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Intent comes first, resources follow

By Gaurav Dalmia

Entrepreneurs fascinate me. I have learnt many things from them. Most importantly, they have taught me one thing: intent comes first, resources follow! Family businesses are a byproduct of such entrepreneurial mindset. To address the issues of intent and resources in the context of family businesses, I would like to present five topics.


First, let me submit that family businesses are more common in the top quartile of the business league tables than most people realize.

Germany’s famous middle market companies are called mittlestand, 99 per cent of which are less than 50 million euro in revenues, though companies’ upto 1 billion euro in revenues are in this category. They are niche focused, agile, high margin and global. They are widely considered the backbone of the German economy, they are the champion exporters constituting 68 per cent of Germany’s exports, and they are the creator of the bulk of the new jobs in Germany.

Looking more globally, research from Wharton shows that by 2025, driven by the rise of the Asian companies, 40 per cent of the large enterprises globally will be family-owned. Already, Fortune 500 companies now have 19 per cent family-owned businesses as compared to 15 per cent a decade ago. Two years ago, the Boston Consulting Group started a Future 50 ranking of companies on the basis of market potential and the individual company’s ability to capture that growth. To identify the Future 50, BCG examined 1,100 publicly traded companies with at least $20 billion in market value or $10 billion in revenue in the 12 months through the end of 2017. Surprisingly, outside the US, this list is not dominated by technology firms. It has basic businesses: a Chinese auto manufacturer, an Indian bank, and a Thai convenience store operator. Many of these are family businesses.

Now, let me take a sample of well-known companies from the business world globally and show you how many of the icons have overlaps with family businesses. Let me start with the most obvious cases to the least obvious.

Let’s start with Samsung, the largest Korean company, with $210 billion in revenues and $36 billion in profits last year. Samsung was founded by Lee Byung-Chul and his son Lee Kun Hee is the current Chairman. And his grandson Jay Lee is the Vice Chairman, and his grand-daughters work in the business. Though it is a multinational, it still retains elements of a classical family business.

Now, let’s take Volkswagen. It makes slightly more than 10 million vehicles a year and is neck to neck with Toyota, the world leader. Some of you may know that it also owns Audi, Porsche, Lamborghini and Bentley. Two families — the Piech family and the Porsche family — jointly control the holding company PAH, which in turn owns 54 per cent of the voting rights of the Volkswagen Group. Five members of the family and the holding company sit on Volkswagen’s supervisory Board — which, as is the normal practice in Germany, are more involved in decision making than normal Boards in other countries — and some of the members have executive responsibilities as well.

Moving ahead, it’s worth studying the family of Phil Knight, who founded Nike. Today, Nike has $117 billion in market value. Phil Knight’s son, Travis Knight, opted to be a musician. Phil and Travis bought Laika, a near bankrupt film animation company. Phil is the principal shareholder; Travis worked in middle management at Laika and is now the CEO. It’s not a billionaire’s indulgence. Laika has been turned around. Over the years, four of its animated films have been nominated for Oscars under the Best Animated Film or Best Visual Effect categories, but none have won. Phil has his foot, quite literally, in the world’s most valuable sneaker company, but also in a family controlled film business.

So, we can see that there are many ways in which families manage their business interests from the tight business control and day to day management, as in Samsung; business oversight mostly is through Board level control, as in Volkswagen; to a clear distinction between family interest and mainline business, as in the case of Phil Knight of Nike.


Now, let us come to the second feature of family businesses, that is, the strengths and weaknesses of family businesses in general. Let’s look at the balance sheet of a generic family business, its assets and liabilities.

On the assets side, we have continuity. This stability of management has several positives. Research by McKinsey found that family businesses have a much higher reinvestment rate in the business as a percentage of profits as compared to similar non family controlled businesses. They have a higher R&D investment as a percentage of their revenues compared to their peers. Family businesses have strong cultures which leads to more effective management. Research by noted business historian Hartmut Berghoff shows that family owned firms have some unique advantages — emotional attachment, lean hierarchies and nimbleness — that others find difficult to replicate. This leads to better customer focus, more efficient operations and better financial metrics. McKinsey’s research corroborated this; they found family businesses to have stronger identities, higher levels of trust, better alignment of interest, and a shared sense of destiny.

On the liabilities side, family businesses tend to be less meritocratic, as they often reward loyalty more than talent. As a result, they typically have weaker middle management ranks. It is not surprising that they often have key man risks. Because of the need for family control and self-imposed restrictions on external capital, they are more capital constrained. Families almost always underinvest in a family charter that encapsulates a thoughtful and objective code that can cater to or constrain the unique needs of family members. Some people question the level of competence of the family members in the business. My own experience shows something different: the level of competence of working members I have encountered is actually high, it’s really the level of complacency that is the main issue. McKinsey’s research found that family businesses had less diversity, were typically more inward looking, sometimes leading to excessive attachment and blind spots, and had transition issues because of authoritative leaders.


This brings me to the third fundamental point. The net result of this balance sheet is quite positive. Credit Suisse completed their latest global study on family businesses last month. This study used two screens: companies with a market capitalization of $250mm or more, and companies where the controlling families held a minimum of 20per cent direct shareholding. Out of the 1015 companies screened by Credit Suisse, the top five homes were China, USA, India, Hong Kong and France. They found that ten-year revenue growth for the family business sample in their study was 2.4 times, as compared to 1.6 times for the whole sample. Margins for family businesses were 200 basis points more. They had more conservative balance sheets than their peers.

India’s 111 entries on the list had a total market capitalization of USD 839 billion. The study showed that from 2008 till earlier this year, Indian family owned businesses generated 7 per cent alpha, as they call it in the world of finance, or additional return compared to their non-family owned peers. This seems to play out across markets. Another older research from the IE Business School in Madrid had showed that in Europe, a portfolio of family owned businesses had provided 5 per cent extra return per year over a decade as compared to the portfolio of non-family owned firms. Which bet would you want to make?


Let me now make my fourth theme: family businesses are well poised to capitalize on some micro trends.

MTV did an international study called the Many Me Project in 2016. The sample was young people in the 13-25 years age bracket. More than 81 per cent of the respondents preferred more control over their jobs. Family businesses are ideally suited to make the most of this.

If you think MTV surveys are pop-psychology, let me point you towards market share trends in India. Niche brands – like Wagh Bakri tea or Cremica biscuits or Fogg deodorant — are going great guns. I agree with what many marketers are betting: at least 100 niche brands with $100mn in revenues are going to be built in the next decade or so.

And capital markets trends are promising as well. The record for the biggest capital gain from a private equity exit from India — at $1 billion plus — remains Warburg Pincus’ profits from Bharti Telecom more than a decade ago. Bharti is a second generation family business at its core, with an overlay of solid professional management. Analysis of returns shows that growth capital in family owned businesses has provided superior returns for many private equity investors as compared to other asset sub-classes within private equity. And they are hungry for more.

These trends will last a long time folks; ride these waves!


My last subject is on the way forward for family businesses.

One of the lessons from adrenaline-filled high growth technology companies is that one must take time out to think in terms ten-fold growth in business. Not three-fold, not five-fold, but ten-fold. That’s when the mind games begin. Ten-fold growth may happen in say five, ten or fifteen years, depending on your business. You have to sow the seeds today and carefully nurture the strategic intent to bear fruits years from now. This 10x planning is not a hypothetical indulgence or the privilege of technology companies. Businesses in all fields can do it. L.N. Mittal did it in his early years, in the global steel industry, a mature, capital intensive, and cyclical business. There are numerous such examples in the so-called old economy businesses in India, from cement to automotive to pharmaceuticals. Thinking hard about this 10x target will encourage you to come up with new paradigms, and force you to confront the skills and resources you need to build in your organisation, and how you personally need to learn new things, and unlearn some things along the way!

As businesses adapt to reach new levels of growth, management thinker Jay Galbraith has identified six dimensions that require attention in parallel: strategy, structure, people, decision making processes, rewards, and culture. In most organisations, these six elements reinforce each other and are in a form of equilibrium. As businesses evolve, leaders have to change all the levers in synch. This is an art form, which requires less of core business acumen such as market insights or financial controls, and more of vision, game theory and social psychology skills.

Changing culture is the trickiest but the payoffs can be extraordinary. Let me relate a tangential story about Haier, which is today the world’s largest white goods manufacturer. In the 1980’s, the company, then a regional state owned company called Qingdao Refrigerator Company, was over-leveraged and close to bankruptcy. A man named Zhang Ruimin was appointed as the new CEO. When he discovered serious quality problems in goods stored in a factory warehouse, he segregated 76 subpar refrigerators from the 400 stored there, and asked employees to bring them to the factory floor. Then he asked workers to destroy them with sledgehammers. This display was not just a public admission of guilt. It was the admission of a new culture. A tactically minded manager in a cash strapped business would have expected kudos for having subpar goods sold at a discount or sent to less quality conscious rural markets. But Zhang Ruimin wanted to change the culture and eradicate the quality problem at its roots. The public destruction of the malfunctioning refrigerators was largely symbolic and sent a powerful message of the change that was necessary. One of the used sledgehammers is proudly displayed at the company’s headquarters! This is the power of culture and only owner-minded business leaders can dare something like this.

All this brings us back to the topic I started with: intent comes first, resources follow. Let me end by borrowing three questions Jack Ma often asks entrepreneurs: “What do you have? What do you want? And most importantly, what are you willing to give up?” Wishing you all the best as you ponder over these!

The author is Chairman of Dalmia Group Holdings. This article is representative of the talk he delivered at The Economic Times Family Business Summit on October 26, 2018

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