session 2 forces of change in today’s world
TRANSCRIPT
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
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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
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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
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These forces combine
and trigger cascading
changes.
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Environmental Degradation and
Ecological Disruption
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
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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
Environmental Degradation and
Ecological Disruption
Technological Advances and
Digital Disruption
Globalization
Socio-Politico-Economic Forces
FORCES OF CHANGE
AND DISRUPTION
JOHN A. DAVIS
Impacting
Society
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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
Environmental Degradation and
Ecological Disruption
Technological Advances and
Digital Disruption
Globalization
Socio-Politico-Economic Forces
FORCES OF CHANGE
AND DISRUPTION
JOHN A. DAVIS
Impacting
Families
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• 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
Environmental Degradation and
Ecological Disruption
Technological Advances and
Digital Disruption
Globalization
Socio-Politico-Economic Forces
FORCES OF CHANGE
AND DISRUPTION
JOHN A. DAVIS
Impacting Businesses
and Family Offices
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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’
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A “Disrupted” Industry
Time
Industry
Lifecycle (Video Stores)
New
Industry
Emerges (Streaming)
Disruption
Output/
Revenue
13
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The Speed of Business Creation and Destruction
Is Accelerating...
Source: Company Websites, Virtus Partners
“Garage” “Mega
Entrepreneurs" Bankruptcy
“Mega Entrepreneurs"
14
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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
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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
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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
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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
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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
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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.
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Technological change
and the pace of life
are accelerating
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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.
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Presenting us with a VUCA world
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You don’t know where the next big
idea, challenge or opportunity
will come from.
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And you don’t have
much time to figure it out.
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Owners need to think
more like owners.
John A. Davis
29
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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.
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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.
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Operator’s
Mindset
Owner’s
Mindset
32
GET ALTITUDE TO FOCUS
ON THE BIG PICTURE
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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
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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
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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
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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
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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”
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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
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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
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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
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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