Latest Thinking in the Field / Trends in Family Enterprise

The Big Gorilla In the Room: Family firms and hypercompetition

The concept of “Hypercompetition,”[1] which Richard D’Aveni, professor of business strategy at the Amos Tuck School at Dartmouth College, introduced in his book with the same title, is changing industries and business practices, especially management of family firms. The phenomenon refers to a competitive environment, in which it will be rare for industry leaders (e.g., profit, revenue or market share) to maintain their leadership position for a long term (more than five years). Emergence of hypercompetition due to intense competition among companies in an industry, changing market conditions or customer preferences, and lower entry barriers for new players will induce such a high level of variability in firm performance that many firms will perish. In fact, many firms and industries, especially those dominated by family firms, have already succumbed to this new competitive dynamic — the newspaper industry being one such example. Among those affected in this industry were the Chandler family of The Times Mirror Co., which controlled The Los Angeles Times; Britain’s Thompson family of The Times and The Sunday Times; the Bancroft family of The Wall Street Journal; and many others. Most of these family newspapers, many with more than 100 years of history and success, have been sold, with the founding family no longer involved in the business. The pace of dynamic change, exacerbated by evolution of the digital economy, left many of these firms playing catch-up with new industry players or companies from other digital and multimedia industries.

Hypercompetition brings an unprecedented level of uncertainty to a firm’s environment that mirrors change happening in our regular environment. Consistent with the predictions of hypercompetition, the pace of change has become so intense over last few decades that companies are struggling to get a grip on it. Hypercompetition’s influence can also be observed among companies once described as Built to Last by Jim Collins and Jerry Porras. Among 18 companies on the list, almost 15 (e.g., American Express, Citigroup, Ford Motors, Hewlett-Packard, and Sony) are struggling in an increasingly dynamic environment and no longer enjoy competitive advantage.

Why should family firms care about hypercompetition? The plight of 15 once undefeatable companies and the demise of some dominant family firms in the newspaper industry is definitely a big reason, but the most important of all is that hypercompetition is the antithesis of family firms, which cherish stability and family control. For family firms, which thrive due to stability in leadership (average CEO tenure –family firm 25 years vs. non-family firms < 5 years), navigating change is uneasy as 70 percent fail at their first opportunity of managing change during leadership transition. Environmental change has made many companies extinct (e.g., Kongō Gumi Co. and Underwood Typewriter Co.), while destroying many industries (e.g., video rental), which is consistent with what Schumpeter predicted way back in the 1940s. However, a lot of people outside academia seem to be unfamiliar with the concept of hypercompetition. There are doubters even in academia, where a large number of business schools still teach their students “sustainable competitive advantage.” In addition, a large majority of business executives and CEOs desperately search for a source of competitive advantage that can be sustained. But ‘sustainable’ and ‘competitive advantage’ seem to be strange partners in today’s prevailing hypercompetitive environment. Even companies such as GE and IBM (from ‘Built to Last’), which previously navigated turbulent industry environment successfully, are recently struggling to maintain performance above their industry peers.

Like Schumpeter’s “Creative Destruction”,[2] where entrepreneurs create new companies and industries at the expense of existing companies and industries, hypercompetition might seem like a new phenomenon, but instances of industries in the grip of this turbulence has increased from almost zero percent in 1950 to about 70 percent in 1990.[3] Family firms may not need competitive advantage for longevity due to their holistic view of firm performance that encompasses more than just financial performance (e.g., family legacy, employment for family members), but the variability and turbulence that hypercompetition brings to an industry may be especially challenging for family firms that need to manage family and business systems simultaneously, unlike non-family firms’ focus on only business systems that evolve quickly to respond to shareholder pressures.

Hypercompetition will challenge family firms in various industries sooner or later. Family owners and managers need to accept this reality first before they can prepare themselves. Competition is not always bad. It brings family firms opportunities that previously might have been thought impossible. But, in order to compete and thrive in a hypercompetitive environment, family owners need to understand the following four characteristics:

  1. Short Product Life Cycles: Industries are experiencing shorter product life cycles, requiring firms to become efficient in developing products/services and managing associated demands at a fast pace. For example, in the automobile industry over the last few decades, the average life of car models has declined from eight years to four years. Meanwhile, product development time has declined from 48 months to about 24 months. And this trend is expected to continue into the future.[4]
  2. Emergence of New Technologies: Similar to product life cycles, technology life cycles are also getting compressed due to creation and accumulation of new knowledge and rapid innovation. For example, a lot of small publishers and booksellers were caught off guard by the rise to prominence of electronic paper (Kindle) and hand-held devices along with the emergence of a sharing economy facilitated by internet.
  3. Competition from New and Unexpected Entrant: Threats from an existing player in an industry can be challenging but manageable. Whereas most industry players compete using some combination of existing industry tools, new players in industry neither abide by the same rules nor employ existing industry tools. The cell phone industry is a good example of this phenomena. Since its emergence over the last few decades, the winners have always been new to the industry, from Motorola to Palm to Microsoft to Apple.
  4. Major Shift in Market Boundaries: Companies are constantly reconstructing and expanding market boundaries, often facilitated by a blurring of boundaries among different industries due to technology shift or customer preference. For example, seismic shifts are occurring in the automobile, taxi, and utility industries, with companies in automobile (e.g., Tesla Motors)[5] and taxi (e.g., Uber) investing in technologies to disrupt all three industries.[6] Self-driving technology is already making experts write the obituary of auto insurance industry.

Considering the characteristics of hypercompetitive environments, family firms need to undertake an entrepreneurial non-family business approach to management. They will have to overlook some of the best family business practices and common wisdom to take advantage of opportunities in this new environment. Some of the new practices and approaches these firms need are:

  1. Reinvent Managing for Long Term: Managing for the long run is inconsistent with the demands of the hypercompetitive environment. Family firms should reorient themselves for long term survival by taking a portfolio approach and pursue different types of businesses for only short terms. They should frequently change or reinvent their product lines for existing or new markets, or may even need to change industries to navigate turbulence. Every product, technology, and market needs to have an expiry date by which it should be phased out. The next iteration of these tools should have shorter duration of expiry period compared to the previous. Families have to model their businesses like Venture Capital and Private Equity firms, which are always on the lookout for the next source of big returns. The Pritzker Family Group of the Hyatt Hotel Chains and Cascade Investment of Gates Family are following this model to chase higher returns.
  2. Firm and Firm Leadership: Leadership stability may become disadvantageous for family firms. The past norm of an excessively long term for family leaders is unsustainable in environments where “sustainable” and “competitive” rarely go together. Family firms should offer fixed short tenure duration for successors and other top leaders. Innovative thinking should be prized while high profile experience should be underemphasized. The entrepreneurial approach requires a flat organizational structure with emphasis on flexibility and autonomy for managers. It requires empowering family talent to compete against non-family talent for position and projects, which companies like Gerdau S.A. and Adolph Coors Company follow.
  3. Reinventing Risk Analysis and Management: Family firms need to make risk analysis focusing on existential threats a regular company exercises. A big focus of the exercise should be on threats to the company from the shifting or blurring of industry boundaries in their value chain or related industries. Families should scan not only their industry value chain for new or emerging technology threats, but also be on continuous lookout for existential threats such as technologies and startups in related and unrelated industries. If a threat is real, the family should operationalize plans to manage change and associated decline of products and/or underlying technology of the industry. The goal should be to lead and set the terms of change instead of letting new players lead and dictate terms.
  4. Speed in Decision Making: Finally, firms need to rethink the governance and management structure of firm and family to facilitate speed in decision making and respond quickly to competitors’ moves and customers’ needs. Firms need to retrain family members and readjust the family culture of consensus to a model that allows leaders to make decisions without the fear of failure. Families have to accept and cherish failures in their quest for the next moment of advantage. Absences of failures should be considered a sign of low innovation and risk appetite that may exacerbate a firm’s decline.

[1] D’Aveni, Richard A. 2010, Hypercompetition: Managing the Dynamics of Strategic Maneuvering, New York, Simon & Schuster

[2] Schumpeter, J. 1942. Capitalism, Socialism, and Democracy, New York: Harper & Bros.

[3] D’Aveni, Richard A. and Thomas, Lacy Glenn, “The Rise of Hypercompetition in the US Manufacturing Sector, 1950 to 2002” (October 11, 2004). Tuck School of Business Working Paper No. 2004-11. Available at SSRN: http://ssrn.com/abstract=611823

[4] Sabadka, I.D. 2014. “Impacts of shortening product life cycle in the automotive industry.” Transfer inovácií, 251-253.

[5] Gao, P., Kaas, H., Mohr, D., and Wee, D. January, 2016. “Disruptive trends that will transform the auto industry. “McKinsey & Company report.

[6] Gao, P., Kaas, H., Mohr, D., and Wee, D. January, 2016. “Disruptive trends that will transform the auto industry. “McKinsey & Company report.

About the contributor

Raj V. Mahto, PhD, is Albert & Mary Jane Black Professor and associate professor of Entrepreneurship at the Anderson School of Management at The University of New Mexico. He can be reached at rmahto@unm.edu.

 

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