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Area: Strategy India Inc: Should India Inc. engage in Diversification or on focused strategies in the post reform era? TOPIC: Strategies for Indian family owned businesses
Submitted By Shailendra Barshikar Tejas Joshi
Contact Details: Shailendra: firstname.lastname@example.org email@example.com Cell No. 09431302805 Tejas: firstname.lastname@example.org email@example.com Cell No. 09835341389
Keywords: Family owned businesses. The strategies. . (TODO: details required here to be given here) Known as chaebols in Korea. Moreover we also feel that although family ownership is good at the entrepreneur stage. We have classified Indian family businesses based on what competencies their business demands and what skills they can leverage upon – essentially a focused approach.Abstract This paper examines the issues faced by family owned businesses (FOBs) and identifies strategies for Indian FOBs to achieve global scale and recognition. We feel that strategies of focus and diversification are more to do with maturity of a particular business. while professional management does better at a later stage. We also look at how family owned businesses are in the very basic culture of India and there-in lies the key to their success in India. FOBs should gradually diversify but the diversification should be “competence driven diversification”. holding companies in Turkey. World over the largest and the most successful companies are family owned and so is the case with India. and diversification or focused growth strategies. Although in the earlier stages. are based on the 4Cs model put forward by Danny Miller and Isabelle Le Breton-Miller . strategies. and grupos in Latin America. the style of growth followed by the company in the past and the dynamics of the industry as a whole. which we suggest for each type of business. the nature of business. these FOBs are dominant players in almost all countries. business houses in India. Indian family owned businesses although large and diversified are nowhere as compared to the world biggest businesses. globalisation. a focused strategy might help in acquiring certain sustainable competitive advantages.
. professions were predefined for a particular family or a class of people and were passed on only in the families from a father to his sons.  As a result of this. 1. many family business researchers would agree that succession is the primary issues facing family businesses Be it the Ambanis of Reliance Industries. basis to shape and perhaps pursue the formal or implicit vision of the business held by members of the same family or a small number of families . the firm’s strategy. The second were the ‘Kshatriyas’.each family has. artisans etc. which must be addressed in order for the business to survive and be passed on to subsequent generations. The ‘varna system’ in its puritanical was a division of labour based segregation of the society into four classes of people each meant to perform a particular function. potentially crossgenerational. or the Modis of Modi Rubber . faced succession and ownership issues and found them tough to resolve. the Nandas of Escorts. The first were the ‘Brahmins’.Introduction We define family business as a business governed and/or managed on a sustainable. trades and for that matter even business we believe are deeply engrained in the very basic mind set of certain people (Gujrathi. in the recent past. It encompasses the nuclear-familycontrolled firm and even the publicly held firm that is shaped and managed by two or more generations of a family that might not hold controlling interest in the firm. It is said that the first generation creates.  Family Business Succession Research on family businesses has explored a variety of issues such as managing conflicts inherent in family businesses. who were the rulers or the warriors followed by the ‘Vaishyas’. priests and thinkers who were supposed to guide policy and preserve and maintain the ideals of the nation. traders. which we feel need to be tackled in order to build global presence. and family influence on the firm. Here we will discuss few very critical issues. Appendix I shows a tabular representation of the various issues faced by FOB. and the ‘Shudras’. the Bajajs of Bajaj Auto. The genesis of family owned businesses according to us lies in the ‘varna system’ and social system that evolved in our very ancient ‘Vedic civilisation’ and there fore the Hindu culture and now the Indian culture. Family Owned Businesses: Issues and Pitfalls The recent spate of the Ambani feud over the reliance empire is the grim reminder of the fate or the question that confronts every family owned business. the second inherits and the third destroys. labourers or unskilled workers. Yet. Thus certain professions. organizational structure. Marwaris Communities). Succession Planning: Succession is the transference of leadership for the purposes of family ownership. who were the merchants.
Risk Averse Trap: Another peculiar problem we noticed. Take the case of Godrej Industries with 80% stake help by Godrej family.04%. The main reason behind this might be the high stakes involved in the business due to the dominant holding and the need to retain control. foster lengthy executive apprenticeships and tenures. Regulatory Issues: The Securities Exchange Bureau of India (SEBI) has imposed a restriction for all listed companies in India requiring minimum public shareholding of 25%. in which the Chairman Azim Premji holds 82. a FOB can face is tending to be risk averse. exercise careful stewardship. Gokaldas Exports. Continuity: Pursuing the Dream Priority Practices Pursue an enduring. Here we present in brief the Four Cs model that drives great family businesses.2. Strategies for FOBs At this point we introduce the 4Cs model .06% and the holding of FIIs/mutual funds and banks is 10.capabilities it depends on lived company to by sacrificing and investing realize it. The country’s largest apparel exporter. which we feel is the strategic potion for problems arising in family owned businesses and also the path that they should adopt in pursuing their global ambitions Potent Priorities at Family Businesses Family businesses. is also amongst those affected with promoters holding 76.9%. . due to their distinct approach of running a business have been observed to follow specific priorities with rare passion and integrity and have engendered a set of practices to follow up on them. This we feel is a serious issue if we consider the cost of lost opportunity in an emerging economy like India.4% public holding. The firms which would be affected would be Wipro. Embrace a meaningful substantive mission and mission and build the core ensure a healthy long. This means that the promoters have to sell their stake to comply with these norms. For the past many years Godrej’s businesses strategies have been conservative by comparative standards. the public 13. These can prove to be important learning’s for Indian family business to replicate when going global.3% with 13. Those companies whose initial offering had been less than Rs 100 Crore would have to comply with the rules. patiently. 3.
stay in partners sustain the firm in the touch with customers. socialize persistently. caring culture with committed and motivated people As mentioned before we now classify Indian family owned businesses based on the nature of business. management team to do so. Dani and Vakil families Asian Paints is India's largest paint company and ranks among the top ten decorative coatings companies in the world today. with a turnover of Rs. generous to society. neighbors and outside parties to network broadly. enforce intolerance of mediocrity. We would later address the question of diversification vs.25. boldness Acting and make courageous. Brand Builders International examples include Estee Lauder. the competencies required and the skills which they can leverage and suggest strategies for going global. An effort has been made to classify established Indian family business houses and their smaller emerging counterparts into five categories based on their core competencies in home markets (and whichever foreign markets they have tapped) and strategies to leverage and transform these core competencies into sustainable competitive advantages when pursuing global ambitions have been charted out. be long run. focus. Apco Coatings and SCIB Chemicals. and originality. Connection: Develop enduring. . Back home some of the family businesses we thought fell into this category are the Raymond Group and Asian Paints. Asian Paints – promoted by Choksi. Command: Preserve the freedom to Act with speed.Partner intimately with Being good win relationships with major clients and suppliers.6 billion (around USD 585 million). exploit a adapting freely adaptive decisions and diverse and empowered top keep the firm nimble. Besides Asian Paints. The first step in brand building is strategy – the competitive positioning choices and distinctive core capabilities a firm embraces in order to: . Asian Paints operates in 22 countries and has 29 paint manufacturing facilities in the world servicing consumers in over 65 countries. create an enlightened "welfare state".Community: Uniting the tribe Stress clarion values. foster informality that frees initiative and teamwork. Nurture a cohesive. Hallmark and Levi Strauss. the group operates around the world through its subsidiaries Berger International Limited. win. Refer Appendix III 1.
Each customer specification is carefully transformed into a costefficient reality. is a 'Full Service Supplier' of engine & chassis components. and stable. technology. or service – promotes cumulative quality enhancement.25 billion Kalyani Group. And to render steep quality investments economical. Back home some of the fitting examples we thought are Bharat Forge and MRF Tyres. 2. Brand continuity and cohesive community although invaluable can lead to conservatism and insularity. and all of its products are built with the expertise necessary to accommodate various industries. companies might make the mistake of to closely stickling to tradition and ignoring the market. Create a brand that stands out as different and attractive Keep building market share to add to the brands critical mass and economies of scale Protect brand integrity Leverage the brand to exploit its power To create and implement their superior branding strategies Indian family businesses should emphasize on: Continuity –Continuity manifests in patient capital to build the brand. Today. The Timken Company (bearings) and The New York Times Company. This threat can be countered by adopting practices of Connection with clients to keep brands visible and relevant and Command – independent command which gives the freedom to managers to renew the brands as needed. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world.. Bharat Forge – promoted by the Kalyani’s Bharat Forge Ltd. hands on brand management to preserve integrity and consistency. exceptionally long executive apprenticeships to convey its intangibles. . the flagship company of the US $ 1. Craftsman Overseas groups include Adolph Coors Company (breweries). Every part which is created is a representation of the company’s overall dedication to craftsmanship. the art of forging metal is a tradition at Bharat Forge. A resolute focus on a core competency – such as a particular process. Community –Community takes the form of a cohesive culture that polices the brand image and indoctrinates staff with highly tuned values and standards.
Operators have. 3. Moser Baer – promoted by the Puri’s Moser Baer is one of India's leading technology companies and ranks among the top three optical storage media manufacturers in the world and probably the lowest in cost too. Moser Baer etc. In order to implement and defend this model. and often stark information on what they are doing wrong and why quality. The craftsman strategy consists of four major elements: The design.sensitive target market. The Indian family businesses that are similar in nature are Arvind Mills. and optimize their business model by catering to a sharply defined price. in effect. By developing inhouse resources and technologies Moser Baer has mastered the art of process-intensive high-quality precision manufacturing and supplies to 11 of the top 12 global brands. Cargill and IKEA. maybe totally off the mark. But there is a serious danger of companies pursuing their passion for excellence rather than quality that is relevant and something clients are willing to pay extra for. Operators The popular examples in this category include Wal-Mart. and delivery of clearly superior offerings The perpetual improvement of offerings and processes A laser like product-market focus tied directly to core capability The leveraging of capabilities across multiple products or markets to further quality development The most striking priorities for such businesses are: Continuity – there should be a clear fundamental substantive mission to continuously improve quality. It has technology deals with Imation and HP and has seen investment by top firms like Warburg Pincus. Community –the business should create a culture of like-minded.competencies are leveraged across enough types of products and markets. capital. operators evolve an elaborate. highly trained people who imbue the company with the craft and the creed of quality. although perhaps superb. frank. production. Enter Connection – relationships that firms form with suppliers or customers bring privileged. rethought their industries to compete in a new way.and cost.intensive infrastructure whose many interconnections and . They derive competitive advantage by adding value more efficiently than their rivals to one or more stages of the supply chain.and relationship.
Ranbaxy has joined hands with GlaxoSmithKline Plc for a global alliance in the area of drug discovery and development.sensitive clients Build a sophisticated operations infrastructure that places a premium on efficiency Specialize and partner along the value chain For Indian businesses following this model of superior operations rely on two basic priorities: Continuity – Continuity fuels relentless focus and striking investments. creative ideas…and who have an unstinting dedication to committing to the risk and . Ranbaxy – promoted by the Singhs Ranbaxy Laboratories Limited.and cost. Former CEO Robert Galvin of Motorola once said: “Renewal is the driving thrust of this company. with various molecules at different stages of drug discovery and development. India’s largest pharmaceutical Company.efficiencies are exceedingly difficult to imitate. Tetra Pak and Motorola. Ranbaxy’s collaborative research initiative with Medicines for Malaria Venture. To accelerate its research program.based International Pharmaceutical Company. Indian examples in this league are Ranbaxy. branded generic pharmaceuticals and active pharmaceutical ingredients. openness. My father never stopped renewing and nor have we…Only those driven to generate a proliferation of new. Innovators Globally acclaimed for innovation are companies like Corning. Original business models and steep investments to create infrastructure and sustain partners. reflects its commitment to eradicate such diseases from the world and become a Research. Dr. The Company has a promising NCE pipeline. leaders of the family businesses should feel free to exercise their prerogatives of Command. Geneva. Reddy’s etc. The strategies of operators are distinguished by four core objectives: Evolve an original business model that adds most value to clients at the lowest cost Cater only to price. to develop a new drug for Malaria. rely on a top managers ability to make courageous decisions – decisions that impatient investors might feel uncomfortable with. In such cases. manufactures and markets world class generics. and responsiveness. 4. Connections – Connections embrace synergistic alliances with clients and suppliers based on integrity. Ranbaxy’s continued focus on R&D has resulted in several approvals in developed markets and significant progress in NDDR.
which follow the Deal Makers strategy. Tata Group etc. Community – Innovation happens in a clan-like organizational community. create insularity and spur tendency to do research “just for the joy of it”. Cohesive community may homogenize worldviews. with strong values. But they stick to what they know best and enlist the support of expert partners. 5. two main priorities are: .P. one major deal or project at a time. That about sums up the competitive approach of innovators whose strategic elements include: Pathbreaking innovation Incremental innovation and leveraging of discovery Commercialization of innovation tailored to key markets Creative destruction – a preemptive jettisoning of the old in favour of the new All of these innovative capabilities – pioneering.promise of those ideas will thrive. There are natural dangers confronting innovators. Deal makers combine the cunning of a speed chess player with the contacts of a socialite. Innovators counter these dangers primarily by employing Connections. Indian companies that fit the bill are Reliance. Morgan. commercialization. and a climate of initiative and collaboration. These conglomerates are among the most quoted examples of following a deal making strategy for growth and we would not spend any time in introducing them. improvement. and creative destruction – rely on two major priorities: Command – liberates family leaders from the short-term constraints of financial markets. ABG group. Deal Makers International examples include J. excellent treatment of employees. They are driven by a desire for brisk growth and impact. Olympia and York Developments and Bechtel. Independent command can issue in too much risk taking and unrealistically ambitious projects. The deal making strategy rests on four unshakable pillars: Spotting opportunities early and creatively Capturing deals by making and “reading” contacts Executing intricate projects via superior knowledge and partnering skills Cumulative learning across projects to become ever more competitive in burgeoning niches of the market For Indian family businesses. Close connections especially with clients and alliance partners make innovations relevant and get a better view of the market.
But to mitigate these risks. based in part on firm and family stability and reputation. When one compares NFOBs (non-family-owned businesses) with FOBs (family owned businesses).e Brand Builders. departments. The decentralized meritocracy can free many levels of managers to use their initiative. thereby offsetting the dangers of unbridled command. Craftsman. all others i. This model is true for businesses which belong to the first 4 categories (Brand Builders.From studies (Gallo and Estapé. The external factors are those associated with the competitive characteristics of the firm and its environment. and reputation cause them to more cautious and take more of a long-term view. opportunities abroad or at home.) and also true for Deal Makers . We see above that leaving aside the Deal Makers. Operators and Innovators. The priority that complements the above ones is Community – which makes it possible to pull together the many resources. and skills needed to pursue complex mega-projects. where both have already reached a significant level of exports. 1991) it is seen that three kinds of factors enable or limit the internationalizing process for family firms. follow acquisition routes and become global power houses of the future. The Deal Makers are huge conglomerates that have successfully diversified across sectors and are leaders in their chosen industries. This makes them fine stewards of resources and managers of risk. these can continue to be diversified and follow the Korean and Japanese models wherein the Chaebols enter markets with their entire range of products and leverage on the breadth of portfolio. The deal makers concerns for the future. and dedicate resources with speed and originality. Luostarinem and Gallo. 1992. Gallo and Sveen. Craftsman. Connections – Deal making relies on superb connections and relationships. the family. 1992. take risks. while the networked structure enhances complex collaboration and effective execution. and . one sees that family businesses initiate their internationalization processes later in the business life cycle  . Such associations with clients and partners help to snag promising deals and execute them in the best possible manner. with the slight difference that they are at an advanced stage in the model as compared to the others. Command – Deal makers accord extraordinary independence to their leaders – the broad discretion to make deals. Operators and Innovators. We now focus on the model which we propose for Indian family businesses to go global. deep continuity and stewardship guidelines are established. all need to follow a focused strategy.
cultivate and exploit the core competencies that make growth possible. top executives were known for their ability to restructure. (E. Refer Appendix II for a list of variables identified by Miguel Gallo and Carlos Point in their study in the area of internationalization of family businesses. This should be a period of consolidation rather than diversification. For any family owned business to go global the basic criteria. they will be judged on their ability to identify. Ranbaxy can diversify into branded Ayurvedic medicines or treatment. apart from formal wear. The third group of factors depends upon the attitudes of top management. Ranbaxy. a FOB’s first step should be exports.whether or not the firm’s technological level is adequate to foreign competition.g. Phase II: Competency Driven Diversification . brand image etc. Following this FOB should adopt a two phase strategy as given below. followed by operations in some emerging economy. fastest time to market.  Keeping these things in perspective we have identified macro level strategy to be followed by Indian business houses for making global presence. according to us. is to be amongst top 3 players in the industry. and related rubber products like turfs. during the 1980s. Jet Airways) This provides necessary leverage for that firm to go global. . MRF can diversify into tyres not just for 2 and 4 wheelers but also aircraft. According to Hammel and Prahlad. Moser Baer can extend its optical memory storage competency to get into optical networking. In this phase.. Appendix IV shows a schematic of the strategy. Tata Motors. Our line of thought is that first the companies identified in the first four categories should reach such a stage where they need to be good at what core competency they have chosen. they need to be in the global league and accepted and recognized around the world that they are good at their chosen area of specialization. To clarify with examples Raymond’s can diversify into fashion wear and casual wear. Phase I: Focus Driven Strategy With reference to Appendix IV. declutter and delayer their corporations. The FOB can try and achieve any of the following: lowest cost. Moser Baer. a business could use emerging economies both as markets as well as an operations base. better quality. Once they achieve that status they need to go in for the second stage which is competency driven diversification which essentially means leveraging competency to diversify into related areas. The second set of factors stems from the internal organization of family firms involving how FOBs deploy family members in their operations. space shuttle tyres. Jet Airways before going international. . In 1990s. concentrated on providing the best service in Indian Aviation industry at a slight premium. The main objective of the firm should be create strong domestic presence and at the same time try and build certain sustainable competitive advantage.
They not only are recruiting local managers but have also got professionals who are foreign nationals to run their businesses. Jet Airways. For Deal makers the logic extrapolated would mean that they can diversify into related competencies in the sectors where they are strong and leaders but only after they have tapped the world markets and saturated them. Kingfisher Air are using this route by handing over part of management to professional managers. This way FOB run businesses might also be able to settle the issue of attracting professional talent in their businesses. setting up of R&D. alliances. Then they should ensure leadership position in domestic market achieved on basis of certain core competencies. The business groups should diversify into ‘related sectors’ using “competency driven diversification route. So the business would become family-owned but professionally managed firm. In this case. This enables the firm to leverage certain advantages (e. BMW Motors is a right example in this particular regard where in the family has handed the management control but maintained the ownership rights. acquiring global brands. We also feel that a FOB business at this stage should necessarily go for professional management. labour cost. we feel the agency theory for separating management and ownership will help the business as such by getting in different perspectives of professional managers vis-à-vis family members. global acquisitions. manufacturing) at home for its international business overseas. the firm should now be able to leverage that competency to diversify. The family members can (based on their merit) or cannot be a part of management. Using these they should target global markets by alliances or acquisitions. Till then rather than diversification it would pay to first tap the huge global world markets and stay focused on the “many” core competencies and sustainable competitive advantages they have across sectors. technology should be the key focus of the firm. However these acquisitions should be in line to your competencies. Pharma company Ranbaxy. Tata Motors significantly enlarged its portfolio of commercial vehicles by acquisition of Daewoo’s commercial vehicle segment. This particular phase might lead to high growth for the FOB and so management of the business through this phase is critical.g. Indian business houses must first of all have strategic intent to go global. This we believe is “Competency Driven Diversification’ which will help FOB gain global footing even in developed markets. Diversification can be across businesses or within the same business itself. Conclusion Summing up our arguments. .Having developed certain competency and a base in emerging markets. In this particular phase.
. Carlos Garcia Pont. Miguel Angel Gallo. Chua Strategic Management of the Family Business: Past Research and Future Challenges. Prahlad and Gary Hamel. Kirk C. Jawaharlal Nehru. Chrisman. ‘Which family-controlled business remain-family controlled? A Resource Based Approach’. Campbell.1990. The Discovery of India. Heriot.References Danny Miller and Isabelle Le Breton-Miller. Important Factors in Family Business Internationalization 1996. Pramodita Sharma. Jess H. Noel D. C. The core competence of the Corporation. James J.’ Managing for the Long Run – Lessons in Competitive Advantage for Great Family Businesses’. North Georgia College & State University.K.
Appendix I .
. • Family issues .Concern for and intense dedication to the long term. . .Appendix II Variables to be considered before internationalization.Resistance of the management team towards internationalization. • Top management attitudes .Concentration of power by an individual interested in internationalization. . . .Family with little international culture and experience.Lack of family members prepared for internationalization. .Community resistance (unions etc.Greater growth opportunities in the national market. • Family issues . . Rigidity Variables • Strategic factors .Family member interested in internationalization.Internal power struggles.Possibility of alliances with other family businesses. . . .Products and services oriented towards the national customer.) to the internationalization of the business. Elasticity Variables • Strategic factors .Speed in decision-making.International preparation of younger family members.Lack of support by the Board of Directors for internationalization. .No disposition to carry out alliances with third parties. .Members of the family residing in various countries.Inadequate level of technology for foreign markets. .Opposition by the principal owners to internationalization. .Lack of non-family member managers prepared for internationalization.Lack of financial resources. • Top management attitudes .Opening work opportunities for other family members through internationalization.Decreasing the financial risk of operating in only one country. . .
Appendix III Classification according to the 4C model .
Truly global presence across markets Compe tence Driven Divers ificatio n strateg y.Appendix IV Strategies for Family Owned Indian Business Houses Capabilities. alliances etc. Africa. better quality. brands etc. Vision. Famil y owned but profes sionall y manag ed. Setting up operations. For technology. technological capabilities Focus Driven Strategy. fastest time to market. Also develop R&D capabilities Jet Airways Through acquisitions. competencies in the domestic market. (S. Target developed countries as markets. Using cost advantage. (Ideally amongst the top 3 players in an industry) Growth by exports Target markets in emerging or developing economies. Middle East and Latin America) Growth by operations Increased revenues enabling further investment. markets. leadership of charismati c family head may help largely. Indian Business House . acquisitions in developing countries for 1) cost advantage or 2) market reach Tata Motors Offer certain USP – lowest cost producer.