Perspectives from ISB

Though late on the scene, standalone family firms have established themselves as formidable players

This article was first published in Forbes India magazine, Issue: March 02, 2018; Authors: Kavil Ramachandran and Nupur Pavan Bang

The year 1991 ushered in a new dawn for the Indian economy with economic reforms across sectors. The entrepreneurial spirit among Indians took advantage of the opportunities, and a new class of family businesses—the standalone family firms (SFFs)—emerged.

In a paper titled Family Business 1990-2015: The Emerging Landscape published by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business in July 2017, we said that by 2015, SFFs accounted for 57 percent of the 4,809 listed firms studied. Close to 73 percent of these were incorporated between 1981 and 1995. SFFs were, in a sense, a creation of the new reforms.

Prominence in the ecosystem

Though SFFs emerged late in the entrepreneurship ecosystem, they soon established themselves as an integral and leading player, belying worries about the potential of family firms to withstand competition. Evidence suggests that the removal of restrictions and controls led to this spurt. Several factors have shaped the destiny of SFFs.

New opportunities: Post-1991, structural changes in the economy and industry provided multiplier effects. Many entrepreneurs were either from business families or became one because of ownership structures. Reduced controls enabled the entry of first-generation-entrepreneurs-turned-SFFs into new territories. Ease of access to the capital markets enabled them to raise funds early on. The average difference between their listing year and their incorporation year was 10.01 years, much lower than business group-affiliated firms or MNCs.

Need for scale to be competitive: The removal of ceilings on capacity and investment, the need to improve efficiency, and scale up led SFFs to focus on a single firm with related products, services and markets. Entrepreneurs did not need to diversify and establish multiple firms to grow, as was the case earlier.

Break-up of the joint family: Historically, business groups had flourished under the ownership of joint families. The emergence of nuclear families meant there was room for next generations to get involved in the same business, without the need to incorporate multiple firms for the members of the next generations.

Unique value creation by SFFs

SFFs have long-term orientations towards success across generations; rarely is enterprise exit an option.

Most successful SFFs have a strong synthesis of entrepreneurial energy, professional discipline and organisational governance. Promoters with sound family governance provide a strong platform to build the enterprise on a rich resource pool of emotional support, committed manpower and continued purpose.

One of the compulsions faced by SFFs is to remain together for economic reasons, if not for emotional reasons.

Emerging challenges

More than half of SFFs are less than 30 years old, with the founders still actively involved in most. Many would be staring at a change of guard soon. It needs to be seen if these firms survive the change.

SFFs have to pay greater attention to their future strategy, professionalisation and governance at family and business levels. There is every chance of a well-run SFF getting into a growth trap unless proactive action is taken on strategy, professionalisation and governance.

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