ISSUES IN MANAGEMENT OF INDIAN FAMILY – OWNED BUSINESS

IN GLOBAL SCENARIO

Dr. Ritu Bhattacharyya, Professor Marketing, Bharati Vidyapeeth’s

Institute of Management Studies and Research

INTRODUCTION
Broadly defined, a Family- owned business is one that is owned
and managed (that is controlled) by one or more family members –
Handler

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” – Daivais and Taguiri

FAMILY - OWNED BUSINESS (FOB)

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 gamily
system and these two systems generally overlap.
Family – owned businesses exist all over the world and some of
the worlds oldest firms are family- owned eg. Kongo Gumi of Japan was
founded in 578 AD and is currently managed by the 30 th generation.
Some of the largest wealth creators and businesses are family owned
like Wal Mart. In India too, the highest generator and creator of wealth
continue to be family – owned businesses.

1
 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.

CHARACTERISTICS OF FAMILY –OWNED BUSINESS

1. Family relationship is a main factor in determination of the
position a person holds in the business.
2. Family members of the CEO, present and past are on the
Board of Directors.
3. The important values and cultures of the firm are identified
with a family
4. Actions of family members, in their personal lives, reflect or
are considered to reflect, on the firms/ business reputation.
5. Relatives feel obliged to hold the company stock for more than
financial reasons.
6. The single minded dedication of the CEO and the family
ensures that family-owned business survives through the
toughest times.
7. Family –owned businesses play a crucial role in the economy
of most countries and in a country like India they have been a
major force.

GLOBALISATION
“Globalization is the intensification of world wide social relations
which link distant localities in such a way that local happenings are
shaped by events occurring many miles away and vice versa.” Anthony
Giddens. The Consequences of Modernity

2
 “Some people think that globalization , on which every perceived
ill is blamed, has gone too far. They want to turn the clock back to a
golden age that never was. I’m old enough to remember those times:
the stagnation of the 70s when we lived in glorious isolation. Then,
only the rich who could travel overseas had consumer choice. Trying to
go back to those old ways is not an option.” – WTO Director General,
Mike Moore, “ The WTO: Challenges Ahead”, Speech to the National
Press Club of Australia, Canberra.
“ The terminology of globalism refers unblushingly to an ideology
of the market, dictated by the IMF, the World Bank and the G-7
executive, crowned by GATT; to a global market of which the United
States, having “ won “ the cold war , is the moral conductor. It sets the
norm not only for free trade but also (in the same universalizing mode )
for human rights, for historical and cultural studies. What is being
globalized is therefore American –style capitalism and its implicit
worldview”. – Geeta Kapur, “Globalization and Culture”. In Fredric
Jameson and Masoa Miyoshi, eds., The cultures of Globalization
“ One can only call the political impact of “ globalization” the
pathology of over-diminished expectations. Many over-enthusiastic
analysts and politicians have gone beyond the evidence in overstating
both the extent of the dominance of world markets their
ungovernability.” - Paul Hirst and Grahame Thompson,
Globalization in Question
Since mid 1991 India has embarked on economic reforms which
aim to liberalize and globalize the economy. The organizations to be hit
most by this opening up of the economy were the family-owned
businesses because the government had forced them till then to survive
in a very strict license raj. Their management and leadership skills

3
were totally utilized in the manipulation of the license and staying out
of trouble with the government and the law. Liberalization brought
about a number of issues along the competition that they were not
prepared to face. The other business sector in the country, the Public
sector, were also in the same boat but due to their government control,
monopoly in their sectors, the governments decision on reservation of
sector they found themselves away from the heat.
In this era of globalization and liberalization the family-owned
business experience cut throat competition and several hurdles that
were totally different from what they were used to pre-liberalization.
Family-owned businesses in India were not very competitive because
the government had restrictions on the quantity of production. When
Mr. Rahul Bajaj of Bajaj Auto Ltd., wanted to increase production and
applied for license to the then government it was refused. This was
when the booking period for a Bajaj scooter was a minimum of 200
months. Most family-owned businesses operated in small quantities
and did not enjoy economies of scale. Restriction on import of
technology also meant that they were not working with the latest of
technology. The scale of business and high taxation on these firms
meant that there was no fund for Research and Development. All these
factors meant that the family-owned businesses were not in a state to
face any competition from outside.
Post globalization family-owned businesses felt that the
government had gone ahead and opened the markets but there were a
number of external factors that were pulling them behind. These were
factors they could do little to change and thus had a disadvantage over
their counterparts who were coming from outside. Some of the factors
were –

4
 LABOUR LAWS – The labour laws of the country have been very
inflexible. They make it impossible to layoff workers. Dismissal of
workers due to non –performance or outsourcing is also difficult.
Most of the big family-owned businesses in India have been in
business for a long period of time. Pre liberalization they used old
labout-intensive technology. On facing competition they tried to bring
in the latest technology most of which is not labour intensive. The
biggest hurdle they faced was related to excess labour. The law
prohibits laying them off and the labour Union prohibits them to be
shifted to other hobs. Thus forcing these companies to carry the excess
baggage and incurring excess costs. This is one of the reasons why
India has not been able to capture the international market as a labour
cost effective location, though our workforce is very big and our salaries
are not very high. An example that sets this point is Bombay Dyeing,
their biggest competitors in the market today are Chinese bed linen
producers who are selling the same product at 1/5th the cost and the
quality is comparable or better. This has the effect of pushing the
company into a state of no recovery.
Indian legal system provides permanency to a contract worker on
working 240 days which makes it impossible for companies to employ
cheaper and crisper contract labour. In case they are employed, their
services have to be terminated on regular basis, creating problems of
continuity. In country like China, which has a higher level of
communist/ socialist bend, a worker can be employed on contract for a
period of 10 years after which permanency should be considered. This
keeps the labour cost less and the productivity of labour high because
they are never complacent on account of permanency. Labour disputes

5
and union autocracies have at times lead to many family-owned
businesses to not invest any more in the business and let them die at
slow death. But the assets that remain blocked in the companies result
in a great loss to the nation.

RECOGNITION OF NEW OPPORTUNITIES – Globally

outsourcing has become an important part of business in order to be
able to give the customer a price advantage and a value added
advantage companies have adopted the formation of the Global Web.
For the purpose of outsourcing, some processes and jobs in the country
have to be discontinued; this is inevitable and cannot be helped. The
Government of India does not allow business houses to close down
operation in the country in favor of setting up a business in another
place only on account of cost saving. This put Indian business houses
at a disadvantage vis-a vis their counter parts from other countries that
are making full advantage of these economies to become market leaders
and thus pushing the Indian products out of the Indian markets. The
glaring example of this is Videocon, and BPL who found it impossible to
fight competition from Korean companies and Ajanta Clock
Manufactures who could sell the product at the price the Chinese sold
because their cost of production was more than the price of the Chinese
goods.
When Videocon and Ajanta wanted to shift their manufacturing
facilities to China the Government declined permission.

COST OF FUNDS – Lending rates in India have always been high.

Though the consumer goods lending rates have come down, the
industrial lending rates continue to be high. Public issue of share is a

6
easy and cheap method to acquire funds for business but the family-
owned business have not been very keen on this route. Diluting the
families hold in the business is not encouraged and the need for
complete control and safety of the company is guarded by not issuing a
large number of the shares in the market. The public issue is so small
and insignificant that all decision – making and management powers
stay with the family. The fear of takeovers is also ruled out by parking
large number of shares of the company with family, who will not sell to
the enemy.
The financing options thus left with them are the family funds,
that cannot be enough for a growing company, and institutional funds,
that are expensive.

TAXES – Indian firms live with a multiple taxation system. The

state and central level taxes lead to the product being taxed several
times under different heads. Coupled with this is the high level of
corporate taxes that the companies have to pay. All these taxes add up
to the cost of product of the company.

INFRASTRUCTURE – India has the 3rd largest road network in

the world and the larges rail network in the world. In spite of these
figures the infrastructure facilities in the country are very bad and now
where close to those present in the world. Bad maintenance,
monopolization in the field by the government and corruption have
made their functioning ineffective and expensive. Many of the
Governments Industrial Development Zones do not have motor able
roads. Frequent power cuts and unstable power supply are the norm.
Most family – owned businesses that function from beyond metros have

7
their own generation plants to ensure that production is continuous
and smooth. This automatically increases the cost.
The Government in China, when it decides to give permission to
set up and industry, allots a fully equipped site to the company in
terms of motor able roads, electricity, water, communication network
and other infrastructure.
The external factor have always been important but there are also a
number of internal factors that are totally in the control of the family –
owned businesses, which they either refused to see or did not believe in
changing. Change was one such important factor. The resistance to
change was very high and these firms tried hard to get together and
stall the process of liberalization. Where they could not stall in
completely they have been successful in putting pressure on the
Government of reduce the pace of change and restricting the entry of
foreigners in many fields. 2005 is a very significant year, it is now going
to be possible even for the Government to put any restrictions. Change
now will be rapid. Business, personal and family transitions are going
to be very complex today, than ever before. Competition is going to be
sharper and a lot more that has been seen today, and will be present in
almost all commercially viable fields. Business cycles will get shorter
and a new highly skilled and educated workforce will come in. The
family-owned business will have to get used to this whether they want it
or not. Stalling of procedures and using political parties to forward their
interest may not longer be possible. The situation today has given rise
to some questions in family-owned businesses like –
1. What course of action would best serve their particular needs?
2. Should they change their business model?
3. Should they diversify?

8
 4. Should they concentrate only on core competencies?
5. What are the advantages they have over the new corners and how
they could capitalize on the same?
6. What is the kind of competition coming in and what are the
advantages they have. Could the competition displace their
company?
7. Should they sell or merge wit the leaders from within or from
those coming in new?
Each choice means a different set of consequences requiring
emotionally charged decision making. There are certain advantages that
family-owned business will enjoy that most of their professionally
owned competitors do not. These factors will always be an advantage to
the family-owned companies and will give them a strength that can
surpass other companies. They are :-
1. Trust : It is a documented fact that trust lowers transaction cost
and corruption. Trust is a source of significant competitive
advantages to a family – owned business. Family-owned business
in India revolve around large joint families who may not live
together but work together. All key functions are entrust to the
family members only and on a job is entrusted to a family
members, every one believes that he will do the job in the best
interest of the business. The same confidence is never possible
with professionals.
2. Nimble or quick decision- making – Family-owned businesses
in India have followed a process where the CEO, at the end of the
day reviews all the days proceedings, even if the day to day
functioning of the business is done by professionals. This policy
has helped them to be quick in taking decisions and also quick in

9
 recognition of change. Since the organization is not very
structured it help the business to be quick and thus not be left
behind.
3. Acceptance of change – After some hitches, them family owned
business recognized that they had no change if they need to stay
alive and viable. The generation next that is being trained to take
over the businesses are all educated in Business schools abroad
and have in many cases also acquired some amount of work
experience before they join the family firm. This generation has
ensured that Technological changes take place. Acceptance of
newer ways of doing business has come in along with generation
next. But for them too family and business are not different and
family is very important, thought it may not come first.
4. Long term strategies – Family-owned businesses have always
survived. The long term strategy should not be a case of only
survival of the firm so that it can be passed to the next
generation. The strategy should be of growth, expansion and
being world leaders. They have learned to survive in the hardest
of times, and grow. They may have done this without a set
strategy that none the same there has been some planning
involved.

CONCLUSION
The one very important issue facing family-owned businesses in India
in the face of rapid globalization is change. Most family-owned
businesses know change and conflict go hand in hand. They know that
transition is the source of most conflicts. Change is very expensive and
leads to high stung family dramas and could also result in family fights

10
and business splits, but all the same they know it is inevitable, if they
want to survive the opening of the markets in 2005. They struggled and
stumbled during liberalization but the lessons they learned at that tine
will stand them good this time round.
Family-owned businesses are attuned to ‘soft’ costs of change.
Comfort is the enemy of change. More successful a family-owned
business, the less reason it has to change. Discomfort is a pre requisite
to change. It is not enough to be uncomfortable to change; the
discomfort should be high enough. Unless a family has a lot to loose by
not changing it may not want to incur the cost and inconvenience to
change. The significance of the loss due to not changing is also very
important. Only significant loss may motivate change.
Change is inevitable, planned change is a matter of choice.
Conflicts around change have to be dealt with.
Businesses today are being buffeted by major gale force winds,
globalization, liberalization and technology among them. The end result
is constant churn, competition and change. In such a holistic
environment, incremental change will not suffice; organizations will
have to radically transform themselves, not once or twice, but
continuously and many times over. - Kumar Mangalam Birla
The illiterate of the 21 st century will not be those who cannot read
and write but those who cannot learn, unlearn and relearn. – Alvin
Toffler

11