How do family enterprises expand in a low-growth environment? Are untapped markets the stuff of blue ocean strategy books or can multigenerational families nimbly channel all-new revenue streams? Scott McCullochnavigates uncharted waters
Companies should stop trying to beat the competition and focus on finding “blue oceans”—new markets devoid of competition that create new demand. That was the wily premise of W Chan Kim and Renée Mauborgne, professors of strategy at French business school INSEAD, in their 2005 international bestseller Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant.
Blue ocean is a metaphor for expanding, competitor-free markets that nimble companies can navigate. Unlike red oceans, crowded with competitors, blue oceans offer untapped market space and the opportunity for highly profitable growth.
“Life coaching is a $2 billion industry that didn’t exist 25 years ago and today it’s the second-fastest-growing profession in America,” Mauborgne told Fortunemagazine.
But is this approach a fit for multigenerational family businesses?
Imran Zawwar, a strategic management expert at Cranfield University’s School of Management in the United Kingdom, says it depends on the context in which families operate.
Zawwar cites the Global Entrepreneurship Monitor, which divides leaders into “necessity-driven entrepreneurs” who are involved in entrepreneurship because they had no better choice for work, and “opportunity entrepreneurs” who are driven by opportunity.
Zawwar believes family businesses are closer to “necessity entrepreneurship” since the next generation, who propel the family legacy forward, enter entrepreneurship not because they see opportunities, but because they see few other suitable work choices available.
Their “opportunity costs” for pursuing different career trajectories or new business opportunities are higher, and therefore traditionally they are not very innovative.
“Family businesses tend to follow set routines and established business practices,” Zawwar says.
“This serves their purpose better as it makes them more stable and less volatile to the changes in the business environment.”
One reason big companies fail to set sail for blue oceans, say Kim and Mauborgne, is that the dominant focus of strategy work over past decades has been on competition-based red ocean strategies—in other words, finding new ways to cut costs and grow revenue by grabbing market share from competitors.
It is certainly plausible that a multigenerational business, with deep roots in pursuing traditional business practices, might be reluctant to explore blue oceans, yet the opposite can be just as true.
Zawwar says business families “feel more comfortable in grabbing a greater share of an existing market. However, their lack of interest in exploring blue oceans does not indicate a lack of ability in pursuing such a strategy.”
Taking the plunge
Some family-held enterprises consciously explore blue oceans by establishing separate strategic business units, and with great success.
Last year, Germany’s €4.3 billion ($5 billion) Eberspächer Group renewed its commitment to sail into uncharted waters.
“We established our new Business Innovation Unit and set our sights on the future,” says Heinrich Baumann, managing partner at the fifth-generation automotive components supplier.
Eberspächer has a longstanding innovation gene, which Baumann says it deftly demonstrated over a decade ago when it entered the high-voltage electrical heater market. Emboldened, it later hit the acquisition trail.
“The time is ripe now for alternative drive systems and electro mobility,” Baumann says.
“Our 2016 majority stake in battery specialist Vecture is another example of how we are gradually expanding our expertise in energy management.”
Baumann adds that taxis and other livery vehicles will soon have high levels of automated driving capability connected wirelessly to smartphones via cloud services.
“So why not think about air-conditioning systems or batteries with internet connectivity? Our aim is to build a product portfolio that will safeguard our future.”
Future-proofing is a recurring theme in sophisticated businesses. Among business families, the finger of fate is often pointed at the next generation. Are they comfortable wading into blue oceans? Some commentators believe so.
“I see this all the time,” says Carol Pepper, chief executive of Pepper International, a New York-based family office.
“Younger family members inspire business-owning families to strike out in new directions, explore new technologies and establish new partnerships with other family businesses.”
Pepper, who acts as chief investment officer to several single family offices, cites an example of a creative next generation family member repurposing a mature wood processing business.
“The family had been in the timber business for generations and this young man in his twenties realised that the future was not just in timber, but in the rapidly-developing carbon-credit trading market.”
“Suddenly a tree was not only wood,” Pepper says.
“It was valuable for its reduction of carbon emissions. He guided the family into the carbon trading market and now the carbon credits are worth more than the land and the timber.”
In his role as an executive development strategist, Cranfield’s Zawwar tells a similar tale of a client he helped seize opportunities through new digital marketing practices.
“In a one-year period the family business increased their online sales by roughly 150% and 93% of these sales were in new territories,” he says.
Success was attributed to the family’s decision to establish a separate strategic business unit.
“It was a way to break down the silos of the family business and establish a new entity altogether.”
Despite the impressive results, the family was hesitant to make further investments in its new business unit. It felt more comfortable with traditional marketing channels, despite higher costs.
“The lead time in implementing strategic change in a family business is more than twice the lead time taken by an average corporation,” says Zawwar, who is often retained for entrepreneurial strategies.
“In most cases, change is not fully implemented as expected.”
Yet strategic business units often pay off handsomely as family members tend to behave more like opportunity entrepreneurs rather than necessity-driven entrepreneurs.
They tend to reduce the influence of the whole family in the strategic business unit and concentrate decision-making in one or two members of the family only.
Some family businesses take to blue ocean tactics like ducks to water. Driven to differentiate, they thrive on creating new demand rather than competing in old shark-infested waters.
“There’s no doubt [we] consciously adopted a blue ocean strategy,” says John Casella, managing director of third-generation Australian winemaker Casella Family Brands.
“The strategic approach was simply intuitive to us.”
Casella says his company was already on a path to differentiate itself from competitors and find untapped markets “before the term blue ocean strategy was defined.”
That was in 2001.
“The wine industry was hugely competitive. We needed to escape the crowded market, make our own rules, and create a brand that had breathing space to grow,” Casella says.
“We needed to be highly strategic as many of our competitors were established market players and very well-resourced.”
The strategy paid off. By 2015, the family-run winery had rocketed from a small Australian regional player to capture a 51% share of the Australian category of the US wine market.
“We found that many people were intimidated by the mature, stuffy wine industry and avoided wine because they did not want to learn about vintages, varietals, regions or any detailed wine terminology.
“We decided that the key to differentiation was to demystify wine and ensure that we brought enjoyment to our consumers’ lives by being more playful and vibrant. Thus, Yellow Tail was born.”
In less than 10 years, Yellow Tail became the number one imported wine and the fastest-growing brand in the history of the US and Australian wine industry.
Blue ocean approaches are neither the preserve of Silicon Valley start-ups nor risk-friendly venture capitalists, say experts familiar with the model.
But the tactic implies a willingness to change. Pepper believes that soon few firms will be untouched by snazzy technologies or forms of artificial intelligence that will ultimately foist change upon business clans.
“Whether a family is making artisanal products or coming up with new apps, there is not one business that is not facing constant change,” she says.
Embracing it nimbly will be critical.
“Today literally all business is affected. An ancient Italian family vineyard may find opportunities to sell wine in a far-flung province in China, where their type of grape can become vastly popular to millions of new consumers rather than fighting for shelf space in Milan.”
As to how best a family firm can ready itself for a blue ocean gambit, Pepper advises a hard look at balance sheet fundamentals.
“There should be a hurdle rate of return for the family business. If the business is not meeting its rate, then it needs to assess whether their business is a cash cow, a star or a dog that becomes a ‘red ocean’ situation with too much competition.”
In the deep end: What is a Blue Ocean strategy?
Blue ocean is jargon for uncontested market space in an unknown industry or innovation.
Introduced in the 2005 book Blue Ocean Strategy, blue oceans are associated with rapid and high profits.
There are two ways to create blue oceans: launch a new industry, as eBay did with online auctions, or expand outside an existing sector.
Montreal’s Cirque du Soleil (pictured above) is oft-cited as a blue ocean organisation because it reinvents the circus, competes outside the confines of an existing industry (the traditional circus), and does not poach customers from rivals.
Cirque du Soleil developed uncontested market space that made the competition irrelevant. In blue oceans, demand is created, not fought over as in competition-based ‘red’ oceans where companies vie for a greater share of a declining market.