Old Companies, New Challenges

Julia de Groote / Nadine Kammerlander - October 20, 2022

Tips for practitioners

The world of family business often comes across as ambivalent when it comes to digitalization. While some companies have made substantial progress in digitalizing their workflows, others are concerningly lagging behind. And this is quite the phenomenon, as many mid-sized companies have, despite the lack of progress, proven themselves to be both hidden champions and rather innovative in their active fields. Given the colossal contribution these firms make toward gross domestic product (GDP)—both in Germany and all over the world—it is of the utmost importance that they be able to tackle digitalization and remain competitive. It’s not only large, modern companies that get to have all the fun here. According to certain best practice examples, companies rooted in tradition can join in as well. “How can family-owned mittelstand firms use their unique resources to master the age of digitalization? The role of family historical, venture, and collaborative capital,” a new study, places a spotlight on these examples, proving that family businesses have three types of special “capital” to help them successfully go digital: family historical capital, family venture capital, and family collaborative capital.

Family historical capital

Family businesses are often decades old and have been handed down from generation to generation. The managers that were asked to participate in the study (all of whom are directly related to the company’s founding family) expressed that they place considerable emphasis on longevity, control, and renewal for their company’s preservation.

The experience that a family business amasses over the years and even centuries plays a significant role here. It allows a firm to focus on its longevity and helps those in charge develop new processes, products, or business models. It also, notably, provides the firm with the endurance necessary to survive moments of uncertainty and to embrace new digital solutions.

Another form of capital, one which evolves over time, is the idea of centralized control. It can be ensured that decision-making processes are effective and that new, innovative ideas are swiftly implemented if the company’s managers are also members of the family in ownership. It may be beneficial for the company to establish a new department specifically designed for the creative development of digitalization-related ideas and the creation of a digital infrastructure—such that the everyday workflow is not simultaneously disrupted. Other family members may be staffed in these departments, thereby facilitating quick and efficient coordination between teams. 

In a complex and rapidly changing world, it’s simply not enough to tread water. Family businesses know this, and, for that reason, they consider renewal to be of considerable importance. The research team observed that companies that had settled matters of family succession at an early stage were also those that had successfully mastered digitalization. Young members of family active in the business are able to uphold the company’s values and corporate culture. They also bring with them new knowledge and connections, thereby giving momentum to any digitization measures taken.

Family venture capital

Mid-sized family businesses can also secure the capital needed for digitalization by making keen investments outside their own organization. It has become increasingly common for such companies to strike while the iron is hot, i.e., to invest its own capital (or that of the family in ownership) in start-ups that offer solutions for the digitalization process. By investing venture capital, the company gains access to the start-up’s expertise, as well as its resources, patents, trademarks, and copyrights. Notably, these processes are becoming increasingly complex, requiring more and more expertise—expertise that mid-sized family businesses, which usually specialize in specific technologies, often lack. Suitable start-up partners can be of particular use here.

Family businesses make the strategic decision to use venture capital in this way to strengthen its own position in the market. Generally speaking, diversification, complementarity between business models, and the enhancement of its own reputation are relevant factors in making such a decision. The targeted investment in start-ups can even develop into a new area for business. This is particularly advantageous when profit margins in the core business are decreasing. Additionally, any such investment helps the company broaden its company portfolio.

Family collaborative capital

Connections constitute another important driving force behind digitalization. For example, maintaining relationships between internal departments and any external partners can help when developing ways of implementing any digital solutions. In the past, family businesses relied chiefly on cooperation with other long-established companies. Today, more and more are looking to collaborate with outside experts or with start-ups and have even started involving their own employees in the development of these solutions. Many have also taken to working in (or even creating their own) innovation hubs alongside partners active in the sciences, all with the intention of developing the most appropriate solutions for the business in question. Similarly, by working with start-ups (outside of simply investing in them), a company is better able to address any issues that may arise in such rapidly changing environments.

And last, but certainly not least, companies can always rely on the commitment shown by their employees. In fact, it is not uncommon for them to have a special bond with the business at hand. Trust in the employer, as well as a feeling of belonging, contribute to a shared desire for innovation and intrinsic motivation to take on challenging tasks—such as the development of digitalization processes that are in the company’s best interest. Also, family members who have previously worked in other industries before joining the family business itself can often bring with them novel ideas from the “new economy.”

How these forms of family business capital work together

It should be noted that the aforementioned forms of family business capital do not act alone. Rather, there is an interplay between them. For example, a company’s history will determine the more suitable collaborative partners. Mid-sized businesses also prefer investing their monetary capital in start-ups with which they have already become acquainted through innovation hubs. All told, family businesses can draw from different, valuable resources to enter the digital age. Given their very nature, they benefit from certain advantages that other companies simply don’t have.

Literature reference and methodology

For “How can family-owned mittelstand firms use their unique resources to master the age of digitalization? The role of family historical, venture, and collaborative capital,” the research team conducted 35 interviews at 34 different mid-sized, family-led businesses exclusively with managers who hold a position of leadership and who are related to the respective families in ownership. The companies analyzed are representative of a wide range of staff sizes—between 10 and more than 10,000 employees.

• De Groote, J./Soluk, J./Laue, S.-L./Heck, M./Kammerlander, N. (2022): How can family-owned mittelstand firms use their unique resources to master the age of digitalization? The role of family historical, venture, and collaborative capital, in: Business Horizons, 2022.