Playing it safe is the key for long-term players in the business
By Aparna Reddy
In India, family businesses tend to range from the small grocery stores to large conglomerates. As per Credit Suisse Research Institute’s (CSRI) latest “CS Family 1000” report, besides China, the US and India, the top 10 countries in terms of number of family-owned companies include France (fourth place), Hong Kong (fifth), Korea (sixth), Malaysia (seventh), Thailand (eighth), Indonesia (ninth), Mexico (tenth).
It further says that Indian companies surveyed are more mature, with 60 per cent of family businesses in their third generation compared to 30 per cent of Chinese companies. The report shares that the financial performance of family-owned companies is superior to that of non-family-owned peers. Furthermore, family businesses appear to focus more on long-term growth and they have outperformed their peers in terms of share price returns.
Good corporate governance is given precedence which leads to a framework of strong orientation towards performance of any family-run businesses and hence there is a significant increase in trust factor over others.
Though there are many advantages of a family-run business, we have also seen many family business fighting legal battles in India. Although we can see many advantages of family-run businesses, there are also many things we can learn.
What family business helps is with stability and long term commitment towards the business. Since the needs of the family are at stake, there is always a greater sense of commitment and accountability. This long-term commitment from the head of the organisation leads to additional benefits, such as a better understanding of the industry, organization and job, stronger customer relationships and more effective sales and marketing. In order to ensure success of the company, the family members can wear several different hats and take on tasks outside their formal jobs.
Though there is always a risk associated with succession business and other issues, the family business will always have an edge over the rest.
Some useful lessons for non-family firms are as follows:
Top management: How do you align the interest of shareholders and managers? Family-run business try to avoid conflicts between managers and owners by selecting a CEO from the family itself. The real challenge starts if they have to select an outsider as chief executive. When a difficult decision has to be made, the family often stick to the CEO they appoint. Judging a CEO after a short adjustment period is neither fair nor sensible. Only with the benefit of time are they able to truly understand the agenda of their new hiree. Family firms get this right. Loyalty beats short-term performance. To cite one example would be Cipla which was just one of the many family-run companies that dominate the business scenario in India. The company embraced the desirable shift to professional management because of a situational compulsion. But the trend is catching on. Promoter driven companies in India are in general in a state of flux and the transformation is turning into a trend.
Strategy: One of the most interesting features of family businesses is their strategic patience. Even when the chosen strategy does not deliver in the short-run, they tend to stick to it. This avoids confusion among staff and customers. Take HiDesign, a leather goods manufacturer based in Pondicherry, India. Their focus on creating an accessory that reflected craftsmanship suited for educated, cosmopolitan and well-travelled professionals seemed un-lucrative. Still, HiDesign resisted the temptation to change direction and implement huge discounts and crowd the market with offers as the likes of Baggit, Lavie and Caprese. In the long run, this strategy paid off. This helped HiDesign to create its own niche customers for its products.
Finances: Family businesses are substantially more traditional in regards to finances than other companies. Mergers are headline grabbing and exciting but they also represent a substantial financial risk. On average, family firms only spend 2% of their annual revenues on acquisitions, while others spend almost double, 3.7%. Similarly, family firms carry less debt.
Family-run business companies do keep spends minimal to their earning. They tend to be more aware of the downturns. And the best way to go through these periods is by building reserves in the good times. For non-family firms, it is particularly challenging to remain traditional. They are under constant pressure to grow but the best companies do not grow at the expense of their financial health.
Innovation: First, family firms tend to stick to more narrowly defined niches. In these niche markets, they combine technical expertise with customer knowledge. The family-run business companies should concentrate only on ideas that can be implemented. Most managers spend the best part of their career with these companies. This gives them a better understanding of the business and hence an edge when they need to decide which ideas they want to invest.
The family approach towards innovation has its benefits, but it is less likely to produce breakthrough innovations.
The key learning: Non-family-run business can learn to be more traditional and stick with the people they chose. It is a business approach that ensures stability. One might miss some of the upsides of more risk-embracing strategies, but if one wants to still be in business in a decade from now, family businesses show that playing it safe is the way to go.
The writer is Director, Aparna Enterprises