The problem

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The essay attempts to address the following issues related to the structure of Indian business:

1) Indian business is overwhelmingly owned and managed by families. Is a family firm necessarily at a disadvantage versus a professionally managed firm? Will an economy based on smaller family business grow slower or be disadvantaged compared to one based on large professional companies?

2) Even if a family firm is not at a disadvantage, it must be able to separate the family’s interest from the interest of the business. Have Indian firms been able to achieve this separation?

3) Why do Indian companies have such a hard time retaining professional outside talent? Why is there a cultural resistance among Indian firms to institutionalise themselves? Will they be able to become professionally managed corporations of the kind which exist in Japan and the United States?

4) Does the joint family offer a competitive advantage to Indian business? Why is the Indian joint business family dying? Why have most of the joint families separated in the last decade?

5) Can a family-run business survive the competitive demands of the post-reform scenario? Can they overcome their historic weaknesses? Can India’s family business firms deliver the goods in a global scenario where the nation’s economic success is increasingly the success of its companies?

6) Finally, what are the characteristics that successful Indian companies are exhibiting today? What is the role that joint ventures should play in their strategy? What, in fact, is the best strategy suited to Indian firms?

 

 

This is a broad canvas made up of large issues. The treatment of each issue will necessarily be swift. In many cases, I expect, it shall be superficial. In others, I shall offer hypotheses which need to be validated by empirical research.

Family firms are not necessarily bad. Indian firms, by and large, continue to be family-run. And that, too, by the Bania families of the traditional trading castes. It is predominantly the Aggarwals and Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains and Banias, Muslim Khojas and Memons in the West, and Marwaris in the East, and, in fact, across the country. Of these, the Marwaris have been the most successful. Fifteen out of the twenty largest industrial houses in 1997 derived from the Vaishya or Bania trading castes. Eight of them were Marwaris.1 Similarly, in contemporary Pakistan, many of the 22 families, who reputedly own half of the nation’s wealth, are Kutchi Memons, which was the leading trading caste among the Muslims of undivided India.2 Of the 128 merchant Marwari sub-castes in Rajasthan,3 only five became big and prominent in national commerce. These were the Maheshwaris, Oswals, Aggarwals, Porwals and Khandelwals.

Today’s industrialists, thus, rose from the bazaar. Their roots in industry are relatively recent, going back largely to the First World War. Before that they were traders and moneylenders engaged in the hustle and bustle of the bazaar. Even in Bombay and Ahmedabad in western India, where the cotton textile mills came up earlier in the last half of the 19th century, it was the trading communities who became industrialists. They were Parsees, Khojas, and Bhatia traders of Bombay and Jain Banias in Ahmedabad.4

That Indian firms are largely family run does not surprise. Even in the U.S., the most ‘professionalised’ business nation, 40 per cent of gnp is still created by family companies and more than 80 per cent of all enterprises are family-run. ‘We forget that in most countries much of retail trade, small industry and all manner of services are in the hands of the family, from the corner store to the most high-tech manufacturing.’5

Many Indian family firms are nervous today because they are afraid that a family-run business will not be able to cope with the competitive demands of the post-reforms scenario. They should feel reassured by the persistence of the family business in advanced societies. Many of us have acquired a distorted view of economic history. ‘In this distorted picture, economies are dominated by massive corporations that are listed on stock exchanges and owned by an army of dispersed investors... the family firm is often portrayed as little more than an early point on a graph of corporate evolution.... It is assumed that a really successful family of this sort is bound eventually to grow beyond the ability of the family to manage and finance it. Its owners will then usually decide to employ professional managers and take the firm public so that they can raise capital from the stock market.’6

The reality, in fact, is that family firms still dominate business life around the globe, and they are especially important in the emerging markets of Asia and Latin America. One such firm in the U.S., Cargill, has managed to grow into a giant multinational corporation employing 70,000 people, with sales of $50 billion, and it still remains a private family firm. Even among industrial countries there are remarkable differences. ‘Germany, Japan and the US were quick to adopt the corporate form of organisation as they industrialised in the late 19th and early 20th centuries, and today their economies are hosts to giant, professionally managed corporations like Siemens, Toyota, Ford, and Motorola. By contrast, the private sectors of France, Italy, and capitalist Chinese societies like Hong Kong, Taiwan, and the marketised parts of the People’s Republic of China (PRC) are dominated by smaller, family-owned and managed businesses. These societies have had much greater difficulties in institutionalising large-scale private corporations; their relatively small companies, while dynamic, tend to fall apart after a generation or two, whereupon the state is tempted to step in to make possible large scale industry.7

India, too, is dominated by small, family-owned and family-managed businesses. With few exceptions, there appears to be a cultural resistance among Indian firms to institutionalise themselves. As a result, there are relatively few large, hierarchical, professionally managed corporations of the kind that exist in Japan and the United States. The lack of large companies of this kind will influence the sectors of the global economy in which India can participate. Contemporary experience suggests that large autonomous corporations are needed to exploit the economies of scale in capital-intensive, complex manufacturing processes or extensive distribution networks. Smaller, family-style companies tend to be better at more labour intensive activities, which demand flexibility, quick response and innovativeness. Thus, large corporations gravitate towards semi-conductors, automobiles and aerospace, while smaller businesses create clusters in fashion apparel, software, machine tools and furniture.

The difficulty experienced by Indian (and Chinese) businesses in institutionalising themselves into large professionally run corporations may shut them out of certain sectors which demand scale and certain strategic types of technology. In these sectors, India may have to depend either on inefficient state-run companies or on large foreign companies.

But family firms must be able to professionalise. The success of the Italian, French, and Chinese small enterprises suggests that being a family firm per se is not necessarily a disadvantage. However, a successful family firm must be able to professionalise. It must be capable, for example, of recruiting and retaining outside professional talent. In a competitive world, it must be able to get the best person to run the company. If the family member is not the best person, then it must be willing to hand over the management to an outsider.

To professionalise means that the family must make the mental leap and separate ownership and management, and distinguish between the family’s interest and the company’s interest. Most Indian companies are in a transition today. They are painfully coping with the problem of incompetent family members at the top of many businesses. Rahul Bajaj says, ‘It is easy to get rid of an outside manager, but how do you get rid of a family member? You must either do what is right for the business or the family. Either way, you will end up with an unhappy family or a weak company.’8

Because of competitive pressures unleashed by the economic reforms, it is beginning to dawn on Indian businessmen that superior companies are built by superior people; that the success of their company depends on their attitude towards men and women of high ability and advanced training. A businessman of a Rs 500 crore company confessed to me that, ‘In the past, I was extravagantly wasteful of talent or myopic in believing that I could do it all by myself.’9

Today, because of competitive pressures and the rapid rate of innovation and change, there is a scramble to find talented people and to retain them when they are found. Almost every industrialist I talked to said that his biggest challenge was to find men and women of ability to manage crucial positions in his company. This is the most profound change we are witnessing in the business world after the reforms.

The inability of Indian business to create large-scale non-family organisations may not, thus, necessarily constitute a constraint on the rate of aggregate Indian economic growth, at least in the early phases of industrialisation. What small companies give up in terms of financial clout, technological resources and staying power, they gain in flexibility, lack of bureaucracy and speed of decision-making. Throughout the 1980s, the economies of Italy and other familistic Latin Catholic societies in the EU grew faster than Germany’s. Max Weber, who argued that Chinese familism would impede economic modernisation, was simply wrong. Indeed, it is likely that small Chinese and Italian family businesses will prosper more than large Japanese or German corporations in sectors serving fast changing, highly segmented consumer markets. If our objective in India is to maximise aggregate wealth, then we have no particular need to move beyond relatively small-scale family businesses.

Managerial capitalism needs social capital. Whether Indian businesses can create managerial capitalism depends partly on the Indian society’s ability to build social capital. ‘Social capital’ refers to the way people associate with themselves in a civil society. Where people spontaneously trust each other as strangers (non-kin) and cooperate with each other, there is high social capital. Indeed, Alexis de Tocqueville regarded this art of association as a key virtue of American society because it moderated the American tendency towards individualism.

Trust and cooperation are necessary in all market activity. High trust can dramatically lower transaction costs, corruption and bureaucracy. While family capitalism may be successful in Italy, Taiwan, Hong Kong and France, it seems also to be accompanied by education and a strong work ethic. Otherwise, it leads to nepotism and stagnation. Many large and successful Indian companies have also begun to realise that educated, hard working professionals usually outperform lazy, uneducated nephews. However, the majority of small and medium enterprises, which form the core of the private economy, are still struggling with this issue.

In India, there has always existed high degree of trust among kin and caste brethren, but we distrust outsiders. The Marwari ‘great firms’ of the 19th century transacted large business arrangements as far away as Central Asia and China based on trust. When a Marwari needed money, he borrowed from another Marwari trader on the understanding that the loan was payable on demand ‘even at midnight’, and he would reciprocate with a similar loan. At the end of the year, interest was tallied and settled. Crores of rupees are transacted in Mumbai everyday based on hundis, as a matter of trust between people one knows. Palanpuri Jains transact millions of dollars in diamonds based on this principle (see next section). But when it comes to employing and trusting outsiders, it is a different matter.

Social capital is eroded during periods of strong political centralisation, according to Fukuyama. He illustrates this by the weakening of French guilds during French absolutism. This is an important lesson for India which is coming out of 50 years of a centralising state since 1947 and another 100 years of a powerful colonial state. As a consequence, it will take time for Indians to rebuild their civil society and release the art of association. Our chambers of commerce, for example, will take time to get over the habit of servility in their dealings with the government. ‘The Left is wrong to think that the state can embody or promote meaningful social solidarity. Libertarian conservatives, for their part, are wrong to think that strong social structures will spontaneously regenerate once the state is subtracted from the equation. The character of civil society and its intermediate associations, rooted as it is in non-rational factors like culture, religion, tradition and other pre-modern sources, will be key to the success of modern societies in a global economy.’10

Familial capitalism is not necessarily a disadvantage or a weakness in the global economy. The inability to professionalise – to bring in and retain outside talent, to institutionalise, to separate the family’s interest from the firm’s interest – is clearly a weakness. In the successful exporting nations, family firms have overcome this weakness. In India, they are still grappling with this issue.

The demise of the joint family. A more unique characteristic of Indian business, at least until recently, was that it was managed as a joint family and derived a competitive advantage from this fact. The famous example is of the Palanpuri Jains of western India, who have established commercial colonies in such diamond centres as Tel Aviv, Antwerp, Mumbai, London and New York and who today account for roughly 50 per cent of all purchases of rough diamonds in the world. Because of the inherent trust in a joint family, Jain diamond merchants rely on inter-ethnic ties to keep this highly scattered, specialised and intrinsically high-risk business together, according to Kotkin.11 It is the family and ethnic ties that give them competitive advantage and partially explain their recent gains in market share at the expense of the Orthodox Jews. Is Kotkin’s proposition true? Does a joint family business provide a competitive advantage in business?

I put this question to Rahul Bajaj, whose family is one of the few surviving joint families in Indian business. His answer was an emphatic ‘no’. ‘Business has to be efficiently managed in a liberalised environment,’ he said. ‘Efficient managers are more likely to be outside the family rather than within. You have no choice but to bring them in to run the family businesses. Otherwise you won’t be competitive.’

‘So Kotkin is wrong?’ ‘Yes.’ he said. ‘The diamonds business is not unique either. De Beers, who are the global leaders in this business, run it with professional managers. The factory manager in my Aurangabad plant controls assets whose value is greater than diamonds. He can do the right or the wrong thing with those assets just like De Beers’ managers.’

‘Does the joint business family have any advantages?’ I asked. ‘Prima facie, there might be two, but I doubt if they are, in fact, sustainable. One is commitment, which in a simple-minded way gets translated into hard work. The other is continuity. I am not sure about either because I have seen just as much commitment and hard work among professional managers. And I have seen just as many lazy family managers. As to continuity, it seems to be often a liability rather than an advantage when you can’t replace a family member who does not perform.’12

Twenty years ago a majority of large businesses in India were run by joint families. Today the joint business family is practically dead. How did it happen? Why did they split up? What is the fallout of the splits on corporate performance and strategy? Pulin Garg, the thoughtful professor at the Indian Institute of Management, Ahmedabad, used to tell his students, ‘Haveli ki umar saath saal’ (The life of a family is sixty years).13

Thomas Mann, the Nobel Prize winning German writer, expressed the same thought in his great novel Buddenbrooks, which is arguably the greatest book about a business family. It describes the saga of three generations: in the first generation the scruffy and astute patriarch works hard and makes money. Born into money, the second generation does not want more money. It wants power; it goes after it with the single-mindedness of a Joseph Kennedy, and Buddenbrook’s son becomes a senator. Born into money and power, what else is left for the third generation to do but to dedicate itself to art? So, the aesthetic but physically weak grandson plays the violin. But the signs of decline are visible and that this is end of the Buddenbrooks family.

There appears to be a natural law leading to the break-up of a joint family in the third generation. In the unusual cases where it manages to survive, it is due to the practice of socialism. Neeraj, Rahul Bajaj’s cousin, who runs Mukund Iron and Steel jointly with the sons of Viren Shah and finds many financial advantages to a joint business family, attributes Bajaj’s success in remaining together to the strict equality with which they divide the pie.

‘We may run businesses of different sizes but we have the same standard of living,’ says Neeraj Bajaj.14 ‘Rahul runs the Rs 2500 crore Bajaj Auto and Shekhar runs the Rs 200 crore Bajaj Electricals, but they get equal salaries and equal pocket money. Splits take place when there is visible inequality. We take pains to observe absolute equality, and our 15 rules keep us honest. We travel in the same types of cars; we are allowed the same class of air travel; we usually vacation together; thus, we minimise differences and comparisons.

‘Every year at Diwali the family members get together and we review the 15 rules by which we run our joint family. These rules relate to what each family member gets as pocket money, vacation allowance, what women spend on jewellery, and so on. Each year the family members update their allowances under the leadership of Rahul, who is presently the head of the household after my father Ramakrishna’s death. And we meticulously stick to our pocket money. No exceptions! And I should know because I am currently the treasurer of the family, responsible for managing the family wealth, disbursing funds, filing tax returns and looking after the family affairs.’15

If there are advantages to life and work in a joint family, why indeed have they split up? Bharat Patel, a corporate executive and an astute observer of Gujarati joint families, suggests an answer. ‘When one brother has only one son, while the second one has three, there is an inherent inequality because the second one gets three times the income and wealth of the first. This situation is exacerbated if the single son turns out to be the brightest and a go-getter and takes the family business to glory. He then feels even more short-changed because the rewards are not commensurate with effort.’16

‘In a sense, life in joint families is a bit like life under socialism,’ says a Birla scion. ‘It doesn’t work in the long run in the same way that socialism doesn’t work. Joint families require strict equality to succeed. Because human beings are unequal and they need material incentives to perform, joint families break up in the end. A strong and fair leader can certainly help them to prolong their life as in the case of the Bajaj’s.’17

Austerity and the lack of visible symbols of inequality also help. A member of the respected Murugappa family (one of the few old Chettiar families that is still together) says that, ‘It is for this reason that young Vellayan, who runs some of the TI companies, was refused an air-conditioned car some years ago; if the old patriarch, M.M. Arunachalam, did not have an AC in his car, how could Vellayan? For the sake of uniformity, Vellayan had to learn to subdue his ego to the bigger family cause. Most youngsters in the third generation are unable or unwilling to do so.’18

Splits occur when the third generation grows up. The head of the family then needs all the skills of a diplomat. ‘Govern a family as you would cook a small fish – very gently,’ says a famous Chinese proverb. ‘When things begin to go sour, the family is the place where the most ridiculous and least respectable things in the world happen. People begin to take hints that were not intended and miss the hints that were intended. Family life is no longer an adventure, but an anxious discipline in which everybody is constantly graded for performance. Brothers deal with brothers with a smile, but they make sure they bring a witness,’ says a member of a prominent business family which has recently split and who prefers to remain nameless. We have seen this spectacle repeatedly in the past ten years among the Modis, the Walchands, the Raunaq Singhs, the Bhai Mohan Singhs and a dozen other joint family firms who have separated.

The split in the Shriram Group (DCM) has left their companies in a financial mess. Vivek Bharat Ram, co-promoter of DCM Daewoo, did not have the cash to subscribe to the expansion of the car company’s capital; as a result, his family’s share in the company has declined from 34 per cent to 10 per cent. Arun Bharat Ram defaulted in paying Rs 70 crore, the final instalment for taking over Ceat’s nylon cord division. Vinay Bharat Ram defaulted in 1996 in repayment of inter-corporate deposits. Siddharth Shriram’s Siel troubles are partially forcing him to divest unprofitable businesses. Siel Ltd is leaving fertiliser distribution and divesting equity in compressors and in India Hard Metals. Says a Business Standard article: ‘After the split the companies suddenly realised that they were unable to negotiate attractive terms from banks and financial institutions as they used to as one family. It was then that the Lala-run management and its weaknesses came to the fore.’19

Family splits have reduced the advantage of the combined group to borrow money or to negotiate common purchases. However, they have had positive fallouts in making the businesses smaller and more manageable. In a number of cases, the families have split businesses logically along industry lines. This has helped to make the businesses more focused and strategic. In other cases, the families ignored business synergies and split the assets in a manner that served the family interest. In the latter case, the next generation is grappling with the issue of divesting unrelated businesses that lack critical mass. Eventually the families will split, but the essential question is of strategic management control. Does it move to professional managers as happened in the United States? Alternatively, does it stay within the family as it does in India?

The strengths and weaknesses of Indian companies. Forty years of socialism was not able to destroy India’s legendary entrepreneurship even though it distorted its behaviour. Indian companies still have a number of strengths. The primary one is that they have been founded largely by the trading castes who have demonstrated great financial acumen, an austere lifestyle, a propensity to take calculated risks, and an ability to accumulate and manage capital. For the past 50 years Birla companies have monitored performance of their numerous enterprises across the globe on a daily basis. The Ambanis single-handedly created ‘the equity cult’ among the Indian middle class by building a two million-shareholder base in the ’80s, one of the largest for any company in the world. Because many Indian industries were under severe price controls in the past 40 years, companies were forced to become low-cost producers in order to survive. These constitute significant strengths, and provide a basis for competitive advantage as India joins the global economy.

However, Indian family companies also have clear and numerous weaknesses. The four most important ones are: an inability to separate the family’s interest from the interest of the business; a lack of focus and business strategy; a short-term approach to business, leading to an absence of investment in employees and in product development; and insensitivity to the customer, largely because of uncompetitive markets, but resulting in weak marketing skills. Some of these weaknesses were reinforced during the 1950-1990 period by the closed economy, which discouraged competition.

Indian companies lack focus and strategy. The biggest failing of Indian companies is that they want to do everything. Whether it is the Tatas, Birlas, Singhanias, Modis or Thapars – the vast majority of big business in India lacks focus. The average business house is engaged in 18 different businesses. Reliance, in refreshing contrast, makes only a few products (all from petrochemicals) and it does it well. Ranbaxy only makes pharmaceuticals; Bajaj Auto only makes two- and three-wheelers.

Whereas overseas companies have been shedding activities that are not related to their core competence, Indian companies seem to be going the other way. Among 50 leading Indian companies studied by Freddie Mehta in 1994-95 there was a specific mention of starting up a finance company in the majority of the chairmen’s statements for 1993-94. The 1994-95 chairmen’s speeches proclaimed their interest in the power sector. The 1995-96 reports showed a desire among many companies to enter telecommunications.

It takes decades to master the fundamentals of an industry through painstaking attention to detail – in building suppliers, in creating distribution networks, in understanding customer needs. Yet, Indian business treats the serious decision of entering a new and unrelated industry as though it was a ‘flavour of the year’. It would be all right if it was a child’s game, but the tragedy is that they are playing with thousands of crores of hard-earned savings of ordinary people. It is difficult to have sympathy with the Bombay Club when some of its members behave in this amateurish, drawing-room manner. Particularly in infrastructure, the stakes are very high, and Indian companies do not have the business fundamentals or the funding capability.

It is odd that B.M. Khaitan, the world’s largest producer of green tea, does not reinvest in the tea business, but fritters away his tea earnings buying unrelated businesses. A few years ago, he spent $95 million to buy out the Indian Eveready battery business of Union Carbide. He proclaims that the Eveready distribution network will help him sell packaged tea; that is possible, but difficult to execute for branded, packaged tea is a completely different business. Or even the outstanding Aditya Birla group, the world’s largest producer of viscose staple fibre and palm oil, does not invest sufficiently in product development in order to strengthen its leadership position or to neutralise the environmental threat to the business.

Having said that, there are many responsible young businessmen in India who are questioning their basic strategy and have asked themselves, ‘What is our core competence?’ and ‘Where can we create competitive advantage?’ One example is the Turner Morrison group, which is divesting out of apparel, sugar, edible fats and alcohol in order to focus on construction materials.20 Even an old diversified house like the Thapars wants to divest all businesses other than chemicals and paper from its flagship company, Ballarpur Industries. The RPG group has divested its tyre cord and razor blades businesses. Vijay Mallya’s UB group has shed its telecom and petrochemical businesses and is selling its engineering firm, Best and Crompton.

The disease of diversification goes back to the origins of Indian business, to the managing agency system that prevailed during British days, when a single management oversaw tea, jute, textiles, cement, shipping and so on. After Independence, the licensing system and inefficient capital markets reinforced the situation. A few groups with good Delhi contacts captured most of the licences and closed the doors to newcomers. Although licensing was unique to India, diversification is not. The Japanese zaibatsus were similarly diversified in the beginning. However, the Japanese have realised that the success of Toyota, Honda, Sony, Panasonic, Cannon and Toshiba has come from focus. Even after the reforms, Indian firms have not learned this lesson. Soon after 1991, they went on a spree forming joint ventures. Each industrial house sought as many joint ventures as it could. In addition, these joint ventures had no relationship with one another, ranging as they did from automotive components to fast foods and fashion garments.

The most important decision of the manager is what not to do. The successful companies have found that it is best to do a few things, make sure these are the right things, and do them brilliantly. Successful managers find that success and happiness lie in absorption and mastery over a small area of life.

Ironically, the recent family splits in India have helped to create focus. When dividing assets the wiser families placed business interest above family interest and split their assets strategically. Thus, they have ended up creating focused businesses, and they will gain major rewards from this virtuous decision. The majority, though, divided their assets by placing family interest first; they split their assets in an illogical way with no synergy between the divided companies.

Indian companies have not invested in people or in innovation. A second major failing of Indian business is its short-term focus. Hence, it does not invest in its people, nor in R&D. Its lack of attention to human capital is evident right at the start, in how it recruits new employees. I recall that when Procter & Gamble used to recruit its trainees at the campuses of the Indian Institutes of Management, we competed mainly against foreign companies (like Citibank, Levers, and Nestle) for the best graduates. There were few Indian companies – Asian Paints was one of them, and they impressed us. Exactly the opposite situation prevails in Japan, where foreign firms find it difficult to get the best graduates from top institutions, such as the University of Tokyo, because of fierce competition from Japanese companies and the prestige and rewards attached to working for a Japanese firm.

If the success of a firm is crucially based on the quality of its managers, why do Indian companies not recruit from the best and brightest at the IIMs and IITs? The answer Indian industrialists give is that IIM and IIT graduates are not culturally suited for their businesses. If the products of the premier schools are culturally unsuitable, the industrialists could have initiated systematic recruitment programmes for bringing in talent from lesser colleges and institutes. Mukesh Ambani has expressed his allergy to the ‘tie-wallah, golf playing executive’, but that does not absolve him of the responsibility of setting up an intake programme which attracts the top graduates of other colleges. The Indian business world is still largely feudal where the owner centralises decisions. Some owners treat their employees no better than they treat servants. In fact, one industrialist, I recall, literally referred to his finance manager as a servant within the earshot of his foreign collaborator. Having said that, Reliance has now set up an excellent intake-recruiting programme. So have RPG, Arvind Mills, and a number of family groups. The famed TAS of the Tatas was a good programme early on, but it ran out of steam. Ratan Tata is reviving it today.

The weakness in recruiting is compounded by the lack of attention to training. A young person is hired and thrown into a department to learn what he can. International companies, on the other hand, prepare detailed training plans for their young managers and closely guide them for the first two years. They reward senior managers not only for the results they produce, but also for the on-the-job training that they impart to their subordinates and for the quality of their organisations. Amiya Kumar Bagchi, former director of the Centre for Studies in Social Science, Calcutta, attributes this lack of attention to human capital to the unequal and feudal social structure in our country. As a result, ‘the owners are arrogant and the managers are servile,’ he says. ‘In East Asia, the owner will happily sit down with an employee for a meal. It is this attitude which has helped them succeed, create universal education and wipe out poverty. India, in contrast, is like the Philippines, which is the only failure in East Asia because it shares our feudal social structure.’

It is fair to say that one of the biggest side-effects of the competition which the reforms have engendered, is the mad scramble for talent in the past five years. Because of the need to raise productivity and quality in a competitive economy, successful Indian companies like Reliance, hcl and Infosys have created outstanding recruiting and training programmes. Infosys has gone further and created a stock option programme among a broad section of its employees. Asian Paints has been amply rewarded for its farsighted decision to recruit at IIMs since the 1970s with leadership of the paints market.

Is it realistic to expect Indian companies to follow another strategy other than cost leader? Indian companies are in a state of transition after the economic reforms. The mindset of the managers has changed and they are internalising the fact that they have to become more competitive if they have to survive. They are finally taking a serious view of their business strategy. Whether their strategy emerges from an evaluation of their distinctive capabilities or whether it is an up-front decision to focus on a single generic variable, the conclusion appears to be inescapable that for the near- to-medium term, sustainable competitive advantage will lie in becoming and maintaining the position of a low-cost producer. Whatever route they may have adopted in coming to their strategic position, they will only succeed if they stay loyal to their low-cost strategy and reap the rewards of the experience curve. Whether it is Tata Steel, Reliance, Arvind Mills, Ranbaxy or Sundaram Fasteners – Indian companies will find that they will succeed by staying committed to and sustaining a cost leader position.

There are only three generic strategies available to a firm in order to build competitive advantage. They are to be a cost leader, a service leader, or a technology leader. It is unrealistic to expect Indian companies to become technology leaders. This is not because Indian scientists are not capable, but because Indian companies will take time to mobilise the power of science and develop a technology-driven culture. The companies of Korea and Taiwan are still not technology leaders; only recently has Japan shown modest capability to make technological innovations. A few Indian companies may be able to differentiate themselves based on superior technology or superior service, but the majority will succeed only as cost leaders.

Until now Indian companies have been competing in the global market on the primitive and opportunistic basis of factor accumulation, the way all developing countries start, with cheap labour and raw material advantages. This is why Indian exports have largely been of undifferentiated products. Such exports have been vulnerable to shifting exchange rates of our competitors and of competition from countries with even lower wages.

After the reforms, however, some Indian companies are gradually rising to a second stage. They are becoming strategic rather than opportunistic. They are beginning to focus on excelling in one area of advantage – cost leadership. They are also seeking customers that are more sophisticated and in some cases segments of the market with higher value added, rather than depending on purely generic products. Although these companies are assimilating the latest technology, they are largely competing in low-price segments with a heavy reliance on foreign components and imported equipment. In a sense, these companies are approaching the type of competitiveness achieved more broadly by Korea and Taiwan.

Adopting a cost leadership strategy does not mean that one can ignore quality. To be a player at all in the global market, Indian companies have to be capable of delivering world class education (NIIT), denim (Arvind Mills), radiator caps (Sundaram Fasteners), steel (TISCO), mountain bicycles (TI Cycles), generic drugs (Ranbaxy), customized software (Infosys), or polyester intermediates (Reliance). This is no easy task. It means that they have to be capable of absorbing the latest technology and incorporating it in their product offerings. This is the capability on which the Japanese, Korean and Taiwanese companies built their initial successes.

Eventually, at a third stage, Indian companies will have to be driven by innovation. This is the stage that Germany, US and Japan are at; it appears at least a generation away in India. For that to happen Indian companies will first need to win in the newly competitive domestic market that will emerge in the next 3-5 years; secondly, they will also have to get bigger to be more competitive. Because of the nature of their industry, information-based companies like HCL and Infosys may be able to become technology-driven in the next decade. Indian companies will need to get larger because only large companies will be able to make the sustained investments in R&D, match the marketing resources and global distribution capabilities of world competitors, and devote huge resources to training and upgrading of their employees’ skills.

Smaller companies will have a role to play, for example as ancillaries or suppliers to large companies. In Japan, Sony, Panasonic and Toshiba routinely leverage the innovations of their component suppliers into the global market. Microsoft and Intel achieved global leadership on the broad shoulders of IBM. The success of Silicon Valley companies depended on AT&T and Motorola. Out-sourcing the non-core activities to smaller companies gives a firm tremendous flexibility, conserves capital, and keeps it focused on its competence.

The essential question is whether Indian companies can realistically adopt another strategy besides cost leadership. A cost strategy is vulnerable to exchange rates of competitors and rising labour costs of domestic employees. Anyone who has shopped in a saree store or eaten in a Udipi restaurant knows the Indian trader’s ability to deliver superior service. The employee in a typical saree store opens a hundred sarees within minutes in an attempt to sell a single one. Similarly, the waiter in a typical restaurant or dhaba delivers the customer’s thali in two minutes flat. There are other inspirational models of superior service in the competitive Indian bazaar. Among larger companies, HDFC and Sundaram Finance are good examples of superior service. Everyone recalls the positive experience of dealing with HDFC for a housing loan. Similarly, the legendary customer loyalty to Sundaram Finance is based on service.

A strategy based on superior service can be especially powerful where the value added is high. In other words, superior service delivered by highly trained knowledge workers – e.g., scientists, engineers, market research professionals and lawyers – provides powerful insulation against competition. Not only can knowledge workers harness the power of information technology, but also they can be trained to benchmark their deliverables against competition and against customer needs. This is a big opportunity, but I am not aware of a single Indian company with global ambition which is seriously and strategically pursuing it.

Emerging global players from India display certain common characteristics. Successful Indian companies with global ambitions share the following virtues:

a) They have developed competence in a core area – Infosys in software, NIIT in computer education, Arvind in denim, Ranbaxy and Wockhardt in generic drugs, Reliance in petrochemicals.

b) They have begun to leverage their pre-eminent position in the domestic market. Because the Indian market is rapidly growing into one of the largest volume markets in the world for a number of products, Indian companies enjoy the advantage of scale and of a large domestic base to help them leverage their strengths or hedge their bets as they expand overseas. Arvind Mills has a 70 per cent share of the Indian denim market and is the fifth largest producer of denim in the world. Ranbaxy is India’s second largest drug company in sales. The Aditya Birla Group is the world’s largest producer of rayon fibre. It has expanded with ventures in Thailand, Indonesia, Vietnam and Malaysia. Reliance is the world’s second largest producer of paraxylene, the world’s largest producer of PET, and among the top five producers of polyester, PTA and polyproplyene. Bajaj Auto is tied for third place in the global two-wheeler market after Honda and Yamaha. Hero is the largest producer of bicycles in the world. The lesson, however, is that achieving success in the domestic market is almost a necessary condition before a company can think of going global.

c) They have already achieved low-cost producer status in their respective product categories and have begun to leverage it to gain share in the world market. Tata Consultancy Services (TCS) and Suraj Diamonds are two of many Indian companies which are taking advantage of India’s low-cost skilled manpower to become major players in computer software and polished diamonds respectively.

d) Some Indian companies have used the large size of the Indian market to set up world-class/world-scale plants. Reliance courageously pioneered this concept, even before the reforms (when the government used to decide the capacities of Indian plants). This is one way that Indian companies can create the conditions for entry into the global market. The next step is to use world-scale facilities to tap world-scale markets. Alliances with MNCs can help to provide access to world-scale markets.

e) Some Indian companies have become subcontractors to foreign firms. Sundaram Fasteners has become the principal supplier of radiator caps to all General Motors plants in North America. Pertech Computers in Delhi has become the supplier of computer motherboards to Dell of the US. Subcontracting is not limited to manufacturing. CSIR is doing research for Dupont, American Cynamid, and Abbot Labs. Dupont recently signed up with Indian Institute of Chemical Technology to develop a new range of agro-chemicals to protect crops.

f) They have begun to lower their financing costs through GDRs and Euro issues. The high cost of funds in India represents a real competitive disadvantage and the smart companies have actively sought to bring down their costs via external financing.

g) They are employing world-class consultants to help them restructure their companies. Almost half of the top 50 companies in India have employed world-class consultants to help them improve their strategies, costs, organisation design and performance. McKinsey, Arthur Anderson, Arthur D. Little, Boston Consulting Group, Monitor – have tapped Indian companies’ strong desire to become globally competitive since the reforms.

Indian companies have responded to the reforms by avidly forming joint ventures, but most of these are weak because they are based on unequal capabilities. A favoured strategy of Indian companies has been to form joint ventures with foreign companies, particularly with the encouragement of foreign investment after the reforms. Most of these joint ventures, however, have not been well thought through. They are weak and are likely to break up. They are subcritical by world standards, legally bind the enterprises to the domestic market and create a new form of dependency for the Indian partner.

Two companies come together to form a joint venture when each senses a real need that the other side can meet. Each partner thus brings a complementary strength and a weakness to the bargaining table. Ideally, ownership in the joint venture should be based on the capabilities of each side. Only then do you have mutual respect and equilibrium. The problem with most Indian joint ventures is that they are hopelessly unequal. The Indian partner is far weaker than his ownership stake in the joint venture. It does not take long for the foreign partner to realise that he is carrying the joint venture, and he resents the Indian partner getting a free ride. This leads to trouble.

In a typical Indian (or Third World) joint venture the foreigner brings the technology or the product and the Indian brings market access – i.e., a distribution network, skills in managing labour and government. This seems like a reasonable way to get started. But the trouble is that the Indian partner often insists on and gets majority equity without realising the inherent inequality of the situation, namely that the venture cannot exist without the foreigner’s product or brand name, but it can survive without the Indian’s capabilities. The inappropriate equity structure is also encouraged by the Indian government’s bias (either tacitly or formally). After they get started the foreigner quickly discovers the Indian partner’s weaknesses – the distribution network is non-existent, government contacts matter less and less, and shockingly, the quality of the managers attracted to the Indian partner is second-rate.

There are, of course, exceptions. Some joint ventures are successful and some Indian partners often over-deliver. However, these are exceptions. The flaws of the typical joint venture speak to the traditional weaknesses of Indian business. These are: one, Indian businesses have not made the mental leap in separating the family interest from the business interest. Two, Indian companies have not had a strategy. They are unfocused. Therefore, they have not built up capabilities, nor do they have deep knowledge of customer needs or technological trends in a particular industry. Three, Indian businesses live in the short term. They do not invest in employees or in R&D. This is the reason why the best Indian managers are not attracted to traditional Indian companies.

To be fair, because of the fear of competition Indian businesses have begun to change since the reforms. They are smart and they are quickly addressing all three weaknesses, but the transition will take time. Meanwhile, a large number of joint ventures will come apart or be renegotiated. Under the circumstances the best thing that Indian managers and businessmen could do is to concentrate on learning whatever they can from the foreign partner. Indian partners should be aware that these joint ventures represent a window of opportunity to absorb technology and management practices and to upgrade their own, their managers’, and their workers’ skills.

Historically, India is at the stage where Korea and Taiwan were 20 years ago. These two East Asian nations concentrated on absorbing technology with a passion. ‘The joint venture is one of the most efficient ways to learn,’ said Anand Mahindra recently. ‘It is a membrane for technology to pass between a developed and a developing country, and it is the responsibility of the joint venture to ensure that the membrane is truly porous.’ Samsung did not learn as much about aircraft from Boeing as it learned Boeing’s legendary project management skills which it later applied to its electronic assembly operations. It matters less for Indian society as a whole what the ownership structure is between the Indian and foreign partner. What matters is the knowledge and skills that are being transferred to Indians. No one will be able to take them away.

The second perspective I want to offer Indian partners is to put themselves in the shoes of their foreign partner. ‘If you have a proven and outstanding technology,’ I would ask them, ‘would you part with 50 per cent of its rewards to a foreign stranger?’ Parvinder Singh of Ranbaxy categorically answers ‘no’. Then why do you make this unreasonable demand every time?

Indian business is overwhelmingly owned and managed by families. This is, however, not necessarily a disadvantage as long as the family firms are able to overcome their historic weaknesses. They have to learn to separate the family’s interest from the company’s interest, create the environment to recruit and retain outside talent, bring focus to their operations, use a joint venture to upgrade their skills and knowledge and follow a consistent strategy. The joint business family is dead for all practical purposes.

 

Gurcharan Das

 

1. ‘India’s Fifty Business Families’, Business Today, 22 August 1997, p. 218.

2. Hannah Papanek, ‘Pakistan’s New Industrialists and Businessmen’ in Milton Singer (ed.), Entrepreneurship and Modernisation of Occupational Cultures in South Asia, Durham, 1973.

3. James Tod, Annals and Antiquities of Rajasthan (2 vols.), London, 1829-32, Vol. 1, pp. 166-169. See also Tom Timberg, The Marwaris, Vikas, New Delhi, 1978, p.11.

4. The great textile magnates of Bombay in the 19th century were the Petits, Wadias, and Tatas (Parsee); the Currimbhoys (Khojas), Sassoons (Baghdadi Jews); the Khaitans, Gokuldases, Thakarseys (Bhatias from Kutch). In Ahmedabad the leaders were Jain Banias – Sarabhais and Lalbhais – who had been prominent Shroffs (although the first mills had been set up by Nagar Brahmins). Rajat Ray (ed.), Entrepreneurship and Industry in India 1800-1947, Oxford University Press, New Delhi, pp. 42-44.

5. The Economist, 9 March 1996.

6. Ibid.

7. Francis Fukayama, Trust: Social Virtues and the Creation of Prosperity, Simon & Schuster, New York, 1995, Chapter 6 and part II and III.

8. Interview with Rahul Bajaj, 18 March 1996.

9. Interview with Jasu Shah, who is a 60% owner of Fisher Rosemount India Ltd, Chemtech and other businesses, 7 February 1996.

10. Fukuyama (1995), op cit., p. 220.

11. Joel Kotkin, Tribes: How Race, Religion and Identity Determine Success in the New Global Economy, Random House, New York, 1993, p. 206.

12. Op cit., fn. 8.

13. Recounted by a student, Arun Chogle, to the author, 4 April 1996.

14. Interview with Neeraj Bajaj, 27 February 1996.

15. Ibid.

16. Interview with Bharat Patel, 4 April 1996.

17. Interview with Kumar Mangalam Birla, 4 May 1996.

18. Interview with A. Vellayan, 6 April 1996.

19. Business Standard, 3 August 1996.

20. Interview with Amit Judge, 3 March 1995.

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