When the Internet and, with it, ecommerce started to disrupt the mail order industry in the late 1990s, the latter was characterized by a high proportion of family firms and a low level of innovativeness. A new study shows that, in case of disruptive industry change, family influence may function for better or worse for incumbent firms.
In its early days, ordering goods by mail was highly innovative and posed threats to established retail businesses. At the time online sales emerged, firms in the traditional mail order industry had decades of experience in logistics, purchasing, and marketing. In the 1990s these firms did economically extremely well. Therefore, it would be reasonable to expect that with the emergence of the Internet, these firms would have a head start over new market entrants and should have grown their businesses and remained market leaders.
Hunters become the hunted
However, it was partly their success, which made them vulnerable. The overall self-confidence in the industry was quite pronounced. Or as one interviewee in our study put it: “We did not have (…) these new competitors in focus and did not regard them as serious competition; on the contrary, we said we will leave them behind. If we put our foot down, we can overtake them.” In some firms the executive teams simply did “not believe in this thing with the Internet”. As we know today, they were proven wrong and firms such as Amazon and Alibaba wrote history.
A process model of determinants of family firms` reactions to disruptive industry change
Based on our data, which consist of interviews with top executives, owner family members, industry experts, and secondary data such as company reports and websites, we identified two crucial phases between the emergence of the Internet and with it the opportunity to move on to ecommerce and the reactions of the family firms and integrated these findings within a process model.
In the late 1990s all firms in our study became aware of the Internet as new technology and potential sales channel. However, the way they dealt with it and in particular their success based on their reaction differed greatly. While some of them rose to become some of the most successful online retailers in Germany themselves, others had to cease their business. The first phase of the reaction involves perceiving the new technology as opportunity (opportunity recognition), and the second phase involves implementing changes in the business that leverage the new technology (opportunity implementation). In both phases, family firm-specific influences play an important role and may catalyze the firms’ actions.
Perception filters hinder incumbents from perceiving the new disruptive technology as an opportunity and acting accordingly. Specifically, we identified four perception filters in our analysis: adhering to rules of the game, prior success, innovation culture, and split focus. Almost all interviewees stated that they became aware of the Internet in the early/mid-1990s, just around the time the first online retailers began their businesses in the US. However, this awareness did not mean that the executives considered the Internet to be relevant for their firms at that time. Except for very rare exceptions executives did not see reasons to react.
When implementing opportunities, the history and status quo, what we refer to entrepreneurial baggage, might get into the way of taking advantage of new developments. Our data show that financial limitations, existing customers, and structures and hierarchies were important drivers of how the firms dealt with the change. For the incumbent firms, setting up structures for the new ecommerce channel meant they had to make large investments. Several interview partners stated that not only was the setup of these structures expensive, but at the same time, their existing businesses had to continue running and developing because it was not yet foreseeable whether e-commerce would truly be successful. Therefore, companies avoided taking excessive risks by allocating too many resources to a still-unknown business. The compensation incumbents had originally hoped for (i.e., substitution of expensive catalogues with comparably cheaper contact via the Internet) could not be realized within a short time frame. At the same time, additional costs were incurred by the companies for the establishment and operation of, for example, online platforms and further marketing costs. Consequently, on the cost side, the incumbents could not compete with the new market entrants.
Compared with many of the new entrants who were funded by venture capital or already had their stocks listed, access to capital was rather difficult for incumbents, and necessary large investments were not fully made. This limitation also made it easier for the newcomers to expand their businesses without facing any consequential resistance from the incumbents.
The role of the family disruptor
We found that in most of the firms, some individuals pushed the process to move the business model toward online applications and testing and introducing ecommerce. How the firms reacted strongly depended on who pushed the topic. The majority of the family’s external board members stated that they were aware of the topic but did not regard it as a threat. Furthermore, to most of them, the topic was not attractive because there were no short- or midterm gains to be made from it. However, there were exceptions to this. One external manager stated: “I would come in through the front door and present my ideas, and if they (the board members) would kick me out, I would come back in through the back door.” However, these endeavors were not very fruitful. In contrast, in cases where a family member pushed the topic, reactions were more open. In some of the younger firms within the sample, members of the first generation who were still running the firm decided that they “just had to do it”. In other incumbent firms, next-generation members pushed the topic, often confronted with irritated reactions by members of the board. In these cases, incumbent firms were better able to deal with industry changes.
Tips for practitioners
- Be aware that the perception of your organization of market signals is biased by perception filters.
- Be aware that “the next big thing” will likely not happen at your doorstep and make sure to attend to different and reliable information channels.
- Foster diversity in executive committees to help avoid blind spots.
- Listen to ideas of the next generation – even if they seem to contradict your experience.
- Grow an innovation culture, which rewards “trial and error”. If this is not feasible for the whole company, separating new activities from old activities, for example, by establishing a spin-off, could be a step toward success.
- de Groote, J. K., Conrad, W., & Hack, A. (2020). How can family businesses survive disruptive industry changes? Insights from the traditional mail order industry, in: Review of Managerial Science: 1-35.
Assistant Professor Dr. Julia de Groote
Julia de Groote is Merck Finck Assistant Professor of Family Business at the Institute of Family Business & Mittelstand. Her research and teaching focuses on how (family) businesses can be sustainably successful by means of innovation and leadership.
Professor Dr. Andreas Hack
Andreas Hack is Director of the Institute for Organization and Human Resource Management at the University of Bern, Switzerland. His research focuses on behavioral processes in family firms, with a special focus on innovation, marketing and leadership.