Family managed companies in a globalising economy

The topic is opportune because the ‘family managed companies’, are now a powerful force and play a dominant role in an economy. Family business has graduated long ago from ‘mom-and-pop stores’ to giant companies like Cargil having headquarters in the United States. Cargil1 the family controlled company2 is the rule in most of the world. Statistics indicate that family controlled company businesses account for 99% of Italian businesses, 70% of Portuguese, 75% of British, 80% Spanish, between 85% and 90% of Swiss, 90% of Swedish and 80% of Canadian. Even in the United States between 80% and 95% of the companies are family controlled.

As of 20093, the private sector represented 95% of all companies in China, the vast majority are family controlled firms and most of the remaining firms are state owned enterprises. The rural areas are heavily populated by small farms.

In India,4 family businesses account for as much as 95% of all Indian businesses. Nearly 80% of family companies dominate Indian economy. About 461 of the 500 most valuable companies are under family control. In addition, the family controlled businesses also comprise large groups like the Tata group and the Aditya Birla group to mention a few. “IT giant TCS and financial services major HDFC (once a family managed company) have been named as India’s two best managed companies in an annual poll conducted by Finance Asia magazine. TCS and HDFC are followed by IT major Infosys, telecom giant, Bharti Airtel and PSU behemoth ONGC in the list of the top-five best managed companies in the country”, says a report in The Times of India on 18th May 2011. The best managed companies are thus a mixed bag.

“The Aditya Birla Group5 is also a hard-charging multinational corporation emerging from that country. (India). The Birla Group produces and sells such products as fibre, chemicals, cement, metals, yarns and textiles, apparel, fertiliser, and carbon black (a petroleum-based material used in the manufacture of rubber and plastic). It is a US $ 30 billion conglomerate operating in about 25 countries, with 60% of its revenues now coming from outside India.”

Competition that firms face now, as we pointed out earlier, is no longer local. Competition cannot remain confined within the borders of a nation. In many industries, competition has now become global. Textile and clothing, automobile, IT, and ITES are just a few examples of industries which now face global competition. Firms compete globally with global strategies in mind. Firms compete globally by participating in global trade and through direct foreign investments. The family managed companies must therefore face global competition.

What are family controlled companies? Do they have the vitality and the dynamism to compete globally? The purpose of this article is to discuss these questions.

A family business6 is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.

“Family firms7 were often able to take a longerterm, more strategic approach and kept stronger relations with their customers, says Harvard Business School professor Belén Villalonga, who has just completed a study comparing the performance of 4,000 family and public firms in the U.S. and Europe. Between 2006 and 2009, she says, family controlled firms both gained market share — increasing sales 2% faster than non-family firms — and outperformed their public peers by 6% on company market value. Another report, by the German consultancy Roland Berger, looked at family owned firms in Europe’s biggest economy and found they navigated the crisis with better liquidity and less debt. This all builds on what has become a decade-long trend of family firms outperforming the market, says Villalonga.”

The Indian experience seems to support this view. Indian companies like Wipro, TCS, Reliance Industries have achieved impressive growth in their sales revenues, exports, profits and market capitalisation. The development of all these organisations in a short period is truly astounding.

Our discussion so far should not lead us to the conclusion that all is well with family managed companies. The carcases of the closed textile mills in Ahmedabad show the utter failure of the family management of the textile industry, the oldest Indian industry. These seasoned captains of the industry could not anticipate the changing competition in the Indian textile industry and therefore could not forge a new competitive strategy to survive in the changed environment.

“From8 behemoths such as Ford to mom-andpop shops, they (family businesses) share a set of common challenges in today’s business climate.” This quotation from Stacy Perman’ article ‘Taking pulse of family business’ aptly describes the situation in India. The small and medium enterprises in India face similar challenges as the large family businesses face. Similarly, the small and medium family businesses have the same dynamism as the large family businesses have. We illustrate our reasoning with the help of an example from the textile and clothing industry. In Appendix I, we present the data about the export of textiles and clothing. The Indian exporters of textiles are mostly medium and large textile mills that are large family controlled [Except the textile mills owned by the National Textile Corporation (NTC) that are not family controlled textile mills. However, the contribution of the NTC mills to export is not substantial and we can safely ignore it]. This data shows the Chinese exports of textiles are about 2.42 times the Indian exports of textiles.

On the other hand, the Indian exporters of clothing are small to medium family owned firms. Here again we notice that the Chinese exports of clothing are 2.79 times the Indian exports of clothing (The firms in the clothing industry are small and medium family owned businesses). These examples support our point that small and medium family businesses have the same dynamism as the large family businesses have.

It may not be out of place to cite another example of a medium-sized family owned pharmaceutical company to reinforce our point about the dynamism in the medium-sized family owned companies. The name of this company is Shiva Pharmachem Pvt. Ltd. whose annual sales in the year 2009-10 were about one billion rupees (Rupees one hundred crore). However, before we discuss the example of Shiva Pharmachem Pvt. Ltd., we explain below some terms that we have used in discussing the example of Shiva Pharmachem Pvt. Ltd.

Value added. Following Paul Samuelson9, we will define the term value added as the sales an organisation achieves minus the items that it buys form outside to achieve the sales that it makes. Some scholars define value added as:

Total income – items bought from outside

Capital employed. We will define capital
employed as net worth plus long-term loans or as net fixed assets plus
working capital.

Return on Capital employed

We will define return on Capital employed as

We now return to the example of Shiva Pharmachem Pvt. Ltd. that we want to cite in support of our point. In Table 1 below, we show the salient features of the company’s financial statements for the years ending 31st March 2010 and 2009, respectively.

How effectively has Shiva Pharmachem Pvt. Ltd. used its human and monetary resources? Do the financial results of the company show the management’s dynamism? We now turn to a discussion of these questions.

From Table 1 we can glean the three important conclusions that we list below.

(1)    The firm’s return on capital employed declined in the financial year ending 31 March 2010. However, even the lower return on capital employed is sufficiently high to give the firm’s owners a good return on their capital.

(2)    The value addition the firm achieved in the year 2009-10 was higher than the value addition the firm achieved in the year 2008-09.

Further, the value added per employee in 2010 is much higher than the minimum a company should achieve. We believe that the minimum value addition that a company must achieve is about Rs.1,200,000. Now it is quite common to see that the average wage bill for a company per employee per year is about Rs.100,000.

(3)    Therefore, the results the company achieved comprise a mixed bag. It has used its human capital better than what it has used in the previous year. However, it has not used its monetary capital as well as it used in the previous year.

The reason for the decline in the return on capital employed is easy to see. From the last two rows of Table I, we see that in the year 2010, the margin the company achieved on sales was almost equal to the margin on sales the company achieved in the previous year. However, the turnover of capital the company achieved was much lower in the year 2010 than what the company achieved in the previous year. Now, we have from (1.6) Return on capital = margin on sales x turn over.

From Table 1 we can see that the margin on sales is almost the same as the margin on sales in 2009. However, the capital turnover in 2010 is much lower than the capital turnover in 2009. Therefore, the return on capital will be lower in 2010. Does the decline in the return on capital in the year ending on 31st March 2010 show the lack of the management’s dynamism in using the capital effectively? The answer is not conclusive. We must wait for at least two years before we come to that conclusion. The decline in the return on capital employed shows the management’s enthusiasm to grow and develop rapidly by making substantial investment in the business. From Table 1 we can see that the capital employed in the company has increased by 39.16% in the year ending on 31st March 2010. Obviously, the management would not make such a large capital investment unless it has a strong desire to develop rapidly, and has the confidence in its abilities to earn a good return on the capital it invests. Here is another example of a family managed company that has the vitality to participate actively in a globalising business. Having achieved high levels of productivity that we measure by its value addition per employee and return on capital employed, Shiva Pharmachem Pvt. Ltd., we have no hesitation in saying that the company is ready to prosper and develop in a globalising economy.

However, all is not well with the family managed businesses. Stacy Perman in his report ‘Taking the Pulse of Family Business’11 observes

“Generally speaking, the failure rate for all private businesses is high. According to the Small Business Administration’s Office of Advocacy, 580,900 new businesses were launched in 2004, the most recent date available for data, while 576,200 closed. Given that only one in three family businesses succeeds in making it from the first to the second generation, it’s clear they have their own inherent risks.

Each succeeding generation has its own ideas about taking the company forward — or if, indeed, it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses —and in the next ten years will see a major increase in the number of companies facing that hurdle, as more baby boomers begin to retire.”

Accordingly, the question arises as to whether and how boomers will pass the baton along to their children. The issue is fast becoming a critical one. The challenges to longevity are substantial.

For starters, many of the concepts that have been traditionally associated with family businesses have eroded and new sources of potential conflicts have arisen, as have new opportunities and challenges. Compared with 10 or 20 years ago, the sense of duty and obligation to join the family business has weak-ened, while the sense of entitlement has grown.

In the same vein Michael J. Conway12, JD and Ste-phen J. Baumgartner, MSc (Econ) observe “While there is entertainment value to the drama and intrigue which surround the Earnhardt, Wrigley, Murdoch, and Walton family owned businesses, their highly publicised trials and tribulations can also provide real-life lessons for family owned businesses that operate well out of the limelight. Family owned businesses face unique issues — succession planning, marriages and divorces, complicated relationships — as well as routine issues that emerge around turf battles, shareholder control, compensation structures, and processes for strategic decision-making. Without proper documentation in place to help address these and other issues when they arise, the family owned business is at risk from an operational, management and financial perspective.”

Closer at home, Professor D. Tripathi13 observes “Behind the glare of momentous changes wrought by liberalisation, a very significant development went almost unnoticed. This was the declining importance of business families in the nation’s life. A well-regarded observer of contemporary business scene has gone to the extent of suggesting that the joint family is dead for all practical purposes.” Professor Tripathi concludes by saying “These prognoses may or may not turn out to be correct, but the mounting crisis in family business is bound to greatly influence the course of private enterprise and its management in the future.”

This article would be incomplete without a discussion about the dichotomy between family managed companies and professionally managed companies. Rahul Bajaj is directionally correct in his comments on the dichotomy between family managed companies and professionally managed companies. According to Bajaj14 , “if a professionally managed firm means one that is managed by those who hold no equity in the enterprise, there is ‘no reason to believe that a non-owner is more competent than an owner. In fact, a lot of studies done recently in the U.S. show that family owned businesses are doing better than non-family managed companies.’ What is relevant in a competitive economy is that the company has to be efficiently managed.” To resolve the apparent dichotomy we must understand the significance of the word ‘profession.’ In the contemporary world management, practitioners and thinkers use two yardsticks to judge whether a business is profession. Below we list the yardsticks.

(1)    Are the practices in the business based on a body of knowledge that can stand a rigorous logical scrutiny as in medicine and engineering?

(2)    Is there a code of conduct in the business that puts service before self?

The last verse of the Bhagvadgita15 sums up the code of conduct extremely well. The last verse asks us “to unite vision (yoga) and energy (dhanuh) and not allow the former to degenerate into madness and the latter into savagery. High thought and just action must ever be the aim of man”.

When we use the word profession to mean that its practices are based on rigorous logic and the profession demands a high code of conduct, then the dichotomy between professionally managed companies and the family managed companies disappears.

Unfortunately, the recent spate of ‘scams’ that we are witnessing leads us to ask “does the Indian business have a code of conduct? In India, businesses, both the professionally managed and the family managed, fail to measure up to the second yardstick.

A dabbawala (one who carries lunch box), some-times spelled dabbawalla, tiffinwalla, tiffinwallah or dabbawallah, is a person in the Indian city of Mumbai whose job is to carry and deliver freshly home-made food in lunch boxes to office workers. Tiffin is an old-fashioned English word for a light lunch, and sometimes for the box it is carried in. Dabbawalas are sometimes called tiffin-wallas.

Though the work sounds simple, it is actually a highly specialised trade that is over a century old and which has become integral to Mumbai’s culture.

The dabbawala originated when a person named Mahadeo Havaji Bachche started the lunch delivery service with about 100 men. Nowadays, Indian businessmen are the main customers for the dabbawalas, and the service often includes cooking as well as delivery.

Economic analysis

Everyone who works within this system is treated as an equal. Regardless of a dabbawala’s function, everyone gets paid about two to four thousand rupees per month (around 25-50 British pounds or 40-80 US dollars).

More than 175,000 or 200,000 lunches get moved every day by an estimated 4,500 to 5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. According to a recent survey, there is only one mistake in every 6,000,000 deliveries.

The BBC has produced a documentary on dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably in the eyes of many Westerners, the success of the dabbawala trade has involved no western modern high technology. The main reason for their popularity could be the Indian people’s aversion to western style fast food outlets and their love of home-made food.

The New York Times reported in 2007 that the 125-year-old dabbawala industry continues to grow at a rate of 5-10% per year.

Low-tech and lean

Dabbawala in action: Although the service remains essentially low-tech, with the barefoot delivery men as the prime movers, the dabbawalas have started to embrace modern information technology, and now allow booking for delivery through SMS. A website, mydabbawala.com, has also been added to allow for online booking, in order to keep up with the times. An online poll on the website ensures that customer feedback is given pride of place. The success of the system depends on teamwork and time management that would be the envy of a modern manager. Such is the dedication and commitment of the barely literate and barefoot delivery men (there are only a few delivery women) who form links in the extensive delivery chain, that there is no system of documentation at all. A simple colour coding system doubles as an ID system for the destination and recipient. There are no multiple elaborate layers of management either — just three layers. Each dabbawala is also required to contribute a minimum capital in kind, in the shape of two bicycles, a wooden crate for the tiffins, white cotton kurta-pyjamas, and the white trademark Gandhi topi (cap). The return on capital is ensured by monthly division of the earnings of each unit.

Uninterrupted services

The service is uninterrupted even on the days of extreme weather, such as Mumbai’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. Occasionally, people communicate between home and work by putting messages inside the boxes. However, this was usually before the accessibility of instant telecommunications.

In literature

One of the two protagonists in Salman Rushdie’s controversial novel The Satanic Verses, Gibreel Farishta, was born as Ismail Najmuddin to a dabbawallah. In the novel, Farishta joins his father, delivering lunches all over Bombay (Mumbai) at the age of ten, until he is taken off the streets and becomes a movie star.

Dabbawalas feature as an alibi in the Inspector Ghote novel Dead on Time.

Etymology

The word ‘Dabbawala’ can be translated as ‘box-carrier’ or ‘lunch pail-man’. In Marathi and Hindi, ‘dabba’ means a box (usually a cylindrical aluminium container), while ‘wala’ means someone in a trade involving the object mentioned in the preceding term, e.g., punkhawala with ‘pankha’ which means a fan and ‘wala’ mean the person who owns the pankha (The one with the fan).

1.       Cally Jordan ‘The family
controlled company in Asia’ (Melbourne Law School: The University of Melbourne,
Legal Studies Research paper 334 P. 5).

 2 .      Ibid P. 4

 3 .    The author has downloaded this information from
the Internet.

 4.       Ibid

 5.      Vikas Sehgal, Ganesh
Panneer, and Ann Graham ‘A Family-owned Business Goes Global’ downloaded from
the Internet.

6.       The author has downloaded this definition from
the Internet.

7.      Sandy Huffaker/Corbis ‘In
Hard Times, Family Firms Do Better’ Newsweek P. 2. The author has downloaded
this article form the Internet. Consequently, the author did not have the
complete details about the date of publication of the article and the Volume
number of the Newsweek’s issue in which this article was published.

8. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report, 13 February 2006)

9. Paul A. Samuelson, Economics International, Student
Edition (Tenth Edition) P. 185.

12.     Michael J. Conway, JD and
Stephen J. Baumgartner, MSc (Econ) ‘The Family-Owned Business’ (2007 Volume 10
Issue 2)P.1

 13.     D. Tripathi ‘Crisis in
family businesses’ (Chapter VIII from a forthcoming book) P. 1

 14.     Rahul Bajaj ‘on
Family-Owned Enterprises, the U.S. Auto Industry and Global Pollution’ (India
Knowledge@Wharton 16 November 2006) P. 1

 15.     S. Radhakrishnan ‘The
Bhagavadita’ (Bombay: Blackie & Son Publishers Pvt. Ltd. 1982) P. 383.