Only 15% of Indian family businesses have robust succession plan: PwC report
The ongoing spat between Tata Sons and its sacked chairman, Cyrus Mistry, shows how family-run businesses struggle to find a balanced solution to succession issues
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While three-quarters of Indian family businesses have grown in the past one year, barely 15% of them have a robust, documented and communicated succession plan, according to PwC’s 2016 India Family Business Survey Report. This ongoing ugly spat between Indian conglomerate Tata Sons and its sacked chairman, Cyrus P. Mistry, is one such example that shows how family-run businesses struggle to try to find a balanced solution to succession issues.
PwC spoke to 2,802 family business leaders across 50 countries and in India with 102 family business leaders.
According to the report, 84% of Indian family businesses expect to grow either steadily or quickly and aggressively over the next five years.
Of those looking at an annual growth of over 10% over the next five years, about 96% said that the growth of core business in existing markets will enable them to reach their targets. Over half of the family businesses surveyed said they were looking to expand into new sectors or new countries and will consider inorganic growth. The positive sentiment can be attributed to two broad factors.
One: family businesses tend to remain relatively resilient and stable in adverse conditions. And two: the India growth story has been reinforced.
The participants in the survey feel that key challenges their business will face in the next five years are: the need to innovate, keeping pace with digital and technology, attracting and retaining talent, competition, need to professionalise the business and regulatory compliances.
Performance, prospects and challenges
Growth in the Indian economy between 2014 (gross domestic product or GDP growth of 7.3%) and 2016 (GDP growth of 7.6%) is reflected in the growth of family business enterprises. 75% of those interviewed said that their business had grown over the last 12 months. This is an improvement from the findings in 2014 (65%) and also compares favourably against the global average of 64%.
Macroeconomic focus continues to be “India positive”. India is the fastest growing major economy in the world and a large number of economists and policymakers expect the country’s economy to grow by around 7.5% in the financial year ending March 2017.
It is no wonder then that over the next five years, Indian family businesses are expected to grow steadily (49%) or quickly and aggressively (35%). Global numbers are more conservative: 70% expect to grow steadily and 15%, quickly and aggressively; moreover, 1% anticipate shrinkage in operations.The optimistic sentiment in India is reaffirmed across all businesses—family and non-family enterprises.
So how will businesses achieve this growth?
Indian family business feel confident in the existing market and there is openness with respect to growth strategy in terms of market, sectors and acquisitions. Notably, 96% of those anticipating growth of over 10% annually over the next five years said that the growth of core business in existing markets would enable them to reach their targets. Over half of the family businesses surveyed said they were looking to expand into new sectors or new countries and would consider inorganic growth.
Challenges in the next 12 months
Family businesses expect market conditions to pose the biggest challenge in the next one year—customers and clients, price fluctuations, availability of cheaper substitutes and cheap imports, heavy discounting (including through online discounts), demand supply mismatch, etc. Not surprisingly, as companies gear up for goods and services tax (GST) implementation and deal with infrastructure concerns, government policy, regulation, legislation and public spending constitute the next big concern.
Another interesting finding is that only 10% of those interviewed in India felt that technology was an area of concern. One interpretation is that the surveyed sample did not consider technology to be a concern; rather, they saw it as an opportunity that will reshape the future. The other interpretation is this mega trend has probably not been given adequate importance. In our experience, digital and technology are redefining the way businesses are carried out and will lead to significant business model changes.
Geopolitical challenges, Brexit, the US elections, conflict dominated states—despite all these issues—Indian companies continue to look favourably at expanding their global footprint, though there has been a slight dip in the number of companies exporting overseas vis-à-vis PwC’s survey in 2014. At present, four-fifths of family businesses export their products/services and this contributes, on an average, to 25% of the total turnover. In the next five years, the numbers are expected to jump to 86% of family businesses looking to export, contributing on an average 33% of total turnover. Global numbers also indicate a similar upward trend, though in moderation. This is a heartening sign for the future of global trade and the economy, which are struggling, given that there is a huge amount of discussion around protectionism.
Alignment of business and family strategy
Family dynamics play a crucial role in defining the direction of a family enterprise. The survey revealed that 76% of Indian family businesses, as against 69% globally, claim that the family and business strategy are completely aligned. Only 6% in India and 10% globally admitted to misalignment.
The business alignment is also impacted by innovation and reinvention, family disagreements and differing voices, role of in-laws and new members, succession, role of the next generation and future planning. For the business to succeed, it is imperative that family expectations and objectives are discussed and concerns handled.
Great expectations: The next generation of family leaders
78% of family businesses in India have next-generation family members working in the business, which is higher than the global average of 69% and also marginally higher (66%) than the last survey.Further, 73% of the next generation working for the business are in senior executive roles, about 34% are in junior or middle management, while 56% do not work for the company but own shares, up from 35% in 2014.
Role of non-family members
With Indian family businesses looking to become more professional, it is not surprising that 81% of the respondents have non-family members on their boards, higher than 65% globally.
The report concludes by saying that today Indian family businesses are very optimistic about their future, which is clearly demonstrated by the heightened entrepreneurial activity being witnessed in the country. However, strategic planning in both dimensions of a family business—the family and the business—will go a long way in enabling family business leaders to achieve their goals.