Expansion and diversification of Family business

Family run businesses are a significant segment of any nation’s industrial structure. In India 95% of business are family run, and 30% of BSE listed companies are family owned. Anecdotal data indicate just about 20% family businesses survive a first generation transfer and 95% of them become defunct within two decade of demise of founder. Unlike a corporation, family members and their extended relations may exercise different rights, expectations and responsibilities in the business.  This sometime can lead to conflict and jeopardize the sustainability of the business, especially when the families decide the expansion and diversion of family business.

It is not uncommon to see well entrenched family businesses to pursue risky and unrelated expansions. A Bengaluru based real estate focussed family wanted to jump on the IT bandwagon because it was considered the best things to talk to in their circle. They invested in a healthcare product company, where the pay backs happen after 4 years at least and a strong ecosystem built to drive the product. With a complete contrast in the revenue generation engines between their primary business and the IT product company, it was anathema for them try out build to grow business while their experience has always been of built to sell business. It is not just revenue cycles, but also the management of human resources that is an Achilles heel for many family businesses when they expand, especially to an area that requires different work routines, knowledge structures and coordination.

Another family owned business wanted to expand to defence and space to ride on the Make in India program.  Unfortunately within 2 quarters both these families realized their folly. Sometimes it is best to stick doing what you do wee and do well.  Family businesses thrive whenever they pursue low degree of product diversification with a broader degree of geographic diversification or into complementary products.  Families benefit from learning curve when they pursue geographic diversification and can quickly fine tune the last mile frills if required.  For a family business in real estate expansion into complementary services such as school or outpost medical facilities or facilities management or even into interiors work well.   Expansion into complementary services that can bundle with the primary offerings or improve the attractiveness of primary offerings or can offer annuity revenues when the primary business is transactional or one-time makes lot of sense.

Family businesses must pursue expansion from three considerations, viz., consolidation, portfolio enlargement or innovation. Consolidation must be pursued when economies of scale opportunities emerge.  Portfolio enlargement may be pursued to acquire skills & talents or in the interest of next generation. Finally innovation expansion can happen when access to IP or newer technologies can be gained.

A little known fact is that similar to the experience of professional run organizations, not all family business diversifications bear expected outcomes. Bereft of a board, in many family business diversification decisions may be centralized with the founder or one of the influential family member. Expansion risks, mitigation plans, roll outs are often not addressed in detail. Diversification may also happen from estate taxation perspective only with limited sustained benefits to the family. Whatever the rationale, family business expansion success hinders on few common criteria: planning, quality of human resources, task complexity, market structure and coordination mechanisms.  Higher variation in any of these increases the cost and efforts of assimilation.  Hiring and retaining right people is the biggest challenge family business face when they expand.  A key bottleneck is the “Go to person” who is mandated from the family side to manage post-merger integration and growth. Often these persons are chosen because of their loyalty and may not carry relevant industry experience or strong network links. Worst happens when the persons with a core rigidity attitude are entrusted to manage the integration and growth of business. In a proverbial sense many of them may actually end up killing the duck for being pennywise. For a family owned business that expanded from industrial trading business to a IP led healthcare business, the goose was boiled as the go to person did not appreciate the “invest (product development, ecosystem levels) and harvest” logic against his experience of “procure and supply” approach.

Family owned business expansion and diversification must start with an evaluation, merger plan and post-merger management. Sufficient time must be invested to address people issues and cultural integration. Unlike a professional run organization, family business expansion experience higher attrition at top and middle level and hence conscientious efforts must be made to communicate and build bridges at all levels. Selection of go to person must be based on industry experience and affability. Family businesses may also consider a time bound integration team to ensure the transition and track progress.

Similar to their professional run counterparts, family business must plan and drive expansion. Family business must set aside diversification or innovation fund to explore newer and high growth areas that derisk their businesses in future.  More importantly, family business must also realize not all diversification can yield results.  Smarter family business use diversification of a low cost but highly relevant asset to expose their next generation to business.  Family business must set aside a second chance kitty to support the experimentation. Key to successful family business continuity is in limiting the fear of failure and sustaining the joy of learning from failures.

Dr T R Madan Mohan


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s