Family Business.

Entrepreneurship Development
Module 05.
ii semester MBA
VTU Syllabus.
1

Importance of Family Business.

Family owned business play a crucial role in the economy of most

countries.
Much of the retail trade, the small scale industry, and the service
sector are run by family businesses.
World wide, family managed businesses employ half the worlds work
force and generate well over half the worlds gross domestic product.
In India, family owned business have played and will continue to
play a central role in the growth and development of the country.
Indian family business have been and will continue to be key drivers
of the economy and what changes these business need to undertake to
continue to succeed.
Worlds oldest family documented family business is a construction
company - Kongo Gumi based in Osaka, Japan was founded in the
year 578.
2

Importance of Family Business.

Some of the statistics of family business of

interest is as follows;
75% of registered companies of the world are family
businesses,
One-third of fortune 500 has families at their helm,
50-60 % of the workforce in the world are engaged
in family controlled businesses,
In India 95% of the registered firms are family
business.

GSSSIETW-IMS MYS
P.K.KUMAR.

Some facts about Indian Family Business by

global financial services major -Credit Suisse

India has the highest percentage of family businesses in Asia,

accounting for 67 percent of the listed companies with market
capitalization of more than $50 million.
The study reveals that 663 out of 983 listed Indian firms were
family businesses and they account for half of all corporate
hiring.
Family businesses in India account for 46.8 percent of the
total market capitalization.
The study, also found that the family-controlled businesses
were delivering impressive investor returns and have been
crucial sources of wealth and job creation
4

Indias Top Family run business

Reliance
TCS
Bharathi Airtel
Wipro
Jindal Group

GSSSIETW-IMS MYS
P.K.KUMAR.

Family Business Indian

Perspective.

Family businesses have existed in India since time

immemorial. With time, the contribution of family
businesses has gone beyond simply paying taxes and
employing people. Some family name is
synonymous with business Marwaris, Saits etc.
During the last 100 years or so, Indian family
businesses have made significant contributions in
three areas;
The Freedom Movement,
Spirit of Entrepreneurship,
Philanthropy

GSSSIETW-IMS MYS
P.K.KUMAR.

The freedom movement

In the early years, firms were created to
pursue ideals such as import substitution and
economic freedom from the colonists.
Ex: The Godrej enterprise, was started by
Ardeshir Godrej in 1897 with a vision to
promote Indias economic freedom

GSSSIETW-IMS MYS
P.K.KUMAR.

Spirit of entrepreneurship

Family business have done an excellent job of

keeping the spirit of enterprise alive
especially through the years of quasisocialism.

Indian family business have played a

significant role in giving back to the
community.

GSSSIETW-IMS MYS
P.K.KUMAR.

Philanthropy by Tata Group

The Tata Group has helped establish and finance numerous quality research,
educational and cultural institutes in India. The Tata Group was awarded
the Carnegie Medal of Philanthropy in 2007 in recognition of the group's
long history of philanthropic activities. Some of the institutes established
by the Tata Group are:

Tata Institute of Fundamental Research

Tata Institute of Social Sciences

Indian Institute of Science

National Centre for Performing Arts

Tata Management Training Centre

Tata Memorial Hospital

Tata Football Academy

GSSSIETW-IMS MYS
P.K.KUMAR.

10

The Giving Pledge

Azim Premji has become the first Indian to sign
up for the The Giving Pledge, a campaign led
by Warren Buffett and Bill Gates, to encourage
the wealthiest people to make a commitment to
give most of their wealth to philanthropic causes.
He is the third non-American after Richard
Branson and David Sainsbury to join this
philanthropy club

11

Family Business Indian Advantage.

Family businesses in India have several inherent
advantages that provide them with unique
strength;
Trust lowers transaction costs,
Small, nimble and quick to react,
Information as a source of advantage.

GSSSIETW-IMS MYS
P.K.KUMAR.

12

Family Business Definition.

There are various definitions of a family

business. However, in general, a family
owned business is one:
In which two or more extended family
members influence the business through the
exercise of kinship ties, management roles,
ownership rights and/or
Which the owner intends to pass a family heir.

GSSSIETW-IMS MYS
P.K.KUMAR.

13

Family Business Definition.

From the point of study, the definition of family

business is divided into two.
One defines on the basis of structure of the business
while the other based on the process of
administration.

GSSSIETW-IMS MYS
P.K.KUMAR.

14

Structural Definitions- these definitions focus on the

firms ownership or management arrangements
(1) Legal control over the business by family
members
(2) Single family effectively controls firm through
the ownership of greater than 50 % of the voting
shares; a significant portion of the firms senior
management is drawn from the same family
15

Process Definition these definitions stress on

how the family is involved in the business
(1) transfer of ownership across at least two
generations.
(2) Continuous relationship between family &
business.

16

Various Types of Family Business.

There are three types;

A family owned business, (Mohan Bhandar)
A family owned & managed business,( GSSSIETW)
A family owned & led company. (Reliance).
From the above it is evident that family business
encompass three major issues upon which ownership
rests. Tagiuri & Davis set these three into a structure
called the 3 Circle Model of Family Business. It
comprises of three systems representing family,
business and ownership.

GSSSIETW-IMS MYS
P.K.KUMAR.

17

Governance of the Family Business.

There are three components to family governance.

(i) family periodic assemblies,
(ii) Family council meeting,
(iii) A family constitution.
From the perspective of management & decision making each
of the above meeting is of immense importance as they
encompass issues such as :
Expansion,
Employment of members,
Distribution of dividends,
Succession process etc.

GSSSIETW-IMS MYS
P.K.KUMAR.

18

History of the Family Business.

Recording of the family history is one of the major

issues & characteristics of family owned business.
There are many reasons to create a formal history. A
few of the more important are as follows;
Founders vision & mission,
Historical accuracy,
Honoring long time employees,
Thanking customers & vendors,
Back ground for the uninformed.

GSSSIETW-IMS MYS
P.K.KUMAR.

19

Benefits from the History.

Set the record straight,

Acknowledge the perseverance of founders,
Interdependence between firm & community,
Succeeding members can have a resource to enhance legacy,
Builds confidence among clients, customers,
communities/societies, vendors, financers, new & old,
Source of renewed energy & motivation for succeeding
generation,
Source for company reputation, PR kit,
Valued treasure that is intangible, lasting impact & true
legacy.

GSSSIETW-IMS MYS
P.K.KUMAR.

20

Responsibility & Rights in family

business.

Be knowledgeable about company operations

(product, service, design, location,
competitors etc),
Be knowledgeable about finance, performance
reports,
Attend shareholders meetings,
Understand board members, their skill &
talents, requirements of the same too,

GSSSIETW-IMS MYS
P.K.KUMAR.

21

Responsibility & Rights in family

business.

Be constructive in suggesting & be part of the

management process without being a
interference.
Be a positive representative of business,
Publicly support management decisions,
Keep necessary business information in strict
confidence & be aware all shareholders are
not entitled to all information of business.

GSSSIETW-IMS MYS
P.K.KUMAR.

22

Responsibility & Rights in family

business.

Where possible & useful, generate business

leads and new business links,
Where possible and useful, provide additional
investment capital,
Keep afloat the family name, family business
& respect in society, more so in public life,
Enhance the feeling of trust & dependability*
& be resourceful person available on demand.

GSSSIETW-IMS MYS
P.K.KUMAR.

23

Rights.

Timely information about business strategy,

important organizational changes, financial status,
Candid views of board & other shareholders on
management matters,
The ability to participate in the election of board of
members,
Fair policies to protect weak members,
Acceptable economic performance & reasonable
returns by way of dividends & capital gains.

GSSSIETW-IMS MYS
P.K.KUMAR.

24

Succession in Family Business.

The succession plan should include the

following;
Key goals for succession process,
A schedule of the transition stage,
Contingency plan.
Family businesses need to recognize the
biological time clock ticking away among
their members.

GSSSIETW-IMS MYS
P.K.KUMAR.

25

Successful Business Succession Plan

For success full business succession plan the

following points may be noted;
Family members to put business interest ahead
of the family interests,
Importance to merit over family positions,
Describe & discuss the role of members
during transition period namely full time, parttime, retire etc.

GSSSIETW-IMS MYS
P.K.KUMAR.

26

Successful Business Succession Plan

Family dynamics alternate plan to work,

Compensation for working members &
shareholders,
Treatment of loyal employees,
Tax implications & consequences,
Periodical review & meetings to nip mistrust
& misunderstandings.

GSSSIETW-IMS MYS
P.K.KUMAR.

27

Pit Falls of the Family Business.

Lack of focus & strategy,

Nepotism in family,
Lack of professionalism,
Inability to separate the family interest from
the interest of the business,
Sibling rivalry in the family business,
Dispute over assets & valuation of properties.

GSSSIETW-IMS MYS
P.K.KUMAR.

28

Strategies for improving capability.

Family firms must be able to professionalize,

The demise of disjoint family,
Replenishing entrepreneurship,
Good Management,
Ability to change & adopt,
Have a strategic plan,
A mercurial board at helm of affairs.

GSSSIETW-IMS MYS
P.K.KUMAR.

29

End of

Module 05.
GSSSIETW-IMS
MYS P.K.KUMAR.

30