The sprawling, family-controlled conglomerates common in the Gulf Cooperation Council may not survive the next generational transfer if they don't refine their focus, according to a recent report.
Booz & Co, the management consulting division of international accountancy firm PWC, said slowing growth in the GCC as well as greater numbers of foreign companies operating in the region is another threat to the longevity of regional family firms.
In the report GCC family businesses face new challenges, Booz & Co blamed the lack of focus of GCC family firms on "restless entrepreneur syndrome".
It said economic growth fuelled by the discovery of oil in Kuwait and Saudi Arabia had allowed many founders and second-generation leaders to haphazardly enter new sectors.
The oil boom meant there was plenty of opportunities and easy access to capital for GCC firms to diversify, the report said, but the majority neglected to institutionalise and streamline the businesses they already had.
It found 48% of family conglomerates operated in more than five sectors and a further 40% operated in three or four.
Only 12% had interests in one or two sectors.
Managing this spread of interests will become increasingly difficult as the founding family grows in numbers, and ownership transfers from one or two individuals to a collection of cousins, the study said.
It added many GCC conglomerates had a sentimental attachment to their original business, and refused to divest it even when that business was underperforming.
To survive in the GCC and to compete internationally, the report said these businesses needed to invest heavily in developing formalised management structures and recruiting and retaining external managers, and also divest underperforming units.
Family businesses that streamlined and focused on just one sector or on closely related sectors between 2003 and 2007 outperformed those that didn't by 5.5% annually, according to Booz & Co's data.
It also said adopting structures such as family offices and foundations that are popular in the US and Europe would enable these conglomerates to keep their family issues and business affairs separate.
But, it said companies could spend heavily on management structures without ever seeing them fully implemented unless they appointed a "change agent" – someone, either a family member or someone close to the family, charged with overseeing the process.
The average GCC family has five children, and, as a result, a typical family business needs to grow at 18% a year to maintain the current levels of wealth across generations – this pressure to grow could be reduced if a family office was used to steward collective assets.
Currently, 33% of GCC family firms are in the third generation, with many are facing a generational transfer in the next 10 years.