How GCC companies can avoid growth traps

In recent years, leading Gulf Cooperation Council companies have grown in their domestic markets and through international expansion.

These large GCC firms are poised to compete with the global corporate elite, those highly successful multinational companies that already have deeply embedded capabilities.

To play at this top level, however, regional firms will need to avoid growth traps. Too often companies focus on top line growth or country-specific competitive advantages rather than building foundational capabilities, which means that after initial rapid expansion they struggle in the big league.

In their early stages, GCC companies were well-positioned to gain market share in their home markets because of their understanding of local market imperfections, access to cheap natural resources and expatriate labour, subsidies and limited competition from multinationals. These advantages have disappeared over time as GCC markets matured, making it easier for multinationals to enter.

Furthermore, GCC markets — except for Saudi Arabia — are relatively small, making it imperative for companies to look outside for growth.

Successful companies have followed a balanced process for developing capabilities over time. There are three ways to build capabilities — in-house, by acquisition or through partnerships. Companies must be aware that each has advantages and disadvantages, that each may require trade-offs and that capabilities must be continuously refined and updated.

SABIC, the Saudi petrochemicals producer, has developed two core capabilities in-house. The first is the ability to manage complex manufacturing plants. This allows it to run over 60 plants in 40 countries profitably. Rather than rely on expatriates, as other companies have done for their technical capabilities, the firm fostered local expertise and made large investments in its employees’ skills. The second is internationalisation, which it achieved through a global operating model with strategic business units with worldwide responsibilities and the ability to strike partnerships.

The chief disadvantage in building capabilities this way, particularly for companies in fast-moving markets, is that it takes time. In-house capability building is also difficult, expensive and risky. In contrast, capabilities building via mergers and acquisitions allows GCC companies to catch up with competitors quickly and develop multiple capabilities simultaneously. However, it also presents challenges that can only be mitigated by developing core M&A-related organisational capabilities, such as turnaround management, integration management and stakeholder management.

Dairy producer Almarai developed important capabilities across the whole dairy value chain, such as investing in high quality farms to manage livestock, efficient supply chain management and vertical integration and sales, and distribution, infrastructure. The firm then used M&A strategies to enter new product categories and foreign markets.

This has allowed Almarai to enter the Egyptian market, acquiring Beyti in 2009, launch new product categories such as baked goods by acquiring Western Bakeries in 2007, and to move into poultry through the acquisition of the Hail Agricultural Development Company in 2009.

Almarai developed a deep capability in post-merger integration, inducting acquired companies into its management system and paying particular attention to capturing, and internalising, the knowledge.

Partnerships offer opportunities for collaboration on a project-by-project basis, and therefore for knowledge transfer with no need to manage or integrate the partner’s business. For their part, many foreign companies need to be successful in emerging markets, but often lack the capabilities and resources. The GCC region represents an interesting growth market and a gateway to the Middle East, Africa, and Central Asia. This intersection of needs creates many ‘win-win’ opportunities.

Etihad Airways’ global expansion, for example, involves a unique partnership strategy that rests upon its existing in-house capabilities. Since 2011, it has started to leverage partnerships that go beyond traditional code-sharing by taking minority equity investments in airlines in strategic markets such as in Jet Airways, Air Berlin and Alitalia.

These investments align the airline’s and its partners’ incentives, allow it to offer a broad number of destinations to its guests and provide scale to reduce operating costs and fleet requirements.

Many GCC companies could use these methods to create the differentiating capabilities they need to become global players.

Their success is of more than corporate interest, because highly capable GCC firms are catalysts for domestic economic diversification and transformation.

Per-Ola Karlsson is a partner with global strategy consulting firm Strategy&

With contributions from Rawia Abdel Samad, director of the Ideation Center, Strategy& and John Jullens, principal with PwC US