Family businesses threatened by rapidly changing environments

By Business Reporter — MUSCAT: Jan 8: Family businesses in the Middle East and North Africa (MENA) region are facing challenges to development, according to a recent study by management consultancy Strategy& (formerly Booz & Company.) To overcome these obstacles, they need to identify their priority areas and proactively institutionalise. MENA family businesses are currently facing three main challenges to sustainable business growth: 1) problems with transitioning from generation to generation, 2) increasingly challenging business environments and 3) more complexity in existing business models. For example, the older, founding entrepreneur of the business is often faced with next-generation family members who have different aspirations for the company and want to be involved in decision-making.

Family business models have also become more complex, now often having a fragmented portfolio spread across various asset classes, geographies and industries, which can create instability and the need for more oversight. Lastly, tighter financial conditions, increased competition, economic slowdown and disruptive innovative trends continue to threaten these businesses. To overcome these challenges, Ramy Sfeir, Partner with Strategy& and the leader of the family business, investments, and real estate practice in the Middle East, explained: “Family conglomerates in the MENA region need to focus on becoming institutions. The journey towards becoming professionally-run institutions will be different for each family business and each will have a different starting point. Institutionalisation will successfully separate family matters from corporate affairs, increase professionalism and maximise value to the owners of the business. It will also make the transition from a family business to a professional enterprise run to the highest standards of corporate governance and transparency.”

To respond to these challenges, family businesses need to identify their priority areas of action as they embark on their institutionalisation journey. They need to take measures in one or more of the three critical areas:1) governance, 2) strategy and 3) corporate enablers. When examining governance practices, family businesses need to build a resilient and best-in-class family and corporate governance tackling areas such as such as the separation of family and business matters, how information sharing occurs between stakeholders, and overall levels of transparency. Such governance structures are vital because they help to deal with the often divergent perspectives between the generations. In terms of strategy, family businesses must identify a few core capabilities to focus on. They should then ensure that their entire organisation and resources are devoted to developing these core capabilities and they should align their core capabilities with their business objectives.  This will allow them to differentiate themselves from competitors and maintain a right to win.

Lastly, family firms’ corporate enablers help it to deliver on its business strategy. This is particularly important for conglomerates with diverse portfolios that contain business entities with different maturities. These require a strong holding entity that will consolidate business assets under one roof and ensure proper oversight and support. Such a holding entity needs best-in-class centralised corporate functions. Maria Abou-Sakr Manager with Strategy& and also a member of the family business, investments, and real estate practice in the Middle East, said: “The importance of the three areas of governance, strategy and corporate enablers can be seen by examining MENA family businesses as they make the journey towards becoming institutions.”

Although each family business has unique features, Strategy& has identified four archetypes, drawing on actual examples from family businesses in the region. For each type, the institutionalisation road map will be different. The first type, the “one man show,” owes its success to one or a few family members and lacks strong non-family corporate capabilities. As new generations join the business, the “one-man show” struggles to decide who should run the business and how. Issues around the areas of governance and corporate enablers should therefore be urgently addressed. The second type, the “business-family merger,” has a growth strategy and developed differentiating commercial capabilities but does not distinguish between family wealth and corporate assets. A top priority should be improving governance.

The third type, the “going concern, going nowhere,” is a legacy organisation with large, established businesses, and a strong market position. It cannot achieve its growth and profitability objectives because it is not nimble enough to respond to changing market conditions. The main focus should be the development of an adaptive strategy for the future to remain competitive and grow. Finally, the fourth type, the “institutionalised family business,” has strong performance, however runs the risk of complacency. This type of family business must maintain a dynamic strategy, continuously grow its differentiating capabilities to avoid backsliding, and be willing to dispose of underperforming business units.