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TOPIC:

INDIAN FAMILY MANAGED BUSINESS

SUBMITTED BY:
Anuranjan

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INDEX
Sr. No. TOPIC Pg. No.
01 Introduction 02
02 Characteristics 04
03 Tata Group 05
04 Reliance 07
05 Advantages 09
06 Controlling The Empire 09
07 Challenges 12
08 Conclusion 16

Introduction:

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A Family-owned business is one that is owned and managed (that is controlled) by one or
more family members. Family-owned firms are – “organizations where two or more
extended family members influence the directions of the business through the exercise of
kinship ties, management roles, or ownership rights.” A family – owned business is any
business in which a majority of the ownership or control lies within a family. It is also a
complex, dual system consisting of the family and the business. Members involved in the
business are part of a task system and also a part of a family system and these two
systems may overlap.

Family – owned businesses exist all over the world and some of the worlds oldest firms
are family- owned e.g. Kongo Gumi of Japan was founded in 578 AD and is currently
managed by the 30th generation. Some of the largest wealth creators and businesses are
family owned like Wal Mart. In India too, the highest generator and creator of wealth are
family – owned businesses. The issues faced and the interests involved by family-owned
businesses all over the world are more or less the same. The importance of the family in
business and the blurredness of the distinction between business and family are
predominant issues.

Over 80% of world business is controlled by families. They employ around 50% of world
work force. They contribute around 40 to 50% in world GNP. But the sad picture is that
only 15 to 20% of family businesses survive till the third generation.

Indian Family Business:

Today’s Indian industrialists rose from the bazaar. Their roots in industry are relatively
recent, going back largely to the First World War. Before that they were traders and
moneylenders engaged in the hustle and bustle of the bazaar. Even in Bombay and
Ahmedabad in western India, where the cotton textile mills came up earlier in the last
half of the 19th century, it was the trading communities who became industrialists.
Aggarwals and Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains
and Banias, Muslim Khojas and Memons in the West, and Marwaris all over India.

Initially they were in small business which required small investments letting the families
manage the business on there own. But once they entered into manufacturing sector
(industry), they felt the need of heavy investments. But they were also aware of the fact
that if they allow anyone and everyone to invest, then they can lose there control over the
management of the entire business. To spread the risk, therefore, the families setting up
industrial undertakings enlisted the cooperation of others, usually close friends or
relatives, and allotted to them blocks of shares, while making sure that the majority
control and, therefore, the management of the company remained with the promoting
family. Thus was born a system of corporate management that was a strange combination
of joint stock principle and family control. As the stock markets were yet to develop
sufficient momentum, and the joint family system remained firmly intact, there never was
a threat to the power of business families over their industrial empires built up through
the ingenious device, popularly known as the managing agency system. All critical

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decisions about the firms were taken by the promoting families, euphemistically termed
managing agents, with their heads exercising as much authority over the companies under
their care as over any other matter affecting their families in any other sphere of life.

In due course this system of corporate management became so deeply entrenched that on
the eve of India’s Independence, hardly any industrial firm of consequence was out of its
orbit. This meant that practically all business operations in the country were controlled by
a few families. R.K. Hazari, a well-known industrial economist, had concluded after an
exhaustive analysis that most of the prominent industrial firms on the contours of Indian
business during the 1950s, were in the hands of just 18 Indian families and two British
houses.

Within a decade of India’s freedom, three major developments disturbed the tranquil
situation that earlier prevailed on the business horizon. These developments were:

1. The nation’s resolve to accelerate the pace of economic development held out an
attractive invitation to the private sector to partake of new opportunities for
business gain, notwithstanding the myriad restrictions imposed on the freedom of
enterprise.
2. Both the Union and various state governments set up a number of financial
institutions to provide industrial finance to private sector companies.
3. The joint family system, once the bedrock of the Indian social structure, began to
increasingly experience severe strains, thanks to growing urbanization and
westernization.

These developments caused many changes in the family businesses. Due to the
magnanimous size of the country’s infrastructural projects, families were no longer able
to mobilize the required resources which gradually passed the financial control of the
firms from the families to the financial institutions. Also the families started showing
cracks. The Dalmias were the first prominent business house to break up after freedom.
The pace, however, accelerated beginning with 1970 and the following 25 years
witnessed splits in at least as many business families. And these included such illustrious
names as the Birlas, Modis, Sarabhais, Bangurs, Singhanias, Mafatlals, Shrirams,
Thapars, Walchands, and Goenkas.

Inspite of the loosening financial control over their companies and growing splits, the
control of business families over the management of their concerns remains almost
unimpaired. According to a recent tally the management of as many as 461 of the 500
most valuable companies is under family control.

Characteristics of Indian Family Business:

Loyalty: Family, extended family and relatives have a very strong sense of loyalty to the
family that automatically translates as loyalty to the business.

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Family relationship: Family relationship is the most important factor in determination of
the position a person holds in the business.

Male Dominated: Sons and male members are more likely to hold higher positions and
Succeed the CEO. Role of women is that of facilitator to the male members and the
mother figure to the family and employees.

Active and non-active members: family members include those who are not
contributing or are involved in the business are on the Board of Directors.

Passing the Baton:

A general pattern that families deploy to pass the leadership of the business to its next
generation consists of three basic components:

1. Grooming the new generation: Families start preparing the young generation
early in there life cycle so that they can understand the intricacies of the business
till the time they are called to takeover.

2. Steady growth of stake: large business families have created a web of


shareholding companies and they are at the top of the pyramid holding the group
together by controlling the management of the entire group. They employ there
young generation the shareholding companies on a salary basis. This way they not
only gain an insight of the business but they are also encouraged to buy stakes in
these group companies using there earned money.

3. Gradually reach the top: With the passage of time, the next generation is ready
to take the charge of the family business as it has acquired both, business
knowledge and stake in the company. They keep galloping the ladder to the top.

TATA Group:

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Tata Group is one of India's largest and most respected business conglomerates,
comprising 98 operating companies (out of which 28 are listed companies) in seven
industrial sectors viz. IT systems and communications, engineering, materials, services,
energy, consumer products and chemicals. Tata Aviation (now Air India) were the first to
operate commercial passenger services in India. The group has operations in more than
85 countries and its companies export products and services to 80 countries. The total
employee strength is around 246,000.

In a country where family firms have dominated the landscape for generations, the House
of Tata remains primus inter pares. In India's tiger economy, nobody roars louder than the
Tata Group, a $17-billion conglomeration that is the country's largest by market
capitalisation, and accounts for 2.8 per cent of India's GDP.

Tata Sons, the premier promoter company of the Tatas was established as a trading
enterprise by Group founder Jamsetji Tata in 1868. It is the promoter of all companies of
the Tata Group and holds the bulk of shareholding in these companies. The chairman of
Tata Sons has traditionally been the chairman of the Tata Group.

Currently, Ratan Naval Tata is the chairman of the Tata Group. Mr. Tata is the nephew of
J.R.D. Tata, a leading industrialist in the days of British rule and the years of socialist
autarky thereafter. Ratan Tata discovered that each division was run by a different

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chieftain as a private fiefdom, with no proper central control. Ratan Tata's elevation to the
throne coincided with the opening up of the Indian economy in the early nineties, and the
end of the so called "License Raj" that had stifled business growth since Independence.
He shook up the group, focusing on the development of high-tech companies and putting
the Tatas at the forefront of the Indian economic miracle.

Nearly 66% of the equity capital of Tata Sons is held by philanthropic trusts endowed by
members of the Tata family. The biggest two of these trusts are the Sir Dorabji Tata Trust
and the Sir Ratan Tata Trust, which were created by the families of the sons of Jamsetji
Tata.

Tata goes Global:

In 2000 Tata tea acquired Tetley group (2nd largest tea manufacturers),

In 2001 Tata a joint venture between the Tata Group and American International Group
Inc (AIG)

In 2005 Tata Steel acquires Singapore-based steel company NatSteel.

In 2007 Tata Steel acquires the Anglo-Dutch company Corus

In 2008 Tata Motors acquires the Jaguar and Land Rover brands. Tata Motors unveils
Tata Nano, the People’s Car, at the 9th Auto Expo in Delhi.

Having found that, it will be imperative to comment that it’s the family values nurtured
by the Tata family and the family unity which it has shown since the first generation has
propelled Tata to the status they enjoy, not only in the business world but also in the
society. There are many families earning fortunes but the trust and respect enjoyed by the
Tatas in unmatched in the history. Tata is one of the best cases for those families who are
trying to build there business and are concerned with the future prospect of their family
and the business. Tatas enjoy there respect and trust worthiness because they have shown
a way to manage your business without spilling the family beans in the public and
nurturing a highly principled value system in the family.

Reliance Group:

Family tree of Reliance Group:

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One of the leading Indian businessmen was born on December 28, 1932 in Chorwad,
Gujarat. Popularly known as Dhirubhai Ambani, he heads The Reliance Industries, India's
largest private enterprise. Dhirubhai started off as a small time worker with Arab
merchants in the 1950s and moved to Mumbai in 1958 to start his own business in spices.
After making modest profits, he moved into textiles and opened his mill near
Ahmedabad. Dhirubhai founded Reliance Industries in 1958. After that it was a saga of
expansions and successes.

Real rags to riches journey took off in 1958 on his return to India. Along with his cousin,
he started Reliance Industries with the capital of Rs 15000. Later, due to the risk-taking
nature of Dhirubhai, his company achieved many milestones. Dhirubhai’s new style of
management was really successful and earned him the confidence of 1.2 million investors
as early as 1985. Later the business tycoon established such a big business house that
every body in India and abroad was envy of the progress.

It was in 1977 when Dhirubhai Ambani took initiative for first IPO. In 1993 the IPO of
Reliance was the largest IPO of India at that time. The meteoric rise and growth in the
business was so enormous that by 2007 the combined fortune of the Ambanis was 100
Billion dollars. In 1992, Reliance became the first Indian company to issue GDRs in
global market. Later in 1999-00, the company established world’s largest integrated
grassroots refinery in Jamnagar.

Another mile stone was, the launch of the CDMA mobile telephony in India in 2002. This
was the year when the mobile communication actually entered the revolutionary era. The
famous 500 Rs mobile offered by the company, brought mobile phones to every nook and

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corner of India. From CEOs to auto rickshaw drivers every body was laced with mobiles!
The high growth figures and innovations of company made it the first Indian private
sector company to enter Fortune’s Global 500 list.

The Big Split:

The great visionary, Mr. Dhirubhai Ambani, who loved to dream big and to attain them,
lacked the vision to carve a succession plan for such a giant corporation. He passed away
without providing the company with clear cut succession route. May be that he never
thought that even such huge empire will fall short of the aspirations of his two little
Ambanis. He failed to understand the strategic importance of planning the succession in
advance and the in year 2004 the sibling rivalry in reliance became the most talked story
in the business world.

Result After Split work

Step 1: Split the Ambani family stake in RIL in the 30:30:40 ratio among the two
brothers and Kokilaben. Anil Ambani to relinquish control to Mukesh, who gets full
control of Reliance Industries' core oil and gas business.
Step 2: Create a special purpose vehicle to house RIL's stake in Reliance Energy and
Reliance Capital. Anil Ambani to continue heading the two firms.
Step 3: In lieu of Anil giving up control in RIL, Mukesh Ambani transfers part of his
45% stake in Infocomm to Anil, who now gets to run the venture.

Reliance split is a burning case presenting the biggest challenge for any family indulged
in business. Just after the split the company slipped in Forbes list.Even if the reliance do
not suffer severely, it certainly devalues the status of the family in the society and trust of
the customers and the shareholders. If Mr. Ambani had planned a business envisioning
the inherent conflict it could have been another story altogether where both the siblings
would have complemented each other with their unique skills and have consolidated the
empire created by their father into a well established and cared family business not just
another business.

Advantages of Family Business:

There are certain advantages enjoyed by the family businesses which is generally not
found in other businesses.

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1. Common Values: Family members share same ethos values and belief. This gives
an extra sense of purpose and pride, and works as a competitive advantage.
2. Strong Commitment: Closer ties between the family members and there
emotional attachment with the family’s occupation instills them with strong
commitment towards the business.
3. Stability: Family businesses seem to be more stable and consistent in long term
planning.
4. Loyalty: Due to strong personal bonds family members are likely to stick
together in hard times.

Controlling the Empire:

After going through the huge empires build by the families in India one gets tempted to
study there group structure to find out the ways using which they are controlling the
management of these empires without investing much of there personal fortunes. When
one goes a bit deeper into the investment-web created by these families in there
companies it becomes clear that almost all of them have created a pyramidical structure
by using the tool of Cross Holding.

Here we have used the web created by the Tata family in Tata group as a case. When Mr.
Ratan Naval Tata became the chairman of the Tata group in 1991 he found that the group
was a loose confederacy of 300 companies’ having sales of around Rs.86 billion.
Moreover Tata Sons enjoyed very little control over the management of the group
companies. Mr. Tata decided to change the group. The Tata group structuring involved
various steps such as building Tata brand, reviving its managerial recruitment and
retaining practices, changing the portfolio of business lines and most importantly making
the group more cohesive and controllable.

While the brand name of Tata group would have ensured that there would be no risk to
loss of management control still the group decided on increasing its ownership stake in its
affiliates. An increase in the cross-holding structure of group companies combined with
pyramid structures provided a mechanism to the Tata group to control firms within the
group without necessarily having significant equity investment. It can also be said that in
quest to increase stakes in the companies Tata has hurt the investor’s interests.

The pattern which is observed in the Tata Sons is generally found in all the other family
businesses in India. It keeps them at the helm of business affairs. The system also helps in
aligning the profits of different group companies. But the sad part is that it inhibits
transparency and can hurt share holder’s interests.

Structure of Tata groups listed firms during 2005:

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Restructured Tata:

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Major GroupTata Sons Stake in Group
Companies Company
FY95 FY96 FY05
Tata Iron &Steel 2.3 8.5 19.5
Tata Motors 1.8 2.7 21.9
Tata Power 5.6 6.3 28.7
Tata Chemicals 7.9 8.2 15.2
Indian Hotels 13.3 13.3 12.9
Tata Tea 7.6 8.6 15.8

Challenges/problems in Family Business:

In spite of the strong position of family business in India there are a couple of inherent
problems in family businesses. Family and business are two quite different institutions.

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And so there values and principles may clash at times. The challenges faced by family-
owned firms vary according to the size of the company and its level of development.

Some of the most inherent problems or challenges which we found worth mentioning are
listed below.

1. Family Emotions:
Emotion is a big dimension in family-owned firms, as brothers and sisters, uncles and
aunts, nephews and nieces, and fathers and children work together. The problem arises in
recognition of these dimensions of emotions and to make objective decisions. Emotional
outbursts are many in family-owned businesses and the quarrels and ill feelings of
relatives have a way of spreading out to include non-family employees. It is very difficult
to keep the bickering from interfering with work and the company becomes divided into
warring camps.

Recommendation: It is believed by many business thinkers that emotions are vital to


Operate a business. But these emotions and passion have to be related to business. Ego
Clashes, sibling rivalry, feeling of been left out, deriving importance etc are some of the
Problems generally seen in a family business. Controlling of ego clashes and sibling is
Tough but all the same if the head of the family encourages open communication among
Family members and has a system of mentoring every member who enters the family
Business then issues can be controlled.

2. Family or Business what comes first:


One of the main concern for the family members is to decide over the direction of the
business. There will be times when it has to sacrifice the interest of either business or the
family.

Recommendation:
Its imperative for the family to sit together and decide over there common goals. They
should be ready to trade-off family interest for business to keep developing and growing.
There should be a clear demarcation between the family and the business.

3. Succession Planning and fair to all approach:


Succession planning is almost absent in family owned business in India. Even a visionary
like Mr. Dhiru Bhai Ambani failed to see the future. It was expected that younger brother
will work under the guidance of the elder but the cracks started showing when Senior
Ambani was himself alive.

Also, families end to act on a fair to all approach meaning that the business pie is divided
equally among all the family members without seeing the contribution they have made to
the business. It results in fragmentation of business and cross holdings to ensure that the
weaker family member shares is taken care of. This system has worked well for the
family but has played havoc for business because in every generation the business gets
divided into smaller units and it also encourages rivalry among various SBU’s.

Recommendation:

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Succession planning is something which every family business must do well in advance,
most appropriately in the first generation itself. Succession planning must not mean
dividing the pie among the family members but it must mean finding a role of each
family member in the group without having to divide the group. If the business is not
split they have a chance to compete with the best in the world. If all the cotton and jute
mills of all th Birla group are put together they will be a very formidable force in the
world cotton and jute market but as they are fragmented they are not even national
leaders.

4. Retaining non-family professionals:


It can be a big challenge to retain the best talents in the organization who are but
non-family members. This is mainly because promotions are closed to them after a
certain point and they see relatives being pushed into executive offices in spite of not
being competent. Outsiders are necessary and managing them is very important.

Recommendation:
The business should decide over a crystal Clear HR-Policy based on performance
and commitment of every employee (family and non-family). The vision should
be to nurture and develop talent wherever spotted. Promotion structure should
ensure secure elevation of all the best talents available in the business and this
elevation could also reach to the top position if there is a case. Non-family
executives should not feel insecure in the organization.

Managing the Family Business Strategically:

Family and business are two different systems having different environments, needs,
values, perception etc. Family has got emotions deeply entrenched in it and business can
do well if they are kept in control. But it does not mean that there should be no emotion at
all. Emotions are also responsible for keeping the families together. Business is an
activity which requires rational and objective decision making. There should be a genuine
effort to synergize the two institutions of family and business. And this effort can be
made effective only when the family is dedicated towards the welfare and global growth
of the business.

Two Different Systems:

Family System

 Emotional Concerns

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 Family needs
 Maintaining stability

Business System

 Business Performance
 Business Demands
 Managing changes

One of the best ways to create synergy between the two systems is to divide the activities
involved in family business based on there nature, into two different set of decision
making environment. By environment, it means two decision making centers dealing
with the specific kinds of activities involved to carry on the business.

There should be two councils working in close coordination with each other but on
different set of issues with a different paradigm.

Family Council:
The council contains members of the family (frequently including in-laws, young adults,
and family members with no connection to the business). Family members develop a
habit of avoiding issues, denying problems, and keeping secrets from each other. If an
issue is controversial families tend to avoid it. The key family members gather to find
answer to such questions a succession planning, pie share, role of members in the
business etc. Various issues which the family council should take into consideration are:

 Mission and values


 Next generation development plan
 Guidelines for family involvement
 Ownership and transfer policy

Common mission and values can be developed into competitive advantage of family
managed businesses. It gives a clear road map of future to every one in the family
and every one is dedicated towards the family’s goals. The natural ties between them
ensures that they remain loyal to the family. But it requires a lot of dedication and
understanding between the family members. The new generation should be properly
educated, not only the management lessons but also the family values and principles
so that they can easily gel with the system. The family council should decide over
the role of each member in the business. The roles should be divided according to the
competency of the members and they should be properly motivated towards their job.
They should also be made aware of there limits in the organization. The ownership
Transfer policy should be developed in such a way that the most competent person
gets the deserved position and the powers associated with it. The new generation
should be allotted jobs according to their competency and interests and should be
motivated to achieve greater heights in their fields. An environment should be created

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wherein every member understands that what is best for the business is best for
him/her and the family. Family values and traditions play a big role in succession
planning.

Business Council:
The business council includes both, key family members and professional experts.
these experts are vital in the sense that they can give objective opinion towards a
problem without being biased. The non-family managers are the eyes of the family
managers to see the organization from a different point of view other than family. It
encourages transparency in the company and rational decisions are taken to propel
the company towards the heights of value chain.
T he business council has following vital issues to tackle with:

 Business Decisions
 Capital Needs (Family and Business)
 Leadership Team Succession
 Succession Governance

Decisions related with business require professional expertise and family interest
should take a back seat when discussing issues related with the business. Financial
decisions like generation of capital, remuneration for family and non-family
employees, interest of share holders and personal needs of the family etc are to be
arrived by the business council. To decide over the succession of business leadership
requires a long term leadership team succession planning to ensure that best talents in
organization should get all the opportunity to decide the future of the business by
gaining authority and responsibility. A close eye should be kept on the performance
of all the family and non-family employees and they should be nurtured into
tomorrow’s leaders. Talent is often dispersed in the organization and to chose any
one among them to succeed as the family and business successor is often a trans-
generational process involving almost three generations. The business council which
consists of family patriarchs and independent respected elders can ease the passing
on of the succession from one generation to another.

All said, it depends on the loyalty and the unity among the family members as to how
the strategies unfold. For any positive result the first requirement is the dedication of
family members towards each other and the business. If there is a clear understand
between the family members it becomes easy to lay the rules of the game.

Conclusion:

“Family is the fundamental unit of every other institution. Business evolved due to
symbiotic interaction Between family and society (itself made of families).This
symbiosis can be made eternal by strategically managing both the institutions (Family

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and Business) ensuring that family remains united and business is given full autonomy to
chart its way according to the changing needs of the time.”

When it comes to family business the rules are very different from other businesses
because there are two different set of value systems working side by side and these
systems can be often in conflict with each other. Due to changing face of global
competition the time has come to face the troubling questions related to family and the
business. The conflicts in family business are of different nature often mixed with
emotions and personal feelings. These conflicts are resolved keeping in mind the overall
unity of the family and the implications of the decisions on the business and the family. If
the goal of the family business is to go global, it should institutionalize the business
system and develop transparent corporate governance structure so that the business does
not feel the heat of family emotions and is given free hand to chart its own way.

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