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

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

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

The Rise of Competition

Limited competitive pressures driven by closed economies are no longer the norm in the GCC, and all countries have entered the World Trade Organization since 2005. Moreover, recent economic reforms, liberalization, and the rise of economic cities has opened up various sectors which previously enjoyed protection. This rise of competitive pressures will require family businesses to put a laser beam focus on strategy to better analyze their positioning and business portfolios to gear their companies for success in the years to come. The recent oil glut hitting the region, also stresses the need to have the right portfolio mix, and better assess internationalization and diversification strategies to mitigate economic risks.

Generational Transitioning

The old adage “The first generation builds the business, the second makes it a success, and the third wrecks it,” unfortunately is more than just a saying. Real statistics back this up with only an estimated 10% of family businesses making it successfully to the third generation. Entering this danger zone are many of the region’s family businesses, with 75% of them currently owned and managed by the second generation.

The large size of GCC families (average of five individuals per family) exasperates the generational challenge by putting pressure on family businesses to grow as quickly as possible to maintain the wealth of family members. In essence, very often the family grows faster than the business does, which presents a serious growth challenge to the business.

Moreover, the transfer of control to a third generation means that a company formerly managed by siblings with the same family roots is now controlled by cousins, with different ones. With more family members and consequently more blood lines the likelihood of internal rifts and formation of family silos is increased. In addition third generation growth can often mean possible entry of non-family members. This increase in number of shareholders and weakening of bonds can often make control on decision making and strategy less centralized and more complex. Essential to effectively managing family cohesion and generational transitions is having a robust family governance system (structures and policies to manage the family-business dynamic) embedded into the strategies of the organization.

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


Portfolio Direction and Management

Core to the strategy of the GCC family business conglomerate is having a clear portfolio direction. Core competencies of the group need to be clearly defined and an investment strategy outlined to match those competencies and opportunities in the market. Without a clear strategy and vision, some GCC family businesses have been spread too thin and have entered sectors haphazardly without factoring synergies with existing businesses and core organizational competencies. In fact, in the GCC, roughly 48% of family conglomerates operated in more than five sectors and a further 40% operated in three or four, with only 12% involved in one or two sectors. Consequently, many of the GCC family businesses’ portfolios have evolved to be too fragmented with investments that don’t add true value, leading to an overstretched and complex organization. In addition, sentimental attachments to pioneering or original businesses in the group often have affected portfolio performance, with an unwavering reluctance from owners to divest from under-performing businesses of this nature.

Portfolio diversification and growth strategies can fall into three categories (Exhibit 2), and avoiding a fragmented portfolio requires putting more focus on adjacent and value chain expansions. Although there are many exceptionally performing family businesses with a diversified portfolio, the ones with a coherent and focused portfolio often over-perform those that are highly diversified.

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 more 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.

The Road Ahead

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