Why do family businesses thrive?
Despite the talk of professionalism, and movies and web series that depict how family-owned businesses are ridden with greed, unbridled ambitions among members, arrogance, egos, hubris, jealousies, and large doses of manipulations and corruption, they survive, thrive, and are hugely-profitable. Not just in India but globally. A recent study finds out why? The single reason emerges from a quote from a book that is thousands of years old. It is from ‘The Art of War’ by the famed Chinese general, Sun-Tzu. “To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.”
This is exactly what family-run businesses are best adept to accomplish. This is why they are so successful, survive for generations, even hundreds of years, and earn huge money. India has examples of families which can show direct and continuous lineages for 400-500 years. Similar is the case with Europe, although since America is a younger nation, the families that survive have done so for 200-300 years. Of course, over the centuries, the businesses change, morph, and transform to keep pace with the changing times, disruptive technologies, and changes in the business environment. New management practices still retain the old ownership structures, albeit with a few additions and subtractions due to legal needs.
In effect, family businesses compete without competing, or rather they keep competitors out of their niche segments, “often without actually competing with them.” The new research focuses on three essential and ingrained traits, which include goals (vision and mission), governance (management), and internal resources. According to the study, “Together, these three characteristics explain how family businesses may use their property rights to get an edge over their competitors.” The combination ensures that either the family businesses keep out competition, enter areas where there is little competition, and manage to compete more effectively.
Let us start with goals. In most professional and other firms, profits, revenues, market shares, and costs are sacrosanct. Especially in modern times, when quarterly performance is critical, and stock prices are crucial, these become the mantras. However, if one looks carefully, family businesses can prioritise non-economic goals ahead of the economic ones, while retaining the latter’s importance. One of them is to give more attention to accumulate personal wealth, as opposed to those of the firms, and save enough money to sustain future generations. They may “choose projects that may yield lower returns,” enter areas that are not lucrative to others, and operate in “spaces where there is not much competition to start with.”
The study cites the example of a Portuguese firm, which is dominant in making cork stoppers, and other cork products. The segment is a narrow niche, and there are a few global competitors. In such a non-competitive, and small segment, which is scoffed upon by large professional groups, the Portuguese firm emerged as the world’s largest cork processing group with a sizable share of global wine and champagne cork. In India, one can find similar family-owned firms that specialise in small niche segments that may be linked to the larger ones such as auto, machining, and capital equipment.
Governance in family businesses is mostly limited to a few family members. In most cases, the eldest takes on the responsibilities, and the others follow, even if the latter handle specific assignments. Hence, they find little need to hire expensive professionals as advisors. In India, when they did hire expensive think tanks and consultants in the 1990s and 2000s for business restructuring due to the fear of the impact of economic reforms, most families junked the suggestions within a year, and went back to their old ways. Since then, and before those 10-15 years, Indian business families have relied on key inputs from the senior family members.
“When they (family businesses) make decisions, they do not need to hire a fancy, Harvey Specter-like lawyer from the show ‘Suits.’ They can decide on the next move for the company while having dinner together. This significantly reduces the costs associated with decision-making. In other words, because they rely less on formal contracts and monitoring, family businesses can operate more cheaply,” states the study. It makes the process faster, and does not always need a consensus from the junior members, unlike a professional firm that requires a nod from the crucial executives, and/or departments. Imagine, a family member, board, or senior executives who have the nerve to question Mukesh Ambani.
Of course, certain resources like raw materials, and inputs are used by professional and other firms in a similar manner. But there are some resources like information and capital, which are not. Take information. Family members, and extended relatives, apart from friends and contacts, regularly seek and collect information that helps to make decisions, and influence others decisions, including policies. This information base enables the families to manage the external environment (politics, media, bureaucracy, and judiciary) better than professional firms that hire a few professionals. Few can dispute that the information network of a Tata Group, Birla Group, or Adani Group is better than a professional MNC.
Professional firms generally access capital through formal and established sources such as banks, stock markets, large funds, non-banking sources, and others. Family-run businesses have an additional, and a vast source, of capital in the form of extended relatives, and friends. They provide money to both set up businesses, and to expand and grow, as admitted by patriarchs in their autobiographies and biographies. Thus, these businesses have lower transaction costs since the money can come either free, or at lower-than-market interest rates. Obviously, a brother or an uncle, or a sister and mother, is unlikely to ask for huge returns?
“Sometimes this shows up in very concrete ways. An uncle may invest money in the business, and never ask for it back. Would that happen at a non-family business? Probably not. This dedication makes family members a special type of human asset that is hard to replace,” states the study. Hence, family businesses generally hire and promote people who are loyal, trustworthy, and care enough for the firms. Such relationships are not up for sale, and cannot be bought by competitors. “This fact helps family businesses keep competitors at bay while essentially being themselves, which… explains why there are so many of them,” adds the study.
