Senior managers need to put together pieces of the corporate jigsaw puzzle into the big picture to take their company to the next level.
After the seeds of entrepreneurship were sown in the early 1860s — when the first cotton mills were set up in Mumbai by Jamshetji Tata — family managed businesses have survived the onslaught of British colonialism, partition, and modernisation to remain at the forefront of economic activity. But however glorious their past, they are confronted by a disturbingly uncertain future. Accustomed to competing only for the favour of the state, to extract protectionism in return for political donations; the very notion of competing for the customer was an alien one. However, with LPG the trauma of many third generation families being forced to see their businesses losing ground is fast becoming a palpable reality. After surviving many a trial by fire, they stand poised to face the sternest threat to their existence. Will they be able to stand up against global competition? Will they be able to survive this onslaught? A few have been reasonable enough to exit early; those who refuse to opt out are trying hard to shift their businesses to a new growth trajectory. The result is a complete paradigm shift; from survival of the fittest to survivable of the most adaptable to survival of the most innovative. The most wrenching of these changes that they are experiencing involves coping with a suitable strategy to compete in a flat and boundary-less world.
Two decades of economic liberalisation has changed the very face of how business is done in India. Companies can no longer expect to sell what they produce; they must produce what the customers are willing to buy. An inevitable outcome of this exposition is a complete overhauling of businesses. Sure, this is not easy; but the top management of most diversified families knows very well that traditional ‘brick and mortar’ businesses that helped them sail in the past are unlikely to wheeze them to the future. The Tatas, for instance, witnessed a dramatic shift from core and infrastructural businesses to focusing on brands and services and also thinking global. Consider this: Its brand business fetched about a 20 per cent of its sales and profits in 1990; but in 2004 it accounted for 50 per cent of its revenues and 58 per cent of its bottom lines. The Ambanis, who were revered for their vertical chain globally, upgraded from textiles to naphtha cracking and ultimately to oil and gas exploration. Subsequently, they jumped to a relatively unknown domain — telecom. In fact, their total investment in telecom to the tune of Rs 25,000 crore, was double the amount of the then existing capital deployments. The Aditya Birlas, who were predominantly a textiles and cement major, dramatically shifted focus to non-ferrous metals. In 2003, of their total investment plan of Rs 20,000 crore, they were close to allocating around Rs 16,000 crore for their aluminum business alone. While in the above cases, their blue-print for success is well mapped, for many it left behind plenty of agony and anguish.
The GP-CK Birla Group, which was lured into the automobile business with licences, growth and sustainability, was assured as long as the market was protected. Once the important pieces of paper were in place, it could simply sit back and relax in a market driven by shortages. It did not ‘market’, but simply ‘allocated’. With the entry of Maruti-Suzuki, it faced a severe challenge in terms of its skill-sets and emerging demands made by the sector. Not familiar with the practice of churning out a new model every three-five years, it had no option but to enter into mere ‘licencing’ agreements with global majors (for example, Mitsubishi, General Motors), as exit is often driven by classic ego coupled with a fear of societal reclusion. In most of the other businesses it had failed to crank up capacities; providing itself neither the advantages of size nor profitability. The Mafatlals failed to realise that it is no longer enough to walk around the weaving shed observing knowledgably the thread count (sans quality).
Top corporate managers need to assemble the pieces of the corporate jigsaw puzzle into the big picture to take their company to the next level. With outdated power-loom technologies, uncompetitive cost structure and lack of scales, the fate of the family was sealed when import duties on textiles started coming down. Only seven of the first 50 Indian business families of 1947 were in business by the turn of this century, and 32 of the country’s largest business families of 1969 are no longer among the top 50 today. Why do some companies succeed while some atrophy, especially when market conditions change? The lesson is quite clear: Family-owned businesses have high mortality rates.
Even globally, less than 10 per cent of the Fortune 500 companies as first published in 1955 still existed as on 2005. Therefore, what we are witnessing in India is not entirely a new phenomenon. In this context, management gurus like CK Prahalad advised companies to focus on their core-competencies; Sumantra Ghoshal stressed on organisational reforms as the road to successful internationalisation; Porter exemplified the concept of value chain to become world-class companies. While these mantras are talked about globally, they have left many top managers baffled and disillusioned when it comes to real-life applications. For instance, many Indian family-heads glorify in the press that they have identified their ‘core competence’; when unknowingly they are talking about their ‘core businesses’. Others talk about recreating independent SBUs (strategic business units) and giving considerable latitude to their business heads; at the same time following the age-old ‘parta’ system. Therefore, the future road-map for most business families, at best, appears very nascent and fuzzy. We offer insights based on a concept we call ‘top management DNA’. It is grounded in reality and can supplement existing practices of Indian business families to enable them to move on to the next level.
About top management DNA
Our interaction with heads of various business families led to the understanding that top managers most often decide on the basis of past experience or ‘what worked before’ and not on the basis of some ‘best’ strategy or optimising procedure. We observed that repeated reinforcements about how the environment acts and reacts leads to the development of various ‘thumb rules’. While positive reinforcements are rewarded, negative reinforcements are punished. Top managers of diversified families operate on multiple thumb rules which act and interact among themselves to form the ‘top management DNA’. The figure below reveals the DNA structure of a typical manager:
This concept is somewhat akin to the DNA that forms the human genome. While the DNA is largely responsible for human attitude and behaviour (among other things); on a similar scale the top management DNA guides how they take key decisions and untangle complex business situations. When faced with crises, they often rely on their DNA which greatly simplifies their decision-making process. Obviously, if managers were to systematically scan the entire environment for every decision, they would face severe time constraints. This is neither desirable nor feasible. The DNA automatically filters out irrelevant information and enables further processing of relevant information. Therefore, for all practical purposes, it facilitates managers to selectively scan the environment and take appropriate decisions. In most cases the DNA is primarily influenced by the family’s core business, which was the driving force behind its evolution and existence. However, unlike human DNA which is predetermined at birth, top management DNA slowly evolves over time. The figure below gives an idea on how the top management DNA evolves:
- Identifying critical factors for success
- Reinforcement of doing right things
Can the DNA backfire?
However, even without entering new businesses, families can face similar crises when conditions change across most industries en masse. When the government of India announced the LPG policy in 1991, it brought about wide scale changes in most sectors. The new environment around the businesses was totally disconnected from their existing DNA. Events were not labeled accurately and managers were often caught on the wrong foot. For instance, size and scale became the cornerstone of cost advantage for most commodities. In a desperate bid to retain competitiveness, Reliance raised its capacities for PSF (polyester staple fibre), PFY (polyester filament yarn ) and PE (polyethylene) to global standards through green-field projects. However, managing such mega projects without missing a single deadline is not everyone’s cup of tea. For others with a surplus, war-chest, acquisitions became the preferred route. When Tata Steel acquired Corus for $11.3 billion, it was more than just raking up capacities or having a global presence. It found itself with a product portfolio driven by flat products that were different from its traditional long products, a manufacturing base in Europe where the work culture is seemingly different, and a market base across the US where the dynamics are different. Lulled into a false sense of complacency, the Kirloskars faced stiff competition from state-of-the-art Japanese technology in compressors and engines. This is also somewhat true for the Singhanias, the Murugappas and the Nandas, whose existing business equilibrium became unsettling due to similar environmental changes. What should business families do in such a situation?
Root of all problems
A simplified comparison put forward by C K Prahalad will demystify the above problem. When a patient complains of severe chest pain, he usually takes an aspirin but, in most cases, to no avail. Influenced by his spouse, he visits a doctor who diagnoses that the patient has cardiac ailments and refers him to a cardiologist. A catheterisation of the coronary arteries reveals serious occlusion which requires a bypass surgery. The patient, even after undergoing a successful bypass operation, finds problems recurring after some time. He revisits the cardiologist, who finds that genetic factors predispose the patient to coronary heart disease. It is evident that problems occur at different levels, and different levels require different solutions. More importantly, when the origin of a problem lies at the core, a re-look at the DNA can offer useful insights. Though current medical research does not offer conclusive evidence on human DNA restructuring, research is currently underway and the expectation is that in the near future genetic screening will be able to identify individuals with a predisposition to cardiac problems or any major illness. These individuals could then receive early counseling about lifestyle changes to reduce the risk of developing major ailments.
When business families face similar crises, can they undergo successful DNA transformation? For top managers, knowledge of the core business is a significant source of information of its DNA. They tend to apply it to businesses where it may or may not be appropriate. This is often the root cause of most strategic failures. When faced with such a crisis, top managers initially tend to resort to quick fix solutions (like downsizing, cost control, etc). When such approaches prove futile, a consultant is hired who reveals that unattractive industry structure and the organisation structure have resulted in a series of wrong decisions. He recommends diversifying to reduce dependence on the industry. The family moves into a new business, but is still unable to shift its growth trajectory. As in most cases, it is the same management which was responsible for the earlier failures. Our experiences reveal that successful restructuring of top management DNA is possible to overcome strategic failures and shift businesses to a new growth trajectory. It should be noted here that changing a few thumb rules is unlikely to have any significant impact on the DNA; to transform the DNA, most of the previous thumb rules must be completely unlearnt before any new learning can take place.
DNA before liberalisation
A detailed understanding of top management psychology is essential to crack the top management. The DNA structure for top managers cannot be obtained by simply asking for it, as stated policies and intentions often vary from what is actually used. Therefore, we undertook detailed interaction with the the heads of various business families to gauge their DNA. To assess how their DNA evolved, we took recourse to various published interviews to dissect their historical decisions, which were the outcomes of their DNA. Prior to economic liberalisation, entry into most sectors was subject to availability of licences and quotas from the ministry concerned. Therefore, most business families maintained ‘industrial embassies’ in the capital city, ostensibly for the purpose of lobbying politicians and bureaucrats to extract benefits. For most successful families, their DNA was unilaterally structured around their intentions to acquire such licences and quotas, obtain priority approval for their resource mobilisation plans and approval for capital imports, and get policies formulated which favoured them (or disadvantaged their competitors, or both). As a result, political donations and preferential policies in the form of high custom duties (in some cases as high as 300 per cent) went hand in hand. Various media reports commented that families (like the Ambanis) which were close to most successive Congress governments got many policies drafted in their favour. However, with a slew of policies directed towards LPG virtually left only a few sectors untouched, protection was no longer the key to success. The business environment demanded a process of rigorous and analytical exploration of the environment and internal capabilities, which played a negligible role earlier.
DNA after liberalisation
Post liberalisation, their DNA transformed around developing certain specialised skills (aka core-competence) and seamlessly adapting to the changing environment. As Ratan Tata commented, “A company does not become global by simply participating in geographical markets around the world. The objective of globalisation is to become globally competitive, leverage global opportunities and have the required global capabilities. It implies an organisation which employs talented people without reference to nationality. We are in the process of acquiring such competitive position and global capabilities.” The Ambanis built a reputation for setting up projects quickly. For instance, they set up a worsted spinning plant within eight months of getting the licence. For their PFY plant they outdid even their collaborators by getting it ready in fourteen months — a feat Du Pont, until then, had not managed to achieve anywhere else in the world. They replicated this magic in their telecom diversification as well, without a single technological alliance or collaboration.
We would like to point out that just like the human genome, the influence of top management DNA is all-pervasive. In most cases, heirs groomed by the older generation unconsciously adopt the same DNA (unlike in professionally managed companies). It influences the entire family, yet it remains invisible. It predisposes a family to certain kinds of problems but also offers a route to come out of those problems. In this transformation, three categories of business families come to our view:
We will start with the first category. In most cases, when the DNA is two or three generations old, it becomes very ‘sticky’. Therefore, when time becomes ripe for a change, resistance pulls it down. The change-resilient R P Goenka family with its laid-back attitude is a classic example in this regard. As in most cases the family was unable to surmount the hill and was drawn back to its original DNA. In the second category, though having the farsightedness, complacency retards the family from developing skills required for the emerging scenario. In case of the C K Birla owned Hindustan Motors, being pioneers in car manufacturing in India, they saw the change coming in the guise of Maruti Suzuki. However, they were unable to react as they had not built up the requisite skills on developing light-weight aluminium die-cast engines, aerodynamic designs, or alternate materials. When it comes to learning, it is difficult to get off the train, walk to the next station, and then re-board. In contrast, the Tatas are a glaring example of the battle against an all-pervasive DNA and emerge as winners, even in the global arena. So we advise conservative business families to enter emerging businesses in a small way, even if the DNA is not matching. Obviously, the performance of the business would be wanting. However, this would act as a saviour for the family as a whole, as it would enable it to keep its DNA in a constant state of flux. It is also advisable for family businesses to cultivate an alternate DNA in the form of professional managers with a distinct culture of dissent and experimentation. This would go a long way for the future of business families in India.
ABOUT THE AUTHOR
The author is a full-time faculty member with IBS, Kolkata, and he can be reached at firstname.lastname@example.org. Sen expresses his acknowledgement to Prof. Sougata Ray (IIMC) for sharing various insights for this article.
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2. Prahalad, C. K. and Bettis, R. A. (1995), “The Dominant Logic: Retrospective and Extension”, Strategic Management Journal, 16: 5-14.