Family businesses in the Middle East play a particularly significant role in the region’s economy, so enabling their growth is high on both the private and public sectors agendas. According to PwC, with a workforce contribution of 80 per cent and $1 trillion estimated to pass from one generation to the next within a decade, it is easy to see why this is a prioritised sector.
Just like any other sectors, family businesses are being confronted by the changing market dynamics which are calling for new business models, adopting digitalisation which is disrupting whole industries with new related skillsets as well as geopolitical tensions, global trade tensions and succession disputes.
Many family businesses across the region have grown to become conglomerates investing in local real estate and many of their balance sheets are dominated by this asset class. However, these changing times require adaptability and action in order to ensure that potential isn’t wasted and that the future is secured.
PwC stated that a simple continuation of the traditional ways of working is not enough for family businesses to succeed in a digital and increasingly competitive age.
The founders and leaders of several regional family businesses face challenges ranging from changing economic environments, accessing the right skills and capabilities as the leadership is passed on to next generations as well as the inevitable need to innovate to stay in the game.
Additionally, the recent economic downturn has also exposed some family businesses to strategic and operational deficiencies, coupled with changing business models driven by digitalisation and increasing competition emanating from start-ups and disruptors.
PwC said that sustainable growth depends on how well companies navigate these treacherous waters and many business leaders in the Middle East intend to adjust to this new reality. Family businesses differ from a generational perspective and the majority of businesses under the leadership successors are taking a fresh look at their portfolios and operating structures, figuring out ways to become leaner and more competitive.
In Saudi Arabia and Kuwait, family businesses are under the leadership of third and fourth generation investors who are bringing in new ideas and new ventures into the family businesses, they are thus more diverse. According to PwC, no current global survey of the health of family businesses would be complete without looking at the challenge of digitalisation.
There is an uptick in the number of businesses feeling vulnerable to digital disruption. Middle East family businesses and investors are preparing for the future by significantly improving digital capabilities in the short-term, re-evaluating business models and bringing in outside professionals for boards and management teams, to help professionalise their businesses as well as boost engagement for the next generation.
However, family businesses with clear strategic plans that underline their values and purpose also have a significant advantage. Middle Eastern businesses are well placed to profit from being values-driven companies, said PwC.
The recent economic downturn has also exposed some family businesses to strategic and operational deficiencies. According to PwC, many family business leaders in the Middle East intend to adjust to this new reality. Many are taking a fresh look at business portfolios as well as operating structures and figuring out ways to become leaner and more competitive.
According to PwC, families in the region tend to be large—their size is on average double that of UK and US families. Given the sheer size of Middle East families, their businesses need to grow by double digits for future generations to maintain the wealth and the same standard of living, representing a huge challenge.
PwC revealed that founders of family businesses across the region believe that attracting and retaining the best talent is among their top priorities over the next two years. This is mainly driven by the pressure to innovate, as well as an understanding that survival depends on a company’s ability to navigate an increasingly complex digital landscape.
Succession planning continues to be a massive challenge for family businesses across the globe, but this is particularly problematic in the Middle East where large families are more common and many of these relatively younger businesses face succession issues for the first time. However, parents in Kuwait and Saudi Arabia have become more experienced in handling transition of power, it is evident that they learn from previous mistakes and are doing more to avoid repeating them.
Establishing family protocols to regulate succession, conflict resolution, business valuations and key issues, are critical in preserving wealth and ensuring a smooth transition between generations. The succession issue has been around for the last five years and is expected to remain a challenge for the next 10 years.
Regional family businesses increasingly adopt policies and procedures, but these do not necessarily include key documents such as family constitutions or conflict resolution mechanisms, therefore there is still much work to be done.
According to S&P, the escalation of tensions in the Middle East could weigh on the creditworthiness of GCC sovereigns and have consequences for Gulf-based entities, possibly banks and some nonfinancial companies.
Adding to their plight, family businesses are concerned about tensions in the region involving decades-old rivalries between Saudi Arabia and Iran, Qatar and the other GCC members, on top of the unrest in Lebanon and Yemen. Family businesses in the Middle East are the engines of growth and a driving force behind economic diversification across the region.
The changing times require adaptability and action in order to ensure that potential is not wasted and that the future is secured. It is increasingly clear that a simple continuation of the traditional ways of working is not enough for family businesses to succeed in a digital and increasingly competitive age.