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Manifestations - 2005 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:

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Page 1: Strategies for Indian Family Business Final

Manifestations - 2005

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: [email protected] [email protected]

Cell No. 09431302805

Tejas: [email protected]@gmail.comCell No. 09835341389

Page 2: Strategies for Indian Family Business Final

Abstract

This paper examines the issues faced by family owned businesses (FOBs) and identifies strategies

for Indian FOBs to achieve global scale and recognition. World over the largest and the most successful

companies are family owned and so is the case with India. Indian family owned businesses although large

and diversified are nowhere as compared to the world biggest businesses. (TODO: details required here to

be given here) Known as chaebols in Korea, business houses in India, holding companies in Turkey, and

grupos in Latin America, these FOBs are dominant players in almost all countries. We feel that strategies

of focus and diversification are more to do with maturity of a particular business, the nature of business,

the style of growth followed by the company in the past and the dynamics of the industry as a whole.

Although in the earlier stages, a focused strategy might help in acquiring certain sustainable competitive

advantages, FOBs should gradually diversify but the diversification should be “competence driven

diversification”. We have classified Indian family businesses based on what competencies their business

demands and what skills they can leverage upon – essentially a focused approach. The strategies, which

we suggest for each type of business, are based on the 4Cs model put forward by Danny Miller and

Isabelle Le Breton-Miller [1].

Moreover we also feel that although family ownership is good at the entrepreneur stage; 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.

Keywords: Family owned businesses, strategies, globalisation, and diversification or focused growth

strategies.

Page 3: Strategies for Indian Family Business Final

Introduction

We define family business as a business governed and/or managed on a sustainable, potentially cross-

generational, 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 [2]. It encompasses the nuclear-family-

controlled 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.

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. 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. The first were the

‘Brahmins’, priests and thinkers who were supposed to guide policy and preserve and maintain the

ideals of the nation. The second were the ‘Kshatriyas’, who were the rulers or the warriors followed by

the ‘Vaishyas’, who were the merchants, traders, artisans etc, and the ‘Shudras’, labourers or unskilled

workers. [3] As a result of this, 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. Thus certain professions, trades and

for that matter even business we believe are deeply engrained in the very basic mind set of certain

people (Gujrathi, Marwaris Communities).

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. It is said that the first generation creates, the

second inherits and the third destroys. Appendix I shows a tabular representation of the various issues

faced by FOB. Here we will discuss few very critical issues, which we feel need to be tackled in order

to build global presence.

1. Succession Planning: Succession is the transference of leadership for the purposes of family

ownership, which must be addressed in order for the business to survive and be passed on to

subsequent generations. [4] Family Business Succession Research on family businesses has

explored a variety of issues such as managing conflicts inherent in family businesses, the firm’s

strategy, organizational structure, and family influence on the firm. Yet, many family business

researchers would agree that succession is the primary issues facing family businesses Be it

the Ambanis of Reliance Industries, the Bajajs of Bajaj Auto, the Nandas of Escorts, or the

Modis of Modi Rubber - each family has, in the recent past, faced succession and ownership

issues and found them tough to resolve.

Page 4: Strategies for Indian Family Business Final

2. Risk Averse Trap: Another peculiar problem we noticed, a FOB can face is tending to be risk

averse. Take the case of Godrej Industries with 80% stake help by Godrej family. For the past

many years Godrej’s businesses strategies have been conservative by comparative standards.

This we feel is a serious issue if we consider the cost of lost opportunity in an emerging

economy like India. 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.

3. 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%. Those

companies whose initial offering had been less than Rs 100 Crore would have to comply with

the rules. The firms which would be affected would be Wipro, in which the Chairman Azim

Premji holds 82.3% with 13.4% public holding. This means that the promoters have to sell their

stake to comply with these norms. The country’s largest apparel exporter, Gokaldas Exports, is

also amongst those affected with promoters holding 76.9%, the public 13.06% and the holding

of FIIs/mutual funds and banks is 10.04%.

Strategies for FOBs

At this point we introduce the 4Cs model [1], 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, 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. These can prove to be important learning’s for Indian family business to replicate

when going global. Here we present in brief the Four Cs model that drives great

family businesses.

  Priority PracticesContinuity: Pursuing the Dream

Pursue an enduring, substantive mission and ensure a healthy long-

lived company to realize it.

Embrace a meaningful mission and build the core capabilities it depends on

by sacrificing and investing patiently; exercise careful stewardship; foster lengthy executive apprenticeships

and tenures.

Page 5: Strategies for Indian Family Business Final

Community: Uniting the tribe

Nurture a cohesive, caring culture with

committed and motivated people

Stress clarion values; socialize persistently; create an enlightened "welfare state"; foster informality that frees

initiative and teamwork; enforce intolerance of

mediocrity.

Connection: Being good neighbors and partners

Develop enduring, win-win relationships with

outside parties to sustain the firm in the

long run.

Partner intimately with major clients and suppliers;

network broadly; stay in touch with customers; be

generous to society.Command: Acting and adapting freely

Preserve the freedom to make courageous,

adaptive decisions and keep the firm nimble.

Act with speed, boldness and originality; exploit a

diverse and empowered top management team to do so.

As mentioned before we now classify Indian family owned businesses based on the nature of business,

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. We would later address the question of diversification vs. focus.

Refer Appendix III

1. Brand Builders

International examples include Estee Lauder, Hallmark and Levi Strauss. 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, 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.25.6 billion (around USD 585 million). Asian

Paints operates in 22 countries and has 29 paint manufacturing facilities in the world servicing

consumers in over 65 countries. Besides Asian Paints, the group operates around the world through

its subsidiaries Berger International Limited, Apco Coatings and SCIB Chemicals.

The first step in brand building is strategy – the competitive positioning choices and distinctive

core capabilities a firm embraces in order to:

Page 6: Strategies for Indian Family Business Final

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; exceptionally long executive

apprenticeships to convey its intangibles; and stable, hands on brand management to preserve

integrity and consistency.

Community –Community takes the form of a cohesive culture that polices the brand image and

indoctrinates staff with highly tuned values and standards.

Brand continuity and cohesive community although invaluable can lead to conservatism and

insularity; companies might make the mistake of to closely stickling to tradition and ignoring the

market. 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.

2. Craftsman

Overseas groups include Adolph Coors Company (breweries), The Timken Company (bearings)

and The New York Times Company. Back home some of the fitting examples we thought are

Bharat Forge and MRF Tyres.

Bharat Forge – promoted by the Kalyani’s

Bharat Forge Ltd., the flagship company of the US $ 1.25 billion Kalyani Group, is a 'Full Service

Supplier' of engine & chassis components. It is the largest exporter of auto components from India

and leading chassis component manufacturer in the world. Today, the art of forging metal is a

tradition at Bharat Forge, and all of its products are built with the expertise necessary to

accommodate various industries. Each customer specification is carefully transformed into a cost-

efficient reality. Every part which is created is a representation of the company’s overall dedication

to craftsmanship.

A resolute focus on a core competency – such as a particular process, technology, or service –

promotes cumulative quality enhancement. And to render steep quality investments economical,

competencies are leveraged across enough types of products and markets. The craftsman strategy

consists of four major elements:

Page 7: Strategies for Indian Family Business Final

The design, production, 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.

Community –the business should create a culture of like-minded, highly trained people

who imbue the company with the craft and the creed of quality.

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. Enter Connection – relationships

that firms form with suppliers or customers bring privileged, frank, and often stark information on

what they are doing wrong and why quality, although perhaps superb, maybe totally off the mark.

3. Operators

The popular examples in this category include Wal-Mart, Cargill and IKEA. The Indian family

businesses that are similar in nature are Arvind Mills, Moser Baer etc.

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. By developing in-

house 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. It has technology

deals with Imation and HP and has seen investment by top firms like Warburg Pincus.

Operators have, in effect, rethought their industries to compete in a new way. They derive

competitive advantage by adding value more efficiently than their rivals to one or more stages of

the supply chain, and optimize their business model by catering to a sharply defined price- and

cost- sensitive target market. In order to implement and defend this model, operators evolve an

elaborate, capital- and relationship- intensive infrastructure whose many interconnections and

efficiencies are exceedingly difficult to imitate. 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- and cost- sensitive clients

Page 8: Strategies for Indian Family Business Final

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.

Connections – Connections embrace synergistic alliances with clients and suppliers based

on integrity, openness, and responsiveness.

Original business models and steep investments to create infrastructure and sustain partners, rely

on a top managers ability to make courageous decisions – decisions that impatient investors might

feel uncomfortable with. In such cases, leaders of the family businesses should feel free to exercise

their prerogatives of Command.

4. Innovators

Globally acclaimed for innovation are companies like Corning, Tetra Pak and Motorola. Indian

examples in this league are Ranbaxy, Dr. Reddy’s etc.

Ranbaxy – promoted by the Singhs

Ranbaxy Laboratories Limited, India’s largest pharmaceutical Company, manufactures and

markets world class generics, branded generic pharmaceuticals and active pharmaceutical

ingredients. Ranbaxy’s continued focus on R&D has resulted in several approvals in developed

markets and significant progress in NDDR. The Company has a promising NCE pipeline, with

various molecules at different stages of drug discovery and development. To accelerate its research

program, Ranbaxy has joined hands with GlaxoSmithKline Plc for a global alliance in the area of

drug discovery and development. Ranbaxy’s collaborative research initiative with Medicines for

Malaria Venture, Geneva, to develop a new drug for Malaria, reflects its commitment to eradicate

such diseases from the world and become a Research- based International Pharmaceutical

Company.

Former CEO Robert Galvin of Motorola once said: “Renewal is the driving thrust of this company.

My father never stopped renewing and nor have we…Only those driven to generate a proliferation

of new, creative ideas…and who have an unstinting dedication to committing to the risk and

promise of those ideas will thrive. 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

Page 9: Strategies for Indian Family Business Final

All of these innovative capabilities – pioneering, improvement, commercialization, and creative

destruction – rely on two major priorities:

Command – liberates family leaders from the short-term constraints of financial markets.

Community – Innovation happens in a clan-like organizational community, with strong

values, excellent treatment of employees, and a climate of initiative and collaboration.

There are natural dangers confronting innovators. Independent command can issue in too much risk

taking and unrealistically ambitious projects. Cohesive community may homogenize worldviews,

create insularity and spur tendency to do research “just for the joy of it”. Innovators counter these

dangers primarily by employing Connections. Close connections especially with clients and

alliance partners make innovations relevant and get a better view of the market.

5. Deal Makers

International examples include J.P. Morgan, Olympia and York Developments and Bechtel. Indian

companies that fit the bill are Reliance, ABG group, Tata Group etc.

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.

Deal makers combine the cunning of a speed chess player with the contacts of a socialite. They are

driven by a desire for brisk growth and impact, one major deal or project at a time. But they stick to

what they know best and enlist the support of expert partners. 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, which follow the Deal Makers strategy, two main priorities are:

Command – Deal makers accord extraordinary independence to their leaders – the broad

discretion to make deals, take risks, and dedicate resources with speed and originality. But

to mitigate these risks, deep continuity and stewardship guidelines are established.

Connections – Deal making relies on superb connections and relationships, based in part on

firm and family stability and reputation. Such associations with clients and partners help to

snag promising deals and execute them in the best possible manner.

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The priority that complements the above ones is Community – which makes it possible to pull

together the many resources, departments, and skills needed to pursue complex mega-projects.

The deal makers concerns for the future, the family, and reputation cause them to more cautious

and take more of a long-term view, thereby offsetting the dangers of unbridled command. This

makes them fine stewards of resources and managers of risk. The decentralized meritocracy can

free many levels of managers to use their initiative, while the networked structure enhances

complex collaboration and effective execution.

We see above that leaving aside the Deal Makers, all others i.e Brand Builders, Craftsman, Operators

and Innovators, all need to follow a focused strategy. The Deal Makers are huge conglomerates that

have successfully diversified across sectors and are leaders in their chosen industries, 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, follow acquisition

routes and become global power houses of the future.

We now focus on the model which we propose for Indian family businesses to go global. This model is

true for businesses which belong to the first 4 categories (Brand Builders, Craftsman, Operators and

Innovators,) and also true for Deal Makers , with the slight difference that they are at an advanced

stage in the model as compared to the others.

When one compares NFOBs (non-family-owned businesses) with FOBs (family owned businesses),

where both have already reached a significant level of exports, one sees that family businesses initiate

their internationalization processes later in the business life cycle [5] .From studies (Gallo and Estapé,

1992; Luostarinem and Gallo, 1992; Gallo and Sveen, 1991) it is seen that three kinds of factors enable

or limit the internationalizing process for family firms. The external factors are those associated with

the competitive characteristics of the firm and its environment, opportunities abroad or at home, and

whether or not the firm’s technological level is adequate to foreign competition. The second set of

factors stems from the internal organization of family firms involving how FOBs deploy family

members in their operations. The third group of factors depends upon the attitudes of top management.

[5]. 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. [5]

Keeping these things in perspective we have identified macro level strategy to be followed by Indian

business houses for making global presence. Appendix IV shows a schematic of the strategy.

Page 11: Strategies for Indian Family Business Final

For any family owned business to go global the basic criteria, according to us, is to be amongst top 3

players in the industry. (E.g. Tata Motors, Ranbaxy, Moser Baer, Jet Airways) This provides necessary

leverage for that firm to go global. Following this FOB should adopt a two phase strategy as given

below.

Phase I: Focus Driven Strategy

With reference to Appendix IV, a FOB’s first step should be exports, followed by operations in some

emerging economy. This should be a period of consolidation rather than diversification. The main

objective of the firm should be create strong domestic presence and at the same time try and build

certain sustainable competitive advantage. According to Hammel and Prahlad, during the 1980s, top

executives were known for their ability to restructure, declutter and delayer their corporations. In

1990s, they will be judged on their ability to identify, cultivate and exploit the core competencies that

make growth possible. [6]. The FOB can try and achieve any of the following: lowest cost, better

quality, fastest time to market, brand image etc. Jet Airways before going international, concentrated

on providing the best service in Indian Aviation industry at a slight premium. In this phase, a business

could use emerging economies both as markets as well as an operations base.

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. 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. To clarify with examples Raymond’s can diversify into fashion wear and casual wear,

apart from formal wear; MRF can diversify into tyres not just for 2 and 4 wheelers but also aircraft,

space shuttle tyres, and related rubber products like turfs; Moser Baer can extend its optical memory

storage competency to get into optical networking; Ranbaxy can diversify into branded Ayurvedic

medicines or treatment..

Phase II: Competency Driven Diversification

Having developed certain competency and a base in emerging markets, the firm should now be able to

leverage that competency to diversify. 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. Tata Motors significantly enlarged its portfolio of commercial

vehicles by acquisition of Daewoo’s commercial vehicle segment. In this particular phase, global

acquisitions, alliances, setting up of R&D, acquiring global brands, technology should be the key focus

of the firm. However these acquisitions should be in line to your competencies. This enables the firm

Page 12: Strategies for Indian Family Business Final

to leverage certain advantages (e.g. labour cost, manufacturing) at home for its international business

overseas. This particular phase might lead to high growth for the FOB and so management of the

business through this phase is critical. We also feel that a FOB business at this stage should

necessarily go for professional management. So the business would become family-owned but

professionally managed firm. The family members can (based on their merit) or cannot be a part of

management. BMW Motors is a right example in this particular regard where in the family has handed

the management control but maintained the ownership rights. In this case, 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. Pharma company Ranbaxy, Jet

Airways, Kingfisher Air are using this route by handing over part of management to professional

managers. They not only are recruiting local managers but have also got professionals who are

foreign nationals to run their businesses. This way FOB run businesses might also be able to settle

the issue of attracting professional talent in their businesses. 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. 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.

Conclusion

Summing up our arguments, Indian business houses must first of all have strategic intent to go global.

Then they should ensure leadership position in domestic market achieved on basis of certain core

competencies. Using these they should target global markets by alliances or acquisitions. The business

groups should diversify into ‘related sectors’ using “competency driven diversification route.

Page 13: Strategies for Indian Family Business Final

References

1. Danny Miller and Isabelle Le Breton-Miller,’ Managing for the Long Run – Lessons in Competitive

Advantage for Great Family Businesses’.

2. Pramodita Sharma, James J. Chrisman, Jess H. Chua Strategic Management of the Family Business:

Past Research and Future Challenges.

3. Jawaharlal Nehru, The Discovery of India.

4. Noel D. Campbell, Kirk C. Heriot, North Georgia College & State University, ‘Which family-controlled

business remain-family controlled? A Resource Based Approach’.

5. Miguel Angel Gallo, Carlos Garcia Pont, Important Factors in Family Business Internationalization

1996.

6. C.K. Prahlad and Gary Hamel, The core competence of the Corporation.1990.

Page 14: Strategies for Indian Family Business Final

Appendix I

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Appendix II Variables to be considered before internationalization.

Rigidity Variables

• Strategic factors

- Greater growth opportunities in the national market.

- Products and services oriented towards the national customer.

- Inadequate level of technology for foreign markets.

- Lack of financial resources.

- Community resistance (unions etc.) to the internationalization of the business.

• Family issues

- Lack of family members prepared for internationalization.

- Lack of non-family member managers prepared for internationalization.

- Resistance of the management team towards internationalization.

- Family with little international culture and experience.

• Top management attitudes

- No disposition to carry out alliances with third parties.

- Lack of support by the Board of Directors for internationalization.

- Internal power struggles.

- Opposition by the principal owners to internationalization.

Elasticity Variables

• Strategic factors

- Decreasing the financial risk of operating in only one country.

• Family issues

- Opening work opportunities for other family members through internationalization.

- International preparation of younger family members.

- Members of the family residing in various countries.

• Top management attitudes

- Concentration of power by an individual interested in internationalization.

- Concern for and intense dedication to the long term.

- Speed in decision-making.

- Family member interested in internationalization.

- Possibility of alliances with other family businesses.

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Appendix III Classification according to the 4C model

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Indian Business House

Capabilities, competencies in the domestic market. (Ideally amongst the top 3 players in an industry)

Growth by exports

Target markets in emerging or developing economies. (S. Africa, Middle East and Latin America)

Setting up operations, acquisitions in developing countries for 1) cost advantage or 2) market reach

Growth by operations

Offer certain USP – lowest cost producer, fastest time to market, better quality. Also develop R&D capabilities

Target developed countries as markets. Truly global presence across markets

Increased revenues enabling further investment.

Using cost advantage, technological capabilities

For technology, markets, brands etc.

Through acquisitions, alliances etc.

Focus Driven Strategy. Vision, leadership of charismatic family head may help largely.

Competence Driven Diversification strategy.Family owned but professionally managed.

Tata Motors

Jet Airways

Appendix IV Strategies for Family Owned Indian Business Houses