Looking at the Scope of Market Intelligence Scorecard

The world of business is a universe of risks that either results to failure or success. The reason behind this is not only the threat of economic inflation, but also because there is absolute uncertainty of sales. There are plenty of competitors in the market and one or two strategies may not be enough. The use of market intelligence measuring tools gives managers a sigh of relief, at least in terms of coming up with good decisions. No, it is not a way of spying on the competition, but it is more of a business approach. Many large companies have been using the time-tested market intelligence scorecard since 1958.The term market intelligence is almost the same with business intelligence. While the latter subject covers a broader spectrum, market intelligence focuses on three specific areas. Thus, there are three approaches or types of market intelligence metric systems. The three systems center on competitor analysis, market research, and benchmarking. In reality, these three areas are all about analysis since market intelligence is really about analysis.

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The competitor analysis scorecard is one of the most important aspects of measuring and analyzing market intelligence. Most of the time, the best way to define a business or even a brand is not through its products and services, but rather by its competitors in the market. This type of scorecard involves three groups of responders: the company, customers, and the competitors. In order for the company to position itself properly in the market, it should have a good grip on what the customers know about the company brand and the competitor’s brand. In the same way, the company should also consider the methods and marketing strategies of the competitor.The second aspect of measuring market intelligence is marketing research. The focus in this aspect is the customer. This is where surveys, product tests, brand recall, product position, and even product packaging come to play. One of the most effective ways of making a product successful is not capturing an already established market but creating one. Through careful research, the company can even come up with a new market from an already existing one. Market research may take time and resources, but the results are worth it.The third aspect in measuring market intelligence is benchmarking. Benchmarking is to company what market research is to customers. It involves four types of benchmarking strategies: internal, competitive, functional, and generic. Benchmarking within the business units of the organization is an internal strategy. Benchmarking becomes competitive when there is a process efficiency or performance check with the competitors. Functional benchmarking, on the other hand, involves operations within a similar industry. And, generic benchmarking involves the comparison of processes between different industries.

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Many companies are behind in terms of technological facilities. But as long as they keep a close hand on market analysis, these companies are still right on the game. The use of market intelligence scorecard may be producing nothing less than just numbers. But once these numbers are processed, business leaders could make decisions that are synonymous to success.

The Effects Of Balance Of Trade Surplus And Deficit On A Country’s Economy

INTRODUCTION

It is in no doubt that balance of trade which is sometimes symbolized as (NX) is described as the Difference between the monetary value of export and import of output in an economy over a certain period. It could also been seen as the relationship between the nation’s import and exports. When the balance has a positive indication, it is termed a trade surplus, i.e. if it consists of exporting more than is imported and a trade deficit or a trade gap if the reverse is the case. The Balance of trade is sometimes divided into a goods and a service balance. It encompasses the activity of exports and imports. It is expected that a country who does more of exports than imports stands a big chance of enjoying a balance of trade surplus in its economy more than its counterpart who does the opposite.

Economists and Government bureaus attempt to track trade deficits and surpluses by recording as many transactions with foreign entities as possible. Economists and Statisticians collect receipts from custom offices and routinely total imports, exports and financial transactions. The full accounting is called the ‘Balance of Payments’- this is used to calculate the balance of trade which almost always result in a trade surplus or deficit.

Pre-Contemporary understanding of the functioning of the balance of trade informed the economic policies of early modern Europe that are grouped under the heading ‘mercantilism’.

Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and military security of the state. In particular, it demands a positive balance of trade. Its main purpose was to increase a nation’s wealth by imposing government regulation concerning all of the nation’s commercial interest. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing export. It encouraged more exports and discouraged imports so as to gain trade balance advantage that would eventually culminate into trade surplus for the nation. In fact, this has been the common practice of the western world in which they were able to gain trade superiority over their colonies and third world countries such as Australia, Nigeria, Ghana, South Africa, and other countries in Africa and some parts of the world. This is still the main reason why they still enjoy a lot of trade surplus benefit with these countries up till date. This has been made constantly predominant due to the lack of technical-know how and capacity to produce sufficient and durable up to standard goods by these countries, a situation where they solely rely on foreign goods to run their economy and most times, their moribund industries are seen relying on foreign import to survive.

What is Trade Surplus?

Trade Surplus can be defined as an Economic measure of a positive balance of trade where a country’s export exceeds its imports. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, which would represent a net outflow.

Investopedia further explained the concept of trade surplus as when a nation has a trade surplus; it has control over the majority of its currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value, when the currency loses value, it makes it more expensive to purchase imports, causing an even a greater imbalance.

A Trade surplus usually creates a situation where the surplus only grows (due to the rise in the value of the nation’s currency making imports cheaper). There are many arguments against Milton Freidman’s belief that trade imbalance will correct themselves naturally.

What is Trade Deficit?

Trade Deficit can be seen as an economic measure of negative balance of trade in which a country’s imports exceeds its export. It is simply the excess of imports over exports. As usual in Economics, there are several different views of trade deficit, depending on who you talk to. They could be perceived as either good or bad or both immaterial depending on the situation. However, few economists argue that trade deficits are always good.

Economists who consider trade deficit to be bad believes that a nation that consistently runs a current account deficit is borrowing from abroad or selling off capital assets -long term assets-to finance current purchases of goods and services. They believe that continual borrowing is not a viable long term strategy, and that selling long term assets to finance current consumption undermines future production.

Economists who consider trade deficit good associates them with positive economic development, specifically, higher levels of income, consumer confidence, and investment. They argue that trade deficit enables the United States to import capital to finance investment in productive capacity. Far from hurting employment as may be earlier perceived. They also hold the view that trade deficit financed by foreign investment in the United States help to boost U.S employment.

Some Economists view the concept of trade deficit as a mere expression of consumer preferences and as immaterial. These economists typically equate economic well being with rising consumption. If consumers want imported food, clothing and cars, why shouldn’t they buy them? That ranging of Choices is seen as them as symptoms of a successful and dynamic economy.

Perhaps the best and most suitable view about Trade deficit is the balanced view. If a trade deficit represents borrowing to finance current consumption rather than long term investment, or results from inflationary pressure, or erodes U.S employment, then it’s bad. If a trade deficit fosters borrowing to finance long term investment or reflects rising incomes, confidence and investment-and doesn’t hurt employment-then it’s good. If trade deficit merely expresses consumer preference rather than these phenomena, then it should be treated as immaterial.

How does a Trade surplus and Deficit Arise?

A trade surplus arises when countries sell more goods than they import. Conversely, trade deficits arise when countries import more than they export. The value of goods and services imported more exported is recorded on the country’s version of a ledger known as the ‘current account’. A positive account balance means the nation carries a surplus. According to the Central Intelligence Agency Work fact book, China, Germany, Japan, Russia, And Iran are net Creditors Nations. Examples of countries with a deficit or ‘net debtor’ nations are United States, Spain, the United Kingdom and India.

Difference between Trade Surplus and Trade Deficit

A country is said to have trade surplus when it exports more than it imports. Conversely, a country has a trade deficit when it imports more than it exports. A country can have an overall trade deficit or surplus. Or simply have with a specific country. Either Situation presents problems at high levels over long periods of time, but a surplus is generally a positive development, while a deficit is seen as negative. Economists recognize that trade imbalances of either sort are common and necessary in international trade.

Competitive Advantage of Trade Surplus and Trade Deficit

From the 16th and 18th Century, Western European Countries believed that the only way to engage in trade were through the exporting of as many goods and services as possible. Using this method, Countries always carried a surplus and maintained large pile of gold. Under this system called the ‘Mercantilism’, the concise encyclopedia of Economics explains that nations had a competitive advantage by having enough money in the event a war broke out so as to be able to Self-sustain its citizenry. The interconnected Economies of the 21st century due to the rise of Globalization means Countries have new priorities and trade concerns than war. Both Surpluses and deficits have their advantages.

Trade Surplus Advantage

Nations with trade surplus have several competitive advantage s by having excess reserves in its Current Account; the nation has the money to buy the assets of other countries. For Instance, China and Japan use their Surpluses to buy U.S bonds. Purchasing the debt of other nations allows the buyer a degree of political influence. An October 2010 New York Times article explains how President Obama must consistently engage in discussions with China about its $28 Billion deficit with the country. Similarly, the United States hinges its ability to consume on China’s continuing purchase of U.S assets and cheap goods. Carrying a surplus also provides a cash flow with which to reinvest in its machinery, labour force and economy. In this regard, carrying a surplus is akin to a business making a profit-the excess reserves create opportunities and choices that nations with debts necessarily have by virtue of debts and obligations to repay considerations.

Trade Deficits Advantage

George Alessandria, Senior Economist for the Philadelphia Federal Reserve explains trade deficits also indicate an efficient allocation of Resources: Shifting the production of goods and services to China allows U.S businesses to allocate more money towards its core competences, such as research and development. Debt also allows countries to take on more ambitious undertakings and take greater risks. Though the U.S no longer produces and export as many goods and services, the nations remains one of the most innovative. For Example, Apple can pay its workers more money to develop the Best Selling, Cutting Edge Products because it outsources the production of goods to countries overseas.

LITERATURE REVIEW

In this chapter, efforts were made to explain some of the issues concerning balance of trade and trying to X-ray some of the arguments in favour of trade balances and imbalances with a view to finding answers to some salient questions and making for proper understanding of the concept of trade balances surplus and deficit which is fast becoming a major problem in the world’s economy today which scholars like John Maynard Keynes earlier predicted.

In a bid to finding a solution to this, we shall be discussing from the following sub-headings;

(a). Conditions where trade imbalances may be problematic.

(b). Conditions where trade imbalances may not be problematic.

2.1. Conditions where trade imbalances may be problematic

Those who ignore the effects of long run trade deficits may be confusing David Ricardo’s principle of comparative advantage with Adam Smith’s principle of absolute advantage, specifically ignoring the latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile. Global labor arbitrage, a phenomenon described by economist Stephen S. Roach, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial. Since the stagflation of the 1970s, the U.S. economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing trade deficit with China. Over the long run, nations with trade surpluses tend also to have a savings surplus. The U.S. generally has lower savings rates than its trading partners, which tend to have trade surpluses. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run.

Few economists believe that GDP and employment can be dragged down by an over-large deficit over the long run. Others believe that trade deficits are good for the economy. The opportunity cost of a forgone tax base may outweigh perceived gains, especially where artificial currency pegs and manipulations are present to distort trade.

Wealth-producing primary sector jobs in the U.S. such as those in manufacturing and computer software have often been replaced by much lower paying wealth-consuming jobs such as those in retail and government in the service sector when the economy recovered from recessions. Some economists contend that the U.S. is borrowing to fund consumption of imports while accumulating unsustainable amounts of debt.

In 2006, the primary economic concerns focused on: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP), high trade deficits, and a rise in illegal immigration.

These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President’s 2006 State of the Union address. On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the U.S. to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand.

2.2. Conditions where trade imbalances may not be problematic

Small trade deficits are generally not considered to be harmful to either the importing or exporting economy. However, when a national trade imbalance expands beyond prudence (generally thought to be several [clarification needed] percent of GDP, for several years), adjustments tend to occur. While unsustainable imbalances may persist for long periods (cf, Singapore and New Zealand’s surpluses and deficits, respectively), the distortions likely to be caused by large flows of wealth out of one economy and into another tend to become intolerable.

In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue until such reserves are depleted. At such a point, the importer can no longer continue to purchase more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus economy’s currency will change the relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction.

More complexly, an economy may be unable to export enough goods to pay for its imports, but is able to find funds elsewhere. Service exports, for example, are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. There are some economies where transfers from nationals working abroad contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are examples of transfer-rich economies. Finally, a country may partially rebalance by use of quantitative easing at home. This involves a central bank buying back long term government bonds from other domestic financial institutions without reference to the interest rate (which is typically low when QE is called for), seriously increasing the money supply. This debases the local currency but also reduces the debt owed to foreign creditors – effectively “exporting inflation”

FACTORS AFFECTING BALANCE OF TRADE

Factors that can affect the balance of trade include;

1. The cost of Production, (land, labour, capital, taxes, incentives, etc) in the exporting as well as the importing economy.

2. The cost and availability of raw materials, intermediate goods and inputs.

3. Exchange rate movement.

4. Multi lateral, bi-lateral, and unilateral taxes or restrictions on trade.

5. Non-Tariff barriers such as environmental, Health and safety standards.

6. The availability of adequate foreign exchange with which to pay for imports and prices of goods manufactured at home.

In addition, the trade balance is likely to differ across the business cycle in export led-growth (such as oil and early industrial goods). The balance of trade will improve during an economic expansion.

However, with domestic demand led growth (as in the United States and Australia), the trade balance will worsen at the same stage of the business cycle.

Since the Mid 1980s, the United States has had a growth deficit in tradable goods, especially with Asian nations such as China and Japan which now hold large sums of U.S debts. Interestingly, the U.S has a trade surplus with Australia due to a favourable trade advantage which it has over the latter.

ECONOMIC POLICY WHICH COULD HELP REALISE TRADE SURPLUSES.

(a) Savings

Economies such as Canada, Japan, and Germany which have savings Surplus Typically runs trade surpluses. China, a High Growth economy has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the United States with a lower Savings rate has tended to run high trade deficits, especially with Asian Nations.

(b) Reducing import and increasing Export.

Countries such as the U.S and England are the major proponent of this theory. It is also known as the mercantile theory. A Practice where the government regulates strictly the inflow and outflow from the economy in terms of import and export. One major advantage of this theory is that it makes a nation self sufficient and has a multiplier effect on the overall development of the nation’s entire sector.

CRITICISMS AGAINST THE ECONOMIC POLICY OF SAVING AS A MEANS OF REALISING TRADE SURPLUS

Saving as a means of realizing trade surplus is not advisable. For example, If a country who is not saving is trading and multiplying its monetary status, it will in a long run be more beneficial to them and a disadvantage to a country who is solely adopting and relying on the savings policy as the it can appear to be cosmetic in a short term and the effect would be exposed when the activities of the trading nation is yielding profit on investment. This could lead to an Economic Tsunami.

CRITICISMS AGAINST THE ECONOMIC POLICY OF REDUCING IMPORTS AND INCREASING EXPORTS

A situation where the export is having more value on the economy of the receiving country just as Frederic Bastiat posited in its example, the principle of reducing imports and increasing export would be an exercise in futility. He cited an example of where a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France, and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of France.

A proper understanding of a topic as this can not be achieved if views from Notable Scholars who have dwelt on it in the past are not examined.

In the light of the foregoing, it will be proper to analyze the views of various scholars who have posited on this topic in a bid to draw a deductive conclusion from their argument to serve a template for drawing a conclusion. This would be explained sequentially as follow;

(a) Frédéric Bastiat on the fallacy of trade deficits.

(b) Adam Smith on trade deficits.

(c) John Maynard Keynes on balance of trade.

(d) Milton Freidman on trade deficit.

(e) Warren Buffet on trade deficit.

3.1. Frédéric Bastiat on the fallacy of trade deficits

The 19th century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France, and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of France. looking at his arguments properly, one would say that it is most adequate to have a trade deficit over a trade surplus. In this Vain, it is glaringly obvious that domestic trade or internal trade could turn a supposed trade surplus into a trade deficit if the cited example of Fredric Bastiat is applied. This was later, in the 20th century, affirmed by economist Milton Friedman.

Internal trade could render an Export value of a nation valueless if not properly handled. A situation where a goods that was initially imported from country 1 into a country 2 has more value in country 2 than its initial export value from country 1, could lead to a situation where the purchasing power would be used to buy more goods in quantity from country 2 who ordinarily would have had a trade surplus by virtue of exporting more in the value of the sum of the initially imported goods from country 1 thereby making the latter to suffer more in export by adding more value to the economy of country 1 that exported ab-initio. The customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of Country 1. But in the real sense of it, Country 1 has benefited trade-wise which is a profit to the economy. In the light of this, a fundamental question arises, ‘would the concept of Profit now be smeared or undermined on the Alter of the concept of Trade surplus or loss? This brings to Mind why Milton Friedman stated ‘that some of the concerns of trade deficit are unfair criticisms in an attempt to push macro- economic policies favourable to exporting industries’. i.e. to give an undue favour or Advantage to the exporting nations to make it seem that it is more viable than the less exporting country in the international Business books of accounts. This could be seen as a cosmetic disclosure as it does not actually state the proper position of things and this could be misleading in nature.

By reduction and absurdum, Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, affirmed by economist Milton Friedman.

3.2. Adam Smith on trade deficits

Adam Smith who was the sole propounder of the theory of absolute advantage was of the opinion that trade deficit was nothing to worry about and that nothing is more absurd than the Doctrine of ‘Balance of Trade’ and this has been demonstrated by several Economists today. It was argued that If for Example, Japan happens to become the 51st state of the U.S, we would not hear about any trade deficit or imbalance between America and Japan. They further argued that trade imbalance was necessitated by Geographical boundaries amongst nations which make them see themselves as competitors amongst each other in other to gain trade superiority among each other which was not necessary. They further posited that if the boundaries between Detroit, Michigan and Windsor, Ontario, made any difference to the residents of those cities except for those obstacles created by the Government. They posited that if it was necessary to worry about the trade deficit between the United States and Japan, then maybe it was necessary to worry about the deficits that exist among states. It further that stated that if the balance of trade doesn’t matter at the personal, Neighbourhood, or city level, then it does matter at the National level. Then Adams Smith was Right!.

They observed that it was as a result of the economic viability of the U.S that made their purchasing power higher than that its Asian counterpart who was Exporting more and importing less than the U.S and that it wouldn’t be better if the U.S got poorer and less ability to buy products from abroad, further stating that it was the economic problem in Asia that made people buy fewer imports.

“In the foregoing, even upon the principles of the commercial system, it was very unnecessary to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous. It obvious depicts a picture that nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this [absurd] doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium.” (Smith, 1776, book IV, ch. iii, part ii).

3.3. John Maynard Keynes on balance of trade

John Maynard Keynes was the principal author of the ‘KEYNES PLAN’. His view, supported by many Economists and Commentators at the time was that Creditor Nations should be treated as responsible as debtor Nations for Disequilibrium in Exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious economic consequences. In the words of Geoffrey Crowther, ‘if the Economic relationship that exist between two nations are not harmonized fairly close to balance, then there is no set of financial arrangement that Can rescue the world from the impoverishing result of chaos. This view could be seen by some Economists and scholars as very unfair to Creditors as it does not have respect for their status as Creditors based on the fact that there is no clear cut difference between them and the debtors. This idea was perceived by many as an attempt to unclassify Creditors from debtors.

3.4. Milton Freidman on trade deficit

In the 1980s, Milton Friedman who was a Nobel Prize winning Economist, a Professor and the Father of Monetarism contended that some of the concerns of trade deficit are unfair criticisms in an attempt to push macro- economic policies favourable to exporting industries.

He further argued that trade deficit are not necessarily as important as high exports raise the value of currency, reducing aforementioned exports, and vice versa in imports, thus naturally removing trade deficits not due to investment.

This position is a more refined version of the theorem first discovered by David Hume, where he argued that England could not permanently gain from exports, because hoarding gold would make gold more plentiful in England; therefore the price of English goods will soar, making them less attractive exports and making foreign goods more attractive imports. In this way, countries trade balance would balance out.

Friedman believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to discourage imports in favour of the exports. Revising again in the favour of imports as the currency gains strength.

But again there were short comings on the view of Friedman as many economists argued that his arguments were feasible in a short run and not in a long run. The theory says that the trade deficit, as good as debt, is not a problem at all as the debt has to be paid back. They further argued that In the long run as per this theory, the consistent accumulation of a major debt could pose a problem as it may be quite difficult to pay offset the debt easily.

Economists in support for Friedman suggested that when the money drawn out returns to the trade deficit country

3.5. Warren Buffet on trade deficit

The Successful American Business Mogul and Investor Warren Buffet was quoted in the Associated Press (January 20th 2006) as saying that ‘The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them’. He was further quoted as saying that ‘in effect, our economy has been behaving like an extraordinary rich family that possesses an immense farm. In order to consume 4% more than we produce-that is the trade deficit- we have day by day been both selling pieces of the farm and increasing the mortgage on what we still own.

Buffet proposed a tool called ‘IMPORT CERTIFICATES’ as a solution to the United States problem and ensure balanced trade. He was further quoted as saying; ‘The Rest of the world owns a staggering $2.5 trillion more of the U.S than we own of the other countries. Some of this $2.5 trillion is invested in claim checks- U.S bonds, both governmental and private- and some in such assets as property and equity securities.

Import Certificate is a proposed mechanism to implement ‘balanced Trade’, and eliminate a country’s trade deficit. The idea was to create a market for transferable import certificate (ICs) that would represent the right to import a certain dollar amount of goods into the United States. The plan was that the Transferable ICs would be issued to US exporters in an amount equal to the dollar amount of the goods they export and they could only be utilized once. They could be sold or traded to importers who must purchase them in order to legally import goods to the U.S. The price of ICs are set by free market forces, and therefore dependent on the balance between entrepreneurs’ willingness to pay the ICs market price for importing goods into the USA and the global volume of goods exported from the US (Supply and Demand).

The Four Economic Benefits of Inflation

Current Economic planners may argue that inflation is the not the main issue in this age of bailouts, and stimulus packages. Inflation is always a threat to any economy, and depending on how the current stimulus packages work, could either become part of the changing economy, or part of an economics textbook.

What are the Advantages of Inflation:

1. Business Growth

 

Controlled growth of Inflation, can become part of business growth, simply because savings are often invested, because of the net loss if they are kept in a Bank.

During times of controlled Inflation, people in the past tended to spend, as they feared prices could rise, saving on buying now, rather then paying more later.

 

2. Falling Debt Values

 

Higher Inflation eats away at the real value of a currency. This could mean that the actual value of debts decrease, benefiting indebted businesses and private individuals.

 

3. Higher Stock Values

 

Stocks bought at an earlier value, could rise in price and sold off at a higher price bringing higher profitability.

 

4. Rising asset Values

 

Values of fixed assets could rise, making some Companies more financially secure. Traditionally higher Inflation often leads to higher prices, therefore fixed assets in theory should rise in value.

 

Conventional Economic theory is based often on past experience, however the current economic crisis has not really been experienced before. It resembles the 1929 Wall Street Crash, but all our economies are fundamentally different, and the World is a different place to the 1930s.

 

We may never be sure what higher inflation could do to our economies, one reason Gold has become the choice of many Savvy Investors. We are at the crossroads of great economical change, and this change could challenge more conventional Economic thinking, especially about the effects of inflation. on an economy.

Aircraft Structural Components

The major aircraft structures are wings, fuselage, and empennage. The primary flight control surfaces, located on the wings and empennage, are ailerons, elevators, and rudder. These parts are connected by seams, called joints.

All joints constructed using rivets, bolts, or special fasteners are lap joints. Fasteners cannot be used on joints in which the materials to be joined do not overlap – for example, butt, tee and edge joints. A fayed edge is a type of lap joint made when two metal surfaces are butted up against one another in such a way as to overlap.

Internal aircraft parts are manufactured in four ways: Milling, stamping, bending, and extruding. The metal of a milled part is transformed from cast to wrought by first shaping and then either chemically etching or grinding it. A stamped part is annealed, placed in a forming press, and then re-heat treated.

Bent parts are made by sheet metal mechanics using the bend allowance and layout procedures. An extrusion is an aircraft part which is formed by forcing metal through a preshaped die. The resulting wrought forms are used as spars, stringers, longerons, or channels. In order for metal to be extruded, bent, or formed, it must first be made malleable and ductile by annealing. After the forming operation, the metal is re-heat treated and age hardened.

Airbus Wings

Here in the UK and in particular at the Airbus facility in North Wales, our expertise is in the manufacture of aircraft wings. Aircraft wings have to be strong enough to withstand the positive forces of flight as well as the negative forces of landing. Metal wings are of two types: Semicantilever and full cantilever. Semicantilever, or braced, wings are used on light aircraft. They are externally supported by struts or flying wires which connect the wing spar to the fuselage. A full cantilever wing is usually made of stronger metal. It requires no external bracing or support. The skin carries part of the wing stress. Parts common to both wing designs are spars, compression ribs, former ribs, stringers, stress plates, gussets. wing tips and wing skins.

Airbus at Broughton employs more than 5,000 people, mostly in manufacturing, but also in engineering and support functions such as procurement and finance.

Wing Spars

Two or more spars are used in the construction of a wing. They carry the main longitudinal -butt to tip – load of the wing. Both the spar and a compression rib connect the wing to the fuselage.

Compression Ribs

Compression ribs carry the main load in the direction of flight, from leading edge to trailing edge. On some aircraft the compression rib is a structural piece of tubing separating two main spars. The main function of the compression rib is to absorb the force applied to the spar when the aircraft is in flight.

Former Ribs

A former rib, which is made from light metal, attaches to the stringers and wing skins to give the wing its aerodynamic shape. Former ribs can be classified as nose ribs, trailing edge ribs, and mid ribs running fore and aft between the front and rear spar on the wing. Formers are not considered primary structural members.

Stringers

Stringers are made of thin sheets of preformed extruded or hand-formed aluminum alloy. They run front to back along the fuselage and from wing butt to wing tip. Riveting the wing skin to both the stringer and the ribs gives the wing additional strength.

Stress Plates

Stress plates are used on wings to support the weight of the fuel tank. Some stress plates are made of thick metal and some are of thin metal corrugated for strength. Stress plates are usually held in place by long rows of machine screws, with self-locking nuts, that thread into specially mounted channels. The stress-plate channeling is riveted to the spars and compression ribs.

Gussets

Gussets, or gusset plates, are used on aircraft to join and reinforce intersecting structural members. Gussets are used to transfer stresses from one member to another at the point where the members join.

Wing Tips

The wing tip, the outboard end of the wing, has two purposes: To aerodynamically smooth out the wing tip air flow and to give the wing a finished look.

Wing Skins

Wing skins cover the internal parts and provide for a smooth air flow over the surface of the wing. On full cantilever wings, the skins carry stress. However, all wing skins are to be treated as primary structures whether they are on braced or full cantilever surfaces.

Fuselage Assemblies.

The largest of the aircraft structural components, there are two types of metal aircraft fuselages: Full monocoque and semimonocoque. The full monocoque fuselage has fewer internal parts and a more highly stressed skin than the semimonocoque fuselage, which uses internal bracing to obtain its strength.

The full monocoque fuselage is generally used on smaller aircraft, because the stressed skin eliminates the need for stringers, former rings, and other types of internal bracing, thus lightening the aircraft structure.

The semimonocoque fuselage derives its strength from the following internal parts: Bulkheads, longerons, keel beams, drag struts, body supports, former rings, and stringers.

Bulkheads

A bulkhead is a structural partition, usually located in the fuselage, which normally runs perpendicular to the keel beam or longerons. A few examples of bulkhead locations are where the wing spars connect into the fuselage, where the cabin pressurization domes are secured to the fuselage structure, and at cockpit passenger or cargo entry doors.

Longerons And Keel Beams

Longerons and keel beams perform the same function in an aircraft fuselage. They both carry the bulk of the load traveling fore and aft. The keel beam and longerons, the strongest sections of the airframe, tie its weight to other aircraft parts, such as powerplants, fuel cells, and the landing gears.

Drag Struts And Other Fittings

Drag struts and body support fittings are other primary structural members. Drag struts are used on large jet aircraft to tie the wing to the fuselage center section. Body support fittings are used to support the structures which make up bulkhead or floor truss sections.

Former rings and fuselage stringers are not primary structural members. Former rings are used to give shape to the fuselage. Fuselage stringers running fore and aft are used to tie in the bulkheads and

former rings.

Aircraft Empennage Section

The empennage is the tail section of an aircraft. It consists of a horizontal stabilizer, elevator, vertical stabilizer and rudder. The conventional empennage section contains the same kind of parts used in the construction of a wing. The internal parts of the stabilizers and their flight controls are made with spars, ribs, stringers and skins.

Also, tail sections, like wings, can be externally or internally braced.

Horizontal Stabilizer And Elevator

The horizontal stabilizer is connected to a primary control surface, i.e., the elevator. The elevator causes the nose of the aircraft to pitch up or down. Together, the horizontal stabilizer and elevator provide stability about the horizontal axis of the aircraft. On some aircraft the horizontal stabilizer is made movable by a screw jack assembly which allows the pilot to trim the aircraft during flight.

Vertical Stabilizer And Rudder

The vertical stabilizer is connected to the aft end of the fuselage and gives the aircraft stability about the vertical axis. Connected to the vertical stabilizer is the rudder, the purpose of which is to turn the aircraft about its vertical axis.

Ailerons

Elevators and rudders are primary flight controls in the tail section. Ailerons are primary flight controls connected to the wings. Located on the outboard portion of the wing, they allow the aircraft to turn about the longitudinal axis.

When the right aileron is moved upward, the left one goes down, thus causing the aircraft to roll to the right. Because this action creates a tremendous force, the ailerons must be constructed in such a way as to withstand it.

Flight controls other than the three primary ones are needed on high-performance aircraft. On the wings of a wide-body jet, for example, there are as many as thirteen flight controls, including high and low-speed ailerons, flaps, and spoilers.

Flaps And Spoilers

Wing flaps increase the lift for take-off and landing. Inboard and outboard flaps, on the trailing edge of the wing, travel from full up, which is neutral aerodynamic flow position, to full down, causing air to pile up and create lift. Leading edge flaps – Krueger flaps and variable-camber flaps – increase the wing chord size and thus allow the aircraft to take off or land on a shorter runway. Spoilers, located in the center section span-wise, serve two purposes. They assist the high-speed ailerons in turning the aircraft during flight, and they are used to kill the aerodynamic lift during landing by spreading open on touchdown.

Trim Tabs

Connected to the primary flight controls are devices called trim tabs. They are used to make fine adjustments to the flight path of an aircraft. Trim tabs are constructed like wings or ailerons, but are

considerably smaller.

Financial Analysis on an Oil Corporation Takeover

Gulf Oil Corp.–Takeover

Summary of Facts

o George Keller of the Standard Oil Company of California (Socal) is trying to determine how much he wants to bid on Gulf Oil Corporation. Gulf will not consider bids below $70 per share even though their last closing price per share was valued at $43.

o Between 1978 and 1982, Gulf doubled its exploration and development expenses to increase their oil reserves. In 1983, Gulf began reducing exploration expenditures considerably due to declining oil prices as Gulf management repurchased 30 million of their 195 million shares outstanding.

o The Gulf Oil takeover was due to a recent takeover attempt by Boone Pickens, Jr. of Mesa Petroleum Company. He and a group of investors had spent $638 million and had obtained around 9% of all Gulf shares outstanding. Pickens engaged in a proxy fight for control of the company but Gulf executives fought Boone’s takeover as he followed up with a partial tender offer at $65 per share. Gulf then decided to liquidate on its own terms and contacted several firms to participate in this sale.

o The opportunity for improvement was Keller’s principal attraction to Gulf and now he has to decide whether Gulf, if liquidated, is worth $70 per share and how much he will bid on the company.

Problems

o What is Gulf Oil worth per share if the company is liquidated?

o Who is Socal’s competition and how are they a threat?

o What should Socal bid on Gulf Oil?

o What can be done to prevent Socal from operating Gulf Oil as a going concern?

Competition

Major competitors for obtaining Gulf Oil include Mesa Oil, Kohlberg Kravis, ARCO, and, of course, Socal.

Mesa Oil:

o Currently holds 13.2% of Gulf’s stock at an average purchase price of $43.

o Borrowed $300 million against Mesa securities, and made an offer of $65/share for 13.5 million shares, which would increase Mesa’s holdings to 21.3%.

o Under the re-incorporation, they would have to borrow an amount many times the value of Mesa’s net worth to gain the majority needed to gain a seat on the board.

o Mesa is unlikely to raise that much capital. Regardless, Boone Pickens and his investor group will make a substantial profit if they sell their current shares to the winner of the bidding.

ARCO:

o Offer price is likely less than $75/share since a bid of $75 will send its debt proportion soaring, thus making it difficult to borrow anything more.

o Socal’s debt is only 14% (Exhibit 3) of total capital, and banks are willing to lend enough to make bids into the $90’s possible.

Kohlberg Kravis:

o Specializes in leveraged buyouts. Keller feels theirs is the bid to beat since the heart of their offer lies in the preservation of Gulf’s name, assets and jobs. Gulf will essentially be a going concern until a longer-term solution can be found.

Socal’s offer will be based on how much Gulf’s reserves are worth without further exploration. Gulf’s other assets and liabilities will be absorbed into Socal’s balance sheet.

Gulf Oil’s Weighted-Average Cost of Capital

o Gulf’s WACC was determined to be 13.75% using the following assumptions:

o CAPM used to calculate cost of equity using beta of 1.5, risk-free rate of 10% (1 year T-bond), market risk premium of 7% (Ibbotson Associates’ data of arithmetic mean from 1926 – 1995). Cost of equity: 18.05%.

o Market value of equity was determined by multiplying the number of shares outstanding by the 1982 share price of $30. This price was used because it is the un-inflated value before the price was driven up by the takeover attempts. Market value of equity: $4,959 million, weight: 68%.

o Value of debt was determined by using the book value of long-term debt, $2,291. Weight: 32%.

o Cost of debt: 13.5% (given)

o Tax rate: 67% calculated by net income before taxes divided by income tax expense.

Valuation of Gulf Oil

Gulf’s value is comprised of two components: the value of Gulf’s oil reserves and the value of the firm as a going concern.

o A projection was made going forward from 1983 estimating oil production until all of the reserves were depleted (Exhibit 2). Production in 1983 was 290 million composite barrels, and this was assumed to be constant until 1991 when the remaining 283 million barrels are produced.

o Production costs were held constant relative to the production amount, including depreciation due to the unit-of-production method currently used by Gulf (Production will be the same, so depreciation amount will be the same)

o Because Gulf uses the LIFO method to account for inventory, it is assumed that new reserves are expensed the same year that they are discovered and all other exploratory costs, including geological and geophysical costs are charged against income as incurred.

o Since there will be no more exploration going forward, the only expenses that will be considered are the costs involved with production to deplete the reserves.

o The price of oil was not expected to rise in the next ten years, and since inflation affects both the selling price of oil and the cost of production, it cancels itself out and was negated in the cash flow analysis.

o Revenues minus expenses determined the cash flows for years 1984-1991. The cash flows cease in 1991 after all oil and gas reserves are liquidated. The cash flows derived account for the liquidation of the oil and gas assets only, and do not account for liquidating other assets such as current assets or net properties. The cash flows were then discounted by net present value using Gulf’s cost of capital as the discount rate. Total cash flows until liquidation is complete, discounted by Gulf’s 13.75% discount rate (WACC), come to $9,981 million.

Gulf’s value as a going concern

o The second component of Gulf’s value is its value as a going concern.

o Relevant to the valuation because Socal does not plan to sell any of Gulf’s assets other than its oil under the liquidation plan. Instead, Socal will utilize Gulf’s other assets.

o Socal can choose to turn Gulf back into a going concern at any time during the liquidation process, all that is needed is for Gulf to start exploration process again.

o Value as a going concern was calculated by multiplying the number of shares outstanding by the 1982 share price of $30. Value: $4,959 million.

o 1982 share price chosen because this is the value the market assigned before the price was driven up by the takeover attempts.

Bidding Strategy

o When two companies merge it is common practice for the purchasing company to overpay for the purchased firm.

o Results in the shareholders of the purchased company profiting from the over-payment, and the shareholders of the purchasing company losing value.

o Socal’s responsibility is to their shareholders, not the shareholders of Gulf Oil.

o Socal has determined the value of Gulf oil, in liquidation, to be $90.39 per share. To pay anything over this amount would result in a loss for Socal shareholders.

o Maximum bid amount per share was determined by finding the value per share with Socal’s WACC, 16.20%. The resulting price was $85.72 per share.

1. This is the price per share that Socal must not exceed to still obtain profit from the merger, because Socal’s WACC of 16.2% is closer to what Socal will expect to pay their shareholders.

o The minimum bid is usually determined by the price the stock is currently selling at, which would be $43 per share.

1. However, Gulf Oil will not accept a bid lower than $70 per share.

2. Also, the addition of the competitor’s willingness to bid at least $75 per share drives the winning bid price up.

o Socal took the average of the maximum and minimum bid prices, resulting in a bid price of $80 per share.

Maintaining Socal’s Value

o If Socal purchases Gulf at $80 it is based on the company’s liquidation value and not as a going concern. Therefore, if Socal operates Gulf as a going concern their stock will be devalued by approximately half. Socal stockholder’s fear that management might takeover Gulf and control the company as is which is only valued at its current stock price of $30.

o After the acquisition, there will be large interest payments that could force management to improve performance and operating efficiency. The use of debt in takeovers serves not only as a financing technique but as a tool to hopefully force changes in managerial behavior.

o There are a few strategies Socal could employ to ensure stockholders and other relevant parties that Socal will takeover and use Gulf at the appropriate value.

o A covenant could be executed on or before the time of the bid. It would specify the future obligations of Socal management and include their liquidation strategy and projected cash flows. Although management might respect the covenant, there is no real motivation to prevent them from implementing their own agenda.

o Management could be monitored by an executive; however, this is often costly and an ineffective process.

o Another way to ensure shareholders, especially when monitoring is too expensive or too difficult, is to make the interests of the management more like those of the stockholders. For instance, an increasingly common solution towards the difficulties arising from the separation of ownership and management of public companies is to pay managers partly with shares and share options in the company. This gives the managers a powerful incentive to act in the interests of the owners by maximizing shareholder value. This is not a perfect solution because some managers with lots of share options have engaged in accounting fraud in order to increase the value of those options long enough for them to cash some of them in, but to the detriment of their firm and its other shareholders.

o It would probably be the most beneficial and the least costly for Socal to align its managers concerns with that of the stockholders by paying their managers partly with shares and share options. There are risks associated with this strategy but it will definitely be an incentive for management to liquidate Gulf Oil.

Recommendation

o Socal will place a bid for Gulf Oil because its cash flows reveal that it is worth $90.39 in a liquidated state.

o Socal will bid $80 per share but limits further bidding to a ceiling of $85.72 because paying a higher price would hurt Socal’s shareholders.

Managerial Economics – Application of Economic Theory in Solving Business Problems!

Managerial economics is concerned with various micro and macro economic tools and the analysis of which can be used in managerial decision making to solve business problems. Micro economic tools that are used in this subject include demand analysis, production and cost analysis, break-even analysis, pricing theory and practice, technical progress, location decisions and capital budgeting. The macro economic concepts that are directly or indirectly relevant to managerial decision-making comprise national income analysis, business cycles, monetary policy, fiscal policy, central banking, government finance, economic growth, international trade, balance of payments, free trade protectionism, exchange rates and international monetary system.

The scope of this managerial science is wide and it has close connections with economic theory, decision sciences and accountancy. Traditional economics talks about the theory and methodology while managerial economics applies economic theory and methodology to solve business problems. It uses the tools and techniques of analysis to provide with optimal solutions to business problems.

  • Relationship with economics:

Managerial economics borrows concepts from economics just as engineering does from physics and medicine from biology. The analysis of both micro and macro economic concepts add valuable inputs to the organization. Say, national income forecasting is an important aid to business condition analysis which in turn could be a priceless input for forecasting the demand for specific product groups. The theories of market structure can be analyzed for the purpose of market segmentation.

  • Relationship with decision sciences:

Decision models are created to format the solutions for problem situations and the process utilizes techniques like, optimization, differential calculus and mathematical programming. This also helps to analyze the impact of alternate course of action and evaluate the results obtained form the model.

  • Relationship with accounting:

Accounting data and statements constitute the language of business. The accounting profession considerably influences cost and revenue information and their classification. A manager should therefore be familiar with the generation, interpretation and use of accounting data. Accounting moreover is viewed as a management decision tool and not anymore as a mere practice of bookkeeping. The concepts and practices of accounting can be very well applied to improve the economic scope of a project.

Economics is an interesting subject as it deals with the day-to-day problems of a common man and at the same time is concerned with the economic prosperity of a country as a whole. Its primary focus is on scarce resource allocations among competing ends. Individuals, enterprises and nations face problems of resource allocation. Managerial economics may be viewed as economics applied to problem solving at the level of the firm.

Role of Budgeting in Planning, Control, and Resource Allocation Process in UAE Companies

Budget

Before understanding the key concepts of budgeting, it is important to understand the meaning of budget. A budget is used to make a documentation of the translation of plans into money. So, the amount of money that needs to be spent in the planned strategies of the company would lie under the budget of that company. These planned strategies include the expenditure that a company incurs and also the income that the company predicts to make. So, in other words, a budget helps one to make an estimation of the amount of money that would be required for the company to handle the projects undertaken by it. It must also be understood that a budget is not made permanently. There are conditions under which a company can make changes in the budget and go as per as the needs of the market. As for example, if a company sees that the use of computers is not as had been planned in the budgeting; it would either replace it with something or not make any investment at all in the field. This is where the utility of controlling comes into the picture. Other than this a budget is also significant from other perspectives. If one talks about the resource allocation, budget has an equally important role to play in it. The reason for the same is that let’s say that a company has budgeted that it can afford a certain amount of power supply for a certain project that is conducted in a village. Under the conditions, the amount of human resource that would be required to carry out the project can be determined from the budget itself. Normally a budget is of three types. They have been mentioned as follows:

Survival Budget: This form of budgeting is important in the boundary conditions. It estimates the minimum resources so as to complete a particular project. So, if a company has a look at the survival project, there is one obvious analysis that can be done. This is that under the most optimistic of the situations, the resources allocated would be sufficient. There would be very little margin of error under the conditions.

Guaranteed Budget: This budget is formulated when there is a guarantee of a particular amount of income at the time of formulation of budget. So, when a budget is made from this perspective, this income is taken into consideration. If somehow, the debtors are not able to provide the income that the company used as guarantee before making the budget, it would have to switch over to the survival budget formation.

Optimal Budget: The third form of budget is the optimal budget. This budget is used under the conditions when there is extra money in the company accounts or else the company feels that it could raise extra money from the market. So, if the position of the company is good then this form of budgeting can be applied. As for example if we consider a very famous company in the infrastructure sector, Emaar, we would find that the company has the ability to raise a lot of extra capital from the market. So, Emaar can hope to use it in utilizing the money to plan a few more interesting projects like it had made the longest mall in the world and the tallest tower in the world. Both these projects were outcomes of an optimal budget made by the company.

Budgeting Responsibilities

Owing to the circumstances under which a budget is fruitful, the organizations should be highly selective in handing over the responsibilities of making the budget. There are a few pre-requisites of making a budget. They are as follows:

The concerned employee should have a clear understanding of the company’s values, strategies, and plans that lie in the near future.

The employees must know the importance of cost-efficiency and cost-effectiveness.

Also, the concerned employee must have knowledge about the resources that would be used to generate and raise funds.

The above pre-requisites are essential for the company if they have the motive of using budgeting in the planning, controlling and resource allocation purposes.

So, it is generally recommended that a company has a budgeting team that has an optimal size so as to prevent any discrepancy with the formation of the budget. Under all situations where the concerned members of the finance department have difficulties in planning the budget, they would have to consult the board of members for the same. For a situation like this to arise, the planning in the company must certainly have been wrong. So, we can see that the new planning would depend solely on the fact that budget allows the same to happen. Under all other conditions, the estimated plan would have to change. (Budgeting, 2010)

Role of Budgeting in Planning

Here we are taking the telecommunication giant, DU into account to understand the role played by budgeting in the planning process. It was only about a couple of years ago that the company introduced its new plan. This new plan was about introducing the pay-by-the second plan amongst the services of the company. This was done as per as the optimal budget plan of the company. DU had formulated a budget where it got the option of introducing a new facility with the extra money that it hand in hand. As the company analysis shows that DU was climbing the ladders of success even then, so this was certainly a major step in the making. Moreover, the funds that had been allocated in the budget were enough for the fact that the company could start this service any time it wanted. So, it chose the time when the nearest rival company Etisalat had screwed up its plans after introducing the Blackberry services. As an optimal budget is that which allows the time for starting a new investment, this was just the time and DU made the most of the opportunity. Today this plan is among the most revenue-fetching plans that the company had ever introduced in its services. So, budget played an extremely important role in the planning of this success of the firm. Had the company planned to use the extra money as a surplus or retained or reserve, it would never have been able to introduce this service. So, one can see the importance of making the right budget at the right time can help in planning for great successes in a company. There are other examples also where one can see the planning being aided by preparation of budget. The tourism department of Abu Dhabi was guaranteed of the fact that it would have a considerable amount of income from the flourishing tourism in the country due to the onset of some of the most peculiar activities in the country. Under the situation, the department used the guaranteed budget to enhance the cultural activities of the country. A number of museums have been renovated because of a planned budgeting under the guaranteed budget plan. The department had planned that with the money they would have from the already existing resources in tourism, it would evoke a cultural feeling in the country and its natives, It has been able to do it successfully as per as the statistics of the museums of the region are concerned. So, once again we see that budgeting has helped in planning of such an important landmark in the country.

As in general one can say that budgeting is about aiding a company to make plans for the future. It is that process where a company can be assured of the fact that it would have enough money so as to carry out the requisite projects. We are all acquainted with the fact that the world is about competition as of today. Every company needs to plan new projects so as to show its core competency. Under the conditions, no company can automatically start investing on its research and development. It has to come through a substantial degree of planning which could only be possible after the budget of the company allows it to do so. In all other situations it would finally have to terminate the services with an excess of demand or supply.

There are also other instances where a company can use the principles of budgeting in order to carry out its planning. This can be seen in the case of training. Every planning of training has to be supported by budget. This is one of the foremost criteria of training. There are a number of instances in the country where the Government is implementing programs like Emiritzation. If the budget of the company does not support such plans they would certainly not be executed. The loss can be huge under the conditions. The first case would be a monetary loss as an incomplete training would actually be of no used as it would be insufficient to fulfill the company’s criteria. If some small companies do place employees with an incomplete bit of training, it would make the company even smaller!

So, we can see how budgeting governs this chain of planning which of not executed in a suitable manner could bring about adverse results. (The Importance of Budgeting, 2010)

Role of Budgeting in Controlling

As in the case of planning, budgeting also has a special role to play in controlling of an organization. We have seen that a plan would simply lay the conditions of taking on a particular activity. What follows is its controlling in the implementation phase. Let’s say that a company wishes to promote its products or services in the trade fare of Dubai. This is one of the places where controlling comes into play with respect to budgeting. Dubai Trade Fare is one of those occasions when a number of companies use the best of means to promote their products. With an adequate amount of control, the companies would never be able to compete in the pool of so many. So, a budgeting has to be done to choose the HR and marketing department which would be responsible to control the scenario.

Without a proper budgeting in this respect, the company would make inefficient decisions and after a while, there would be no control over the promotional measures of the company.

There are also a number of chances where a company goes with leisure expenses. It does increase the value of the company for a particular period of time but after a while there has to be an end to it. Now, with a planned budget under the conditions, the companies would be able to restrict themselves from over-spending as the budget would not suit their expenditure. This requires the company to make a survival budget. As we can see a survival budget would certainly take care of the budgeting requirements of the company. If the employees are aware of the fact that they would not be able to complete their respective projects with the type of expenditure they are doing, they would certainly shift to other economic reasons. This way a company can also control the activities of the employees. Once a planned budget is produced the whereabouts of the employees can also be checked as they would be on a hire. The amount of time given to them in the budget would be fixed. If they are unable to finish their respective works in this stipulated time they would see the effect on their salaries or wages. So, this way, the company’s activities, employees, time and money can all be under control with the introduction of budget in the company’s financial plan. The company would certainly become more efficient if it works in a controlled manner. So, this would be for the mutual benefit of both the employees and the company as well. (Controlling a Budget, 2010)

Role of Budgeting in Resource Allocation

A company’s success is highly dependent on the resource allocation. This has to be done optimally so as to complete a certain project. The law of economics suggests that a company has the least resources and has to make the most of it. So, only an appropriate resource allocation would help this happen. This would be in terms of human resource, raw materials, equipments, money, time and all other attributes that take for making a project successful. Here again, the budgeting of the company plays an important role to play. The reason for the same is that in all the sectors that have been talked about here, only a planned budget could decide the maximum a company can afford. Let’s say that ADNOC has the plan of staring a new subsidiary. Under the conditions, it would have to make a budget where the company could allocate the amount of human resources in order to make this happen. Not only this, there are a series of activities that would have to be done in the process. Much of the time, there would be two processes going on and at times even one. So, a planned budget would estimate the amount of money that the company can afford throughout the process. Based on this, the processes would have to be allocated in a manner where the company can make the best use of the human resource available. If ADNOC has 200,000 AED for the purpose, and there are 10 slots, rather than allocating 20,000 AED per slot, the company would have to see the priorities of each slot. If a particular slot requires double the number of processes than the others, the resources would have to be allocated accordingly for the same. Now this can only be possible with an appropriate amount of budgeting. If the budget of the company does not allow double resource allocation for a particular slot because of other activities, then the company would have to come up with other alternatives. Had there been an inability of a budget, the company would allocate double resources and finally land up with none available for a process that has little requirement. So, we can see that even the process of resource allocation requires budgeting to a large degree.

Talking about the company Emaar, as per as the organizational size of the company, there has to be a proper budgeting done. The reason for the same is that every department requires an adequate amount of human resource and funds. If the company’s budget for a particular project is 200 million AED, the company would also have this budget divided into different departments. Every department would have to use only the allocated funds to support its human resource and all other requisites prior to conducting the project. If the construction department spends so much that the company is not able to use any funds for its advertisement, in this world of competition, even a company like Emaar would have to bow down to others in the league. There are so many options that people have for residents that promotion under forced conditions could change every profitability ratio of Emaar. So, here again we see the hierarchy that could be affected because of the inappropriate use of resources that would result from the non-availability of a budget that could suit the purpose. (The Basic Budgeting Problem, 2010)

Conclusion

So, one can see that a budgeting process has a number of utilities in the projects of a company. This could be from the perspective of planning, controlling or resource allocation. Every company has the desire to be at the top. Finance has a special role to play in the same. Te steps of laying down an appropriate budget are as follows:

Firstly, the concerned person should lay down all the places of investment with respect to a particular project.

Next, make an estimation of the unit cost of every product that would be manufactured in the process.

Next, analyze the resources that would be sufficient to provide for the unit costs found.

Next make a proper budget format so that it is clear to all the departments and they the amount of allocation for them in all the respects.

It is also advisable to make notes so as to be able to explain the budget better.

Next, it is required to take a feedback on the budget so as to see whether it is applicable to all the departments or not. If not, then it would have to be re-planned.

Finally, make the final documentation so as to be able to help in planning, controlling and resource allocation as has been suggested earlier.

With all the above processes followed, a company can afford to perform all the financial activities in its respective projects. It must be remembered that only a systematic design of budget as has been concluded could be used for the mentioned cause.

What Exactly is an MBA Degree?

An MBA (Master of Business Administration) is a graduate degree obtained at a university or college that offers both theoretical and practical training to provide graduates general knowledge about general business management functions. The MBS degree may have a specific focus as: accounting, marketing or finance.

An MBA degree represents a level upward from an undergraduate business course and its achievement places the graduate far above other candidates owning just an undergraduate degree.MBA programs has become to be offered by most universities and colleges during the past two of years. For instance, only in the UK, 116 business schools are currently offering MBA courses and the number of students graduating this form of education has risen from 4,000 in 1990 to over 10,000 in 2000.

In order to be accepted in an MBA program, an applicant must take the Graduate Management Admission Test (GMAT) – for the US education system. The GMAT is a standardized test that aims at determining the aptitude of a candidate for an activity in business management studies. It is presently made up of an essay section containing two free-response essays of 10 minutes each; two multiple choice sections, one mathematical section and one verbal skills section.

Apart from the GMAT test, other admission criteria focus on significant work experience, academic transcripts, references and personal interviews. Extra-curricular and community service activities represent an interest for the admission boards.

The MBA degree courses offer students knowledge on economics, organizational behavior, marketing, international business, finance, government policy, accounting and information technology management.

The traditional MBA degree offers students a broad range of general courses in the first year of studies, followed by a specialization in the second year.

Specialization in particular areas as: technology management, accounting, strategy or specialized business, marketing and finance is being offered by many MBA degrees.

There are several ways of attending MBA courses.Nowadays MBA degrees can be accessed through online, distance learning or e-learning as the program offered by the Open University Business School. Due to the large variety of MBA degrees offered worldwide, the elite business schools are being accredited by independent bodies as the Association of MBAs. This association acts as a global network for the MBA community: MBA students, MBA graduates, schools, businesses and employers.

Consequently, the MBA degree represents a leading management qualification that creates highly competent professional managers.

Serial Entrepreneurship, Multipreneurship, Individualpreneurship, and The Self-Reliant Career

A serial entrepreneur is an individual who starts mainly multiple upwardly mobile enterprises and moves on to the next, either when a new management team takes control, or if the enterprise becomes lifestyle in nature. Because serial entrepreneurs have experience with multiple enterprises, they tend to be bigger risk takers than those that have started only one enterprise. As a consequence, their experience better positions them to respond to problems and to avoid failure over time. Many have learned from past mistakes. A serial entrepreneur will typically always work for themselves, and employ others.

A multipreneur is an individual who pursues multiple upwardly mobile and/or lifestyle business activities as a portfolio, either serially or in parallel. These activities can be within one business, such as new product and/or service line extensions, new product and/or service lines, new markets, or new business units; as new related or unrelated businesses; or as varied careers. A multipreneur may move from being self-employed to being employed by others to being self-employed again.

An individualpreneur is a focused multipreneur. The term “individualpreneur” is derived from the term “individualprise,” which in turn is derived from the term “individual enterprise.” The notion of an individual as an enterprise is based upon the practice of all income sources on an individual’s tax return being actively managed as a portfolio. Thus, individualpreneurship is a “top-down” mindset starting with the summarization of employment, entrepreneurship/business ownership, and investing activities as driven by multipreneurial initiatives. Each multipreneurial activity may be event or opportunity driven.

Multipreneurs (and hence individualpreneurs) include solopreneurs (individuals who work alone), webpreneurs (those doing business primarily on the internet), and can be employed working for others in parallel or between their entrepreneurial endeavors.

Because a married couple can file a joint individual tax return, the notion of individualpreneurship extends to both husband and wife (and their dependents as appropriate). This is notion is consistent with the concept of families pursuing many income generating activities during the agricultural age, such as farming, glassmaking, metalwork (smithy), needlework (weaving), stonework (masonry), and woodwork (carpentry).

Thinking and behaving as an “individualprise” helps an individual perform better, not only as an entrepreneur/business owner, but also for an employer, especially in an executive capacity. This is because they understand the concepts of income generation and expense, asset, liability, and capital management. They should also have a broader understanding of legal, finance, human resources, information technology, business development, and operations activities. For visionaries in the corporate world, intrapreneurial capabilities are also important for enacting and responding to change.

For many jobs, there is a lifecycle from value-added to commodity work over time. As jobs become commoditized, they are often outsourced to scale providers who perform the tasks at lower cost. Thus, to keep the economy healthy, it is necessary to provide for capital formation in new innovative enterprises that generate new job opportunities as the old jobs erode. Both serial entrepreneurs and multipreneurs who see and pursue multiple opportunities for innovation help keep the economy healthy. Typically for every one innovative job generated by an entrepreneur, there are many infrastructure and support jobs generated, either in the same enterprise, or in related.

Those seeking employment positions where such a lifecycle exists must recognize that a job search is a marketing campaign just as a business would adopt. Therefore, it must be treated as such by the job hunter if a satisfactory result is to occur. Thinking as an enterprise, the individualpreneur is more likely to achieve a satisfactory result in a job search because they are aware of the need to add value and promote it as such in the marketplace. Individualpreneurs appreciate the benefit of business relationships and networking, and the value of referrals.

Individualpreneurship is a discipline for building an individualprise for a sustainable self-reliant career. Sustainable means being able to continue over time, either by developing, enhancing, or maintaining the current state, or by changing it. Self-reliant means having the confidence to exercise one’s own judgment so as to be able to continue over time in a career – endeavors of achievement in both personal and professional lives.

As a multipreneur, an individual is willing and able to consider new and emerging opportunities as existing ones mature and decline. As an individualpreneur, they focus on those opportunities that offer the best likelihood of sustaining a livelihood over time.

Individualpreneurship embraces the entrepreneurship disciplines of entrepreneurship, leadership, and management, which apply to every individual in business, whether as an employee, as an entrepreneur/business owner, or as an investor. In the corporate world, leadership and managerial capabilities, and especially the ability to communicate effectively, are essential for advancement through the ranks.

Building a Kingdom – Case Study of Kingdom Financial Holdings Limited

This article presents a case study of sustained entrepreneurial growth of Kingdom Financial Holdings. It is one of the entrepreneurial banks which survived the financial crisis that started in Zimbabwe in 2003. The bank was established in 1994 by four entrepreneurial young bankers. It has grown substantially over the years. The case examines the origins, growth and expansion of the bank. It concludes by summarizing lessons or principles that can be derived from this case that maybe applicable to entrepreneurs.

Profile of an Entrepreneur: Nigel Chanakira

Nigel Chanakira was raised in the Highfield suburb of Harare in an entrepreneurial family. His father and uncle operated a public transport company Modern Express and later diversified into retail shops. Nigel’s father later exited the family business. He bought out one of the shops and expanded it. During school holidays young Nigel, as the first born, would work in the shops. His parents, particularly his mother, insisted that he acquire an education first.

On completion of high school, Nigel failed to enter dental or medical school, which were his first passions. In fact his grades could only qualify him for the Bachelor of Arts degree programme at the University of Zimbabwe. However, he “sweet-talked his way into a transfer” to the Bachelor in Economics degree programme. Academically he worked hard, exploiting his strong competitive character that was developed during his sporting days. Nigel rigorously applied himself to his academic pursuits and passed his studies with excellent grades, which opened the door to employment as an economist with the Reserve Bank of Zimbabwe (RBZ).

During his stint with the Reserve Bank, his economic mindset indicated to him that wealth creation was happening in the banking sector therefore he determined to understand banking and financial markets. While employed at RBZ, he read for a Master’s degree in Financial Economics and Financial Markets as preparation for his debut into banking. At the Reserve Bank under Dr Moyana, he was part of the research team that put together the policy framework for the liberalization of the financial services within the Economic Structural Adjustment Programme. Being at the right place at the right time, he became aware of the opportunities which were opening up. Nigel exploited his position to identify the most profitable banking institution to work for as preparation for his future. He headed to Bard Discount House and worked for five years under Charles Gurney.

A short while later the two black executives at Bard, Nick Vingirayi and Gibson Muringai, left to form Intermarket Discount House. Their departure inspired the young Nigel. If these two could establish a banking institution of their own so could he, given time. The departure also created an opportunity for him to rise to fill the vacancy. This gave the aspiring banker critical managerial experience. Subsequently he became a director for Bard Investment Services where he gained critical experience in portfolio management, client relationships and dealing within the dealing department. While there he met Franky Kufa, a young dealer who was making waves, who would later become a key co-entrepreneur with him.

Despite his professional business engagement his father enrolled Nigel in the Barclays Bank “Start Your Own Business” Programme. However what really made an impact on the young entrepreneur was the Empretec Entrepreneur Training programme (May 1994), to which he was introduced by Mrs Tsitsi Masiyiwa. The course demonstrated that he had the requisite entrepreneurial competences.

Nigel talked Charles Gurney into an attempted management buy-out of Bard from Anglo -American. This failed and the increasingly frustrated aspiring entrepreneur considered employment opportunities with Nick Vingirai’s Intermarket and Never Mhlanga’s National Discount House which was on the verge of being formed – hoping to join as a shareholder since he was acquainted with the promoters. He was denied this opportunity.

Being frustrated at Bard and having been denied entry into the club by pioneers, he resigned in October 1994 with the encouragement of Mrs Masiyiwa to pursue his entrepreneurial dream.

The Dream

Inspired by the messages of his pastor, Rev. Tom Deuschle, and frustrated at his inability to participate in the church’s massive building project, Nigel sought a way of generating huge financial resources. During a time of prayer he claims that he had a divine encounter where he obtained a mandate from God to start Kingdom Bank. He visited his pastor and told him of this encounter and the subsequent desire to start a bank. The godly pastor was amazed at the 26 year old with “big spectacles and wearing tennis shoes” who wanted to start a bank. The pastor prayed before counselling the young man. Having been convinced of the genuineness of Nigel’s dream, the pastor did something unusual. He asked him to give a testimony to the congregation of how God was leading him to start a bank. Though timid, the young man complied. That experience was a powerful vote of confidence from the godly pastor. It demonstrates the power of mentors to build a protégé.

Nigel teamed up with young Franky Kufa. Nigel Chanakira left Bard at the position of Chief Economist. They would build their own entrepreneurial venture. Their idea was to identify players who had specific competences and would each be able to generate financial resources from his activity. Their vision was to create a one – stop financial institution offering a discount house, an asset management company and a merchant bank. Nigel used his Empretec model to develop a business plan for their venture. They headhunted Solomon Mugavazi, a stockbroker from Edwards and Company and B. R. Purohit, a corporate banker from Stanbic. Kufa would provide money market expertise while Nigel provided income from government bond dealings as well as overall supervision of the team.

Each of the budding partners brought in an equal portion of the Z$120,000 as start-up capital. Nigel talked to his wife and they sold their recently acquired Eastlea home and vehicles to raise the equivalent of US$17,000 as their initial capital. Nigel, his wife and three kids headed back to Highfield to live in with his parents. The partners established Garmony Investments which started trading as an unregistered financial institution. The entrepreneurs agreed not to draw a salary in their first year of operations as a bootstrapping strategy.

Mugavazi introduced and recommended Lysias Sibanda, a chartered accountant, to join the team. Nigel was initially reluctant as each person had to bring in an earning capacity and it was not clear how an accountant would generate revenue at start up in a financial institution. Nigel initially retained a 26% share which assured him a blocking vote as well as giving him the position of controlling shareholder.

Nigel credits the Success Motivation Institute (SMI) course “The Dynamics of Successful Management” as the lethal weapon that enabled him to acquire managerial competences. Initially he insisted that all his key executives undertake this training programme.

Birth of the Kingdom

Kingdom Securities P/L commenced operations in November 1994 as a wholly owned subsidiary of Garmony Investments (Pvt) Ltd. It traded as a broker on both money and stock markets.

On 24th February 1995 Kingdom Securities Holding was born with the following subsidiaries: Kingdom Securities Ltd, Kingdom Stockbrokers (Pvt) Ltd and Kingdom Asset Managers (Pvt) Ltd. The flagship Kingdom Securities Ltd was registered as a Discount House under Banking Act Chapter 188 on 25th July 1995. Kingdom Stockbrokers was registered with the Zimbabwe Stock Exchange under ZSE Chapter 195 on 1st August 1995. The pre-licensing trading had generated good revenue but they still had a 20% deficit of the required capital. Most institutional investors turned them down as they were a greenfield company promoted by people perceived to be “too young”. At this stage National Merchant Bank, Intermarket and others were on the market raising equity and these were run by seasoned and mature promoters. However Rachel Kupara, then MD for Zimnat, believed in the young entrepreneurs and took up the first equity portion for Zimnat at 5%.

Norman Sachikonye, then Financial Director and Investments Manager at First Mutual followed suit, taking up an equity share of 15%. These two institutional investors were inducted as shareholders of Kingdom Securities Holdings on 1st August 1995. Garmony Investments ceased operations and reversed itself into Kingdom Securities on 31st July 1995, thereby becoming an 80% shareholder.

The first year of operations was marked by intense competition as well as discrimination against new financial institutions by public organisations. All the other operating units performed well except for the corporate finance department with Kingdom Securities, led by Purohit. This monetary loss, differing spiritual and ethical values led to the forced departure of Purohit as an executive director and shareholder on 31st December 1995. From then the Kingdom started to grow exponentially.

Structural Growth

Nigel and his team pursued an aggressive growth strategy with the intention of increasing market share, profitability, and geographic spread while developing a strong brand. The growth strategy was built around a business philosophy of simplifying financial services and making them easily accessible to the general public. An IT strategy that created a low cost delivery channel exploiting ATMs and POS while providing a platform that was ready for Internet and web-based applications, was espoused.

On 1st April 1997, Kingdom Financial Services was licensed as an accepting house focusing on trading and distributing foreign currency, treasury activities, corporate finance, investment banking and advisory services. It was formed under the leadership of Victor Chando with the intention of becoming the merchant banking arm of the Group. In 1998, Kingdom Merchant Bank (KMB) was licensed and it took over the assets and liabilities of Kingdom Securities Limited. Its main focus was treasury related products, off-balance sheet finance, foreign currency and trade finance. Kingdom Research Institute was established as a support service to the other units.

The entrepreneurial bankers, cognisant of their limitations, sought to achieve critical mass quickly by actively seeking capital injection from equity investors. The aim was to broaden ownership while lending strategic support in areas of mutual interest. An attempt at equity uptake from Global Emerging Markets from London failed. However in 1997 the efforts of the bankers were rewarded when the following organisations took up some equity, reducing the shareholding of executive directors as shown below: ïEUR Ipcorn 0.7%, ïEUR Zambezi Fund Mauritius P/L 1.1%, ïEUR Zambezi Fund P/L 0.7%. ïEUR Kingdom Employee Share Trust 5%, ïEUR Southern Africa Enterprise Development Fund – 8% redeemable preference shares amounting to US$1,5m as the first investee company in Southern Africa from the US Fund initiated by US President Bill Clinton, ïEUR Weiland Investments, a company belonging to Mr Richard Muirimi, a long standing friend of Nigel and associate in the fund management business took up 1.7%, Garmony Investments 71.7% -executive directors. ïEUR After a rights issue Zimnat fell to 4.8% while FML went down to 14.3%.

In 1998, Kingdom launched four Unit Trusts which proved very popular with the market. Initially these products were focused at individual clients of the discount house as well as private portfolios of Kingdom Stockbroking. Aggressive marketing and awareness campaigns established the Kingdom Unit Trust as the most popular retail brand of the group. The Kingdom brand was thus born.

Acquisition of Discount Company of Zimbabwe (DCZ)

After a spurt of organic growth, the Kingdom entrepreneurs decided to hasten the growth rate synergistically. They set out to acquire the oldest discount house in the country and the world, The Discount Company of Zimbabwe, which was a listed entity. With this acquisition Kingdom would acquire critical competences as well as achieve the much coveted ZSE listing inexpensively through a reverse listing. Initial efforts at a negotiated merger with DCZ were rebuffed by its executives who could not countenance a forty year old institution being swallowed up by a four year old business. The entrepreneurs were not deterred. Nigel approached his friend Greg Brackenridge at Stanbic to finance and effect the acquisition of the sixty percent shares which were in the hands of about ten shareholders, on behalf of Kingdom Financial Holdings but to be placed in the ownership of Stanbic Nominees. This strategy masked the identity of the acquirer. Claud Chonzi, the National Social Security Authority (NSSA) GM and a friend to Lysias Sibanda (a Kingdom executive director), agreed to act as a front in the negotiations with the DCZ shareholders. NSSA is a well known institutional investor and hence these shareholders may have believed that they were dealing with an institutional investor. Once Kingdom controlled 60% of DCZ, it took over the company and reverse listed itself onto the Stock Exchange as Kingdom Financial Holdings Limited (KFHL). Because of the negative real interest rates, Kingdom successfully used debt finance to structure the acquisition. This acquisition and the subsequent listing gave the once despised young entrepreneurs confidence and credibility on the market.

Other Strategic Acquisitions

Within the same year Kingdom Merchant Bank acquired a strategic stake in CFX Bureau de Change owned by Sean Maloney as well as another stake in a greenfield microlending franchise, Pfihwa P/L. CFX was changed into KFX and used in most foreign currency trading activities. KFHL set as a strategic intention the acquisition of an additional 24.9% stake in CFX Holdings to safeguard the initial investment and ensure management control. This did not work out. Instead, Sean Maloney opted out and took over the failed Universal Merchant Bank licence to form CFX Merchant Bank. Although Kingdom executives contend that the alliance failed due to the abolition of bureau de change by government, it appears that Sean Maloney refused to give up control of the extra shareholding sought by Kingdom. It therefore would be reasonable that once Kingdom could not control KFX, a fall out ensued. The liquidation of this investment in 2002 resulted in a loss of Z$403 million on that investment. However this was manageable in light of the strong group profitability.

Pfihwa P/L financed the informal sector as a form of corporate social responsibility. However when the hyperinflationary environment and stringent regulatory environment encroached on the viability of the project, it was wound up in early 2004. Kingdom pursued its financing of the informal sector through MicroKing, which was established with international assistance. By 2002 MicroKing had eight branches located in the midst of, or near, micro-enterprise clusters.

In 2000, due to increased activity on the foreign currency front within the banking sector, Kingdom opened a private banking facility through the discount house to exploit revenue streams from this market. Following market trends, it engaged the insurance company AIG to enter the bancassurance market in 2003.

Meikles Strategic Alliance

In 1999 the entrepreneurial Chanakira on advice from his executives and the legendary corporate finance team from Barclays bank led by the affable Hugh Van Hoffen entered into a strategic alliance with Meikles Africa whereby it injected some Z$322 million into Kingdom for an equity shareholding of 25%. Interestingly, the deal nearly collapsed on pricing as Meikles only wanted to pay $250 million whilst KFHL valued themselves at Z$322 million which in real terms was the largest private sector deal done between an indigenous bank and a listed corporate. Nigel testifies that it was a walk through the incomplete Celebration Church site on the Saturday preceding the signing of the Meikles deal that led him to sign the deal which he saw as a means for him to sow a whopping seed into the church to boost the Building Fund. God was faithful! Kingdom’s share price shot up dramatically from $2,15 at the time he made the commitment to the Pastor all the way to $112,00 by the following October!

In return Kingdom acquired a powerful cash-rich shareholder that allowed it entrance into retail banking through an innovative in-store banking strategy. Meikles Africa opened its retail branches, namely TM Supermarkets, Clicks, Barbours, Medix Pharmacies and Greatermans, as distribution channels for Kingdom commercial bank or as account holders providing deposits and requiring banking services. This was a cheaper way of entering retail banking. It proved useful during the 2003 cash crisis because Meikles with its massive cash resources within its business units assisted Kingdom Bank, thus cushioning it from a liquidity crisis. The alliance also raised the reputation and credibility of Kingdom Bank and created an opportunity for Kingdom to finance Meikles Africa’s customers through the jointly owned Meikles Financial Services. Kingdom provided the funding for all lease and hire purchases from Meikles’ subsidiaries, thus driving sales for Meikles while providing easy lending opportunities for Kingdom. Meikles managed the relationship with the client.

Meikles Africa as a strategic shareholder assured Kingdom of success when recapitalisation was required and has enhanced Kingdom’s brand image. This strategic relationship has created powerful synergies for mutual benefit.

Commercial Banking

Exploiting the opportunities arising from the strategic relationship with Meikles Africa, Kingdom made its debut into retail banking in January 2001 with in-store branches at High Glen and Chitungwiza TM supermarkets. The target was principally the mass market. This rode on the strong brand Kingdom had created through the Unit Trusts. In-store banking offered low cost delivery channels with minimal investment in brick and mortar. By the end of 2001, thirteen branches were operational across the country. This followed a deliberate strategy for aggressive roll-out of the branches with two flagship branches ïEUR­ïEUR one in Bulawayo and the other in Harare. There was a huge emphasis on an IT driven strategy with significant cross-selling between the commercial bank and other SBUs.

However, it was further discovered that there was a market for the upmarket clients and hence Crown banking outlets were established to diversify the target market. In 2004, after closing three in-store branches in a rationalization exercise, there were 16 in-store branches and 9 Crown banking outlets.

The entrance into commercial banking was probably held at the wrong time, considering the imminent changes in the banking industry. Commercial banking does provide cheap deposits, however at the price of huge staff costs and human resource management complications. Nigel concedes that, with hindsight, this could have been delayed or done at a slower pace. However, the need for increased market share in a fiercely competitive industry necessitated this. Another reason for persisting with the commercial banking project was that of prior agreements with Meikles Africa. It is possible that Meikles Africa had been sold on the equity take-up deal on the back of promises to engage in in-store banking, which would increase revenue for its subsidiaries.

Innovative Products and Services

KFHL continued its aggressive pursuit of product innovation. After the failure of the KFX project, CurrencyKing was established to continue the work. However this was abolished in November 2002 by government ministerial intervention when bureau de change were prohibited in an effort to stamp out parallel market foreign currency trading.

Sadly this governmental decision was misguided for not only did it fail to banish foreign currency parallel trading but it drove underground, made it more lucrative and subsequently the government lost all control of the management of the exchange rate.

In October 2002, KFHL established Kingdom Leasing after being granted a finance house licence. Its mandate was to exploit opportunities to trade in financial leases, lease hire and short term financial products.

Regional Expansion

Around 2000 it became evident that the domestic market was highly competitive, with limited prospects of future growth. A decision was made to diversify revenue streams and reduce country risk through penetration into the regional markets. This strategy would exploit the proven competences in securities trading, asset management and corporate advisory services from a small capital base. Therefore the entrance had low risk in terms of capital injection. Considering the foreign exchange control limitations and shortage of foreign currency in Zimbabwe, this was a prudent strategy but not without its downside, as will be seen in the Botswana venture.

In 2001, KFHL acquired a 25.1% stake in a greenfield banking enterprise in Malawi, First Discount House Ltd. To safeguard its investment and ensure managerial control, an executive director and dealer were seconded to the Malawi venture while Nigel Chanakira chaired the Board. This investment has continued to grow and yield positive returns. As of July 2006 Kingdom had finally managed to up its stake from 25,1% to 40% in this investment and may ultimately control it to the point of seeking a conversion of the license to a commercial bank.

KFHL also took up a 25% equity stake in Investrust Merchant Bank Zambia. Franky Kufa was seconded to it as an executive director while Nigel took a seat on the Board.

KFHL had been promised an option to gain a controlling stake. However when the bank stabilized, the Zambian shareholders entered into some questionable transactions and were not prepared to allow KFHL to up it’s stake and so KFHL decided to pull out as relationships turned frosty. The Zambian Central Bank intervened with a promise to grant KFHL its own banking license. This did not materialize as the Zambian Central Bank exploited the banking crisis in Zimbabwe to deny KHFL a licence. A reasonable premium of Z$2.5 billion was obtained at disinvestment.

In Botswana, a subsidiary called Kingdom Bank Africa Ltd (KBAL) was established as an offshore bank in the International Finance Centre. KBAL was intended to spearhead and manage regional initiatives for Kingdom. It was headed by Mrs Irene Chamney, seconded by Lysias Sibanda with the concurrence of Nigel after managerial challenges in Zimbabwe. Two other senior executives were seconded there. She successfully set up the KBAL’s banking infrastructure and had good relations with the Botswana authorities.

However, the business model chosen of an offshore bank ahead of a domestic Botswana merchant bank license turned out to be the Achilles heel of the bank more so when the Zimbabwe banking crisis set in between 2003 and 2005. There were fundamental differences in how Mrs Chamney and Chanakira saw the bank surviving and going forward.

Ultimately, it was deemed prudent for Mrs. Chamney to leave the bank in 2005. In 2001 KFHL acquired the mandate as the sole distributor of the American Express card in the whole of Africa except for RSA. This was handled through KBAL. Kingdom Private Bank was transferred from the discount house to become a subsidiary of KBAL due to the prevailing regulatory environment in Zimbabwe.

In 2004 KBAL was temporarily placed under curatorship due to undercapitalisation. At this stage the parent company had regulatory constraints that prevented foreign currency capital injection.

A solution was found in the sourcing of local partners and the transfer of US$1 million previously realised from the proceeds of the Investrust liquidation to Botswana. Nigel Chanakira took a more active management role in KBAL because of its huge strategic significance to the future of KFHL. Currently efforts are underway to acquire a local commercial bank licence in Botswana as well. Once this is acquired there are two possible scenarios, namely maintaining both licences or giving up the offshore licence.

The interviewees were divided in their opinion on this. However in my view, judging from the stakeholder power involved, KFHL is likely to give up the off shore banking licence and use the local Kingdom Bank Botswana (Pula Bank) licence for regional and domestic expansion.

Human Resources

The staff complement grew from the initial 23 in 1995 to more than 947 by 2003. The growth was consistent with the growing institution. It exploded, especially during the launch and expansion of the commercial bank. Kingdom from inception had a strong human resourcing strategy which entailed significant training both internally and externally. Before the foreign currency crisis, employees were sent for training in such countries as RSA, Sweden, India and the USA. In the person of Faith Ntabeni Bhebhe, Kingdom had an energetic HR driver who created powerful HR systems for the emerging behemoth.

As a sign of its commitment to building the human resource capability, in 1998 Kingdom Financial Services entered a management agreement with Holland based AMSCO for the provision of seasoned bankers. Through this strategic alliance Kingdom strengthened its skills base and increased opportunities for skills transfer to locals. This helped the entrepreneurial bankers create a solid managerial system for the bank while the seasoned bankers from Holland compensated for the youthfulness of the emerging bankers. What a foresight!

In-house self-paced interactive learning, team building exercises and mentoring were all part of the learning menu targeted at developing the human resource capacity of the group. Work and job profiling was introduced to best match employees to suitable posts. Career path and succession planning were embraced. Kingdom was the first entrepreneurial bank to have smooth unforced CEO transitions. The founding CEO passed on the baton to Lysias Sibanda in 1999 as he stepped into the role of Group CEO and board deputy chair. His role was now to pursue and spearhead global and regional niche financial markets. A few years later there was another change of the guard as

Franky Kufa stepped in as Group CEO to replace Sibanda, who resigned on medical grounds. One could argue that these smooth transitions were due to the fact that the baton was passing to founding directors.

With the explosive growth in staff complement due to the commercial bank project, culture issues emerged. Consequently, KFHL engaged in an enculturation programme resulting in a culture revolution dubbed “Team Kingdom”. This culture had to be reinforced due to dilutions through significant mergers and acquisitions, significant staff turnover because of increased competition, emigration to greener pastures and the age profile of the staff increased the risk of high mobility and fraudulent activities in collusion with members of the public. Culture changes are difficult to effect and their effectiveness even harder to assess.

In 2004, with a high staff turnover of around 14%, a compensation strategy that ring fenced critical skills like IT and treasury was implemented. Due to the low margins and the financial stress experienced in 2004, KFHL lost more than 341 staff members due to retrenchment, natural attrition and emigration. This was acceptable as profitability fell while staff costs soared. At this stage, staff costs accounted for 58% of all expenses.

Despite the impressive growth, the financial performance when inflation adjusted was mediocre. Actually a loss position was reported in 2004. This growth was severely compromised by the hyperinflationary conditions and the restrictive regulatory environment.

Conclusion

This article shows the determination of entrepreneurs to push through to the realisation of their dreams despite significant odds. In a subsequent article we will tackle the challenges faced by Nigel Chanakira in solidifying his investments.