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Entrepreneurial learning journey: family business innovation in San Francisco

November 20, 2015

Onto the second leg of my entrepreneurial learning journey in America, and over to the West Coast and San Francisco’s northern waterfront, Fisherman’s Wharf. The Wharf is a popular tourist attraction, its name and neighbourhood characteristics stem from the city’s early days of the mid 1800s when Italian immigrant fishermen came to the city by the bay to take advantage of the influx of population due to the gold rush.

Most of the Italian immigrant fishermen settled in the North Beach area close to the Wharf and fished for the local delicacies. From then until the present day it remained the home base of San Francisco’s fishing fleet. Despite its redevelopment into a tourist attraction during the 1970s and 1980s, the area is still home to many active fishermen.

Seafood restaurants are aplenty in the area providing a wide range of fresh seafood dishes, most notably Dungeness crab and clam chowder served in a sourdough bread bowl. Some of the restaurants, including Fishermen’s Grotto, Pompei’s Grotto and Alioto’s, go back three generations of the same family ownership.

Boudin Bakery is self-proclaimed as the Original San Francisco Sourdough French Bread bakery, based on the Wharf. It was established in 1849 by Isidore Boudin, son of a family of master bakers from Burgundy. Wild yeasts in the San Francisco air had imparted a unique tang to their traditional French bread, giving rise to ‘San Francisco sourdough French bread’. By blending the sourdough prevalent among miners in the Gold Rush with French techniques, a unique business was born.

In the 1906 Great Earthquake, Louise Boudin saved a portion of the original ‘mother-dough’ in a bucket. Today, the Boudin family’s initial recipe lives on in the hands and hearts of their expert bakers, with a portion of the original mother-dough still starting each and every sourdough loaf made.

Boudin is among a small minority of San Francisco bakeries staying true to the original artisan sourdough recipe, just unbleached flour, water, salt, and a portion of mother-dough. In spite of prevailing baking trends, no fats, sugars, preservatives, or dough conditioners are ever introduced at Boudin. Despite the widespread use of Fleischman’s cake yeast, the bakery still uses the same starter yeast-bacteria culture it developed during the Gold Rush.

Steven Giraudo, an artisan baker from Italy whose first job in America was at Boudin, bought the bakery in 1941 from the founding family, and subsequently ownership of the bakery has passed to Giraudo’s sons. Today there is a team of 40 bakers.

Besides Fisherman’s Wharf, Boudin has 30 other cafés throughout California, and is San Francisco’s oldest continuously running company. Though much has changed since the boomtown beginnings, they still hold fast to their long-standing mission of bringing fresh, quality bread at fair, affordable prices, for everyone’s pocket.

Their business model holds a few interesting characteristics:

  • There is no wholesale business, the customer model is bakery shops with cafes
  • The bakers continue to hand craft each loaf
  • All Boudin locations mix, shape, score and bake bread throughout the day.
  • Visitors can watch the baking process from beginning to end, the working bakery is also an open, demonstration bakery
  • As referred to earlier, each location starts their baking each day with some of the original mother-dough

The economic world today is changing on an ever more rapid cycle, and that includes the business model of the family enterprise. Remember, everything affects everything, and there is a need to more rapidly incrementally improve all that we do, but perhaps more challenging, we have to work to not unduly resist breakthrough innovation. Families have to maintain values but not excuse skipping innovation for loyalty to the values.

The changing business environment today has driven the emergence of a family enterprise model. Where previously heritage, legacy and culture were competitive weapons, these have been eroded. The business model of family businesses today such as Boudin needs to be infused with innovation.

Family companies may have a conservative heritage, but research suggests they can teach us a lot about innovation. It’s said they rely too much on familial ties, are often conservative in outlook based on a stewardship ethos, and are reluctant to take on external financing measures fearing the dilution of control. All these attributes are thought to hinder innovation.

Another train of thought however suggests businesses under family ownership are less motivated by short-term profits and show greater alignment between ownership and management, characteristics which are known to stimulate innovative behaviour. This paints a paradoxical picture, and raises the question does the family-owned enterprise business model stifle or enhance their capacity to innovate?

Research supports the latter, suggesting family-ownership boosts both the quantity and quality of innovation as evidenced by the number and substance of its firm level patents.

The New Lyrics of the Old Folks: The Role of Family Ownership in Corporate Innovation, co-authored by Po-Hsuan Hsu Associate Professor of Finance at the University of Hong Kong, Sterling Huang, Assistant Professor of Accounting at Singapore Management University and Hong Zhang, Assistant Professor of Finance at INSEAD, researched a comprehensive sample of U.S. companies to unearth these findings.

The results were illuminating. They found family firms were associated with 11% more patents filed and scored 14% higher in originality (patent outputs) and 30% higher in generality (patents’ versatility), indicating that not only is there more innovation happening in these organisations, but it is of a higher quality than non-family companies.

Surprisingly, family firms spent less on R&D but were significantly more efficient with what they did invest, when measuring R&D spending against patent output. That is, they produced more and better patents. So what are family firms doing right? A closer look at the data identified three channels which promoted innovation.

Focus on long-term value. By sheltering managers from the short-term pressures of irrational and myopic investors, the family ownership model encouraged them to pursue development initiatives with long-term value.

Reduced financial constraints One train of thought suggests that in their efforts to retain control, families may be less willing to resort to external financing methods. However, lenders had a tendency to trust family firms more, thus reducing financial constraints that hinder innovation.

Improved governance Based on the assumption that the presence of external investors indicates better governance and encourages innovation, they found family ownership serves as a substitute for these investors and replaces other governance mechanisms in spurring innovation by lowering costs and strengthening monitoring.

Family firms account for a significant portion of business activities and constitute the backbone of economic development worldwide. But their link to innovation is less obvious. While family ownership can hamper a firm’s innovation – conservatism and nepotism can result in family businesses adopting suboptimal investment policies and there may be higher capital costs due to under-diversification or exacerbating agency issues – the above research findings show family firms can stimulate innovation through a balance of tradition and modernity – adapt to survive change.

Another finding of the research was that family business implemented innovative thinking quicker than in non-family run firms. At first glance it may seem like a family business is a business model which would be most hampered by traditional thinking. The reality though, is that due to many factors, implementing innovative thinking quickly in a family business is more viable than in many other companies.

One factor is the collaboration between different generations. Often, family businesses will find themselves with at least two generations being involved in the business, which leads to an interesting mix of ideas. Whereas the older generation could potentially fall into a routine way of approaching the business, the new generation will feed the business with current ideology, tools and techniques.

When family businesses are able to encourage a company-wide philosophy of learning, so that each generation can impart their unique knowledge with each other, then the business is able to implement innovation and keep ahead of the market with some dexterity.

The research identified some common characteristics of family firms that can work against business innovation, for example:

  • Limited exposure to ideas from other industries, particularly in families where business leaders have not worked anywhere else
  • Lack of willingness to adopt outside ideas due to a feeling that family members, who may have been in the business for decades, know more than anyone else about what it takes to succeed
  • Limited desire to take risk because all of the family’s eggs are in one basket.

Countering these findings, the research also identified that because family businesses can grow at their own pace, they can be even more innovative and take more risks. Their actions may not move the needle in the short run, but they yield long-term results because they inevitably take a longer time horizon on outcomes.

Family businesses will not look for disruptive innovation, but innovation that enables sustainability and versatility. It’s clear that most family businesses value flexibility and adaptability, and think of these qualities as important aspects of entrepreneurship and innovation.

There could be a generational factor at work here. Founders will have likely possessed a degree of entrepreneurial flair in order to have created and grown a successful business. They took risks out of necessity. The next generation is more likely to revitalise the family business’ strategy and professionalise how the business is run, than pursue a risky or entrepreneurial agenda.

In enterprising families, this intrapreneurship style is particularly significant, as it serves as an opportunity for the next generation to expand the business or try out a new direction within the context of the family framework and culture. The benefits of this, for both the family and the business, are plentiful.

In the context of the business, it allows for renewal, growth, and an infusion of energy. On the family side, intrapreneurship introduces the prospect for a next generation that wants to carry the enterprising family torch.

Intrapreneurship has been the driver of numerous exciting innovations in Boudin, and it can be seen that long-term performance of family companies exceeds that of other forms of ownership due to ‘patient capital’. Conversely, the primary cause of failure is emotion and breakdown in relationships, not economic or commercial factors.

So family businesses like Boudin succeed with their own form of entrepreneurial spirit, fostered by intrapreneurship, and a balance of emotion and realism whilst retaining a long-term perspective, framed by a stewardship ethos – to pass the business onto the next family generation.

The research shows 30% of family businesses make it to a second generation, 15% to a third but only 5% make it to the fourth. Again Boudin reflects this, the transfer and sales of the business to the Giraudo family came at a time when the surviving Boudin family had simply run out of steam to take the business further forward.

Small, family business is the backbone of our economy, it’s where the jobs are generated. Behind every family business, like Boudin, there’s a story worth knowing, they didn’t come out of nowhere. Often they’ve survived due to deeply personal relationships with customers, but today they are leading the innovation charge. The extent and the success of innovation from family businesses was my key discovery and learning from San Francisco.

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