Shifting Obstacles to Opportunities in Family-owned Businesses in the Middle East
Much has been written about familyowned businesses; their contribution to the economies of the countries where they operate, the challenges they face, the way they are managed and most importantly, their future. Despite current challenges, family businesses in the Middle East have continued to grow and diversify, to the extent that they now compete with large global corporations.
As family businesses moved from their infancy to their adolescence, they were run on traditional models of parochialism, informal decisionmaking, and tacit knowledge. The context has shifted now that many have achieved a magnitude wherein this modus operandi is no longer efficient. Additionally, there are ‘new sheriffs in town’ – technology and globalisation – that present new challenges.
The forces of technology and globalisation have changed how business is conducted, as well as the quality and volume of information available to business leaders, customers, and employees alike. On the human capital front, improved access to information has also impacted talent sources and affected workforce mobility and demographics, especially in terms of employee diversity.
The landscape has now changed to a level playing field, wherein the reach of business is no longer limited by geographic or other boundaries. Family businesses in the Middle East and elsewhere that have not historically had to keep abreast of external developments now need to catch up and compete more aggressively. The rate at which they are able to do this will affect and dictate the way these businesses think, operate, thrive, survive or fail.
Obstacles of family-run businesses
According to the Family Firm Institute, family-owned businesses contribute 70-90% of the annual global GDP1. In the Middle East, 80% of businesses are family-owned, family-run or family -controlled2 and make a significant contribution to the overall economy.
The success of these organisations has far-reaching consequences. It is as much in the interest of the business ecosystem, as it is of the family itself that family businesses avoid an existential crisis and function profitably.
Profitability requires agility in thinking, openness to embracing new ways of doing business, and efficient management processes. Globalisation has removed geographical boundaries; family-owned companies now find they are competing with multinationals and other family businesses based all over the world, who are selling to their customers, and encroaching on their turf.
Why are some family businesses thriving while others are struggling to survive? External factors that prevent growth include the political, economic, social, technological, legal and environmental challenges that every business faces. Family businesses, with their entrepreneurial flair, are typically adept at coping with these external factors, exploring new opportunities, discovering new markets, providing niche services, and creating a place for themselves.
The most significant challenges that family-owned businesses face are in fact internal. Overcoming these internal challenges will determine whether the business will remain competitive and relevant. While these challenges are not exclusive to family businesses, they are more pronounced in them because of their unique emotional, power, decision-making, and operating dynamics. These factors must be given attention to ensure solutions are viable and practical.
Successful family-owned businesses are those that have refined processes, are able to attract and retain the best talent, are strategically focused, and aggressive in executing their goals. They have taken steps including building capability, either through hiring non-family members in leadership positions or grooming family members, and implementing structural processes and changes to ensure the business runs profitably.
Family-owned businesses need to shift their focus from current obstacles to future opportunities:
S uccession and exit planning
H olistic management
F orward thinking mindset
T alent management
1. Succession and exit planning
Most family-owned businesses do not have an established succession plan in place. It is an uncomfortable and emotional topic, evoking issues of mortality and ownership. As families grow in size, first-generation owners are less visible to younger family members. At the same time, younger family members are more removed and often have different ideas about how the business should be run. Factors around succession planning, especially family dynamics, can be addressed through formal or informal mentoring programmes, where family members gain gradual exposure to the business from the ground up, and owners spend time passing on their experience.
This is also important from a knowledge management perspective. Decisionmaking in family-owned businesses is usually centralised; owners rely heavily on key people who have a great deal of knowledge about the company. A succession plan will ensure continuity of ownership and management, better knowledge transfer, and greater bench strength of the next generation of leaders. It will ensure that knowledge is shared and retained within the organisation instead of residing with just a few individuals, reduce overdependence on key personnel and will create a pipeline of qualified individuals to take over.
If a lack of interest, ability, or negative family dynamics precludes family members from taking over, then owners should consider appointing and grooming non-family members to take over the business. Before a successor can be chosen, owners need to provide managers with opportunities and guidance to take risks, make decisions, and slowly build trust in the decision-making abilities of their managers and employees.
2. Holistic management
Holistic management is moving towards compassionate capitalism, realising that people come before profits and that reputation impacts revenue. The unique selling proposition of family-owned businesses is the family atmosphere and the personal touch the owners bring to the business. The owners generally bring their values into the business and make an effort to know their employees personally.
As the business grows, this personal touch can be lost, so owners and managers need to make greater efforts to ensure it remains. Large, international companies are trying to emulate the model that family businesses have followed for a long time. Events involving family members such as recreation events and making time to connect with people help maintain a holistic approach towards work.
Another element of holistic management is participating in philanthropic efforts and contributing to the community. Since family-owned businesses are homegrown, there is a level of attachment and sense of responsibility towards the country and community that support and patronise them. Efforts to maintain that will go a long way towards making a difference, and creating a sense of community in an increasingly impersonal world. With the increased focus on nationalisation in most Middle East countries, this is even more relevant.
The challenge in this case is firstly making owners and their employees see the value in doing things differently and secondly, learning how to do things differently.
As competitive pressures have increased, familyowned businesses may increasingly find that the products they are trading are obsolete, the number of new players has increased, access to information has impacted customers’ requirements, and relationship dynamics are different. They need to have greater agility to respond to these changes and realise that the way something is done is as important as what is done.
An environment that promotes innovation in processes can create a competitive edge; one that is supported by easier access to technology can be leveraged for efficiency and transparency in processes. Freeing time through a shift from transactional to strategic, value-added activities is an important key to success.
Family businesses need to take steps to fairly assess the skill sets of employees and establish meritbased, equitable pay, promotion and development opportunities to attract, retain and develop the best talent in an increasingly competitive environment. Efficient and equitable human capital practices will enable family-owned businesses to build an effective employee value proposition. Combining robust structure with the values of a family-owned organisation holds the potential to become an employer of choice, offering fulfilling careers and a personal touch.
4. Forward thinking mindset
This is one of the most significant determinants of success and probably the hardest one to overcome. Most owners are aware they need to promote a mindset among employees that ensures their business maintains its relevance in the market. This includes more structured processes, better systems, more strategic planning, and greater responsiveness to change. However, awareness does not necessarily translate into action; change in family-owned businesses is often hard, slow and painful, stemming from resistance. In addition to the innate fear of the unknown, owners find it hard to accept that the approach that has led to their current success, will not guarantee success in the future.
The fact that employees and leaders of familyowned businesses often have limited experience outside their organisations, having traditionally risen through the ranks, means both can be resistant to new approaches. In fact, varying levels of education and lack of awareness of technological, structural progress and their value, can lead to active disruption of change efforts. In turn, employees of family-owned companies can be frustrated that change initiatives tend to be superficial, rather than core and systematic.
Owners can leverage the influence of key leaders by demonstrating a forward-thinking approach at the highest levels. By promoting and rewarding this kind of behaviour, leaders influence employees, and drive the direction of the organisation. Change in any organisation comes from its leaders, and unless leaders have a desire to change and perceive tangible benefits, the status quo is likely to continue.
5. Talent management
Family-owned businesses now operate on a level playing field, competing for talent across geographies and industries. If they are to grow, they need to attract the right people at the right time in the right place and have structured processes for managing them.
The ethos in most family businesses has not historically been built on a performance culture. Their people, rather than position-based structures result in positions being filled on the basis of factors such as length of relationships, trust factor, and family dynamics. Recruitment, rewards, performance management and development structures are halfheartedly implemented or nonexistent.
The history and personal relationships owners have with employees and family members make it difficult to implement changes. For example, when family members or long-term employees are not performing, it is troublesome to remove them from the company.
Also, depending upon the relationship, disciplinary and performance improvement measures may not be applied consistently for non-performing employees. Complacency and lack of accountability are common issues that plague family-owned businesses; often employees continue working till retirement, regardless of their performance.
From the perspective of employees, inequality in terms of compensation, promotions and training opportunities signals a lack of fairness. This in turn affects engagement, productivity and retention, making it difficult to attract and retain talent and develop the knowledge, skills and abilities required to grow the business profitably.
Obstacles to opportunities Despite the challenges discussed in this article, family businesses in the Middle East are at an exciting phase in their evolution. They have seen success, growth and diversification into new markets, have faced the challenges of increased competition, and weathered the global financial crisis. There is a realisation that the enigmatic and successful founders at the helms of these organisations need to plan for leaders to drive future growth.
Using the tools highlighted in this article, this new generation of leaders can turn obstacles into opportunities through increased agility and dynamism, and continue to play a role in shaping the business landscape of the Middle East.
2 Middle East Family Business Survey Key Findings, PWC, 2014
Associate Partner & VP, Middle East, Turkey and Africa Head
Aon Strategic Advisors & Transaction Solutions
Aon Hewitt Middle East