Dr K. Anji Reddy founded Dr Reddy’s Laboratories Ltd (DRL) in 1984. Since then, the company has grown to become one of the largest pharmaceutical companies in India. The company professionalised early on, and over the years, the family members defined and refined their roles for the efficient and effective running of the company. Dr Reddy passed away on March 15, 2013. His son-in-law, G. V. Prasad and son Satish Reddy had been with DRL for more than two decades by then. Prasad, CEO, acknowledged that a lot needed to be done to fulfil Dr Reddy’s dreams. He had been contemplating his own future role in the company and the need for a smooth succession. But who would succeed him? Would a non-family CEO be a suitable replacement?
ISBInsight: What was the objective of writing the Dr Reddy’s case study?
Ramachandran & Bang: Dr Reddy’s is a special case. G.V. Prasad, the Co-Chairman and CEO of the company, has been involved in building the company from the very early stages. Prasad has seen the company transform from an entrepreneurial small business to one of India’s largest pharmaceutical companies.
At the Thomas Schmidheiny Centre for Family Enterprise at ISB, we are interested in family business case studies. Dr Reddy’s highlights how family businesses can practise a high standard of governance and professionalism. Many family businesses usually employ friends and family, and struggle to build their businesses successfully. They realise the need to professionalise too late. The Dr Reddy’s case study enables us to understand what helped the company become the world class organisation that it is today.
What were the unique aspects of writing this case and for Professor Ramachandran in teaching this case?
Ramachandran & Bang: There are several unique aspects to the Dr Reddy’s case. One, this family entrepreneurial venture grew to become a global company, constantly making changes in the product-market scope. It redefined organisational capabilities to retain a competitive advantage while remaining a family-controlled organisation. During this journey, Satish, the son and Prasad, the son-in-law worked closely with Dr Anji Reddy, all with a shared purpose and set of values. There was no conflicting or selfish agenda. Both Prasad and Satish appreciate each other’s strengths and play the leadership role very effectively. Satish as the Chairman looks at the company’s external affairs, while Prasad handles the operations. If the rules of this “doubles game” are not followed, there is a risk that employees might take advantage or that there might be clashes or misunderstandings.
Another unique aspect is the doubles game that is played between the family and the professionals working in the organisation. Prasad has a management council which consists of department heads. The kind of autonomy and freedom that Prasad gives them in handling their respective divisions is also important. You cannot hire professionals and then expect them to work in a constricted atmosphere. Prasad considers himself a professional first!
The third unique aspect is that the leader i.e. Prasad, realises the need to find a replacement when he steps down. Prasad is already talking about finding a non-family professional to run the company after him. This is commendable as he is still young at 57 years old. The concern for him is how a professional who is a non-family member would understand the family values of the company.
Could you identify two or three challenges particularly for Indian owned family businesses?
Ramachandran & Bang: Succession is universally the largest challenge in a family business. In India after liberalisation in 1991, due to availability of more opportunities, a lot of family businesses were established. Out of 4,809 sample Indian listed companies that we studied, 2,731 entities were standalone family companies. Past research has shown that the average age at which entrepreneurs start a firm is about 40 and the average tenure of founders is generally 24 years. With the average age of standalone family firms being 28.73 years, many of these companies would now be looking at a change of guard, with their founders’ average age being in the 60s today. A large number of these companies are in the phase of the second generation coming in, and the first generation retiring. In addition, the children of Indian family business owners often go abroad to study. With the eco-system that exists today, they want to become entrepreneurs and have a start-up of their own. Not all such children are looking at coming back into running the family business. With this background, succession becomes even more critical in the Indian context as the number of companies is so large.
The second challenge is professionalisation. In India, we still believe in the system of an extended family running the business, with an inherent culture of ‘owner’ and employees working for the owner (and not the organisation). The underlying challenge is to distinguish between what is good for the organisation from what is good for the owner family on all business aspects. In addition, there are challenges of treating employees professionally and giving them an environment in which they can utilise their potential. At the end of the day, the promoter family has the last word whereas in non-family businesses, there are systems and processes in place to take decisions.
Given this context, Dr Reddy’s has professionalised well, and the family members play a joint game with non-family professionals very effectively. At Dr Reddy’s, there is a shift in mindset and the non-family professionals are given freedom along with accountability.
What are the main takeaways for passing on the family owned business baton?
Ramachandran & Bang: First, family owned businesses should look at merit and not relationships. If a person is meritorious, then it doesn’t matter if she/he is a family member or not. One should look at passing the baton to someone who is capable and will be able to take the company forward. If you have equally qualified candidates and one is a family member and other is a non-family member, then you might want to select a family member as the family member is entrenched in the value system from her/his childhood. Of course, there is a comfort factor too. However, if the family members are not qualified or capable or interested the company must select someone from the outside.
Second, one has to look at the vision of incoming leaders versus the vision of the existing set of leaders. While fresh set of ideas should be welcomed, one has to acknowledge the things that are already in place.
Third, the selected candidate/s must be groomed by the outgoing family business leader. Succession is a process. It is not an event. Sufficient time must be given for the incoming leader to understand the company, its values, culture, vision and strategy, under the guidance of the outgoing leader.
Lastly, the old leadership must actually retire when the new person finally takes charge. Otherwise they never stop interfering. They have to pass on the baton and leave. There may be a cooling off period for a year or six months where the old leadership is not available at all. In this period, the new leadership establishes itself.
Could you describe some unexpected takeaways from this case study during class discussions?
Ramachandran & Bang: Typically, in a family business case, what is expected is that we talk about issues in the family. In this case, there are no issues with the family such as one member undermining the other, or two people not getting along, or someone trying to capture ownership. At Dr Reddy’s, the relationship between Prasad and Satish is smooth. So, the students bring out the best practices in family businesses that are practised at Dr Reddy’s. For example, the case discussion revolves around two family members working together, family members working with professionals, family members practising high levels of governance. Students find good behaviour unexpected. It is difficult to find a family business where there are no family issues. This is one case that serves as a benchmark for other family businesses to emulate.
How can the learnings from this case be applied to succession management strategies across various businesses in India?
Ramachandran & Bang: Irrespective of whether a business is run by a family not, if the organisation is large enough, it has a legacy. When you talk about Tata, Murugappa in business and the Indian Institute of Management Ahmedabad in education, their founders and leaders have left a legacy. It may be more pronounced in family businesses. When you talk about Tata, you talk about Jamshedji Tata, the founder. It is important to institutionalise the values and culture created and built over the years. Most businesses institutionalise systems and processes as the organisation becomes larger. But not enough care is taken to institutionalise the values and culture of the organisation. In the case of Dr Reddy’s, Prasad is trying to find a successor who will not only take forward the growth of the company but also take forward the value system of the company. Similarly, irrespective of a company being a family business or a non-family business, care should be taken to institutionalise the value and culture of the company.
Could you share some anecdotes while interacting with the company?
Ramachandran & Bang: When Prasad joined the company, the founder Dr Anji Reddy had another partner. They had about 400-500 employees at that time. The partner walked away from the business to start something of his own around that time. Around 200 employees left the company with him. That’s when Prasad decided that he would put systems and processes in place such that the institution is bigger than the person. So, no one person’s loss will affect the company to such an extent. This led to governance mechanisms and systems and processes that were professionally managed over a period.
One more story is that before they were listed on the New York Stock Exchange, Dr Reddy’s had an ornamental board in place with ’yes men’. They decided to have a stronger and active board. Prasad invited a few eminent people including one who was already known as an activist board member. So, after the first meeting of the reconstituted board, this particular board member took Prasad aside and told him that he thought he had made a mistake by joining their board. He told Prasad that they lacked good governance practices. He suggested that more information be given in advance, disclosures be made, and that board members be allowed to have open discussions, all in the interest of the organisation. Since Prasad wanted the board to be an active board and a custodian, he accepted all suggestions and imbibed them into practice.
How has your experience been of teaching this case in class?
Ramachandran & Bang: This is an extremely rich case, not just for a family business course but also for a strategy course. In the context of family businesses, it can be taught from various angles: professionalisation, governance and board of directors, institution building, leadership succession, to list a few. Similarly, in the context of a strategy session, the case can be used to discuss growth strategy formulation, building of resources and capabilities, strategy implementation, and so on. In short, this is a very rich case that is amenable to discuss a number of themes under family business and strategic management.
About the Case Authors:
Professor Kavil Ramachandran is Executive Director, Thomas Schmidheiny Centre for Family Enterprise at ISB.
Dr. Nupur Pavan Bang is Associate Director, Thomas Schmidheiny Centre for Family Enterprise at ISB.
About the Writer:
Nikhila Chigurupati is a Content Associate at the Centre for Learning and Management Practice at ISB.
About the Case:
Bang, N.P., Ramachandran, K., 2018. The Unfinished Agenda: Dr Reddy’s Laboratories Ltd. Indian School of Business case. Harvard Business Publishing. https://hbr.org/product/the-unfinished-agenda-dr-reddy-s-laboratories-ltd/ISB097-HCB-ENG