Family business in India

By Manesh L Shrikant

The landscape ofIndian family managed businesses (FMBs) is in a state of disequilibrium, even turmoil, as evidenced from certain performance paradoxes given in Table 1, on the next page. Analysis is not easy and future prognosis is even more difficult. However, by examining the evolution of India and its businesses, it is clear that certain challenges must be met for Indian businesses and India as a nation to move forward and prosper.

The business context
The business context in any society is a function of its history. The socio-economic canvass in which FMBs have operated and evolved is characterised by (i) an economy of shortages; (ii) demographic heterogeneity ? numerous castes, communities, religions, languages and life styles; (iii) economic disparity ? co-existence of some of the wealthiest families in the world with poverty stricken masses; (iv) a rural-urban divide; and (v) regional imbalances of the second most populous country in the world. However, government has had a major role in shaping the current context, as will be explained later.

The period between 1950 to 2000 has been the determining period for the current Indian business scene. In order to understand the Indian business context for meaningful analysis, the time period needs to be divided into two parts: the period of controlled economy largely dictated by the State (1950-1990) and the post-liberalised era (1991-2000).

The controlled economy era (1950-1990)
The economic policies and development strategies of the government during this period had a significant and lasting impact on FMBs, particularly those of yesteryear. These policies included: (i) directed growth based on the Russian model of State investment in heavy industry; (ii) centralised planning necessitating government approvals for important business decisions, resulting in crippling procedural bureaucracy; (iii) emphasis on self-reliance and hence preference for import substitution over export promotion; (iv) crippling tax structures ? both direct and indirect -? to support proliferating government bureaucracy besides developmental plans; (v) inadequate investment for creating infrastructure of transport, communication and other public services that remained the exclusive domain of government; and (vi) a complex system of preferential tax schemes to selectively promote small-scale industries and regional development.

This regime was in sharp contrast to the one in South Asian countries. There, development strategies had a logical sequence starting with agricultural reforms followed by production of mass consumption items in the private sector. At the same time, public investment for creating physical and social infrastructure became necessary. Unlike the Indian case, where the government emphasised regulations and direct participation in procurement, production and distribution of goods and services, the South Asian nations' governments promoted and coordinated private sector initiatives to push export-led growth.

The government's strategy of the controlled economy era failed to achieve the expected growth and left undesirable imprints on the owner managements of all categories of FMBs that grew during this period. The overall impact of these government policies on the FMBs was threefold.

First, most of the industries became fragmented. Local and regional firms mushroomed to serve 'local markets' ? a response to the inadequate transport and communication infrastructures in the country. The survival of these small firms depended on preferential tax incentives, easy availability of relatively soft loans and, unfortunately, administrative ease in tax evasion.

Second, many of these firms were vertically integrated and offered a wide product range ? a logical response to the small regional markets suffering from supply bottlenecks and the inefficient transport and communication infrastructures. An important structural feature of intra-industry specialisation and division of work observed in South Asian economies was conspicuous by its absence on the Indian scene: that of producing low cost high quality products for export markets.

Third, the regulatory framework induced large firms and business houses to corner licences and reap benefits by perpetuating supply constraints. It also ensured growth through unrelated and irrational diversification, purely guided by the regulatory control regime.

The post-liberalised era (1991-2000)
The year 1991 was a watershed year for the Indian economy. Following worldwide trends, albeit belatedly, the government redirected its policies and introduced liberalisation reforms. These reforms were implemented haltingly and partially as they challenged the status of the ruling classes, including the government bureaucracy and organised labour. The process that entailed reduction of direct taxes, import tariffs and excise duties, relatively free imports, freedom in creating capacities and permitting foreign firms and investments still remains incomplete. However, these reforms shifted the business dynamics towards a more competitive environment.

In sharp contrast to annual GDP growth of 3. 5% in the previous decades ? infamously known as 'Hindu rate of growth' ? the decade of the 1990s witnessed an average annual growth of over 6% ? one of the highest among nations worldwide. This shift has legitimately raised expectations that India will emerge as an economic super power.

Strategic clusters of FMBs
FMBs can be categorised as distinct clusters and their respective conduct and strategies are a response to the environmental context described above. The concept of strategic clusters is useful in understanding intra-industry dynamics.

Strategic clusters are mutually exclusive groups of companies within an industry. Each group consists of companies with similar strategies and challenges. Intragroup similarities and inter-group dissimilarities form the foundation on which the concept of strategic clusters rests. For FMBs in India, strategic clusters need to be based on: (i) a firm's size; (ii) its age; and (iii) whether it belongs to a family house owning many companies or to the 'one business ? one family'category.

FMBs in India can be grouped into four strategic clusters:

(i) Traditional business houses (TBH): These third or fourth generation business houses exist through a succession of business dynasties with diversified portfolios of matured businesses, mostly in core or quasi-core sectors. The Tatas, Birlas and Godrej of Mumbai; the Modis and Shri Rams of Delhi; and TVS of Chennai are some of the leading business houses belonging to this cluster. Centralised decision-making and paternalistic management whereby family members occupy key decision making positions characterise the top management of TBHs.

(ii) New business houses (NBHs): These first and second generation companies began operations in the 70s. By the 90s, they emerged as business houses with diversified portfolios of businesses consisting largely of sunrise industries. With internationally competitive strategies and often serving international markets, they have been managed professionally, although qualified and competent family members retain final authority.

(iii) Non-diversified enterprises (NDEs): These are single business ventures with market leadership positions often in niche markets. They represent medium sized single businesses. In every society, such enterprises form an important pillar of the business edifice.

(iv) Small scale industries (SSIs): Companies with very small, virtually insignificant capital investment and a handful of employees form this cluster. They normally operate as ancillary suppliers, service providers or vendors to a much larger outfit, or directly feed retail market sales. They are active in skill based industries such as handicraft and diamond polishing, and in manufacturing sectors and process industries such as pharmaceuticals, paints, dyes and chemicals.

Conduct, performance and challenges of strategic clusters
Traditional business houses (TBHs)
The companies belonging to the TBH cluster benefited most from the pre-1990 business environment because the Licence Raj system suited them ideally. Their feudal system of operation with trusted lieutenants and loyal retainers ensured that they profited immensely at the cost of overall national efficiency and the consumer. Their easy access to government decision-making and understanding of the licensing mechanism ensured that competition was marginal. The comfort of being the market leader or of enjoying a position of dominance, often through cartel operations, produced a sense of complacency with little attention to modernisation, neglect of strategic review and failure to professionalise their businesses.

Under- and over-invoicing, tax avoidance, unofficial premia on timely supply of goods and other such practices resulted in enormous wealth generation for TBH families ? little that could be officially accounted for and thus acquired the term 'black' money. The sharing of such surpluses often resulted in family feuds which led to family splits and, in the absence of long term viable business development plans, break up of businesses. During 1952 to 1990, around 40 leading business families experienced break-up of businesses.

As a result, Indian FMBs and their firms were relatively small in size by world standards. The development of financial muscle ? a prerequisite for global operations, brand building, R&D and such other essential functions for modern day corporations ? was also prevented as an outcome of the above. Hence, it has not been a surprise to find that the prediction for the survival of a large percentage of these houses or their businesses is 'weak'to 'very weak'.

New business houses (NBHs)
In the late 70s and thereafter, new entrepreneurs entered the business scene identifying fresh opportunities and pursuing aggressive planning of products, markets and technologies.

With no historical baggage, these NBHs could identify emerging opportunities. Thus, they ventured into areas that have now provided them with a platform to take the next leap towards becoming world class and world size players. Economic performance and growth, rather than pursuit of personal social status or exclusive concern with accumulating family wealth, signified the guiding force for the management of these houses. The 'right to manage'has been more a result of the competencies of family members than of ownership. The Ambanis (Reliance), Munjals (Hero Honda), Singhs (Ranbaxy) and Premjis (Wipro) have occupied centre stage in this cluster.

Reliance Industries is a classic success story in this cluster. It converted itself from a textile company in the 70s to one of the largest integrated petrochemical corporations in the 90s. Reliance has now entered the telecom field and is aggressively planning to enter the bio-tech sector. This orchestrated strategy has enabled it to emerge as the largest and one of the most admired groups in the country. Wipro is another example. With roots in the vegetable oil business in the 1960s, today it is the leading IT firm. Both these giant FMBs have emerged as corporate role models and their owners belong to the club of the wealthiest families in the world.

Non-diversified enterprises (NDEs)
These organisations have typically been single business firms, some built over the decades. Over the years, they have been able to create distinctive competencies through sustained efforts on focused strategies in a single business. They have emerged with unassailable leadership positions, even in the world markets. The commitment to excellence has been intrinsically embedded in the psyche of these growth-seeking families.

A welcome feature of their strategies is that they pursued the path that took them well beyond establishing operating efficiency and encompassed more advanced aspects including strong product management and brand building, creating strong distribution channels with effective logistics operations and forming strong technology alliances. The collective outcome of this orchestrated strategy enabled some of them to compete successfully with global MNCs. For instance, Asian Paints with ICI, Nirma with Levers, and Videocon and BPL with Japanese and Korean firms. Today well known NDEs include Ranbaxy and Dr Reddys (pharmaceuticals), Nirma (detergents), Marico (FMCG sector), Infosys (software), and Videocon and BPL (consumer durables).

A sub-group in this category consists of firms enjoying market leadership in relatively smaller markets. These firms did not receive much public attention but possess all the characteristics described earlier, particularly highly focused product-market strategies. These firms operate in relatively 'small industries' like fasteners (Sunderam), cables (Finolex), wall clocks (Ajanta), printing inks (Hindustan Inks) and stationery products (Camlin).

Small scale industries (SSIs)
The growth of employment intensive SSIs has been a mixed bag. A positive aspect of SSIs is their participation in an economically justifiable and appropriate arena: they are involved with the production of handicrafts, diamond polishing and aquaculture as well as value added activities in natural resource-based industries such as the agrobased segments. Manifold expansion of this sector is feasible if the organised sector creates capacities, currently inadequate, for procurement, storage, processing and marketing of the products of the SSIs. If this happens, worldwide dominance is possible, as the software industry has recently shown. But the initiative has to come from large firms in the organised sector by taking the SSI products to the markets, with or without processing. Indian Tobacco Company (tobacco procurement) and Amul (milk procurement) are classic success examples.

There is also an unhealthy aspect of SSI operations. Incentives and other preferential treatments have resulted in haphazard growth, particularly in the manufacturing sector. Typically, these units produce substandard goods, with inappropriate firmlevel vertical integration, employ polluting processes and operate in unhygienic environments. These practices coupled with tax evasion (a socially corrupting influence of SSIs) are unhealthy side effects.

Therefore, a structure rationalisation within the SSI cluster is needed. Fewer firms in number and transformation of the 'vertically integrated' firms into 'process specialised' firms, along with appropriate technological upgradation, will form a strong arm for industry-wide networked efforts to serve both local and international markets efficiently.

Relative performance
The importance of 'age'of Indian FMBs is a result of varying impacts of government policies on behaviour of and decision making by owner managements.

From this analysis, two important conclusions emerge:

a) Not a single firm of TBHs occupies a position among the top ten with respect to any of the parameters: sales, profit after tax (PAT) or market capital.

b) New businesses (NBHs and NDEs) as a group form the largest number among the top 50 firms ranked on the basis of Sales, PAT or market capitalisation. More importantly their share of market capital (43%) is larger than the corresponding share of sales (26%) and profits (30%), reflecting superior investor confidence.

The superior performance and prospects of newer companies compared to that of older companies once again confirms the adverse impact of 1950?1990 government policies.

Future challenges
Several surveys predict that India will emerge as one of the largest consumer goods markets in the world. The very affluent class is predicted to be a much larger group than similar classes elsewhere in the world.

New business houses and medium-sized strategically focused and organisationally strong firms will emerge as natural growth propellers. These new business houses and the stand alone businesses ? becoming increasingly important in the economy ? have established viable business models and have in place launching pads to acquire successful positions in the world markets. It is safe to assume that increasing number, size and the contribution of this cluster will be at the heart of India's economic growth. How many firms in this cluster and how fast they will attain scale and size to be world players is yet to be seen.

The future of SSIs will be influenced by the conduct and performance of business houses and NDEs. The business houses and NDEs need to proactively plan for logical integration of the rationalised and restructured SSIs with their own activities. What is needed is a viable networked industry structure capable of international integration wherever feasible ? a model that South Asian countries have successfully established. The next tribe of NDEs will come, of course, from some of the stronger SSIs.

A skilled work force, abundance of physical resources, availability of a large pool of technical and managerial talent and, above all, an enterprising spirit and a huge market potential positions India as a nation with immense opportunity waiting to be exploited. India, along with China and South Korea, could well shift the centre of the world economy from west to east. Towards this development, the role of FMBs will be a determining factor, assuming the government will bring about required policy reforms, including labour matters and exit policies for non-viable firms and simplification of procedural work connected with business. The slowness of reform implementation is a price India has to pay with its multi-party, parliamentary form of democracy ? a political system that stands in sharp contrast with other 'performing'nations like China, South Korea, Singapore and Taiwan.

Challenges for TBHs are formidable. Restructuring of business portfolios to correct inappropriate diversification of the yesteryears and devoting resources to selected businesses is an immediate need. This has been initiated by several businesses, with the help of management consulting firms. However, a far more difficult task will be to redefine strategic logic for businesses that lack sustainable competitive strength. Finally, they need to strengthen the structure, systems, processes and culture within their organisations to make them responsive to the emerging demands of the market place.

Whether Indian family members of FMBs will find enough courage and determination to change themselves first, a prerequisite to change the organisation, is yet to be seen. Only timely realisation of this fact can hold back the onslaught.