Advantages And Challenges Of ExportingBy Tekle S.
7%-38%-55% Communications MythBy Robert P.
Top 10 Big Mistakes Of Big BusinessBy Francis T.
Climate Change Is Real! Act Now!By Kathrin G.
Improving The Quality Of Decision MakingBy Niladri R.
Advantages And Challenges Of ExportingBy Tekle S.
Top 10 Big Mistakes Of Big BusinessBy Francis T.
Best Practice Benchmarking - The Path To ExcellenceBy Robert C C.
What Is A Healthy Company?By Raymond H.
Challenges And Opportunities In The New EconomyBy Alkistis A.
Also Interesting ...
Coaching Virtual Multicultural TeamsBy Peter B.
Mergers, Acquisitions And PartnershipsBy Marie M.
The Contract You Did Not SignBy Barry C.
Stress Management - What Choices Are You Making?By Simerjeet S.
Think How Many Ways You Can Lose A Customer!By Martin Keith S.
How Gulf Companies Can Build Global Businesses
Companies based in the GCC states are using their petrodollars to expand into global markets. But in the long run, these companies will have to develop distinctive capabilities and skills.
When, in 2006, DP World acquired the British port and ferry operator P&O, in a deal valued at $7.1 billion, political debate over the company's ownership of US port assets dominated the headlines. What was not in dispute was the transaction's significance for the industry - the deal catapulted DP World to the position of the world's third-largest container terminal operator.
Lying behind that massive acquisition, moreover, is a growing trend for companies from across the Gulf Cooperation Council (GCC) states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) - to use the petrodollars flooding into the region to finance strategic investments abroad. Even if oil prices declined modestly over the next few years, these states would likely accumulate $2.4 trillion in windfall revenues through 2014. While much of this money is headed toward domestic investments in health care, education, and infrastructure, a significant portion of it is financing overseas investments. But today's moves, unlike those of earlier oil booms (when much of the surplus was funneled into passive portfolio investments), are likely to be strategic.
What's more, since today's investments do not focus exclusively on Europe and North America but also include assets in Asia - another change from the pattern during the last oil boom - they are likely to accelerate the shift of global economic power from West to East. The first moves in this new strategic direction are already apparent in telecommunications, logistics, and petrochemicals, among other sectors.
Growing liquidity in the GCC region is providing a strong impetus for international expansion. Many companies have built successful businesses at home, capturing substantial profits in markets that are often protected from competition. Starved of sufficiently large-scale opportunities in the domestic base, these companies are expanding beyond national borders.
Deep pockets alone, however, will not buy GCC companies a seat at the global economy's head table. If they are to become global leaders in their industries - and insulate the region more effectively from the consequences of lower oil revenues in the future - they will have to master capabilities that would equip them to face global competition. By and large, they have not had to develop these capabilities in their home markets.
Companies of all stripes are active in this transformation. The petro-chemical giant Saudi Basic Industries (Sabic) was among the early movers, acquiring the petrochemical division of the Dutch chemicals and pharmaceuticals group DSM in 2002 for $2 billion - at the time, the largest takeover of a European company by a Middle Eastern investor. The deal helped Sabic become the world's tenth-largest chemical company, with revenues of $20.9 billion in 2005. A year later, Sabic announced that it would invest up to $5 billion in a Chinese joint venture. Other state-controlled businesses have also been active. In late 2006, for instance, a consortium led by the UAE's Dubai Aerospace Enterprise (DAE) paid $1.3 billion for the Swiss company SR Technics, the leading independent supplier of aircraft maintenance, repair, and overhaul services.
Private companies are also fueling the trend. In 2005 the Kuwaiti logistics group Agility (formerly PWC Logistics) bought companies in Singapore and the United States as part of a drive to become one of the world's top logistics groups. Smaller, family-owned businesses, such as the Saudi independent car distributor Abdul Latif Jameel (ALJ) and the Kuwaiti retailer M. H. Alshaya, are rapidly venturing into Europe, Russia, and elsewhere.
In general, two factors motivate such expansionist ambitions. The first is the need to find new growth opportunities as domestic markets become saturated. Many GCC companies are larger and more advanced than their counterparts in neighboring North Africa and the countries bordering the eastern Mediterranean. Although these regional markets could provide a significant growth opportunity for any company - in mobile telecommunications, for example - the inherent risks and relatively small size of the markets have kept them off the agenda for many large multinationals.
It is this situation that faces the GCC's telecom companies as they have moved aggressively into Africa and South Asia in recent years (see 'Gulf telcos: Managing expansion better'). The UAE's Emirates Telecommunications (Etisalat), for instance, has acquired strategic stakes in Pakistan Telecommunication and in Atlantique Telecom (in West Africa), as well as mobile licenses in Egypt and Saudi Arabia. Strong earnings at home give Etisalat the luxury of being able to wait for its overseas investments to pay off. By late 2006, it was operating in 12 countries, with a customer base of more than ten million.
The second motive for expansion is a desire to acquire particular skills or capabilities. Acquisitions in Europe and North America, especially, are typically part of a broader strategy to gain rapid access to Western management know-how and technology; they allow Gulf companies to short-circuit the laborious task of building such capabilities internally. In 2006, for example, the Dubai property group Emaar Properties acquired both the second-largest private home builder in the United States, John Laing Homes (for $1 billion), and the UK realtor Hamptons International (for $154 million). Besides gaining access to the British and US markets, Emaar can now draw on John Laing's vast experience in real-estate development and Hamptons' expertise in marketing. The latter skills, in particular, will be critical for Emaar as it expands into overseas markets, where, contrary to the situation at home, supply of real estate greatly outstrips demand.
Strong cash positions have not only opened the door for aggressive takeover strategies but also given GCC companies time to learn about new markets and to absorb the skills they need. Relying solely on their experience in lucrative home markets, by contrast, would ultimately doom their expansion strategies. The advantages that drive margins at home - high-income customer pools, cheap labor, and low energy costs - can't be transferred to external markets, and Gulf companies will need to become more efficient abroad to be profitable there. The acquiring companies must out of necessity bring in (or quickly develop) special capabilities that foster competitive advantages.1
Acquisitions inspired by growth will probably have to be underpinned by a strong customer service ethos, while integration skills will be especially important when an acquirer buys a company to gain its capabilities. Other factors also come into play: for example, customers will span a broader range of incomes, including a large segment of the poor and "near poor." Segmentation, pricing, and cost-efficiency skills will be crucial in these cases. In addition, companies will have to transform their organizations to manage operations across a number of countries, and finding and retaining managerial talent will require more attention as the need for it develops.
These are the core challenges facing most companies that enter emerging markets. The long-term success of expanding GCC companies may also rest on something more nebulous - a change in corporate culture. In the GCC and throughout the Arab world, relationships between people and social structures have traditionally carried great weight in every aspect of life: social, business, and public. In corporate life, these relationships can determine whether someone is hired, promoted, transferred, or fired. What in the West would be criticized as nepotism or cronyism is still widely accepted in the GCC as a way of reinforcing cultural bonds.
Yet as Gulf companies expand into other cultures and compete to hire top global talent, they will need to find a balance between their own established cultural mores and the expectations of the global corporate environment. As they grow in scale, scope, and complexity, they will also find it increasingly difficult to manage an organization based on personal relationships. Inevitably, such relationships will become less important and individual performance more so, forcing companies to maneuver their way through a very difficult corporate transformation.
This challenge will extend to the boardrooms of the acquired companies: GCC acquirers must understand and work within the governance structures of other business environments, which may be quite different from the GCC norm. The board of the acquired company must be active and aggressive in setting performance targets for it and not allow it to drift without direction after the takeover.
Despite these challenges, we expect GCC companies to go on expanding into international markets. In the near term, a steady diet of petrodollars will fuel this trend. But over the longer term, larger servings of distinctive capabilities and skills must balance the diet.
Got an opinion? Want to thank Albert?
54 more Articles by Albert
17 min. Over the next two decades, the country's middle class will grow from about 5 percent of the population to more than 40 percent and create the world's fifth-largest consumer market.
POP4 min. Recently, I came across a code of ethics for hackers (yes, it really does exist) that I'd like to share with you, because I think it really hits home with ...
8 min. Foresee the future, that's what your customers expect, that's what you need to deliver.
9 min. The global talent war has seen organisational leaders scratching their heads to understand how they can attract and retain the very best talent that is ...
17 min. An organization is much more likely to improve its current performance and underlying health by using a combination of complementary practices rather than ...
13 min. Of all the findings on business strategy yielded by the study of the businesses in the PIMS? database, the following is one of the most controversial: ...
15 min. By building social issues into strategy, big companies can recast the debate about their role in society.
5 min. Improving the customer-centricity of your organization isn't just good business, it's also good marketing.
13 min. The days, weeks, or months between taking the job and assuming power are precious. Put them to good use.
POP19 min. Eight emerging trends are transforming many markets and businesses. Executives should learn to shape the outcome rather than just react to it.
4 min. Few companies have the skills to effectively manage procurement across all spending categories. Smart enterprises should examine their procure-ment strategies ...
15 min. Further reform will be essential if one of the world?s fastest-growing regions is to seize a broader role in the global economy
6 min. Once companies reach a certain size, setting realistic performance aspirations gets a bit trickier.
15 min. Five easy-to-use tools help negotiators in complex deals arrive at a negotiating position that is not only acceptable to them but also palatable to other ...
4 min. US Recruiting, Retaining & Developing Talent Statistics & Best Practises
15 min. Operational risks are costly, but they can be conquered when high-ranking executives join the battle.
31 min. There appears to be plenty of room for much greater effort and involvement by companies and organizations around the world. Here a few thoughts and pointers.
17 min. How leading-edge companies are streamlining applications development.
6 min. Plenty are the professionals who are on the "front lines" of the industry, knowledgeable of the countless changes, and who are willing and able to speak ...
13 min. Talent can be bought, but the best companies develop their own.
16 min. For GCC states, liberalizing the labor market and developing the local workforce are the keys to moving beyond a reliance on foreign workers.
9 min. The success of strategic investments depends largely on the subsequent moves of competitors. Uncertainty about competitive conduct can lead executives ...
POP11 min. Somewhere in Corporate America, a human resources manager is tweaking her company's employee-incentive program. Maybe she's dumping last year's customized ...
13 min. Everything that we do for our clients is based on the idea that improved communications will improve an organisation's performance and contribute to the ...
3 min. Over the last two years of working with hundreds of clients from all walks of life, I have noticed trends of what my clients want and need. This top ten ...
9 min. Complexity has been one of the most frequently used words for some years now. People talk about complex systems, complex interrelationships, complex problems ...
3 min. The aim of this guide is to prepare you for discussions with a bureau, and to get you thinking about all the factors that affect your Facilitator choice.
15 min. The CEO helps a transformation succeed by communicating its significance, modeling the desired changes, building a strong top team, and getting personally involved.
4 min. The proliferation of brands and channels is forcing companies to restructure their marketing efforts significantly.
6 min. Valuable insights on using your speaker to maximise the success of your event
POP18 min. Looking for inspired leadership, passionate employees, unsurpassed productivity, and grateful customers? Forget the dispirited corridors of corporate ...
8 min. Gen X-ers want far more collaboration with companies - both as customers and as employees. CIOs are uniquely positioned to help their enterprises meet ...
12 min. Companies that rely on IT governance systems alone will come up short.
13 min. Employees' personal connections can be as valuable as their individual knowledge base. Social network analysis, or SNA, helps maximize a company's collective smarts.
POP19 min. The art of leading deep corporate change can be learned. The trick is to help each member of the company discover a new reality...
14 min. Newspapers have tried a host of measures to halt the long-term decline in their readership, but they haven't stopped consumers from turning to TV and the ...
POP6 min. Two of today's buzzwords are Team and Teamwork. Those with a particular desire to conform to the spirit of the age portray them as the polar opposite of ...
28 min. Surprisingly, many organizations lack a proper succession plan. One reason is that they do not have an effective succession planning process. This author ...
6 min. Trying to perfect a flawless presentation can result in disaster...
7 min. Sometimes we can all use a friendly reminder to keep us from backsliding into old ways of thinking about selling that lead us down the wrong path with potential clients.
5 min. Should work be fun? Must it be fun? Today, the answer to these questions is mostly yes. What else should it be? Yet however plausible this answer might ...
21 min. Are you on board with enterprise risk management? You had better be. It's the future of how businesses will be run.
4 min. "Size is no guarantee of future success." What is strategically important is strength not size. Speed is more important than physical mass and flexibility ...
16 min. Services are more difficult to measure and monitor than manufacturing processes are but executives can rein in variance and boost productivity - if they implement rigorous metrics.
11 min. Growth is necessary, but size is no guarantee of a successful future! Nevertheless, growth is needed. Without growth there is no life. In a certain sense, ...
8 min. Organic search engine optimization has some distinct advantages over pay-per-click advertising. However, there are undoubtedly certain situations and scenarios ...
POP10 min. To get beyond survival and to grow both profits and margins, the successful companies of the future will be forced to become true customer experts.
20 min. What is success, what is failure, and how can you improve your odds for success?
4 min. How do you know if the speaker fits? How do you avoid embarrassing mismatches?
11 min. Reasons Why You Should Speak at and Attend Professional Seminars
11 min. Lean Thinking is a highly evolved method of managing an organization to improve the productivity, efficiency and quality of its products or services. The ...
12 min. Value created by knowledge is often not captured. Five accounts of knowledge strategies.