session 2 forces of change in today’s world

SESSION 2

Forces of Change in Today’s World:

The New Reality for Family Businesses

JOHN A. DAVIS Cambridge Family Enterprise Group

MIT Sloan School of Management

VIRTUAL MASTERCLASS | MILAN

DAY 1 | OCTOBER 13, 2020

WHAT IS OUR FAMILY

TRYING TO ACHIEVE ? It’s a New Game

© CAMBRIDGE FAMILY ENTERPRISE GROUP, 2020. THIS MATERIAL MAY NOT BE QUOTED, REPRODUCED OR DISTRIBUTED WITHOUT WRITTEN PERMISSION. 3

We have entered a new age

for family businesses.

You must understand and adapt

to the complex terrain before you.

The future will be very different.

Environment/Ecosystem

International alliances

Laws & Regulations

Communication

Business and Industries

Work & Careers

Management

Investing & Family Offices

Portfolios

Capital sources

Social impact activities

Wealth & Society

Cities

Transportation

Ownership forms

Governance

Leadership

Families

Human longevity

Succession

Education &

Development


© CAMBRIDGE FAMILY ENTERPRISE GROUP, 2020. THIS MATERIAL MAY NOT BE QUOTED, REPRODUCED OR DISTRIBUTED WITHOUT WRITTEN PERMISSION.

1784 1900 2000 2017

A vast and

unprecedented boost to mental

power akin to

the earlier boost

to physical

power

Mechanization,

steam power,

weaving loom

Mass production,

assembly line,

electrical energy

Automation,

computers and

electronics

Cyber Physical

Systems, internet of

things, networks

Andrew McAfee, MIT

5

FORCES OF

CHANGE

AND

DISRUPTION

Environmental

Degradation and

Ecological Disruption

Technological

Advances and

Digital Disruption

Globalization

Socio-Politico-

Economic Forces

Covid-19

JOHN A. DAVIS



These forces combine

and trigger cascading

changes.


Environmental Degradation and


Technological Advances and

Digital Disruption

Globalization

Socio-Politico-Economic Forces

FORCES OF CHANGE

AND DISRUPTION

JOHN A. DAVIS

Impacting

Businesses and Family Offices

Impacting

Families

Impacting

Society


Society itself is morphing.

• More urbanized, crowded, diverse and connected

• Younger, more educated, more frustrated

about lack of opportunities

• More international

• More egalitarian

• Wealth much more concentrated

• Governments less able to cope with growing

social needs and tensions

• Political polarization (to some extent intentional) and stalemates




Digital Disruption

Globalization


FORCES OF CHANGE

AND DISRUPTION

JOHN A. DAVIS

Impacting

Society


The modern business family is

morphing:

• More diverse and complex

• More geographically dispersed

and international

• More egalitarian and seeking

greater transparency

• Less committed to traditional

businesses and to careers in the

family business




Digital Disruption

Globalization


FORCES OF CHANGE

AND DISRUPTION

JOHN A. DAVIS

Impacting

Families


• Industries are maturing, consolidating, and

disappearing more quickly

• Consumers are becoming much more

powerful

• Supply chains are becoming more

connected and international

• There are occasional disruptions

• Family companies and family offices must:

• anticipate change and disruption

• innovate constantly

• update business models more often

• consider divestment and wider

diversification to migrate sooner




Digital Disruption

Globalization


FORCES OF CHANGE

AND DISRUPTION

JOHN A. DAVIS

Impacting Businesses

and Family Offices


Something new that makes

what we are using or doing

much less useful, or even obsolete.

Disruption

Threatens the viability of existing

business models

Can threaten societal order & transform a society

Adaptation to disruption requires a breakthrough or ‘step change’



A “Disrupted” Industry

Time

Industry

Lifecycle (Video Stores)

New

Industry

Emerges (Streaming)

Disruption

Output/

Revenue

13


The Speed of Business Creation and Destruction

Is Accelerating...

Source: Company Websites, Virtus Partners

“Garage” “Mega

Entrepreneurs" Bankruptcy

“Mega Entrepreneurs"

14


FAMOUS LAST WORDS...

Neither RedBox nor Netflix are

even on the radar screen in

terms of competition.”

Jim Keyes – Blockbuster, 2008

Right now we are selling millions and millions and millions of

phones a year. Apple is selling zero phones a year. In six months,

they'll have the most expensive phone

by far ever in the marketplace...”

Steve Ballmer – Microsoft, 2007

Screw the iPod Nano. What

the hell does it do? Who

listens to 1,000 songs?”

Ed Zander – Motorola, 2006 “ “ “

15


Primary product: ball bearing, an integral part for combustion engines

For automotive, aerospace, industrial uses

One of the world’s largest clutch manufacturers

16

Automotive Industry

Demand for cars worldwide

Disrupted by car-sharing, hybrid,

electric, autonomous vehicles

Meanwhile . . .

Massive disruption to

automotive technology

• 60% of Schaeffler’s sales relate to the combustion

engine, which is being replaced by hybrid & electric motors

• The company’s primary product is unnecessary in

electric motors.

2018–2019

The Schaeffler Family has seen among the largest

declines in wealth among Europe’s families this year.

• Stock price declined 55% since Jan 2018

• 2019: 900 job cuts. Closed factories.

• 2020: Massive declines in demand due to COVID.

30,000 job cuts.

Impact on Schaeffler


Began adapting to technological disruption in automotive market:

Shifted

Production

away from

ball bearings for

combustion engines

To

Transmissions;

Components for hybrid,

electric, autonomous

vehicles

Diversification launched new app

Smartphone App for mechanics & retailers to access vehicle parts and training

More R&D 20+ new R&D initiatives

solutions for new automotive technology

new investments

expanded U.S. operations

with updated technology

+

17


AWARENESS, BUT LACK OF REALISM

It’s not that industries are moving so fast

that companies have no time to adjust and adapt.

Owners, boards, and leaders see

their industries changing…

but they choose to believe that

changes won’t affect their company.

18


How close is your business to the waterfall?

A) We are in calm waters and in control of our journey

B) The river is running quickly

C) We are in the rapids

D) We can hear the waterfall

20


Change that is accelerating and somewhat predictable

favors companies that:

• ANTICIPATE

and ARE:

• ORIENTED TO CHANGE

• AGILE

• FINANCIALLY STABLE

• LONG-TERM

• PERSISTENT

• and REALISTIC

21

Yes, it will

happen to us.

Our job is to figure

out how change,

disruption, and

innovation will

affect us, and how

we must prepare.


WHAT IS OUR FAMILY

TRYING TO ACHIEVE ? Speed and Fog

Makes anticipation very challenging.


Technological change

and the pace of life

are accelerating

© CAMBRIDGE FAMILY ENTERPRISE GROUP, 2019. THIS MATERIAL MAY NOT BE QUOTED, REPRODUCED OR DISTRIBUTED WITHOUT WRITTEN PERMISSION. 24 24


Windows of

opportunity are

closing faster.

The pace of

almost everything

is accelerating.

25

Volatile

Uncertain

Complex

Ambiguous

Change has changed:

It is accelerating and is less predictable.


Presenting us with a VUCA world


You don’t know where the next big

idea, challenge or opportunity

will come from.

© CAMBRIDGE FAMILY ENTERPRISE GROUP, 2020. THIS MATERIAL MAY NOT BE QUOTED, REPRODUCED OR DISTRIBUTED WITHOUT WRITTEN PERMISSION. 27 27

And you don’t have

much time to figure it out.

WHAT IS OUR FAMILY

TRYING TO ACHIEVE ? It’s time to start acting more like owners.


Owners need to think

more like owners.

John A. Davis

29


HISTORICALLY Family companies have done better in

stable, gradually changing environments.

They have also done well managing through

economic cycles.

Most have focused on: • Operational excellence

• Steady improvement of products and processes

• Long-term view

• Loyal stakeholder relationships

• Financial stability • Growth within their industry

Operator’s

Mindset

Stability, reliability, and steady improvement

have historically led to superior performance.


TODAY

Owner’s

Mindset

31

Success in volatile times requires that owners

and their boards also have an Owner’s Mindset:

• Gain altitude and a broader, outward perspective, including on macro trends, new opportunities, threats

• Re-examine one’s business model, practices, mission

• Move experimentally into growth opportunities

• Let go of investments, activities, and people that

aren’t adding value

• Develop a change-oriented culture

Altitude, a focus on value creation, and agility

are vital to superior long-term performance today.


Operator’s

Mindset

Owner’s

Mindset

32

WHAT IS OUR FAMILY

TRYING TO ACHIEVE ? How to Adopt an Owner’s Mindset

GET ALTITUDE TO FOCUS

ON THE BIG PICTURE


LOOK OUTWARD

With a big company, you’ve got a big machine

in motion [and] sometimes it’s hard to get

people to think about what’s the next new

thing. When everybody is running the machine

there’s a tendency to look at the short-term and

focus on incremental opportunities and not look

ahead to the really big opportunities.

I talk to people often about looking out at the

horizon. What’s on the horizon?

What’s beyond the horizon?

“ ”

Abigail Johnson 3rd Generation

Chairman and CEO



MANAGERS

(50 ft)

“in the trees”

CEO

(100 ft)

“just above the trees” BOARD

(30,000 ft)

“high enough to understand the terrain”

DESIGN AND COMPOSE YOUR BOARD

TO HELP WITH

OWNER-LEVEL DECISIONS

36


FIGURE OUT

YOUR MISSION &

VALUES,

AND

WHAT YOU ARE

GOOD AT

YOUR FAMILY

MISSION &

VALUES

GROWTH

OPPORTUNITIES

WHAT YOUR

FAMILY IS GOOD AT

INVEST HERE

COLLETTE AND DAVIS, 2018

37


B U I L D

VALUE ACCORDING TO YOUR

VALUES John A. Davis

38

A WINNING FAMILY MISSION

Financial

Social Impact

Reputational

Relational

Intellectual Property

TYPES OF VALUE:

Particular businesses will come and go, but an adaptive

portfolio and organization help a family company live for a long time.

Anticipate and focus on addressing challenges and

opportunities for the value of the portfolio—rather than just solving organization and operations problems.

VALUE CREATION REQUIRES

AN AGILE PORTFOLIO AND

ORGANIZATION


Companies that do not formalize such a process will find

themselves increasingly shaken by forces of change and

disruption.

• Formalize a process to continually scan for and identify signals of change: potential changes and disruptions that can affect your

businesses, industries, supply chains and other investments

• Create a Dashboard to track signals of change

• Review your dashboard and scenario plan.

LEARN TO READ “SIGNALS OF CHANGE”


ESTABLISH YOUR ‘POINT OF VIEW’

ABOUT WHERE THE FUTURE IS GOING

The future is inherently unknowable. It’s not useful to plan very

far out. But you can prepare for the future.

Based on the signals you see today, what is the owners’ and board’s point of view about the future?

• Scenario plan different alternative visions of the future

• Use advisors who see your company through outside perspectives and

have a mandate to challenge your views

• Amass resources (capital, talent, alliances) for innovation and agility


ENCOURAGE STRATEGIC EXPERIMENTS C O N S I S T E N T W I T H Y O U R P O I N T O F V I E W A B O U T T H E F U T U R E

Set up cross-functional teams to design new projects

Start with small experiments: Think big, start small, scale up fast

Launch start-ups and learn from them

Invest in start-ups

o Through a VC arm

o Accelerator/Incubator of your own

o Through an outside accelerator (supporting several early startups)

Have a direct investing strategy. Educate owners, board members and senior managers about direct investing.

Consider partnerships, joint ventures and acquisitions © CAMBRIDGE FAMILY ENTERPRISE GROUP, 2020. THIS MATERIAL MAY NOT BE QUOTED, REPRODUCED OR DISTRIBUTED WITHOUT WRITTEN PERMISSION. 42


INVESTMENTS Making bets on investments

Getting out of bad investment bets

PEOPLE Making bets on people

Getting out of bad bets on people

CULTURE Protecting and adjusting the culture that we believe is key to our success

GOVERNANCE Designing effective decision-making structures and processes for the Family Enterprise

BECOME SKILLED AT MAKING

THESE 4 OWNERSHIP DECISIONS

1

2

3

4

43


B U I L D

VALUE ACCORDING TO YOUR

VALUES John A. Davis

44

SEE YOU TOMORROW Governance During Turbulent Times

and

A New Look at Succession

JOHN A. DAVIS email [email protected]

twitter @ProfJohnDavis

MIT executive.mit.edu/family

writ ing johndavis.com

advisory CFEG.com

session 2 forces of change in today’s world

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