Family-owned businesses are professionalising at a fast pace. The move is an effort to tackle new realities like increased competition, democratisation of information and other aspects that are disrupting business models.
According to a study on family businesses by Stellar Search, over the next five years, 72% of family-run businesses plan to bring in non-family professionals to help run operations (see graphic). The study covered over 50 family businesses across industries, having a turnover in the range of Rs 500-25,000 crore. In addition, Stellar surveyed 150-200 professionals, including people currently working in a family business or are making the transition, or have worked in a family set-up in the past. What’s interesting is that the issues faced are the same across these companies.
In some emerging markets, more than half of the largest companies are family businesses. Yet, for decades, most of the research on family businesses has focused on benchmarks from developed markets. Leaders of such businesses in emerging markets seeking guidance on key topics, such as governance, succession, and talent management, should be wary of relying on insights derived solely from the experience of their counterparts in developed markets.
Emerging markets present a distinctive context for operating a family business. Regulations, institutions, and contract law, for example, are still evolving in many countries, and talent shortages are common. Moreover, families in emerging markets are often much larger, more cohesive, more respectful of hierarchy, and less open to talking about mortality (among other attributes) than families in developed markets.
To understand how this context should influence decision making, The Boston Consulting Group conducted extensive research on family businesses in both developed and emerging markets. The research included about 200 family businesses in developed countries and 1,000 in India, Southeast Asia, and Brazil.
We found that family businesses in emerging markets perform and evolve very differently than the benchmarks from developed markets predict. For example, they grow faster than the non–family businesses in their markets, often at the expense of profitability. And families that remain active in the business over time outnumber those that do not. Our findings point to a clear implication: the distinctive context of emerging markets warrants an equally distinctive approach to fundamental issues affecting the family and the business.
BREAKING DOWN THE DIFFERENCES
We define “family business” using two criteria: the family must own a significant share of the company and be able to influence important decisions, particularly the choice of chairman or CEO; and there must have been a leadership transition from one generation to the next or, in the case of a founder-owned company, plans for such a transition.
In applying this definition, we found that family businesses are among the major companies in all regions globally. They represent 33% of US and 40% of French and German companies that have annual revenues of more than $1 billion. And they are even more prevalent in emerging markets, accounting for approximately 55% of large companies in India and Southeast Asia and 46% in Brazil. (See Exhibit 1.)
If we exclude multinational companies, family businesses constitute a considerably higher share of large companies in emerging markets—more than 70% in India, for example.
Family businesses in emerging markets are also more likely to have family members in managerial roles. We found that such individuals are directly involved in managing approximately 90% of these businesses in India. In Europe and the US, in contrast, family members are investors without managerial responsibility in more than 60% of family businesses.
Family characteristics and cultural differences are distinguishing features in emerging markets. The family is thought of in broad terms, including in-laws and their relatives. Moreover, emerging-market cultures are often more hierarchical and less individualistic than those in developed markets, which further elevates the influence of the family in the business environment..
Our research confirmed the widely held view that family businesses in developed markets take a conservative approach to their performance, focusing on resilience and on sustaining the company. As a result, these businesses grow more slowly than others in their markets, have stable profits in good times and in bad, take on less debt, pursue smaller mergers and acquisitions, and take fewer risks. We found that family businesses in emerging markets follow a very different approach. In fact, they are among the world’s most ambitious companies, as evidenced by their aggressive pursuit of growth and acquisitions and their willingness to accept risks.
Growth. Whereas family businesses in developed markets grow at a slower annual rate than other companies in their markets, the CAGR of family businesses in emerging markets is 3% to 5% higher than that of other businesses. (See Exhibit 2.)
Profitability. Return on equity is higher for family businesses in developed markets than for other companies. And family businesses’ emphasis on stable profits instead of aggressive growth is evident during both boom times and economic downturns. The picture is considerably different in emerging markets. Looking at return on capital employed in Southeast Asia and India, and return on assets in Brazil, we found that family businesses have lower returns in all those markets.
Debt. Family businesses in developed markets take on less debt than other businesses—we found that their financial leverage is 27% lower on average. In emerging markets, family businesses take on a similar amount of debt as non–family businesses.
M&A. Family businesses in developed markets spend less on M&A than other companies, pursuing fewer and smaller acquisitions. In emerging markets, they take a more ambitious approach, making more and larger deals than other companies. Both the average number of deals and the deals’ size or value are greater.
EVOLUTION: STEPPING DOWN VERSUS STEPPING UP
In studying how families’ involvement in the management of their businesses has changed over the past 200 years, we found that in developed markets it has generally declined over time. As non–family members are brought in to manage the increasingly complex organization, family members’ status has evolved from owner-managers to owner-investors (who continue to participate in major decisions) to passive investors.
The opposite is true in emerging markets, where families have become more actively involved in their businesses. (See Exhibit 3.)
Indeed, we found that families play an active management role in more than 90% of family businesses in these markets.
THINKING DIFFERENTLY ABOUT THE FUTURE
What do our findings mean for families that have built successful businesses in emerging markets? Put simply, they should not feel compelled to model themselves on their counterparts in developed markets. To win in their context, they must chart their own course. While this advice applies to many aspects of their business, three recommendations stand out.
Stay with the business if your contribution is valuable. In many cases, families offer singular benefits. Examples include:
Credibility and Trust. Families often bring credibility and trust to the business, which are highly valued by partners, lenders, and government officials. Maintaining the faith of these parties is especially important in emerging markets.
Deep Knowledge of the Business. The family’s extensive understanding of the business, in some cases acquired over generations, can be a source of competitive advantage.
Agility. Because they are not weighed down by burdensome governance structures, many family businesses can make decisions quickly. In a rapidly changing environment, this agility lets them seize opportunities that other companies move too slowly to capture.
Long-Term Perspective. Family members often apply a longer time horizon to decision making than executives in non–family businesses. This helps avoid the itfalls of managing the company to please equity analysts on a quarterly basis.
If families make important contributions such as these to the management of the business, then staying involved is the best course. This involvement can take various forms, depending on how the family chooses to build and change the company over the long term.
In the fiercely competitive Indian market, family-owned businesses face the challenge of competing with larger corporations and startups. To level the playing field, these businesses rush to streamline their operations, implementing key strategies to enhance efficiency, agility, and competitiveness. This article explores how family-run businesses in India navigate this landscape and emphasize the need for operational optimization.
Embracing Technology:
Family-owned businesses recognize the pivotal role of technology in staying competitive. They invest in modernizing their infrastructure, adopting digital tools, and implementing robust enterprise resource planning (ERP) systems. By leveraging technology, they streamline processes, improve communication, enhance productivity, and gain real-time insights into their operations.
Professionalizing Management:
To compete effectively, family businesses acknowledge the importance of professional management. They recruit and empower qualified professionals, often from outside the family circle, to bring fresh perspectives and expertise. These professionals drive efficiency, implement best practices, and introduce performance-driven systems, enabling the business to adapt swiftly to market changes.
Implementing Lean Practices:
Family-owned businesses in India are increasingly embracing lean management principles. They focus on eliminating waste, optimizing resource allocation, and improving overall operational efficiency. Through lean practices such as value stream mapping, just-in-time inventory management, and continuous process improvement, these businesses streamline their operations and enhance their competitiveness.
Supply Chain Optimization:
Efficient supply chain management is critical for competing with larger corporations. Family-owned businesses in India proactively optimize their supply chains by fostering strong relationships with suppliers, adopting inventory management techniques, and implementing agile logistics systems. This enables them to meet customer demands effectively while minimizing costs and enhancing delivery speed.
Continuous Improvement and Innovation:
Family-owned businesses realize that continuous improvement and innovation are vital for sustained competitiveness. They foster a culture of innovation, encourage employee involvement in generating ideas, and invest in research and development. By continuously improving products, services, and processes, they differentiate themselves in the market and stay ahead of the competition.
Customer-Centric Approach:
Family-run businesses in India prioritize a customer-centric approach to differentiate themselves from larger corporations and startups. They leverage their close-knit nature and strong customer relationships to offer personalized services, maintain trust, and deliver exceptional customer experiences. This customer focus allows them to carve out a niche and compete effectively in the market.
Strategic Partnerships and Collaborations:
To enhance their market presence, family-owned businesses in India seek strategic partnerships and collaborations. They form alliances with complementary businesses, enter into joint ventures, or collaborate with startups to leverage each other’s strengths, access new markets, share resources, and foster innovation.
Conclusion:
In the dynamic Indian market, family-owned businesses compete with larger corporations and startups by rushing to streamline their operations. Embracing technology, professionalizing management, implementing lean practices, optimizing the supply chain, fostering innovation, adopting a customer-centric approach, and forming strategic partnerships are key strategies that allow these businesses to thrive. By focusing on operational excellence, family-owned businesses in India successfully carve their path in the market and ensure sustainable growth in the face of intense competition.
Source: Boston Consulting Group, Times of India.