Summary: GCC and the wider mid-east has, perhaps, the highest concentration of cash-rich, diversified owner managed businesses (OMBs) on this side of the globe. Evolving from trading houses into diversified conglomerates, these businesses now face an unprecedented threat – change or perish. The reason for this has largely been a slow but steady change in local business regulations, imminent movement of the GCC economies into WTO, and fast movement of hot gulf money into other economies-a phenomenon that is forcing investors to reevaluate their options. OMBs face new realities that can fundamentally alter the way they function. The key reason for this situation is the inability of owners to distance them from day-to-day management of the business. Such micromanagement, coupled with closeted decision-making, and little or no emphasis on management / leadership development, is the main cause that stunts OMBs’ growth prospects.
Introduction: The GCC (Gulf Cooperation Council) has been one of the busiest geographic areas in terms of import-export. In fact, the economies of this region have perhaps benefited most out of trading, after, obviously, the oil business. It is no surprise therefore that most of the businesses in this region have strong trading roots. The biggest names in local business are, almost by a norm, diversified and owner managed, with heavy control vested with the owner. The mainstay of these businesses is essentially trading – importing and selling goods, re-exporting, and now, getting into ‘last mile’ manufacturing, which by and large is limited to non-complex operations like re-packaging or re-branding. There are, of course, some businesses which have started investing in full-scale back-end operations, but such examples are far and few between.Given their trading roots, OMBs in this region also have a business structure that is fairly representative of a trading house – a mix of private equity, lots of debt, and large personal holdings. Control is always in the hands of the owners, and they are hands-on in the day to day functioning of the company. In that, one could easily see what ‘owner-manager’ is like. This is especially true for mid-sized companies. From a distance, this structure in not very different from what we see in other economies where small and mid-sized businesses have large ‘owner-participation’. This is true in emerging as well as developed economies. However, there is a vital difference in OMBs in the GCC, and such businesses somewhere else, as follows. GCC is flush with cash. 9/11 caused a lot of movement of cash back to this region and increasing oil prices infuse more cash each day. Investors are ready to put in their money even if the project has half a chance. In any other economy, a mid-sized business would stifle and suffocate due to lack of capital. In order to attract capital, these businesses would impress the markets either with their results or with their potential (reflected in the price of share and P/E ratios). Only then, they’d be able to get capital that is required to propel them from being mid-sized to large sized businesses. This is where IPOs come in. As is natural in the above case, public scrutinizes every aspect of the business. Underwriters do massive due-diligence before they underwrite the issue. Managers need to show potential and a level of know-how that can impress the investors. The business needs to have a strong script and a strong direction for it to attract investments. If one looks at recent IPOs in, say India, almost all of them have ridden the investment wave based on managers’ credentials. It is the management team that attracts capital, obviously along with the business story. However, a strong management usually ends up in investors beating a path to the business’ doors. The Great Divide: Therein lies the difference. As compared to an economy like India, the GCC has more than enough investors who are ready with capital to invest. With limited avenues for the cash to home in on, a lot of benchmarks take a beating when evaluating businesses. This is a natural phenomenon – a demand and supply situation. Supply of money is high, whereas avenues are low. Movement has to happen, and something has to give. With this scenario playing out on a macro-level, mid-sized businesses do not face as much a task of attracting capital, as would be the case in other emerging economies. Hence management does not have to run from pillar-to-post, trying to make an impression on the investors. There is no pressure on the owners to prove their business acumen to the investors. Attracting capital is not as much a challenge as it would be for a classical mid-sized business. The Genesis of the problem: Given this generous capital situation, why do mid-sized businesses remain mid-sized? Why do large businesses continue to be as diversified as having perfume trading business on one hand, and cement plants on the other? The problem is as simple as it is complicated. It lies in the management structure of OMBs. Because owners have no pressure to prove business acumen, they continue to manage the business in the way they have done in the past. Focus remains on making money – however that happens. Being in trading business, the endeavor remains growing businesses to a larger scale, which may or may not necessarily be more efficient. It is, therefore, hardly a surprise that we have not seen any substantial portfolio rationalization exercises in this region. Core competency, a concept that is getting dated but still relevant, has almost no takers in this part of the world. Businesses continue to diversify in all possible directions. Since focus is on increasing the bottom-line, all OMBs tend to get into all possible areas that exhibit any potential. Take example of the real estate market – almost all major business houses in Gulf have a presence in that area. The net yield is that sush ‘rushes’ into low hanging fruits develop what can be referred to as ‘mirror-conglomerates’ – All players compete in the same spaces, increasing competitive intensity, over-capacity, and the result is a zero-sum game in a very short span of time. It begs, therefore, the question: why is such behavior exhibited by OMBs? The genesis of this problem, as is evident from the above discussion, is the owners’ penchant for managing their businesses themselves, employing similar approaches in managing and developing their businesses, and not focusing on creating a differentiated, long term, competitive sustainable advantage. This micromanagement, while on one hand gives them immense control, causes a tunnel-vision on the other hand, through which they can see only those options that they are comfortable with. There is hardly any cross-pollination at a decision-making level as the managers they employ, are not the final decision makers. This inhibits new management techniques to take root, or new methodologies to get employed in making business decisions. Motivation levels at middle and senior management positions are limited to managing business on a daily, monthly, and quarterly levels – not yearly or 3/5 year plan period levels, as would be the case when the same managers are decision makers, evaluated both on short and long-term commitment to the business. The Way-Out: If mid-sized OMBs want to sustain growth, they would have to alter their management in a fundamental way and bring in delegation and decentralization. While easier said than done, delegation works both ways – the owners focus on generating wealth, and managers focus on generating overall business value. It is fairly simple mechanism – the one we know as public listing. However, going the public listing way will require mammoth external / policy changes, hence not a possible way-out in the short-mid term. The other way is manage business via a holding company which could be chaired by the owners, but managed by professional managers. While it might come across as a simple mechanism, it is not quite same as having a holding company in the traditional sense of the word. This new ‘professionally managed holding company is distinct from the traditional models, wherein investors have their chosen representatives as board members. In more mature economies, people with experience and business knowledge are usually nominated to board positions, whereas in this region the trend is to nominate one’s kith and kin (because focus is on exerting greater control). This needs to change, and board needs to comprise of trusted advisers who may or may not be related to the investors / owners. Focus has to move from that of ‘control’ to ‘value-generation’, and that can come by only when professionally competent people are allowed to manage and lead the business. Some of the business houses which have grown large, have managed to do just that. Dubai Inc. (via its various companies) has managed to do just that, and the results are for all to see.In sum, it is of utmost importance, particularly for mid-sized OMBs to make this mind-set transition if they want to remain competitive in the coming three-five years. They will have to initiate decentralization and delegation not just for minor business decisions, but for greater, mission-critical decisions that can impact the growth curve of the business. The operative concept is to vest such powers in people who have the skills and the experience to manage business with a long-term view.
