Understanding the Unique Model of Family Businesses
The importance of family businesses has grown significantly over the last few years. Many family businesses have stepped beyond their existing footprint to build and acquire companies in new industries and new geographies, across the world. Mr. Raman Nanda, Founder and CEO, STEP Transformations in conversation with Mr. Sudhanwa Kopardikar, Director, MCCIA shares how family businesses should tackle the challenges they face.
Could you talk about the about evolution of family business enterprises in India and around the world?
Family businesses are an extremely important segment of our economy contributing to not only a huge part of our GDP and employment, but also powering innovation and meeting the changing needs of the customers.
Even globally, the importance of family businesses is growing so much that more and more business schools are having or setting up exclusive departments catering to these. Harvard, Kellogg, ISB, SP Jain Institute are just a few examples of that.
What are some of the challenges that family businesses typically face?
With the focus on relentless growth and a lack of exposure to governance, family businesses start to face some challenges by the time of the second generation.
Sometimes lack of clarity about what is fair and what is right becomes a problem. It can be resolved through open mindedness, dialogue and taking objective external help before the issues start becoming disputes leading to potential division of the families and their strength.
In business operations, how important is the separation of ownership and management-especially in family businesses?
It will be difficult to generalize this in case of family businesses, but in other businesses it almost always pays to separate ownership from management to ensure checks and balances, and to have management in the hands of experts.
In case of family businesses in the first generation and till the time the operations are small and can be managed by the owner and family, it makes sense to keep it that way.
However, once the business becomes bigger and more complex, professionalization is inevitable.
How does family ownership affect financial decisions?
Family ownership has an impact on financial decisions in terms of risk that can be taken.
Some owners are not comfortable with any risk, many others are happy to take risks that others would not.
Generally, it is perceived that family owners can take quicker decisions based not necessarily on complete information, which professionally managed companies would not be able to take because of separation of ownership and management.
Thus, family ownership can have an impact on speed of financial decisions. Sometimes listed companies have a much higher access to shareholder funds, that family businesses may find difficult to match.
Could you share your insights about succession planning?
This topic can take a long time to discuss, but in short there is no magic potion for this.
This issue should remain on the focus of Family Council meetings and be on the family owner’s mind, so that adequate time is spent on it. Also, actions should be taken proactively rather than reactively which would impact the business.
Hopefully, internal options are there in the family business, who can be groomed/considered and a learning cum development plan can be implemented to build their skills, competencies, and confidence.
At the same time, if no credible option is available internally, you must look outside including potentially taking a partner or selling the business. This is so that the business continues for the sake of all its other stakeholders, including customers, employees, vendors and the community.
This is one of the most crucial issues for family businesses and can create a lot of stress. It is always suggested that family businesses should consider having an unbiased partner or adviser to guide the owners in this area.
How can a family business strategize for growth?
It is not too different than strategizing for growth in a professionally run business
It depends on the opportunities available, the hunger for growth, the bandwidth available, the competencies available, risk taking ability and so on.
Fundamentally, growth in new customer segments for existing products and services is a good option.
Growth in new lines for new customer segments can often be challenging, and comes close to a green field launch.
A family business needs to keep time aside to investigate new opportunities in terms of geographical expansion, product lines, more variants, as well as totally new business lines, for organic or inorganic expansion.
How should a family business guard itself against hostile takeovers?
The best way is to maintain control over the equity structure by the leading owner.
That is sometimes not possible because of the sharing between siblings or cousins. In such a case, creating family councils to keep the families together, through dialogue and convergence of thought process and interests, is one of the best ways.
What is the way forward for family businesses in India and the world?
Family businesses have a promising future because of their specific advantages over other forms of structure. The passion of owners, their brand name, the legacy, the long-term vision, the speed, and the creativity are difficult to match.
However, they need to do the right things for the family and business, and not necessarily the fair things as seen by them or by others.
How do family dynamics affect internal functioning of businesses?
This is an important issue and if not taken seriously can be a source of weakness, as against a source of strength.
Feelings of inequality between siblings or feelings of insufficient recognition and compensation or lack of internal dialogue are some of the many things that can take a toll on the business.
Sometimes businesses are unable to attract professional talent that they need, because of family dynamics.
By ensuring good governance, family dynamics should not be allowed to affect functioning of business.
How do family businesses reinvent themselves with the changing times?
Covid-19 has taught all businesses many lessons.
Four things are especially important nowadays for family businesses:
a. Governance and professionalization
b. Communication, transparency, and trust building
c. Managing succession issues
d. Developing a long-term business strategy
Does a family business experience dilution of brand as the family grows in size?
A brand and public perception [aka goodwill] are really valuable assets of a family business, build often over decades. If care is not taken through consensus and by all legal means, dilution can start. It depends on the family what happens.
For example, there are Chikki shops at Lonavala with the name ‘Maganlal Chikki’. However, the question is-are they helping to protect the name or does the customer not trust any of them.
There are multiple jewelry shops in Kolkata with the same brand name (similar names as Lakhi Babu Jewellers )and whether the brand strength is the same as before or not is a question.
On the other hand, Chitale Bandhu in Pune have always made major efforts to preserve the sanctity of the brand.
Do you have any advice for young family members of family-owned businesses?
Firstly, the younger members must have huge respect for the seniors. They should make serious efforts to gain the wisdom and experience of the senior generation, while having their own mind.
Be ready to sit at the feet of the elders to learn from them, and then on the shoulders of the seniors to build the business multiple times while taking it over. Finally, a word of caution-never disparage the past.
How do you balance tradition and innovation in a family business?
Tradition can come in the way of innovation in any business or in any aspect of life. The problem can become acute because family ownership is stable across generations, unlike in professionally managed organizations which experience a higher turnover at the top.
Being acutely sensitive and conscious about the issue, listening to the next generation with an open mind, listening to the customers carefully about their needs, creating a focus on innovation at all levels, are some of the methods by which innovation is encouraged. An owner-manager always need to do what is right for the business, and while culture and values are non-negotiable, business processes, products and so many other things need innovation continuously for the business to survive.
How can the transition from one generation to other be handled smoothly?
Succession and transition must be long and planned processes if they have to be smooth.
There should be an identification of a successor after all internal family processes, there has to be a sufficiently long period to build him or her for the higher position, and there has to be a stepping back by the existing leadership.
Each of these steps is not easy and require thought, application, and discipline.
For example, tradition may dictate the senior most heir, but pragmatism may dictate a younger sibling as the best option to run the business. Sometimes such a person may not be ready to take such a responsibility.
Finally, inspite of all planning, things can still go wrong, but we must carry out the above process to significantly enhance the chances of success.
Many family business experts like Prof. Kavil Ramachandran of ISB also suggest including mentoring and coaching in the succession process.
(This interview first appeared in the January 2021 edition of Sampada. You can read the issue here https://mcciapune.com/media/printmedia/January_2021_-_Web.pdf )