Reinhold Würth led his family’s company for 40 years. He made Adolph Würth KG, in Kuenzelsau, Germany, the largest supplier of assembly products in the world, with subsidiaries in 44 countries. And he kept it there because he never lost his flair for innovation. When he discovered that his workers’ hand tools had not changed shape for a century, he initiated a research project with the University of Stuttgart which resulted in a whole new set of ergonomically designed tools, some of which reduced worker stress by more than 30 percent. Recently, when he heard a worker at a construction site grumbling about how hard it was to read the coordinating numbers stamped into machine tools and the screws that went with them, Würth, now chairman, prompted his company to devise a system of colored rings for quick, easy identification. The matching system, subsequently patented, was a huge success.
Würth’s story is told in Hermann Simon’s new book, “Hidden Champions: Lessons from 500 of the World’s Best Unknown Companies” (Harvard Business School Press, 1996). The lesson, which reappears throughout the book, is that innovation must be part of the strategic agenda of any company…and that the entrepreneurial spirit that leads to innovation must begin at the top.
Even businesses that may operate in a sheltered niche market will have to adapt sooner or later. But owners cannot expect employees to produce new ideas if the company’s culture is steeped in tradition, especially if the current product line was invented and marketed by the chairman himself or his ancestors. To remain competitive, family businesses must ask themselves: How good are we today at anticipating—and meeting—changing market requirements? How can we ensure that innovation is part of our management mindset? And finally, who is the initiator of our internal innovation?
This last question is the one that often illuminates a dangerous weakness in family firms: Most family business leaders like to think they are still creative, but in reality few are. They undoubtedly believe it when they say, “We are an innovative organization!” But the question of benchmarking needs to be raised: Innovative compared to what? The traditional yardstick is improvement in the company’s own net profit and cash flow over time. But these metrics only show the results of past performance. Only by personal and corporate benchmarking against the outside world can you assess your own long-term prospects and that of your firm. As CEO or chairman, you must evaluate your own ability to identify changing market conditions and reformulate your company’s strategy. This requires an open mind and critical self-analysis.
The first step is to realize that personal and corporate renewal is frequently blocked by attitudes that are deeply ingrained in many family businesses. Three of the most common are:
The control attitude. “My family started this business, my family owns this business, and my family runs this business!” Family business managers often have a pronounced feeling of exclusive control over their firm. Excessive pride may eventually lead to a narrow focus, which makes it difficult for innovative ideas to be introduced.
The tradition attitude. “We have always done it this way!” While tradition is often the strongest asset of a multigenerational family business, it can prevent a necessary break with product lines which were created in the past by the older generations.
The secrecy attitude. “They don’t need to know and it’s none of their business!” Sharing important information with other stakeholders is not the typical strength of family business managers. A closed structure does not encourage exchange with the outside world, restricting creativity.
As family businesses grow older they tend to develop cultures incorporating one or more of these attitudes. Nobody should understand the need for innovation better than the founding entrepreneur, who, after all, probably started the business with a new and different idea. And yet, as entrepreneurs grow older, the desire for security, for safeguarding what has been achieved, becomes stronger. They become risk-averse. Over time the family business resembles more and more the inert structures of larger public corporations. The feeling of “having seen it all” generates a seductive feeling of complacency.
Family business owners who can combat these attitudes—in themselves—will rekindle that entrepreneurial edge and be rewarded handsomely. Author Simon studied 122 small and mid-sized German companies who are No. 1 or No. 2 in their markets; 76.5 percent of them are closely held, which means they are probably family controlled. These companies are obsessive innovators. They often take their cues from the needs of customers, with whom they maintain close relationships. In Simon’s book, the CEOs of these companies talk about how their employees—and they themselves—are geared to finding opportunities to innovate. The average tenure of the CEOs is 20.1 years—far longer than that for the CEOs of large public corporations. Yet they do not suffer from hardening of the arteries.
Ruthless introspection does not come naturally to highly successful individuals. Yet personal benchmarking requires asking some unpleasant questions:
• Do I still understand what is driving today’s market?
• Am I able to anticipate tomorrow’s market requirements?
• Do I allow new ideas from others or am I upset that they are not mine?
• Am I sufficiently flexible?
• Do I still like my job?
• Would the company be better off with a new manager providing fresh insight?
One way to do personal benchmarking is to devote more time to meeting with peers in informal settings where you can hear about their goals and attitudes. This will allow you to compare not only your strategic agenda but your management style, value systems, and means for coping with the challenges of your particular life stage.
A key question you might ask yourself is: “Would another, similarly structured company hire me today as its CEO?” If the honest answer is that you are unable to innovate or foster innovation, you must introduce some type of corrective mechanism. This may range from improving your attitude and learning new skills to retiring from your position.
You may want to ask yourself two sets of pointed questions. The first set is meant to gauge whether there is a reduction in your ability to remain innovative over time:
The character question: Am I more inward-looking—both on personal and business issues—today than I was five years ago?
The performance question: Have I reviewed my personal targets, and my ways of achieving them, in the last five years? Or have I simply assumed they will remain the same?
The flexibility question: Am I becoming increasingly annoyed at pressures to change and adapt products and processes that seem to be working well?
The creativity question: Am I becoming increasingly interested in preserving the achieved, and less interested in exploiting future opportunities?
The second set of questions rates your behavior against that of peers:
The character question: Are my peers more outward-looking—both on personal and business issues—than I am?
The performance question: Are their personal targets, and their ways of achieving them, more aggressive and competitive than mine?
The flexibility question: Do they respond more adeptly to pressure than I do?
The creativity question: Are they more actively exploiting future potential than I am?
The results of these benchmarking tests are intended to stimulate your thinking. Their usefulness depends on your ability to adopt a detached, rational, and honest viewpoint. Involving a trusted person in your self-assessment might help. An outside consultant or nonfamily board member might offer an objective opinion.
Benchmarking the company can be done in a similar way. Companies with an impressive track record of innovation maintain institutional mechanisms to encourage it. In small and medium-sized family businesses, this responsibility usually lies exclusively with the owner. In larger businesses the challenge is to create a culture that not only allows but actively promotes innovation. Regrettably, traditional management education has provided many instruments for controlling the corporation—which, though worthwhile, can also seriously inhibit creativity.
It is interesting—and ironic—that the largest corporations with the most innovative track records are those that have adapted the organizational concept of smaller family businesses. General Electric and Asea Brown Boveri are examples of huge, underperforming giants that were turned around by being broken into small, tight-knit business units. Their respective managers enjoy a large degree of freedom. The role of headquarters is that of a coach providing financial and other resources for new and valuable projects. And creativity is coupled to financial rewards.
Think back to the origin of your company. Innovation took place because one or several individuals acted in an environment where the only significant boundaries were those imposed by the legal system! The lack of resources forced the entrepreneur to create value in unconventional and uninhibited ways. Innovation requires freedom. The most effective way to stimulate it is to reduce—ideally, remove—all barriers that inhibit freedom. This can be done in part by separating the innovators from traditional departments and allowing them to report directly to the CEO, especially if they are to produce a “revolution” in the sense of a new product or service. If innovation is intended to produce “evolution,” as in finding new markets for an existing product line, then the innovator’s success may actually depend on more effective integration between departments, and better communication and teamwork.
Your family business has a unique advantage over public corporations. The overlap of ownership with management gives you the ability to make decisions and implement them rapidly. Yet, even a growing family business requires organizational structure. Therein lies the challenge: to build a company that can be managed and controlled effectively without destroying the creativity needed for entrepreneurial behavior at all levels.
Joachim Schwass is Industry Professor at IMD (the International Institute for Management Development) in Lausanne, Switzerland, and executive director of the board of the Family Business Network in Europe.