Alfredo De Massis is Deputy Director of the Center for Young & Family Enterprise of the University of Bergamo, Italy and the incoming Director of the Family Business Centre at Lancaster University Management School, IEED, UK.
Address correspondence to: Federico Frattini, Department of Management, Economics and Industrial Engineering, Politecnico di Milano, Piazza Leonardo da Vinci, Milano 32 20133, Italy. E-mail: email@example.com.
How family firms manage product innovation remains an overlooked topic in existing business research. This happens despite the fact that family businesses play a crucial role across all economies, and they often use technological innovation to nurture their competitive advantage. By drawing upon the resource-based view of the firm as well as agency, stewardship, and behavioral theories and using empirical evidence gathered through a multiple case study, the paper studies how and why the anatomy of the product innovation process differs between family and nonfamily firms. The analysis shows that family businesses differ from nonfamily ones as regards product innovation strategies and organization of the innovation process.
Family firms can be defined as businesses “governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (Chua, Chrisman, and Sharma 1999). The fact that family businesses play a crucial role across all economies in the world is widely acknowledged (Aronoff and Ward 1995; La Porta et al. 1999; Neubauer and Lank 1998). There is also a growing body of empirical evidence showing that family firms leverage technological innovation to nurture their competitive advantage and overcome economic and financial downturns (Gudmundson, Tower, and Hartman 2003; McCann, Leon-Guerrero and Haley 2001; Souder and Thomas 1994). Based on these premises, it is surprising that very limited attention has been devoted by management research to study technological innovation in family firms so far (Craig and Moores 2006; Kotlar et al. forthcoming).
According to the established process-based conceptualization (Freeman 1976), technological innovation can be defined as the set of activities through which a firm conceives, designs, manufactures, and introduces a new product, service, or process (Burgelman, Kosnik, and van den Pol 1988). Technological innovation is therefore all about change, which can take two forms (Tidd, Bessant, and Pavitt 2001, p. 6): “[…] in the things (products/service) which an organization offers, and change in the way in which they are created and delivered.” Accordingly, two types of technological innovations are usually distinguished; that is product and process innovation (Utterback and Abernathy 1975).
There are strong conceptual reasons to argue that family involvement in ownership, governance, and management affects how resources are managed and deployed (Sirmon and Hitt 2003) and determines distinctive incentives (Fama and Jensen 1983; Jensen and Meckling 1976), authority structures, and norms of accountability (Gedajlovic, Lubatkin, and Schulze 2004) resulting in unique advantages and disadvantages that may significantly affect the characteristics of the technological innovation process in family firms. There is a vast body of empirical evidence pointing to the distinctive nature of family firms regarding other business processes, for example, corporate governance (Randoy and Goel 2003), internationalization (Zahra 2003), entrepreneurship (Naldi et al. 2007), and financing (Romano, Tanewski, and Smyrnios 2001). This suggests that there might be important differences as well in the anatomy of the technological innovation process that distinguish family and nonfamily firms.
The paper attempts to disentangle these differences by focusing in particular on product innovation. This for two reasons. First, product innovation poses the same problems as process innovation concerning how it is organized and managed internally, but it entails specific challenges in terms of interaction and engagement with external market actors (e.g., clients, lead users, providers of complementary products and services, distributors). These distinctive features of product innovation are likely to result in exceptional challenges for family firms due to their idiosyncratic ability and propensity to develop relationships between the family and the firm's stakeholder (e.g., see Gómez-Mejía, Nunez-Nickel, and Gutierrez 2001). Second, far more has been written on product innovation in comparison with process innovation. This allows us to have a broader and more consolidated body of empirical evidence against which the peculiarities of product innovation in family firms can be contrasted.
Although research has shown that family firms perceive dissimilar incentives and face different barriers to technological innovation (e.g., see Zahra, Donald, and Larrañeta 2007), whether family businesses are more or less innovative than comparable, nonfamily ones remain an open question, and contradictory results have been found in this regard (e.g., see Craig and Moores 2006; Morck, Stangeland, and Yeung 2000). Instead of focusing on the outcome of family firms' efforts in technological innovation, this paper contributes to opening up the “black box” on innovation in family firms by investigating what characterizes their product innovation process. To the best of the authors' knowledge, there are no studies that have attempted to identify what differentiates family firms from nonfamily companies as regards the organizational solutions and managerial principles used in this very important process. Uncritically applying the good practices identified by product innovation research to family businesses is risky because the latter has almost exclusively adopted the standpoint of nonfamily firms so far. By drawing upon and integrating several theoretical perspectives (that is resource-based view, agency, stewardship, and behavioral theories), this paper argues that family businesses are different from nonfamily firms in several aspects of product innovation, therefore pointing to the need for further research aimed at unearthing which critical success factors (CSFs) in product innovation specifically apply to family businesses.
The arguments of the paper are developed using empirical evidence gathered through a multiple case study, which involved 10 small-sized Italian firms, five of which are family and five nonfamily businesses. The analysis of the cases indicates that family firms only engage in innovation processes aimed at developing and bringing to market incremental new products or services, which are carried out relying on a functional organization, with high levels of decisional autonomy given to the project leader. Throughout this process, family firms rely on a relatively high number of collaborations with external sources of knowledge and technologies. Finally, the predominant organizational climate, which permeates the firm's attitude and behavior toward product innovation, is largely informal and unstructured and mainly risk averse.
The structure of the paper is as follows. The next section provides the theoretical underpinnings of the research, whereas the third section illustrates the methodology employed in the empirical analysis. The fourth section reports and discusses the main findings of the multiple case study, and the last one concludes and outlines avenues for future research.
Sources of Differences between Family and Nonfamily Firms
The distinctive nature of family firms has been empirically found to affect different business processes (Dyer 2003), for example, corporate governance (Randoy and Goel 2003), internationalization (Zahra 2003), entrepreneurship (Naldi et al. 2007), and financing (Romano, Tanewski, and Smyrnios 2001). There are different theoretical lenses that can be used to explain why and how family involvement in ownership, governance, and management results in distinctive characteristics of the product innovation process in family firms if compared with nonfamily enterprises.
A first theoretical framework which can be used to explain the distinctiveness of family enterprises is the resource-based view of the firm (Wernerfelt 1984). In a family firm, the interaction between the family unit, the business entity, and individual family members creates unique systemic conditions and constituencies (Habbershon and Williams 1999; Habbershon, Williams, and MacMillan 2003) that generate a bundle of unique resources and capabilities (Chua, Chrisman, and Sharma 1999; Zahra, Hayton, and Salvato 2004). Under this view, the interaction between the family and the business contributes to the building of competitive advantages or disadvantages through higher or lower stocks of social, human, and financial capital (Sirmon and Hitt 2003).
Social capital is defined as the resources embedded in the relationships among people (Hoffman, Hoelscher, and Sorenson 2006). It involves both relationships among the individuals working in the organization (internal social capital) and between the organization and external parties (external social capital) (Adler and Kwon 2002). Within the organization, social capital can reduce transaction costs, facilitate information flows, knowledge creation, and accumulation (Lin 2001; Nahapiet and Ghoshal 1998), and improve creativity (Perry-Smith and Shalley 2003). One of the main competitive advantages of family firms is the use of a unique family language, which allows their members to communicate more efficiently and share more information (Tagiuri and Davis 1996). The shared goals and values characterizing family firms usually result in a higher degree of cohesiveness and commitment of the workforce, which contributes to creating potential advantages over nonfamily firms (e.g., Fukuyama 1995; Lyman 1991). Outside the organization, social capital improves alliance and partnership success (Ireland, Hitt, and Vaidyanath 2002; Koka and Prescott 2002). Family firms may have some advantages in developing social capital between the family and the stakeholders (Gómez-Mejía, Nunez-Nickel, and Gutierrez 2001), given that they typically (1) have the ability to foster and nurture long-standing relationships across generations, and the firm's stakeholders may be more likely to develop personal attachments to a family that owns and manages a business, rather than to an unfamiliar, impersonal firm (Carney 2005); and (2) pay particular attention to developing relationships with key stakeholders in order to improve their visibility and family reputation within the external community (Dunn 1996). Even if this is rarely recognized, social capital may also be a source of competitive disadvantages of family firms over nonfamily enterprises, such as dysfunctional relationships due to bond ties, business complexity, and paralysis of action (Arregle et al. 2007; Pearson, Carr, and Shaw 2008). The characteristics of internal and external social capital of family firms may affect the characteristics of the product innovation process. For example, the ease of interindividual communication may simplify the organizational solutions and managerial principles used to coordinate the different actors involved in innovation activities, or encourage collaborative, interorganizational forms of innovation.
Human capital is defined as the knowledge and skills embodied in people (Hatch and Dyer 2004). The family business' human capital is supposed to be a source of competitive advantages because it is associated with attributes like commitment to the business (Horton 1986), motivation (Ward 1998), friendliness, sincerity, and close relationships (Horton 1986). However, family firms are usually characterized by a lack of access to qualified human capital (Carney 1998; Miller and Le Breton-Miller 2005) because the family can exercise favoritism toward kin over more capable skilled individuals, and unfair human resources management practices may reduce employee incentive to invest in firm-specific knowledge (Miller, Le Breton-Miller, and Scholnick 2008). The idiosyncratic characteristics of family firms' human capital may affect the features of their product innovation process by determining specific advantages and disadvantages for family firms. For example, the superior commitment of employees may render decisional autonomy in the innovation process more easily to achieve, whereas the typical lack of access to skilled human resources, which is exacerbated in small firms (Freel 2000), may impact upon the orientation to rely on external sources of knowledge in innovation projects.
Financial capital is defined as the current and potential cash resources of the firm, comprising the ease with which it accesses new resources through financial markets and its average cost of capital (Hunt 2000). The management of financial resources in family firms is unique, as the interaction between family and business results in a long-term perspective (Gallo and Vilaseca 1996; Sharma, Chrisman, and Chua 1997) because families strive to ensure the longevity of the business through generations and protect the long-term financial security of the founding generation (Donckels and Fröhlich 1991; Dunn 1996; Dyer 2003). The characteristics of financial capital in family firms may affect different aspects of their product innovation process, such as the orientation to run into hazardous investments to the detriment of the family's security or the financial sources used to fund product innovation projects.
Agency theorists (Jensen and Meckling 1976) have viewed family firms as a highly advantageous governance structure because management and ownership are not separated but rather aligned, which in turn eliminates, or at least minimizes, potential agency costs (Fama and Jensen 1983). More recently, however, Schulze et al. (2001) and Gómez-Mejía, Nunez-Nickel, and Gutierrez (2001) have shown that private ownership and owner management characterizing family firms do not necessarily reduce the agency costs of ownership, because family firms may have other agency problems engendered by self-control and altruism (Lubatkin et al. 2005) that are not considered in the agency theory of the nonfamily firm.
Under an agency theory perspective, we can argue that, due to their ownership, family members enjoy certain control rights over the firm's assets and use these rights to exert influence over decision-making processes in the organization. The unification of ownership and control, especially in a small firm, incorporates organizational authority into the hands of the entrepreneur and his or her family and generates three dominant propensities, acknowledged as parsimony, personalism, and particularism (Carney 2005), which differentiate family firms from other governance archetypes. Parsimony is rooted in the fact that the alignment of owner–managers' interests in family firms reduces the tendency toward opportunism and generates a propensity toward careful resource conservation and allocation relative to nonfamily enterprises (Jensen and Meckling 1976). Family firms make strategic decisions with the family's personal wealth and can be expected to behave more prudently in the management of the product innovation process.
Personalism stems from the fact that the family acts as a unique agent in which both ownership and management are concentrated, determining a personalization of authority that gives family members extremely high power and legitimacy within the organization. Consequently, the agents involved in the product innovation process can be exempted from the internal bureaucratic constraints and strictly formalized management practices that limit managerial authority and inhibit ownership priorities in nonfamily firms.
Particularism follows from the personalization of authority and derives from the fact that family control rights entail a personalistic exercise of authority that allows family members to pursue diverse goals rather than pure profit or firm value maximization (Chrisman et al. 2012). For example, the family may intervene in the affairs of the firm by employing decision criteria based on altruism or nepotism, and this may impact upon several aspects of the innovation process.
Parsimony, personalism, and particularism may affect the product innovation process in several ways. For example, the propensity for parsimony and personalism may drive the government of the innovation process toward cost-saving organizational solutions and low-bureaucracy methods, whereas particularism may affect the outcome of the innovation process (i.e., the type of product innovation achieved) as a result of the distinctive and particularistic goals of the owning family.
Stewardship is a complementary perspective to agency theory, as managers find that they identify with their organization and do not instinctively act in an opportunistic way (Davis, Schoorman, and Donaldson 1997). The stewardship theory-based explanation of family firm behavior (Davis, Schoorman, and Donaldson 1997; Donaldson 1990; Donaldson and Davis 1991) proposes that family managers look at their firm as a vehicle to accomplish their needs for security, social contribution, belonging, and standing within the family (Gomez-Mejia et al., 2007; Miller, Le Breton-Miller, and Scholnick 2008).
A stewardship orientation is composed of three dimensions (Davis, Schoorman, and Donaldson 1997): (1) autonomous motivation, that is, individuals act with a sense of volition that is in contrast with controlled motivation in which individuals feel pressured to perform a certain task (Gagné and Deci 2005; Ryan and Deci 2000); (2) collective orientation, that is, individuals are driven by and concern for the success of the collective organization rather then being centered on individualistic gains with a threat of guileful behaviors (Donaldson 1990; Zahra et al. 2008); and (3) high-trust climate, that is, organizational members who are autonomously motivated and collectivistic, very strongly trust each other (Mayer, Davis, and Schoorman 1995; Schoorman, Mayer, and Davis 2007).
The distinctive stewardship orientation of family versus nonfamily firms may idiosyncratically affect the characteristics of the product innovation process. For example, autonomous motivation and collective orientation may positively affect the degree of decisional autonomy in organizing the innovation process and may render a formalized approach to administering innovation activities unnecessary.
Behavioral theory (Cyert and March 1963) has been used as the basis for proposing that family firms differ from nonfamily enterprises because they are more willing to pursue emotional value of ownership (Astrachan and Jaskiewicz 2008; Zellweger and Astrachan 2008), emphasize the creation and conservation of socioemotional wealth for the family (Gomez-Mejia et al., 2007) and altruism toward family members (Lubatkin et al. 2005; Schulze, Lubatkin, and Dino 2003). Chrisman et al. (2012) show that such psychological attachments to the firm by family members increase both commitment and pursuance of transgenerational family control.
The corroborated evidence on the importance put by family firms on the conservation of their socioemotional wealth (Gomez-Mejia et al. 2007) leads controlling families to be strongly concerned about potential control losses. According to the behavioral theory, the reluctance to lose family control (Donnelley 1964) may generate differences between the extent to which family and nonfamily firms invest in innovation and the way they manage the innovation process. From this perspective, family firms may be less likely to be engaged in innovation activities, especially collaborative innovation projects, because innovation requires professional expertise which is not always available within the firm's boundaries. In addition, there is the need to give autonomy to knowledge-intensive managers who often cannot be groomed from within the family firm. As a result, it is frequently necessary to cede shares to outside parties, which may include venture capitalists or institutional investors (Gomez-Mejia et al. 2011).
The analysis reported in this section points therefore to the existence of important theoretical reasons that lead us to argue that family firms differ from nonfamily firms as regards the anatomy of the product innovation process. The next section provides an overview of the main theoretical and empirical findings on technological innovation in family firms.
Overview of the Literature on Technological Innovation in Family Firms
Although technological innovation has been considered in some streams of family business research, it is not a dominant topic in this literature. There have been some attempts to investigate whether or not family and nonfamily firms have a different propensity toward technological innovation (Craig and Moores 2006; Tanewski, Prajogo, and Sohal 2003), but they have reported contradictory findings.
Initial empirical studies found that family businesses are less innovative than comparable, nonfamily enterprises. For example, Dunn (1996) and Donckels and Fröhlich (1991) argue that family firms tend to consider technological innovation as less important than nonfamily companies, and consequently, they are seldom pioneers, leading to less innovation and growth, with evidence of technological innovation taking place only incrementally. Morck, Stangeland, and Yeung (2000) show that Canadian firms controlled by heirs were less active in technological innovation than comparable nonfamily firms, and Tanewski, Prajogo, and Sohal (2003) find, through the investigation of a large sample of 2,000 Australian companies, that family businesses have fewer technological innovations than nonfamily firms. More recently, Chen and Hsu (2009), Munari, Oriani, and Sobrero (2010) and Muñoz-Bullon and Sanchez-Bueno (2011) report a lower technological innovativeness of family firms as a result of their lower research and development (R&D) intensity. In other words, most scholars find a lower propensity toward technological innovation in family firms due to their tradition and aversion to risk (Levinson 1987; Morris 1998).
However, there are also several studies showing that family firms can be more innovative than nonfamily enterprises (e.g., Craig and Dibrell 2006; Craig and Moores 2006; Naldi et al. 2007). McCann, Leon-Guerrero, and Haley (2001) underline the important role technological innovation plays in the family firm's competitive advantage. Westhead (1997) finds that family businesses offer a wider range of new products and services in the search for superior competitive advantage in comparison with nonfamily firms. One recent contribution on technological innovation is the study of Cassia, De Massis, and Pizzurno (2011) who propose a preliminary set of family-related enabling and constraining factors for product innovation.
Taken together, this literature identifies several distinctive characteristics of family firms that may hinder or facilitate technological innovation. However, to the best knowledge of the authors, no attempts have been made so far to investigate how and why the innovation process in family businesses differs from nonfamily firms. This paper tries to fill this gap through a multiple case study, which involved 10 Italian small and medium-sized enterprises (SMEs), five of which are family firms and five nonfamily businesses. The next section develops a simple framework that identifies a set of dimensions that should be looked at in order to spot the major differences between family and nonfamily businesses as regards the characteristics of the product innovation process. It will be used as a lens to gather and interpret the empirical evidence collected through the multiple case study.
A Framework to Study Product Innovation in Family versus Nonfamily Firms
It is possible to identify three major areas around which the characteristics of the product innovation process can be grouped (Tidd, Bessant, and Pavitt 2001; Trott 2008): (1) strategy, which refers to the long-term objectives of the product innovation process and their linkage with the firm's business and corporate strategy; (2) organization, which refers to how resources involved in the product innovation process are ordered so as to accomplish the established goals; (3) climate, which refers to the recurring patterns of behavior, attitude, and feelings that permeate work in the innovation process. For each area, a set of important aspects should be looked at to gain a comprehensive picture of the anatomy of the product innovation process. In this paper, we focus on those described hereinafter.
Radical versus Incremental
A first strategic aspect regards whether the goal of the product innovation process is to develop and bring to market something which represents a breakthrough advancement or only a minor improvement over the status quo (Bessant et al. 2005). A more risky strategy entails the development and commercialization of radically new products and services, which offer completely new functionalities to customers or cost far less than the alternatives they supersede. Alternatively, a firm might try to reduce risks and resource commitment by proposing a new product or service that only incrementally improves the benefits currently delivered to customers. Of course, these two strategic orientations can coexist within the same firm, with both radical and incremental product innovation processes.
Closed versus Open Approach
A second strategic aspect regards whether a firm leverages the competencies and technologies of external organizations (e.g., clients, suppliers, competitors, universities, individuals) during the innovation process, or rather if it relies on its own R&D and technological assets (Grönlund, Rönnberg Sjödin, and Frishammar 2010). Again, within the same firm, different innovation processes, and even different stages of the same process, can be undertaken under highly dissimilar degrees of openness (Trott and Hartmann 2009).
Cross-Functional Team versus Functional Organization
Concerning how the innovation process is organized, a first aspect regards whether process activities are carried out by purposefully created project teams, staffed with people temporarily drafted from the various functions of the firm (e.g., R&D, marketing and sales, operations) who respond to the team leader, or rather the different functions contribute to innovation projects by devoting part of the time of their human resources, who however continue to respond to the functional head (Clark and Wheelwright 1992).
High versus Low Decisional Autonomy
A further important organizational issue regards whether the person responsible for a product innovation project is given a high or low degree of autonomy concerning how process activities have to be carried out and unexpected problems addressed (Johne 1985). Whereas high levels of autonomy can impede the exploitation of synergies across innovation processes, they are likely to improve the flexibility and speed of innovation activities.
Risk Taking versus Risk Averse
A first important aspect of the organizational climate regards the extent to which uncertainty, ambiguity, and personal initiative are tolerated or even encouraged (Isaksen and Tidd 2006). In a risk-taking climate, people will feel free to take a gamble on some of their ideas and think “out of the box,” whereas in a risk-averse context, people will be more cautious and will always try to “stay on the safe side.” Product innovation might benefit from a risk-taking climate, which however may as well distract resources from everyday business activities to the detriment of the firm's overall efficiency.
High versus Low Formalization
A second aspect regarding the recurring behaviors that permeate the product innovation process concerns whether a highly formalized and structured approach is superimposed to preside over the progress of innovation activities (e.g., a stage-gate system), or rather a more adaptive and unstructured line is used, which entails continuous adaptation from individuals to the changing contingencies surfacing during the project (Cooper, Edgett, and Kleinschmidt 2002).
Figure 1 gives a synthetic representation of this framework. The arrows linking the three areas indicate that there might be relationships between them. To mention a few, it has been found that a firm's willingness and ability to pursue radical innovations are bolstered by a risk-taking organizational climate and a low degree of formalization (Tushman and O'Reilly 1997). Furthermore, a functional organization appears to be more appropriate when pursuing incremental innovations, whereas radically new products and services require a cross-functional organizational endeavor (Clark and Wheelwright 1992). Finally, high decisional autonomy allowed to the individual responsible for the product innovation process is likely to be associated with a poorly formalized and adaptive climate in the innovation process.
The next section describes the methodology used in the exploratory empirical analysis which was designed and carried out to gain further clarifications as to how and why family firms differ from nonfamily ones concerning the idiosyncratic characteristics of their product innovation process.
Given the aim of the investigation and our conceptual starting points, we adopted an exploratory approach in our empirical analysis. In particular, we used a multiple case study methodology (Yin 2003) for the study, which was chosen because it allows both an in-depth examination of each case and the identification of contingent variables that distinguish each case from the other. Furthermore, as noted by Hall (2005), there is a need in the field of family business for qualitative research which both draws on and generates theory, because family businesses are characterized by complex relationships and interactions.
Our study involved 10 Italian firms, five of which are family and five nonfamily businesses, according to a “polar type” sampling logic (Eisenhardt and Graebner 2007). Although a precise operational definition of the term “family firm” remains a topic of discussion (Westhead, Cowling, and Howorth 2001), in this study, it refers to firms in which family plays a significant ownership and managerial role (De Massis, Kotlar, Campopiano, and Cassia in press; Mahto et al., 2010). However, De Massis, Kotlar, Chua, and Chrisman (forthcoming) assert that companies with the same level of family involvement in ownership and management may not consider themselves family businesses and, more importantly, may not behave as family firms. From an operational point of view, we adopted the following three criteria to distinguish family from nonfamily businesses consistently with the above-mentioned definition: (1) 50 percent or more of ordinary voting shares are owned by members of the largest family related by blood or marriage (Westhead, Cowling, and Howorth 2001); (2) 50 percent or more of the management team is drawn from the largest family group who owns the company (Westhead 1997); and (3) the company is perceived by the chief executive to be a family business (Westhead, Cowling, and Howorth 2001). Furthermore, we decided to focus on firms which are well respected for their prowess and success in the area of product innovation. Having selected companies that consider product innovation a critical determinant of their competitive advantage, we could not misinterpret differences in the anatomy of the product innovation process due to heterogeneity in the strategic relevance assigned to this activity. Finally, we decided to include in our sample only small companies (according to the definition provided by the Recommendation of European Commission 2003/361/EC), all with fewer than 50 employees. First, this choice was suggested by the fact that product innovation is considered one of the most critical determinants of sustained competitive advantage for this category of firms (Cefis and Marsili 2006; Hausman 2005). Second, innovation in small firms has several peculiarities which differentiate it from large companies (e.g., Tan et al. 2009; Tether 1998). What is more, scholarly research has thus far focused in particular on large firms and only to a lesser extent on small firms (Verhees and Meulenberg 2004). By focusing on small companies only, we also reduced the risk of unobserved heterogeneity due to differences in the size of the family and nonfamily firms in our sample. Besides family involvement, strategic relevance assigned to product innovation, size, and geographical location (we focused indeed on companies headquartered in Northern Italy, for convenience reasons), we built a heterogeneous sample regarding other firms' characteristics, for example, industry belonging, age, presence of private equity in the firm's capital. We controlled for the impact of these variables on the characteristics of the product innovation process through cross-case comparison procedures, as will be mentioned later. We adopted this convenience, theoretical sampling approach because we needed to create an experimental empirical basis that allowed us to study the phenomenon under particularly insightful and illuminating circumstances (Siggelkow 2007). Of course, it is not possible to statistically generalize results from this type of exploratory case study analysis (Yin 2003). Our aim is to make analytical and theoretical generalizations to the existing body of knowledge regarding the anatomy of the product innovation process in family firms. The findings will hopefully inform future theoretical and empirical studies concerning product innovation in family firms but cannot be generalized to populations of firms or markets (Harrison and Kjellberg 2010).
The characteristics of the sampled firms are reported in Table 1.
Table 1. The Studied Cases and Demography of the Respondents
No. of Employees
Turnover (Mio Euro)
HR, human resources; IT, information technology; R&D, research and development; NA, not applicable.
Innovation; HR; Control & Accounting; Marketing; Sales; Distribution; Logistics; IT
Director of Innovation
HR Executive Officer
Comprehensive information regarding the scope and type of product innovation activities carried out in the sampled firms is reported in Appendix 1.
We identified the firms that met our convenience sampling criteria through preliminary interviews with some experts belonging to the Center for Young and Family Enterprise of the University of Bergamo, the Regional Committee for Small Enterprises of Confindustria (the major industrial association in Italy), and the Family Business Advisor Office of Unicredit, which is the largest banking group in Italy.
With regard to data collection, we gathered information mainly through direct interviews, undertaken between October 2009 and December 2010. Specifically, the following steps were taken:
At the outset of each case, a relationship was established with a senior manager from the selected firm. This person was briefed about the research project through a written project summary and a telephone meeting. During this meeting, we asked the respondent to introduce us to the entire top management team and the staff in charge of product innovation.
Then, we personally interviewed at least two informants for each company. We undertook two semistructured interviews for each respondent (each lasting on average 1.5 hours), for a total of more than 35 hours of personal interviews. Direct interviews followed a semistructured replicable guide that comprised a set of open questions for each area of the product innovation process included in the theoretical framework (see Appendix 2).
Secondary information was collected in the form of company reports and project documentation. In particular, we gathered and analyzed all the available company documents, catalogs, family information, and reports of product innovation projects. This informed the researchers with background information about the selected firms, the type of product innovation they undertake, and the approaches they use to administer product innovation activities. Above all, these secondary information sources were integrated, in a triangulation process, with data drawn from the direct interviews, in order to avoid post hoc rationalization and to ensure construct validity (Yin 2003).
All interviews were tape recorded and transcribed; generally, at this stage, a telephone follow-up with the respondents was conducted in order to gather any important missing data.
Before being analyzed, information gathered through the case studies was manipulated by applying data categorization and contextualization techniques (Miles and Huberman 1984). We then followed a structured process for data analysis, made up of a preliminary within-case study, an explanation-building investigation, followed up by a cross-case comparison. These structured procedures for data collection and analysis, as well as the use of the semistructured interview guide, helped enhance the reliability of the research (Yin 2003).
Findings and Discussion
In this section, the findings of the case study analysis are used to illustrate how family firms differ from nonfamily companies as regards the anatomy of their product innovation process, and to identify the reasons behind the emerged differences. The empirical evidence that we collected is synthesized and mapped along the six dimensions of the reference framework in Appendix 3. Table 2 provides a synoptic view of these data to allow for a more straightforward comparison and analysis. An in-depth discussion of this empirical evidence is reported in the following paragraphs.
Table 2. Synoptic Representation of the Case Study Evidence
Radical versus Incremental
Closed versus Open Approach
Cross-Functional Team versus Functional Organization
High versus Low Decisional Autonomy
Risk Taking versus Risk Averse
High versus Low Formalization
Functional and cross-functional
Radical and incremental
Radical and incremental
Radical and incremental
Radical and incremental
Strategy: Radical versus Incremental Innovation
One first finding of our analysis is that family firms focus their efforts toward incremental product innovations, whereas nonfamily firms are more often engaged in breakthrough and radically new product development projects, which aim to offer completely new functionalities to customers and are targeted to unknown market segments. For instance, Firm D invests exclusively in product innovation with the aim of introducing minor improvements on its existing production machineries, and more than 10 new products have been created in 2009 merely by gradually enhancing existing ones (e.g., plasticized PVC or a new rubber range of products). As the CEO (father) of Firm D stated, “We strongly believe in the importance of product innovation, but I have to carefully manage the resources of our family and avoid as much as possible an excessive consumption of our personal wealth by proposing new products that only incrementally improve the existing ones.” The nonfamily firms in our sample, on the other hand, show a stronger propensity to invest in radical innovations, that is, new products and offerings that represent a major improvement over the status quo and offer something completely new to customers. These efforts toward radical innovation often coexist with incremental innovation projects, as clearly emerges in the Firms G, H, and I. The attitude toward radical and incremental innovation can be explained with the agency theory. The propensity toward parsimony (Carney 2005) of family firms entails a careful preservation of resources that hinders their inclination to experiment costly and radically new business opportunities because they root out the slack resources needed for successful experimentation (Nohria and Gulati 1996). Moreover, family firms are less able to undertake radical innovation because the potential agency problems arising from information asymmetries between family business owners and lenders (Jensen and Meckling 1976) limit their ability to borrow, so that they have limited external financial resources compared with nonfamily firms. The behavioral theory provides a complementary perspective to interpret this empirical evidence. The family firms' documented aversion toward control losses in order to protect their socioemotional wealth (Gomez-Mejia et al. 2007) reduces the possibility to invest in radically new products, which are far more expensive than incremental innovations, because funding breakthrough innovation projects frequently requires ceding shares to outside parties such as venture capitalists or institutional investors (Gomez-Mejia et al. 2011).
Strategy: Closed versus Open Approach
As regards the “openness” of the innovation process, it emerges that family firms are much more inclined to rely on external sources of knowledge and technologies during innovation activities, whereas nonfamily firms predominantly adopt a closed and inward-looking approach. Specifically, family firms are used to leverage their network of external stakeholders to collaboratively carry out most of the stages of the product innovation process. This is clear when analyzing the Firms A, B, C, and D. For instance, Firm A works on a continuous basis with three suppliers, the Department of Materials Engineering of a local university and a thermoplastic specialized research center throughout the R&D process, and 50 percent of the firm's R&D budget is dedicated to fund collaborations with outside partners. As the second generation chief commercial officer of Firm A said, “We are a very well-known family in this province, and this is very helpful when it comes to building partnerships and alliances with our external stakeholders, who are so critical for the success of our new product.” An exception to this trend is Firm E, which appears to be very closed to external collaborations. However, this is also the result of a very negative experience the firm had with an external partner in the near past, which created a soaring fear of losing control over core competencies and appropriability over the results of innovation activities: “We had a very bad experience in the past when we tried to co-develop a new technology with a research center. After 7 months of hard work and the commitment of substantial resources, our partner decided to stop the collaboration and licensed the new technology to our competitors. Today, our innovation projects are carried out autonomously, with a high level of protection, so as to avoid opportunistic behavior” (interview with the head of R&D). On the other hand, nonfamily firms appear to rely predominantly on internal capabilities to execute the activities of the product innovation process. This emerges in the cases of Firms F, G, H, I, and L, where our respondents acknowledged that technological collaborations are very infrequently employed during the innovation process, unless external support has to be sought out due to lack of a specific piece of knowledge or technology.
The superior ability to nurture and develop prosperous, long-standing relationships with the stakeholders (Gómez-Mejía, Nunez-Nickel, and Gutierrez 2001; Miller and Le Breton-Miller 2005) and the greater inclination to raise visibility and family reputation with outside interested parties (Dunn 1996) explain why family firms tend to rely to a greater extent on the contribution of external sources of knowledge during innovation projects. This finding is consistent with previous studies that argued that external social capital improves alliance and partnership success (Ireland, Hitt, and Vaidyanath 2002; Koka and Prescott 2002). On the contrary, this apparently seems to be in contrast with recent behavioral theory-based predictions centered around the concept of socioemotional wealth (Gomez-Mejia et al. 2011) because the proved evidence on the importance family firms put on the conservation of their socioemotional wealth (Gomez-Mejia et al. 2007), which leads controlling families to be strongly concerned about potential control losses, is expected to complicate collaborative relationships with external partners when open innovation implies a restriction to the firm's control over the product's technological trajectory (Almirall and Casadesus-Masanell 2010). However, a more careful and nuanced analysis of our empirical findings shows that the type of technological collaborations set up by the family firms in our sample basically involved universities, public research centers, and suppliers (the last bound by severe intellectual property (IP) contractual agreements). These forms of collaboration are likely to determine a lower loss of socioemotional wealth if compared with “horizontal” collaborations with competing firms. Our study suggests, therefore, the importance of distinguishing between different forms of collaboration: horizontal (with competitors), vertical (with suppliers and clients), and with public research institutions such as universities, the former that appear to be the most critical as regards the loss of socioemotional endowment by family firms.
Organization: Cross-Functional Team versus Functional Organization
Concerning the organization of the innovation process, our empirical analysis first indicates that family firms usually adopt functional structures, whereas nonfamily ones mostly use cross-functional teams, made of employees temporarily separated from the department (e.g., R&D, marketing, operations) to which they belong. For instance, in the family Firms A, D, and E, R&D is given the responsibility over administering product innovation projects, and both the marketing and manufacturing functions devote part of the time of their resources to participate to specific phases of the product development process. As stated by the CEO (father) of Firm A, “When a new project is started, the first step is to estimate the competences and resources needed to carry out the project. Then, a formal meeting with all the corporate functions is held and the amount of resources to be devoted to the project estimated. At this point we search for the commitment of each functional head, which is critical for the success of our innovation projects, which are always organized through a functional approach.” An exception to this trend is Firm B, where product innovation projects are usually carried out through cross-functional teams made of external consultants, suppliers, and employees from the engineering, procurement, manufacturing, and logistics departments. Again, this is due to the presence, among the shareholders of Firm B, of a venture capital fund, which has struggled to introduce new practices in product innovation since its arrival in 2003, in the attempt to exert a stronger control. On the other hand, nonfamily firms are used to build cross-functional teams to carry out product innovation projects, as it is clear if we examine all the nonfamily firms in our sample, that is, Firms F, G, H, I, and L.
Our analysis indicates that the higher motivation, cohesiveness, and commitment (Fukuyama 1995; Lyman 1991), the easier communication and information exchange (Tagiuri and Davis 1996), and the closer relationships between individuals (Horton 1986) that characterize family firms, which are the unique traits of their human and internal social capitals (Adler and Kwon 2002; Hatch and Dyer 2004), offer a possible interpretation for the observed differences between family and nonfamily firms as regards the organization of product innovation activities. Specifically, this particular resource endowment of family firms allows them to mitigate the drawbacks that characterize the use of functional organizations (e.g., communication problems, conflicts between the functional heads) and to manage the complexity of product innovation projects without incurring into the high costs and resource duplication associated with cross-functional teams. The adoption of this efficient and cost-saving structural solution to organize the product innovation process is also explained by the parsimonious attitude of family firms (Carney 2005) that agency theorists acknowledge as a consequence of the unification of ownership and management (Jensen and Meckling 1976).
Organization: High versus Low Decisional Autonomy
We move now to the second variable which defines the organization of product innovation activities, that is, the degree of autonomy given to the head of the innovation project. Our multiple case study indicates that this autonomy is usually very high in family firms, whereas less delegation of decisional power characterizes the innovation projects undertaken in nonfamily companies. This is clear if we look at the family Firms A, C, D, and E, where the managers interviewed acknowledged that a very high level of decisional autonomy is given to the innovation project leader. In Firm E, for example, “We trust the leaders of our R&D projects and we purposefully give high autonomy to them. This is key to ensure flexibility and ability to fix the unforeseeable problems that necessarily occur” (interview with the head of R&D, the father's brother). An exception to this trend is Firm B, where all project leaders are given low decisional autonomy and have to get back to the CEO (father of the family) when they take decisions affecting the progress of product innovation projects. This is due however to the uncontrolled diffusion of nepotism (Gómez-Mejía, Nunez-Nickel, and Gutierrez 2001) in this firm, caused by the unwillingness of the father to fire an incompetent family manager, which resulted in increased agency costs (Jensen and Meckling 1976). Therefore, leaving a low level of decisional autonomy to the manager was the only viable alternative. In nonfamily firms, on the other hand, innovation project leaders usually have a lower level of decisional autonomy, as explicitly emerges from the analysis of Firms G, H, I, and L. An exception to this trend is Firm F, where the project leader has always had full decisional autonomy in recent new product and service development projects. This exception is explained by the words of the director of the technical department: “The rapidly-changing competitive and market conditions require us to be as quick and flexible as possible to develop new products. This has led us to give a high level of decisional autonomy to the project leader, but this autonomy is somehow ‘bounded’, because he is always a member of the Board of Directors who acts consistently with the policies defined by the Chairman of the company and the Board Members.”
The difference between family and nonfamily firms regarding the level of decisional autonomy is mainly due to the autonomous motivation (Gagné and Deci 2005; Ryan and Deci 2000), collective orientation (Donaldson 1990; Zahra et al. 2008), and high trust (Mayer, Davis, and Schoorman 1995; Schoorman, Mayer, and Davis 2007) that characterize family firms' individuals. These three characteristics ensure that organizational members act as stewards (Davis, Schoorman, and Donaldson 1997) strongly identified with the organization and motivated to pursue the interests of the collectivity, thus allowing innovation activities to be administered with a high decisional autonomy.
Climate: Risk Taking versus Risk Averse
As regards the organizational climate, one first finding of our analysis is that family firms are characterized by a risk-averse climate which permeates their decisions in product innovation, whereas nonfamily enterprises are predominantly risk taking. An internal organizational context (Gibson and Birkinshaw 2004) which promotes entrepreneurial behavior is lacking, and incentives to experiment with risky innovation opportunities are hindered by the predominant family climate. This is clear, for example, in Firms A, C, D, and E, where the family firm's climate is characterized by conservative behavior, and incentives toward assuming risks and experimenting with really new innovation opportunities are used.
This seems to arise from the fact that family firms pay more attention to protecting the financial security of the family and ensuring the longevity of the business (as it emerged from the interviews in Firms D and E), which leads to them avoiding risky innovation projects that often promise very high short-term payoffs, as clearly stated by the CEO (father) of Firm C: “I would never put the destiny of my family at risk by undertaking irresponsible innovation projects to gain high profits in the short term. I have to think about the future of the firm.” Firm B, whose organizational climate is predominantly risk taking, is an exception in this respect. However, this can be explained considering the fact that this family firm is partially owned by a venture capital fund, which heavily affected its dominant climate and improved its short-term attitude. If we look instead at nonfamily firms, it clearly emerged that they have a relatively more risk-taking dominant climate.
The long-term orientation (e.g., Dyer 2003) and conservativeness that characterize the entrepreneurial behavior of family firms (e.g., Dunn 1996), which are the distinctive traits of their financial capital (Hunt 2000), explain, from an RBV perspective, the rationale behind the differences between family and nonfamily firms as regards the predominant climate permeating product innovation management decisions. This explanation is also consistent with an agency interpretation of the emerged findings, given that the idiosyncratic propensity for particularism and parsimony of family firms (Carney 2005) causes an augmented attention of the firm to pursue particularistic goals that are different from value maximization and to efficiently use the resources, and this leads to avoiding risky projects that have strong resource commitment requirements and largely unpredictable outcomes.
Climate: High versus Low Formalization
The empirical analysis concerning the recurring attitude toward the product innovation process further reveals that family firms are more inclined to employing an unstructured and flexible approach to govern the innovation process, whereas nonfamily firms more often administer innovation activities with highly formalized and structured methods. All the managers we interviewed in the sampled family firms told us indeed that the progression of product innovation projects is controlled with very unstructured methods. In Firm D, for instance, the chief technical officer (son) said, “We govern innovation projects with an unstructured and flexible approach that continuously adapts to the changing and ongoing contingencies arising throughout the project itself.” It is worth noting that even if a low level of formalization is predominant among family firms, different processes undertaken within the same firm may be administered according to higher levels of formalization. This happens, for instance, in the case of Firm C, where complex new textiles have been exceptionally developed following a very structured method employing a stage-gate system. Nonfamily firms, on the other hand, are more likely to adopt rigid and formalized methods to govern product innovation projects, as clearly emerges when analyzing all the nonfamily firms in our sample. For instance, in Firm H, a specific software called “aiR&D” is currently used to monitor the advancement of all innovation projects and support the management of the gates with specific “checkpoints” that call for the authorization of the CEO.
The observed differences in the degree of formalization of the product innovation process between family and nonfamily firms can be explained considering the personalization of authority (Carney 2005) stemming from the concentration of ownership and management that characterizes family firms, a fact which endows owner–managers with high power and authority within the organization so that they possess the managerial discretion (Hambrick and Finkelstein 1987) to avoid formalized management practices that constrain their managerial authority. This finding is consistent with previous studies showing that family firms do not develop the planning systems and structured management methods required for deliberative and coordinated adjustments of complex and interdependent activities (Chandler 1990). The agency theory provides therefore a useful perspective to interpret the emerged empirical evidence.
The results of the case study findings are summarized in Figure 2, which provides a tentative synoptic view of the differences between family and nonfamily businesses as regards the characteristics of the product innovation process.
From our exploratory analysis, it emerges that family firms only engage in innovation processes aimed at developing and bringing to market incremental new products, which are carried out relying on a functional organization, with high levels of decisional autonomy given to the project leader. Throughout this process, family firms rely on a relatively high number of collaborations with external sources of knowledge and technologies. Finally, the predominant organizational climate, which permeates the firm's attitude and behavior toward product innovation, is largely informal and unstructured and mainly risk averse.
On the contrary, nonfamily firms invest both in incremental and radical innovations, and predominantly establish cross-functional teams to carry out these projects, with limited delegation of decisional authority to the project leader. The innovation process is highly structured, based on formal stage-gate systems, and it is closed, with only sporadic, ad hoc collaborations with external partners. Finally, nonfamily companies are more risk taking, and individual entrepreneurship is strongly encouraged.
Conclusions, Limitations, and Future Research
Considering the importance that product innovation has for family firms and their ubiquity in most industrialized economies, this paper investigates the differences in the anatomy of the product innovation process between family and nonfamily businesses. Drawing upon and combining the resource-based view as well agency, stewardship, and behavioral theories, and using an exploratory multiple case study as an empirical research strategy, the paper shows that family firms differ from nonfamily ones under several aspects of the product innovation process (see Figure 2). The reasons underlying these dissimilarities are discussed in light of the peculiarities of family firms' resources, authority structures, incentives, orientations, and behavioral attitudes.
Of course, the main limitation of our study descends from its exploratory nature. Because our objective was to gain theoretical clarifications as to how and why the product innovation process in family firms is different from nonfamily firms, our findings should not be generalized to any populations of companies. However, and this represents the main contribution of our study, these findings will hopefully encourage family business and product innovation scholars to examine whether or not the results of our analysis can be statistically generalized. This would require building random samples of family and nonfamily businesses, and testing for the existence of the differences in the characteristics of the product innovation process unearthed by our analysis. By constructing random samples that include both SMEs and large businesses, firms that consider product innovation as a critical determinant of competitive advantage as well as companies that are not very innovative, firms headquartered in different countries; such confirmatory studies will be able to understand whether and how the anatomy of the product innovation process in family firms is contextual upon a set of exogenous factors that were not considered in our exploratory analysis. The firms that we studied are indeed all small companies. Although the decision to focus on small firms reduced the risk of unobserved heterogeneity due to differences in firm size, we consider this a further limitation of our study as some peculiarities of product innovation may be different between small and large-sized companies (Tan et al. 2009), so that not all the results of the study may be applicable when large family firms are considered. Furthermore, in recent years, family business researchers have increasingly moved from viewing family firms as homogeneous entities to viewing them as heterogeneous ones (e.g., Westhead and Howorth 2007). Future scholars are encouraged to understand whether different characteristics within family firms (e.g., different degrees of family involvement in ownership and management, different generations of family control) may affect the anatomy of the product innovation process. Future research should also theoretically and empirically study if our findings apply to other types of technological innovations (in particular process innovations) and consider as well other aspects of the technological innovation process, which were outside the scope of the present analysis. For instance, it would be interesting to see what differentiates family and nonfamily firms as regards the way they listen to the needs of their clients, the approaches they adopt in Intellectual Property management, and the criteria on the basis of which innovation projects are evaluated and selected. Another contribution of our study is to show that some established theories in family business research (e.g., agency and stewardship theories) can be usefully applied to study problems in technological innovation. Scholars are therefore encouraged to see if these theoretical models can be used to interpret—from a different angle—well-known innovation management phenomena (e.g., response to disruptive technological change or design-driven innovation) taking place in nonfamily companies. In this regard, scholars who are willing to apply the socioemotional wealth theory to study collaborative innovation in family firms are encouraged to distinguish between different types of collaboration (e.g., horizontal, vertical, and with public research institutions) as they appear to entail dissimilar levels of loss of socioemotional endowment.
These directions for future study will strongly benefit both family business and innovation management research. The former has started only very recently indeed, as noted in the literature review section of this paper, to open up the “black box” on innovation in family firms. The latter will benefit theoretically and empirically by considering how family involvement in ownership, governance, and management affects innovation. For instance, models predicting success and failure in technological innovation do not consider whether the CSFs differ between family and nonfamily firms, although our exploratory analysis identifies several theoretical reasons suggesting that the “family” variable would be a relevant moderator of the relationship between CSFs and success. In this regard, it is exemplary to note, for example, the large diffusion of the functional organization among the family firms in our sample, which might suggest that cross-functional teams are not necessarily the most appropriate solution to administer product innovation projects in family businesses, as instead innovation management research mostly suggests (Clark and Wheelwright 1992).
This of course also represents a very important issue for managers working in family firms, who are encouraged not to take for granted what technological innovation management handbooks propose as universally applicable good practices. They should carefully think instead about how family involvement in ownership, governance, and management of the organization they work in could affect the effectiveness of these good practices and how they should be revised to best suit its distinctive characteristics. Although our analysis remains exploratory in intent, we believe that it will inspire future work with strong impact on management practice.
aCalculated as the average value in the last three years.
NPD, new product development; PVC, polyvinyl chloride; TSS, technical and scientific services; R&D, research and development.
Ninety-five percent of NPD projects the firm has initiated in the last five years (about 20) have been motivated by the attempt to satisfy a latent need in the market. Very often, it is customers who get in touch with the firm to ask for improvements or modifications to their current products. These improved products are then also transferred to other clients of the firm. It happens less frequently (in 5 percent of product development projects) that the firm develops new solutions or technologies for which a market application is sought. Eighty percent of NPD projects consist of on-demand manufacturing new plastic molds by applying the firm's knowledge in the field of thermosetting to new materials and cutting edge technologies that are purchased from corporate partners. The average budget per NPD project is 160 kEuro, and the average project duration is eight months.
800.000 (∼80 percent for product innovation)
Forty percent of sales from new products sold in the last three years; product innovation is the main issue in the firm's industrial plan 2010–2012
Classic product innovation projects (70 percent of the total) entail developing new products that better satisfy customer needs by improving the superficial material of wooden products. Five years ago, the firm decided to leverage the increasing attention of its clients toward the environment to innovate its products and manufacturing processes by reducing their environmental impact. Since then, the firm's innovation efforts have been directed toward improving the sustainability of its offering, so as to take advantage of the growing demand for “green” products and services. Environmental innovations (30 percent of the total) are carried out by codesigning ecological and socially sustainable new products with universities, research centers, suppliers, and customers. Four new projects are launched every year; the average budget per NPD project is 40 kEuro, and the average project's duration is six months.
160,000 (∼70 percent for product innovation)
The whole range of products has been completely renewed in the last three years; winner of several awards for product innovation
Innovation projects regard the analysis of the most recent market trends and customer preferences, and the employment of innovative mixes of fabrics (e.g., silk, wool, cotton, rayon, and linen) to combine shapes, geometries, and colors that originate new clothes that respond to market needs. The development of new collections of clothes and accessories is the result of a continuous, ongoing analysis of the needs of the customers. One hundred percent of the new collections are originated as a response to the identification of an unmet market need. Five new projects are launched every year; the average budget per product innovation project is 130 kEuro, and the average project duration is six and a half months.
720,000 (∼70 percent for product innovation)
Sixty percent of product mix made of new products introduced every year
In 2009, the firm brought to market 10 new products, and five product innovation projects were launched in 2010. The firm invests in both market-pull and technology-push innovation projects. About 50 percent of its new products (as the new type of stiff PVC, launched in 2009) are triggered by the recognition of a latent need on the market. Fifty percent of them (as the new halogen-free material commercialized in 2010) result instead from research conducted in the firm's lab. Innovation projects typically consist in applying new technologies provided by TSS firms to fabricate new plastic materials developed by changing the composition of existing ones (e.g., synthetic resin polyester). The average budget per innovation project is 110 kEuro, and the average project duration is six months.
550,000 (∼70 percent for product innovation)
One-third of sales from new products introduced every year
Product innovation projects consist in conceiving and developing new models of vending machines on the basis of information on customer needs and preferences. The firm uses systematized methods to analyze customer needs so as to generate ideas for product innovation. In particular, every four months, a questionnaire is sent to all the operators of their vending machines. On average, the response rate is very high, close to 75 percent. Every year, a prototype for a new vending machine is built and given to the employees to test the new functionalities. By doing so, the firm further collects ideas and latent needs that can be used to generate or refine product concepts. Only very infrequently (less than 5 percent of cases) is the innovation project triggered by the identification of a technology for which a market application is sought. The average number of new products launched in the last three years is 12. The average budget per innovation project is 75 kEuro, and the average project duration is nine months (the maximum duration is 24 months for very complicated projects).
700,000 (∼80 percent for product innovation)
Fifteen new products introduced in 2009; 10 of them had commercial success
The firm works to support the innovation process of its clients; therefore, the largest portion of new services is developed through product innovation projects, which are triggered by the attempt to satisfy clients' needs. Only very infrequently (about 10 percent of cases) does the firm propose new technologies and solutions, especially to its long-standing clients and partners. The firm has patented many breakthrough technologies (>10 in the last three years) which are a significant competitive advantage when it comes to providing assistance to prospective and current customers. Twelve new product innovation projects were started in 2009, and 15 in 2010. The average budget per innovation project is 10 kEuro, and the average project duration is four months.
95,000 (∼70 percent for product innovation)
Thirty percent of sales from new products and service introduced every year
Product innovation projects are mainly triggered by the attempt to follow the evolution of the firm's clients' tastes, regarding for instance dietary or health reasons. More recently, the firm has also tried to address, by launching projects aimed at developing revolutionary new products, promising market segments regarding clients with particular dietary needs for religious reasons (i.e., kosher, halal). For example, in 2009, the firm completed a project aimed at replacing alcohol-based ingredients (forbidden to Muslims) in chocolate cream. These revolutionary projects are 30 percent of the total. The company has launched nine new products in the last two years, and the most successful innovation has been a self-baking cake batter that heats the oven and cooks itself in less than 5 minutes, which was commercialized in 2010. The average budget per innovation project is 70 kEuro, and the average project duration is seven months.
800,000 (∼70 percent for product innovation)
Product innovation is the main issue of the firm's industrial plan 2011–2013; 25 percent of sales from new products introduced in the last two years
Product innovation projects in the field of military and civil aircraft are triggered by the identification of unmet client needs. On the other hand, in the field of new components, it is often the development of new materials or devices (e.g., fuel valves or novel electromechanical actuators) that determines the initiation of a new innovation project, which looks for market needs that can be addressed by using the new technologies. Nineteen product innovation projects were launched in 2008 and 2009. Twelve of them were originated to respond to an unmet market need, whereas the remaining seven were undertaken to develop leading-edge technologies that only in a second phase would possibly generate market applications. The average budget per innovation project is 40 kEuro, and the average project duration is 10 months (the maximum duration has been 36 months for very complex projects).
390,000 (∼80 percent for product innovation)
Winner of product innovation award in 2009 and 2008; 50 percent of 2010 sales from new products
Product innovation is based upon an artisan-like approach to the design and manufacturing of products, and product innovation projects traditionally consist in searching for and developing new materials and technologies that can profoundly improve the performance and functionalities of the new products. However, any innovation project is initiated by the identification of an unmet need or an opportunity in the market for which a solution is sought. Each project always starts with a careful scanning and understanding of market trends and of the evolution of clients needs. It never happens that the firm engages in the development of new technologies without a clear idea of where and how it could be applied. The average number of new product innovation projects started in the last three years is five. Twenty percent of the profits are invested in very ambitious projects with a success rate lower than 10 percent (the two most innovative and successful projects of 2009 and 2010 were the development of a pair of shoes made of innovative plastic materials and a pair of waterproof shoes made of nanomaterials). The average budget per innovation project is 70 kEuro, and the average project duration is six months.
600,000 (∼70 percent for product innovation)
Half of net profits invested in product innovation every year; two-thirds of product mix made of new products introduced every year
Product innovation projects are usually triggered by the identification of new technologies, which are then developed so that they can be applied to the firm's products. The functionalities enabled by the new technologies are tested with selected clients to understand how they can be better integrated in the firm's offering. Ninety-five percent of projects consist in the development of cutting-edge new technologies, materials, and product architectures characterized by very innovative functionalities and exceptional performance. The remaining 5 percent of projects consist in making gradual improvements over existing products. Two new product innovation projects were started in 2010. The average budget per innovation project is 100 kEuro, and the average project duration is 30 months (six months for the minority of projects implying simple improvements over existing products).
750,000 (∼70 percent for product innovation)
Fifty percent of profits invested in activities related to product innovation every year
Appendix: Appendix 2
When was your firm founded? Which industry does it operate in? What are the sources of its competitive advantage? What are the main economic and financial data? How many employees work in your firm? Which is your average annual R&D and innovation budget? Do you think that your firm is more or less innovative than its direct competitors?
How are the major responsibilities in your firm organized? Who takes critical governance decisions? How many members are there in your family? Who works in the company and what positions they hold? Do you have any expectation(s) regarding one or more family members continuing with the company in the future? Would you mind if it were someone outside the family? Is the family a conditioning factor in terms of decision-making at the company?
Do you invest in innovation projects aimed at producing a really new product, which represents a breakthrough over the status quo? If so, how often in the last five years? Why do you invest money in these kinds of projects? What is the success rate of these projects? How important are incremental innovation projects for your strategy? How often do you start a project like this? How do you ensure a proper balance between radical and incremental innovation projects in your portfolio?
What is the most common source of ideas for your innovation projects? Do you usually turn to your customers (both existing and potential) to identify new product opportunities? Is this your predominant approach to concept generation, or do you also start from new technologies for which a market application is sought? How often does this happen? What portion of your budget for innovation is devoted to market-driven and technology-push projects?
Are your employees encouraged to express out-of-the-box ideas for new products? Is failure accepted and risk tolerated in your firm? Are there any extrinsic (e.g., monetary incentive) or intrinsic (e.g., easier career progress) rewards for those employees who propose valuable innovation opportunities? Do you think they might be useful for improving your product innovation performance?
How are your innovation projects organized? Do people take part in the project dedicated to innovation activities on a full time basis? Or rather, do they continue working in their own functions and work part time on the innovation project? Does the innovation project leader have a higher authority in comparison with the heads of the business functions? Does your firm apply the same organizational structure to all innovation projects? If not, why?
What types of decisions is the project leader entitled to take without the need for authorization from higher-level managers? Does the project leader have full responsibility over the results of the innovation project? Is he/she rewarded depending on the results of the firm's innovation project? Are there any differences in the project leader's decisional authority depending on the type of innovation project?
Does your firm employ any methods for monitoring the progress of innovation projects? If so, do they entail the use of milestones and metrics? How often are they measured? Are these criteria for project control strictly applied? Are there any differences in the application of these methods depending on the characteristics of the innovation projects?
Do you collaborate often with external partners during innovation activities? If so, in which phases of the innovation project? Who are the partners you most often collaborate with? What are the reasons why you have decided to access external sources of knowledge and technologies? What are the advantages and drawbacks of these collaboration activities? Are there any particular innovation projects during which you collaborate more often with external partners?
Appendix: Appendix 3
Evidence from the Case Studies
Radical versus Incremental
Closed versus Open Approach
Cross-Functional Team versus Functional Organization
The firm's innovation strategy relies on continuously introducing minor innovations on molds and materials, leveraging its state-of-the-art competencies in the field of thermosetting plastics. In particular, the firm's predominant approach to innovation is summarized as follows: “We acquire new materials and technologies from our partners and we apply our knowledge to make the best out of them for our clients. This is our core competence” (interview with the chief technical officer). According to our respondents, the firm has never engaged in the development of really new products or services.
“Incremental innovation projects are at the basis of our competitive strategy, in the last three years we have launched 57 innovation projects to develop new products that simply introduced minor improvements in the base classes of existing ones” (interview with the CEO).
Three suppliers, the Department of Materials Engineering of a local University, and a thermoplastic specialized research center are usually involved in the innovation process by the firm, which adopts severe contractual arrangements (e.g., exclusivity rights, binding agreements) to protect its intellectual property. Around 50 percent of the average budget for innovation projects in the past three years has been allocated to fund external collaborations. “We are a very well-known family in this province, and this is very helpful when it comes to building partnerships and alliances with our external stakeholders, who are so critical for the success of our new products” (interview with the chief commercial officer).
The incremental innovation projects the firm is involved in are carried out through a functional organization. The leadership of the project is given to R&D, and the other business functions (in particular marketing and manufacturing) contribute to it by allowing part of their human resources to temporarily join project activities. It happens only exceptionally that a project (especially when it is very complex from a technical point of view, and the deadline is very strict) is carried out by a temporary cross-functional team. “When a new project is started, the first step is to estimate the competences and resources needed to carry out the project. Then, a formal meeting with all the corporate functions is held and the amount of resources to be devoted to the project is estimated. At this point we search for the commitment of each functional head, which is critical for the success of our innovation projects, which are always organized through a functional approach” (interview with the CEO).
The focus of the firm innovation strategy is to continuously improve existing products (e.g., through the removal of toxic metals components or the replacement of timber with local materials and supplies from certified forests) and manufacturing processes (with the aim to reduce waste, emissions, and energy consumption). The firm's top management believes that developing something really new can disorient customers and reduce their loyalty to the brand.
“Our family feels a strong sense of responsibility toward the future of our employees; it would be too risky for us to embrace radical innovation projects” (interview with the Head of R&D).
Especially when the firm started to invest in environmental innovations, it realized that a number of competencies were not available internally. Therefore, it built a network of relationships with universities, research centers, and suppliers (under strict IP contractual agreements), which is constantly involved in the new product development processes. More infrequently, the firm has also collaborated with its customers.
A pool of four employees from the innovation department, which is made up of six full-time employees, is specifically dedicated to undertaking projects developing physical products under the paradigm of open innovation.
“The project to develop an ecological wooden panel for residential interiors, started on March 2009, was carried out by involving, in different stages of the innovation process, two universities, four suppliers and two of our most important customers. It lasted 7 months and it was a great opportunity to leverage our network of external stakeholders” (interview with the head of R&D).
Every time a new product innovation project is launched, an autonomous team is built by combining suppliers and firm employees. Depending on the characteristics of the innovation, the functions that make up the team can be different, although engineering, procurement, manufacturing, and logistics are usually involved. It usually occurs that the team also includes an employee from one of the firm's suppliers and external consultants. The leadership of the cross-functional team is usually given to the R&D department.
“The management of innovation projects through cross-functional teams was one of the new practices introduced in 2003 after the sale of part of our equity to a venture capital fund that required changes in several of our management activities” (interview with the head of R&D).
The product innovation strategy of the fashion house is based on the attempt to identify new ways to combine existing shapes, geometries, and colors by using innovative mixes of fabrics such as silk, wool, cotton, rayon, and linen. The firm therefore only innovates its collections incrementally without experimenting with completely new offerings, which have a largely unknown market potential.
“We have never dared to introduce a radically new product that would require huge financial investments. I know this may limit our market potential, but I must carefully manage our finances in order to protect the destiny of my family and of our employees” (interview with the CEO).
It is common for the firm to systematically leverage the competences and professional experience of a number of external parties, such as universities, designers, and specialized research laboratories (under severe IP contractual agreements). “Leveraging our network of external partners is key to the success of our innovation projects because it allows us to rapidly acquire the competencies not available inside our firm and keep up with the deadlines required from our customers” (interview with the CEO).
More than 90 percent of the 2010 budget for innovation activities has been devoted to support projects codeveloped with several external partners.
The organization of the innovation process is functional. All the new collections are developed within the creative department, staffed with clothes designers, with the temporary involvement of people from the marketing and sales division, when competencies related to the analysis and interpretation of consumers' needs are required. Occasionally, the development process sees the involvement of the operations division, when estimates regarding temporal deadlines are needed.
“When the project to develop a new collection is started, a specific project committee is set-up where the different functional heads of the firm negotiate the number of full time employees that each of them will dedicate to the new project” (interview with the CEO). The chief technical officer (father of the controlling family) is endowed with the leadership of innovation activities.
The firm's strategy entails a heavy reliance upon product innovation. This is evident if we consider that around 30 percent of the firm's sales derive from new products launched in the last year. In 2009, it commercialized 10 new products. However, the firm deliberately avoids investing money in the development of really new products because of the risk that they do not match customers' demands. Instead, the firm's innovation strategy is based on the continuous launch of minor modifications to its current offering, regarding, for example, changes in the composition of the plastics used to build some of the firm's products.
“We strongly believe in the importance of product innovation, but I have to carefully manage the resources of our family and avoid, as much as possible, an excessive consumption of our personal wealth by proposing new products that only incrementally improve the existing ones” (interview with the CEO).
The firm does not have all the required competencies needed to continuously innovate its products and materials. Therefore, collaborations with external partners (especially suppliers of machines and tools and public research centers specializing in firmware and robotics) are necessary, and they are typically used during the innovation process.
“One of our latest product innovation projects has been the development of a plastic good that changes its color when exposed to UV-light. External sources of knowledge and technologies, such as three research centers and two technology suppliers, played a pivotal role in different stages of this innovation project” (interview with the chief technical officer).
Depending on the type of innovation project, the organization varies. Usually, shorter and low budget projects are carried out by using a functional organization, where the R&D department is directly involved in the process and is supported by the marketing function when necessary. For more complex and high-cost projects, a cross-functional organization is usually preferred, with a team staffed with people from the different functions. Leadership of innovation activities is given to the head of the R&D department in case of functional organization and to the team managers in case of cross-functional team.
“In 2009 our firm started 23 projects to develop new plastic products, and only 6 of them, the most complex and expensive ones, were carried out by creating temporary and cross-functional project teams” (interview with the chief technical officer).
The firm's innovation strategy entails a methodical search for expired patents that can be used to incrementally improve its offering in two directions: (1) increase the quality of the coffee served through its automatic machines and (2) reduce the energy consumption and increase the lightness of the machines.
“We have only three patents in our portfolio, whereas our competitors have a much wider range of intellectual property. This is why we want to be second movers and continuously improve our existing products by developing new ways of applying their technologies” (interview with the Head of R&D).
The firm is completely closed to external collaborations. The top management fears the loss of important information and competencies, in case the firm engages itself in interorganizational collaborations. Therefore, it relies heavily on internal capabilities, which are developed through substantial R&D and technology development investments. “We had very bad experiences in the past when we tried to co-develop a new technology with a private research center. After 7 months of hard work and commitment of substantial resources, our partner decided to stop the collaboration and licensed the new technology to our competitors. Today, our innovation projects are carried out autonomously, with a high level of protection, so as to avoid opportunistic behavior. That said, we are aware that, by doing so, we can lose potentially valuable collaboration opportunities” (interview with the head of R&D).
The organization of the innovation process is always functional, with the responsibility for the administration of the activities assigned to the R&D function. However, the manufacturing and research and technology scouting functions are involved in some phases of the process on a temporary basis. Their involvement serves the purpose to anticipate constraints and problems in the ramp up of the manufacturing processes. The marketing department has a minor role in the process, with an advisory function needed to ensure that it remains focused on the needs of the clients identified before it is started.
Product innovation takes place incrementally, with minor improvements introduced to the competence basis of the firm to address the specific needs of new and established clients. However, it emerges from the analysis that, by responding to the clients' needs, several technological breakthroughs have occurred. These give the firm a significant advantage over competitors when it comes to providing assistance to new and existing clients.
“Throughout 2009 we started 12 projects aimed at developing radically new technological services for our customers, and 9 of them have definitely been a commercial success” (interview with the director of technical department).
The firm carries out its innovation projects according to a very closed approach, whereby external contributions are searched for only on an ad hoc basis, when specific competencies are lacking. The director of the technical department noted: “We want to control the whole set of competencies needed to innovate our services. We have the ability to do so and we are willing to prevent the risk of opportunistic behavior from our partners.”
The firm organizes its innovation process according to a cross-functional approach, whereby autonomous teams are created each time the needs of a new client are to be satisfied. These teams are staffed with people with heterogeneous competencies, who are temporarily staffed on the project. Interestingly, very frequently, selected employees from the client firms take part in the project team.
“We have managed all the 12 product innovation projects launched in 2009 by deliberately creating project teams staffed with people temporarily drafted from the R&D, Marketing and Sales, Technical and Operations functions. In 5 cases, such as the project for a new thin film deposition service, a pool of employees from the client firm was involved in the project team” (interview with the director of technical department).
The firm's competitive strategy is based on the production of typical and traditional food products (especially dry cakes). As a result, the predominant nature of its innovation activities is incremental, with the firm identifying minor improvements (e.g., regarding packaging) which can reinforce its competitive position. However, over the last five years, the firm has launched several revolutionary products for the food industry, regarding for instance ready-to-eat traditional dishes, which encountered a particular success on the market.
“We are investing almost 50 percent of our R&D budget to generate and experiment new ideas about really-new products that satisfy very innovative market needs. For example, we have recently developed a self-baking cake batter that heats the oven and cooks itself in less than 5 minutes” (interview with the head of R&D).
Although innovation is very common, and the firm also engages in radically new projects, external collaborations aimed at accessing external technologies and competencies are very sporadic. They are pursued exclusively on an ad hoc basis, when the firm thinks that developing internally new competencies would delay the termination of the project. This happened, for example, in the project related to the substitution of alcohol-based ingredients (forbidden to Muslims) in chocolate cream, which has been carried out by leveraging the collaboration with an Islamic research center.
Every time a new product innovation project is launched, a separate autonomous team is built by combining food technicians and marketing experts. This particular organization of the cross-functional team is aimed at ensuring a high level of food quality and ability to meet consumers' needs. “When innovations are developed by using especially new raw materials and ingredients, also external consultants and experts join the cross-functional project team” (interview with the head of R&D).
In most sectors of firm activity, innovation mainly occurs incrementally, for example, in the military aircraft, civil aircraft, rotorcraft, UAV (Unmanned Aerial Vehicle), and airships. Nevertheless, in the business of small components, the company has developed and patented several highly innovative products that represent a breakthrough development in the field (hydraulic actuators and manifolds, landing gears, door locks, and drag brace). These radical innovations accounted for almost 50 percent of the total sales in 2010.
The firm does not usually enter technological collaborations to support any phases of the innovation process. “We are a very traditional company and we have to maintain a certain degree of independence from the external environment. Potential technological partners are more
of a threat than a real opportunity for us” (interview with the CEO). The firm's management acknowledges that this might result in lower performance innovation, but the need to control and prevent knowledge spillovers or leakages of critical competencies is considered to be a more important requirement.
The innovation process is organized within autonomous, cross-functional teams, where employees with particular competencies and belonging to different functions are selected and join the team to engage in innovation activities (which can last even two or three years). Sometimes, these teams are also made of employees from client firms. A critical constituency of the innovation project team, both in case of technology-push and market-pull processes, is a senior manager from the marketing function.
To avoid disorienting loyal customers, accustomed to a very recognizable product (in terms of design and types of leather), the company adopts an incremental innovation strategy, whereby its products are changed and improved only incrementally, in an ongoing way. Accordingly, every year, the product range is only partially renovated, and new materials are introduced on the shoes gradually, starting from small details. However, every year, the firm also dedicates around 20 percent of its profits to more risky, radically new product innovation projects, which have only 10 percent of success rate (two successful products launched in the last two years were a pair of shoes made of a very innovative plastic material and a pair of waterproof shoes made of nanomaterials).
The innovation process of the firm is very closed, with technological collaborations involving external partners undertaken very infrequently and on an ad hoc basis. It happens sometimes that local specialized suppliers are involved in some specific process activities, so as to fix problems regarding lack of human resources (e.g., during the application of new high-tech materials to the sole of shoes).
“The only case of involvement of external partners is limited to the sporadic outsourcing of labor-intensive activities of our innovation process that we could not carry out because of the small number of our internal resources” (interview with the head of R&D).
Any new project launched with the aim of improving the existing product offering is assigned to a “working group.” This is a very small, cross-functional team that is headed by a designer who is responsible for the project outcome. Members of the team are also craftsmen and a number of experts from research and design, who are temporarily separate from the department to which they belong until the end of the project.
The strategic orientation of the firm entails the search for breakthrough innovations with the aim to gain a first-mover advantage. Therefore, most of the firm's efforts in product innovation are devoted to the identification of radically new technologies, materials, and product architectures that represent significant advancements in terms of both costs or functionalities over the status quo. Of course, incremental improvements over existing products are undertaken, but this is not the main focus of the firm's innovation efforts. “Our strategic goal for product innovation is to continuously develop and bring to market leading-edge technological products that offer completely new functionalities to customers” (interview with the director of innovation).
The firm had a very negative experience during a collaboration with external partners a few years ago. As a result, an internal policy has been established, which severely hinders the reliance on external sources of technologies and knowledge during the innovation process. The managers are aware that, by doing so, they are likely to miss opportunities to improve the quality and time to market of the new products, but they believe that this is the only way to protect the firm's competencies and know-how. “We are well aware of the problems that our approach can cause, but we prefer to rely on our own forces in innovation because otherwise the risk of knowledge spillovers and organizational complexities becomes soaring” (interview with the director of innovation).
The innovation process is organized into a cross-functional, dedicated team. The team leader has a higher authority than the department heads, thus allowing him to commit additional resources when needed. The members of the dedicated team (which is made up on average of four people) do not come back to their functions unless for training reasons during the duration of the project.
“When the Director of Innovation proposes a project to develop a new product he provides me with an estimate of the amount of human resources needed and the functional background required for each one. Afterwards, if the decision to start the project is taken, I organize a cross-functional project team, made of people fully dedicated to the project, which is as consistent as possible with the project's requirements” (interview with the CEO).
High versus Low Decisional Autonomy
Risk Taking versus Risk Adverse
High versus Low Formalization
R&D, research and development; IP, intellectual property.
The head of the technical department is the only person entitled to take decisions regarding the advancement of the project, of course only after it has been formally approved by the top management. The head of the technical department is evaluated and rewarded depending on the results of the innovation projects he has supervised.
“I am the person usually in charge of leading product innovation projects. My father as CEO of the firm totally trusts my experience and capabilities, and therefore grants me a high degree of autonomy as regards how to operationally carry out project activities. […] Of course I am evaluated on the basis of the performance of each innovation project I lead” (interview with the chief technical officer).
The family members who administer the firm are very cautious and tend to avoid risky innovation projects and business opportunities. This attitude toward risk has permeated the firm's organizational climate, where employees very infrequently express original ideas and think “out of the box.” As noted by one of our respondents: “My father is very cautious; he avoids excessive risks, but I think this attitude has made us miss some valuable opportunities to more radically innovate our products and our offering” (interview with the chief commercial officer).
The first step a typical innovation project has to go through is the presentation of the new concept to the head of the R&D function. The project can start only after he has signed a formal authorization and only after an “OK” has been obtained from top management. After authorization, the project is managed with high flexibility, without the existence of planned and fixed milestones when reports on the progress of project activities have to be sent to the head of R&D. Top management suggests that monthly updates should be ensured, but this is often a very flexible deadline.
“When you start a product innovation project you never know how things will go and unpredicted events always occur. It would be therefore very difficult to govern the innovation process relying on a rigid and pre-defined approach based on fixed methods and tools” (interview with the chief technical officer).
The leader of the project (who is selected before the kickoff and usually belongs to the engineering function) has a very limited degree of autonomy. All the decisions regarding the project, even those that do not substantially modify the budget, schedule, and quality requirements of the new product, have to be approved and validated by the CEO (father of the family), who has been the real champion of the firm's strategic decision to focus on environmentally friendly innovation.
“All decision-making activities require the approval of the Board of Directors, which ensures that the person responsible for a product innovation project acts according to rational rather than emotional or familial criteria […] This guarantees that employees behave professionally and none of them is favoured” (interview with the chief commercial officer).
The predominant organizational climate is highly entrepreneurial and risk taking: “Due to the pressures we receive from the venture capital fund which controls 20 percent of our shares, in our firm we have a highly innovation-friendly climate, which is critical to achieve our environmental goals very quickly. This turns into a very high number of ideas and opportunities coming from our employees, not only those working in the R&D department” (interview with the CEO). Employees are also rewarded if they propose new ideas, even if they are very risky and unusual for the company. This encourages them to think out of the box. What is more, the firm often invests in these innovation opportunities by committing resources to risky projects which are aimed at improving their short-term gains.
Although decisions regarding project advancement have to be approved by the CEO, no structured and formal methods are used to administer and monitor the progress of its activities. As it emerges from the words of one of our interviews, the innovation process is rather elastic, with no signs of the application of rigid stage-gate systems: “The bimonthly meetings with the CEO are the only form of control we have on innovation projects. In those meetings, we update him as regards timing, costs and performance achieved. Often, when the agenda of the CEO is full, these meeting are skipped and the only executive update on project progression is provided through a 150-words report containing very short and concise information” (interview with the head of R&D).
The responsibility for innovation projects is given to the two senior designers working in the creative department. They are two members of the family and who also sit on the board of directors. They are completely autonomous when it comes to taking critical decisions regarding project development. This is of course also the result of their hierarchical position within the company.
“The persons in charge of the development of new products operate under a high level of autonomy that speeds up our innovation activities. I am called on to take part in product innovation project decisions merely when extremely negative circumstances occur, such as in the case of the recent launch of a new textile that suffered a 3-month delay due to a quarrel between the divisional heads involved in the project” (interview with the CEO).
In spite of being a fashion house, the predominant organizational climate does not promote risk taking and entrepreneurship. This is the result of the senior management's determination to protect the security of the family, without engaging in risky and short-term projects. Of course this is consistent with the firm's strategy, which entails betting on incremental innovations and minor improvements to the existing offering in the attempt to preserve the security of the family. “I would never put the destiny of my family at risk by undertaking irresponsible innovation projects to gain high profits in the short term. I have to think about the future of the firm” (interview with the CEO).
Usually, the firm does not employ any type of formalized and structured methods to govern the development process. It is left to the experience of the fashion designers to continuously monitor the development of the project, foresee and anticipate likely constraints, and introduce corrective actions. It happens only very infrequently (on average, once or twice a year) that some intermediate milestones are introduced, where the designers have to report to the CEO on project results. This is typical of projects with very short deadlines and severe customer requirements.
“I consider it a waste of time and money to train employees to use standardized project management tools and techniques. All the employees effectively administer the innovation process through unstructured methods that are dynamically adapted to the peculiarity of each project. In February 2009 I tried to engage a consulting company to train the top performing employees on project management skills, but soon after I realized that those practices were superfluous and unnecessary for us” (interview with the HR executive officer).
Independently from the organization of the project, the leader is given a very large degree of autonomy as regards the administration of the whole process. He is made responsible for taking all the necessary decisions on the project, such as stopping, postponing, or modifying activities and the proposed plan. He does not require any formal authorization from the senior management of the firm and is evaluated on the basis of the results of the innovation projects he is responsible for achieving.
The organizational climate is very conservative, with aggressive investments in risky innovation opportunities that are in practice discouraged. No intrinsic and extrinsic rewards to stimulate entrepreneurship, and “out-of-the-box” thinking is used. Again, this is the result of the senior management's intention to protect and preserve the future of the family. “I do not want to invest in very risky innovations; I have the responsibility for the future of the family. For us, tradition is very important” (interview with the chief technical officer). The company in June 2010 has avoided embarking on an ambitious project to develop an original plastic nanomaterial that had been proposed by one of its important suppliers because it considered it too hazardous for the financial security of the family.
The company does not adopt any formalized approach to govern innovation projects. The leader of the process has the knowledge and competencies needed to adapt the progress of the activities to the emerging challenges or to interrupt them in case of unforeseen problems. This happened, for example, during the development of a new energy-saving plastic profile for windows, which was stopped six months after the beginning. “We govern innovation projects with an unstructured and flexible approach that continuously adapts to the changing and ongoing contingencies arising throughout the project itself” (interview with the chief technical officer).
The decisional autonomy of the project leader (usually, the head of the R&D function) is very high. He is in charge of taking all the decisions required to ensure smooth project progress without the need for formal approval from the senior management. “We trust the leaders of our R&D projects and we purposefully give high autonomy to them. This is key to ensure flexibility and ability to fix the unforeseeable problems that necessarily occur” (interview with the head of R&D).
The predominant climate in the firm is characterized by risk aversion. There are neither intrinsic nor extrinsic forms of rewarding for those employees who propose new ideas and suggest really new opportunities. What is more, the firm's top management often rejects the riskiest and most uncertain projects. As a result, this discourages employees from proposing very innovative ideas. “Our company is not interested in investing in risky business opportunities. I cannot risk the financial security of my family and the longevity of our business too much,. It is the long term perspective that matters” (interview with the CEO).
The firm does not apply any structured and formalized method to control and monitor the advancement of the innovation process. “Our approach to the management and control of innovation projects does not entail any structured method. We encourage the project leader to identify ex-ante three deadlines, where he shares with top management data regarding cost and quality requirements. However, this is very flexible, and the different phases are often conducted in parallel to anticipate technical constraints and this decision does not entail a formal approval from the top management” (interview with the head of R&D).
A member of the board of directors (made up only of senior managers) is always part of the project team with the role of project leader. Due to the hierarchical power conferred by the board of directors, the project leader has full decision-making autonomy on any innovation projects. “The rapidly-changing competitive and market conditions require us to be as quick and flexible as possible to develop new products. This has led us to giving a high level of decisional autonomy to the project leader, but this autonomy is somehow ‘tied' ”, because he is always a member of the Board of Directors who acts consistently with the policies defined by the Chairman of the company and the Board Members” (interview with the director of the technical department).
A strong orientation toward continuously scouting new and risky business opportunities is evident in the firm, which encourages employees and managers to propose and launch new ventures and initiatives. The firm's top management explicitly encourages suggestions for new ideas, services, and business opportunities from all the employees of the firm. “Our employees have several formal and informal opportunities to come to my office and give me any kind of suggestion for innovation” (interview with the director of the technical department). Around 20 percent of the annual net profits are devoted to rewards and career advancement of the most entrepreneurial employees.
The firm uses a very structured process for administering innovation projects. It is a typical stage-gate system, comprising seven different stages, each of which requiring the project leader to prepare a written review, which is circulated (by e-mail) among the members of an evaluation committee. This committee, which also includes external experts and university professors, is required to evaluate whether the planned goals (in terms of costs, time, and more importantly, technical requirements) are met. The members of the committee are asked to explain, in a short written report, their evaluation, which is anonymously sent to the project leader. If the project gets a red light, a postponement period is agreed upon with the project leader. This system is adopted in a very similar fashion in all the product innovation projects the firm is engaged in.
The team leader (usually a food technician) ensures the progress of the project according to the established milestones and goals. However, all decisions regarding changes in the project's technical, budgetary, and temporal characteristics have to be discussed with the firms' senior management who is given the ultimate responsibility for these decisions.
“I am updated on a weekly basis about the advancement of project activities. The project leader discusses every operational decision with me on how the activities to develop a new product will be executed, and no critical decision can be taken without my final approval” (interview with the CEO).
Innovation permeates the firm's climate and is central to the 2011–2013 innovation plan. The firm's top management is particularly risk taking. “Walk in our offices and talk to our people and you'll see that innovation is in the air. Everyone has a chance to be an inventor and entrepreneur” (interview with the head of R&D). This turns into a level of R&D investments which is significantly higher than the industry average and generates a clear propensity in all employees toward entrepreneurship and risk taking.
The pastry chef (the food technician with the highest experience and seniority) oversees the progress of all innovation projects, focusing on quality and technical requirements. An accountant collects all information regarding project costs and provides a brief report to assist project management.
Highly structured methods (which however might be very different from project to project) are used to govern the most important strategic projects or those involving external partners.
“The individuals involved in product innovation activities regularly attend a course in project management fundamentals that is given once a year in our firm by a specialized management consulting company from Pavia. This ensures that employees keep up with the most updated formal techniques for managing innovation projects” (interview with the head of R&D).
Although minor decisions regarding the development of the project can be taken autonomously by its leader (which is typically an employee from the R&D function), the most critical choices regarding postponements or changes in the technical requirements of the new products are all to be shared and approved by the senior management, and in particular by the chief technical officer.
“Every week, usually on Friday morning, we set-up an operational project meeting that lasts on average a couple of hours, where project leaders are called to share and discuss with me the most important decisions on product innovation management. Also our CEO usually takes part in these committees, unless he is busy with other priorities. […] This provides a big picture of the on-going projects and allows for exploiting synergies across different projects” (interview with the chief technical officer).
Overall, it appears that the firms' organizational climate is very risk taking and entrepreneurial. The firm also uses different types of extrinsic incentives to reward those employees who contributed with “important advancement in the company innovation” (interview with the CEO). Very recently, for example, this reward has been given to the senior engineer who proposed a new device for a new air valve for civil aircrafts.
The firm uses a very complex and structured management control system to monitor the development of the innovation process in every detail, according to a stage-gate, structured system. The importance of this kind of structured control is clear if we consider that the firm has also bought a software called “aiR&D,” which combines all information regarding the ongoing projects. This software also supports the management of the gates, which are checkpoints where the project can proceed only with a formal authorization from the CEO.
The designers participating in the “working group” have a limited degree of autonomy regarding their decisions. Even the team leader is asked to share his decisions and look for formal approval from a permanent committee. “A specific committee made of the CEO and four members from the Marketing, Sales, Manufacturing and R&D functions has the responsibility to set the guidelines for designers and the project team leaders and to evaluate and select the new products that will actually be launched on the market, and approve all decisions taken during the project advancement” (interview with the CEO).
The company is rather risk adverse, with a typical reactive approach toward new opportunities. This ensures that the firm does not consider innovations without a clear market application. “Our strategy is very clear: market-pull innovations in the line of our long-standing tradition, which guarantees volumes and margins” (interview with the CEO). There are no intrinsic or extrinsic mechanisms used to stimulate out-of-the-box thinking from employees, although the firm devotes part of its resources to radical innovation opportunities.
The R&D function defines and periodically updates a system of performance indicators that has to be collected by the project leader when the fixed milestones of the project are reached. This performance measurement system is made of quantitative metrics regarding especially time and quality requirements. The team leader has the faculty to propose changes in the measurement system (regarding, for example, frequency of data collection) to the R&D function if problems in its application become evident.
According to the firm's procedures, the director of innovation always has to be involved in the decisions concerning the innovation project development. After the project's approval and kickoff, the autonomy of the project leader is limited to daily activities and work organization, but he is supposed to work under the close and continuous supervision of the head of R&D.
“I am constantly consulted for all the critical choices taken by project leaders along the development of each project. At the end of the day all the leaders of product innovation projects must send me a structured e-mail that summarizes possible criticalities and proposed solutions to overcome them. No decisions are taken without my final consensus” (interview with the director of innovation).
The firm's organizational climate strongly encourages risk taking and entrepreneurship among employees at all hierarchical levels. According to the interviewees, this is a key if a firm wants to leverage radical innovation to gain a competitive advantage and wishes to rely on its sole resources to protect core competencies and capabilities. Failure is considered as an acceptable outcome of a firm's efforts in radical innovation, a sign that the whole company is moving toward the right direction. “We have managed to turn our employees into entrepreneurs and real innovators, by creating and sharing an exciting vision and engaging them in all our decisions regarding radical innovation” (interview with the director of innovation).
The innovation process is subject to a very structured form of control, which is embedded in a typical stage-gate system. There are five different stages, and the project has to meet a number of technical, budgetary, and temporal requirements to proceed to the next stage.
“In September 2007 we bought a PD-track development software specifically developed for us by the IT Department of a local university. The adoption of this software in all our innovation projects allows for a constant check over the progression of innovation activities. More than 95 percent of new projects launched in the last three years have been completed within the deadlines” (interview with the CEO).