Family business vs. Industry 4.0

Self-driving cars, 3D printers, drones, virtual experiences, genetic breakthroughs: welcome to the world of Industry 4.0. Call it what you will, “Industry 4.0”, the “Fourth Industrial Revolution” or “4IR”, the fact remains that these technological advancements are well and truly upon us and have become a staple of our everyday modern lives, fundamentally altering the way we live, work, and ultimately do business. In order to remain sustainable and successful, family businesses must rapidly adapt to this new paradigm, adequately assessing their threats and risks. There is no room for complacency in this new era.

A new industrial revolution is upon us, perhaps a little earlier than originally anticipated. Not only is it characterized by a range of new technologies, but these technologies are essentially fusing physical, digital and biological worlds, impacting all disciplines, economies and industries.

Family firms have traditionally been renowned for their ability to act fast and adapt to changing market forces, however, at the dawning of this new age, this disruptive force, which we may not necessarily understand the true extent of, requires action. A reactive approach that has been commonly employed among GCC family businesses may no longer suffice.

How are family businesses affected?

Financial wealth is no longer a prerequisite to business success. We live in an era where companies dominate their respective industries without owning any tangible assets as witnessed by Uber, Airbnb and Facebook. This is nothing new, however it serves to highlight the changing business market and the potential downfall of traditional business models.

While family businesses have traditionally competed in markets based on their strong asset bases, long-standing relationships with customers and stakeholders and well-established brands and reputations, start-ups are challenging this traditional approach by being agile, innovative, active experimenters and risk takers. This is where traditional family businesses may begin to be detrimentally impacted.

The Deloitte NextGen Survey 2017, Leading a family business in a disruptive environment, found that while 47 percent of family businesses believed that there was a likelihood of facing potential disruption over the next 2-3 years, only 27 percent believed they were prone to losing market share to new entrants, with 48 percent believing it was unlikely. These figures do not offer much reassurance, particularly when considering that 37 percent of respondents either do not have a strategic plan, or do not address disruption in their strategic plan if they had one.

A possible explanation could be that family firms perceive their biggest challenges to be internal rather than external, which raises a red flag as to whether family firms really understand the nature and potential impact of the Fourth Industrial Revolution on their business.

That is not to say that family firms do not face internal challenges, however, the key is to be aware of, and address both, internal and external risks, to better manage their effects and steer the course to business success.

The challenges facing family businesses are further compounded by the fact that new market entrants and startups are closing the gap on the advantages offered to family businesses, such as the security of having access to ready capital.

Access to capital       

There has been a dramatic rise in venture capital funding over the past decade, but even before startups reach this phase, founders have access to loans from banks. Small business loans and lines of credit are now available from many providers, as well as loans from peer-to-peer online platforms.

There are also many platforms that allow entrepreneurs to raise money for a product, game, or film, even before it is made. Backers can also buy a product in its prototype stage to contribute to the cost of its making, in turn allowing for the production of a given item.

In essence, access to capital for startups is not as much of a limitation today as it may have been in the past. There are several sources of capital available, and the competition among lenders is rife, thereby offering borrowers low interest rates and costs of borrowing.

Brand loyalty            

The concept of brand loyalty no longer exists, or at the very least is waning: customers are not as loyal to brands as they once were. Consumers do not see the benefit of sticking to one brand, particularly in a more transparent market, creating greater consumer awareness and providing greater options. 

It has also become easier for new brands to build a reputation and market presence. Unlike in the past, new brands do not have to wait for time to build a reputation, which in turn allows businesses to acquire large customer bases and penetrate various markets at an astonishing rate.

So are family businesses doomed?

No. Family businesses lead from a position of strength, with a longstanding history of great vision, leadership, management and profitability. They are still well positioned to compete with startups and may even benefit from engaging with them.

“Coopetition” in particular is a concept that family businesses need to embrace. Many business-owning families in the Middle East have the willingness to collaborate with, or invest in start-ups, however the culture of these companies should back up this strategy and bolster risk-taking, agility and collaboration. There are many opportunities for synergies and lasting growth, and it is promising to note that “the next generation of family entrepreneurs said they could identify new initiatives that deliver near-term impact and accelerate transformation of their family business.”¹

The rapidly evolving digital economy, technology changes and forces of globalization brought upon us by the Fourth Industrial Revolution promise to have far-reaching consequences on the business models of the typical family business in the Middle East and worldwide.

The survival of the family-owned business model as we know it is under greater threat than ever before. Family businesses need to get ahead of the curve, anticipate and account for disruption, and adequately equip themselves with the necessary tools to face the disruption of the Fourth Industrial Revolution.

by  Walid Chiniara, Partner and Head of Family Enterprise Consulting, Deloitte, Middle East
and Yasmine Omari, Manager, Family Enterprise Consulting, Deloitte, Middle East

Endnotes

1. Deloitte NextGen Survey 2017, Leading a family business in a disruptive environment, p.20