Family owned businesses (FOBs), merely by their outlook and structure, have different business models, values and cultures in comparison to non-family owned businesses. Their strengths and weaknesses are also, therefore, quite different.
Family owned businesses mutually depend on two ecosystems (family and business) that have fundamentally conflicting characteristics. As there is a conceptual difference between family and business, it becomes increasingly difficult for FOBs to choose between combinations of risks and returns of business growth and conservation of wealth of the family. It is interesting to look at the challenges faced by family owned businesses in India and some interesting strategies that could be adopted to overcome them.
Let’s discuss how one can overcome some key challenges to boost family businesses.
Having a clear vision and strategy roadmap is essential for any business. Thus, companies with a clear vision of their growth paths, clear understanding of the avenues available to build efficiency and profitability and robust strategy planning to leverage these avenues, will always have the first-mover advantage. To achieve this, a business leader has to first understand the core business and benchmark it against the changing market scenario. In the second step, identify three core aspects that will help the business survive, sustain and grow. The third step is to identify and set aside short- as well as long-term budgets for upgrading the company -- to invest in innovation, efficiency and profitability. Also, business owners need to look into the periodical investment planning for the current business, in areas like supply chain, manufacturing process, financial management, sales and marketing for improving contribution as that can trigger considerable growth for the business.
Every business owner understands the term ‘return on investment’ but very few understand the term ‘return on ignorance’. It is of utmost importance that all key stakeholders in a family business are informed and aware of the current affairs, as well as the key aspects that will affect their respective businesses, both directly and indirectly.
Appreciate digital disruption Family businesses do understand the benefits of adopting digital technology and the consistent need of upgrading the business. However, they are often conservative when it comes to spending on innovative technology and digital tools. FOBs understand the benefits of adapting digital technology, but very few of them take it up at the board level. It is crucial for business leaders to formulate a strategy to integrate digital as part of the business’s culture and incorporate the ability of the business to deal with a data breach or a cyber-attack. Therefore, understanding the impact of digital on the business is crucial. Plan for succession
In business families, there’s additional pressure to manage expectations of family members who may later become substantial shareholders. Very often, there is a rift due to the lack of communication between the present successors and the next generation. As ownership and management succession are the key concerns of a large number of business family, they have to devote extra attention to the process involved.
Succession planning, conflict resolution and ownership structure are all inter-related. It is the synergy created by the interactions and back-ups of these aspects that help family businesses to exist and grow. In my view, the three aspects that must be clearly planned include entry of new generation, retirement of present successors and mechanisms for resolving conflicts. An entry of a new family member in the business should depend on the ‘space’ available in the organisation, which in turn depends on the success of the business.
Families must choose their most competent members to manage the business, irrespective of their age, gender and bloodline. Regular conversations with the next generation and involving them in passive roles initially will help them prepare for and understand the challenges of the business. It is also imperative that the potential successor gains experience by working in an external environment and understands market pressures and functioning of other organisations before joining the family business. It is also important to plan for post-succession roles for the retired, to explore if they can take up an advisory role as a mentor or that of a non-executive chairperson.
Appoint external resource
The need to hire external ‘non-family’ professionals to build organisations is well recognised. However, an area of conflict is to decide the roles and responsibilities of external professionals in these businesses. An ‘outside-in perspective’ can help understand prevailing market conditions and competition in the market. Also, growing interest in corporate governance has had its positive effects on family governance, especially in introducing greater level of professionalism in business. It is advisable to on-board individuals who have expertise in a particular area that is important for the organisation’s growth and development.
Family businesses perceive success differently. For some, it is about profit, while for others it is about establishing the legacy and taking a long-term approach to growth. Family businesses with greater level of professionalism are likely to perform and perpetuate better over time.
JP Singh is President and Head, Commercial Banking Group, Axis Bank.