Beyond Three Generations: The Definitive Guide to Building Enduring Indian Family Businesses

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THE ENDURING FAMILY BUSINESS

Beyond Three Generations

Family, as an entity, is one of the oldest surviving institutions of humankind. Yet, family businesses hardly last beyond three generations. One of the main reasons for this unfortunate trend is dilemmas that lead to conflicts in mind and matter under various circumstances. Consider some of these examples in the Indian context:

A family business owner placed his brother-in-law as the vice president (sales and marketing) of his growing fast moving consumer goods (FMCG) business. Within a year of this decision, he discovered that the incumbent did not have the required expertise to manage the function and grow sales. Torn between a sensitive and delicate family relationship and business responsibilities, the owner was in a dilemma about how to ask his brother-in-law to take up a lesser role or look for another job outside the group. Lack of professionalization and good governance at this juncture would have its impact on the future of the organization.

In another instance, an eighty-three-year-old family business patriarch, who had built the business from scratch, was reluctant to let go of operational control. He dithered over handing the reins of management to his two sons, who were knocking at his doors. Meanwhile, the business stagnated and missed many opportunities in the marketplace. The patriarch argued that if he did not attend office every day, it would affect his mental health and well-being. Regarding the expansion of the business, till then based in Kerala, the patriarch identified Tamil Nadu as the location for the company’s third manufacturing plant. But his dilemma was who would manage the Tamil Nadu factory, since the two sons were running the other two plants based in Kerala. What should the two sons do? Poor succession planning and lack of hiring professionals would have a bearing on the growth of this firm.

Then we came across this very successful family that wanted to expand and diversify but lacked the internal funds to invest. The patriarch said, ‘Let us be happy with what we have’, while his son voted for bringing in private equity or venture capital to fund growth. The family business is now at a crossroads. Lack of ambition and the inability to unlock wealth is a serious bottleneck if you want to take the family business to the next generation.

In another case, to manage growth and transformation, four brothers of a family business felt the need to hand over the reins of leadership to a professional CEO who would report to the family business board. They selected a very competent CEO with a successful track record from the same vertical after a wide search and due diligence. However, the professional CEO quit within six months of joining, citing lack of freedom and space as reasons—a clear case of cultural incompatibility and lack of preparedness of the organization to accept a professional CEO. When a family business grows, unless it is able to bring in and nurture a cadre of professionals, its growth will be stunted.

Here is another example of two brothers running a large service company with more than 6,000 employees. The younger brother, after attending a family business seminar conducted by renowned South Indian business magazine Dhanam, was convinced of the need for a family constitution and a family trust for wealth management. The elder brother disagreed and did not feel the need for the same. Poor governance mechanisms often toll the death knell of family firms.

A family business owner CEO fell sick and placed her twenty-five-year-old daughter as the executive director (ED) in charge of the business. Two senior vice presidents, each of whom had experience greater than the daughter’s age, refused to cooperate. The CEO was left in a dilemma about how to handle the serious situation.

Again, in a third-generation family business, the granddaughter’s compensation was a bone of contention between her grandfather and father. The father wanted to pay his daughter market-rated compensation commensurate with her qualifications and experience, whereas the grandfather wanted to pay her a token compensation as pocket money. The logic of the patriarch was that as she was part of the family, living with them and not married, she needed to be paid only pocket money. Diversity and equality matter and unless a family firm learns to accept women at leadership and ownership levels on fair terms, the firm and the family may not go very far.

The management of a leading FMCG company very successfully run by four brothers as a second-generation family business failed to nominate a chairman from among the four to head the family board fearing that choosing one out of the four might create disharmony or even conflict among them. With the third generation entering the business, conflicts emerged on how to run the business. With a leaderless board, differences and disputes became the order of the day. The group was caught on the horns of a dilemma. Could it grow to the next level and the next generation?

One South Indian business group wanted a family constitution to be written and asked a well-known family business advisor to share a standard template, little realizing that each family business is unique. The family was told that one size does not fit all and that success of a management principle or strategy in one family-managed company does not mean that it can be universally applied with successful results. The group patriarch was also in a quandary on whether to institute a constitution or not. Family constitutions help to avoid conflicts and divisions within a group and are a precursor to growth and longevity.

All of the knotty issues mentioned can and do result in collateral damage to the longevity of family businesses. What starts as a small strain in one generation leads to crises when the business shifts to the next generation. That is why popular and conventional wisdom infers that a majority of family businesses cannot sustain beyond the third generation. It is believed that the genesis of the ‘three generations’ theory emerged from a 1980s study of manufacturing companies in Illinois.¹ That study is the basis for most of the facts cited about the longevity of family businesses. The researchers took a sample of companies and tried to figure out which of them were still operating during the period they studied. They then grouped the companies into thirty-year blocs, roughly representing generations. Only a third of family businesses in this study made it through the second generation, and only 13 per cent made it through the third.

Professor Kavil Ramachandran recalled an expression, ‘shirt sleeves to shirt sleeves’, which suggests that the money made by one family generation is exhausted by the time of their grandchildren in the third generation. The same is exemplified in the Brazilian saying ‘rich father, noble son, poor grandson’. Many countries have some version of that saying. According to the not-for-profit Parampara Family Business Institute, ‘It has been observed that just 13 per cent of family-run businesses survive till the third generation; only 4 per cent go beyond it, and one-third of business families disintegrate because of generational conflict.’² Various global studies show that over the decades, 90 per cent of family businesses—even those that manage to scale—do not survive beyond the third, or, maximum, the fourth generation.

Family businesses constitute a majority of the businesses in India and this is the case with most other industrialized nations. Estimates do vary, but the figure is above 75 per cent in all cases.

In the case of the Indian economy, while family businesses constitute about 75 per cent of the economy, 90 per cent of these are believed to be micro, small and medium enterprises (MSMEs). Their importance to the nation cannot be undermined. Together, they contribute about 29 per cent of the country’s gross domestic product (GDP) and account for 49 per cent of its exports. It is estimated that the sector has the potential to create ten million new jobs in the next four to five years and be a significant player towards the US$ 5 trillion Indian economy-in-the-making.³

Much of the academic and popular literature on family businesses focuses on large groups like the Tatas, Birlas, Ambanis and Mahindras and not on MSMEs. As per the government classification, turnover of MSMEs ranges from an annual Rs 5 crore to Rs 250 crore.⁴ Yet, they are not able to dream, scale and grow to the next stage to Rs 1,000 crore and above, due to a variety of crippling challenges. This inability of MSMEs to scale is also a major contributing factor to the death of Indian family MSMEs beyond three generations.

Challenges

In the last three decades since economic liberalization in India, family businesses have gone through a raft of challenges and crises. Rapid expansion in the industrial base has not only created growth opportunities for many, but has also tested their ability to respond to them. In many such cases, families under strain tend to buckle, placing a question mark on their future.

When the Indian economy was opened up in 1991, the majority of the large firms were family-owned. Since the economy was opened up rather suddenly, many family firms that had grown under government protection did not have a strategy ready to respond effectively and experienced the opening up of the economy as a threat rather than an opportunity. These business families went through huge conflicts that sometimes ended with the division of assets.

The difficulty of improving to tackle a competitive environment is made worse by various other factors such as the enhanced need for product knowledge, not knowing how to capitalize on market opportunities, and how to deal with challenging regulatory rules and rapid technology upgradation. Finally, even though a good part of Indian exports comes from the MSMEs, many MSMEs find it difficult to manage in a global environment.

In sum, challenges that inhibit families from growing from generation to generation include:

limited and strained communication between incumbent and incoming generations;

inability to handle succession planning;

lack of attention to issues between division of ownership and management;

poor understanding of financial issues and lack of financial education for the next generation;

lack of clarity in terms of devolution, which could lead to insecurity and eventually the breakup of family businesses; and

complex cross-holding ownership structures that can lead the family into a maze.

Every family is unique and faces unique challenges and situations. Globally companies such as Merck of Germany (thirteen generations over 350 years), and nationally the TVS Group in South India, the Birlas in Kolkata and the Tatas in Mumbai are the stuff of family business folklore.

Sustaining beyond Three Generations: A Roadmap

This book is intended to be a guide to the millions of MSMEs and thousands of larger family businesses on how to build enduring corporations. Written in an anecdotal manner, this book is based on twelve case studies of companies from across the country that are not traditionally large family businesses, but those in a league below them, mostly with turnovers of around Rs 1,000 crore and thereabouts with some exceptions. We tell the story of how they started small, moved into higher leagues and set up processes, systems and a culture to create enduring family businesses that could live beyond three generations.

The companies are well-recognized in their respective sectors and have strong brand equity in regions where they have a market presence. They are: Aravind Eye Care System (Madurai); Bhima Jewellers (Kochi); Dodla Dairy (Hyderabad); Eastern Condiments and Group Meeran (Kochi); ELICO Ltd (Hyderabad); Evolve Back (formerly Orange County Resorts & Hotels; Bengaluru); Gera Developments (Pune); House of Anita Dongre (Mumbai); IBS Software (Kochi and Singapore); OmniActive Health Technologies of the Sanjaya Mariwala Group (Mumbai); Popular Automobiles (Kochi); and Sandu Pharmaceuticals (Mumbai).

From our decades of collective experience in interacting with family businesses and based on our own research, we have identified the ten most critical drivers that will help family business owners and stakeholders to create lasting business groups: mindset; vision and strategy; governance; succession planning; professionalization; building great brands; managing the external environment; going global; unlocking value and wealth; and, the importance of family business advisors.

Expert Take by M.S.A. Kumar

Many books on the management of family businesses are conceptual in nature. However, this book narrates real-life experiences of twelve Indian family-business groups and explores the challenges and promise of building an enduring institution spanning multiple generations. The book draws inspiration from the well-known 5D model of Professor Kavil Ramachandran of ISB, Hyderabad. Starting with the first D (dilemmas), family businesses move through to the last D (destruction), en route having passed through the other three Ds (deviations, differences and disputes). The many examples given at the beginning of this chapter are those that I have encountered in my family business advisory practice. There is no standard prescription that will prevent these dilemmas from leading to destruction, as each family business is unique. Tailor-made prescriptions and solutions have to be administered through continuous dialogue and powerful conversations among family members. When a family overcomes the five Ds, it has built the foundation of an enduring family business.

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LOOKING BACK

The Roots and the Journey

The twelve case studies in this book present a picture of diversity. While their stories of scale-up have certain unified themes, their beginnings are as diverse as the colours of a rainbow.

Four businesses out of the twelve case studies are wholly or in part in the same or allied field as the original. (i) Aravind Eye Care System emerged from the vision and compassion of Dr Govindappa Venkataswamy (popularly known as Dr V), who established the GOVEL Trust in 1976 and started the first of his not-for-profit institutions, the Aravind Eye Hospital, in Madurai. (ii) Eastern Condiments of Kochi’s Group Meeran traces its origins to a humble wholesale grocery store, ‘Eastern Coffee and Curry Powder’ established in Adimali (about 100 kilometres from Kochi) by M.E. Meeran. (iii) Hyderabad-based ELICO Ltd, India’s first analytical instruments firm, owned and managed by the husband–wife team of Ramesh and Vanitha Datla, is an inheritance bestowed by Ramesh Datla’s uncle who started the firm in 1960. (iv) Mumbai’s Sandu Pharmaceuticals has roots going deep down to an ayurvedic practice started in the 1800s by the forefathers in Rajapur, in Ratnagiri district.

Another two businesses have no connection to any previous business, or businesses. (v) Telangana-based Dodla Dairy led by never-say-die Sunil Dodla Reddy, is the by-product of three previous entrepreneurial failures followed by a gold strike with his fourth enterprise, Dodla Dairy. (vi) IBS Software too is the stand-alone flowering of an idea nurtured by aeronautical engineer V.K. Mathews, which is now flying high.

One business among the twelve, emerged from an up-and-running family business. (vii) Mumbai-headquartered Sanjaya Mariwala’s OmniActive Health Technologies is an offshoot of Kancor, the company that Sanjaya headed pre and post the division of the Mariwala family businesses.

The remaining five case studies have either moved into areas far from the original, or have started from the scratch. (viii) Bhima Jewellers, also Kerala-based, owes its origins to Lakshminarayana Bhattar who was born in Udupi, Karnataka, but trudged all the way to the coastal town of Alleppey in Kerala to pursue his school studies and help his uncle in his nondescript restaurant. (ix) The uber-luxury Evolve Back Resorts managed by the seven Ramapuram brothers, has come a long way from the time of its founder—an agriculturist from a well-known Roman Catholic family in the village of Ramapuram, Kerala.

(x) Pritamdas Gera, patriarch of the Gera family, and Kumar Gera of Gera Developments made the difficult journey from Quetta to Pune during the Partition, struggling hard for the family to reach where it has today. (xi) Ultimate in fashion design, the House of Anita Dongre, although synonymous with the high-priestess of fashion, is actually the outcome of collective entrepreneurship among three Mumbai siblings who were raised in a very close-knit family in Bandra. (xii) From washing machines to tyre vulcanizing to becoming one of India’s most popular automobile retailing firms, Popular Automobiles owes its existence to the leadership of the fiery erstwhile Communist leader K.P. Paul.

This chapter traces the origins, history and journey of these twelve firms and the families that have dared to dream, scale up and live on the promise of creating enduring family businesses.

Eastern Condiments and Group Meeran: Kochi

In 1950, we became a Republic. Just a year later, even as India was in the throes of the post-Independence nation-building years, young M.E. Meeran, armed with a school education, started a small grocery shop in the unexceptional village of Nellimattom near Kothamangalam in Kerala. From there he hotfooted it about 40 kilometres away, to the scenic and green