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Family businesses face new challenges

Dubai, April 29, 2009

A family-run business is a viable model for competing effectively in the global economy, but in today's turbulent times, such family businesses operating in the GCC face new challenges, according to a new study.

These businesses face the dual challenge of operating in a difficult global economic environment and managing the transition of the business to a third generation of family control, said the study by Booz & Company.

With most GCC family firms under 60 years old, there is a need to develop a long-term strategy to manage the family and the business, commented Joe Saddi, chairman of the board of Booz & Company.

'A sustained long-term strategy for growth and formal governance structure will lead them through challenging economic environment and third generation transition,' he said in the study.

'To survive, grow, and ensure enduring success, firms must tame the “restless entrepreneur” syndrome, and develop a long-term strategy to manage the family and the business,' he pointed out.

According to him, steps for lasting success begin with a re-evaluation of the existing business portfolio, which may involve the divestment of original businesses that no longer fit the long-term growth strategy.

 “The same discipline is required for the evaluation of new investments, and may call for individual family member investments to be separated from the family firm’s activities,” Saddi noted.

Creating a formal governance structure and recruiting and developing outside management talent are other crucial steps. The appointment of a change agent, whose interests are closely aligned with that of the family and the business, ensures such changes are achieved.

Some of the world’s most successful companies are family businesses, with governance structures either controlled by, or with the strong involvement of, members of the original founding family.

'They have thrived; surviving economic downturns, wars, family feuds, and other challenges. An index compiled by Credit Suisse found family firms have outperformed non-family firms in shareholder creation by 15 per cent between January 2005 and October 2008,' he added.

Ahmed Youssef, a principal at Booz & Company, said its analysis of more than 100 family businesses reveals the most critical factor to their success is the families’ co-ordinated and sustained long-term strategy for growing and controlling their businesses.

' It usually involves the exercise of patience in investing capital, the retention of companies through bull and bear markets, a focus on core businesses, and an emphasis on long-term performance over quarterly gains, and most importantly the development and retention of management talent,' he explained.

Old firms

GCC family firms tend to be young, with most under six decades old. Many are managed by members of the first or second generation, with a few seeing involvement from third generation members, Youssef stated.

Some GCC family businesses have historically benefited from privileged advantages specific to the market and the region’s cultural heritage.

These advantages include limited external competition, abundant opportunities, and special access to capital, business networks, and information. These have allowed families to build large conglomerates spanning a variety of sectors.

Besides it has more concentrated control within families. 'Most family-controlled GCC businesses are still driven by one or two members of the family with many driven by the original owners, some of whom are highly visionary and entrepreneurial,' he pointed out.

The cultural heritage of the region has also protected family businesses from destructive family feuds. In instances of conflict, disputes tend to be kept private and managed within the family, limiting negative impacts on business.




Tags: GCC | Crisis | family businesses | challenge |

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