Keeping it in the Family: Strategies for the GCC Family Business Conglomerate

Family businesses in the GCC are true heavyweights of the regional economy. With an 80% share of the non-oil GDP they represent the lifeblood of the private sector. Close to 60% of family businesses in the region sprung up during the 1940s-1960s, when the oil boom underscored the times. Those with deep-rooted ties and special access to business networks and capital thrived, aided by favorable economic conditions, closed economies and limited competition. However, the landscape for the GCC family business (many of which are conglomerates) has been changing for the past years which has presented them with an array of challenges, affecting financial results and business performance.

Strategic Challenges

Management Systems and Style

As the family business expands and matures, its internal business systems need to grow and mature at the same rate. Often, however, there is a pronounced misalignment between the size of the organization and the maturity of its management systems.

This entrepreneurial approach to running the business often lingers longer than it should, often affecting business performance adversely. This is sometimes driven by an entrepreneurial mentality which puts more focus on entering and developing new businesses rather than scaling and professionalizing existing ones. With the growth of the business there should also be a shift to a more professional management style and implementation of the right structures, processes, systems, and culture to match the maturity of the organization. Practically, this translates to adopting such elements as organizational policies and procedures, corporate governance, performance management, strategic and operational planning, talent management, etc. This shift from an entrepreneurial management style to a more professional one should be a bedrock in the strategies of family businesses in the region.

Pillars of the Family Business Strategy

Of course, all family businesses are different, and each organization should craft a strategy based on their core competencies, sectors they are involved in, and challenges facing them. However, in the GCC many of the critical decisions, (which essentially represent the strategy), can fall into three broad strokes or pillars (Exhibit 1).

Exhibit 1: Strategic Pillars of the Family Business

Family Governance

Several points of contention emerge in the family business which can include choosing future leaders of the family, exiting of family shareholders, mechanism to solve family conflicts, the employment of family members into the business, etc. In fact, 50% of family businesses in the GCC argue about the future direction of the business and over 70% do not have a process to deal with family disputes. A fundamental aim of family governance is to mitigate conflict and harmonize interests to ensure business sustainability. Successful family businesses in the region often establish a governance model and do the following

• Establish and formalize family rules and polices through a family constitution
• Have a clear succession plan in terms of family ownership and leadership
• Establish the right structures and bodies to enable proper family governance e.g. family assemblies, councils etc.

Professionalization of the Firm

As the business evolves so should its management systems. The focus on professionalization is often forgotten as more efforts are put in developing new businesses and capturing new opportunities. Professionalization essentially means upgrading management systems through better implementation of several factors including, namely

• Corporate Governance: Having an effective Board of Directors with the right structure, composition, roles, decision making rights, etc. In addition to having the right supporting committees to support the business (audit, executive, remuneration, etc.)
• Planning and Performance: Having a planning function for both holding and subsidiary levels supported by a performance management system
• Controls: Effective management controls are in place to ensure proper functioning of business processes
• Processes, Policies, and Procedures: Effective processes and policies for core business functions, job descriptions, authority matrices, etc.
• Technology: Implementing technological systems which increase efficiencies in processes and promote more effective decision making

Exhibit 2: Portfolio Growth Strategies

To avoid the pitfalls of a poor portfolio strategy, portfolio management should be put in place, which entails a periodic, rigorous, non-objective, and systematic evaluation of new and existing investments. Active performance measurement and monitoring should be institutionalized as well as a periodic external scanning of new business opportunities that can bolster portfolio performance. Opportunities for divesture, IPOs, or required business transformations should be driven by the portfolio management function of the group.

Finally, to optimize portfolio direction and management it is critical to clearly define the role of the holding or parent company in relation to subsidiary businesses. This involves defining the level of control the parent asserts which articulates its strategic vs. operational focus. There are primarily four principal roles which constitute the control spectrum of the holding company that range from a purely financial holding, to one which is heavily involved in operations (Exhibit 3).

Exhibit 3: Role of the Holding

The role the holding company should play depends on a variety of factors including the synergies existing between companies, capabilities of the office, centralization of activities, etc. Nevertheless, however the structure and role of the holding are designed it should emphasize creating value (financing advantages, business synergies, centralization of activities etc.) and not destroying it (additional complexity, slower decision making, inefficient processes, etc.) for the sister companies in the group.

Professionalization of the Firm

With changing business dynamics and regional landscape, it is now more critical than ever for GCC family business conglomerates to have a clear vision and strategy. Economic conditions, competitive pressures, generational transitions, and management system maturity comprise key challenges for these companies. However, these challenges can be tackled effectively by embedding three fundamental pillars into the organizational strategy.

1. Family Governance: Mitigating and harmonizing family interests to ensure business sustainability
2. Professionalization of the Firm: Moving from an entrepreneurial management approach to a formalized professional one with the right structures, processes, systems, and culture aligned to the maturity of the organization
3. Portfolio Direction and Management. Establishing a portfolio direction aligned to organization core competencies and market factors with a rigorous and institutionalized approach to evaluating and managing investments and a clarified yet value-creating role played by the holding company.

*Sources: All information above is based on primary and secondary research conducted by Caliber Consulting