It is common to hear from owners of typical family managed businesses that the business is not attractive anymore. Margins are going down and costs are going up. They are not getting good people and those who join do not stick. Money has become scarce and all that they have earned in life is blocked in credit to the customers. On their head is only bank loans and personal guarantee.
There are reasons for this situation. A majority of Indian family businesses thrived under three conditions that have drastically changed in recent times.
Supply starved, protected economy Since 1980’s, economy started expanding and for a long time demand out-stripped supply with protection from global supplies. That yielded good profits to the businesses because of which they could afford gross as well as hidden inefficiencies. With the advent of globalisation, now they are exposed to global competition. It is common to hear that the landed price of finished product is lower than even our raw material costs. This has jeopardised the very existence of once profitable businesses.
Information arbitrage Earlier, information was not widely available. The buyer did not know all possible sources of supply and the seller did not know all possible users. Business prospered leveraging because of this gap. Now technology has made information readily available and as a result the premium available in the business of managing the gap has drastically gone down.
Intermediation With bigger profits the industry could afford a longer supply chain enabling many businesses to flourish which played the role of intermediaries. With squeezing margins on one hand and enabling technology on the other, the supply chain in getting truncated. Large number of businesses who thrived on this intermediation are finding themselves side-lined.
It is in this context that Indian family businesses need to re-look at their models and adapt to the changing times. It is clear that what worked in the past may not work in the coming times. But it has to be equally clear that while some doors are getting closed; many new doors with phenomenal opportunities are opening up.
It was way back in 2004 that Thomas Friedman, in his book The World is Flat, wrote about changes that have brought about opportunities in form of new businesses. One is globalisation: Agarbattis are made in Vietnam, dipped in fragrance in Mumbai and sold in Mexico. The second is models such as outsourcing, insourcing and offshoring. Companies are now outsourcing cleaning, filing, accounts, HR and what not? We see new businesses springing up everywhere. Finally, he talked about the impact of technology that has overthrown many businesses but created many more different businesses.
Some of the areas where Indian family business will need to reflect on are:
1. Slow and steady does not win any more; now is the time for speed. What was done in 10 years earlier, now needs to be done in one year. The time is to be agile in this fast changing business environment. 2. Small is no longer beautiful. Days of small shop or factory are over. Now is the time of scaling up. Franchising, chaining and collaborations are important. Scale is rapidly becoming the rule of the game. 3. Mediocrity is no more tolerated. With competition from all over the world, businesses are expected to provide quality at competitive prices in shortest possible time. This requires gearing up with world class competencies. 4. Alone we will climb the hill approach is not viable. Now is the time for collaboration. Capital from one source, management from another and execution from third. This approach enables businesses to collaborate with experts from various fields, thus reducing risks. 5. Turn limitations into opportunities. Once remaining within a small closed circle was seen as a virtue. A textile trader saw no need to learn about what is happening in the field of information technology. Now with plethora of new developments, it is critical to keep our eyes and ears open to new things around us. 6. Go global, be reachable, accessible and be ready to expand. Businesses operating in, dealing with multiple markets across borders are opportunities in coming times.
Internalise technology, own your expertise and keep upgrading it. No business in the world will remain insulated from the onslaught of disruptions. It is better to invest time, money and energy in technology to keep the cutting edge in current times.
There are five reasons why the future holds a number of golden opportunities for Indian family businesses.
We are bestowed with some of the finest business acumen in the world.
1. We understand money and their cost consciousness gives an edge. 2. The ability to understand and grasp technology fast. 3. Fire in the belly. 4. A dollar to seventy rupees gives tremendous advantage.
It is time, Indian family business tighten their seat belt, thrust on full throttle and aim for the world. All this is possible provided they listen. With their deep conviction in Lakshman Rekha most of them still continue to neglect the world of opportunities and keep asking the question “who moved my cheese?”
Written by Dr. Piramal Merchant, Director- Global Family Managed Business, SP Jain School of Global Management. Views are personal