7 Findings where German family-owned Hidden Champions are with their Digital Transformation Strategy

Table 1: Case study results related to company specifics

Finding 1: No digital transformation strategy and being digital followers

Freimark et al. (2018) asked the question, whether hidden champions are also champions of digital transformation and did a survey in Germany. The results show that only 28,4% of the hidden champions have a detailed digitalization strategy, 48,1% have a rough digitalization strategy (cf. Figure 1). Only 17%, i.e. 1 out of the 6 cases, have a detailed digitalization strategy (Case 4). Case 2, 5 and maybe 3 have rough digitalization strategies, that is 33-50%.

Figure 1: Digitalization strategies in Germany, translated and adopted from (Freimark, et al. 2018, 9)

Case 4 has a detailed and released digitalization strategy, but I would not consider it a digital transformation strategy (cf. Digital Transformation Definitions) as it is technology driven and only make use of the digital technologies for productions and customer relations.   

In the international comparison (Geissbauer, et al. 2018), 5% in EMEA are digital champions, 20% digital innovators, 45% digital followers and 30% digital novices (cf. Figure 2). Among the cases studied there is no digital champion, 16% digital innovators (Case 1), 67% digital followers (Case 2,3,4 and 5) and 16% digital novices.

Figure 2: Levels of digital maturity by geographic region, adopted from  (Geissbauer, et al. 2018, 15)

Case 1 has not a released digital strategy, but I rate them as digital innovators, because digitalization is for them integral part of their innovation driven corporate strategy. “Digital strategy is for us, how to setup the different organization units. We opened a digital lab. We hired 50 people with skills we had not before, like UX, scrum, agile topics, data scientists etc. […] It must pay into the direction of the consumer or research. Speed up Time-to-Market or make it smarter.” (Case 1)

Geissbauer et al. (2018, 14f.) say that ”among industries, automotive and electronics had the largest share of Digital Champions, at 20% and 14%. Consumer good, industrial manufacturing, and process industry lag significantly behind”.

Case 1 and 4 belong to the process industry, Pharmaceuticals and Chemicals, whereas Manufacturing & Industrial Products and Automotive & Assembly are staying behind.

All companies show a constant revenue growth and Germany is the third largest export nation after China and the USA and the export account for nearly 50% of the GDP) in Germany (Wikipedia, List of Countries by Export 2019). Mensch (1982) found out that during times of economic prosperity, companies are not willing to take high risks. On top of this family-owned businesses are conservative, risk-averse, show a lack of openness and readiness to change (Cassia, Massis and Pizzurno 2012).

Therefor it is not a surprise, that these companies show no active motivation to formulate and implement a digital transformation strategy. They only deal with the topic of digitalization and they see no need for a business transformation due to digitalization, as it is usually characterized by a high level of uncertainty as this affects not only products and processes but transforms key business operations as well as organizational structures and management concepts. (Matt, Hess and Benlian 2015)

Finding 2: Lack of Innovation

Only Case 2 reports a KPI related to innovation. The company “measures the effectiveness of Research and Development activities using the share of new products. These are products younger than four years in percentage of sales. This is 33,6%.” (Case 2)

Surprisingly Case 2 invests more into capital expenditure (6% of revenue) than into R&D (4% of revenue). As there is no definition for a new product, it might not be clear, whether these are product updating measures to extend the lifecycle of existing products or real innovations. But Simon (2012) reports: “It is always impressive to see what the hidden champions produce with relatively small R&D budgets”.

Like Case 2 also has Case 6 a balanced ratio between capital expenditure and R&D investments.

Case 1 is the only company, which invests significantly more into R&D (18% of revenues) than into CAPEX (5% of revenue). This company is a researching pharmaceutical company, where the development of new pharmaceutical products and research in this field is very expensive (DiMasi, Grabowski and Hansen 2016), but also very much depending on innovations.

Case 3 and 4 show a significant unbalanced ratio between investments into property, plants and equipment (CAPEX) and R&D. The difference with Case 3 is 9 percent points (CAPEX 14% of revenue to R&D 5% of revenue) and 6 percent point with Case 4 (CAPEX 9% of revenue, R&D 3% of revenue). This can be interpreted in two ways. First, that developing new products can be done very easily, but demand later high investments into production capacities to manufacture and distribute the innovations into the market. Second, that these companies have the focus on existing products and producing higher volumes. Companies with innovations in a growing stage show increasing sales and profit due to the benefits from economics of scale (Luna 2019). But except Case 1 all cases show growing revenues and declining EBIT margins, which is more an indicator, that they lack real innovations.

Another explanation for the lack of innovations, can be cash-flow problems. Innovations have an uncertain future, whether these investments will bring any return, but companies need to fulfill the capital needs to be able to afford the investments. May (2012) says “the most contribution to the financing is profit”. Family businesses prefer financial independence. Except Cases 6 and 5, where I did not get the information, all companies have an equity ratio above 40%. But the only company who is fulfilling the capital needs is Case 1 with a constant increasing EBIT margin of actual 18% which they invest into innovation. This might be another reason for the lower investments into R&D as they have the need to finance further growth. On top Case 3 and 6 have much higher capital expenditures than EBIT, which most probably mean, that they need to finance their investments with debts.

Finding 3: Possible Disruption

All cases show a constant revenue growth (CAGR) over the last 4 business years, but except Case 1 they report a declining EBIT margin (CAGR) over the same period.

The loss of profitability can be interpreted from the companies in two ways:

First, internal costs are too high, because of e.g. a low degree of automation. Except Case 1, all other companies choose more defensive strategic approaches like seeking cost efficiency or improving selling expenses (Bughin and Zeebroeck 2017). Under this assumption it makes sense that the companies have no digital transformation, but only a digitalization strategy, i.e. IT enabled transformation, which pays into giving back a competitive advantage, cf. Digital Transformation Definitions (Venkatraman 1994) (Porter and Millar 1985), but does not prevent disruption.

Second, as revenues are growing and profitability is shrinking another explanation can be, that the products have reached a stage of maturity and sales growth is only coming by focusing on the product and the production of higher volumes with the need to do this at a lower cost (Luna 2019). Disruption is possible when at the time of a product-focused stage of maturity a new technology is in the growing phase offering a similar customer value to a lower price or even make the products redundant (Christensen 1992).

Table 2: Case study results related to digital transformation strategy

Finding 4: Drivers of the digital transformation strategy

In Why do Companies Digitally Transform I gave a summary of drivers of the digital transformation strategy retrieved from the current state of research. Internal motivations should be efficiency increase or pressure coming from tech savvy employees as well as corporate social responsibility and sustainability. External triggers the exponentially accelerating emerging technologies, tech savvy and pro-activeness demanding customers as well as pressure coming from society and government regulations.

But our cases in general only confirm the statement of Arnold (2018), that the typical European and German digital strategy approach is to be technological driven focused on traditional European skills.

Cases 2 and 4 clearly confirm that, but the dimension “Technology & Security” is the only building block of the digital transformation strategy that had been confirmed by all companies. The declining EBIT margin shows, that the companies want to achieve cost savings due to digitalization to improve the situation.

Cases 1 and 5 report product innovation as a driver of the digital transformation strategy, but they make use of technology to come to new products and services. Case 1 for example said the motivation for them to do the digital transformation is to come to “new products, where the product is not a pill anymore, but a hardware-software device, which we develop in our digital labs” (Case 1).

That is at least according to Burghin and Zeebroeck (2017) a sign for an offensive strategy, where top performing companies could achieve more than 80 percent higher revenues than the industry average and achieve a digital return on investment (ROI) that is 10 times higher than the low performing companies.

Finding 5: Dimension of the digital transformation strategy

Gouillart, Kelly and Gemini Consulting (1999) say that the business models originate from the industrial age and are influenced by mechanical engineering. In the digital age these business models come to a limit. Business transformation means a fundamental change, where a company needs to redefine all dimensions.

Only Case 1 and 3 consider all dimension in their digital transformation strategy, followed by Case 6 which do not consider new ways of working. Table 3 shows the counts of dimensions considered in the digital transformation strategies of the cases in comparison to the order critical to success (cf. Digital Transformation Content).

Table 3: Comparison counts of digital strategy dimensions of the cases

Although it is least important for success, all cases have the focus on technology, for Cases 2 and 4 this is also the main driver for the digital transformation strategy. On the other side, the dimension business model innovation, which is most critical to success, has the least counts among the six cases.

Business model innovation is the main pillar to make strategic decisions towards the future of the company. Kaltenecker, Hess and Huesing (2015) say that this is necessary to overcome the dilemma of possible disruptions by shifting from product selling to service offering (product-as-a-service). An enabler for business model innovation is “Platform Play” as an offensive strategy approach (Bughin and Zeebroeck 2017) and Berman (2012) show in relation to today’s business model the path of transformation.

Asked why they do not consider business model innovation, Case 2 answered “it is quite clear that the business groups, first have to have a certain critical size, b) must have a certain brainpower, both in management and IT, as well as in other functions, because they are on a completely different level than smaller business groups, which also quite frankly say that they have neither the capacity nor the imagination at all.” (Case 2)

When generalizing this statement, it justifies that a digital transformation strategy cannot be separated from the dimensions of culture, leadership, HR & skills and why technology is least critical to success, as the existence of a technology does not help to overcome the lack of imagination to change to new business models.

The main motivation for cases 1 and 5 is product innovation, where the rank in counts matches with the criticality related to success. Case 3 has more an organizational motivation with “Transparency, Speed and Collaboration” which is reflected in the dimensions culture, leadership and ways of working. Case 5 reports first results in production with their strategy, but do not consider production as part of the dimensions. Case 4 do not consider the most critical dimensions and Case 3 has only a focus on technological advancements. 

This overall incomprehensive picture across the cases shows the high level of uncertainty connected with the digital transformation. This is consistent through the different structures of family-owned businesses, whether they are family-controlled or family-managed, sibling partnerships, cousin consortiums or focused businesses (cf. Family Businesses). 

Table 4: Case study results, comparison corporate strategy vs. digital transformation strategy

Finding 6: Missing goals for the digital transformation strategy

The first of six principles of strategic positioning formulated by Porter (2001, 71) is: Start with the right goal: long-term return on investment. Ismael, Khater and Zaki (2017) summarized in their synthesized framework for “Digital Transformation Strategy Content” as the first out of seven key areas: long-term objectives, business scope and revenue streams from digitally enhanced products. Kane, Palmer et al. (2015) conclude that rather focusing on technological opportunities, companies should focus to use technologies to achieve strategic goals.

In all cases, the strategic direction of the companies is given by a vision and goals. While you can argue, whether the visions motivate the employees to change, the goals help to prioritize activities and can be measured. Only with targets the financing and investments needed to fulfill these goals can be determined and prioritized to keep the cash-flow under control.

Case 1, 3, 5 and 6 have given the information that they have no specified goals for a digital transformation and no target to explicit change the value proposition and break this down in which regards these influences and changes the value chain. So far, the elements do not fit together. Case 2 have at least a revenue target for revenues done over the e-commerce channel, but this does not change the value proposition and pays into a defense strategy (cf. Digital Transformation Process, Table 5). Case 4 has (defensive) goals which pay into a positive effect of the corporate targets and can be determined for the financing and investments of the digital transformation. “We have also described certain expectations related to savings. The responsible for this goal and its achievement is not the digital program, but the core business, which had confirmed them. So, we’re talking about larger double-digit million amounts that are the committed [for the digital transformation, note from the author]” (Case 4)

Finding 7: Lack of a systematic approach for the formulation and implementation of a digital transformation strategy

All cases seem to have a corporate strategy following a mature proven approach for strategy formulation inside the companies. Table 4 shows the comparison of the corporate strategy with the digital strategy of each case.

In all cases the corporate strategy process includes a clearly defined responsibility, a communication of the strategy inside of the organization, a strategy cycle, a release date and a regular revision of the results measured by KPIs, which are mainly financial figures. All cases have a strategic vision. 

Although a systematic approach is crucial for success (Matt, Hess and Benlian 2015), none of the cases follows neither the procedure of the corporate strategy nor any existing frameworks like described in the Digital Transformation Process. Only in Case 1 and 4 the digital transformation is coupled with the corporate strategy and alongside the functional strategies. Case 3, 5 and 6 reports that they have a self-developed framework to formulate and implement their digital transformation strategy. Case 2 and 4 report, that they are not using any methodology to formulate and implement a digital transformation strategy, but surprisingly say that the digital strategy have been officially released. Case 5 has already 2016 released their strategy, while Case 3 is about to release it.

The drivers of digital transformation are the exponentially growing emerging technologies and the technological change will accelerate with such speed that “society will spend less and less time at any particular technological level” (Lee 2013). The more it is surprising that except Case 4, none of the cases consider a strategy cycle to renew the digital strategy or even only 2 out of 6 cases consider a regular revision of the strategy (Case 4 and 6). Case 5 said “we have a digital strategy; do we need another one?”.

A digital transformation strategy makes it mandatory to align, coordinate and prioritize the many independent dimensions across all other strategies. It these tasks are executed half-heartedly; the formulation and implementation might lose the scope with possible serious effects on operations (Matt, Hess and Benlian 2015). While the responsibility for the corporate strategy is with the CEO or the executive board, only Case 4 and 5 have dedicated roles in their company, where CDOs are officially empowered to formulate and implement a digital transformation strategy. Case 4 is at the same time also the CIO of the company, which gives the topic a more technological driven aspect, where the other dimensions might step into the background. Analog case 1, where the CFO is the former CIO and takes over an equivalent function as a CDO. Regarding to the information retrieved all the above functions serve as a coordinating function. Case 3 is with their digital transformation strategy in an early stage and has a work group dealing with the topic, which can be successful, when it follows a cross-organizational setup and will serve later as a coordinating board. Case 2 and 3 have not clarified the clear responsibility inside the organization and has not assigned the task to a specific role. Managers inside these companies appoint themselves as being entrepreneurial or play the role of a digital evangelist to create awareness related to the digital transformation. “The former head of marketing […] did it in a marketing manner, tore down a firework […] and wanted to draw everyone into digital enthusiasm. And of course, he wanted to appoint himself to drive it forward.” (Case 2).

The formulation of a digital transformation strategy can be aligned into three phases (Feichtinger 2018), the “why”, the “what” and the “how”. The implementation follows the basic principles of change management described by Lewin (1947, 34): “Unfreezing, Moving, and Freezing of Group Standards”.

The “why” should be described by the drivers of the digital transformation strategy, the “what” with the dimensions. Regarding the “how” and the change management measures, Cases 3 and 6 report that they are at an early stage, Case 2 have just completed the formulation, Cases 1 and 4 say they are in the implementation and have achieved first results, Case 5 have achieved first results in production.

Implementation and change management demand a lot of communication to inform everyone and to move them into the new direction. While the corporate strategy will be communicated throughout the organization, mainly by the CEO and the board and with a top-down approach, it seems that the digital transformation strategy will not be communicated at all in half of the cases. The others are in preparation or follow the top-down approach. Only Case 4 has a planned communication: “There is a corresponding intranet and we are regular guests in corresponding townhall meetings. We are now in our second year on a digital roadshow. This means that they have visited all the major locations and presented the program and content accordingly, and in a certain way try to take each employee with them in their specific challenge” (Case 4).

Work Cited

Arnold, Heinrich. The European Path to Digital Transformation. 10 21, 2018. https://www.theglobalist.com/europe-germany-digitalization-technology-data/ (accessed 08 11, 2019).

Berman, Saul J. “Digital Transformation: opportunities to create new business models .” Strategy & Leadership, 40 (2), 2012: 16-24.

Bughin, Jacques, and Nicholas Van Zeebroeck. 6 Digital Strategies, and Why Some Work Better than Others. 07 31, 2017. https://hbr.org/2017/07/6-digital-strategies-and-why-some-work-better-than-others (accessed 08 19, 2019).

Cassia, Lucio, Alfredo de Massis, and Emanuele Pizzurno. “Strategic innovation and new product development in family firms.” International Journal of Entrepreneural Behaviour & Research, Vol. 18 (2), 03 2012: 198-232.

Christensen, Clayton M. “Exploring the limits of the Technology S-Curve. Part I and II.” Production and Operations Management, Vol 1 (4), Fall 1992: 334-366.

DiMasi, Joseph A., Henry G. Grabowski, and Ronald W. Hansen. “Innovation in the pharmaceutical industry: New estimates of R&D costs.” Journal of Health Economics, Vol 47, 2016: 20-33.

Feichtinger, Gudula. “Digitalization in SME : a framework to get from strategy to action.” 2018. http://repositum.tuwien.ac.at/urn:nbn:at:at-ubtuw:1-115120 (accessed 08 09, 2018).

Freimark, Alexander Jake, Johannes Habel, Simon Huelsboemer, Bianca Schmitz, and Matthias Teichmann. Hidden Champions- Champions der digitalen Transformation? München: IDG, 2018.

Geissbauer, Reinhard, Evelyn Lübben, Stefan Schrauf, and Steve Pillsbury. Global Digital Operations Study 2018. Digital Champions. How industry leaders build integrated operations ecosystems to deliver end-to-end customer solutions. Study, PWC, 2018.

Gouillart, Francis J., James N. Kelly, and Consulting Gemini. Transforming the organization <dt.>. Wien: Ueberreuter, 1999.

Ismael, Mariam H., Mohamed Khater, and Mohamed Zaki. “Digital Business Transformation: What Do We Know So Far?” University of Cambridge. 11 2017. https://cambridgeservicealliance.eng.cam.ac.uk/resources/Downloads/Monthly%20Papers/2017NovPaper_Mariam.pdf (accessed 07 26, 2019).

Kaltenecker, Natalie, Thomas Hess, and Stefan Huesig. “Managing potentially disruptive innovations in software companies: Transforming from On-premise to the On-demand.” The Journal of Strategic Information Systems, Vol. 24 (4), 12 2015: 234-250.

Kane, Gerald C., Doug Palmer, Anh Nguyen Philipps, David Kiron, and Natasha Buckley. Strategy, not Technology, Drives Digital Transformation. Research Report, MIT Sloan Management Review and Deloitte University Press, 2015.

Lee, Mike. Meeting aliens will be nothing like Star Trek – fact. 05 08, 2013. https://phys.org/news/2013-05-aliens-star-trekfact.html (accessed 07 31, 2019).

Lewin, Kurt. “Frontiers in Group Dynamics: .” Human Relations, Vol 1 (1), 1947: 5-41.

Luna, David C. Why Companies Need to Eat Their Children: A Comprehensive Guide to Disruption. Article, Berlin: Gamma Digital & Beyond, 2019.

Matt, Christian, Thomas Hess, and Alexander Benlian. “Digital Transformation Strategies.” Business & Information Systems Engineering, 05 14, 2015: 339-343.

May, Peter. Erfolgsmodell Familienunternehmen. Das Strategie Buch. Hamburg: Murrmann, 2012.

Mensch, Gerhard. Das technologische Patt: Innovation überwinden die Depression. Frankfurt am Mein: Umschau , 1982.

Porter, Michael E. “Strategy and the Internet.” Harvard Business Review, March 2001: 62-78.

Porter, Michael E., and Victor E. Millar. “How Information Gives You Competitive Advantage.” Harvard Business Review, July-August 1985: 85-103.

Simon, Hermann. Hidden Champions – Aufbruch nach Globalia. Die Erfolgsstrategien unbekannter Weltmarktführer. Frankfurt am Main: Campus Verlag, 2012.

Venkatraman, N. “IT enabled business transformation: From Automation to Business Scope Redefinition.” Sloan Management Review, Winter 1994: 73-87.

Wikipedia, List of Countries by Export. 07 15, 2019. https://en.wikipedia.org/wiki/List_of_countries_by_exports (accessed 07 15, 2019).

Digital Transformation, Change Management and Family Businesses

One of the inherent system risks for family-owned businesses is the lifecycle (May 2012). Schumpeter (1939) explained why doing business in capitalistic markets is a cycle of economic growth and recession. Especially for companies with the aspiration to sustain over many generations this is a huge challenge. May (2012) suggests family businesses to outwit the lifecycle by following a few simple rules: (1) operate in long-lasting markets, i.e. chose a product portfolio which is independent from short-term trends, (2) introduce a lifecycle radar, a combination of strategic tools and KPIs, (3) continuous adjustments to such an extent to constantly eliminate products which are at the end of the lifecycle and to invest into innovation, (4) make bold decisions, e.g. radical changes like cannibalizing the current revenue and jumping onto new technologies to overcome the innovators dilemma (Christensen 1997).

Bartels, von Hochberg and May (2017) interviewed 50 owners of large family businesses among others related to disruptive trends. They identified that companies that had already survived several generations and had been faced with the downfall of their original business areas have developed strategies to diversify their business and change the business models. Some do not operate in their original business area any more, but others had been able to adopt their business model from selling their product to offer their product-as-a-service (cf. Digital Transformation Process). The common challenge today is the increasing dynamic and speed of change. These changes are not only of technical nature, but especially a question of changing the culture. A possible success factor might be the opportunity of succession as the following generations are already digital natives (cf. Digital Transformation Context).

These considerations demand transformation capabilities in family-owned businesses. Cassia, Massis and Pizzurno (2012) researched “strategic innovation and new product development in family firms” due to the fact that little is known about leading and managing complex transformations in family businesses and with the aim to offer a better understanding of the influence of “familiness” (cf. Family Businesses) in particular the strength and weaknesses. They found out that the advantages are long-term orientation, human resources and dedication to “progression”, tendency to be close to their customers and being focused. Their disadvantages are being conservative and risk averse, a lack of openness, readiness to change, conflicts within the family and the economic rationality of decision-making processes.

Gouillart, Kelly and Gemini Consulting (1999) say that the business models originate from the industrial age and are influenced by mechanical engineering. In the digital age these business models come to a limit. Business transformation means a fundamental change, where a company needs to redefine all dimensions (cf. Digital Transformation Content). Gouillart et al. (1999) researched how companies in industries like chemistry, electronics, pharmacy, automotive etc. managed the change and synthesized these approaches into the “four R of transformation” that need to be achieved:

  • Reframing, i.e. change of attitude by achieving mobilization of the employees, creating a vision and setting the goals and KPIs;
  • Restructuring by constructing a value adding business model, aligning the necessary infrastructure and redesigning the business processes;
  • Revitalizing by becoming customer centric, inventing new business and changing the rules with the help of emerging technologies;
  • Renewing by creating a reward structure, encouraging individual learning and renewal of the organization.

This business transformation approach follows the basic principle of change management described by Lewin (1947, 34): “Unfreezing, Moving, and Freezing of Group Standards”.

The most prominent model underlying the research of Lewin are Kotter´s “8 step process for leading change” (Kotter 1995), summarized here only on headline level: (1) establish a sense of urgency, (2) form a powerful guiding coalition, (3) create a vision, (4) communicate the vision, (5) empower others to act on the vision, (6) plan for and create short-term wins, (7) consolidate improvements and produce more change, (8) institutionalize new approaches.

Kotter never claimed to have developed this model, he captured it by observing more than 100 companies going through transformational change (Farell 2017). One prominent example is the digital transformation of IBM after the company lost more than US$ 16bn and needed to change their business model from selling and running mainframe computers to an e-business company (Farrell 2017).

Although evidently successful for many large enterprises, Oxley (2017) claims that “Kotter’s change framework doesn’t work for large family businesses”. He argues that on the one hand, steps 1 to 5 of Kotter’s model are based on the assumption that no individual leader can enforce change and followers must be convinced to change. On the other hand, the underlying message of steps 5 to 8 is that those who do not comply with the change must leave the organization. Oxley (Oxley 2017) says that this is contradictory to the “familiness” and therefor special characteristics of a family business: (A) dominant ownership, often combined with the existence of a figure who is followed unquestioned by the organization and (B) individual loyalty, i.e. a very strong commitment to the employees and the sense of obligation to take care of them (cf. Family Businesses).

Figure 1: Success Factors of Digital Transformation, adopted and translated from (Müller-Seitz and Weiss 2019, 51)

An alternative approach for family business and hidden champions will be provided by Müller-Seitz and Weiss (2019) who describe five success factors for cultural and structural change to manage digital transformation, cf. Figure 1:

  • Self-organization:
    Change to agile ways of working as the central guiding principle to give space for innovative thinking due to interdisciplinary teams and flexible work environments. Self-organization demands a respectful understanding of people, in which employees are fully trusted.
  • Dealing with uncertainty:
    “Across many industries, a rising tide of volatility, uncertainty, and business complexity is roiling markets and changing the nature of competition” (Doheny, Nagali and Weig 2012). VUCA as an acronym referring to volatility, uncertainty, complexity, and ambiguity has recently found its way into business lexicons (Bennet and Lemoine 2014). To deal in a VUCA world demands curiosity and the attitude of “fail early and fail often”.
  • Work, organization and communication:
    A customer and innovation centric company culture as the basis for success and strengthen the strength of the people as a guiding principle for HR.
  • Add value with cooperation partners:
    Valuable partnerships create the basis for common success as well as building of intercompany networks and linking of work.
  • Organizational learning and knowledge management:
    Implicit knowledge is difficult to handle, but worthwhile to transfer within the organization. Knowledge platforms inside the intranet are possible solutions.

Work Cited

Bartels, Peter, Peter von Hochberg, and Peter May. Strategien erfolgreicher Familienunternehmen 2017. Report, PWC, 2017.

Bennet, Nathan, and G. James Lemoine. “What VUCA really means for you.” Harvard Business Review, Vol 92. (1/2), 01 15, 2014: 27-29.

Cassia, Lucio, Alfredo de Massis, and Emanuele Pizzurno. “Strategic innovation and new product development in family firms.” International Journal of Entrepreneural Behaviour & Research, Vol. 18 (2), 03 2012: 198-232.

Christensen, Clayton M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press, 1997.

Doheny, M., V. Nagali, and F. Weig. “Agile operations for volatile times.” McKinsey Quarterly. 05 2012. https://www.mckinsey.com/business-functions/operations/our-insights/agile-operations-for-volatile-times (accessed 09 20, 2019).

Farell, Adrian. John Kotter – Leading Change Guru. 04 28, 2017. http://candowisdom.com/change/change-management/john-kotter-leading-change-guru (accessed 09 01, 2019).

Farrell, Adrian. Lou Gerstner – IBM’s Digital Transformation Change Master. 05 21, 2017. https://candowisdom.com/change/change-management/lou-gerstner-ibm-digital-transformation (accessed 09 01, 2019).

Gouillart, Francis J., James N. Kelly, and Consulting Gemini. Transforming the organization <dt.>. Wien: Ueberreuter, 1999.

Kotter, John P. “Leading Change: Why Transformation Efforts Fail.” Harvard Business Review, May-June 1995: 59-67.

Lewin, Kurt. “Frontiers in Group Dynamics: .” Human Relations, Vol 1 (1), 1947: 5-41.

May, Peter. Erfolgsmodell Familienunternehmen. Das Strategie Buch. Hamburg: Murrmann, 2012.

Müller-Seitz, Gordon, and Werner Weiss. Strategien zum Umgang mit der digitalen Transformation … aus der Sicht eines mittelständigen “Hidden Champions”. München: Vahlen, 2019.

Oxley, David R. Why Kotter’s Change Framework Doesn’t Work for Large Family Businesses. 07 11, 2017. http://www.davidroxley.com/kotters-change-framework-doesnt-work-large-family-businesses/ (accessed 09 01, 2019).

Schumpeter, Joseph A. Business Cycles – A Theoretical, Historical and Statistical Analysis of the Capitalist Process . New York, Toronto, London: McGraw-Hill Book Company, 1939.

Family owned hidden champions – technological change, family structures and financial stability

Handler claimed 1989 that “defining the family firm is the first and most obvious challenge facing family business researchers” (Methodological Issues and Considerations in Studying Family Businesses, 258). In 2011 Litz, Pearson and Litchfield found out that between 54% of 80 surveyed family business researchers there is almost no consensus on the definition of family businesses (Charting the Future of Family Business Research: Perspectives From the Field).

Despite the fact that family business research has not yet found a commonly accepted definition, it seems that the researchers generally define them based on three perspectives (Handler 1989): dominant ownership, family and the cross-generational aspiration to do business (May 2012).

First, dominant ownership based on the degree of ownership and/or management (Dyer 1986) (Lansberg, Perrow and Rogolsky 1988) that allows the family to influence the most important business decisions in their interest (May 2012). Second, Family, i.e. degree of family involvement in the business (Davis 1983) (Lansberg 1983), the so-called “components-of-involvement” (COI) approach. It is also called the demographic approach (Basco 2013) and defines a family business over the involvement of a family in the company, i.e. its influence through ownership, management and/or governance. (Zellweger, Eddlestone and Kellermanns 2010) (Mazzi 2011). Third, cross-generational aspiration, i.e. the essence of the family business, its behavior to be a family business and the family members involved wish to retain this status  (Chrisman, Chua and Sharma 2005) and to transfer the business to the next generation (Churchill und Hatten 1997) (Ward 2011).

Figure 1: Definition family business, adopted and translated from (May 2012, 26)

Chua, Chrisman and Sharma proposed a slightly different theoretical definition of family business: “a company is a family business because it behaves as one and that this behavior is distinct from that of non-family firms” (Defining the family business by behaviour. 1999)

In China private firms distinguish two different forms “private firms” (个体户 gè tǐ hù) and “privately managed industry” (私营企业sī yíng qǐ yè) (Wu 2006) as one opposite to the “state-owned enterprises” (国有企业 guó yǒu qǐ yè). Privately managed industries match more with the above defined characteristics of a family business. Private firms in mainland China are more about self-employment with a private business hiring less than 8 employees.

To understand family businesses in China, one must understand Confucian traditions that relates to family, social ethics, loyalty to a hierarchical structure of authority and trust between close friends, relatives and family members. Family businesses tend to do business with those who share a common culture and direction, where the collective good of the group and society is more important than the needs of the individual. Many relationships are formed based on informal networks (关系 guānxi) lacking a formal documentation system (Weidenbaum 1996). To achieve the success and sustainability of the family firms, Chinese entrepreneurs came to a modern value of Confucian thinking to combine traditional features and cultural heritage with management thinking, entrepreneurial spirit and a unique commercial culture (Wah 2001).

The International Family Enterprise Research Academy (IFERA) reports 2003 (Family Businesses Dominate) that 96% of all US companies are family businesses, but contribute only with 40% (-50%) to the gross domestic product (GDP). Whereas in Europe from 60% in Germany/France over 70% in Belgium, 75% in Spain up to 80% in Finland and Greece are family businesses. Despite Finland with 45% of GDP (-35%) the difference is more moderate, Belgium 55% (-15%) and Spain 65% (-10%), insignificant in Germany 55% (-5%) or even nonexistent in France with 60% (+/- 0). (International Family Enterprise Research Academy (IFERA) 2003)

An increasing number of family businesses had been very important to China´s economic success and rapid growth (Tsui, Cheng and Bian 2006). The privately managed industry (私营企业sī yíng qǐ yè) contributed in the past decade to more than 66.7% of the GDP in China (Wu 2006).

The world´s largest export nations are China (US$2.157 trillion), USA (US$1.576 trillion) and Germany (US$1.401 trillion), but while this is only 11.9% of the GDP in the USA and 19.6% in China, it accounts for nearly 50% (46.1%) in Germany. (Wikipedia, List of Countries by Export 2019)

Figure 2: Number of Fortune-Global-500-Corporations and exports per country, (Simon 2017)

The German successes in export are coming less from large enterprises, but from SMEs. Germany has more hidden champions than any other country in the world. The large number of hidden champions can be explained from the history of the 19th century, when Germany was not one nation, but split in many small states with traditional decentral competences, which made it already necessary to trade across borders. This developed already the mindset for internationalization. (Simon 2012, 79f.)

The strength of these businesses is that they do not offer a broad portfolio but are very specialized in their offerings and focus often in niche markets, being 100% customer oriented. The success factor is constant growth. Globalization and innovation are the outstanding engines of growth.  But an innovation can be considered a success only if it had proved itself on the market. “Whereas the industry study cited found that 23% of revenues were generated by new products, the percentage is much higher among innovative hidden champions.” (Simon 2012, 273). The range is between generating 48% of revenues with products that are less than 2 years on the market (Bosch Power Tools) or 85% with products younger than 5 years (Kärcher). As there is no definition of a new product, the comparability of these indicators seems not clear, but show that these companies are very innovative. “It is always impressive to see what the hidden champions produce with relatively small R&D budgets and teams.” Therefor quality of people is more important to innovation than money. Loosing such experts can become a serious risk for the companies (Simon 2012). “Superior results seem to be a function of the quality of an organization´s innovation process rather than the magnitude of its innovation spending” (Jaruzelski, Dehoff and Bordia 2005, 2)

Many of these businesses grow from visionary self-employed entrepreneurial inventors, who stay as role models for generations, over hidden champions­­­ to big champions with more than US$5bn in revenue and more than 5000 employees. The risk of specializing is that they are highly dependent on their focus markets, the often high-price market niche can be attacked by standard products or by low-cost suppliers. They are exposed to a high risk of technological change. The threatening situation caused by changing technological requirements makes it mandatory for companies in highly specialized markets to take the leap in technology to be able to survive. (Simon 2012)

Besides failing due to technology change, more often family businesses break down as a result of an unsuccessful succession. To understand the difficulties of transition processes inside a family business May (2012) classifies them in 3 dimensions: ownership structure, company structure and governance structure .

Figure 3: The 3-Dimension Model, adopted and translated from (May 2012, 180)

The ownership structure and its complexity are increasing from a controlling owner over a sibling partnership, cousin consortium to a family dynasty. In companies with a controlling owner you often find the founding entrepreneurial inventor, being the unquestioned visionary and leading in many cases with a patriarchal style. Most conflicts and risks to fail are in a sibling partnership stage and cousin consortiums, where jealousy plays a big role especially when money, power and heritage are unequal distributed among the descendants of the family. With an increasing number of family members (>30) and shrinking shares in a family dynasty, many owners start to see the business only as an investment and loose the relationship to the company (May 2012). Still the difference to a public company or private equity fond is the homogeneous ownership structure. (Habbershon und Williams 1999) describe it as the “familiness”. “It is the unique bundle of resources a particular firm has, because of the system interactions between the family, its individual members, and the business” (Habbershon und Williams 1999, 11), which is a precondition for continuity over many generations.  

The major issue with the company structure is the risk resp. the risk limitation. The risk is increasing starting from a family start-up business over the focused and then the diversified family business up to the family investment office. While in the start-up and the focused family business the necessary competences and identification can be found in the family, it will be difficult with a more and more diversified investment. (May 2012)  

The central aspect of the governance structure in a family business is the principal-agent-problem. Jensen and Meckling (1976) describe the conflicts of interest, when the owners (principals) assign external managers (agents) to lead the business. In other words, an external manager deals with other people’s money different than the owner. While the owner is interested in the return of the invested capital, it is the focus of the external manager to increase the own value. This risk is significantly lower when the owner or family members are managing the own business but is increasing when the business is only controlled by the family or even the control of the family business is executed by externals.

Family businesses facing the same issues as public companies, but added the problems connected with the family. On the one hand with the increasing complexity of the ownership and company structure it then becomes necessary to create formal mechanism of coordination, planning and organization of family meetings. On the other hand, similar to other companies it is common to promote or fire people, set goals or measure performance. The difference here is, that these decisions affect members of the family – a father, sibling, son, daughter or cousin (Rodrigues und André Marques 2013). Typical risks are family patriarchs who despite their old age are unable to let loose of the business or parents which promote their insufficient prepared children (May 2012, 144). These authors argue that there is a way to minimize the impacts of these problems by establishing a form of organizational governance for each of the subsystems, family and business.

Figure 4: Structure and Complexity of Family Businesses, (Rodrigues und André Marques 2013, 51)

Astrachan, Klein and Smyrnios (2002) introduced the F-PEC scale measuring the family business in the dimensions of power, experiences and culture. Power as in the 3-dimensional model (May 2012). Experiences coming from the generations of ownership, in active management/governance and number of contributing family members. Culture, i.e. the overlap between family values and business values and the commitment to the family business. Marín et al. (2017, 2) summarize in their study about organizational culture and family business different sources that “organizational culture has been traditionally considered as one of the most important intangible strategic resources in developing competitive advantages […]. Organizational culture is even of greater importance in the sphere of the family firm, where a set of beliefs and interests, highly influenced by the family relations […], may produce significant differences from any other non-family organizations […].” They conclude that to prevent the risk of subsequent loss of family wealth and family control and if family business want to change their emotional, internally-oriented organizational culture towards a more rational, market-oriented organizational culture, family owners and managers should consider “a professionalized and dynamic culture that favours innovation, internationalization and financial outcomes” (Marín, et al. 2017, 8)

“Throughout the world and across the centuries, family businesses share a common set of challenges: liquidity for the shareholders, capital for business growth, and responsiveness to shareholders’ control objectives.” (Visscher, et al. 2011, 1) Family businesses have different types of liquidity needs related to the family be it the dividends for the invested capital, desire for income or to settle liabilities in case of a shareholder’s death. A family business needs capital to fund the working capital as well as the growth plans of the firm. “The business’s needs for and access to sources of growth capital are likely to increase as the forces of competition, globalization and innovation challenge the company” (Visscher, et al. 2011, 5). “The more control the family desires, the less liquidity will be available to shareholders and the less capital will be available to expand the business” (Visscher, et al. 2011, 6).

Figure 5: The Family Business TriangleTM When the liquidity and capital needs drift apart, control is lost, adopted from (Visscher, et al. 2011, 3f.)

In other words, the risk is that the family loose its control over the business when the growth plans become too ambitious. If the company’s independence from third-party influence is most important as the company should remain a family business, then stability must take precedence over profitability and growth. To be able that the family remains to play a dominant ownership role, the business depends on the financial resources provided by the family (May 2012). May also says when rejecting outside influence “the most contribution to the financing is the profit” as this is the major source for strengthening the equity capital in the family business (2012, 105).      

Michiels and Molly (2017) collated “that the literature still remains inconclusive on the level of debt used in family firms. […] A trade-off needs to be made in family firms between the retention of control, which favors the use of debt financing over external equity, and risk aversion, which stimulates the company to adopt more cautious attitudes towards debt […]” (Michiels and Molly 2017, 374). Schulze, Lubatkin and Dino (2017) researched the use of debts of family businesses esp. in relation to the ownership structure. They found evidence that sibling partnerships use less debts and are therefor less willing to take risks than controlling owners or cousin consortiums, who show an increased level of loss aversion and misalignment within the family. According to Visscher et al. (2011) companies in the start-up phase more likely fund the capital needs with internal cash-flow and short-term debts, while focused and diversified businesses use longer-term debts until family investment offices may also go to the private or public equity market.

According to May “Low Leverage is Key”, family businesses need high equity ratios. While financial investors use the effect of leverage to maximize the return of the invested capital, do family businesses exact the opposite. To stay as independent family businesses and be profitable over many generations, they favor financial stability. Among the top family businesses May has seldom seen a worse ratios than 1:2 of external financing to equity capital. (May 2012, 108ff.) The research from Hermann Simon showed that Hidden Champions have an average equity ratio of 42% und under the assumption of costs of debts of 6%, their return on equity (ROE) is 25%. (Simon 2012, 342)

Figure 6: Median equity ratio of family and non-family business in comparison, (Centre for European Economic Research (ZEW); Institut for SME Research (ifm) 2019)

As a conclusion, family businesses are characterized by a dominant ownership, “familiness” and the aspiration to stay independent and within the family for many generations. Worldwide most of the businesses are family firms with a high contribution to the GDP, especially in Germany. Their success factor is coming from constant growth, where globalization and innovation play an important role. To be able to stay in control of the family business with the challenges of increasing family members over the generations in the dimensions of ownership, company and governance structure an equilibrium between control, cash flow and capital needs must be achieved. A high ROE and therefor high equity ratio increase the entrepreneurial freedom and creates good conditions for the typical competitive advantage in family businesses in the form of quick decisions uninfluenced by external constraints.

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