Beyond the crisis response, family based businesses must adapt themselves to a changed post-crisis landscape.
This article was co-written with Ramy Sfeir, Partner, Strategy&, and Bilal Mikati, Principal, Strategy&.
The dual shocks of the COVID- 19 pandemic and low oil prices are severely stressing GCC economies. This especially pertains to many family based businesses, which entered the crisis on shaky footing with high leverage, limited liquidity, and depressed profits. It is essential these businesses weather the existing storm and prepare themselves for future years, considering that these organizations constitute 60% of the region’s non-oil GDP and employ 80% of the workforce, according to PwC’s Middle East Family Business Survey .
Fortunately, most family based businesses took sound measures for the immediate crisis. Most are supporting staff and retaining the talent essential for their long-term success. Some are contacting key clients and suppliers to coordinate actions and ensure business continuity. They are drawing down lines of credit and pooling cash amongst their businesses whilst getting the most from their working capital. However, beyond the crisis response, family based businesses must adapt themselves to a changed post-crisis landscape. We think that family based businesses should adopt four ways of better position themselves for longterm success:
1. Diversify through a fresh lens
Economic cycles have shortened, and financial crises have grown to be sharper, more frequent, and global in nature. Consequently, the original risk management concentrate on sectors and geographies is failing woefully to shield portfolios adequately. Continue, family businesses have to have a more encompassing view of risk when constructing and managing their portfolios. They should incorporate an assessment of other factors (e.g. cybersecurity threats, disruptions to provide chain, geopolitical events) on cash flows and valuation drivers (e.g. demand, price) to comprehend risks in aggregate over the portfolio. They also needs to conduct portfolio stress testing against these potential shocks. Family based businesses have to improve portfolio liquidity and geographical diversification. This implies rebalancing and, where necessary, overhauling their portfolios to lessen focus on core businesses. Taking a few of their assets public can enhance liquidity, and also permit them to benefit more directly and faster from government stimulus packages during times of crisis. Geographical diversification may also reduce potential market risks.
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2. Digitize their core operating businesses and spend money on “stay-at-home”
Prior to the pandemic, online shopping and working at home was increasing. Now, chances are to become structural “way-of-doing-business” for consumers and businesses alike. Thus, family based businesses, particularly those in retail or financial services, should adapt their operating companies’ business models to the brand new “stay-at-home” economy. They’ll have to open digital channels and provide services remotely. For that, they’ll need to spend money on digital infrastructure and cybersecurity and develop the correct digital capabilities because of their core operating businesses. In considering new investment opportunities which will take advantage of the “stayat- home” economy, family based businesses should look at digital business enablers such as for example cybersecurity, distance education tools, remote work platforms, digital banking, and delivery services.
3. Benefit from localization opportunities
The closing of national borders to safeguard populations from the COVID-19 pandemic has accelerated the study of critical supply chains and how exactly to increase localization efforts. For family based businesses, buying local production capabilities and offer chains can reduce reliance on imports and drive back potential supply chain disruptions. Opportunities in manufacturing could possibly be particularly attractive given the manufacturing sector’s stable performance through oil cycles in Saudi Arabia. They are able to also consider domestic tourism and entertainment opportunities given the expected drop in international travel.
4. Pursue private sector participation (PSP) opportunities
Government deficits in your community are increasing, due to lower oil revenues and higher spending to aid economies. For instance, the Saudi Arabia government announced stimulus packages totaling SAR120 billion (US$32 billion) by April 9, 2020. Governments will therefore need family based businesses to fuel the economic engine as part of your. Family based businesses should respond by firmly taking on significant PSP projects such as for example infrastructure opportunities by, potentially, creating partnerships between multiple family corporations to mix capabilities and share risk. To adjust to these changes and improve the performance of their businesses and investments, family based businesses must strengthen their corporate holdings by attracting the proper talent, improving portfolio construction and value-creation capabilities, and buying digitization initiatives. This way, they could be ready for growth following the pandemic.
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