Stream Number 14 and Strategic Management

Stream Number 14 and Strategic Management

Competitive Session

Under new management, tradition of innovation and innovation of tradition: the case of constructive disruption in a family firm

Antoine Hermens

UTS Business School, University of Technology Sydney (UTS)[1]

Ace Volkmann Simpson

UTS Business School, University of Technology Sydney (UTS)

Marco Berti

UTS Business School, University of Technology Sydney (UTS)

Jesse Adams Stein

Faculty of Design, Architecture and Building; University of Technology Sydney (UTS)

Abstract

We investigate narrative discourses at an Australian steel foundry, as the business balances the challenges of implementing change to remain competitive in a global environment, while maintaining itsidentity and values as a ‘family firm’. Analysis of research data under macro, meso and micro discursive categories revealed four key themes as sites of dynamic tension: 1) stability in instability, 2) narratives of mastery, 4) intertwined identities, and 3) community centricity.We discuss how these findings expand our understanding of the relationship between tradition and innovation within family firms, where notions of tradition provide value as a discursive resource that can be deployed to ease the social tensions emerging from innovation, in a paradoxical process that translates local family connections and histories into dynamic capabilities for the firm.

Key words: dynamic capabilities, strategy in SME, strategy and culture, strategy as practiced, value chain

Introduction

The advance of globalisation and the rise of developing economies such as China and India have placed manufacturing in developed economies under unprecedented pressure. The higher costs of labour and materials, together with stricter regulatory constraints, make it difficultfor manufacturers in developed countries to maintain competitiveness, justifying downsizing and offshoring strategies. Yet amidst these pressures, some enterprises find ways to preserve their viability and even expand. One such organisation is KH, a family owned firm operating in themanufacturing sectorthathas – notwithstanding its reliance on Australia’s weakening mining sector – transformed itself andthrives,in an industry that is in decline: steel manufacturing. Over a ten year period between 2006 and 2016,62 Australian foundry establishments (25 per cent)have either bankrupted or shifted operations overseas, with further decline projected into the future (Williams 2016).Our attending to narrativeswith KHrevealed discursive elements (‘tradition’, ‘innovation’, ‘family’, ‘local versus global’) that both ease internal resistance toradical innovation initiativesand sustain the firm’s dynamic capabilities.

Thecaseexplores,the(revolutionary) strategic decisionsmanagementmustmake,withlimitedresources,inbalancingparadoxicall tensions(technologicalorbusinessmodel);source(openorclosedinnovation)and strategic focus (demand product pushormarket job lot pull)oftheirinnovation and manufacturingactivities. Theresearchaddresseskeythemesofsmall and medium businessmanagementsuchaschanging management structure and roles,buildingsocialcapitalandmarketcredibilityandentrepreneurial strategy.

KHhas the fundamental characteristics of a family firm: visibly active owners who are emotionally invested in the enterprise and want it to endure, a culture centred upon traditional family values oftakingpride in generational proprietorship, prioritisingcare for customers and employees, and promoting a collective community identity (e.g. Berrone, Cruz & Gomez-Mejia 2012; Chirico & Salvato 2016). We argue that integral to KH sustained success has been the narrative discourse concerning the company’s identity as a family firm. Yet, paradoxically, the owners’ commitment to keeping KHwithin the family and thecommunity has forced the CEO to introduce innovations in the firm’sprocesses and products, including a strategic shift of its core focus and self-definition. Through ongoing ethnographic observation, interviews with 25 KHemployeesand analysis of company newsletters, we investigated the role of narrative discourse in KH transformation.

Key questions that emerged through the research process concerned how narrative discourse related to KH status as a family enterprise has contributed towards the firm’sflourishing, despite operating in a hostile global environment that hascaused so many similar organisations to close their Australian operations. Our findings are presented under the headings of fourdiscursive themes: 1) stability in instability, 2) narratives of mastery, 3) intertwined identities, and 4) community centricity. We discuss the implications of our findings for developing further understanding ofdiscursive roles of history and tradition in family run firms,and more generally, for supportinginnovation and manufacturing within developed economies.

Innovation and Family Business

The relationship between innovation and family firmsis problematic. In addition to thepositive emphasis in family firms on tradition, community concerns and employee care; they are also frequently depicted as backward, conservative, nepotistic and consequently “ill-equipped to develop the organizational capability to manage large-scale, technologically advanced industries” (Carney 2005, p. 250).Decisions in family firms are distinguished by a high degree of emotional, rather than purely rational evaluation(Sharma 2004; Zellweger & Astrachan 2008). In contrast to publicly listed corporations where profit reigns as the supreme consideration, in family firms the profit imperative tends to be tempered by the value invested inSocioemotional Wealth (SEW) comprised of considerations relating to family ownership and values, care for employees and customers, and involvement incommunal initiatives (Berrone, Cruz & Gomez-Mejia 2012; Cennamo et al. 2012; Kammerlander & Ganter 2015).

Commitment to community values gives family firms a level of trust not afforded to publicly listedshareholder owned companies. ‘Familiness’, the specific bundle of resources that stream from the family’s involvement in the business (Habbershon & Williams 1999; Zellweger, Eddleston & Kellermanns 2010), can be rationalised and leveraged as a strategic asset for a company’s competitive advantage. In this process, community values, rather than the rights of individuals, are put at the centre of discourse, as in a Gemeinschaft (Tonnies 2001 [1887]), where community is maintained through strategic narratives and specific actions aimed at reinforcing a sense of ‘collective ownership’.

The manner in which history is collectively chronicalled is crucial for family corporations, since history’s effects are not merely descriptive but also constitutive: “family firms are organizations saturated with a heritage that is somehow meant to be passed on and, therefore, meant to be carried on …the past and future are constantly negotiated in the present” (Hjorth & Dawson 2016, pp. 16-7). The existence of a coherent narrative is not a taken-for-granted outcome in a family firm: the image of ‘family’ does not necessarily imply normative consensus, unity, and harmony, in a context where various ‘histories’ compete as forms of control and resistance(Ainsworth & Cox 2003).

De Massis et al. (2016)investigated the manner in which long-lived family firms draw uponhistorical legacy to construct paradoxical narratives of ‘innovation through tradition’using four building blocks: 1) the promotion of traditional knowledge, either pertaining to the history of the firm or the industry; 2) the use of codified and tacit forms of past knowledge; 3) the pursuit of product innovation either by altering the physical features of products or transforming their meaning; and 4) the (re)interpretation of the company’s capabilities.An emphasis on product development could contribute to perceptions of innovation as the offspring of localised dynamic capabilities, extending from effective research and development practices (Eisenhardt & Martin 2000; Teece 2009, 2014; Teece & Pisano 1994; Teece, Pisano & Shuen 1997; Winter 2003). Yet, innovation in small and medium enterprises, as most family firms tend to be, does not exclusively manifest fromresearch and development, butrather frequentlyemerges from the introduction of advanced machinery, training and design(Santamaría, Nieto & Barge-Gil 2009). The influence of such alternative drivers of innovation appears particularly significant in low-medium technology firms.

Leveraging the potential of multiple innovation drivers within the context of a family firm calls for a fluid mindset capable of “paradoxical thinking” to accommodate diverging forces,as opposed to an attitude of trying to resolve tensions into a univocal solution (Ingram et al. 2016). Critical tensions identified in the family firm literature include tradition and change, control and autonomy, stability and liquidity (Ingram et al. 2016). An organisation that typifies such tensions, as well asparadoxical thinking, is KH, the focus of the current study.

Narrative discourse lenses

Narrative discursive analysis is an organisational studies methodology,pioneered by such luminaries as Foucault (1977) and Clegg (1989b) among others, that seeks to unravel the ways in which discourse orders things(Alvesson & Karreman 2000). The theoretical assumption of discursive analysis is that reality is socially (re)constructed thorugh texts, language and rhetoric that rulethoughts and practices, by privileging certain ways of thinking, talking, and constructing knowledge, while dismissing others. Discourse flows through organizations via various modes of formal and informal communicationpractices.

Our interestis discourse within the organizational context of KH, particularly how macro-level social discourse is drawn upon to construct meso-level organisationalnarratives, and justify transformation of micro-level relational practices.

Research Context

KH presents an example of a family owned firm operating in a developed economy, within a difficult industry – steel making – that has been significantly disrupted by the discourse of globalisation and all that is associated with it. While globalisation is seen tooffer opportunities for developed countries to import cheaper consumer goods and offshore manufacturing to countries with looser regulatory controls and lower labour costs; these “benefits” often result in extensive job losses, brought on by the closure of entire industries (Milanovic 2003). The effects of globalisation have been felt in the provincialAustralian city where KH is headquartered.

The KH foundry, along with a few other manufacturing firms, is among the city’s largest employers, providing employment to over 150 people.

Established in 1934 as a three-person foundry business, KH has grownan international customer base to become one of Australia’s most awarded and innovative companies. The current owners, third generation family decedents of the company founder, attribute KHslongevity to a focus on innovation that,since the company’s inception, has been central to its operating philosophy.Yet it is only over the past several years thatKHhas begun the process of shifting its core organizational identity.

KHis unusual, not only as a manufacturing firm flourishing in a developed economy, but also due to its mixed management structure. Since 1988 family owned KHhas employed an external CEO to bring fresh insight, expertise and experience into the business, with the current CEO recruited in 2008.The approach has paid off. Whereas in the mid-2000sthe company appeared on the verge of collapse, in 2013 KH was ranked seventh in the Business Review Weekly “50 Most Innovative Companies” list, ahead of some of Australia’s largest corporations. In 2014 KH invested $5 million in upgrading its two foundries, increasing productivity by an estimated 170 per cent; launched KH 3D, a subsidiary business providing advanced manufacturing capability through 3D printing (3DP); and won the prestigious Endeavour Award for “Most Innovative Company in Australia”.

In researching KH, our goal was to identify how the company deployedmeso-levelnarrative discourse, particularly related to its family status, to justify micro-level changes as a response to broader macro discourse concerning its survival and expansion in a challenging global environment. Of particular interest is examining tensions in the discourse related to KH’sidentity as a family firmthat may have been eroded byits unusual governance structure – where the owners hold managerial positions hierarchically subservient to the CEO –which invites questioning ofits family firm status. Given the commitment of family firms to SEW considerations (Berrone, Cruz & Gomez-Mejia 2012), we anticipated tensions between KH’s SEW concerns and its needs for profitability in a changing global environment. Further, given that employees in family firms have been found to be more trusting, committed and loyal to their family employers than employees in publicly listed companies (Berrone, Cruz & Gomez-Mejia 2012), we were curious if loyalties would be eroded by change initiatives typical of so-called post-bureaucratic organizations (Josserand, Teo & Clegg 2006; McKenna, Garcia-Lorenzo & Bridgman 2010),aimed at professionalising the enterprise for improved efficiency, effectiveness and competitiveness, particularly when the change was championed and executed by an externally recruited CEO. KH’s extraordinary and paradigmatic characteristics make it a rich and relevant case study for research (Flyvbjerg 2006), and we sought to analyse the construction of narrative discourse used to manage these unique tensions to expand our knowledge of how family firms use narratives to address the inherent tensions that underlay notions of family, tradition and community with apparently opposite concepts of professionalism, innovation and global-expansion.

Methodology

With discursive analysis in the organizational context there is no need to construct complex research instruments – all the intricacy a researcher could want for is available in the mundane discourses of organizational life (Grant & Hardy 2004).The discursive texts that form the basis of our study include field observations and discussions, interviews, and company newsletters.We used a three level discurive framework (LeGreco & Tracy 2009)to identify theinfluence ofmacro discourseon meso-level naratives and justify mico-level transformations of workplace relations(Alvesson & Kärreman 2000).We interpretedthe macro-level of analysisas concerning Discourse that informs a specific zeitgeist (‘spirit of the times’), as is the case with discourses of globalisation and family firms(LeGreco & Tracy 2009). We framedour meso-level analysis as concerningorganisationally constructed narative themesinforming policies and strategies. Finally, we framed micro-level discourse as justying transformations of interpesonal workplace relations and processes.

The research emerged from the long-standing relationship of one of the members of the research team with the KH CEO, even before he took his current position with KH in 2008. As the CEO grew into the role, the significance of KH as a paradigmatic case of family firm undergoing transformation and succeeding in a difficult global manufacturing environment became increasingly apparent. Frequent (almost weekly) phone calls discussing KH and its transformation were followed by several field trips to Bendigo to observe firsthand the introduction of innovative processes and technologies that were revitalising the firm. Seeking to gain a broader perspective on the transformation, in 2015 the research team was expanded, and a series of interviews were conducted with company staff. Due to KH’s regional location, access was limited to five days when the additional members of the research teamcould be on site to interview staff and observe practices. Ultimately the interview sample comprised of 25 employees (workers and managers) who provided semi-structured interviews, each lasting an average of 50 minutes. Additionally, the team accessed narratives produced by the company on its website, press releases, news reports and 60 issues of internal newsletters from between 2013-2015. During the interview process, interviewees were asked to describe the history of their relationship with KH,and comment on topics related toany transformation they have observed over the past several years, the key drivers of this transformation, and whether they perceived any employee resistance to recent changes. They were also asked about the basic factors underpinning KH’s survival, and the significance of its status as a family business with a long history. The interview process accordingly involved collecting organizational discourses as interviewees responded with their own individual narrativesof KH’spast history, present development and possible future.

Thefield-notes, interview transcripts and KHnewsletterswere analysed to identify discursive themes at the macro-meso and micro levels (Alvesson & Kärreman 2000), following standard methods for building grounded theory (Glaser & Strauss 1967; Strauss & Corbin 1997). Over a period of some 3000 hours, this source material was coded into key themes and subthemes, both through individual and group effortsofcomparingemergent themes arrived at through engagement with the data sources. Setting the various themes and subthemes against each other revealedlevels of competing discourses at play in KH’s effortsto balance the contradictory narratives of managing change and transformation, while also maintaining a historical traditional identity as a ‘family firm’, as encapsulated in the company’s paradoxical slogan, “a tradition of innovation”.

Findings

Analysis of the findings revealed four emergent narrative themes at our three levels of analysis. At the macro-level were competing systemicissuesinterpreted within KH as concerning: 1) stability in instability.At the meso-level were discourses promoting the company’s endurance and innovation through: 2) narratives of mastery and 3) intertwined identities.Finally, at the micro-level, radical changes to organisational practices were justified on the basis of narratives promoting: 4) community centricity.Each of these themes includes several subthemes (Table 1), for which we provide exemplar quotes (Table 2). While we propose that these themes can provide insight into the dualistic processes of managing transformation and traditionin a family-owned firm, we also acknowledge the limitations of abstracting complex context-specific data into simple generalizable categories (Langley 1999; Lynchnell 2011). Conversely, it can equallybe limiting to insist that each individual’s experience is unique and thereby ignore patterns of similarity found in respondents’ shared experiences. We also acknowledge that interrelatedness and overlap in explanations is also influenced by the level of abstractionthat we select as researchers (Weick & Westley 1999).

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Discussion

The discoursesthat emerged in thisstudy (categorised as: stability in instability, mastering materiality, intertwined identities and community centrality)can be generalised to inform strategy for manufacturing organisations to manage, survive and flourish in a developed economy. Globalisation has disrupted the way companies and nations conduct business, presenting both benefits and costs(Banerjee 2008; Clegg & Baumeler 2010; Milanovic 2003). A family company such as KH – operating as a foundry in a developed economy – is particularly exposed to globalisation’s negative impacts.

At KHthe owner-managers and the CEO constitute an integrated system where the ‘disruptive’ dynamism provided by the CEO, is tempered by the sense of continuity offered by the owners-managers. The asset of ‘familiness’, the specific bundle of resources that stream from the family’s involvement in the business (Habbershon & Williams 1999; Zellweger, Eddleston & Kellermanns 2010),is recombined and amplified through the agency of a CEO who introduces an engineering culture of standardisation, automation and knowledge management that, while retaining the traditional foundry identity, projects the firm in a different direction as an innovative engineering enterprise.Paradoxically, it is thenarrative related to family values and a strong sense of a traditional communitythat makes the rationalisation possible. In this process, community, rather than individuals, are put at the centre, as in a Gemeinschaft (Tonnies 2001 [1887]), where community is maintained through strategic narratives and specific actions aimed at reinforcing a sense of ‘collective ownership’.