Management Process Assignment

By: Abhishek Mishra Batch: ISBE\SS\10-12 Roll No. 01

Family Businesses in India

INTRODUCTION:
A Family-owned business is one that is owned and managed (that is controlled) by one or more family members. Family-owned firms are organizations where two or more extended family members influence the directions of the business through the exercise of kinship ties, management roles, or ownership rights. A family owned business is any business in which a majority of the ownership or control lies within a family. It is also a complex, dual system consisting of the family and the business. Members involved in the business are part of a task system and also a part of a family system and these two systems may overlap. Family owned businesses exist all over the world and are some of the worlds oldest firms. Some of the largest wealth creators and businesses are family owned like Wall Mart. In India too, the highest generator and creator of wealth are family owned businesses. The issues faced and the interests involved by family-owned businesses all over the world are more or less the same. The importance of the family in business and the blurredness of the distinction between business and family are predominant issues.

FAMILY-OWNED BUSINESS IN INDIA:

India has seen some very influential families in business. These families have made a lot of difference in the business and industrial culture of the country. These families have existed for over hundred years and have influenced the economic and political situation of the country. Until the government of India took a very socialist stand on investment the family-owned businesses in India were very successful and Tata Airlines was among the top 10 Airlines in the world. The economy of the country was gauged for several years on the basis of the growth and development of the family business. In the 1970s Private owned firms, 93% of which were family-owned at that time, were put though very regressive policies to control growth of private wealth. This huge period between 1970 to 1990 created a lot of problems for the private sector (most family-owned) and rendered it quite unfit for global standards. With the opening of the economy and the influx of multinationals the family-owned businesses and the private sector was

at a great loss and on a back foot. It was felt that the family-owned business and family-owned business houses would lose their place in the industrial map of the country. Time has proved this to be wrong because the family-owned businesses have proved to be very strong in their determination to carry the business on. But there are several road blocks that have ensured that Indian family-owned firms are not global leaders in their field.

CHARACTERISTICS OF FAMILYOWNED BUSINESS IN INDIA:

1) Family relationship is the most important factor in determination of the position a person holds in the business. 2) Family members including those who are not contributing or are involved in the business are on the Board of Directors.
3) Few cases have been very successful and thus are synonym with family-owned

businesses in India The Aggarwals and Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains and Banias, Muslim Khojas and Memons in the West, and Marwaris in the East. Of these, the Marwaris have been the most successful. 4) Every caste has a very dominant culture that is followed in the business by all. 5) Family, extended family and relatives have a very strong sense of loyalty to the family that automatically translates as loyalty to the business. 6) The single minded dedication of the CEO and the family ensures that family-owned business survives through the toughest times. 7) Sons and male members are more likely to hold higher positions and succeed the CEO. Role of women is that of facilitator to the male members and as the mother figure to the family and employees.

THE CHALLENGES FACED BY FAMILY-OWNED COMPANIES:

The challenges faced by family-owned firms vary according to the size of the company and its level of development. There are some large family-owned companies that have their operations on an international level. These companies have made the transition from family company to a corporate family. They have professionalized their management boards, diversified their ownership and, issued shares on the stock market. In such cases, the challenge is on governance between the management board and groups of shareholders. Majority of the family owned companies operate like extended family units. All decisions are centralized and taken behind closed doors and guarded from everyone. There is lack of communication and management is closely held by a few members of the family. Family members can never hold all position therefore, professionals are present but do not have any freedom in decision making they are mere implementers of decision taken by family members. The challenges are more in such family-owned businesses. Challenges faced by family-owned business are different from the challenges faced by non-family business. When close relatives work together, emotions often interfere with business decisions. Some family companies face challenges of control of daily operations while others face a high turnover rate among non-family members. Some companies have a severe problem of growth because some of the relatives are unwilling to plough profits back into the business. Some businesses face challenges of funds management and others find it impossible to employ all family members fruitfully. Many family-owned firms find the morale of non family employees very low because the trust factor in outsiders is very low and family members are given benefits they have not worked for, Most family-owned firms face the problem of SUCCESSION PLANNING which even the most professionally managed familyowned firms are guilty of ignoring.

SOME OF THE MAJOR CHALLENGES FACED BY FAMILY-OWNED BUSINESSES THAT ARE RESULTING IN THEM NOT ACQUIRING WORLD CLASS STATUS ARE:
1. Non participative family members. 2. Family emotions. 3. Family or Business what comes first? 4. Human Resource. 5. Defining Authority. 6. Fair to all approach. 7. Retaining non family professionals. 8. Speed of accepting change. 9. Succession Planning.

Examples:
Godrej Group: Into the fourth generation, the Godrej group is over a century old, having started by Ardeshir Godrej to make locks. The three generations that built the group added several products to the portfolio. From locks in 1887, to soaps in 1918 and refrigerators in 1958, the group has steadily grown over the years. It is highly diversified group, present in industries ranging from food, soaps and detergents, consumer durables, electronics, insecticide, veterinary products and engineering. The group has acquired brands such as Fiskars, Jet and Banish and has forged alliances with several transnational such as GE, P&G, Pillsbury, and Sara Lee. The group turnover grew from Rs 28 billion in 1999 to Rs.33 billion in 2004. The group holds a majority shareholding in most of its companies ranging from 50% to 100%. The Godrej was awarded the Citizen of the Year in 2003 by the Economic Times for its contribution to social development. The family strongly believes in the trusteeship role of each member in perpetuating the family and the business. In its 100-year old history, the group has never experienced a single split. Although the groups titular head is still the patriarch, S P Godrej, all the groups businesses are managed by the third generation. The fourth generation has just commenced entry into the business. The young generation has to join at the lowest executive rings and be trained and found

good before climbing up the hierarchy. There exists a strong and systematic grooming process for them under the guidance of the family members and outside professionals. Group companies are chaired by family members, but as Adi Godrej, the group Chairman put it, it is mainly on paper, and each company CEO has maximum freedom to decide the strategy of the company. Obviously, there is consultation, both at the family and business levels. It is to note that the group has recorded steady growth in the past five years on sales, PAT and net worth front.

Kirloskar Group: It was in the mid-1920s that Laxmanrao Kirloskar started manufacturing world class diesel for the first time in India. Sticking largely to engineering related products, it has grown over the next three generations. A majority of its revenue comes from its core businesses of castings and forgings, pumps, engines, electric motors, power equipment, and compressors. During 1956-80, the group was led by SL Kirloskar. The group has been conservative in growth and has closely held ownership within the family. In fact, the group turnover has come down from Rs.9.50 billion in 1999 to Rs.7.45 billion in 2004, with the networth also depleting simultaneously. While the family is unified, and the six members of the fourth generation in the age group of 41-49 are actively involved in business, they have not embarked on any aggressive growth options. The group is led by the last member of the third generation, who is now 54 years old. He has worked towards synergizing relationships among family members and making them think as a group. Although all the male members of the fourth generation are actively involved in managing group companies, they have developed mechanisms for mutual consultation regularly. Their exposure and experience with TQM methods from collaboration with Toyota, Japan provided all of them with a common platform to compare and exchange notes. Their long association with the companies and their non-family manages have helped the group work as a single entity. While this has helped build smooth internal synergies, it is found to be inadequate to build long term business competitiveness.

Conclusion:
Though it is easy to give family-owned firms advise no how they can overcome their challenges and be global players it may not be very smooth. Family ties and traditions are very deep rooted in family firm. Some families tried to separate ownership and management but it did not work for the long and unfortunately in many of the cases the movement of the family outside the management resulted in fall in the business fortunes and the family was forced to get actively back into business. This has resulted in old timer giving this example to all that the family keep the interest of the business paramount and an outsider never thing that it is his baby. The dialogue continues as to what is best for family-owned firms in India.