Development of Family Business Innovation: A Case in Indonesia

Development of Family Business Innovation: A Case in Indonesia

Muhammad Dharma Tuah Putra Nasution, Ahmad Rafiki, Cut Kesuma Pahlufi
DOI: 10.4018/978-1-7998-6477-6.ch018
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This current literature looks closely into the aspects of family firm and innovation to enhance the general understanding on Indonesia's family business innovation. More specifically, the attention will rest on the challenges and opportunities of the family business. Indonesia promises a huge potential of economics' prospects, one of which comes from its wealth of natural resources. There is also a series of dynamic social and cultural characteristics in Indonesia that uniquely support its bustling economic development. The family-owned businesses' innovation processes highlighted in this chapter shall explore and resolve issues connected to innovation's implementation.
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Most of the businesses that soar in Indonesia are family-oriented and they are known to have hired millions of people, and further catapult the economy to a greater level. However, its sustainability becomes frail as the third generation comes into existence. In a report by Deloitte in 20201, it is stated that some of the problems of family business involve establishing or maintaining international-standard, being professional and transparent after their parents have left them to take charge. Based on this observation, 30 percent of family businesses only lasts until the second generation, 13 percent until the third generation and 3 percent beyond three generations. Another issue lies in the succession plans for the second and third generation inheritors. More than 95 percent of all businesses in Indonesia classified as family businesses face this issue- from small to medium enterprises (SMEs) that have together opened doors for millions of job hunters and at the same time spurred Indonesia's economy. It is a fact that 12 percent of family businesses are controlled by third generations globally. We are reminded of the fact that the challenges family business successors face are not the same as those faced by the founders. One of the key is being able to adapt so that the company can survive.

However, based on the report by Credit Suisse Global Wealth 2019, Indonesia flaunts the highest net worth individuals in Southeast Asia, with 130,000 people having total wealth of US$1.8 trillion- this gives us the picture of the apparent growing demand for private enterprises in Indonesia. These private enterprises are mostly family-run. 95% of local businesses are family-owned in Indonesia. This figure speaks for a lot of the country’s most prominent and well-respected corporations; including several of which that are now publicly traded on Indonesia’s fledgling capital markets2. According to the Boston Consulting Group (BCG) data, family-controlled businesses account for approximately 40% of Indonesia’s market capitalisation and have considerable influence across a multitude of key industries that include property (91% market share), agriculture (74%), energy (65%) and consumer goods (45%). Foreign entities that make their way into the Indonesian market should therefore properly understand the nature and nuances of its family-owned businesses, as they will most probably need to work closely with this type of firm in their roles as prospective partners, suppliers and clients.

Being popular as a powerhouse economy, the vast majority of the country’s family-owned businesses in Indonesia are still relatively new, compared to their Western counterparts. Unlike most of the companies listed in Forbes’ index of the top 500 family-owned businesses – which are primarily based in Europe or North America, they are already in the fourth generation of leadership or older, while it is typical for Indonesia’s family-owned businesses to still be controlled by the first or second generation. One of the differences is that many family-owned businesses in Indonesia have not yet undertaken the journey through the main transition phases that can significantly affect their potential to succeed.

There is perhaps, an old, if not wise, statement saying that ‘the first generation builds the business, the second generation makes it a success and the third wrecks it’. The third generation is pictured as very agile and may find it difficult to sustain the family-owned business in Indonesia. Generalisation is not an issue here, but the concern should be on the preliminary plan on resolving the issue related to the third generation. A report of Boston Consulting Group (BCG) stated that only about 30% of family businesses survive the move from first to second generation, while a mere 9% were able to progress from the second to the third generation.3

In terms of the innovation process in family-owned businesses, it is an attractive and promising field of research where it examined the impact on family and non-family businesses (De Massis et al., 2013). With respect to the innovation activities and outcomes, the ownership and its structures also tend to vary. Meanwhile, affected by the corporate orientation, family ownership participation could be the result of the innovation process (De Massis et al., 2013; Zellweger et al., 2012).

Key Terms in this Chapter

Social media: A computer-based technology that facilitates the sharing of ideas, thoughts, and information through the building of virtual networks and communities.

Innovation: An introduction of new goods, new methods of production, the opening of new markets, the conquest of new sources of supply and the carrying out of a new organization of any industry.

Family Business: A commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals.

Succession Planning: A process for identifying and developing new leaders who can replace old leaders when they leave, retire or die.

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