Corporate sector in the Gulf Cooperation Council (GCC) should strengthen their internal capabilities through mergers and acquisitions (M&A) to allow them become more competitive and contributor to their national economies; else they fall in growth “traps”, according to strategy, an international management consultancy firm.
Highlighting that growth traps are situations in which companies that grew quickly by taking advantage of favourable external market conditions face issues in sustaining their growth due to the absence of internal corporate capabilities; strategy& said “to circumvent these growth traps, the GCC companies should develop powerful capabilities either through internal development, M&A’s or partnerships.”
The GCC companies that have succeeded followed a deliberate and stepwise plan for moving from basic capabilities to more sophisticated ones that can support world-class innovation, technology and design,” according to Per-Ola Karlsson, partner with strategy&.
Many companies in emerging markets, including some in the GCC, focus primarily on top-line growth or country-specific comparative advantages and neglect to build the foundations for future success. They initially benefit from being ‘first movers’ in their home markets but eventually have to play catch-up with more experienced multinationals in global industries and consequently fall into ‘growth traps, the report found.
When building capabilities through M&A’s, the GCC firms should ensure they pursue targets with a capability fit. In the assessment of the 75 largest acquisitions made by GCC companies during 2009-14, one-third resulted in the acquirer performing more poorly than the market average (based on total shareholder return).
It also revealed acquisitions that were capability-driven (either enhanced or leveraged the capabilities of the acquirer) performed significantly better than deals with a limited capability fit (acquirer doesn’t improve upon or apply the acquiring company’s capabilities system in any major way).
The two year annualised total shareholder return of acquirers was 13.9% higher than the local market return on average for capability-driven deals, versus 9.4% lower than the local market return on average for limited-fit deals, the report said.
As companies transition from one phase to the next, not only do they find that the underlying sources of competitive advantage change, but they also confront new growth traps that they need to navigate, it added.
“Successful companies typically follow a four-phase process for improving capabilities cumulatively over time. This starts with enhancing basic production (know-how) and progresses all the way to acquiring world-class innovation capabilities (know-why),” said Rawia Abdel Samad, director of the Ideation Center, the leading think tank for strategy& in the Middle East.
These companies first identify opportunities to develop their basic capabilities; then they build their strength by refining their business models, scale up and consolidate through acquisitions, and finally move up and out to enter international markets, she said, adding each phase allows them to incrementally develop their capabilities by building on previous successes.
Since many companies in the GCC are linked to the state, governments have a role to play in helping them become globally competitive. There are more than 550 state owned enterprises in the region and GCC governments are major or minor investors in 78 of the top 100 publicly listed companies and consequently could influence the capability-building process of these companies, the report said.
“Government leaders should take measures to upgrade corporate governance practices within these companies and help them reach their potential. In turn these countries would reap economic benefits from improved performance,” it said.
Samad (left) and Karlsson: Corporate sector must be more competitive.
