A BROAD PRESPECTIVE OF FAMILY BUSINESSES IN INDIA

SAHEEL SINHA (NA13043) MD.ADIL SAGHIR (NA13032) RAJ JAISWAL (NA13038) BHAVYA KAMANI (NA130)

INTRODUCTION
By definition, a family business is one in which the majority of the stake is held by the person who has established or acquired the company (or by his or her parents, spouse, child or child's direct heir) and at least one representative of the family is involved in the management or administration of the business. Family businesses are the unsung heroes of the Indian economy and they have aggressive growth plans, they battle to retain staff in bad times, focus on supporting the community issues and are agile in their decision-making. Indian family businesses continue to be bullish about their growth plans despite the recent economic slowdown. 74% of the companies have had a robust growth in the last 12 months. However, it does not mean that these family businesses did not face the brunt of a slowing economy. Many of them missed or revised their annual growth targets, put expansion plans on hold, reduced their headcount, etc. The fact that despite a slowdown, the International Monetary Fund (IMF) still projects India to be one of the fastest growing economies compared to its developed and emerging market counterparts has also provided a relative advantage. Family businesses dominate the economic landscape in nations around the world. India is no exception. In India, family run businesses account for 85% of all Indian companies and account for the vast majority of national output and employment. According to Business Today, family-run businesses account for 25% of India Inc.s sales, 32% of profits after tax, almost 18% of assets and over 37% of reserves. Not all family-owned businesses are created equal. India has seen its share of some very influential families in businesses that have influenced the economic and political situation of the country. They have existed for over hundred years and have evolved into world-class business conglomerates. At the other end of the spectrum there are also a number of family entities who have continued to be promoter driven. This article highlights on how the traditional family business houses are transforming from their traditional business style to adopt the latest management practices to sustain in this competitive business world amidst the Multi-national Companies. The business families are commonly driven by the some basic values like mutual trust, cost consciousness, high level of risk taking ability, centralized decision making, agility, culture of driving business by intuition and relationships rather than facts and professionalism. More often than not, the values of the Promoter or owner are the expected values and culture of the organization. Also, in many families there is the continuing concern for ownership and management, governance, structure and organization. In many family entities there is the lack of separation of ownership from management. The lack of a proper governance framework, which quite often negatively affects the ability of the organization to control its actions,

increase the likelihood of irregularities and result in inconsistencies in the way business is conducted. Another important requirement is ensuring proper management of information in the family so that there is harmony between the three parts - family, management and ownership. Some owners cling on to the position they hold and do not let go of their ownership. This often becomes detrimental to the growth and professionalism of the organization. Further, with growth in scale of the organization, there is a resultant substantial increase in decision making also. And if this change in the process of decision making is not addressed, the organization will be in a limbo. The following graph explains how of Indian business are confident of achieving their predicted growth:

Over 90% of Indian business are confident of achieving their predicted growth:

Chart Title
Shrink Consolidated Grow steadly Grow quickly and aggressively 0% 10% 12% 20% 30% 36% 40% 50% 60% 70% 80% 2% 0% 6% 16% 69%

58%

Global

India

Compared with the global scenario 36% Indian family businesses predicts an aggressive growth, 58% of them agrees for a steady and sustainable growth, 6% are expecting consolidated growth which is a good sign for Indian economy in larger context.

Increased

Competition

Opening of the economy and the influx of multinationals further added to the complexity of a business family ecosystem. Reduced trade barriers, increasing privatization and economical activities to increased competition and eliminating monopolies - have resulted in changing the landscape of doing business in the India. Like other companies, the family-run companies found themselves on the back foot. The rules of the game significantly changed and these companies were finding it difficult to carry their own business. They realized the need to reexamine their business model. This accentuates the need to become professional, not only in the business but also with people in the business (including family members). This calls for a change from the current way of work and systems. The organizations are increasingly facing more and more challenges requiring a new set of skills to operate a successful business model, as these are not totally available within the family. Family run companies are mostly interested in hiring good talent from big giants. Also many senior professionals from the organised sector take this lead since the roles offered are extensive and more motivating. However the lack of governance and transparency in the system raises considerable difficulties for retaining the non-family talent.

The need for Diversification to hedge risks in the competitive landscape

Many business families in India have undergone unrelated business diversifications over the period of time. The reasons identified have been many - varied interests of the family members, better opportunities, expertise of a family member or a kin in a particular field, need of the time, etc. The family concern views diversification as an effective strategy of hedging risks and enhancing economic growth and wealth formation. On the other side, the owners goal and vision for the business starts getting diluted because of this extreme diversification. The group is initially held together with loose structures that lack logical organization in terms of type of business and/or industry group. In some cases, certain activities and investments are held and controlled by the owner(s) himself (themselves), in other cases the entities are mixed up in non-compatible lines of business (technology and real estate for example), which inevitably leads to significant challenges in management, control, monitoring and accountability. Such an issue is perhaps one of the by-products of the lack of strategic direction at the group level where entities and businesses sometimes operate in different or in extreme cases, contradicting - directions. The various businesses operating under a single brand name (of the family) need to have one common brand message to continue to be together and grow together in unison which could be a challenge.

65% sales growth

74% sales growth

15% no change

18% no change

19% reduction Global

08% reduction

India

To meet the aggressive aspirational goals of the next generation, the family needs to raise additional funds either through equity or loans. However, on account of the economic challenges facing the world, it is no longer easy or even possible to raise financing required based on family brand or relationships alone. Increasingly, the better financing options are available either via foreign funds or through professionally managed financing institutions. Specifically, many Indian & Middle-East based Private Equity investors are

Showing increasing interest in investing in the small and medium size family business which are poised on the verge of rapid growth. However, most of these financial institutions are looking more into business fundamentals and cash flows. While Investing Firms are riding high on India Growth Prospects, they have strong imperatives on due diligence prior to investing. There is a general perception that promoterled companies are significantly dependent on the promoters and the management teams are often not robust. Due diligence on the current management team including the promoter, covering areas like management style, senior management compensation, experience, background, as well as the systems and processes is undertaken to get a solid insight for the equity funds on the execution capability of the management team to deliver the promises.

In todays competitive environment, innovation is an essential requirement to survive and

thrive. Family businesses in India view continuous innovation as the most challenging aspect over the next five years. Talent issues, technology needs and complying with the regulations are additional challenges that family businesses will have to face over the next five years. Innovation for a competitive advantage Our survey reveals that 56% of the family businesses in India view the need to continually innovate as a key challenge over the next five years. Innovation is critical maintain their relevance in the changing business environments. In order to innovate successfully, they need to combine their new strategies to broader business goals. In addition to this, these companies need to invest in innovation, promote a culture where mistakes are permitted that innovation is crucial to survival.

Retaining talent This is important for any organisation. Family businesses believe that attracting the right talent (40%) and then retaining it (36%) is a challenge that will have to be faced in the medium term.

Efficient succession planning Mentoring and developing the next generation of successors and leaders is crucial to the success of family businesses. 22% of our respondents felt that training and preparing the high-potential members of the staff to take up high-level decision- making positions and the ability to survive succession is one of the major challenges awaiting them in the near future. Need for new technology Technological advancements are redefining business models, strategies and the changing industry dynamics. Family businesses are acutely aware of the risks their businesses face if they are unable to either adapt to the new technological advancements or bring in new technologies to enhance the quality of products and services. One-third of the companies interviewed feel the need to constantly keep up with the fast-paced strides technology is taking in turning the older business models obsolete and therefore, the need to invest time and resources in research and development (R&D). Even though most family firms are confident about their prospects, external market conditions as well as the government policies and regulations remain a cause for concern over the next 12 months. The global economic downturn coupled with the domestic macroeconomic situation (sustained periods of high inflation, high interest rates, fluctuating exchange rates, lack of clarity on policy and regulation which affects decision-making within the government, etc.) pose significant uncertainties for entrepreneurs who run their own businesses. The entry of new players resulting in increased competition, the growing power of global megabrands, supply chain challenges, the changing consumer behaviours, the introduction of new technologies, etc. relating to their supply chains are some other challenges. Recruiting the right talent and retaining ranks highest (36%), especially for those family business enterprises that want aggressive growth. The cash flow and cost control is a concern for 20% of our respondents. 14% also feel that the availability of finance is an area of concern. Some family firms struggle not only to fund but also to find the required staff for their overseas operations because the family members may be reluctant to either relocate or hire someone sufficiently qualified. A number of businesses also cited the importance of establishing or improving their internal and IT systems, especially in relation to regulatory compliance.

Anticipated challenges of Indian and global family businesses till 2017

70 60 50 40 40 36 56 62 66 58 46 34 37 39 34 30 30 59

30
20 10 0

9 2

Indian response (by rank)

Global response (by rank)

Key challenges faced by family businesses in India In India, family businesses range from the small grocery (or kirana) to large conglomerates with equally varied business interests. As their growth has skyrocketed, many have stepped outside their zones to acquire companies in new industries and geographies. Their contribution to Indias growth is also being increasingly recognised. Though family businesses have always been in India, managing them has its own unique challenges: Managing the diverse opinions of family members in the business, solving internal issues and disputes, etc. Creating clear succession plans between siblings or cousins Difficulties the younger generation may face in proving themselves to the former generation Differing views between the older generation and the newer generation Hiring external staff which may perceive that career advancement, freedom and decision-making are solely the purview of family members Regular and streamlined access to the capital to help grow and develop the business

As the organization overhauls its business model to respond to a changing business landscape, the structure needs to be streamlined with the new model and the roles, responsibilities and accountabilities need to be clearly spelt out. But there is a perceptible need for change in the organization culture that encourages the desired philosophy. So it is important that new organization philosophy is echoed across all systems and policies uniformly. This change journey requires a holistic approach to realize the full value. Time for change To bring a certain change in the working style of the organization, the leaders need to identify the right issues and prioritize them. Many a times the issues or problem areas that seem to exist are very superficial, but have deeper roots to them. This comes in to picture only when one starts addressing the superficial ones. It requires exploration deep down the surface. Leaders in such situations get caught between so many issues that they dont understand how and what to address and which one would help them achieve their goal. Building a sense of family pride would greatly help to sustain family businesses. Moreover, it should be ensured that there is smooth communication between various generations of family members, and between the family's men and women. Also a professional approach to management is crucial. Changing business needs in todays economy require the organization to be transparent and in their systems. This is when the need for an external expert assistance arises. Here are some of the examples of budding family businesses in India: Elder Pharma Founder: Jagdish Saxena, 72 Daughter: Shalini Kumar, MD, Elder Instruments Sons: Alok, Director, Elder Pharma and Anuj, MD, Elder Healthcare; In a recent interview when asked by the reporter to Mr sexena Why did he started this company he told "When the company I was with laid off 300 people, I felt responsible for them. I quit, started my own unit and employed them all. Total turnover: Rs 1,000 crore Main companies: Elder Pharmaceuticals (flagship), Elder Healthcare, Elder Projects, Elder Instruments. Elder Pharmaceuticals Limited, or EPL, considering the group he heads - with a turnover of over Rs 1,000 crore, and annual growth of about 20 per cent for the past three years - has joined the ranks of India's leading pharm companies within just 23 years of existence. Today, the Rs 700-crore flagship EPL manufactures and markets prescription pharmaceutical brands, as well as surgical and medical instruments and devices. Its core strength has been the prescription arm, a business which chimes well with the conservative approach of both Jagdish and Alok.

In another example we see how VISA group came into exsistance, typographical resemblance between the logos of the VISA and Tata groups is not entirely coincidental. There is a lot of Tata in VISA. Vishambhar Saran, founder of VISA Group, Rs 5,000-crore conglomerate with interests in steel, mining, power, international trading, shipping and logistics, not only worked for the Tatas for a good 33 years after getting his degree in mining engineering from Banaras Hindu University in 1969, but has also tried to organise his group's culture in the Tata way. Saran, who lost his Agarwal surname in his Class X certificate like many Indians, structured VISA with different councils and boards to engage with professionals. It has attracted top professionals such as Shardul Shroff, M.S. Verma and Ashok Basu to serve on the boards of its companies. Indeed, while working with the Tatas, Saran's outlook on life changed. When he started out, his aim was to work for a few years and then return to Kanpur, his hometown, to set up a small-scale unit. Global research shows that most business families cant keep their flock together for more than three generations. In India, no clear data exists but there is anecdotal evidence. The Birlas split after three generations, the Ambanis in the second generation, and the Bajajs in the third generation. The Jindals have divided the business empire operationally; though the control of the company is centralized in the hands of Savitri Jindal. No wonder then that Indian business families are eager to avoid a script-less family drama. They would much rather plan for the involvement of members in advance. When Anil Ambani made his impassionate plea about ownership issues at the Reliance AGM on August 3, 2005, Reliance Industries stock fell from Rs. 760 to Rs. 710 before recovering somewhat. Even the Sensex dropped 80 points that day on this development. A more important factor is that most business groups are fighting a war for talent. Family members can be valuable resources for the group to tap. Indian business houses are competing with MNCs for talent. Family members, if properly groomed, can be a source of advantage in their understanding and also commitment to the business. The second key reason is that the members of the next generation know their place in the enterprise. This prevents nasty surprises for family members as well as investors. Counter-intuitive as it may sound, Indian families are involving the younger members of the family right at the start of the discussion. The younger lot is more educated and open to concepts. The older generation is often caught in situations where respect means saying nothing. Even when they see something they dont agree with, they say nothing. So the next generation must be involved. They are anyway the people who will have to execute the plan and must be convinced, otherwise it wont work. If the participants are not agreeable to the plan, then even if its a legal document, nobody will act on it. The other major shift that business families are trying to make is to include their daughters as well in the succession and discussion plan. Till now, daughters have been by and large

ignored. Including daughters is a welcome change. Indian business groups are particularly prone to splitting because they dont involve daugh ters in their family business. A family that only has brothers at the helm is the most unstable form of business enterprise. Brothers often end up with ego issues. If they involve daughters and other members then the bond is stronger. It is criminal to not deploy 50% of the talent in a business family. If Indra Nooyi can run PepsiCo, If ICICI and UBS can be run by women, why not a family business? The Godrej group is a good example. Adi Godrejs two daughters, Tanya Dubash and Nisa, are both playing an active role in the group. Ajay Piramals daughter Nandini played a very active role in Abbotts purchase of Piramals generics business. She is assisting Ajay Piramal into their foray into realty among other new ventures that they have planned. Perhaps the most critical aspect of getting the family involved is the blueprint required to get the entire family to understand the exercise. Broadly, there are two models of doing this. The first approach believes that it is indeed possible to harmonize expectations inside the family before any blueprint is made. The second approach is about dividing the empire. The first model is far more difficult, but is finding acceptance on a larger basis because an undivided group has more resources, a bigger balance sheet and hence a bigger impact in the market place. Though the pioneers here are the Murugappa group, it is GMR, the infrastructure heavyweight that has really taken this to a new level. It has a family constitution that is the book to which members must refer for dos and donts. The most interesting aspect of GMRs approach was actually to get all the family members away on a retreat. The key message sent out at the retreat was that before handling family wealth, each one of them would have to understand relationships within the group. Spouses were taken on board and were explained how their husbands and sons could be picked for a role inside the organization. They were told the logic behind these choices. Spouses influence the male members thinking tremendously, says Kumar, who worked out their transition plan. All family members were also advised to bring their living standards within a commonly accepted band. A lot of resentment can be traced back to the fact that one segment in the family may have an extravagant lifestyle while the other may be more down to earth. Family members also decide what sort of schools children will attend, says Kumar. That might appear intrusive but this sort of thing makes sure that the family members have a similar world view and value systems. Perhaps the most critical matter before most business families is the way they introduce their sons or daughters into the business. Twenty years ago, this was not such a big issue. India still believed in God-given rights! Todays employees are different. They have been brought up on a diet of meritocracy. If top professionals feel they will not have room to grow because the scion of the business family and his cousins will grab all the

top spots, then there is sure to be a talent flight. Most business groups are very careful about how they do this. GMR uses the results from an aptitude test and a host of other crite ria like education and inclination to come up with a right place inside the organization for the youngster who wants to join the family business. At Wipro, things are a bit different. It is widely understood in Wipro that Rishad Premji will take his fathers position, simply because his father owns 80% of the company. However, it doesnt bother people too much in the organization, because they see the difference between ownership and management. Although Premji is the final authority on everything, he doesn t run Wipro like a family firm. He has put in place elaborate processes and checks for taking large decisions and he is a stickler for rules. So, large strategic decisions are taken collaboratively. People often disagree with Premji and he allows that. So in their minds, they are clear that the same culture will continue at Wipro. One key issue is that Indian family members want to remain involved with the operations of the companies in their group. This is important because at some point if a business group remains undivided, family members might concentrate on playing the role of an active investor in the holding company, rather than an operating manager. When that happens they will need top quality management to run the company and deliver returns to shareholders. It is important for family members to realize this because many professionals today want to work for family businesses. They feel that such groups have a longer view of the business. They like the values and culture of a family business. This is a huge plus, says Ward. This might be some time away in India given the dynamic nature of the market, but it will happen and those groups that have prepared well will see their companies thrive even if the family members dont run it on a daily basis. Those groups may even last beyond the three generations natural limit! To take the company to the next level, Pranav is now signing up to enter the fitness equipment as well as the sports specific garments business. He also admits that sometimes one makes mistakes in a rush of adrenaline but believes in taking it on the chin and moving on. "I took a decision to import the first consignment of a variety of fitness equipment but it turned out to be a wrong decision. Access to global education has also played a big part. "Earlier, only children from big industrial families were fortunate to get such education," says Prof Ramachandran. Now a growing number of children from even mid-sized business houses are going to study abroad and are exposed to international trade and labour practices.

These families are sending their kids for higher education, in India and abroad, not for the sake of an illustrious degree, but for specific education that enables them to understand their family business better.

Handling a team of six people, she supervised right from the designing stage to marketing campaigns, store changes and domestic production. The result was a 15% spurt in sales in the spring-summer collection compared to the year before. The higher profits have helped the father-daughter bond grow. Business gurus too have their faith in the new generation.

Challenges with Internationalization

37% 28%

22%

EXCHANGE RATE UNDERSTANDING FLUCTUATIONS WITH LOCAL REGULATION

COMPETITION

ECONOMIC SITUATION IN OTHER MARKET

The above will reflect understanding key aspects what family businesses in perceive and will help government bodies to understand and reflects on these ideas.

References: 1. 2. 3. 4. PwC family business survey 2012-13. PwC global family business 2013. India Today family business survey 2013. Forbes.com current scenario of family businesses in India.

22%