Family Owned Business Institute

Research Scholar's Abstracts 2010 - Janyanth Jayaram, Jaideep Motwani, Mita Dixit

A Case Study Analyses of Logistics and Supply Chain Management Strategies in Small and Medium Enterprise Family Owned Businesses in India

Jayanth Jayaram, Jaideep Motwani, and Mita Dixit
2010

Worldwide, more than 75 percent of all business enterprises are owned or managed by families (Ramachandran, 2009). Moreover, family-owned businesses represent 50 to 90 percent of the Gross Domestic product (GDP) in all free market economies (Kenyon-Rouvinez & Ward, 2005). Similar to trends in several developed countries, even in India there is a large portion of the economy driven by family-owned businesses. The success stories of large family owned businesses like Reliance Group and Tatas (Range et al, 2008; Chandler, 2007) have attracted the attention of the worldwide press through their aggressive growth oriented strategies and professionally run companies. However, India has historically also seen the co-development of the small and medium enterprises as well. For example, in the competitive sector of retailing (Fernandes et al., 2006), the traditional and unorganized sector of small ‘mom and pop’ retailers run by family owned businesses co-exist with the large corporate retailers. Ward (2000) estimates that there are about 6 million small scale industries in India all of whom are family businesses have an average net worth of less than $500,000. Also, India’s small and medium sized enterprises consisting predominantly of family owned and managed businesses are projected to contribute up to 22 percent of the national GDP by 2012 (Jindal, 2008).

Similarly, on the consumer side, the shopping patterns of Indians differ from the shopping patterns of consumers in the developed world. Although packaged foods are becoming more common in India, most middle-class families still shop for food every day and will spend money on appliances such as juicers to help their families eat healthy (Beinhocker, 2007). A combination of necessity and preference leads most middle-class consumers to do much of their shopping in small-format and unorganized stores: mobile vendors (selling fresh vegetables and fruits), paan shops (tobacco stores that sell other goods), roadside pavement markets, and kirana (mom-and-pop) stores. In contrast, modern-format stores in malls are becoming more common in urban India. Some 40 organized retail chains have set up shop in the past six or so years. These stores offer prices that are 10 to 20 percent lower than those of mom-and-pop shops, as well as the convenience, for time-pressed shoppers, of having almost everything in one place. Consumers are more likely to shop at modern-format stores for clothing and appliances.

Most prior literature in the family owned business domain tends to focus on the large private houses that are family owned, and predominantly on issues relating to family governance (Neubauer & Lank, 1998; Sharma et al., 1997), intergenerational transfer of wealth, succession (Handler, 1989a), entrepreneurial spirit and professionalism across family owned and non-family owned businesses (Brockhaus, 1994; Heck & Mishra, 2009).

More recently, in India, largely due to post liberalization economic policies, supply chain and logistics business has gained momentum and importance. The Indian logistics industry is set to become a $125 billion industry by 2010 and the outsourcing of third-party logistics business (3PL) in the country could touch $90 million by 2012, up from the current $58 million (ASSOCHAM, 2008). Therefore, a scientific approach on the research issue of whether a family owned firm is necessarily at a disadvantage versus a professionally managed firm with respect to the supply chain and logistics management challenges is vital.

Largely because private sector firms in India have been operating in a protected atmosphere with an undisputed hold over a large domestic market, their products were historically of poor quality by world standards. With the re-emergence of competition from firms that provided superior quality goods largely from some of the prominent family owned businesses in India, firms in the SME sector were forced to reinvent themselves. India along with China is becoming an important global source for products and services in industries such as retailing, financial and software services, auto supplier industry and apparel industries, to name a few. Even among professionally run companies, customers in developed countries such as USA and in European countries complain of uncertainty in supply lead times, quality issues and non-responsive issues on part of the supply base in India. This phenomenon is especially stark in the small and medium size firms which are typically in the family owned sector. Yet, these firms who have traditionally developed local economies are finding saturation and intense competition in the local markets leading to them to seek global customers. Thus, the impetus for competing effectively with professionally run companies on the logistical and supply chain excellence is vital today. These issues are especially stark while comparing small and medium sized family owned companies with large corporate and professionally run companies. Family owned businesses have traditionally retained a large and loyal local customer base by constantly competing in the price-sensitive segment. Whereas, professionally run companies have used structural expertise and capital investments to constantly bring in technological innovations that have led to first mover advantages. Yet, the pattern is not clear and consistent. We seek to fill this research gap through this study.

We will use a case based approach to study the research objectives laid out in the ensuing section within a small sample of firms in the small and medium enterprise sector in India, predominantly in large cities such as Mumbai and Chennai, as these metro cities are commercial hubs and major centers for logistics business. Findings from our study will help develop a deeper understanding of the barriers faced by these firms and how these firms are competing with their organized sector (and professionally run) counterpart firms in maintaining, defending or expanding their market share.