Lennard Kritzler

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In the public perception family firms may be perceived as backward and little digitized. It seems clear that multinationals lead the fourth industrial revolution. But what about family firms? Can they keep pace in an ever more rapidly changing business environment?

Three main criteria define a family firm: 1) Family firms are subject to the significant and characteristic influence of one family or several families; 2) Typically, this is connected to the majority ownership of the stake respectively the voting rights of the company; 3) Family members do not have to be employed in the company and third parties can run the management (Berthold, 2010). Even though family firms may be very heterogeneous, they share crucial fundamental characteristics like long-Term orientation, institutional memory, smart diversification, and a balance between tradition and change. Family firms’ leaders run their business with the objective of handing it over to the next generation in better condition than when they received it. The family members’ long relationship with the firm and their deep industry knowledge helps them to guide the business even through troubled economic waters. They undertake smart decisions on business diversification to reduce risk and leverage knowledge. Finally, tradition and the adaption to, for example, technological chance always stay well balanced (Rodriguez, n.d.). It seems as if those characteristics may support family firms’ successful digital transformation.

But at the same time, these very characteristics may be the reason why family firms in particular struggle with digitalization. The geographical and temporal independence of information or data and family firms’ limited resources and regional roots fundamentally contrast with each other. Family firms are naturally forced to focus and thereby may oversee innovations disrupting their business. Furthermore, family firms’ hierarchical structure and centralized decision making may let many opportunities coming with digitalization unused. Finally, entrepreneurs in family firms often intend to be free from dependencies and act on their own free will. Anyway, in a more digitalized world, individual companies will be barely able to operate in isolation from the digital world and other companies (Cravotta & Grottke, 2019). The general long-term orientation of family firms is represented appropriately in the average CEO tenure: family firm leaders stay with their company for 20 to 25 years. For publicly owned firms, the average CEO tenure is six years. This increases the difficulties of coping with shifts in technology, business models, and consumer behavior (Stalk & Foley, 2012). In fact, 75% of family businesses agree that there is a need for digitalization but they may not fully understand the significance or its possible benefits given limited understanding of digitalization. Among family businesses that see a need to digitalize their businesses, 63% cited a lack of expertise and skills needed to develop and implement a digitalization strategy (KPMG, 2017).

To conclude, a family firm’s key differential resources, its organizational culture, the employees’ deep commitment and loyalty, its patient financial capital, and its long-term orientation can be critical barriers when coping with digital transformation (von Olenhusen, 2019). But still, the very characteristics of family firms mentioned above could contribute to a successful way of mastering the fourth industrial revolution. Whether a family firm’s characteristics inhibit or promote digital transformation will be subject to persistent discussions.

References:

Berthold, F. (2010). Familienunternehmen im Spannungsfeld zwischen Wachstum und Finanzierung. Lohmar: JOSEF EUL VERLAG.

Cravotta, S., & Grottke, M. (2019, January-June). Digitalization in German family firms – some preliminary insights. Journal of Evolutionary Studies in Business, 4(1), pp. 1-25.

KPMG. (2017, May 29). Family businesses in the digital economy. Retrieved September 2020, from KPMG: https://home.kpmg/sg/en/home/insights/2017/05/family-businesses-in-the-digital-economy.html

Rodriguez, K. (n.d.). Why Family Businesses Outperform Others. Abgerufen am September 2020 von The Economist: https://execed.economist.com/blog/industry-trends/why-family-businesses-outperform-others

Stalk, G., & Foley, H. (January-February 2012). Avoid the Traps That Can Destroy Family Businesses. Abgerufen am September 2020 von Harvard Business Review: https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses

von Olenhusen, F. (7. October 2019). Digital transformation in German family firms : internal enablers and barriers for the development of dynamic capabilities for digital transformation. Abgerufen am September 2020 von Universidade Catolica Portuguesa: https://repositorio.ucp.pt/handle/10400.14/29080

Image source: Unsplash – Markus Winkler

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The impact of the COVID-19 crisis on businesses widely varies between industries. While Amazon hired 175,000 new employees and celebrated record earnings during the pandemic, many traditional brick and mortar stores will be closing this year. In the US alone, 12,000 stores will close, not including small businesses like restaurants which would multiply this number. In Germany, nearly 70,000 restaurants are on the brink of bankruptcy. Meanwhile, Uber Eats doubled its revenues during the pandemic.
Even though the effects are manifold, two macro trends can be identified which shall be discussed in this article: An acceleration of digital transformation and industry consolidation.

Globally, the coronavirus crisis has boosted the economy’s digital transformation. In order to protect employees and to maintain service for customers facing mobility restrictions, most c-suite executives have led their companies to digitize at least some parts of their businesses and continued digitizing operations at increased speed. In a matter of eight weeks, some industries vaulted five years forward in digital adoption and transformation concerning their interaction with customers, their operations, and their business model in general.
Eight months into the pandemic, businesses are slowly returning to full capacity while trying to be resilient in face of a fast-changing and unpredictable environment. Forced to rethink their operations in to reach their new “normal”, businesses are confronted with three major structural changes. Firstly, customer behavior and the customers’ preferred way of interacting with companies has changed. 75 percent of people using digital channels for the first time said that they would continue using them when things return to “normal”. Secondly, demand recovery will be uneven across geographies, sectors, product categories, and customer segments. Many companies are about to go through fundamental and potentially painful restructuring processes. Historical data and forecasting models will only be of little use for forecasting emerging demand and necessary supply. Thirdly, the abrupt shift to remote-working is now substantial enough to reconsider current business models and the way we work.
Therefore, many companies’ only option is to speed up their digital transformation. Supported by ongoing testing and continuous improvement, digital solutions must be scaled-up quickly in to stay in business.

As mentioned above, the impact of the COVID-19 crisis varies widely between industries. Some are severely affected while for others, the economic impact was neutral or even positive. This disparity may manifest itself in further industry consolidation.
The described shift in consumer behavior was reflected by the stock markets. Big tech companies registered strong gains in market capitalization outperforming the general market indices. Those players, which are appointed with cash, may want to seize the opportunity to increase their market share by acquiring weakened competitors or start-ups facing liquidity issues. In Q2 2020, tech companies like Facebook, Microsoft, and Intel all announced such deals indicating an upcoming wave of acquisitions and thereby a wave of consolidation in certain industries. In the Technology, Media and Telecom sector (TMT), deal numbers have significantly increased despite the COVID-19 outbreak reflecting the importance of telecommunication for a new way of working and doing business. In a survey interviewing 50 C-level executives and senior corporate development leaders about their acquisition plans, 23% of respondents reported that they do not intend to change their forecasted deal volume in 2020. On the contrary, they want to increase their deal volume during the remainder of 2020 to make use of lower market valuations. Some buyers may need to transform digitally, innovate new business models to reposition for post-COVID market realities, or accelerate commercialization of the most promising technologies, medical advancements, and delivery models. Financially strong companies will use the current opportunity to strengthen their long-term digital agenda. The response of policymakers to this increasing consolidation remains to be seen.

To conclude, it is already clear that COVID-19 is a catalyst for change – economic, societal, personal, and corporate. It is hard to tell what the future looks like after COVID-19. But it is clear that this crisis boosted industries’ digital transformation and will benefit those companies that can develop a digital competitive edge leading to further industry consolidation.

References:

Baig, A., Hall, B., Jenkins, P., Lamarre, E., & McCarthy, B. (2020, May 14). The COVID-19 recovery will be digital: A plan for the first 90 days. Retrieved September 2020, from McKinsey Digital: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/the-covid-19-recovery-will-be-digital-a-plan-for-the-first-90-days

Bellon, T., & Rana, A. (2020, August 6). Uber rides take COVID-19 hit but food-delivery business doubles. Retrieved September 2020, from Reuters: https://www.reuters.com/article/us-uber-results/ubers-food-delivery-business-doubles-covid-19-eviscerates-rides-demand-idUSKCN25230X

Bosker, D., Zuidema, M., & Groeneveld, O. (2020, August 10). COVID-19 has a major impact on the M&A market. Retrieved September 2020, from KPMG: https://home.kpmg/nl/nl/home/insights/2020/08/covid-19-has-a-major-impact-on-the-m-and-a-market.html

Cazers, F. (2020, July 6). German restaurants still hungry for customers post-lockdown. Retrieved September 2020, from TheJakartaPost: https://www.thejakartapost.com/life/2020/07/06/german-restaurants-still-hungry-for-customers-post-lockdown.html

Conca, J. (2020, August 21). The Coronavirus Accelerates Online’s Destruction Of Brick & Mortar Shopping. Retrieved September 2020, from Forbes: https://www.forbes.com/sites/jamesconca/2020/08/21/the-coronavirus-accelerates-onlines-destruction-of-brick–mortar-shopping/#205ccc634734

Fitzpatrick, M., Gill, I., Libarikian, A., Smaje, K., & Zemmel, R. (2020, April 20). The digital-led recovery from COVID-19: Five questions for CEOs. Retrieved September 2020, from McKinsey Digital: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/the-digital-led-recovery-from-covid-19-five-questions-for-ceos

Herndon, M., & Bender, J. (2020, June 10). What M&A Looks Like During the Pandemic. Retrieved September 2020, from Harvard Business Review: https://hbr.org/2020/06/what-ma-looks-like-during-the-pandemic

Lee, D. (2020, July 30). Amazon doubles quarterly profit despite Covid-19 costs. Retrieved September 2020, from Financial Times: https://www.ft.com/content/7a42b1d8-9ca7-4827-aaae-729fdb7637f5

PWC. (2020, June 23). The COVID-19 crisis has accelerated the Digital Transformation across industries and can lead to a wave of consolidation in the TMT sector. Retrieved September 2020, from PWC: https://www.pwc.com/sk/en/current-press-releases/the-covid-19-crisis-has-accelerated-the-digital-transformation.htm

Family Firms x Digitalization – A Contradiction in Terms?

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