Impact of divisions in family businesses: Motivations and consequences

The recent trend of ownership restructuring and vertical splits amongst prominent Indian family businesses, exemplified by the division within the Godrej Group, has brought to the forefront the complexities and challenges associated with managing large, multi-generational enterprises. Though opting to split the business may appear as a strategic manoeuvre to navigate differing visions and aspirations within the family, it necessitates a thorough examination of both the potential benefits and drawbacks.

This article delves into a comprehensive perspective on family business divisions, scrutinizing both the motivations propelling such decisions and the adverse consequences they may entail at both familial and corporate levels.

The positives

Complexity of managing large conglomerates: As family businesses expand and diversify, managing the intricate web of operations and stakeholders becomes increasingly challenging. Formations of smaller clusters, each having its own strategic business units, allows for streamlined management structures and clearer accountability, leading to enhanced efficiency and agility in decision-making. For instance, the Adi-Nadir and Jamshed-Smita clusters will enable the entities to focus on their core competencies and strategic priorities, driving operational excellence and value creation in their respective sectors.

Unlocking value and growth potential: A split can unlock the individual value and growth potential of different business segments. Specialised focus allows each entity to tailor strategies, attract specific talent, and pursue targeted investments, ultimately leading to greater success and profitability. The division of the Godrej Group into separate entities controlled by different family members should enable each cluster to capitalise on their respective strengths and market opportunities, drive innovation, and value creation.

Accommodating growth and aspirations of the family: As family businesses expand across generations, differing opinions on strategy and management can arise, leading to conflict. Dividing the business offers autonomy to individual branches, fostering ownership and accountability while reducing discord. For example, the Birla Group split allowed each faction to pursue independent growth, leveraging diverse skills.

Additionally, younger generations may seek opportunities aligned with their interests, driving innovation. For instance, the Bajaj Group's diversification into finance empowered the next generation to pursue their entrepreneurial vision.

Learning from experiences: Observing the challenges faced by other business families during succession or disputes can serve as valuable lessons. Proactively choosing to divide the business allows for a planned and amicable transition, ensuring the preservation of family relationships and the brand's reputation. The Bajaj family's decision to split the Bajaj Group into separate entities facilitated a smoother transition of leadership and ownership, mitigating the risk of future legal battles and reputational damage, while preserving the family's unity and legacy.

Ownership and rewards: A strategic and amicable split within a family business can enable individuals to have greater "skin in the game" and receive rewards commensurate with their contributions and aspirations, ultimately fostering harmony and prosperity within the family. The Mittal family, for example, founders of the Mittal Steel Company, decided to amicably split the business to align ownership with individual aspirations and rewards.

Moreover, the division of the business not only aligns ownership with individual aspirations and rewards but also serves to minimize politics in decision-making processes. By decentralising control and empowering each cluster within the family, quicker decision-making is facilitated, eliminating the need for seeking approval from numerous stakeholders.

While the preceding discussion highlights reasons that motivate families to split, it is essential to recognise that divisions entail inherent risks and complexities, too.

Now, we discuss some negative impacts of splitting.

Unintended downsides

Loss of synergy and economies of scale: A unified conglomerate often benefits from synergies between diverse business segments, leading to cost efficiencies, shared resources, and heightened bargaining power. 

For instance, the Tata Group's diversified portfolio leverages synergies across industries, bolstering its competitive edge and financial performance, including a cohesive brand identity. 

However, the division of such conglomerates, as seen in the case of the Ambani family's split of the Reliance Group and the TVS group, risks diluting these synergistic advantages, thereby impacting profitability and competitiveness.

Potential for family conflict and rivalries: Though a division may aim to address the existing disagreements or differing aspirations within the family, it can inadvertently give rise to new challenges and rivalries between the separated entities. The battle between two Hero Group entities, after the split, regarding the use of the brand name Hero, highlights the potential for discord arising from family business divisions. Such conflicts can impede decision-making processes, hinder strategic alignment, and erode shareholder value.

Challenges in succession planning and leadership development: Staying unified provides access to a broader talent pool, both from within the family and externally, ensuring continuity and strength in leadership across the organisation. The Murugappa Group's robust leadership development programmes serve as a prime example, facilitating seamless succession planning and talent pipeline management across its diverse business verticals. However, splitting the business may curtail these opportunities, making it more challenging to ensure a seamless succession process and maintain robust leadership across the separated entities.

Emotional and cultural impact: Family businesses often pride themselves on strong cultural identities and shared values that underpin their success. The Murugappa Group exemplifies this with its deep-rooted cultural ethos of trust, integrity, and entrepreneurship, which has fostered a cohesive organisational culture and sustained business performance over generations. However, division poses a risk to this unity and shared purpose, potentially leading to emotional challenges and a loss of cultural cohesion within the family.

Growing wealth isparity: Past business splits have revealed that while divisions may start out equitable, over time, one faction often amasses more wealth and resources. For example, the Ambani brothers' feud over the Reliance Group's assets led to a significant wealth gap between Mukesh and Anil Ambani. These disparities can fuel family tensions and perpetuate financial inequalities, highlighting the socioeconomic impact of family business divisions.

Familial vs corporate

In navigating the complex terrain of family business divisions, it becomes imperative to acknowledge the nuanced interplay of motivations and consequences. Though the prospect of splitting a conglomerate may offer avenues for addressing immediate challenges and accommodating evolving aspirations, it also entails significant risks and losses, both at the familial and corporate levels. The case studies of prominent Indian business families, such as the Ambanis, Birlas, and Munjals, underscore the intricate dynamics and far-reaching implications of such divisions, ranging from wealth disparities to emotional upheavals.

By embracing a proactive stance towards addressing emerging challenges, family conglomerates such as Godrej could potentially have emerged as global powerhouses, wielding not just economic influence but also shaping the broader political and societal landscape.

However, by choosing to split, these conglomerates risk diluting their legacies and missing out on transformative growth opportunities. Ultimately, the path forward for family businesses lies in striking a delicate balance between tradition and innovation, unity and autonomy, to ensure sustained success and relevance in an increasingly competitive global landscape. We can only hope that the sum of the parts is eventually greater than the whole, in numbers, as well as in family harmony, togetherness, and impact.

The authors are with the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business