With the rise of artificial intelligence, electric vehicles, and the sharing economy, one could be forgiven for thinking we are already living in an age of disruption.
But analysis by RBC Wealth Management suggests companies like Airbnb, Uber, and Netflix are the tip of the iceberg, with the current climate of sluggish growth and productivity ripe for much more widespread disruption.
Frédérique Carrier, RBC's head of investment strategy, says the number of firms opening and closing in the US each year has declined steadily over the past four decades, suggesting the present business landscape is—contrary to popular belief—characterised by a lack of change.
Disruption will accelerate as the services and products coming to the market require less capital than in the past thanks to technology that easily connects customers and services. Consider, Carrier says, the small investment required for Airbnb to disrupt the hotel industry.
“If you have lower capital requirements, that lowers the barriers to entry for disruptors, it enhances competitive dynamics and it puts pressure on incumbent companies.”
Carrier gives the example of video rental chain Blockbuster, the chief executive of which said in 2008 that Netflix was not even “on the radar screen” of competition. Blockbuster filed for bankruptcy in 2010, while Netflix has more than 100 million subscribers today.
So what can multigenerational family businesses do to stay ahead of the curve? And how can family office investors insure they don't have any Blockbuster-type companies in their portfolios?
Carrier says the first step lies in identifying the threats to industry—these can come in the form of regulation, technology, or societal changes—a trifecta now at work in the auto industry.
Carmakers, including family-controlled companies like Ford, BMW, Toyota, Fiat Chrysler and Volkswagen, are facing massive disruption from lithium ion batteries and EV technology. At the same time they are dealing with regulatory changes around emissions,” Carrier says.
“Incumbent companies need to rethink their businesses completely. And if that was not enough, society is changing through the sharing economy. We've seen studies that show one shared car could replace 10 privately owned cars.”
Investors need to be able to assess which companies can adapt to disruptive environments, tricky given the timing of the impact of an innovation is very difficult to assess.
“What you really need is management with the ability and the willingness to change,” Carrier says.
“And the acid test of that is whether they will be willing to sacrifice some core divisions, whether management is willing to see 'sacred cows die off'.
“It is difficult for management to do that because often they fear it needs to protect the legacy business.”
Disruption also spells opportunity for families. David Storm, head of multi-asset portfolio strategy, says family offices showed particular interest in alternative investments like cryptocurrencies.
“Multifamily offices…tend to be earlier adopters of some of these investment opportunities,” Storm says.
“A lot of that comes from the founder mentality where there's generally an entrepreneur looking for these opportunities.”