Innovation in the Family Business

Succeeding Through Generations

Joe Schmieder

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137386243
• Topic: Business
• Subtopic: Management
• Index: Business

Schmieder shares a broad range of tools and pathways that family businesses across sectors use to stimulate, execute, measure, and reward innovation. The 50-plus family stories cited in this book will inspire any family enterprise to create a strategy and environment that can stimulate success for many generations to come.

Chapter 1

The Family Business Difference: Capitalizing on Family Innovation

“How did Grandpa and Great Aunt Millie start the family business?”

Ten-year-old Billy Douglas asked his father that as they sat with other relatives around a campfire. It was a cool September Sunday evening, and the extended family had gathered for a reunion at their historic Iowa homestead. In recent years, Billy had heard bits and pieces of how the family’s agricultural products business began. It was a rich opportunity for his father, William, to share the full story of its origin, a story that highlighted the many benefits of family businesses.

Billy’s grandfather, Ed Douglas, had always been well liked in his community, and had a clear interest in entrepreneurship. In the late 1940s, he owned a farm outside Des Moines, Iowa. He decided to branch out into selling fertilizer off the back of his Ford pickup truck, aided by his sister, Millie. Observing how much they and their farmer customers—and they themselves—struggled to improve their yields of corn and other crops, the siblings were interested in new soil-preparation approaches. Most of the large agricultural suppliers that served the area were less willing to experiment with fertilizers and other products.

“Why not develop our own fertilizer?” Ed said to Millie one spring day. They had heard about the possibility of using anhydrous ammonia, an inorganic fertilizer (82% nitrogen), to help replace the essential nutrients needed for healthy crops. Millie was excited about the prospect, but they had few tangible assets to dedicate to the venture: an aging John Deere tractor, a modified Hobart mixer in which to try new fertilizer formulas, a dozen-odd barrels to hold materials, and a small old barn for storage. At the same time, the Douglas siblings had several intangible assets: close relationships with local farmers (to help them understand market needs), deep experience with conditions affecting crop yield (based largely on their own farming), courage to try new approaches to increase yields, and patience to wait for the growing cycle in order to prove the effectiveness (or lack thereof) of their fertilizers.

Based on these assets—and their commitment to reduce their dependence on unpredictable crop yields—Ed and Millie decided to make and sell their own fertilizer. However, because they each had a growing family (eight children altogether, including Will, Billy’s father), they were unwilling to bet the farm, literally, on the new venture. They decided to launch the business on top of their day-to-day farming duties, with Millie mixing the fertilizer, and Ed selling and delivering it.

And so Duration Ag Products was born.

Long-standing family values of hard work, creative problem solving, and experimentation were evident in Ed and Millie’s approach from the start. They worked tirelessly on new products, keeping careful track of what worked and what did not work, always soliciting feedback from customers. After several years of formulating, testing, and reformulating mixtures, they found a winning combination that consistently improved crop output. So in 1953, Millie and Ed transitioned their farm duties to several siblings, cousins, and hired hands and focused their full-time efforts on the business. They were eventually joined by several of their children, including William.

Over the next 60 years, Duration Ag grew into a business with over $100 million in sales and over 300 employees, serving domestic and international customers in 15 countries. The company’s offerings expanded dramatically, from one chemical fertilizer to multiple fertilizer types (hot-mix, cold-mix, suspension, and dry), limestone, agricultural chemicals, soil-testing products, micronutrients, feed, seed, and technical support. Of course, the two generations had to overcome many challenges to succeed, including the need to rebuild after a large fire in 1967 and the inability to collect almost a third of their receivables because of the impact of interest rate spikes on customers in the 1980s.

Several factors went into Duration Ag’s ongoing success. One was the owners’ emphasis on operating with minimal debt; another was its long-term view. The family also relied on strong, long-standing ties with its bankers, attorneys, and accountants, several of whom also came from family businesses. For example, their estate-planning attorney and accountant had helped them keep all shares within the family to the present day, including the use of a gifting process to transfer ownership between the first and second generations (and soon to the third, Billy’s cohort). The business had also hired experienced executives, including an agronomist with an advanced degree as head of research and development (R&D). This professional helped them develop cutting-edge fertilizer formulations, including foliar nutrients and crop protection products with additional environmental benefits.

Grateful to the community that had supported their business and eager to give back, the family donated a community foundation center—named the Douglas Foundation Center—to their hometown. They also continued a long-standing tradition of providing assistance in the form of scholarships and grants to the communities, farms, and families with which they did business.

Now firmly established as a mid-sized player in a mature market, Duration Ag faced new pressures as it prepared to transition ownership to the next generation. Among the challenges were increasingly strict and complex environmental regulations, mounting foreign competition, higher ingredient pricing from large chemical companies, and determination of the best business/governance roles for the 12 third-generation cousins (including Billy) who may have wished to join the business.

Resolving these issues would require new solutions built on the same kind of innovation that had taken Duration Ag from a few barrels of fertilizer in a barn to a $100 million multigeneration business.

* * *

THE FAMILY BUSINESS DIFFERENCES

Duration Ag exemplifies how most family enterprises represent a living business organism that is quite distinct from nonfamily firms. Specifically, the overlap of family and business creates a tight connection unique to family firms. In most cases, family members are owners and operating leaders of the business until it grows to a size and complexity best served by a blend of family ownership and professional executive leadership. Thus the business’s success correlates directly to the family’s well-being, and the family’s economic well-being correlates directly to the business’s success. On one hand, that can mean that family enterprises “are further complicated by the close proximity of these dual relationships because family members simultaneously participate in both business and family relationships, in their personal and professional lives.”¹ On the other, it can mean that family businesses have unique strengths built on the overlap of family and business, in part because the family running the business has more at stake—including reputation, survival, and security—than the managers and employees of nonfamily firms do.

Innovation is one such strength at the family business intersection. Innovation in a family business, like most other features, is different from that in nonfamily firms. A key difference is that innovation in family firms is driven and enhanced by several distinct factors that can ultimately yield greater business performance and family harmony. The drivers include

◆ personal attachments,

◆ incremental versus radical innovation (“Everything in moderation”),

◆ a longer-term horizon,

◆ shared values over shared profits (definition of success),

◆ low leverage (independence from capital markets),

◆ experimental tolerance, and

◆ family leadership (decision-making).

The remainder of this chapter describes each of these innovation drivers in detail, with examples from innovative family businesses.

PERSONAL ATTACHMENTS

In a family enterprise, business performance and risk are deeply personal. Launching and growing Duration Ag directly impacted the family’s financial status, reputation, employment opportunities, and ultimately their legacy. It was a positive impact in the Douglas family’s case. On the flip side, the consequences can be quite negative, as many families have discovered firsthand, such as when a family business decimates a family’s life savings and creates dysfunctional behavior, including interpersonal conflict. But personal attachments, as defined here, also include relationships the family maintains within and outside their family group and enterprise. Each of these elements can distinguish a family business from a nonfamily firm and help drive innovation in the former.

Consider the types of personal attachments illustrated in the Duration Ag story. First, Ed and his sister, Millie, had a strong, trust-based family bond that allowed them to consider establishing a business together in the first place and made them more open to the others’ ideas and perspectives, resulting in more diverse strategies and tactics. Their mutual trust also helped them separate responsibilities, like Millie’s early focus on product development and Ed’s on sales/delivery, and innovate together, encouraging each other to try and try again through countless failed products. Family bonds also enabled the siblings to borrow money from relatives who believed in their idea and potential. Those early funds—which would have been hard to secure from a bank or other nonfamily funding sources—helped support early innovation, which was crucial for the business. In general, family bonds may enable family business leaders to secure capital for creative developments, including those which stem from less conventional ideas.

Second, Ed and Millie maintained deep customer relationships built largely on their standing in the community, first as individuals and then as a family enterprise. These often long-standing and deep personal attachments allowed Ed and Millie to get to know local farmers’ needs based on “insider knowledge” secured through confidential or less accessible communication channels, and to develop new offerings with these in mind. For example, when they heard through close customers that farmers wanted better access to fertilizer throughout the day, they installed a self-service facility with around-the-clock access, pleasing customers and boosting revenues. Moreover, many of their early customers were families whom they had known for a long time, families who trusted them enough to allow testing of their early prototypes on small portions of their crops. These customer families would be more reticent to provide a faceless corporation the same privilege. Families help families.

That holds true for interfamily business relationships, as well. There is an informal but frequently vocalized code among family businesses of cooperating with one another across a range of activities. For example, in the United States alone there are approximately 50 active family business centers housed mostly at universities (such as Northwestern University’s Center for Family Enterprises at the Kellogg School of Management) that bring family businesses together to share insights and best practices. Many of these shared ideas have to do with innovation, whether related to developing new products and processes or transferring ownership to the next generation.

Finally, the Duration Ag example includes evidence of connections to external partners, including financial and legal advisors, like the accountant and attorney who helped the family maintain and transfer ownership. Such long-term partners aid the family business in innovating and performing on multiple levels as they steward the enterprise for the sake of shareholders, future generations, and the broader community.

Not surprisingly, strong personal attachments are driven largely by the founders and the present leaders of the family business, who can help establish a culture that values personal ties. Even billion-dollar family enterprises continue to be well served by family leaders who stay personally involved, providing inspiring connections to the family and promoting “ambassador” relationships with employees, key customers, vendors, and community leaders. As the Amway Corporation grew from a garage-based operation into a multibillion-dollar company, it became even more important that the two family founders—Rich DeVos and Jay Van Andel—were out front kicking off business conventions, talking about new ideas, writing compelling newsletter articles, and meeting and greeting the prospective “independent business owners” who formed the corporation’s marketing backbone. This personal touch not only provides deep motivation for nonfamily members to join the business family, but also helps promote firm-wide change and MODERNIZATION. People are always excited to work with a firm dedicated to changing with the times, and are willing to commit themselves to driving innovation for such businesses.

INCREMENTAL VERSUS RADICAL INNOVATION (“EVERYTHING IN MODERATION”)

Groundbreaking new products—like the iPhone or Viagra—rarely emerge from family businesses. Family-run enterprises tend to prefer smaller-scale, incremental innovation over radical changes, in contrast to the publicly held Apples and Pfizers of the world, which have deep pockets for R&D funding. For most family enterprises, growing by incremental steps is preferable to advancing by giant leaps. This “incrementalist” approach dominates partly because family businesses are averse to assuming large risks and taking on large debt. Not surprisingly, then, family businesses tend to be quick followers or quick improvers, rather than original innovators. But we can argue that incrementalism represents a form of innovation, as it focuses on steady improvement of offerings or ways of doing business through meaningful change, in line with the definition of “innovation” provided in the Introduction.

Research suggests that successful, long-lasting family firms exercise moderation with regard to most key dimensions: planning, leverage, and innovati...

Table of contents

• Cover
• Title
• 1: The Family Business Difference: Capitalizing on Family Innovation
• 2: Structured Chaos: Creating a Culture of Innovation
• 3: New Products and Services: Driving Value with Innovative Offerings
• 4: Money and Metrics: Funding and Measuring Innovation
• 5: The Next Generation: Reinnovating the Family Business
• 6: Leadership and Ownership Transitions: Ensuring Succession Supports Innovation
• 7: Governance: Overseeing Key Relationships to Support Innovation
• 8: Moving Innovation Forward: Concluding Thoughts
• NOTES
• ABOUT THE AUTHOR
• INDEX