It is India's proudest institution. Symbolising courage and common sense, energy and enterprise, aspiration and adventurousness. It is also India's most engendered institution. And after surviving many a trial by fire, it stands poised to face the sternest threat to its existence. For, however glorious its past, the Indian business house is confronted by a disturbingly uncertain future.
After the seeds of entrepreneurship were sown in the 1860s-when the first cotton mills came up in Mumbai-the family has survived colonialism, partition, and modernisation to remain at the helm of business. But will it emerge through liberalisation with just as much impunity? Will its reign over the country's corporations, reflected in ownership and control of 93 per cent of all companies operating in India, be perpetuated? Or will the family business house fall victim to the incompetence- and uncompetitiveness-devouring forces that are reshaping the Indian economy and the business landscape?
Caught up as it is in the furious flow of change, that's a question that the business house itself may not know the answer to. Yet. In the 50th year of India's independence, however, there is no question more momentous for the future of business.
That's why the answer-with reference to the country's 50 largest business houses today-represents the Holy Grail of the quest that BT has embarked on. And the journey that this quest has set us off on is also a chronicle of the tectonic transitions affecting the response of Indian business houses to change.
THE RESPONSE: BUSINESS STRATEGY
The most wrenching of the changes that the business house is experiencing involves acquiring a strategy to cope with liberalisation. Accustomed to competing only for the favour of the state to extract licences and permits, the very notion of competing for the customer's attention and patronage is a foreign one to the family business. As a result, the trauma of the transition is fast becoming palpable, with many families being forced to watch as their businesses wind down. A few have been able to sell out early enough to command a reasonable price-but both eventualities represent a dramaticshift in the trajectory that the typical family business had become comfortable with.
Family businesses make up for the absence of certain formal support systems. Once these new systems are developed, the old ones will fade away.
Rajan Nanda, CEO, Escorts Group
In the complex and volatile business environment, inducing professional management as a conscious strategy is the only route to success.
K.M. Birla, CEO, A.V. Birla Group
Family businesses must ask themselves where to concentrate their limited resources, and why. This needs a new way of thinking about strategy
M.V. Subbiah, Chairman, Murugappa Group
As for those who refuse to opt out, they're having to morph themselves into fighters. The easier option-albeit not a long-term one-is to become competitive in the local market so as to ensure survival, if not market-leadership. The more demanding decision, which a handful of groups are beginning to take, is to stay and fight on equal terms with global competitors marauding into the marketplace.
That, in turn, is forcing genres of behaviour that Indian business has not pursued extensively in the protected past: forging alliances and joint ventures with transnationals; acquiring global competencies for the local market; cranking up quality and cost competitiveness to target export markets; or even bearding the lion in its den by going global. Comments S.P. Oswal, 55, CEO, Vardhman Group: ''Actually, being locally competitive is not enough. Because the competition locally is global. Markets simply don't accept any thing less than world quality.''
Critically, none of these responses has been an easy one, given the internal structures, dynamics, relationships, and methods used hitherto by the business houses.
The result, but inevitably, is a complete makeover. First, because it demands a process of rigorous and analytical exploration of the environment, opportunities, and internal capabilities- factors which played little role in making important choices in the past. In an open economy, every emerging field represents an opportunity for growth to the family business. But whereas permission wheedled out of the bureaucracy was the only entry ticket needed earlier, an entire portfolio of skills are essential for survival today. To conduct a self-audit, to make the decision of investing in growing those skills, and to accept that choices are all about trade-offs, requires a level of strategic thinking that the business house is only just beginning to attain. And the dialectic caused by the clash of these compulsions with the classic ego-driven refusal to exit unprofitable businesses for fear of social derision is dragging the family enterprise through an enormous change of mindset and attitudes. The new model is being set by CEOs like Shashikant Ruia, 54, chairman, Essar Group, who asserts: ''I see a continuing role for the Ruias only in terms of identifying new business opportunities and providing a direction for growth in the existing businesses.THE RESPONSE: FAMILY STRATEGY
The post-liberalisation challenge is to corporatise and become globally competitive. Surprisingly, corporatising is proving tougher than globalisation.
S.P. Oswal, CEO, Vardhman Group
Generating and transferring various ideas for value addition to the business through the boards and the CEOs must be critical components of the family's strategy.
Shashikant Ruia, CEO, Essar Group
The way the country was opened up to foreign competition was unfair, but it has to be faced up to by the family business with a new set of strategies.
Atul Kirloskar, CEO, Kirloskar Oil Engines
Despite their intrinsic differences, the family- the first and the simplest institution of society- has been able to cohabit with the corporation- one of society's most modern and complex organisations- primarily because of its ability to transform societal mores into simple principles of management. The critical issue was to stay together, which offered the only route to controlling others and creating wealth. Energised by this motivation, business families used bloodlines to build empires and perpetuate dynastic management. Only when family unity was threatened was the business also threatened as a result. Much the stronger force, however, was the family tradition of building, and passing on, wealth to one's heirs, which was almost a sacred duty for the male members of the family.
Analyses sociologist Rajen Gupta, 57, who has studied the relationship between families and business in India and Japan: ''In India, the father's business is divided among all children. They and, eventually, their children, manage the business. With time, they diversify into other areas or expand the original business, and a business group emerges.'' Coupled with this vector was the other, maternalistic, convention of seeking a safe haven for the child, which provided an added impetus for creating an off-the-shelf business for the son rather than asking him to set up his own.
The outcome of these forces: the interests of the family became indistinguishable from those of its businesses. Says the patriarch of a business house: ''Even though management gurus may distinguish the corporate entity from its shareholders, only those who own and manage the business can have an emotional bonding with it.'' Today, however, the disintegration of these bonds and of the equations that flowed from them is one of the strongest changeinducing forces impacting the business house. Part of the impetus is coming from new societal structures such as the growth of the nuclear family, the triumph of individualism, and the need for instant gratification.
The divergent ambitions of succeeding generations, as well as personality clashes, are throwing powerful challenges to stability. Some equally potent compulsions are being imposed from without, all of them threatening the age-old benefits and rationale that drove the family business.
First, size and expansion are no longer parameters of success; profitability and shareholder value have supplanted them. Second, companies can no longer expect to sell what they produce; they must produce only what customers will buy. And third, specialised skills rather than access to capital and connections are the key ingredients of a recipe for survival. The family-owned, family-managed business group, thriving on feudal relationships, absolute control, and loose systems, is, not surprisingly, an anachronism in this situation. The validity of every assumption-from patrilineal succession to sharing of assets, from the exclusion of female heirs to the perpetuation of the group identity despite individual differences-is being re-examined.
Under the combined onslaught of these internal and external forces, a radically different future is emerging for the business house-one where different compulsions and objectives are reworking the relationship between the family and the business.
Acknowledges Parvinder Singh, 54, CEO, Ranbaxy Laboratories: ''In today's circumstances, ownership and management issues are getting segregated.''THE RESPONSE: STRUCTURAL STRATEGY
As the family wrapped the business around itself, it created partnerships between its members- with other relatives taking up financial stakes- thus enabling the dynasty to retain strategic control over the business. Not only did this structure not disturb the patriarch's line of authority, it also left enough room for other members of the family to air their personal ambitions. Importantly, the pursuit of these new businesses did not lead to the creation of completely independent companies.
Instead, it only spawned complex networks of companies with cross-holdings meant to ensure the financial participation of different members of the families. Records business historian P.N. Agarwala in his book, The History Of Indian Business: ''The Birlas and the Goenkas were directors in almost every variety of industrial undertaking, from small jute and cotton pressing factories to the biggest automobiles and engineering concerns, even though they had hardly any technical qualifications or backgrounds.''
As a result, the switch to the board-managed corporation from the managing agency structure, brought about by the government in 1969, saw only superficial changes. The boards of family businesses comprised promoter-directors drawn from the family; a few managers with long and deep relationships with the family; friends of the family masquerading as professionals, non-executive directors; and institutional directors. However, the maze of mutli-layered companies, with cross-holdings and intermediate level investment companies, persisted- as did the centrally-controlled structure of the entire group. Since liberalisation, however, the rationale for these forms has disappeared. For instance, the relaxation of restrictions on inter-corporate investments and of taxes on direct holdings has made complex shareholding structures redundant.
Explains M.F. Pancha, 50, finance director, Indian Hotels: ''There is no longer a need to have a maze of investment companies to hide one's holdings.'' Likewise, the habit of funding new ventures with cash sucked out from from existing businesses is being frowned upon, in turn making it unnecessary to further divisionalise companies.
Equally important are the new considerations dictating the structure of family business groups. For instance, promoters are beginning to consolidate their fractured holdings of yore in order to stave off takeover attempts in the emerging market for corporate control. After all, many groups have seen prime businesses being hijacked by insiders or outsiders. Agrees Ravi Sinha, 50, president, SRF: ''The issue of ownership cannot be left to market forces.'' Moreover, as the new strategic imperatives- nurturing a core competence, pruning diversified portfolios, honing inimitable competitive advantages, making trade-offs between customer segments, and delivering value-assert themselves, the family business is being compelled to take on new structures in response: substituting centralisation with a confederate configuration; flattening hierarchical pyramids; replacing family management with professional management et al.
Complains Ashwani Windlass, 41, joint managing director, Max India: ''The existing structures do not reflect the financial strength of a business group, or its core competence, or its business vision.'' The business family is making its transition to creating new structures that will. Analyses Rajan Nanda, 54, CEO, Escorts: ''Family businesses make up for the absence of certain formal support systems within the economic environment. Once these new systems are fully developed, the old ones will weaken, and, eventually, fade away.''
THE RESPONSE: SURVIVAL STRATEGY
That the Indian business house must tread these paths of transformation is by now a tautology. That the journey, and not the destination, is important in today's and tomorrow's stasis-hating economies is also obvious. Unfortunately, merely embarking on these changes will not guarantee survival. The extent of the progress already made, three years short of the new century, is a crucial indicator of the chances of a group's entering that century. And it is this progress that the BT Business House Survival Index sets out to map in this issue. Just what, then, is the prognosis for the country's 50 largest business houses? The sobering conclusion: not one of the 50 business houses is sending out a powerful survival signal.
Only 14 of them display qualities that make for strong-albeit by no means powerful-survival signals. The signals emitted by as many as 16 are only medium while those from 20 more are downright weak.
If that paints a bleak landscape for the future of the mega-groups of family business in India, the responsibility lies in across-the-board deficiencies rather than specific shortcomings. For, the final rating of a group is a function of its performance on nine different parameters (See The Family Business: A Survival Model), and on none of these measures do the scores of a group indicate a major deviation from the overall picture.
For instance, the number of groups on the top of the five rungs of strategic performance is zero. At the other end, 10 of the 50 groups fall into the bottom bracket on this parameter.
The lesson can hardly be ignored: for India's family business groups to survive, unidimensional excellence will not suffice. Only a leap onto the level occupied by world-class companies on every aspect of performance will ensure survival. Who dares forget that 32 of the country's 50 largest corporations in 1969 are no longer among the Top Fifty today? However irresistibly it is drawn into the throes of transformation, no business house can rely on the tides of change to bring it to the shore. It must bend the currents of change to its will. To survive. Tomorrow.