The need for family businesses to stay relevant

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The travails of Ferrero provide the latest news in a something which was known earlier, that the chocolate industry will have to take a hard look at itself. The FT also carried an article on Nestle and Lindt facing such pressures.

This is an increasing trend where the traditional family businesses, which have succeeded on the back of a super successful product, face challenging times where they face a possible decline for their flagship product. This is a situation, where the chocolate makers are currently facing, due to the growing trend towards healthier lifestyles have led to declines in growth rates. Recent findings from government authorities have shown the unhealthy impact of sugar and palm oil to human health.

These businesses have to face these challenges which the new environment brings. Being family run with the inherent challenges of managing the family, and also depending on the single product for the firms success does not make things easier.

There are numerous examples of family businesses not being able to cope with the changing environment.

Earlier on in 2006, Japanese temple builder Kongo Gumi, supposedly the oldest family business in the world at the time, running since 578 closed its shutters after 14 centuries due to debt and unfavourable economic conditions. The Japanese economy reduced the contributions to temples, and the bursting of the real estate bubble in Japan made it difficult for Kongo Gumi to operate despite $67.6million in 2004 revenues.

There are other examples of relatively newer businesses in India, when in 2015, the Ghantewala sweet shop closed after 225 years in business. The business had survived the collapse of the Mughal Empire, seen the rise of the British rule, Indian Independence but found themselves unable to cope with the growing regulations and compliances along with the decline in sales as people’s eating preferences changed.

It is interesting to note, in this light, that Pepsi and Coca-Cola have moved into healthier drinks, to include juices, flavoured water and recently Pepsi moved into dairy with its launch of Quaker Oats Milk

There are also traditional handicraftsmen, jewellers and artisans who had flourished by royal patronage and who face the constant pressure for survival in today’s changing times. A heritage jeweller in Jaipur, (who requested anonymity) said that the growing expectations of the next generation along with their lavish lifestyles puts increased pressure on the family business. He admitted that the customer demand for their jewellery had dried up, with the current generations preferring lighter and cheaper designs, due to convenience and security. “No one wants to wear real jewellery anymore” he claimed, indicating that there is a thriving business in fashion imitation jewellery which has also spawned multiple designers. He is faced with the dilemma of not being able to offer these along with his brand as he enjoys a reputation for the original traditional jewellery. He started a new line by next generation under a separate brand. His other competitors in the same business are still carrying on the traditional business and face declining sales.

We can also see the challenges that the Italian fashion houses have to face, given the handicrafted products that they make compared to the cheaper offshored products from cheaper factories. Or even manufactured by robots. In fact, the chocolate manufacturers have stated that they face competition from the hand made local artisans, for their robot manufactured products. Which may be run by small local families! So this brings us to a full circle, with larger family run businesses being beaten by locally run small hyper local businesses. Schumpters’ creative destruction policy at play? On the other hand, there have also been the example of the German Mittelstad becoming world leaders by their focus on small niche products but catering to the world markets. Whether a broad stoke or a narrow focus, family businesses like all businesses will have to get out of their comfort zone, and will have to review their relevance regularly, if they are to survive. Just sitting on legacy and past glories will not help. It is not a case of how fast you are running, but how fast the world has changed.

-By Rajiv Agarwal is the Associate Professor of Family Business at SPJIMR