Old Economy vs. New Economy – Indian family businesses adapt well to the digital world

Family businesses evoke the memories of a Bajaj scooter or a Godrej lock, in India. Though now they dominate even the sunshine industries like pharma, telecom, biotechnology and information technology with firms like TCS, Wipro, Sun Pharma, Biocon and Airtel being the largest players in their respective industries. 

Yet, when we talk of new-age industries like e-commerce and analytics, we often think of the Flipkarts, the Swiggys, and the Microsofts, all of them either private equity-backed startups or non-family firms. Family firms are not yet known in a big way in e-commerce and the next generation wave of technology viz. artificial intelligence, analytics and machine learning. 

Belying anecdotal worries about the potential of family firms to withstand the rush of competitive forces in the economy post liberalization in 1991, family firms registered remarkable growth. Removal of restrictions and controls unleashed their entrepreneurial spirit. 

Five years back, in 2016, the Tata group made a silent entry into e-commerce with Tata CLiQ. It has neither sprinted ahead of Flipkart and Amazon, nor is it the most popular. Yet, it’s gaining ground slowly and steadily

Taking advantage of the changing business landscape through the 1980s and the big bang reforms of 1991, family firms built businesses in all industries including in areas otherwise reserved for the public sector and the upcoming industries. 

Family firms now face another set of challenges different from the ones they faced post-liberalization; that of disruptive technologies and the digital economy. The traditional business models are being challenged and the speed of change is nerve-wracking. 

Some of the unique advantages that family firms possess, like long-term orientation, loyal employees and owners’ passion, maybe deterrents to being agile and innovative to cater to the changing market demands. So far, the family firms have been laggards in the race. But will it be the story of the tortoise and the hare? With slow and steady winning the race? 

Take the example of Tata CLiQ. In 2007, Flipkart pioneered the e-commerce market in India, with Amazon foraying in in 2013. There were many startups that tried to compete and then either shut shop, consolidated or gave up the dream to become as big as either of them. 

Five years back, in 2016, the Tata group made a silent entry into e-commerce with Tata CLiQ. It has neither sprinted ahead of Flipkart and Amazon, nor is it the most popular. Yet, it’s gaining ground slowly and steadily. 

They do not believe in offering deep discounts like the other portals do and have strategies that they know are sustainable. They have been adding more brands to their platforms, have steep revenue growths, and have acquired some well-known existing e-commerce platforms. 

Would Tata CLiQ ever topple Flipkart and Amazon to become the number one e-commerce portal in India? We do not know. But what we do know is that Tata CLiQ is here to stay and will benefit from the experience, the philosophy and the resources at its disposal as a part of the Tata group. 

While Flipkart will have to rely on external funding, the Tata group acts as the venture capitalists for CLiQ, saving them from the pressures of finding funds. Even in the past, the Tatas started their information technology business as a division of the group holding company Tata Sons, in 1968. The company was listed only in the year 2004. 

Similarly, many family firms have a presence in the new age businesses, albeit in a small and no-frills fashion. Owing to the reputation of the family at stake, they may take them public only when the venture achieves a respectable size. 

Many of these businesses are championed by the next generation members of the family who are more exposed to the current trends due to their education or interest. The trend has made it easier for the next generation members of the family to do something of their own.

It is easier for the family to invest in a member of their own family rather than trust their money with a 30 something youngster with a risky idea. Puneet Dalmia, a third-generation member of the Dalmia Bharat group started the online career portal, jobsahead.com, with funding from the family. It was later acquired by Monster worldwide. Puneet then joined the core family business but continues to act as a venture capitalist for other startups.

Like the Dalmia group, many family firms have become active investors in the startup ecosystem, either in their own capacity as a family or through the firm. Apart from investing in fields of online education, e-commerce, agri-solutions, investments in emerging technologies and digital space are also popular amongst the families who have been involved in traditional businesses only so far. 

For example, PremjiInvest, the personal investment arm of the Azim Premji family, has invested in wide-ranging startups- from food (iD fresh foods) to data management and analytics (Data Stax) to e-commerce (Snapdeal). 

While the family firms may not have a direct presence in many of the new age economy businesses, they do have a significant stake in many of them through investments. These investments are typically in a personal capacity or through the family office, without disrupting the core family business. Though being cautious about their reputation, family businesses monitor the progress closely and may impose certain strategic restrictions.

New ventures by next-generation family members and investment in startups by non-family members require robust governance mechanisms to approve the funding by the family. The buy-in from the investment committee of the family or the family office is important. The venture must be approved keeping in mind the long-term goals of the family. 

Professional help from wealth managers and experts from financial institutions may be needed to evaluate the financial viability of the proposed venture and subsequently to monitor it. In many cases, the socio-political clout of the proposer within the family influences the decision making, apart from the economics of the proposal. Through sound governance systems and processes, the subjectivity can be minimized. 

Nupur Pavan Bang is associate director at the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, and Kavil Ramachandran is professor and executive director of the Thomas Schmidheiny Centre for Family Enterprise, ISB.