Performance & Challenges for Family Businesses

By
Prof R K Gupta
BE (Hons), MBA, FIE
Aravali Institute of Management
Jodhpur (Rajasthan)
E-mail : cityju@rediffmail.com / rkgupta_India@hotmail.com
URL : www.Geocities.com/rkgupta_india
 

Performance & Challenges For family Businesses

There are several issues related to management of modern large corporate bodies: Their shareholding pattern, the value system and culture, the Mission and Vision plans (which hardly anyone understands and reads inside or outside the organisation-being considered as vague and decorative show pieces) the short term and long term objectives of the promoters (Owners) and effective management of these organisations. There is clear shift in previous Lalaji (Indian nick name for main promoter or his heirs) cum Manager of the firm model to separating the executive function from the ownership. There has been an amendment in Indian Companies Act that now requires listed companies to have certain percentage or number of full time Directors who are executives or professionals. But is separating the two- the ownership and management strictly possible? There is then ESOP or profit sharing arrangement in most of top corporate bodies. Can you then call an executive or professional director purely a professional?

My personal experience in Indian Corporate sector over last 30 years shows that while top corporate have been able to mange the issue satisfactorily, the smaller organisations do have undesirable outcomes from Lala-cum-Manager arrangement. It has been seen that these guys are not able to reconcile to a professional running the enterprise independently or taking decisions without consulting them (It is difficult to delegate for most of them and let go of day to day controls).It is also difficult for them to let go of their old bad habits and mindset in deciding on various issues. Even some go to the extent to envy their own CEO who becomes popular and successful and feel insecure.

However, both the professionals and academicians agree on need to separate executive functions from Overall Policy making regarding: New Investments, finance, growth and HRM. What one may call Strategic Decisions vis-à-vis environmental challenges; and to promote or alter value system in the organisation. There is thin line between the two. As both tasks depend on each other and overlap.

However, it is clearly seen that the two types of commercial organisations have different problems:

Publicly or Privately held large organisations (Say above Rs 500 crores/$100 Mil. annual Turnover) and SMEs that may have turnovers from Rs 50 crores to 500 crores/$10 to 100 Mil.

It is also seen that a large number of prominent organisations are family controlled as well as owned with significant contribution to Top 100 lists and share in GDP of countries like USA and Europe and even in India. Many are routinely managed by heirs of the original promoters.

It is very difficult therefore to clearly define, as to what is a family Business?

It is difficult to define family business .But all share a few common characteristics:
* A single family controls the company's ownership.
* The controlling family's members are currently active in top management.
* The family has been involved in the company for at least two generations—or seems likely to be.

Probably the best yardstick could be the degree and nature of control and direct involvement of owners/families on   Board room decision making processes, whatever these may be. Even this definition defies clarity. But we shall accept this for sake of analysis.

Survey of Family Businesses:

According to Rottenberg, 80 percent to 90 percent of all U.S. companies are "family businesses," defined by his magazine as those in which several generations of a single family have been and remain actively involved.

Such companies, he noted, account for an estimated 49 percent of the U.S. gross domestic product, 59 percent of the work force and 78 percent of new jobs.

"Family companies tend to be intuitive and instinctive," Rottenberg said. "The business and the culture is in their blood, which means they don't have to spend a lot of time with analysis, poring through reports or making decisions."

Some of the top US based family owned businesses are shown in the adjoining table.

As far Indian scenario is concerned, since 1947 several changes have taken places in Economy. First business Maharajas grew under protective economy of Government and now several new have come up. A few are first generation entrepreneurs like Narayan Murthy and team of Infosys.

Names like Tata, Birla, and Bajaj became household words. Such companies grew to account for 15% of the Indian economy, and their products penetrated the lives of consumers in everything from cars to clothing. When the grand patriarchs died, they handed down their empires to their sons. And when the sons died, they handed down their empires to their sons. Yet now, with the second and third generations at the helm, it's a whole new India and a whole new ball game.
 

The Top Ten and Economic Profit in India
 

With India increasingly deregulating, the descendants of the founders of its blue-chip dynasties are faced with a huge challenge: transforming their companies into competitive dynamos that will prosper in the new global economy. The Indian government is moving toward eliminating tariffs that protect family monopolies. Competition from multinationals and Indian upstarts alike is coming on strong. ''The burden on this generation is unlike any other,'' says Gurcharan Das, a former CEO of Procter & Gamble India and now a consultant. ''They have to become competitive in their own right. This is reckoning time.''

There is no disputing the crisis in business leadership today. It is acute and will probably become worse before taking a turn for the better. Competition and change are battening down family businesses, chipping away at profits and market shares. Competitive shock has badly shaken the confidence of 'wise' patriarchs.

Given the importance of family-run businesses in the Indian economy, such news is, to say the least, worrying. Sixty-six of Business India's Super 100 companies are family-run. According to Business Today, family-run businesses account for 25% of India Ink's sales, 32% of profits after tax (pat), almost 18% of assets and over 37% of reserves.

For large corporations the challenge is to develop competent leadership that can take over the reigns from the outgoing leadership. Another big challenge is to extend operations to global and world class levels, perhaps including overseas facilities. Third challenge is to cope with fast changing technological environment throwing new products, processes and ideas every day. The fourth challenge is to create a trained, competent and committed team of employees. This last one has always been weak point of emerging Indian corporate sector, because of the work style and inherent mindset as explained earlier.

In fact India has one of the highest rates of Brain drain in the world. The debate on this issue whether India benefits or not is not scope of this analysis.

Family Business characteristics

Various studies have revealed at different points of time that Family businesses typically have lesser emphasis on Strategic decision making aspects. However there is no such conclusive proof. Many family businesses have been showing high degree of strategic management capability too. Some of the typical characteristics that influence Strategy of family businesses can be listed as (Harris, Martinez and Ward: 1994):

- Inward orientation

- Slower growth and less participation in Global markets

- Long term commitment

- Less capital intensive

- Importance of family Harmony

- Employee care and loyalty

- Lower costs

- Generations of leadership

- The Board's influence on implementation

However, the conclusion of authors was that "the assessment of these Family business characteristics and their influence on strategy leaves more questions than the answers".

Others (Pascarella & Frohnan, 1990) have suggested that stages of the family life cycle may significantly affect the survival and success of the family firm. This leads to the question of differences between generational ownership of family businesses. In other words, do family businesses in their first generation of family ownership have the same dynamics and, therefore, follow similar strategies as family firms in their third generation of ownership? Anecdotal evidence seems to suggest that this is not the case. Lansberg (1983) discusses some of the challenges that family firms face as they move through various stages of their existence. To deal with the human resource issues, the author recommended that ownership and management should be separated when making these decisions; the firm is to act more like a non-family than a family business when making business decisions.

Notably, our results indicate that family firms are less innovative, emphasize industry leadership less, but have a greater prospecting orientation than non family firms. Gudmundsen et.al (1999) similarly found that family businesses emphasise a higher prospecting orientation, though they also found that family firm owners emphasize higher industry leadership when selling to consumer markets.

WE can thus summarize that:

Family business firms are predominant in any economy over the globe.

Their contribution to capital markets and GDP of country they belong to is significant

Overall the performance of family owned family managed businesses have been at par with non family corporations.

The fast changing global environment has put lot of stress in evolution of family run businesses in terms of changing leadership needs, strategic decision making, requirements for globally competitive operations, development of strategic human resource base, involvement of employees in business success, induction of professionals at decision making levels, raising financial resources to meet global competition and absorption of technology which is fast changing.

Some of The US and Indian family owned businesses have shown remarkable elasticity in reorienting themselves to new environmental realities and the third generations have taken over leadership role rather quite impressively and smoothly including women heirs( Hindustan times, Thermax, Alfa Laval and so on).
 

Prof R K Gupta
BE (Hons), MBA, FIE
Aravali Institute of Management
Jodhpur (Rajasthan)
E-mail : cityju@rediffmail.com / rkgupta_India@hotmail.com
URL : www.Geocities.com/rkgupta_india
 

Source : E-mail June 14, 2004

B A C K