that must be managed to ensure they do not impede innovation.

Firstly, many family businesses tend to be thrifty and are unwilling to take on additional debt or other external financing measures to fund research and development (R&D) because of the fear of dilution of ownership. Product development can require highly skilled and experienced employees and technology-intensive equipment and, depending on the industry, the development period may take several years. In reality, this can translate into the business investing large amount of money with no guarantee of returns. Therefore, it is important for family-owned SMEs to develop a clear investment and cooperation strategy to fully utilise external resources, to show how these investments will be used to achieve the business’s short-, medium- and long-term goal. There should also be full transparency regarding the business’s R&D spending. Family-owned SMEs could look at partnering with other similar family-owned businesses facing the same challenges regarding innovation, to reduce the investment barrier and spread the risk across different partners. Family-owned SMEs should also encourage more informal exchanges and/or formal cooperation to allow employees to gain complementary skills and knowledge, thus encouraging employees to remain open-minded and thereby avoid the “tunnel vision” mind set.

Secondly, emotional attachment to a particular product or brand can render businesses reluctant to replace them. This is especially so in family-owned SMEs where rich histories and deeply-rooted traditions are often prevalent. “Achievement Myopia” is a phenomenon that occurs when business owners overvalue their past success at the cost of underestimating the need for change, often to the detriment of the business. Family-owned SMEs need to constantly remind themselves to be objective about their particular products or brands. It is understandably not easy to do, especially for business owners and long-term employees who have committed so much to the business. It is therefore advisable for family-owned SMEs to constantly remind themselves that the way to remain competitive is to revisit their processes and products, so they can adapt and change their business model to newer, emerging trends.

Finally, inflexibility in family-owned SMEs are often a hindrance to innovation and can be due to the long-term nature of the employment of their employees. Workplace uniformity reduces diversity and discourages the introduction of innovative or even radical ideas into the existing system. Family business owners and long-serving employees can become very comfortable with a certain way of doing and running the business, which can turn into inflexibility after an extended period of time. This is aggravated when family-owned SMEs routinely hire people with similar educational backgrounds, reducing the opportunities for an injection of new ideas into the business. However, this could also partly stem from the challenges SMEs face more generally in attracting talent into their businesses. The problem worsens for firms who are uncomfortable in engaging external professional advice from third party consultants or experts. In combination, these contributing factors to can thus restrict family-owned SMEs from being able to detect future trends and to develop innovative products. It is of utmost importance that businesses recruit a workforce from diverse backgrounds and skills. Family-owned SMEs should also establish a clear and updated development plan to encourage continuous training and education for its employees. This will help the family-owned SME to maintain an updated knowledge management system and skilled workforce that can focus on upcoming trends and development.

Innovation and the ability to change is critical for any firms’ survival and legacy-building. Nevertheless, there remain obstacles that family-owned SMEs face that impede innovation, from limited resources, emotional attachments and inflexibility. With determination and a shift in mind-set, these factors can be mitigated to encourage innovation. In the next series, we will look at the strengths of family-owned SMEs and how they can leverage on these factors to encourage innovation, while striking the right balance tradition and modernity in the business.


[1] http://www.singstat.gov.sg/docs/default-source/default-document-library/statistics/visualising_data/singapore-economy18032015.pdf