Based on the knowledge management and related firm innovation theory, this study carries out in-depth research on the innovation that rely on traditional knowledge through case study on Japanese long-lived family businesses where in traditional industries. Firstly, the research reveals the characteristics of innovation of long-lived family business: (1) the learning of traditional knowledge; (2) the combination of traditional techniques and modern technologies; (3) the distinctive traditional style that new product contains. Further analysis finds that the change of consumer demand and inter-generational succession would bring innovation opportunities for long-lived family business. The realization of product innovation requires the inheritance and innovation of traditional technology, and the pursuit of inter-generational innovation requires the inheritance and learning of family tradition. Further more, knowledge management supports the inheritance and innovation of traditional knowledge in inter-generation innovation. In the aspect of technological tradition, formal skill tradition depends more on knowledge transfer, while non-formal skill tradition depends more on knowledge integration. In the aspect of implicit family tradition, ancestral tradition depends more on the externalization of knowledge, while commercial tradition depends more on the socialization of knowledge. The case study also finds that the knowledge management mechanism of traditional inheritance depends on the effective family management structure. This paper explains that why long-lived family business could innovate continuously, and reveals its value of adhering to tradition.