Liberalisation led to the Rise of Stand Alone Family Firms, finds ISB Study

White Paper- Family Businesses: The emerging landscape, 1990-2015

Indian family businesses flourished and contributed significantly to the growth of the economy in the post liberalisation era

A study conducted by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB) reveals that liberalisation led to the rise of Standalone Family Firms (SFFs) in India and they were the primary drivers of accelerating the growth of the Services Sector in the country.

Authored by Dr. Nupur Pavan Bang and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at ISB and Professor Sougata Ray of IIM Calcutta, the study chronicles the evolution of family businesses in India since the initiation of liberalisation in the country. A first- of- its kind, the study traces the progress of Indian family businesses over a 26 year period from 1990 to 2015.  The authors studied 4,809 firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) of India as a part of the study.

The year 1991 ushered in a new dawn in the Indian economy with sweeping reforms across sectors. There were widespread apprehensions about the capabilities of the family owned and managed businesses to withstand the pressure of the newly created “freedom”.  However, the study finds that not only did the family firms withstand the new rush of competitive forces in the economy, but also adapted to the changing business environment.

Based on their shareholding and management control, the companies were classified into two categories: Family Businesses (FBs) and Non-Family Businesses (NFBs). Family businesses were further classified into Family business group affiliated firms (FBGFs) and Standalone family firms (SFFs) and NFBs were further classified into State-owned enterprises (SOEs), Multinational subsidiaries (MNCs), Other Business group affiliated firms (OBGFs) and Standalone non-family firms (NFFs).

Key Findings of the Study:

The rise of standalone family firms:  Close to 73 percent of the listed standalone family firms were incorporated in the period 1981 to 1995. In comparison, only 49 percent of the business group affiliated family firms were incorporated in the same period. As the pace of reforms picked up with liberalisation, more and more standalone family firms started to leverage the changing business landscape. While the family business group firms did take advantage of the reforms in the early stages, it was the standalone family firms that emerged as the single largest ownership category in terms of number of firms.

The growth in the number of standalone family firms was driven primarily by the new firms in the services sector. Wholesale trade, financial services and Information Technology were the most favoured industries for the listed standalone family firms. This was reminiscent of the rising contribution of the services sector to the GDP.

Growth of the Services sector: In the financial year 1990, services sector accounted for about 45 percent of India’s GDP while its contribution was close to 60 percent in 2015.  Traditionally, family businesses were strong in manufacturing but they showed an equal penchant for the services sector, when the opportunities arose.  But, standalone family firms were the fastest growing category in the services. It was because of their entrepreneurial acumen that India’s services sector has grown so well in recent years.

While manufacturing and services contributed almost equally to the total assets for family firms, in the case of non-family businesses, the services sector accounted for more than 90 percent of their total assets. Amongst the non-family firms, the State-owned enterprises dominate the services sector with large assets in the banking sector, whereas, the sector accounted for just 18 percent of the total assets of multinational companies.

Family Businesses grew faster and contributed more to the GDP and Exchequer: The study shows that the representation of family businesses grew at a much faster rate than the non-family businesses. In fact, evidence suggests that removal of restrictions and controls in the liberalised era actually unleashed their entrepreneurial spirit.  In 1990, family firms represented 15.7 percent of the GDP in terms of their total income, whereas by 2015, they represented 25.5 percent of the GDP. In comparison, Non-family firms formed 20.5 percent of the GDP in 1990 and 26.6 percent in 2015.

Family firms accounted for 28 percent of all indirect taxes and 18 percent of all direct corporate taxes in the financial year 2015, while non-family firms accounted for 26 percent and 25 percent respectively. Though, the pattern has oscillated over the years, overall, the contribution of family firms has gone up from 1990 to 2015.

Asset Creation: The total assets were highest for State-owned enterprises owing to their monopoly and massive investment by the government, followed by business group affiliated family firms. In 1990, family firms accounted for 24.7 percent of the total assets of all firms in our sample. This grew to 27.7 percent in 2015. The standalone family firms were able to grow in spite of not having the resources available to a group affiliated firm. While the standalone family firms were large in number [of firms], they were smaller in size. This was perhaps due to their focus on services sector which were less capital intensive and also the lack of resources.

Access to capital markets: The average difference between the listing year and the incorporation year for business group affiliated family firms was 14.76 years, whereas for standalone family firms it was 10.01 years. The standalone family firms were probably forced to list earlier compared to those affiliated with business groups due to the capital constraints and limited sources of financing.

The SOEs were the last to resort to equity markets to raise funds. The average number of years taken for SOEs to list was 34.07 years, as opposed to 14 to 17 years taken by MNCs, standalone non family firms and other business group firms.  The study also noted that the average number of years taken for the firms to list has been going down over the years pointing to the ease of access to capital markets due to the regulatory changes post liberalization.

Impending succession challenges: Succession remains the number one concern for most family businesses even today, as the senior management comprises of family members in most cases. It needs to be seen if the family businesses, especially the ones that are at the crossroad to either transition to the next generation or on the cusp of making non-family professionals their agents, survive the change. 

The listed standalone family firms were younger at an average age of 28.73 years than the business group affiliated firms. More than 50 percent of the standalone family firms had been in existence for less than 30 years. The first generation founder would still be actively involved in most of these companies but many of them must be staring at a change of guard in the near future. On the other hand, the non-family firms typically have senior management personnel who are nominated by the board members and appointed for fixed tenures.

The family business group firms have been around for 38.44 years on average and the State owned enterprises have an average age of 54.04 years. The MNCs, other business group firms and the standalone non-family firms have 42.09, 36.9 and 35.16 years of average existence.

Conclusions

The study throws up two important developments that are worth mentioning:

·        One, the process of liberalisation in India enabled family firms to take stock, restructure and open up new opportunities in the services sector, thereby, increasing their contribution to the economy.

·        Two, there was a wave of entrepreneurial spirit that got unleashed due to conducive environment.

Indian family businesses have shown resilience and have been progressed well over the years. They have increased their footprint in the Indian economy. With better governance and more transparency, they will only get better. Their capacity to transcend time is their greatest strength. 

Pep Up Entrepreneurs

This article was first published in Outlook Magazine, October 2, 2017; Co-author- Kavil Ramachandran

https://www.outlookindia.com/magazine/story/pep-up-entrepreneurs/299340

Indian B-schools must have students infused with a ‘launch business’ spirit

Economic liberalisation in 1991 triggered a spurt of entrepreneurial activities in the country, once it was freed from the shackles of the licence-quota raj. It became easier to raise capital through the stock­markets and there was an influx of investment from venture capitalists. The rise of the services sector and the internet meant that people could start businesses with lower capital and reach the customers more easily.

Institutions of higher education, particularly the business schools, became a breeding ground for entrepreneurs. There was a lot of buzz regarding business creation, yet very few became entrepreneurs. Among them, many did so if they could not find a job that matched their education, skill and experience. Only a few campuses made serious efforts to promote entrepreneurship as an alternative to well-paying jobs.

Today, the government’s Startup India programme has renewed interest in entrepreneurship. Alongside, there are Skill India and Pradhanmantri Mudra Yojana, giving tax incentives. According to the Randstad Workmonitor Survey, 72 per cent of the respondents in the 25-34 age group said they would love to be an entrepreneur. Yet, 72 per cent of the fresh graduates or post-graduates joining the workforce do not launch business ventures. The Global Entrepreneurship Monitor Report of 2016-17 reports that India ranks 56th out of 61 countries on “Entrepre­neurship a good career choice”.

Why don’t most potential entrepreneurs take the plunge? Is it a fear of failure or perceived incapability? Do our business schools prepare students for the rigmarole of life as an entrepreneur?

Initiatives like the Society for Entrepreneurship Educators formed by the Indian School of Business in the early 2000s to bridge a gap between the educators (across B-schools) and business owners-managers did not see much traction. Entrepreneurship was not recognised as an independent discipline yet. The faculty in most business schools was either not prepared or not incentivised to drive entrepreneurship on campus.

Similarly, there was little success for schools that started hubs with an objective to bring together different stakeholders in the entrepreneurship ecosystem, such as technology incubators, service providers, venture capitalists, mentors and academicians. For, they were not able to integrate the various spokes in the hub.

As a result, frustration grows on many students who are genuinely interested in starting their own ventures, as they do not get practical support from the ecosystem. They either abandon the pursuit or suffer failure. As many as 90 per cent of Indian startups fail within the first five years, says a study by the IBM Institute for Business Value and Oxford Economics. An integrated environment will reduce the information asymmetry, allow the schools to learn from the experiences and experiments of others and adopt the successful ones. For example, other business schools too can adopt the Maha Mandi event at NITIE Mumbai that has been a highly successful model in “Sell-Think-Learn-Repeat”. Similarly, Judge Business School at Cambridge University has a series of free evening lectures and networking sessions.

At the B-school level, activities, both curricular and non­curricular, that build a wave of interest and excitement in entrepreneurship would create an ecosystem that stimulates innovation, funds commercially viable projects and facilitates mentorship through interactions and internships with industry leaders and other entrepreneurs. At the city or zonal level, several B-schools should come together under one umbrella where organisations such as The Indus Entrepreneurs (TiE) join the journey. There can be events such as the TiE-ISB Connect that create a platform at the regional level for encouraging entrepreneurship among the youth. At the apex level, there should be more integrated programmes that involve multiple agencies like the Department of Science and Technology and the Ministry of Human Resources Development.

Integration at various levels will start a movement for entrepreneurship that will be effective and will lead to a variety of new initiatives at various levels. There will be a complementary synergy thus created to help students take entrepreneurship as a serious career option.

Entrepreneurship should be innovation driven

This article was first published in www.smallisbig.co on September 23, 2017; https://smallisbig.co/2017/09/23/expert-view-entrepreneurship-should-be-innovation-driven-says-isb-associate-director-nupur-pavan-bang/

Lack of jobs leave the youth of a country with no option but to explore being an entrepreneur. India is one such country where more than a million youth enter the workforce every month but only about 61 percent of them are able to get employed for a full year. Majority of unemployed graduates and post graduates cited non availability of jobs matching with education/skill and experience as the main reason for unemployment in the Employment- Unemployment Survey (2015-16), Government of India, Ministry of Labour and Employment. If the education and skills of these youths does not match the jobs available, they are left with no option but to start something of their own. Majority of the entrepreneurial activities in India are necessity driven.

The Government has been promoting its Startup India program, urging the youth to become “job creators” instead of “job seekers”. The youth will see entrepreneurship as an opportunity and not a necessity when they see it as being more satisfying both financially and emotionally (by creating jobs and bringing about change and innovation). Entrepreneurship will be lucrative if the idea (either product or service) offers value to its customers. Only then the business will become commercially viable in a short span of time. Lack of innovative ideas often plagues the students who may be inclined to become entrepreneurs.

There is also the fear of failure. The number of startups in India is very high and so is the number of ventures that fail. Almost 90% of startups fail within five years of their inception. The entrepreneurs are often not ready to tackle the real life challenges. They lack industry exposure and mostly have no one to guide. Low level of funding is also one of the reasons for failure. As per an estimate by FICCI, while the average amount being invested by the angel investors have increased over the years, most of the investors prefer to invest in the range of Rs0.5-1 million.  

The best insurance against all these challenges is an innovative idea. Whether it is a product or service, if it is what the people want and/or it is something that no one else is offering and/or it is cheaper than what the existing players are offering at, the chances of success goes up drastically. Innovation is really the key to a successful business venture!

Politics and the family plot

This article was first published in the New Indian Express on September 21, 2017; Co-author- S. Subramanian

http://www.newindianexpress.com/opinions/columns/2017/sep/21/politics-and-the-family-plot-1660487--1.html

Can political parties in India and abroad find their own Jorgen Vig Knudstorp (Lego), Sergio Marchionne (Fiat Chrysler Automobiles) or Oh-Hyun Kwon (Samsung Electronics)? These people are all successful non-dynast professional CEOs of family-run businesses. Do political parties pick candidates keeping in mind what is best for the party, its growth and purpose?

Typically, communist parties in countries such as China, Vietnam, North Korea and Cuba are run as family affairs. Party leaders pass the baton from one family member to the other and one generation to the next. The descendants of the communist party elites, or ‘princelings’ as they are called, are usually chosen to lead the party, and are given important portfolios in the government and the country when the earlier generation retires or passes away.

It is almost impossible for anybody to rise to the top of the party (and hence the government machinery) unless they have strong family influence in the communist party. In China, four of the seven members in the all-powerful Politburo Standing Committee of Communist Party of China (CPC) are princelings. Similarly, in the Communist Party of Vietnam (CPV), of the 19 members in the Politburo, 11 are princelings. In North Korea, the ‘Kim’ family is in power for the third generation. And in Cuba, after Fidel Castro, his brother Raul Castro came to power.

The above scenario is similar to many family-run businesses all over the world. Closer home, in India, most of the businesses are owned and managed by founders and their family members. The reasons for this phenomenon of family-based succession are culture and the ‘correct fit’.

Asian countries are known for their collectivist family-oriented culture, unlike Western individualist culture. The elders want to pass on what they have earned to the next generation family members. This is reflected in the literature on succession in family-run businesses. The business is passed on from one generation to the next for the family to retain control, even if there are better candidates outside the family for continued shareholder wealth creation.

The founders of the party earned power when they set up the party and they want to pass on that power to the next generation family members. The thought process is that ‘the founders of the party set up the political establishment in the country and even though the government is for the people, the founders and their family members are best suited to enjoy the outcomes and take the mission of the party forward’.

This thought process is more or less explicit in the succession planning in Vietnam. The Communist party’s informal rule set by Ho Chi Minh, the founding father of the CPV, states that priority should be given to the children of the senior comrades, i.e. party elites.

Even if the incumbent leadership of the family business genuinely wants to consider outsiders for succession planning, it does not work in many situations. The outgoing leadership typically has a vision for the company and wants to choose someone who understands and shares that vision.

When they search for a successor, they find it difficult to find an outsider who fits their expectations. On the other hand, they find that their own family member, who has been brought up under their supervision, is entrenched in the same values and shares the same vision. Hence they prefer to pass on the baton to someone inside the family rather than an outsider.

The communist party elites feel the same. It is up to the non-communist parties in democracies like India to decide if they would like to follow this method of selecting successors. It must be emphasised that if the next generation of the founding family is well qualified, as passionate as the founder or incumbent and as suitable to lead the company as an outsider, the family member may be given a preference over the professional as the family member would be well entrenched in the values of the company. But, if the next generation is not well suited for the top job, the shirt sleeve to shirt sleeve in three generations saying may prove to be right!

A look into the various Birla Groups proves an important point. The Aditya Vikram Birla group which appointed professional CEOs with strategic freedom at the business level for most of its companies continued its success story in the liberalised environment, whereas the other Birla Groups which continued with family leadership did not perform as well.

The political parties would do well to realise that the adage will apply to them as well if they don’t learn from the experiences of family-run businesses and make course corrections. Parties that subscribe to dynastic politics can learn from family businesses that choose ‘outsiders’. Family-run businesses are realising the need for change. So should the political parties!

Will Family Businesses Jump on the e-commerce Bandwagon?

This article was first published in www.entrepreneur.com on September 6, 2017; Co-author: S. Subramanian; https://www.entrepreneur.com/article/299866

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization

It is interesting to note that out of the 13 different sectors represented by the Nifty stocks, sunshine industries like Pharma, Telecom and IT are totally dominated by family businesses. Though most of the older family business groups like the Bajaj, Birla, Godrej, Reliance and TATA started with traditional manufacturing, metals and energy sectors, almost all of them forayed into the emerging services sector with aplomb and success.

Family Businesses Rule

Out of the 50 companies in Nifty, 32 are family businesses and 11 of those 32 are less than 25 years of age, accounting for 47 per cent of the market capitalization of Family businesses in Nifty. This points towards the swiftness with which families have responded to the emerging opportunities and embraced them.

Entrepreneur Ruling the Scene

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization and 74% of the market capitalization of all IT industry stocks in Nifty. To draw a parallel, e-commerce in India is at a nascent stage and start-ups, all entrepreneurs, are ruling the scene in this space. However, what intrigues us is that none of the large family businesses have forayed into it in a major way so far. While they do have a presence in the B2B space, they have so far stayed away from the B2C sector, with the exception of the recent foray of TATAs with CLIQ.

E-commerce Business Boost

With government initiative like Digital India, the internet penetration in the country is set to rise further. The growth rate is already one of the highest at 51 per cent per annum.  This will provide a further boost to the e-commerce business. According to estimates by the Associated Chambers of Commerce & Industry of India (Assocham) and Forrester, revenues from e-commerce market in India is expected to grow to $120billion by the year 2020.

How a Young Team Helps

Typically the ecommerce start-ups are headed by youngsters of less than 35 years age and the employee teams are also usually fresh engineers and MBAs.  This may be essential for a B2C e-commerce venture as the buyers in online stores are predominantly the youngsters. Their behavioural pattern as consumers is very different from that of the traditional buyers.

For example, they rely a lot on social media communication to develop an opinion about the product. And hence having a young team, led by a youngster, is important to understand the consumer mindset and set the right strategic direction for the ecommerce firm. But the traditional family owned businesses tend to have experienced personnel at the very top level. Having very young people lead a venture is new for them and may take some time to culturally accept.

VC-funded Start-ups

Let us assume that a business group does promote an e-commerce business and lets a team of youngsters, led by a young CEO, manage it.  Will that guarantee success? Probably no, as the team may not still get the strategic freedom similar to that of their standalone competitors. Most of the existing ecommerce start-ups are almost fully funded by the venture capitalists (VC), whose expectation as investors are completely different from that of a business family. The VCs’ expectation of success in the start-up that they invest is just about 10 percent or so. Hence they allow the team to take risks, even if it means going to an uncharted territory. The families do not and probably cannot allow such risky moves in their own ventures, there by effectively curtailing the strategic freedom of the top management.

High-risk Strategies

Further, such high-risk strategies have created expectations of high returns from the e-commerce ventures. This, in turn, resulted in the valuations skyrocketing, essentially creating a bubble, and some analysts went to the extent of calling them as Ponzi schemes. The business families, while willing to enter into the sunshine sector, are generally cautious about their reputation.

The entry of Tata Group into e-commerce sector with CliQ, the first such venture by a major family business group, may indicate that the moment has come. What is to be seen is if CliQ is not too late to take on the Flipkarts and the Amazons of the industry which have already established themselves in the market. Would CliQ set the precedence for the other family businesses to foray into the ecommerce bandwagon? And, we would be happy to do a similar analysis 20 years from now to see how many ecommerce companies form a part of Nifty and how many of them will be family businesses!