The Marwaris Read online

  According to Siddharth Birla, one of Aditya’s nephews: ‘This system has many advantages. Essentially it emphasizes the speed of reporting, even sacrificing some accuracy in the process. There is mental pressure on the manager to perform daily’.

  Uncle Ganga Prasad Birla says: ‘The family widely adopted the system during the depression years. Money was tight, credit was not easily available, and you had to worry about money more than anything else.’12

  Given this, it is interesting to note that the Aditya Birla (G.D. Birla’s grandson) Group, now run by his son, Kumar Mangalam, gave up the parta system in 2003 for the ‘Cash Value Added’ method of reporting results. It was reported that the parta concentrated excessively on production, while the Cash Value Added method looked equally at profitability, asset productivity, and growth.13 The change was part of a more general change in orientation which will be discussed later.

  The Need to Decentralize in a Large Organization

  K.K. Birla reports:

  I believe in decentralization. Once I asked Pandit Govind Ballabh Pant, when he was chief minister of Uttar Pradesh, how strong his hold over the administration was. He said, ‘Krishna Kumar, not a leaf in my state moves without my approval’. What he said was correct. The state did not move, whereas the rest of India moved forward.14

  Or perhaps more revealingly:

  Once R.K. Dhawan, Indira Gandhi’s assistant, sent for me. He said that the prime minister wanted two students to be admitted to BITS (Birla Institute of Technology and Science at Pilani, Rajasthan). I explained the position to Dhawan and expressed my helplessness in the matter. I felt it was fruitless to discuss further as he was only carrying out directions given by the prime minister. I requested Dhawan to fix an appointment for me with Indiraji to allow me to explain the position to her . . . I explained the position to Indiraji, who appreciated it but asked me an exploratory question ‘. . . can nothing be done in the matter?’ I said, ‘Indiraji, there is a simple solution provided you accept’. I told her that I was prepared to place five seats at the disposal of the prime minister. These could be regarded as the prime minister’s quota. My only stipulation for the quota would be that the recommended person should not have obtained less than a certain percentage of marks, say 70 per cent. On this basis, the five students would be accepted. At the same time I also said, ‘Indiraji, for these five seats you will receive 500 requests for admission’. Indiraji smiled and said that I was a clever man to have passed the buck to her.15

  A leading Kolkata industrialist of the present generation (a decade or two younger than K.K.) once said that his enterprises did well when he left them to his trusted executives. Whenever he intervened they got into trouble. The decline of several leading business families from several decades ago is generally attributed to too much intervention by the family members and not enough delegation to professional executives.

  But we should not assume that the only role of the family firm is to delegate, as explained in the final sections.

  Limits of Delegation and the Strategic Role of the Family Centre

  Gita Piramal quotes Shashi Ruia, another industrialist: ‘The key to Aditya Birla’s success lay in his ability to organize himself and everyone around him’. She proceeds to quote Birla himself: ‘What do you do to attract people? You give them tremendous powers and independence while monitoring their performance’. Aditya’s tight management team, consisting of mostly Shekhawati Marwaris like himself, was well regarded, though it has almost fully been replaced by his son, Kumar Mangalam.

  Delegating control to executives is not a panacea. One notes the phrase ‘monitoring their performance’ in the quote above. The story of the revival of the Tata group under Ratan Tata’s leadership is partially a story of his bringing to heel powerful executives who had developed too much autonomy under his predecessor, J.R.D. The difficulty is to preserve a distance from details. As Aditya Birla says, ‘Watch the financials, intervene if necessary, decide what next industry to get into, and which ones to withdraw from’. The story of the rise and decline of Indian family firms and groups is partially one that details which firms have managed to spot the prospects as they unfold and which stayed with old, declining industries.16

  Hence, once the system is in place, a business group needs to make the right entrepreneurial start-up decisions.

  Choosing the Right Enterprise

  The ideal Indian family business group is similar to other venture capital firms or wealth managers but in contrast to its Western counterparts, it, more often than not, takes the initiative rather than wait for entrepreneurs. If anything, this bias towards taking the initiative has now been facilitated by the spread of management education which inculcates skills for evaluating new investments in terms of increasing stockholder value and the members of family groups have learned them formally.

  The Birlas Scout Out New Opportunities

  K.K. Birla deals with this issue in terms of the first enterprise he worked on—the creation of an Indian textile machinery company. This was a task which he found most unpromising:

  Father’s thinking was that as the textile industry was the most developed industry in the country at that time, the manufacture of textile machinery should prove to be very profitable . . . I thought to embark on this venture without proper knowhow would be a rash and hazardous undertaking. At any rate, as father had already decided, we had to proceed with the project and there was no looking back . . . There is a big difference between a consumer industry and a capital goods industry. In a consumer industry, like textiles or jute goods, there is a market even for products of inferior quality . . . if the design and workmanship of capital goods are not up to the mark, that becomes a permanent headache for the customer. This is what I tried to explain to father. He did not agree with this view. I, therefore, made frantic efforts to find a suitable foreign collaboration.

  . . . In reply, father gave me a lecture on what could and should be done. I had no doubt in my mind that what father was saying was of academic significance and to venture into the manufacture of textile machinery alone was like striking one’s head against a wall. Uncle BM (Brij Mohan Birla), as I mentioned earlier, was more practical. He entirely agreed with me and discussed my problems with father.

  We get a somewhat similar account in his brother B.K.’s autobiography:

  One day, towards the end of 1937, Kakoji (G.D. Birla) out of the blue told me, ‘Basanta, your college career will end in March, 1938. You will have to give your full time to business after that. I have arranged for you to enter into medicine manufacture. I have engaged a foreigner, Mr. Percs, for this scheme. He is a specialist in hormone medicines. He will be in Calcutta in March or April, 1938. I will arrange a meeting with him. I have specially selected this project for you. It’s a new field; you will have to work hard’. That was all and then he changed the topic! It was done so casually that I felt a little nervous.

  I had no idea what hormones were, how much investment would be required to set up the factory, what the sales possibilities were, from where I would get a manager, and so on. My mind was in a whirl. After all, I was just seventeen and a college student. One more thing to keep in mind, a seventeen year old Birla boy of today is altogether different from a seventeen year old Birla boy of those days. Television, computers, comics, foreign travel and schooling from the age of two onwards make today’s children mature much faster than they did in those days.

  A few days later, when I wanted to discuss this new scheme with Kakoji, the reply I got was, ‘We will talk about it when Percs comes’.17

  B.K.’s account does not give details of the ultimate result. As reported by Kudaisya, Jugal Kishore, B.K.’s pious uncle, vetoed the whole operation despite its profitability because it involved using animal products.18 It turns out that as with textile machinery, there were a few hiccups in this business start-up process too.

  Looking for the next sector to invest in i
s not alien behaviour. Those who remember Dustin Hoffman’s performance in The Graduate remember the older friend who whispered ‘plastics’ in his ear as the direction of success. The same is echoed in K.K. Birla’s quote about how the family directed him, mistakenly he thought, into textile machinery, or B.K.’s discussion of hormone medicine.

  Securing Succession and Continuity

  The greatest challenge to the survival of a family business is connected with succession, ensuring that the family members from each succeeding generation are able to manage the firm successfully. Often firms dissolve either because of conflict among family members or because of their incompetence. Conversely, family firms face difficulty in inspiring the loyalty of non-family members whose skills may be needed.

  To meet these challenges, founders of family businesses embark on a serious programme of education for their heirs. In K.K. Birla’s biography, which details his experiences following the completion of his undergraduate studies (which he did eventually as a private student in Hindi), we are told that he then studied accounts:

  Within six months, I had become proficient in accounts . . . Father thought that if I acquired some knowledge of the technical side of the workings of a textile unit it would stand me in good stead in managing the textile business. He selected Panchu Babu to give me lessons on the technical side of a textile unit. A south Indian, Panchu Babu was the cost accountant at the Kesoram Cotton Mills. He was neither a technician nor did he have any accountancy background. He was, however, an able man and had a good knowledge of both accountancy and the working of a textile unit . . . What Panchu Babu taught me was the theory of spinning, weaving and sizing.

  . . . Father then sent me to Jiyajeerao Cotton Mills at Gwalior which was one of the best managed units in our organization. Not only that, late Durgaprasad Mandelia, who was the most senior manager under my father, was in charge of this mill. I stayed in Gwalior in 1939 for three months and got thorough training under Durgaprasad . . . In Gwalior, I got training in stores, timekeeping and the technical side. I learnt the names of hundreds of items used in textile mills, such as shuttles, bobbins, picking band, temple, weft fork holder, lease rod, drop box pickers, weft pern, reed hields, not to speak of items which are used in every factory like bolts and nuts, screws, files, etc. Durgaprasad asked me to try to remember who the important manufacturers of important items were, what was the volume of their consumption, what their rates were, and all other details. Not only that, to give me a thorough grasp of the technical side, he asked a fitter to open a carding engine, which is an important machine in a spinning unit, to teach me the names of each part and then to reassemble the carding engine in my presence. I could not have found a better guide.19

  This was all in the 1930s but the pattern would not be too different today, except that an MBA from a leading international business school and perhaps a technical degree in a field of interest to the family business would be expected from the heirs. Aditya Birla, G.D.’s grandson, was one of the first to acquire an engineering degree from MIT, and his son, Kumar Mangalam, is an MBA and a chartered accountant.

  Part of the conventional autobiographical account is usually the proposition that ‘Father was correct and far seeing’—as in the supposed Mark Twain comment that when he was eighteen, his father seemed the dumbest man in the world, but by the time he was twenty-one it was remarkable how his father had matured.20 The narratives indicate that paternal guidance is not always perfect, as is seen in the statements of K.K. and B.K. Birla. Kudaisya asserts that G.D. Birla, their father, was so focused on public affairs that he did not share the kind of relationship with his sons that his brothers (B.M. and R.D.) did. An advantage of the extended family is that if the needed rapport is absent with one relative, it is often there with another.

  The specific factors mentioned give a general idea of behavioral patterns in family firms especially those that are at the centre of business groups. They monitor and evaluate; they allocate capital and managerial resources. Generally speaking, they perform a strategic but not a tactical role. But they also face some inherent challenges connected with social, as distinguished from commercial, sustainability. There are a variety of answers to these challenges—right and wrong—and they are connected with a range of management styles.

  Management Styles: Fathers and Sons—Intuition and Systems

  There are different styles manifest in how the heads of Marwari firms handle the challenge of intervention in their groups’ day-to-day functioning. Piramal lays in contrast what she sees as the highly rational analytic style of Aditya Birla and Rahul Bajaj with the more intuitive style of B.M. (Brij Mohan) Khaitan and Rama Prasad Goenka; she implies that Goenka’s heirs and successors practiced a more rational style. She quotes Rama Prasad Goenka as having said:

  I hear that my sons are more comfortable when they have figures before them, but I have always preferred to listen to people. My gut feeling is my only pathfinder. Harsh, like Ratan Tata, is conscious of and worried about the need for structured planning and appears to be concerned about his father’s enthusiastic response to every opportunity that comes his way.21

  Some of these differences in style between fathers and sons reflect the idea that those who found businesses and those who inherit them are bound to have different professional approaches. Even in non-family firms, like Apple and to a lesser extent Microsoft, tension between the founders and the managers of routine innovation is observed.

  Typically, it has been seen that founder-managed family firms outperform non-family firms, whereas heir-managed family firms do not. However, this is not the case everywhere. All Japanese family firms, whether run by heirs or founders, outperform others, and incidentally the highest performers are those managed by adopted heirs—quite frequently, heirs who have attained their status by marrying into the family.22

  Piramal focuses her attention on her two paradigms, the inheritors of large groups, Rahul Bajaj and Aditya Birla, emphasizing the importance of the strategic vision that they brought to their groups (as she does with Ratan Tata) in sharp contrast to the intuitive style of many of the business founders. The inheritors as distinguished from the founders in her vision are more systematic and organized. The heirs are also characterized as being more attentive to quality issues, though this may be an adaptation to the greater competitiveness of the Indian market today. Aditya Birla’s son, Kumar Mangalam, replaced his father’s senior executives, changed the financial reporting system, and more importantly changed the human resources system, responding both to his own style and the changing demands of business in post-reform India.

  Each new generation might be expected to bring in new ideas. The heirs of a business house might differ from its founders. They might feel a compulsion to address problems which they feel had been accumulating as the founder aged and times changed. The changes brought by Ratan Tata were as dramatic as those brought by Kumar Mangalam Birla. If the retirement of old executives moved more slowly in Tata’s case there were reasons everyone understood. These reasons were rooted in the ethic of the Tata group and the relationships its senior executives had with the companies. Gita Piramal reports similarly that Harsh Vardhan Goenka commissioned a McKinsey study which recommended various changes, and though his father felt that these changes were dubious the RPG Group still went ahead and implemented them.23

  One of the greatest challenges family businesses face is the ‘routinization of charisma’.24 Undoubtedly, entrepreneurs can found and manage businesses using their intuition. For an institution, business or otherwise, the founder’s charisma has to be institutionalized. This is obviously what heirs strive to do but it is difficult.

  Nassim Taleb points out in his latest bestseller, Antifragile,25 that business school techniques and theories should be derived from successful business practice, not the other way around. It is to be expected that successful business practitioners may not need them, but their heirs might value the systematizatio
n and explication business schools provide. Taleb reports a business economist telling him that to handle a particularly complex financial derivative one had to know the Girsanov theorem. But none of the traders he knew had ever heard of such a thing. Given their proclivities he felt they would think it a brand of vodka! Or as Wassily Leontief, an economic quant, said once: If you cannot explain something in words it is false, even if a mathematical explanation is often more concise, easier, and certainly more computable. In a more generalized way, the intuitions of successful business founders obviously worked for them; their heirs might prefer tried-and-tested methods.

  The Birla versus the Tata Style

  Piramal describes the Birla style, focusing on loyalty and financial control, as recognizable enough, so it leads foreign firms, disposing of their assets, to prefer a B.M. Khaitan or a Rama Prasad Goenka with a less uniform and more relaxed style of management. But as we shall see, defining that style is not so easy. To quote Piramal again: ‘While a Tata success depended on the performance of individual executives, the Aditya Birla group depended on its systems’. That is all very well, but as we find later in her book she thinks that the Birla success depended as well on the strategic vision and the organized pursuit of it by Aditya Birla as an innovative entrepreneur engaging in continuous, systematically planned, and rapid expansion. In fact she has a later quote from Aditya Birla in a specific reference to Ratan Tata—one which is more generally applicable: ‘If you don’t have systems, any individual will fail, and if you have systems but don’t have a leader to lead the system, it will fail . . . I’m sure the Tatas have very good systems’.26 What Aditya Birla may not have recognized is that Ratan Tata was also hoping to have a system for innovation that transcended individual leadership. Whether that was achievable was the issue. Tata thought that he needed to change his companies’ attitudes to respond to competition and serve customers more efficiently than they did. Piramal quotes Aditya Birla: ‘I think there is a need to take some hard decisions which doesn’t come from guidance alone . . . Success is knocking confidence into Ratan’.27