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Family business
Why outsiders spark innovation in family firms but can’t finish the job alone
A lack of innovation is killing family enterprise, but new research suggests it isn’t a lack of ideas that’s the problem.
Rapid read:
- Family firms are stagnating despite having the resources to lead. Innovation failure is driven less by capability gaps and more by risk aversion and fear of eroding socioemotional wealth, threatening both firm longevity and broader economic health.
- External talent is hired but not empowered. Non‑family managers bring innovation potential, objectivity, and growth orientation, yet families often block execution through centralized control, misalignment, and symbolic professionalization.
- Innovation requires governance redesign, not just professionals. Sustainable renewal depends on blended leadership, delegated decision‑making, clear innovation pipelines, and reframing innovation as a protector – not a threat – to legacy.
The world is moving at lightning speed. Markets are evolving, customer expectations are growing, and technology is refining. But rather than keeping pace – or setting it, given they account for more than 70% of GDP and 60% of employment – family businesses are standing still, and it’s not only jeopardizing their own longevity but painting a worrying picture for our global economy, too.
As artificial intelligence and machine learning power decision-making, hyper-personalization unlocks new markets, and diversification becomes a critical longevity tool in many publicly controlled businesses, family firms are stalling. While conventional wisdom points to resource constraints or indulges the depiction of a ‘mom and pop shop’ chained to tradition, in reality, it isn’t a lack of innovation, resources, or capabilities that is killing family businesses. It’s down to an unwillingness to use them, grounded in risk aversion and the fear of dwindling socioemotional wealth.
Innovation is widely recognized as a critical strategic driver for ensuring a firm’s survival and long-term success. Without it, firms – family or otherwise – face stagnation and decline; too much, however, can cause a loss of identity, which is crucial for legacy building and wealth preservation in family businesses. These competing pressures are creating a tension between family stakeholders and non-family professionals hired to make an impact but barred from making change. It’s also a contributing factor in the demise of 70% of family enterprises that struggle to make it to the second generation.
In this article, we explore this ability-willingness paradox in action – analyzing over 100 business studies conducted between 1990 and 2023 to define what the parameters of success look like in a firm that utilizes external talent to innovate. We also offer family firms top tips for retaining values and identity while sparking renewal.
Non-family managers are catalysts for innovation.
The ability-willingness paradox
Non-family managers are catalysts for innovation. They are increasingly being hired in family firms to professionalize operations, bringing their wealth of external knowledge, networks, and expertise to help family firms sustain a competitive edge, overcome innovation inertia, and seize new opportunities. Non-family managers also help to reconfigure internal resources more effectively, supporting innovation activities and fostering a more structured approach to developing innovation capability. Without an emotional tie to the business, they also help reduce family biases and promote more objective and effective innovation decisions.
But hiring and enabling are two very different things, and while family businesses are engaging external professionals en masse, at times fighting against Wall Street banks and elite private equity firms to attract them, they aren’t allowing them to thrive. It’s creating an intent-action gap, a pool of disenchanted professionals, and a stream of missed opportunities.
According to our research, while non-family managers are often behind successful feats in research and development, knowledge acquisition, and capability building, they are rarely able to see their innovations through to new product development, markets, or patents. That’s because bureaucracy, misalignment, and fear are all stalling progress and stopping innovations before they even begin.
With socioemotional wealth, legacy, and capital preservation at stake, family firms must scrutinise the work and decisions of external talent and family professionals alike.
A power struggle between growth and control
At the heart of this struggle lies a fundamental tension between growth and control. While some families, like those behind global champions such as Volkswagen or Walmart, have accepted diluted control in exchange for growth, the two are not mutually exclusive, and external talent can often play a bridging role between the family and the future, shifting perspectives, unlocking new and missed opportunities, disrupting norms that stagnate growth, and creating alignment between the business and new-generation family members who may otherwise remain apathetic or disengaged.
Similarly, non-family managers can enhance the objectivity of decision-making in innovation by reducing cognitive biases such as risk aversion or resistance to change. Their detachment also disrupts entrenched groupthink among family members and mitigates strategic myopia, fostering an innovative environment aligned with organizational growth. Their greater propensity for risk-taking facilitates the pursuit and implementation of innovation.
With socioemotional wealth, legacy, and capital preservation at stake, family firms must scrutinize the work and decisions of external talent and family professionals alike. However, they must also remain open to change, collaborate, and leverage outside expertise.
Hiring one executive from outside the family will not drive the innovation required to make a difference.
5 steps to kick-start innovation in your family business
To innovate and allow external talent to propel family businesses in a fast-moving business landscape, families must be prepared to make and see changes unfold. They must also:
1 – Move beyond box-ticking and symbolic appointments
Hiring one executive from outside the family will not drive the innovation required to make a difference. Instead, focus on building diverse teams where external professionals can have real influence.
2 – Focus on onboarding and embedding this talent into your organization
Beyond recruitment, families need to focus on utilizing and embedding the external talent they have. Innovation impacts depend on trust and alignment. You can ensure both by including external professionals in strategic discussions, reducing informal ‘family-only’ communication and decision channels when it comes to business, and aligning incentives across family and non-family talent, considering the likes of long-term incentive plans.
3 – Allow inputs to translate into outputs
Our study found that while external professionals played a pivotal role in sparking innovation, families often served as a bottleneck to progress. Firms must establish clear innovation pipelines, define accountability for outcomes and their metrics of success, and bridge gaps between strategy and execution – often by steering outside of a family comfort zone and being open to new areas.
4 – Loosen centralized control
Family firms tend to increase bureaucratic controls for decision-making, such as formal policies and professional procedures to constrain non-family managers’ discretion, potentially leading to slower and less efficient processes. Founder-led firms need to introduce formal governance structures and delegate authority in innovation decision-making, effectively loosening their centralized control and allowing external talent to make their mark.
5 – Take note of successful multi-generational firms
While first-generation firms have a higher reliance on internal resources and networks, limiting the extent to which non-family managers can leverage their experience, expertise, and networks and constraining their ability to expand – established, multi-generational firms comprise mixed leadership teams with some of the most renowned and respected external talent working in alignment with the family to innovate and achieve their long-term goals.
Innovation fuels family survival
Family businesses have more at stake than publicly controlled businesses. On top of balance sheets sits a layer of non-economic utilities that influence every decision taken by family and non-family members alike, something we refer to as socioemotional wealth. It includes family values, family legacy, and family relations, which must be preserved above all else.
From decades of theoretical and empirical research, we know that this often leads owning families to adopt idiosyncratic forms of governance, characterized by concentrated ownership and the appointment of family members as firm leaders. It also fuels distinctive norms, incentives, and authority structures that permeate the firm’s goals and operations. While imperative for the survival of business-owning families, for family businesses to survive, they need to innovate and, importantly, view innovation as an opportunity for growth, rather than a risk factor.
Family firms need diversity of thought, blended leadership teams, and clear innovation pipelines anchored in formal governance structures. Professionalizing leadership isn’t enough; family firms must redesign decision-making structures to unlock innovation, remembering it’s what fuels their survival, not what dilutes it.
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