Business growth specialist Tony Backhouse explains why every family businesses need to innovate – not just to thrive, but to survive.
We know that all businesses need to adapt and family businesses are often at the forefront of innovation. However, as a business develops through the generations, the founder’s impact on innovation can diminish. As the owner of a family business that may have been producing the same, high-quality product or service for generations, you may not think your business needs to innovate to thrive. But innovation is vital to survive, not just thrive.
All businesses, no matter the size, have innovated. Innovation can come from those “eureka moments” that lead to the significant advancement of a product or industry or, more simply, from making changes that improve efficiency and processes.
Every family business has unique goals. Whether your ambition is to become the biggest and best within your market, to remain at your current size but grow revenue or to maintain what you have built, you will need to innovate to achieve your goals across the generations.
We are happy with our business, why do we need to innovate?
You may be happy with your business and think you can continue performing and growing without the need to innovate; however, this is unsustainable. No industry stands still, as all industries have businesses that are seeking to grow or improve. This is what pushes industry forward.
Each industry is built by a number of businesses, all with their place in the market. There are industry leaders who may be in their position through a unique product, established brand, or higher levels of efficiency, and there are those businesses taking the smallest percentage of the market, with potentially lower margins and small scale operations.
The majority of businesses will fall somewhere between these ends and operate in the middle of the market. These businesses will regularly move up and down the industry in terms of market share, swapping positions with those around them.
What do you need to innovate?
Innovation does not have to be a eureka moment that changes an industry. The majority of innovations are done through setting objectives for the short and long-term and working hard to achieve them. Businesses must identify any barriers to innovation, such as a lack of time, ideas or skillsets within the business. Identifying these barriers, and setting goals for overcoming them, is essential for innovation.
At RfM Business Consulting, we use the Value Discipline approach, identified by Michael Treacy and Fred Wiersema, to help clients. This principle suggests that an important step towards innovation is to decide which of three value disciplines (Operational Excellence, Product Leadership or Customer Intimacy) a business should focus on. Companies often find it difficult to identify which area they need to focus on, and dilute innovation by trying to cover all three areas equally.
If your business is spending money on innovation in the wrong area, it is unlikely to become the business you want it to be.
If your business distributes spending and focus evenly across all three disciplines, it probably won’t become a market leader.
A good rule of thumb is that roughly 80% of your innovation focus should be directed towards the value discipline you want your business to excel in.
Research & Development Tax Relief
As well as the rewards gained through the advancements of innovation, there is also financial relief for those that innovate. Research & Development reliefs support companies that innovate by improving their internal performance or advancement in their field. The relief can come in the form of a reduction on corporation tax, or a cash refund if the innovation expenditure was during the previous two accounting periods.