Professional Documents
Culture Documents
Family Business Whitepaper
Family Business Whitepaper
Contents
1
INTRODUCTiON
2
APPROACH AND REsEARCH METHODOLOGY
4
SNAPsHOT OF INDiAN FAMiLY BUsiNEssEs
7
THE NEED FOR PROFEssiONAL EDUCATiON iN FAMiLY BUsiNEssEs
9
WAY FORWARD
10
CONCLUsiON
10
HOW TECHNOPAK CAN HELP FAMiLY BUsiNEssEs
Authors: Enayet Kabir | Vice-President Aurobindo Saxena | Associate Director Anuj Kumar | Senior Consultant Aditi Pandey| Associate Consultant Design & Development: Arvind Sundriyal | Assistant Manager-Design 3
November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
Introduction
The past decade was an interesting time; at no other point in history did almost all the countries of the world, whether developed or developing, grow at an above-average rate 5%. Almost no country in the world was left behind in this unique growth, which was partly fuelled by cheap money. However, it is widely believed that this pace is not going to become a new normal, and economies which have not reformed and brought about fundamental internal improvements will find it difficult to sustain this growth. In the case of India, this hypothesis is being proven true. Indias globalized economy has, to a large measure, lost its sheen due to a steady deceleration in economic growth over the past several quarters. Some of these concerns are reflected in the depreciation of the rupee and the wane in job creation. There is widespread concern that the present sentiment is not going to improve unless there is a change in governance in India. In India, the relationship between the economy and family businesses is symbiotic; one cannot exist without the other. Family businesses in India comprise 80% of the total businesses and contribute 60% of the GDP. Given the globalized nature of todays economy, international whims and swings influence Indias family businesses just as much as they influence Indias economy. Despite their size and contribution, family businesses often get ignored and underreported in mainstream business narratives. This Whitepaper thus aims to get into the minds of entrepreneurs and family businesses in India and appreciate their worldview. Another key objective is to understand the interlinking of professional business education with governance, quality of management, professionalization of business, and a progressive ecosystem. To aid this effort, our team travelled to 35 Indian cities and interviewed a number of family business owners, across several generations, as well as professionals in key roles within family businesses and those who actively serve family businesses, including personnel from the accounting, banking, legal, and private equity world. It is this teams experience that enriches and informs this Whitepaper.
Research Methodology
Indian family businesses have certain unique features which distinguish them from those in any other country. Dimensions like caste, region, and cohesiveness that typify Indian joint families foster a rather complex kind of family business. These dimensions, along with the sector of operation, the generation (of the family) by which a business is being managed and local microeconomic factors make Indian family businesses a rich subject for exploration. In order to capture accurately the myriad dimensions of Indian family businesses, we decided on a sampling frame that would map various regions in India to the corresponding, dominant business communities. This mapping exercise was further qualified using such variables as nature of industry (manufacturing and services), the generation managing the businesses (2nd, 3rd, etc.), and city type (Metro, Mini Metro, Tier I, Tier II, etc.). We included companies whose revenues are over INR 5 crore (USD 0.83 million), and which have been in operation for more than 5 years, from the sample. Besides interviewing family business promoters and professionals, we also interviewed bankers, lawyers, Private Equity professionals, Chartered Accountants, and academicians who have been actively involved with family businesses for at least the past 5 years. Most interviews were conducted face-to-face; only about 10% of the interviews were conducted telephonically. In the case of telephonic interviews, the interviewees were mailed the questionnaire along with a brief note on the purpose of the interview. The data collected from the interviews was analyzed using standard statistical tools.
November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
Exhibit 1
Age of Respondents
6% >60 19% 50-60 Age(Yrs.) 29% <30
Exhibit 2
Gender of Respondents
94%
6%
23% 40-50
23% 30-40
Male
Female
Exhibit 3
0.5% Illiterate
Source: Technopak Analysis
1% Certification
Looking at the families themselves, it can be observed that a good number of these families stay as a joint family even today.
Exhibit 4 43% 32%
12%
6%
7%
<5
Source: Technopak Analysis
5-10
10-15
15-20
20+
Exhibit 5
Gender Distribution
89%
11%
Male
Female
35%
55%
In the US, family-owned firms dominate the economy in terms of their contribution to GDP and job creation. while in the UK, they generate 25% of the GDP (with a nearly 10% contribution to tax revenues), and employ 33% of the workforce.
Exhibit 7
Contribution of Family Businesses to GDP , Workforce in the Developed World vs. India
65% 63%
25% 33%
80% 75%
USA
UK
% GDP Contribution by Family Businesses
India
% Workforce Employed by Family Businesses
Source: Family Firm Institute; Family Business data (University of Michigan-Flint); various media sources
It is evident from Exhibits 6 and 7 that family businesses play a much more critical role in the Indian context than in the developed world. This difference between Indian family businesses and those in the developed world can be attributed to the following key factors: Access to capital: Family businesses in the developed world have had easier access to capital for a much longer time due to well-developed financial markets. This access in turn affected the dilution of the familys stake to an extent where families let go of the control of the business. This transition in ownership has had a profound effect on organizational design and culture. On the contrary, in India, capital was not easy to come by for most of the past century. This, coupled with the conservative mindset of the families, led to their greater control on the business. Using the larger family as a resource pool: In India, the notion of family is different from that in the West. Indians have a broader definition of family and their families are typically larger in terms of the number of family members. Indian family businesses have shown a greater propensity to tap into family resources for managing the business. The flipside of this phenomenon is that, typically, Indian family businesses are less transparent compared to their Western counterparts. 4
November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
Rooted to tradition: Tradition and community have always played important roles in the way business is done in India. Business communities like the Marwaris or the Baniyas enjoyed the support of their community networks. There have always been unwritten rules on how to transact and many of these transactions have been based on trust. On the contrary, in developed countries, the importance of the community has not been significant. While there are differences between family businesses in India and in the West, there are similarities as well. It can be observed both in India and abroad that family business owners give a free hand to the professionals only while the market scenario is favorable and the company is growing. When the tide turns, the promoters take over the reins of the company once again. The recent instance of Proctor & Gamble (P&G) and Dell in the United States, and of Infosys and Wipro in India, are cases in point.
Technopak also tried to identify key attributes and success factors for family businesses at different stages of their growth, through extensive discussions with promoters and professionals as well as academicians. From these, three classifications emerged, viz. small size companies (i.e. whose revenues do not exceed INR 100 crore), midsize companies (revenues between INR 100 crore and INR 500 crore), and large size companies (revenues exceeding INR 500 crore). Some of the other insights from our discussions are enumerated in Exhibit 9 below. The key success factors were identified via studying the best practices of the highest-performing companies in each of the above classifications. For example, in the case of small size companies, we looked at companies that have grown at a CAGR of 30% (year-on-year) or above.
Exhibit 9 Size of the business
Key Attributes and Success Factors at Different Stages of a Family Businesss Growth
Key Attributes Preoccupation with operational aspects Room for all family members; roles are not well-defined Little room for strategic thinking. Promoters have little resources and bandwidth to Finding a niche take an outside view of their business Focus on products and services Centralized decision making Focus on key revenue streams and Typically, families are risk-averse and have low appetite for investing in new profitability opportunities Focus on scaling up Low dependence on processes; decisions are taken in an informal and ad hoc manner Propensity to utilize family talent pool Growth is the all important aspect for the family Growth through new products and services mostly in adjacent areas Hunger for operational excellence, cost optimization, and best practices Strong and enlightened leadership to harness strategic resources and attract top talent Inducting institutional investors into the business for a larger resource pool and strategic guidance Separation of management and ownership Creating a strategic roadmap after considering family aspirations and business needs Strong leadership pipeline at various levels Diversification Focus on innovation and R&D Key Success Factors
Small-cap
Mid-cap
Realization that decision making needs to be process-driven and decentralized Realization of the need for inducting high quality professionals Realization that the role of the family needs to be strategic and well-defined
Family members dominate in playing a strategic/investor role Familys shareholding in Indian businesses exceeds that in Western counterparts Large-cap Have a quality professional talent pool and ability to hire top talent Ability to go global for new markets, technology, brands, cheaper capital or natural resources
While there are both bearish and bullish predictions about India and its future, the reality will probably be somewhere in between. A vibrant capital market, robust growth in domestic consumption, a democratic political superstructure, the availability of young talent, and the resourcefulness of Indian family businesses make them the right candidate for growth. While there are a lot of positives favoring Indian family businesses, they cannot afford to be complacent and need to address their challenges proactively. 6
November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
Illustrative Programs in the Family Business Domain Offered by Top Indian Business Schools
Program Name Managing Family Businesses for Generational Success India Management Program for Entrepreneurs and Family Businesses Management Program for Family Business Post Graduate Program in Family Managed Business Women Manager Program Owner Manager Program Program Duration Short-term (4 days) Program Fees* (INR) Target Audience Family Business Members (across generations) SME and Family Business Entrepreneurs Family Business Owners (younger generation) Family Business Incumbents Family Business Women Family Business Owners Family Business Incumbents/ Employees Family Business Owners/ Managers Focus of the Programs Issues specific to family businesses like succession, ownership control, and shareholder relationships are discussed to arrive at a strategic plan for the familys future Understanding business Environment and developing business strategy General management Preparing for the leadership role in family businesses General management Taking businesses to the next level Preparing for the leadership role in family businesses Understanding the changing dynamics of competition and organizations
2.4 lakhs
9 months
5 lakhs
15 months
30 lakhs**
Symbiosis Institute of Business Management, Pune Narsee Monjee Institute of Management Studies, Mumbai
Post Graduate Diploma in Family Business MBA (Entrepreneurship & Family Business)
24 months
14 lakhs
Most family business programs offered in India tend to focus on the owners of family businesses and accord less attention to the professionals and advisors who play a very important role in the ecosystem. In many developed economies, there are programs that are strictly available to professionals. Some such programs are enumerated below.
Exhibit 11
Illustrative Programs Focused on Family Business Advisors/ Professionals in Global Business Schools
Program Name Program Duration Program Fees* (USD) Target Audience Focus of the Programs Technical skills, along with the strategies and tools needed to incorporate social and human considerations as a trusted advisor; affiliation to Institute of Family Enterprise Advisors Comprehensive understanding of the functioning of, and issues confronting, family businesses Integrating critical business functions in a unified strategy that drives innovation and growth Family enterprise advising and consulting, and the myths, realities and trends relating to Family enterprises
13,960
Business Families Institute, Singapore Harvard Business School, USA The Family Firm Institute, USA
Program for Advisors: Understanding Family Business Key Executives Program Certificate in Family Business Advising
1,920
Family Business Advisors & Private Bankers Senior Executives Family Business Advisors
20,000
12 months
5,000
Need-Gaps
Considering the demand for higher education in the family business ecosystem and the supply of programs, some clear need-gaps can be identified. These are: Exclusive focus: Currently, the few institutions that offer family business programs offer them largely as a sideshow. There is not a single institution in India that has been set up to focus primarily on family businesses as is the case with institutions like The Family Firm Institute in the USA. Short-term programs: Further, existing institutional programs are mainly long-term with few programs which are short-term in nature. Our research underscores the need for short-term programs with a sharp focus on specific areas. Focus on professionals/advisors: Most of the current offerings are targeted at the promoters of the family businesses. There is very little on offer for professionals and advisors like accountants, lawyers, bankers, financial planners, therapists or coaches, who may need to augment their existing technical skills with a more sophisticated understanding of business families and the challenges unique to them. Customized programs: Our research underlines that the existing programs do not cater to sector-specific needs. Additionally, there is a need for customization considering factors like the revenue of a company, which generation of the family is in charge, location, etc. 8
November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
Way Forward
Management programs for family businesses in India are relatively a new phenomenon. However, in recent years, several high profile business schools have begun offering these programs in various formats. At present, the total expenditure on such programs is around USD 10 million. However, it is believed that there will be a spurt in the availability of such programs in the years to come. Besides educational intervention in family businesses, at a structural level, there are some imperatives for the improvement of the quality of management in family businesses. These improvements would come about when all stakeholders play their part.
Professionals/Advisors
Invest in family business management courses: It is observed that professionals advising the families get restricted to their area of expertise, e.g. Chartered Accountants for taxation, lawyers for legal matters, etc. In order to become a family business advisor, not only is strong domain knowledge needed but a great depth of experience across multiple disciplines is also required; the advisor must also possess high emotional intelligence in order to handle the complexity of inter-family relationships. Professionals should therefore undertake courses which are focused on providing family business advisory skillsets, e.g. helping a family business create its roadmap and constitution.
Policymakers
Need for institutionalizing Family Business Advisors: The role of family advisors in developed economies is strictly defined. These are qualified professionals affiliated with statutory authorities for certain activities like developing family constitutions. There is much need for creating such a regulatory body in India, along the lines of, say, ICAI for Chartered Accountants.
Conclusion
While the latest round of reforms suggested by the government may be cause for optimism, the overall state of Indias economy remains a cause of concern. Family businesses must therefore focus on innovation and creating a long-term strategic roadmap to not only buffet against the turbulent external environment but also streamline the transition from one generation to the other. Education can play a very important role, both in helping develop a keen understanding of the shifting landscape and in reconfiguring the business. Our research highlights the fact that most professionals are playing a transactional role in the management of family businesses. However, there can be an opportunity for professionals who evolve themselves through education to carve out a larger, strategic role for themselves. It is deeply felt that the time is ripe for policymakers to provide a regulatory framework conducive to the evolution of family business advisors in India.
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November 2013 | Family Businesses: Envisioning Growth Along the Knowledge Curve
About Technopak
Indias leading management consulting firm with more than 20 years of experience in working with organizations across consumer goods and services. Founded on the principle of concept to commissioning, we partner our clients to identify their maximum-value opportunities, provide solutions to their key challenges and help them create a robust and high growth business models. We have the ability to be the strategic advisors with customized solution during the ideation phase, implementation guide through start-up and a trusted advisor overall. Drawing from the extensive experience of more than 150 professionals, Technopak focuses on five major divisions, which are Fashion (Textile & Apparel), Retail, Consumer Products & E-tailing, Education, Food & Agriculture, and Healthcare.
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Healthcare
Our Healthcare team is dedicated to assisting healthcare clients manage their businesses and provide innovative solutions with focus on short-term as well as long-term results. Our expertise in the field of strategy development and implementation has allowed us to execute varied assignments across the entire healthcare spectrum, covering varied geographies. Our team, comprising business analysts and research professionals, offers a variety of services that covers the entire gamut of Healthcare operatives.
Disclaimer
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Enayet Kabir Vice President E-mail: enayet.kabir@technopak.com Aurobindo Saxena Associate Director E-mail: aurobindo.saxena@technopak.com
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