Family-owned businesses in India contribute 75% to the country’s GDP, which is one of the highest percentages in the world. This is likely to rise to 80-85% by 2047, McKinsey says in a new study.
The study titled ‘Five differentiators of outperforming family-owned businesses in India’ by Senior Partner Avinash Goyal and Partner Chaitali Mukherjee shows that these businesses reported higher revenue growth and 2x returns to shareholders than other companies.
‘Family-run’ businesses (family involved in day-to-day operations) tend to be more efficient operators while ‘family-governed’ (family involved only in strategy decisions) and ‘family-owned’ (family involved only as passive investor) were better operators and asset utilisers, with higher capital efficiency, finds the study.
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Goyal and Mukherjee analysed 300 public-listed family-owned businesses (with revenues of more than Rs 2,000 crore achieved at least once in the last five years) and interviewed the leaders of a significant number of them to understand how the best-performing family businesses create value.
Their study identified five key differentiators for top-performing family-owned businesses — operational excellence, diversification, talent retention and culture, robust governance, and effective transition from one generation to the next. Says Mukherjee, “In an increasingly competitive environment, family-owned businesses will need to interpret, strategise and execute on differentiators that can propel them ahead in the context of their own businesses. After all, the value at stake is substantial: the average-size family-owned business could see a potential annual economic profit gain of about Rs 100 crore-300 crore over a five year period.”
The research also found that diversification across non-adjacent sectors is a key enabler for family-owned businesses to achieve substantial scale. “Through risk mitigation in the portfolio and improved access to market expansion opportunities, diversification also ensures long-term sustainability for them,” says the study.
Many successful family-owned businesses tap discontinuities in the industry or economy to bet on new emerging segments with strong tailwinds for the near future. This also helps to de-risk the diversification to a large extent, it says.
Goyal explains, “Our research showed there was a significant increase in diversification of portfolio as family-owned businesses transitioned from ‘emerging’ (revenues of less than `2,500 crore) to ‘at scale’ (revenues more than `6,500 crore) status. Introducing external executives was shown to play a pivotal role in this, helping to provide the bandwidth at scale to diversify.”
Speaking of leadership transitions, the report notes that business owners typically have a “growth mindset” and look for similar-minded executives to run their businesses. “The owners believe in continuously improving performance, and not merely sustaining it, and so are very careful to choose external executives who mirror their mindset and passion,” says the report.
The research also shows that the proportion of top-performing family-owned businesses across generations remained almost the same (20-25%). However, the proportion of family-owned businesses in the bottom 40% increases with passing generations — from about 33% of first generation-run family businesses to about 43% of the second generation and 46% of the third generation or beyond.
This can be attributed to priorities shifting after the founding generation, notes the authors. The tendency to focus on high growth even at the expense of liquidity may lead to an emphasis on preserving wealth. Another reason could be that when a business loses the benefit of its founder’s entrepreneurial edge, growth slows down and performance drops.
“Given that most businesses in India are family controlled and that the economy has been growing at a high rate, it is natural to expect the engine of growth to be with family businesses. It is also important to note that such businesses have a combination of high quality entrepreneurial strategies, professionalisation and governance,” says Kavil Ramachandran, Professor of Entrepreneurship (Practice), & Senior Advisor, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.
“If family-owned businesses are to continue to power growth — their own and that of the wider economy — it is imperative for them to make timely decisions that serve the interests of the business and the family, following a capability-led approach with the right incentives to grow the business,” says Goyal.
From: financialexpress
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