Manifestations - 2005

Area: Strategy India Inc: Should India Inc. engage in Diversification or on focused strategies in the post reform era? TOPIC: Strategies for Indian family owned businesses

Submitted By Shailendra Barshikar Tejas Joshi

Contact Details: Shailendra: shailendras.06@astra.xlri.ac.in shailendrab@gmail.com Cell No. 09431302805 Tejas: tejasj.06@astra.xlri.ac.in tejasjoshi@gmail.com Cell No. 09835341389

Abstract This paper examines the issues faced by family owned businesses (FOBs) and identifies strategies for Indian FOBs to achieve global scale and recognition. World over the largest and the most successful companies are family owned and so is the case with India. Indian family owned businesses although large and diversified are nowhere as compared to the world biggest businesses. (TODO: details required here to be given here) Known as chaebols in Korea, business houses in India, holding companies in Turkey, and grupos in Latin America, these FOBs are dominant players in almost all countries. We feel that strategies of focus and diversification are more to do with maturity of a particular business, the nature of business, the style of growth followed by the company in the past and the dynamics of the industry as a whole. Although in the earlier stages, a focused strategy might help in acquiring certain sustainable competitive advantages, FOBs should gradually diversify but the diversification should be competence driven diversification. We have classified Indian family businesses based on what competencies their business demands and what skills they can leverage upon essentially a focused approach. The strategies, which we suggest for each type of business, are based on the 4Cs model put forward by Danny Miller and Isabelle Le Breton-Miller [1]. Moreover we also feel that although family ownership is good at the entrepreneur stage; while professional management does better at a later stage. We also look at how family owned businesses are in the very basic culture of India and there-in lies the key to their success in India.

Keywords: Family owned businesses, strategies, globalisation, and diversification or focused growth strategies.

Introduction We define family business as a business governed and/or managed on a sustainable, potentially crossgenerational, basis to shape and perhaps pursue the formal or implicit vision of the business held by members of the same family or a small number of families [2]. It encompasses the nuclear-familycontrolled firm and even the publicly held firm that is shaped and managed by two or more generations of a family that might not hold controlling interest in the firm. The genesis of family owned businesses according to us lies in the varna system and social system that evolved in our very ancient Vedic civilisation and there fore the Hindu culture and now the Indian culture. The varna system in its puritanical was a division of labour based segregation of the society into four classes of people each meant to perform a particular function. The first were the Brahmins, priests and thinkers who were supposed to guide policy and preserve and maintain the ideals of the nation. The second were the Kshatriyas, who were the rulers or the warriors followed by the Vaishyas, who were the merchants, traders, artisans etc, and the Shudras, labourers or unskilled workers. [3] As a result of this, professions were predefined for a particular family or a class of people and were passed on only in the families from a father to his sons. Thus certain professions, trades and for that matter even business we believe are deeply engrained in the very basic mind set of certain people (Gujrathi, Marwaris Communities). Family Owned Businesses: Issues and Pitfalls The recent spate of the Ambani feud over the reliance empire is the grim reminder of the fate or the question that confronts every family owned business. It is said that the first generation creates, the second inherits and the third destroys. Appendix I shows a tabular representation of the various issues faced by FOB. Here we will discuss few very critical issues, which we feel need to be tackled in order to build global presence. 1. Succession Planning: Succession is the transference of leadership for the purposes of family ownership, which must be addressed in order for the business to survive and be passed on to subsequent generations. [4] Family Business Succession Research on family businesses has explored a variety of issues such as managing conflicts inherent in family businesses, the firms strategy, organizational structure, and family influence on the firm. Yet, many family business researchers would agree that succession is the primary issues facing family businesses Be it the Ambanis of Reliance Industries, the Bajajs of Bajaj Auto, the Nandas of Escorts, or the Modis of Modi Rubber - each family has, in the recent past, faced succession and ownership issues and found them tough to resolve.

2.

Risk Averse Trap: Another peculiar problem we noticed, a FOB can face is tending to be risk averse. Take the case of Godrej Industries with 80% stake help by Godrej family. For the past many years Godrejs businesses strategies have been conservative by comparative standards. This we feel is a serious issue if we consider the cost of lost opportunity in an emerging economy like India. The main reason behind this might be the high stakes involved in the business due to the dominant holding and the need to retain control.

3. Regulatory Issues: The Securities Exchange Bureau of India (SEBI) has imposed a restriction for all listed companies in India requiring minimum public shareholding of 25%. Those companies whose initial offering had been less than Rs 100 Crore would have to comply with the rules. The firms which would be affected would be Wipro, in which the Chairman Azim Premji holds 82.3% with 13.4% public holding. This means that the promoters have to sell their stake to comply with these norms. The countrys largest apparel exporter, Gokaldas Exports, is also amongst those affected with promoters holding 76.9%, the public 13.06% and the holding of FIIs/mutual funds and banks is 10.04%. Strategies for FOBs At this point we introduce the 4Cs model [1], which we feel is the strategic potion for problems arising in family owned businesses and also the path that they should adopt in pursuing their global ambitions Potent Priorities at Family Businesses Family businesses, due to their distinct approach of running a business have been observed to follow specific priorities with rare passion and integrity and have engendered a set of practices to follow up on them. These can prove to be important learnings for Indian family business to replicate when going global. Here we present in brief the Four Cs model that drives great family businesses. Continuity: Pursuing the Dream Priority Practices Pursue an enduring, Embrace a meaningful substantive mission and mission and build the core ensure a healthy long- capabilities it depends on lived company to by sacrificing and investing realize it. patiently; exercise careful stewardship; foster lengthy executive apprenticeships and tenures.

Community: Uniting the tribe

Stress clarion values; socialize persistently; create an enlightened "welfare state"; foster informality that frees initiative and teamwork; enforce intolerance of mediocrity. Connection: Develop enduring, win- Partner intimately with Being good win relationships with major clients and suppliers; neighbors and outside parties to network broadly; stay in partners sustain the firm in the touch with customers; be long run. generous to society. Command: Preserve the freedom to Act with speed, boldness Acting and make courageous, and originality; exploit a adapting freely adaptive decisions and diverse and empowered top keep the firm nimble. management team to do so.

Nurture a cohesive, caring culture with committed and motivated people

As mentioned before we now classify Indian family owned businesses based on the nature of business, the competencies required and the skills which they can leverage and suggest strategies for going global. . An effort has been made to classify established Indian family business houses and their smaller emerging counterparts into five categories based on their core competencies in home markets (and whichever foreign markets they have tapped) and strategies to leverage and transform these core competencies into sustainable competitive advantages when pursuing global ambitions have been charted out. We would later address the question of diversification vs. focus. Refer Appendix III 1. Brand Builders International examples include Estee Lauder, Hallmark and Levi Strauss. Back home some of the family businesses we thought fell into this category are the Raymond Group and Asian Paints. Asian Paints promoted by Choksi, Dani and Vakil families Asian Paints is India's largest paint company and ranks among the top ten decorative coatings companies in the world today, with a turnover of Rs.25.6 billion (around USD 585 million). Asian Paints operates in 22 countries and has 29 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings and SCIB Chemicals. The first step in brand building is strategy the competitive positioning choices and distinctive core capabilities a firm embraces in order to:

 Create a brand that stands out as different and attractive Keep building market share to add to the brands critical mass and economies of scale Protect brand integrity Leverage the brand to exploit its power To create and implement their superior branding strategies Indian family businesses should emphasize on: Continuity Continuity manifests in patient capital to build the brand; exceptionally long executive apprenticeships to convey its intangibles; and stable, hands on brand management to preserve integrity and consistency. Community Community takes the form of a cohesive culture that polices the brand image and indoctrinates staff with highly tuned values and standards. Brand continuity and cohesive community although invaluable can lead to conservatism and insularity; companies might make the mistake of to closely stickling to tradition and ignoring the market. This threat can be countered by adopting practices of Connection with clients to keep brands visible and relevant and Command independent command which gives the freedom to managers to renew the brands as needed. 2. Craftsman Overseas groups include Adolph Coors Company (breweries), The Timken Company (bearings) and The New York Times Company. Back home some of the fitting examples we thought are Bharat Forge and MRF Tyres. Bharat Forge promoted by the Kalyanis Bharat Forge Ltd., the flagship company of the US $ 1.25 billion Kalyani Group, is a 'Full Service Supplier' of engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. Today, the art of forging metal is a tradition at Bharat Forge, and all of its products are built with the expertise necessary to accommodate various industries. Each customer specification is carefully transformed into a costefficient reality. Every part which is created is a representation of the companys overall dedication to craftsmanship. A resolute focus on a core competency such as a particular process, technology, or service promotes cumulative quality enhancement. And to render steep quality investments economical,

competencies are leveraged across enough types of products and markets. The craftsman strategy consists of four major elements: The design, production, and delivery of clearly superior offerings The perpetual improvement of offerings and processes A laser like product-market focus tied directly to core capability The leveraging of capabilities across multiple products or markets to further quality development The most striking priorities for such businesses are: Continuity there should be a clear fundamental substantive mission to continuously improve quality. Community the business should create a culture of like-minded, highly trained people who imbue the company with the craft and the creed of quality. But there is a serious danger of companies pursuing their passion for excellence rather than quality that is relevant and something clients are willing to pay extra for. Enter Connection relationships that firms form with suppliers or customers bring privileged, frank, and often stark information on what they are doing wrong and why quality, although perhaps superb, maybe totally off the mark. 3. Operators The popular examples in this category include Wal-Mart, Cargill and IKEA. The Indian family businesses that are similar in nature are Arvind Mills, Moser Baer etc. Moser Baer promoted by the Puris Moser Baer is one of India's leading technology companies and ranks among the top three optical storage media manufacturers in the world and probably the lowest in cost too. By developing inhouse resources and technologies Moser Baer has mastered the art of process-intensive high-quality precision manufacturing and supplies to 11 of the top 12 global brands. It has technology deals with Imation and HP and has seen investment by top firms like Warburg Pincus. Operators have, in effect, rethought their industries to compete in a new way. They derive competitive advantage by adding value more efficiently than their rivals to one or more stages of the supply chain, and optimize their business model by catering to a sharply defined price- and cost- sensitive target market. In order to implement and defend this model, operators evolve an elaborate, capital- and relationship- intensive infrastructure whose many interconnections and

efficiencies are exceedingly difficult to imitate. The strategies of operators are distinguished by four core objectives: Evolve an original business model that adds most value to clients at the lowest cost Cater only to price- and cost- sensitive clients Build a sophisticated operations infrastructure that places a premium on efficiency Specialize and partner along the value chain For Indian businesses following this model of superior operations rely on two basic priorities: Continuity Continuity fuels relentless focus and striking investments. Connections Connections embrace synergistic alliances with clients and suppliers based on integrity, openness, and responsiveness. Original business models and steep investments to create infrastructure and sustain partners, rely on a top managers ability to make courageous decisions decisions that impatient investors might feel uncomfortable with. In such cases, leaders of the family businesses should feel free to exercise their prerogatives of Command. 4. Innovators Globally acclaimed for innovation are companies like Corning, Tetra Pak and Motorola. Indian examples in this league are Ranbaxy, Dr. Reddys etc. Ranbaxy promoted by the Singhs Ranbaxy Laboratories Limited, Indias largest pharmaceutical Company, manufactures and markets world class generics, branded generic pharmaceuticals and active pharmaceutical ingredients. Ranbaxys continued focus on R&D has resulted in several approvals in developed markets and significant progress in NDDR. The Company has a promising NCE pipeline, with various molecules at different stages of drug discovery and development. To accelerate its research program, Ranbaxy has joined hands with GlaxoSmithKline Plc for a global alliance in the area of drug discovery and development. Ranbaxys collaborative research initiative with Medicines for Malaria Venture, Geneva, to develop a new drug for Malaria, reflects its commitment to eradicate such diseases from the world and become a Research- based International Pharmaceutical Company. Former CEO Robert Galvin of Motorola once said: Renewal is the driving thrust of this company. My father never stopped renewing and nor have weOnly those driven to generate a proliferation of new, creative ideasand who have an unstinting dedication to committing to the risk and

promise of those ideas will thrive. That about sums up the competitive approach of innovators whose strategic elements include: Pathbreaking innovation Incremental innovation and leveraging of discovery Commercialization of innovation tailored to key markets Creative destruction a preemptive jettisoning of the old in favour of the new All of these innovative capabilities pioneering, improvement, commercialization, and creative destruction rely on two major priorities: Command liberates family leaders from the short-term constraints of financial markets. Community Innovation happens in a clan-like organizational community, with strong values, excellent treatment of employees, and a climate of initiative and collaboration. There are natural dangers confronting innovators. Independent command can issue in too much risk taking and unrealistically ambitious projects. Cohesive community may homogenize worldviews, create insularity and spur tendency to do research just for the joy of it. Innovators counter these dangers primarily by employing Connections. Close connections especially with clients and alliance partners make innovations relevant and get a better view of the market. 5. Deal Makers International examples include J.P. Morgan, Olympia and York Developments and Bechtel. Indian companies that fit the bill are Reliance, ABG group, Tata Group etc. These conglomerates are among the most quoted examples of following a deal making strategy for growth and we would not spend any time in introducing them. Deal makers combine the cunning of a speed chess player with the contacts of a socialite. They are driven by a desire for brisk growth and impact, one major deal or project at a time. But they stick to what they know best and enlist the support of expert partners. The deal making strategy rests on four unshakable pillars: Spotting opportunities early and creatively Capturing deals by making and reading contacts Executing intricate projects via superior knowledge and partnering skills Cumulative learning across projects to become ever more competitive in burgeoning niches of the market For Indian family businesses, which follow the Deal Makers strategy, two main priorities are:

 Command Deal makers accord extraordinary independence to their leaders the broad discretion to make deals, take risks, and dedicate resources with speed and originality. But to mitigate these risks, deep continuity and stewardship guidelines are established. Connections Deal making relies on superb connections and relationships, based in part on firm and family stability and reputation. Such associations with clients and partners help to snag promising deals and execute them in the best possible manner. The priority that complements the above ones is Community which makes it possible to pull together the many resources, departments, and skills needed to pursue complex mega-projects. The deal makers concerns for the future, the family, and reputation cause them to more cautious and take more of a long-term view, thereby offsetting the dangers of unbridled command. This makes them fine stewards of resources and managers of risk. The decentralized meritocracy can free many levels of managers to use their initiative, while the networked structure enhances complex collaboration and effective execution. We see above that leaving aside the Deal Makers, all others i.e Brand Builders, Craftsman, Operators and Innovators, all need to follow a focused strategy. The Deal Makers are huge conglomerates that have successfully diversified across sectors and are leaders in their chosen industries, these can continue to be diversified and follow the Korean and Japanese models wherein the Chaebols enter markets with their entire range of products and leverage on the breadth of portfolio, follow acquisition routes and become global power houses of the future. We now focus on the model which we propose for Indian family businesses to go global. This model is true for businesses which belong to the first 4 categories (Brand Builders, Craftsman, Operators and Innovators,) and also true for Deal Makers , with the slight difference that they are at an advanced stage in the model as compared to the others. When one compares NFOBs (non-family-owned businesses) with FOBs (family owned businesses), where both have already reached a significant level of exports, one sees that family businesses initiate their internationalization processes later in the business life cycle [5] .From studies (Gallo and Estap, 1992; Luostarinem and Gallo, 1992; Gallo and Sveen, 1991) it is seen that three kinds of factors enable or limit the internationalizing process for family firms. The external factors are those associated with the competitive characteristics of the firm and its environment, opportunities abroad or at home, and

whether or not the firms technological level is adequate to foreign competition. The second set of factors stems from the internal organization of family firms involving how FOBs deploy family members in their operations. The third group of factors depends upon the attitudes of top management. [5]. Refer Appendix II for a list of variables identified by Miguel Gallo and Carlos Point in their study in the area of internationalization of family businesses. [5] Keeping these things in perspective we have identified macro level strategy to be followed by Indian business houses for making global presence. Appendix IV shows a schematic of the strategy. For any family owned business to go global the basic criteria, according to us, is to be amongst top 3 players in the industry. (E.g. Tata Motors, Ranbaxy, Moser Baer, Jet Airways) This provides necessary leverage for that firm to go global. Following this FOB should adopt a two phase strategy as given below. Phase I: Focus Driven Strategy With reference to Appendix IV, a FOBs first step should be exports, followed by operations in some emerging economy. This should be a period of consolidation rather than diversification. The main objective of the firm should be create strong domestic presence and at the same time try and build certain sustainable competitive advantage. According to Hammel and Prahlad, during the 1980s, top executives were known for their ability to restructure, declutter and delayer their corporations. In 1990s, they will be judged on their ability to identify, cultivate and exploit the core competencies that make growth possible. [6]. The FOB can try and achieve any of the following: lowest cost, better quality, fastest time to market, brand image etc. Jet Airways before going international, concentrated on providing the best service in Indian Aviation industry at a slight premium. In this phase, a business could use emerging economies both as markets as well as an operations base. Our line of thought is that first the companies identified in the first four categories should reach such a stage where they need to be good at what core competency they have chosen, they need to be in the global league and accepted and recognized around the world that they are good at their chosen area of specialization. Once they achieve that status they need to go in for the second stage which is competency driven diversification which essentially means leveraging competency to diversify into related areas. To clarify with examples Raymonds can diversify into fashion wear and casual wear, apart from formal wear; MRF can diversify into tyres not just for 2 and 4 wheelers but also aircraft, space shuttle tyres, and related rubber products like turfs; Moser Baer can extend its optical memory storage competency to get into optical networking; Ranbaxy can diversify into branded Ayurvedic medicines or treatment.. Phase II: Competency Driven Diversification

Having developed certain competency and a base in emerging markets, the firm should now be able to leverage that competency to diversify. This we believe is Competency Driven Diversification which will help FOB gain global footing even in developed markets. Diversification can be across businesses or within the same business itself. Tata Motors significantly enlarged its portfolio of commercial vehicles by acquisition of Daewoos commercial vehicle segment. In this particular phase, global acquisitions, alliances, setting up of R&D, acquiring global brands, technology should be the key focus of the firm. However these acquisitions should be in line to your competencies. This enables the firm to leverage certain advantages (e.g. labour cost, manufacturing) at home for its international business overseas. This particular phase might lead to high growth for the FOB and so management of the business through this phase is critical. We also feel that a FOB business at this stage should necessarily go for professional management. So the business would become family-owned but professionally managed firm. The family members can (based on their merit) or cannot be a part of management. BMW Motors is a right example in this particular regard where in the family has handed the management control but maintained the ownership rights. In this case, we feel the agency theory for separating management and ownership will help the business as such by getting in different perspectives of professional managers vis--vis family members. Pharma company Ranbaxy, Jet Airways, Kingfisher Air are using this route by handing over part of management to professional managers. They not only are recruiting local managers but have also got professionals who are foreign nationals to run their businesses. This way FOB run businesses might also be able to settle the issue of attracting professional talent in their businesses. For Deal makers the logic extrapolated would mean that they can diversify into related competencies in the sectors where they are strong and leaders but only after they have tapped the world markets and saturated them. Till then rather than diversification it would pay to first tap the huge global world markets and stay focused on the many core competencies and sustainable competitive advantages they have across sectors. Conclusion Summing up our arguments, Indian business houses must first of all have strategic intent to go global. Then they should ensure leadership position in domestic market achieved on basis of certain core competencies. Using these they should target global markets by alliances or acquisitions. The business groups should diversify into related sectors using competency driven diversification route.

References

Danny Miller and Isabelle Le Breton-Miller, Managing for the Long Run Lessons in Competitive Advantage for Great Family Businesses. Pramodita Sharma, James J. Chrisman, Jess H. Chua Strategic Management of the Family Business: Past Research and Future Challenges. Jawaharlal Nehru, The Discovery of India. Noel D. Campbell, Kirk C. Heriot, North Georgia College & State University, Which family-controlled business remain-family controlled? A Resource Based Approach. Miguel Angel Gallo, Carlos Garcia Pont, Important Factors in Family Business Internationalization 1996. C.K. Prahlad and Gary Hamel, The core competence of the Corporation.1990.

Appendix I

Appendix II Variables to be considered before internationalization. Rigidity Variables Strategic factors - Greater growth opportunities in the national market. - Products and services oriented towards the national customer. - Inadequate level of technology for foreign markets. - Lack of financial resources. - Community resistance (unions etc.) to the internationalization of the business. Family issues - Lack of family members prepared for internationalization. - Lack of non-family member managers prepared for internationalization. - Resistance of the management team towards internationalization. - Family with little international culture and experience. Top management attitudes - No disposition to carry out alliances with third parties. - Lack of support by the Board of Directors for internationalization. - Internal power struggles. - Opposition by the principal owners to internationalization. Elasticity Variables Strategic factors - Decreasing the financial risk of operating in only one country. Family issues - Opening work opportunities for other family members through internationalization. - International preparation of younger family members. - Members of the family residing in various countries. Top management attitudes - Concentration of power by an individual interested in internationalization. - Concern for and intense dedication to the long term. - Speed in decision-making. - Family member interested in internationalization. - Possibility of alliances with other family businesses.

Appendix III Classification according to the 4C model

Appendix IV Strategies for Family Owned Indian Business Houses Capabilities, competencies in the domestic market. (Ideally amongst the top 3 players in an industry)

Growth by exports

Target markets in emerging or developing economies. (S. Africa, Middle East and Latin America)

Growth by operations

Increased revenues enabling further investment.

Setting up operations, acquisitions in developing countries for 1) cost advantage or 2) market reach

Tata Motors

Offer certain USP lowest cost producer, fastest time to market, better quality. Also develop R&D capabilities

Jet Airways

Through acquisitions, alliances etc.

For technology, markets, brands etc. Target developed countries as markets. Truly global presence across markets

Compe tence Driven Divers ificatio n strateg y. Famil y owned but profes sionall y manag ed.

Using cost advantage, technological capabilities

Focus Driven Strategy. Vision, leadership of charismati c family head may help largely.

Indian Business House