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Are Family-Run And Diversified Businesses Going To Thrive?

Time is up to enter any industry market nonchalantly in India, and foreign competition is increasing.

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A family business is a business in which two or more family members hold key positions in management or have board seats. It could also be that a family or its members are major shareholders of such a business or group of businesses. There could be holdings of different family members in such businesses and it will be called a family business. The big question is whether these businesses will survive in an age of professionalism and high degree of specialization. After all, who knows quality and marketing better than experienced industry executives and when their autonomy is challenged, is that a recipe to grow or perish? It depends. 

Family-Run Businesses

Andrew Carnegie, once richest man of the world, left a motto for Carnegie Mellon University when he founded it in 1900. It was “my heart is in the work”.  For Andrew Carnegie, this may have been his best message to the students who would study there. What I discovered was that, for heart to be in work, you have to be working for self-interest. People are motivated otherwise but shareholder interest is like performance bonus, it is tied to the result. Hence, I want to draw a line for critics of family run organizations. With stakeholder and shareholder interest comes a burning desire to grow and with multiple people in the family running the show, often times, these businesses do very well. They could still be run professionally with key decisions in the hands of the owner family, especially strategy, which is often pivotal. In India, often, multiple people in the family join in to run organizations, with everyone’s interest, tied to the bottom line and the top line. The family becomes a think tank and youngsters learn the ropes not just from their education, but also from elders in their families. There is often a kind of grooming and sculpturing of youngsters, that takes place in such families. 

Family businesses have been around for centuries. Some that started over a century ago are still thriving and have grown into multinational conglomerates. Amongst the best-known family businesses globally renowned, are Walmart, Volkswagen, Samsung, Comcast, Toyota, Ford, Glencore, Red Bull, Nordstrom, Bombardier, Koch Industries and the list is long. Native to India are companies such as Wipro, Sun Pharma, HCL Technologies, Emami, DLF, Marico, and many more. These all come under the category of being “professionally family run”. Often, the vision is that of the family or the founding family member laid the founding stone historically. The execution is with the help of professionally managed teams, who along with family members in the business, run the show. It is important to know that there are pros and cons to running businesses in this way. 

India is a land of family-owned and run businesses. While, if the family interest is aligned to the company’s, it’s good news, but if the family promoters’ interest is in actions that conflict with the company’s, it could be bad for other shareholders and stakeholders. Sometimes, decision making can go haywire of meritocracy is replaced by despotism in the organization. Succession planning could be wrong and the business could sink. There could be feuds within the family or polarization and creation of power centers in case of too many people. Au contraire, there could be too much dependence on the promoters which is a bad thing for the future of the organization. Corporate governance and transparency are key to incorporate in a family run organization. Extra care has to be taken to bring everything above board.

If members of the controlling family are qualified and motivated, a family business could thrive and grow exponentially. We have seen this in many examples and while business education is tilting towards complete professionalism, I think this drift will meet with resistance in many countries and research is lacking on the topic. There are plenty of business education programmes directed towards family businesses.

One threat to higher growth of family businesses is that families sometimes don’t want to reduce their stake and for a company to grow, it needs to raise capital periodically. Thus, it is imperative for the controlling family to have a strong penchant for growth, see the larger picture, and sacrifice if need be. Easier said than done. Microsoft, Apple, Google, Facebook, Amazon and other giants wouldn’t be in that position if their promoters didn’t get diluted.

Families around the world have made it really big in businesses and the biggest examples are the diversified business groups of India, such as Tata, Mahindra, Aditya Birla, Bajaj etc that are your historically prominent groups. They accumulated cash, expanded into other sectors and are doing well. How do you explain the success of these groups? They all are family run too. Is time running out on easy market share?

Diversified Businesses

The best example of a global diversified business group that has outperformed is General Electric. It is not family owned though. Virgin is another one and that is owned by Richard Branson and family. As far as diversified businesss go, it is wise to diversify only if you have deep pockets, or it’s another area of specialization for you or your team members or of course, if a lucrative opportunity arises. The brand rub-off between businesses can be an advantage but quality control across all businesses in this case is a must. A hit on one business’ image could rub off negatively on the other. Common branding is an important aspect of multi-industry groups and it can go positively too if things are consistently done in the right way.

Sometimes, there is no synergy between one business and another. In these cases, it is noted that the group’s central management is the centrifugal point of many key aspects of running the businesses. Key decision makers often sit in the headquarters that manages the entire umbrella of companies under the brand. Of course, other day to day aspects of running the business are controlled within the individual companies, which runs with the help of it’s board and management, and reports to the central office headquarters, it’s fallback destination on a rainy day. It can be extremely exciting to diversify and an immensely fulfilling learning experience to understand another industry and meet experts from different fields. Diversified groups do well in India because the ecosystem is strong and acceptance is very high for the model. It has proven its efficacy in India so far. Resources can be shared between companies and if it’s family run, individual family members can be responsible for different such companies that fall within their empire. One certainly requires passion for running businesses, to want to diversify. 

I am not taking away the fact that this is an age of specialization and if diversified conglomerates are to rise, they have to do so with the help of specialists and teams, a lot of piled up cash, contacts and love for value creation for their shareholders and stakeholders. Product or service in the case of diversified groups have to match up to that of a specialized business these days, otherwise you will fall prey to low market share. Business has always been a quality game, but with the advent of technology, standards have risen even higher and to keep up with businesses that run solely in one industry, a diversified group has to understand that it must enter that industry only if it can compete with the best and/or establish its niche.

Time is up to enter any industry market nonchalantly in India, and foreign competition is increasing. Government policies recently have encouraged foreign competition and have raised the bar for Indian goods and services. While that is a good thing, barriers to entry are increasing. While diversification can be bountiful, staying in one specialized and concentrated field of business and focusing on growing it, is also not such a bad idea. Indian companies are going global but slowly. Our price advantage is negated by technology disadvantage resulting in inferior goods. A thing to note, however, is that two of the largest companies of India by market capitalization as of 2020, are of a diversified company and a company belonging to a diversified group. Both are originally family businesses.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Vaibhav Maloo

The author is Managing Director of Enso Group. He resides in Mumbai. He holds an undergraduate degree in business from Carnegie Mellon University and a postgraduate diploma in global business from Oxford University.

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