MODULE-4---FAMILY BUSINESS

Objectives
After studying this lesson, you will be able to:
• Understand the role and importance of the family business and its
mechanisms and concept.
• Trace the history of family business in India along with the examples
• To know the roles, responsibilities and rights of family members in a
family members
• Identify the types and models of family business and challenges
faced by family owned business.
• To discuss the succession plan in family business
• To discuss the strategies for improving the performance of family
businesses.
 Introduction
The turn of the eighteenth century marked the transition from
mercantile capitalism to industrial capitalism. The colonial rule led
to the decline of the vibrant Indian merchant community.
India has an almost unique system of promoters who own and manage
much of the corporate sector. There are mammoth of promoter
groups that have been around for decades such as Tatas, Birlas,
Mahindras, Bajajs, Goenkas and Godrejs. There are relative
newcomers such as the Ambanis of Reliance, the Mittals of Bharti,
the Agarwals of Vedanta, the Biyanis of the Future Group, the
Singhs of erstwhile Ranbaxy, etc. The common thing between
Reliance, Godrej, Bajaj, Birla, are that they are all family run
businesses.
 Meaning and definition
We can define a family business in many ways which satisfies---
1. There is a management or ownership by direct decedents of
the founders
2. Generation wise involved in the family
3. High percentage of shares owned by the family members
4. Intention to make family involvement in all the aspects.
A family business is a commercial organization in which
decision-making is influenced by multiple generations of
a family, related by blood or marriage or adoption, who has
both the ability to influence the vision of the business and the
willingness to use this ability to pursue distinctive goals.
 Meaning and definition
Families businesses can be defined as one where owner
has power to take strategic decisions, succession is
based on family relation and the owner has full liberty
to appoint his relatives to any position he wants.
Family owned firms are “organizations where two or
more extended family members influence the
directions of the business through the exercise of
kinship ties, management roles or ownership
rights”.
 Role and Importance of family business
Family businesses form more long-term relationships with suppliers and
advisors. ... Family nepotism can lead to underperforming companies. With family
businesses making up such an important part of the economy, it's important that
we understand how family businesses view the current economic and regulatory
environment.
• First, many family businesses are run by owners who have a long-term and
generational perspective. In many cases, they see themselves as stewards for the
future.
• Second, family businesses tend to operate more informally than other businesses.
Handshake deals are not uncommon, and things can get done more quickly.
• Third, trust-based relationships are an important part of how and with whom they do
business. Family businesses form more long-term relationships with suppliers and
advisors.
• Fourth, meritocracy is not always at work within family businesses. It’s not always
the best person who gets hired and promoted. Family nepotism can lead to
underperforming companies.
• With family businesses making up such an important part of the economy, it’s
important that we understand how family businesses view the current economic and
regulatory environment.
 Characteristics of family business
The family business is popularly defined in terms of three
characteristics
(a) Pre-dominance
(b) Engagement:
(c) Identification:
(d) Importance of family relationship
(e)Composition of board of directors
(f)Loyalty
(g) Dedication of family members
(h)Male dominated
(i) Dominance of certain trading communities
 Advantages of family businesses
Family businesses still thrive in today’s competitive economy. As
most successful family businesses are not only well-founded but
also well-run.
• Commitment and unified leadership
• Stability
• Trust and authenticity
• Flexibility and versatility
• Vision and long-term goals
• Decrease costs and expenditures
• Next-generation ingenuity
• The family culture is a source of great pride for family employees.
 Disadvantages of family business
Lack of interest among family members:
Family Conflict:
Unstructured Governance:
Nepotism:
Succession Planning:
Risk of Ownership
Family Can Be Distracting
Hard to Separate Work and Home
Business Could Be More Vulnerable
May Break the Rules
Causes hard feeling towards other staff.
Lack Skills for the Position
Too Many Chiefs
Negative Feedback Not Taken Well
Promotions May Be Hard to Get
Stale Ideas
 Contributions of family business in India
In India, keeping business ownership within a family is a deeply-rooted
practice that surfaced after 1900 with their share of total capital growing
consistently, while that of the British declined concurrently from 1900 to
1947. Today, India boasts a rich and illustrious list of family owned
businesses. This model of enterprise has survived through the British Raj
and the post-Independence controlled-economy phase, and has flourished
in the post liberalization stage since 1991.
Following the liberalization of the Indian economy post 1990, the influx of
Multinational Corporations (MNCs) in India was expected to initiate the
downfall of these family set-ups. On the contrary, family businesses have
competed strongly and have continued to remain relevant, predominantly
due to certain inherent synergies such as faster decision-making and
greater focus on relationship building. Family businesses in India have
demonstrated the ability to grow rapidly from small beginnings, achieve
scale and to make a significant contribution to national and global
economies.
 Evolution of family business in India

1. Businesses initiated as a small scaled

enterprise run by a sole proprietor
2. Organizations grew larger, making it
challenging for a single proprietor to operate
3. The second generation of the family is often
larger than the first, and can take up more
functions
4. Thus, family members involved to support a
larger scale of operations
Stages of development of a family business
The typical family business goes through four stages in its development.
1. Entrepreneurial
2. Functionally specialized
3. Process driven
4. Market driven
This also includes The Second Generation - Sibling Partnership
5. Harmony between the family members
6. Smart and Timely Communication between the family members
7. Standardising the business process etc by having good SOP's
8. Listing down the criteria for key management positions
The Third Generation - Family Dynasty
9. Ownership structure
10. Family Member Employment
11. Shareholding liquidity
12. Dividend Policy
13. Family Conflict Solving Policy etc
 Various types of family business

Family businesses can be of the

following types.
• Family-owned business
• A family-owned and managed
business
• A family-owned and led business
 Roles and responsibilities and rights of
family members in a family business

[Link]
[Link]-Share holders
[Link] of directors
[Link] members
The three circle of model of family business

•Non family, non- •Non family

manager owners employees

•Family
members
The three circle of model of family business

Governance of the family system

Governance of the business
system
Governance of the ownership
system
 Challenges faced by family owned businesses
Large business houses spanning three or more generations face the
challenge of growth and sustenance due to different issues in family
businesses.
 Splits
 Liberalization, Privatization and Globalization
 HR Issues
 Transnational Attack
 Restructuring
 Lack of Professionalism
 Other Challenges: The other challenges include:
*Seniority, rank and gender;
*Children do not like to face challenges;
*No encouragement from parents’ side;
*Brothers and sisters often reluctant to grant authority to their siblings;
*The younger child possesses better skills than that of the elder;
*Children are very good with numbers but not with people;
 STRATEGIES ADOPTED BY BUSINESS
FAMILIES FOR THEIR SURVIVAL & GROWTH

• Understanding the realities

• Research and Development
• Raising capital base
• Consolidation of business
• Managing the pace of change
• Appointment of Professional Managers
• Mergers and Acquisition
• Succession Planning
 SUCCESSION PLANNING IN FAMILY OWNED BUSINESSES

In the lives of family owned businesses, the issues of

successors and succession reigns supreme.
There are few issues which are to be managed by
succession planning such as:
(i) Who’s going to manage the business when owner no
longer work the business?
(ii) How will ownership be transferred?
(iii) Will the business even carry on or will you sell it?
(v) Succession planning in family businesses can be
especially complicated because of
the relationships and emotions involved, and
(vi) Most people are not those comfortable discussing
topics such as aging, death, and their financial affairs.
 Essentials for family business succession
Certain things are essential for family business succession
planning to get the succession
planning process underway and ensure a smoother transition
from one generation to
another. The important ones are:
(a) Start business succession planning early.
(b) Involve your family in business succession planning
discussions.
(c) Look at your family realistically and plan accordingly.
(d) Get over the idea that everyone has to have an equal share.
(e) Train your successor(s) and work with them.
(f) Get outside help with your business succession planning.
 GUIDELINES FOR SUCCESSION PLANNING

(i) It is not just selection. On the other hand there should be a

development through job rotation, mentoring and formal training
programs.
(ii) It must take into account the cultural environment of the
organization.
(iii) It should be tailored to suit the needs of the organization. For
example, if the skills necessary to manage the company in the
changed environment are not available in family, there may be no
option but to bring in an outsider.
(iv) It should develop key candidates, in anticipation of future openings.
(v) It must be consistent with the future strategic direction and vision of
the company.
(vi) It should be driven by the line function and not HR executives.
 REASONS FOR FAILURE OF SUCCESSION PLANNING

(i) High potential candidates are illogically identified.

(ii) When one person leaves, instead of moving decisively and appointing a
successor, the portfolio is split among two people at the next level,
leaving people totally confused.
(iii) The designated replacement may be far from ready to take over. The
assessment may be more positive than what it should be.
(iv) Promotions are made keeping in view the organizational needs, but
totally ignoring the employee aspirations.
(v) The process lacks transparency and confuses talented people who may
decide to leave.
(vi) Outside hires are brought in indiscriminately without explaining the
rationale to insiders.
(vii) Many executives make excellent No. 2s and act as a fine complement to
their CEOs but fail miserably when they move into the corner office.
STRATEGIC PLANNING PHASE FOR OWNERSHIP SUCCESSION

Ownership Succession strategic planning phase involves who is

actually going to control the business. Here owners must
meticulously rely on sound business principles and
criteria to make their decisions.
Questions include:
(i) Who is best able to control this business?
(ii) How should the transition of control best be implemented?
(iii) How will active and non active family owners be
differentiated?
(iv) When should this process begin?
(v) What criteria should be used to select who should control?
(vi) What can best finance this ownership model?
 IMPROVING THE PERFORMANCE OF
FAMILY BUSINESSES
1. Non participative family members
2. Authority must be clearly defined
3. Attitude of accepting change
4. Giving priority to non-family professionals
5. Family emotions must be kept outside the purview of the business
6. Succession planning and fair to all
7. Promoting family values across the organization
8. Shared vision
9. Professionally standardized family members
10. Good governance
11. Communication
 CONCLUSION
There is a need to teach the right values to the next generation.
Some could become artists, some doctors but they are also
likely to be shareholders. Shareholding is like partnership and
it is important to know what values they represent.
High standards of corporate governance, modern management
with technology support and a long term strategy are key
drivers for family business.
Family business as a viable form of enterprise would continue to
flourish in the era of globalization too. Though it is very
easy to give advice to family businesses on how to overcome
challenges and become global players, but the road is not so
easy. Collective effort is required on the part of all family
Idea generation and Feasibility analysis
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the various sources to generate potential
business ideas for new ventures;
2. Discuss methods available for generating new
ideas;
3. Utilise the existing need to turn an idea into an
opportunity;
4. Describe the concept of idea assessment; and
5. Prepare an opportunity analysis plan
 INTRODUCTION

Essentially, entrepreneurs need ideas to start and grow their

entrepreneurial ventures. Generating ideas is an innovative and
creative process. Sometimes, the most difficult aspect of
starting a business is coming up with a business idea. Even if
you have a general business idea in mind, it usually needs to
go through fine-tuning processes.
Fruitful ideas often occur at points where your skill set,
your hobbies and interests, and your social networks intersect.
In other words, the best ideas for a new business are likely to
come from activities and people
that you already know well
 Innovation, Creativity and idea generation
• Innovation is the successful exploitation and execution of the
opportunity of an idea within a business model. ... Innovation is
about moving a novel idea into an idea of value that fills a
specific need. Identifying an innovative idea can be
a creative process.
• While creativity is the ability to produce new and unique
ideas, innovation is the implementation of that creativity - that's
the introduction of a new idea, solution, process, or
product. ... Creative problem solving gives that competitive edge
that any business is striving to achieve.
• Idea generation is described as the process of creating,
developing and communicating abstract, concrete or visual ideas.
• It’s the front end part of the idea management funnel and it
focuses on coming up with possible solutions to perceived or
actual problems and opportunities.
What defines a good business opportunity
An idea is a thought or a concept that comes into existence in the mind
as a product of mental activity. Business ideas includes
1. A resolved problem faced by an actual or potential entrepreneur
2. An unmet customer need.
3. Changes in the business environment
An opportunity is characterized by the following:-
Urgency of the market need
Adequate market size
Sound business model
Potential brand value
An able management team
 Identification of business opportunities
SOURCE OF NEW IDEAS
As Kaplan, argued that you may be surprised to hear
that not all entrepreneurs come up with unique ideas.
According to Timmons and Spinelli, finding a good
idea is the first step in the process of converting an
entrepreneurs creativity into an opportunity.
Therefore, we might have these questions in mind:
What is a good business idea
Where should the entrepreneur look for a new business
idea?
 A Good Business Idea
Any good business ideas could be an invention, a new product or service, or
an original idea or solution to an everyday problems.
Here are a few ways to build upon the already existing material and would
still provide a profit-driven concept:
(a) Develop ideas as an extension of an existing product i.e.
adding camera and song features to a mobile phone).
(b) Create an improved service (fast delivery services).
(c) Market a product at a lower price (via e-commerce e.g. [Link]).
(d) Add value to an existing product or service (i.e. reputable brand
name or delivery service).
(e) Altering their quality or quantity.
(f) Introducing automation, simplification, convenience (i.e. smart
product).
(g) Personal interests or hobbies ă many people find ways to turn their
hobbies into successful businesses.
 A Good Business Idea
(h) Work experiences, skills, abilities ă a business, related to the
work you do.
(i) A familiar or unfamiliar product or service.
Spot the latest trends.
(j) Changing the delivery method, packaging, unit size or shape.
(k) Increasing mobility, access, portability or is possibility.
(l) Simplifying repair, maintenance, replacement or cleaning.
(n) Changing their colour, material or shape.
A survey of entrepreneurs found that most new start-up
companies are involved in industries where they had
significant work experience. Anybody who intends to start a
business in a new industry are therefore encouraged to firstly
become an "apprentice" for a suitable period of time.
 TECHNIQUES FOR GENERATING IDEAS

In general, entrepreneurs identify more ideas than opportunities because

many ideas are typically generated to find the best way to capitalise on
an opportunity.
Brain storms
Focus group
Observation
Surveys
Emerging trends
Research and development
Trade shows and association meetings
Exhibitions
Business Magazines
others
 Tasks in Developing Business Ideas
(a) Identify the value proposition of your business idea
(b) Discuss products/services with prospective customers
(c) Assess the market using in-depth market research
(d) Analyse your competitor
(e) Consider possible start-up strategies
(f) Set approximate targets and prepare first-cut financial
projections
(g) Prepare a simple action plan
(h) Critically examine ideas from all angles
 Preparing Opportunity Analysis

The opportunity analysis consists of five different

stages:-
Phase 1: Seize the Opportunities
Phase 2: Investigate the Need through Market
Research
Phase 3: Develop the Plan
Phase 4: Determine the Resources Needed
Phase 5: Manage the Distinguishing Features of the
Business
 Evaluating Opportunities
We may have brainstormed half a dozen ideas for a new business
and narrowed it down to a couple that seems promising. How
do you know if any of these opportunities is worth pursuing?
1. What are the indicators that lead to this idea and
opportunity?
2. What are the conditions that permit the opportunity to
occur?
3. How will the future of this new product or service change
the idea?
4. How great is the window of opportunity?
This framework covers market analysis, financial and harvest
issues, competitive advantage issues and finally management
team and risk issues.
 Feasibility Analysis
INTRODUCTION
The process of setting up a business is preceded by the decision
to choose entrepreneurship as a career and identification of
promising business ideas upon a careful examination of the
entrepreneurial opportunities. Generation of ideas is not
enough; the business ideas must stand the scrutiny from
techno-economic, financial and legal perspectives.
Setting up of new business enterprises is a very challenging
task; We are likely to encounter many problems en route. It’s
advisable to be aware of these problems as to forewarn means
to fore arm!
 Marketing feasibilities
Market feasibility is concerned with two aspects the aggregate
demand for the proposed product/service, the market share of
the project under consideration. For this market analysis
requires variety of information and appropriate forecasting
methods. The kind of information required is
● Consumption trends in the past and the present consumption level
● Past and present supply position
● Production possibilities and constraints
● Imports and exports
● Structure of competition
● Cost structure
● Elasticity of demand
● Consumer behaviour, intentions, motivations, attitudes, preferences and
requirements
● Distribution channels
● Administrative, technical and legal constraints
 Financial feasibilities
Financial analysis is necessary as ascertain whether the propose
project is financially viable in the sense of being able to meet
the burden of servicing dept and whether the
propose project will satisfy the return expectations of those
who provide the capital. The aspects to be looked into while
conducting financial appraisal are as follows.
● Investment outlay and cost of project
● Means of financing.
● Project profitability
● Break-even point
● Cash shows of the project
● Investment worthiness judged in terms of various criteria of
merit
● Project financial position
● Level of risk
 Political feasibilities
Political feasibility analysis is used to predict the
probable outcome of a proposed solution to a policy
problem through examining the factors, events and
environment involved in all stages of the policy-
making process. It is a frequently used component of
a policy analysis and can serve as an evaluative
criterion in choosing between policy alternatives.
Government policies
Business and corporate laws
Government regulations
 Economic feasibilities
Economic/Social Cost-benefit Analysis
This is concerned with judging a project from the larger social point of
view, where in the focus if on social costs and benefits of a project, which
may often be different from its monitory costs and benefits. The questions
to be answered in social cost-benefit analysis are as follows.
● What are the direct economic benefits and costs of the project measured
in terms of shadow (efficiency) prices and not in terms of market prices?
● What would be the impact of the project on the distribution of income
in the society?
● What would be the impact of the project on the level of savings and
investment in the society?
● What would be the contribution of the project towards the fulfilment
of certain like self-sufficiency, employment and social order?
 TECHNICAL ANALYSIS
Technical analysis seeks to determine whether prerequisites for successful
commissioning of the project have been considered and reasonably good
choices have been made with respect to location, size, and so on. The
important questions raised in technical analysis are:
● Has the availability if raw material, power, and other inputs been
established?
● Is the selected scale of operation optimal?
● Is the production process chosen suitable?
● Are the equipment and machines chosen appropriate?
● Have the auxiliary equipment and supplementary engineering works
been
provided for?
● Has provision been made for treatment of effluents?
● Is the proposed layout of the site, buildings and plant sound?
● Have work schedules been drawn up realistically?
● Is the technology proposed to be employed appropriate from the social
point of view?
 Social and legal feasibilities
Entrepreneur has to be sure also of the administrative
and legal issues involved in the project. These
include, choice of the form of business organisation,
registration and clearances and approvals from the
diverse authorities.
Legal feasibility study is use to conclude whether the
proposed plan or system is conflicts with the national
or international legal requirements. Protection Acts
simply use to decide the any violation the legal
requirements. It is also a planned method.
 Managerial feasibilities
Managerial Feasibility studies is the objectively and rationally
uncover the strengths and weaknesses of an existing business
or proposed venture, opportunities and threats which are
presented by the environment, the resources required to carry
through, and ultimately the prospects for success. In its
simplest terms, the two criteria to judge feasibility are cost
required and value to be attained. Managerial feasibility study
is an analysis of the viability of an idea.
The Managerial feasibility study focuses on helping answer the
essential question of “should we proceed with the proposed
project idea? ” All activities of the study are directed toward
helping answer this question.
 Location and other utilities feasibilities
An entrepreneur should not be tempted select locations that are not viable.
A location is almost permanent to any project and as such plays an
important role in cost competitiveness and viability of the organization
throughout its life. An entrepreneur is tempted usually on three counts,
first the cheapness on and second love of the native place of the
entrepreneur and third the incentives offered by the government
agencies for location of industries. It could be seen that all the three
alternative give a broad idea of the costs whereas the selection be made
only on the basis of techno-economic analysis and overall benefits to
the proposed projects.

The important factors that influence industrial location are raw material,
proximity to market, availability of water, power, transportation
facilities, man power, labour laws, taxes, incentives, subsidies etc. The
factors to be considered for selection of site are load bearing capacity,
access to water, effluent discharge etc.