Family Businesses & SMEs

Better Equipped for Digital Business Models

How does the owning family influence how businesses develop digital business model innovation?

In recent years, new digital technologies have prompted family businesses to rethink and adapt their business models. In this process, it has become apparent that family businesses differ from other businesses in the development of their own business models. Their potential to flexibly deploy certain capabilities makes family businesses particularly adaptable.

Companies, whether family-owned or not, must invest in digital technologies such as Big Data, cloud computing, the Internet of Things, and several others in order to secure long-term business success. However, this is not just about digital process or product innovation, but particularly about digital business model innovation (BMI). Compared with other types of innovation, digital BMI entails additional challenges because the development is often much more complex. The reason: digital BMI are subject to continuous experimentation and iterations during the innovation process and require constant readjustments. In addition, there is the risk that external stakeholders who are supposed to contribute to the renewal and digitalization of the business model could seize the company's intellectual property. Finally, as companies continue to develop their own digital business models, they must address the evolving concerns of new customer groups as well as the ongoing changes in their (new) markets. 

A recent study shows that family-owned businesses generally master these challenges better than other businesses. This is due to the fact that the family influence is associated with the development of certain dynamic capabilities that, in turn, help the companies to develop digital BMI—although family businesses are often seen as more careful when it comes to digitalization initiatives. Dynamic capabilities enable companies to adapt to a rapidly changing environment by incorporating, building, and reconfiguring internal and external competencies. Unlike the (often scattered and decentralized) owners in more corporate businesses, families have more freedom to shape their own business ideas and can have a greater influence on the nature and course of digital innovation.

Which dynamic capabilities influence digital BMI?

Following the analysis of a variety of existing dynamic capabilities, the study identified three which are especially helpful when it comes to a successful development of digital BMI in companies: knowledge exploitation, risk management, and marketing capabilities. These three dynamic capacities are useful in the digital economy because they allow the respective company to develop a new business model focused on the customer and thus gain sustainable competitive advantages.

1. The dynamic capability of knowledge exploitation

Digital BMI is often perceived as much more complex than conventional BMI. While conventional BMI results in an innovation that usually lasts for several years, digital BMI is often continuously evolving. It is the inherent nature of digital technologies that they are constantly changing. As they begin to drive business model innovation, the result is a constant cycle of experimentation and implementation. The fluid transitions mean that it is often unclear where a particular innovation process ends and another process begins, or when an innovation can be considered as complete. This increased complexity compared to conventional BMI makes digital BMI particularly knowledge-intensive and thus dependent on the company's ability to acquire the necessary knowledge and exploit it.

Family businesses are characterized by a high degree of community-orientation, trust, and closeness. The stronger the family's influence, the closer the bond with the company. This strong attachment ensures that family businesses want to pass on economic and social values to future generations. As a result, family members support the further development of the company with all their divergent expertise, and a constant exchange of knowledge takes place on the basis of mutual trust. In this respect, family businesses are better prepared for digital BMI than other businesses. 

2. The dynamic capability for risk management

The higher complexity of digital BMI is also due to the fact that digital technologies are exposed to higher risk. For instance, digital technologies make BMI vulnerable to cyber-attacks, raising privacy and data protection concerns. In addition, the development of digital BMI typically involves other groups and external partners. This challenges existing norms on liability and intellectual property protection. The decentralized nature of digital BMI and the ability for external stakeholders to leverage at least parts of it for themselves make the success of digital BMI particularly dependent on risk management capabilities.

A stronger influence of the owning family leads to a long-term orientation in companies. This is accompanied by a desire to maintain a good reputation for the business and hand it over to a successor. The family wants to retain control of the company, which is expressed through the desire for greater independence and manageable business risks. In family businesses, potential risks of ventures are thus scrutinized carefully. Thus, all family members in a family business are involved in some kind of risk assessment. The learning mechanisms with regard to business risks are therefore particularly strong and include a joint learning process. Consequently, in contrast to other companies, family businesses also have an advantage when it comes to risk management.

3. The dynamic marketing capability

Digital BMI are associated with faster changes in customer needs and market developments compared to conventional BMI. Since companies with digital BMI often target entirely new customer segments and markets as compared to conventional BMI, they need to gather insights into what the needs of these new customers are and how digital markets work. In addition, further insights into digital markets and new customers can also help coordinate complex external relationships. This is particularly useful in innovation ecosystems where digital BMI often emerge. Consequently, the development of digital BMI is also dependent upon the company's marketing capabilities.

In companies with stronger family influence, trusting relationships with customers and business partners are cultivated in a unique way due to their focus on tradition and the maintenance of stable and long-term partnerships. The more influence and control the owning family possess, the more it will determine which business partners to cooperate with. In particular, this applies to long-standing and proven relationships with customers and business partners, but also to other relationships, e.g., with online communities and loosely organized crowds. This is because in companies with a strong family influence, decision-making processes are generally less bureaucratic, and the hurdles faced when entering new collaborations are lower. Because of their efficient implementation structures, they also have more stamina useful for maintaining these collaborations.

More family influence and efficient decision-making can thus lead to a more conscious choice of market activities. In addition, family businesses are more strongly oriented toward customer interests. The increased efficiency in decision-making and the higher level of customer orientation are particularly important for the development of marketing capabilities, as they enable companies to react quickly and find suitable responses to fluctuating market conditions. Companies with strong family influence are therefore also well positioned with their marketing capabilities for digital BMI.

The positive influence of the family on BMI

The idiosyncrasies of the owning family's influence thus has a significant impact on digital BMI. Even though family-owned businesses otherwise often lag somewhat behind other companies when it comes to more radical forms of innovation, the family's influence on digital BMI has a positive effect and provides an advantage over non-family-owned companies. The family enjoys more freedom to shape its own company and can be more agile. In addition, the family holds more influence over the type and process of innovation. In this context, the marketing capabilities of the companies have the greatest proven influence on digital BMI, while risk management plays a lesser role. Owners and managers in family businesses should be aware of these strengths and base their digital innovation strategy on them.

Tips for practitioners
  • As a family business, do not underestimate your ability to implement digital business model innovation. There are several important conditions in which you are inherently better prepared than non-family businesses.
  • Be sure to make use of the existing knowledge of family members, practice a sound risk management, and maintain flexible marketing capabilities in order to develop digital BMI.
  • In-house channels of knowledge sharing, the close connection between family and business, and associated learning mechanisms are distinctive features of family businesses from which they can develop tangible added value.ene Kanäle der Wissensweitergabe, die enge Verbindung zwischen Familie und Unternehmen und speziell dort verfügbare Fähigkeiten sind Besonderheiten von Familienunternehmen, aus denen sie einen konkreten Mehrwert entwickeln können.
  • Align your new (digital) business model consistently with your customers. The focus on (constantly changing) customer needs is an important foundation for the successful development of digital innovation.
Literature references and methodology

For the study "Family influence and digital business model innovation: The enabling role of dynamic capabilities," the researchers analyzed survey data from 1,444 German companies. These had a minimum size of 50 employees. 46 percent of the responses came from companies with family influence, meaning at least five percent of the company was owned by a family.

  •  Soluk J./Miroshnychenko I./Kammerlander N./De Massis A. (2021): Family influence and digital business model innovation: the enabling role of dynamic capabilities, in Entrepreneurship Theory & Practice, In press.
Authors

Dr. Jonas Soluk

Jonas Soluk is an Affiliated Researcher at WHU - Otto Beisheim School of Management, where he also completed his doctoral degree with highest distinctions. His research is specifically dedicated to digital innovation, digital transformation and digital entrepreneurship in family businesses. His work has appeared in leading international journals and has received several international awards.

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Assistant Professor Dr. Ivan Miroshnychenko

Ivan Miroshnychenko is an Assistant Professor at the University of Bolzano-Bozen in Italy. He is also an affiliated researcher at the Scuola Superiore Sant'Anna in Pisa. Ivan focuses his research on management, strategy, and entrepreneurship in family businesses. He regularly publishes his studies in international journals and has conducted various practical projects.

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Professor Dr. Nadine Kammerlander

Nadine Kammerlander holds the Chair of Family Business and is Director of the Institute for Family Business and Mittelstand at WHU - Otto Beisheim School of Management. Her research interests focus on innovation, employees and governance in family businesses and family offices. Her scholarly contributions are regularly published in international journals and awarded with renowned research prizes.

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Professor Dr. Alfredo De Massis

Alfredo De Massis is Professor of Entrepreneurship and Family Business at the University of Bolzano-Bozen in Italy. He also regularly accompanies companies and legislators as a consultant. Alfredo is (co-)editor of several journals and has published his research in several leading journals. International media such as the Financial Times or the Harvard Business Review have also referred to his research results.

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