Family businesses make up a major part of the global economy. In India, family businesses contribute nearly 60-70% of GDP in the organised sector, and far larger in the unorganised sector. Family values define family dynamics and ultimately the family’s identity, culture and legacy through its business. A shared sense of family values drive a number of key decisions such as risk, investment and succession.
Disruption: Requiring a shift in mind-set
A 2018 global study by the Deloitte Family Business Center called Next-generation Family Businesses polled 575 current and future family business leaders across the world to investigate their attitudes and actions in response to the changing business ecosystem.
The study showed that while most family-owned businesses view business ecosystems as an opportunity for growth, a number of limiting behaviours persist, even with leaders who view themselves as more open to collaboration.
Innovation is one area in which many family business leaders’ attitudes seem particularly out of step with their actions. Nearly 89% of survey respondents agreed that business ecosystems provided an opportunity for innovation. However, 53% indicated that they had rarely or never partnered with other organisations during the past three years in such innovation projects. Nearly 32% of the respondents said their businesses would work on new services and/or products only with organisations with which they already had a long-standing relationship.
This is consistent with many family businesses’ traditional emphasis on operating within stable, closely knit networks of collaborators, a model that is at odds with disruption, where platforms and digitalisation has disrupted most businesses. However, a change in mindset to reflect business is key to some family businesses succeeding over others.
Commercial orientation and technology evangelism
Commercial orientation is one of the biggest challenges that most next generation leaders grapple with. Helping them master their understanding of unit level economics and the financial underpinnings of the business is a critical enabler in their transition to leadership.
Technology is no longer an enabler, but is increasingly becoming core to operations in most businesses. How quickly can leaders embrace technology and drive building futuristic business models will enhance their visibility and acceptance as future leaders.
Succession planning
Succession within a family business is generally an emotional decision. Worldwide, only one in three family businesses make a successful transition from one generation to another.
Our research found that the most common attribute that is considered when deciding which family member should be groomed for leadership is his/her expression of interest in becoming the next leader. Other factors include work experience within and outside the company. Working outside helps build future family business leaders by building self-confidence, wider business experience, and networks that in turn build greater credibility with non-family members.
Our survey also indicates that only a small portion of family businesses globally had written succession plans, although many indicated that there was a succession plan. A written succession plan will significantly reduce the possibilities of doubts, misunderstandings, and conflicts.
Managing professionals
Founders typically manage their businesses through a team of loyalists with associations going far back in time from the time of childhood in many instances. The command and control style of founder-driven organisations is difficult to sustain, and professionalising becomes a serious imperative by the time the next generation enters the business. Some of the largest multi-generation family-driven businesses continue to struggle to build a people eco-system where professionals can thrive. Professionals need to understand what they are responsible for and need to be given the space and independence to implement their plans.
Family governance: Family council
The “business of the family” and the “business of the business” are equally important, but at odds. This is because principles of business functioning is different from principles of the family functioning.
A family council that operates separately from, but in coordination with the board of directors helps in addressing both business of the family and that of the business. Discussing family matters in a structured manner can resolve misunderstandings without escalating them to involve the business. The family council is also designed to contribute to better family relations by providing a mutual support system during difficult times.
Family owned businesses are one of the oldest form of business organisations and are important building blocks of a nation’s economy. Formal structures may appear intimidating or unnecessary to many family businesses, let alone the prospect of multiple, overlapping structures that may include some combination of a board of directors, family council and a family office to exist alongside the management team. No matter how daunting they may appear, these are important steps that reflect the growing maturity of the business.
Sources:
1. Challenges faced by Family Businesses in India: Thomas Schmidheiny Centre for Family Enterprise
2. Perks and Problems of Indian Family Businesses: Pratik Mantri
3. The CS Family 1000
4. Value Creation by Family Businesses: A Literature Review
5. SWOT Analysis of India’s Family Business: IOSR-JHSS
6. Naude W(2010) Entrepreneurship and Economic development
7. Other secondary research
( Views expressed are personal. )
The author is partner, Deloitte India
