El Pasha

جده

2017-04-14T16:02:00.001+03:00

صراحه جدة حلوه بأهلها ، ناس روحهم حلوه

العيد

2015-09-25T07:40:00.001+03:00

كل عام و أنتم بخير ، احلي عيد مع اسرتي الصغيرة

Success

2014-05-22T13:23:00.001+03:00

“Successful people are the ones who think up things for the rest of the world to keep busy at. -Don Marquis”

I am fine

2012-08-22T16:47:00.001+03:00

The average person tells 4 lies a day. And 1,460 a year. A total of 88,000 by the age of 6. And the most common lie is 'I'm fine'.

الحياة

2012-08-06T19:14:00.001+03:00

الحياة أقصر من أن تهدرها مع أشخاص تبرر لهم أفعالك طيلة الوقت، من يحبك سيرى الخير فيك ومن يبغضك لن تستطيع إرضائه!

Get the Salary You Want (HBR)

2012-07-13T14:34:00.001+03:00

Get the Salary You Want
Negotiating a salary can be an uncomfortable process. You want to get what you're worth, but you also don't want to scare off your future employer. Prepare for your next talk by doing the following:
Do research. Information is power. Reach out to friends or colleagues who can tell you what the employer might typically pay for the role.
Be honest. When a recruiter asks if you have salary requirements, be upfront. The employer needs to know your expectations so they don't waste their time or yours.
Offer Solutions. A salary talk is a negotiation — two parties trying to reach a solution that works for both sides. If the initial number is lower than your reasonable expectation, propose something that will meet the needs of both you and the employer.
Today's Management Tip was adapted from "How to Negotiate Your Next Salary" by Amy Gallo.

Feedback HBR

2012-04-18T23:28:00.001+03:00

Keep Your Cool When Getting Feedback
No one likes to hear that they aren't performing well. Yet, everyone can improve. Next time you receive constructive feedback, do these three things:
Relax. It's understandable to be nervous during a feedback session. The other person holds all the power. Accept this imbalance and be easy on yourself.
Expect to be surprised. You're likely to hear something that you weren't aware of. Perhaps something was a bigger deal than you thought, or something you thought was resolved wasn't.
Don't be defensive. Even if you disagree, hold your tongue. Instead of defending yourself, ask questions. Once you've cooled down, you can always follow up.
Today's Management Tip was adapted from "How to Keep Your Cool During a Performance Review" by Robert M. Galford.

HBR

2012-04-15T20:49:00.001+03:00

Need a Mentor? Forget the Expert
When people early in their careers seek mentors, they often target those with a depth of experience. But experts can't teach you everything. And, often they are so far removed from your day-to-day work that they can't help you solve problems. Select at least one mentor with only a few more years of experience than you. Someone who has recently walked in your shoes can give you practical, relevant advice on the challenges you face. She may also give you insight into what's coming in your career and the types of challenges you'll be up against next.
Today's Management Tip was adapted from Guide to Getting the Mentoring You Need.

Elbert Hubbard

2012-04-06T21:39:00.001+03:00

"One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man."

Fake friends

2012-04-02T21:16:00.001+03:00

Fake friends are easy to find and easy to loose but real friends are the hardest to find and hardest to lose.

Twitter

2012-03-30T15:33:00.001+03:00

T.W.I.T.T.E.R = Tweet With Integrity To Then Earn Respect. ~ Milana Ryan #quote”

Warren Buffett

2012-03-28T09:19:00.001+03:00

Roger Babson

2012-03-27T23:20:00.001+03:00

: "It is wise to keep in mind that neither success nor failure is ever final." - Roger Babson

عيد الام

2012-03-20T18:30:00.001+03:00

في ذكرى يوم الأم..ان عدتي سأجعل كل ايامي عيدا لك.لكن أين أنت الان؟ لا تبخلوا على امهاتكم بالزيارة والمهاتفة والحنان.لم تجربوا بعد فراق الأم

Live like

2012-03-20T15:57:00.001+03:00

Live like Spongebob, laugh out loud all day without any reason, and annoy the mean people with your happiness.

Nice words

2012-03-20T15:45:00.001+03:00

"Giving up doesn't always mean your weak; sometimes it means you're strong enough to let go."

Women

2012-02-27T17:34:00.001+03:00

Women marry men hoping they will change. Men marry women hoping they will not. ~ Albert Einstein

Strategic Marketing

2012-02-16T09:15:00.001+03:00

Introduction:

In this assignment, I am going to talk about the organization that I am working for which is Arab National Bank. I going to give a brief overview about the bank then I will conduct a SWOT analysis. By chosen the line of investment services offered by the bank, I would apply what I have learned in the module to this line. I will use some of the analytical tools that I have learned to discuss the marketing management strategy in relation to the market, the implementation of the marketing strategy through the 4P’s and the ethical issues that can be raised I will be able to offer alternative routes for the organization. Finally, I will write my conclusion.

Organization analysis:

Arab National Bank is a Joint- stock company established in 1979, by changing the ownership of Arab Limited Bank branches in Saudi Arab, owned 60% by Saudi citizens, and 40% owned by a foreign partner. Its mission statement is ‘Financial solutions for better life’. Its objective is to offer the best financial services that satisfy the customer’s needs and to make continues growth on the return of the capital employed by the shareholders. The following table shows the growth in the bank business.

	1^st Half 2003	1^st Half 2004	% Growth
Net Profit	377 Millions SAR	576 Millions SAR	53%
Return on Equity	18.8%	26.6%	41%
Return on Assets	1.68%	2.19%	30%
Loans	17,547 Millions SAR	24,460 Millions SAR	39%
Customer Deposits	31,457 Millions SAR	37,834 Millions SAR	20%
Provisions Coverage Ratio	113%	154%	36%
Market Capitalization	11,340 Millions SAR	19,190 Millions SAR	69%

Peter Drucker observed that a company’s first task is to create customers. However, his premise is that customers will buy from the firm that they see as offering the highest perceived value (1).The bank is following Michael Porter 'generic' strategy, which is A Focus Strategy (2). The bank has many strategic marketing alliances. The bank marketing strategy is the Market- Challenger Strategy. Arab National Bank strategic objective is to attack the market leader.

In order to analyze Arab National Bank products (services) I will use the customer value hierarchy (3):

Core product: money deposit
Basic product: check account, saving account, Investment account, etc...
Expected product: high quality services, high interest rate, ATM machines, loans, etc…
Augmented product: Internet banking, Bank assurance services, etc…
Potential product: Internet brokerage, Mortgage, International services for privet banking customers, etc…

After this products analysis we need to now that today’s competition essentially takes place at the product-augmentation level.

I am going to analyze the organizational culture by using Schein’s theory of culture (4). Applying the surface level artifacts to the bank, it is one of the most popular banks in Saudi as the paying banks for the pensioners and for the third year, it is the most profitable bank in Saudi. Applying level of values and norms, we could say that the staffs are proud that they are working for successful bank. It is one of the leading banks in the field of staff development which I use my self as an example for this as the bank is sponsoring me in the MBA program. Applying a level of beliefs and assumptions, they believed that the customers would come to them.

I could say that the bank is an organic firm with a flexible structure and it is open to the environment, which can be justified by their financial result. In order to understand Arab National Bank more, I will make a SWOT analysis:

Strength:

· Market penetration:

I could say that the bank is the leader in number of customers.

· Strong customer base:

Its customer base is huge and it cavers all kind of customer and levels.

· Effective distribution channels:

117 branches cavers all regions in Saudi.

· Strategic alliances:

Arab Limited Bank, AXA sun life, Goldman Sax and many local organizations.

· Technology innovations:

It was the first bank to offer internet banking in Saudi.

· Experienced management team:

More than 25 years banking experience in Saudi.

Weaknesses:

· Small spending on advertising:

It is one of the lowest banks on advertising spending in Saudi.

· Branded as the pensioners bank:

As the paying bank for the pensioners, their branches are crowded must of the time.

· Low percentage of internet banking user and ATM machines:

The bank is not promoting the usage of ATM and internet banking to reduce the number of customers in the branches.

· Limited numbers of Islamic services:

The bank is not offering enough Islamic services to react with new trend in the market.

· Small numbers of ladies sections in the branches:

The bank is not reacting with huge increase in the ladies workforce that they need special sections for them.

Opportunities:

GDP growth:

The increase in GDP will affect the local economy and the bank should use this opportunity to increase its market share.

New investment laws:

Saudi is opening many sectors for foreign investor.

The trend toward Islamic services:

The bank should use its strength to react with this trend.

Threats:

Foreign banks entering the market:

The increase in the number of competitors could affect the bank profitability.

A new fully Islamic bank will open soon:

The new Islamic bank could cause Arab National bank to lose a big segment.

As a result, I will use this information in the discussion of the marketing management strategy of the organization.

Q: Discuss the marketing management strategy of the organization, in relation to; 1 the market the organization is in; 2 implementation of the marketing strategy (through the 4Ps); and 3 ethical issues that are raised by the marketing strategy and its implementation.

Introduction:

Investment Services Group is on of the SBU in Arab National Bank, which I will apply what I have learned in the module to their line of product. Business Development, Local & International Shears, Asset Management, and Investment Complains they are the departments of the Group. By discussing the marketing management strategy in relation to the market, the implementation of the marketing strategy through the 4P’s and the ethical issues that can be raised I will be try to offer alternative routes for the organization. Finally, I will write my recommendation.

Main body:

Saudi is an oil-based economy. The Saudi society is strongly religious. There a big trend in the Saudi market toward the Islamic banking services. All banks in the Saudi market offer almost the same Investment services. Currently, the local shears brokerage is the most attractive Investment choice in the market. The market is very attractive, Arab National Bank is one of the strongest in the industry, and wants to invest its best resources in support of their offering. Despite continuing concerns about the international economic environment, Investment Services has witnessed an exceptional growth in the last 3 years. We continue to offer a comprehensive range of investment products – primarily in Saudi and International share brokerage, investment funds and insurance. The Asset Management Department was the most successful department in the group in terms of assets under management and revenues. During this period, assets under management have grown significantly – one of the biggest increases amongst Saudi banks. The Saudi Share Brokerage Department has also its most successful period, with a strong growth in revenues and trading volumes. The Bank continues to offer one of the most comprehensive trading and price dissemination network in Saudi, giving customers’ access to Saudi share markets for more than 50 locations. International Share Brokerage has seen some improvement during the same period in business level. Therefore, I could say that the investment services group sales force (Business Development Department) is doing their task.

If we look to the bank, it is following Michael Porter 'generic' strategy, which is A Focus Strategy. Therefore, The Investment Services Group has marketing alliances with Goldman Sax, AXA Sun life and Shroder. The Group marketing strategy is the Market- Challenger Strategy. The strategic objective of the group is that they can attack the market leader. The group general attack strategy is the Encirclement attack with a specification on the improved services. The bank is using Multi Attribute Segmentation to segment the customers according to their average balance. The Investment services group is using the bank segmentation strategy for their services, which is limiting the group efforts to the existing customers mainly. As a result, the Multi Attribute Segmentation is not the helpful segmentation strategy to be used by the group. I do recommend the use of Behavioural Segmentation, which the group could segment, the customer to nonuser, ex-user, potential user, first-time user, and regular user (5). The Behavioural Segmentation will increase the target market, which will lead the group to increase their market share, as they are not mainly concentrating on the existing customers. Arab National Bank awarded for the second year running the best bank in Saudi from the Global Finance magazine in 2003 and for the second year running Overall Fund Manger of the year from the Saudi Arabian Monetary Agency. Therefore, I could say that the bank and the Investment services group are positioning as the operationally excellent firm according to the value disciplines framework for Treacy and Wiersema (6).

To determine whether the Investment Services Group portfolio is healthy or not, I will use the Boston Consulting Group (BCG) approach. By applying the Growth-Share Matrix to the group services, I could say that Investment funds is Stars level, Insurance products is Question marks level, International share brokerage is Dogs level and Local share brokerage is Cash caws level. The Investment services group portfolio is healthy in general as they have only one dog which is the International share brokerage and the bank should keep this business because the main reason for its current situation is the huge trend toward the Local share. The week part in the group portfolio is the Insurance products whish the bank should do something about it. The bank could solve its problem with insurance products by identifying the main problem. I could say that the main problem is the trend toward Islamic insurance, which had affected the bank market share. I do recommend that the bank should develop a new rang Islamic insurance products to support its portfolio.

I will analyze the Investment Services Group environment in 2 levels, the micro level and the macro level in order to evaluate their marketing strategy(7).

Firstly, the micro-environment main elements:

Collaborators: There are many collaborators locally and internationally that the group is dealing with. The banking regulation is allowing banks to make strategic alliance.

Customers: Two major factors could increase the volume of business in the banking sectors. Firstly, the good performance of local economies due to the increase on the oil price. Secondly, the money that did return after what happened in the USA on September 11^th.These two factors give us an indication that the market will increase.

Distribution Channels: there are huge demographical changes in Saudi because of the increase in population that should cause the banks to review the location of their distributional channels regularly.

Competitors: currently there are nine competitors and soon this number will increase by the foreign banks that will enter the market .Therefore, the bank should take that in consideration.

Secondly, the macro-environment using the PEST frameworks (7):

Political-Legal: A many policies the Saudi Government promoted to regulate the business to apply with the World Trade Organization requirement that Saudi is willing to join.

Economics: The GDP-real growth is 5.3 % (2003) compared to 0.6% (2002) and Inflation rate is 0.5 %( 2003) compared to 1.0% (2002).

Socio- Culture: There a huge number of the Saudi society is strongly religious how want to deal only with an Islamic based product (Halal).

Technology: The "Information Age" or the "information revolution," the fact is that we have more information available more quickly and less expensively than at any point in history (8).

As a result, we can see how the market is attractive from the environment analysis.

Michael Porter has identified five forces that determine the intrinsic long-run profit attractiveness of a market or a market segment, which I will apply it to the Investment services group in order to analyze the competitive forces:

1. Threat of intense segment rivalry:

Investment services group currently is facing nine competitors and soon this number will increase. I could say that currently there is no threat.

2. Threat of new entrants:

The market is expanding with the new forging and local banks that will enter the market. I could say that there is big threat from the new entrants, which is putting pressure on the group to introduce new product to face this threat.

3. Threat of substitute products:

This segment is likely to fall in Saudi because the central bank controls the pricing in the market.

4. Threat of buyers’ growing bargaining power:

As the group held the best performer in Saudi for the last 2 years, I do not think that The Investment services group could face any threat from this segment but they must keep the same level of performance.

5. Threat of suppliers’ growing bargaining power:

As a service provider, the group is not dealing with suppliers. The bank makes alliances with International Insurance companies and Investment banks so I could say that there is no threat.

As a result, the Investment services group main threat is from the new entrants.

The implementation of the marketing strategy through the 4Ps explained as follow taking in consideration that for service business 3Ps should be included:

Product:

Classification: services product.
Services mix: A breadth of four pure services lines with a depth of 16 products in Investment fund, 4 products in insurance, 2 products for the local shears, and 2 products for the International shears.
Characteristics of services: The group characteristics its services under Intangibility. They are using services quality as an evidence to reduce uncertainty. In addition, they position themselves as the fast bank and this clear from the availability of the marketing tools in the group. I could say that the positioning strategy of the group is working with all of their services.
Product lifecycle (PLC): We can say that the services are on the growth stage. The numbers shows that the group market share in increasing.
Service branding: The group is using corporate brand to identify the services. London-based bank HSBC Holdings plc is re-branding all its global retail operations under one corporate brand. In the UK, market shifts such as the increasing consumer interest in financial decision-making and the Internet as a channel, are forcing companies to invest in brand building exercises with consumers (9).
Service quality: I could say that the quality of services in the group is high and this could be seen from the outstanding performance of the group.

As I have mentioned before, ANB awarded for the second year running Overall Fund Manger of the year from the Saudi Arabian Monetary Agency. This information gives us an induction about the quality of the product that ANB is offering to the customers.

Pricing:

As a financial service provider in the Saudi the pricing is determine by the central bank of Saudi (Saudi Arabian Monetary Agency). At the end, we have to know that the quality of the service has major influence in the customer.

Promotion:

From the information given before, we can say that ANB is not spending enough on advertising. It was spending very little on advertising compared to the others. Arab National Bank share out of the bank’s share of expenditures on advertising from 1998 to June 2004 was 4.8%, 4.4%, 6.9%, 6%, 8.7%, 5.2%, and 7%. Out of these numbers we can see how they are spending on a market consist of 10 banks. The following chart shows the total spend by year in Saudi on advertising.

(US$ 000’s)

Most of advertising that the bank did was not using AIDA (awareness, interest, desire, action). AIDA and models like it have been around for a long time. AIDA itself first appeared in the 1950s and is basically an evolved version of these earlier models (10). As a result, the promotion mix is consisting only from the personal seals and the point of sales. I recommend that the bank should increase its spending in advertising and use the AIDA models. ANB is using a pull strategy, which is not a helpful strategy to be taken out by the group. I recommend using the push strategy, which will help the business more.

Place:

There is 117 branch distributed over three regions. Investment services group sales force distributed into three regions. The sales staffs is responsible about the direct sales over an area consist of 5 branches in average, which I do not think that this number of branch to caver will not give the sales staff the opportunity to serve the customer, will. The present marketing is depending on the customer relationship management along with quality. The group should expand their direct sales force. The number of local share brokerage areas in the branches is 50 and expected to increase more.

Regarding the other 3Ps (people-process-Physical evidence):

People:

The support that the group is delivering to them trough advertising is not enough. The group do not have a rewarding system like the other banks to motivate their sales force. I do think that the group their motivation strategy.

Process:

The group is using the technology to develop the work process to make faster.

Physical evidence:

I could say that the group is performing well in this.

As a result, I could say that there are some points needed to be reviewed in order to have a proper implementation for the marketing strategy in relation for the 4P’s and the 3P’s.

In relation to the ethical issues, Today Several Forces are driving companies to practice a higher level of corporate social responsibility: rising customer expectations, changing employee expectations, government legislation and changing business procurement practices (11). These are some of the ethical issues that are raised by Arab National Bank marketing strategy and its implementation. Regarding government legislations, there is a huge pressure from the Saudi government toward banks to decrease the number of expatriate and replace them with Saudi staff and the bank is progressing on that, as 86% of their staff is Saudis as of today. The group is avoiding the other ethical issues such as money laundering and rising customer expectations by the code of ethics that each marketer in Arab National Bank should sign it. In addition, by the bank is training its marketer that they should practice a social conscience in their specific dealing with customers.

Recommendation:

From the dissection to the marketing management strategy for the group, I have come up with some recommendations for the group. I recommend the group to change their current segmentation strategy to behavioural segmentation in order to increase their market share. From the portfolio analysis, I recommended the group to develop a new range of Islamic insurance products to react with the new trend in the market. Furthermore, they need to develop a new line of Islamic investment products and local investment funds to satisfy the customer need of local funds and Islamic products. By doing this, the group will be able to deal with the threat of the new entrants. Regarding the promotions, I recommended the bank to increase their spending in advertising and the more use of AIDA models. Along with that, I think changing the group promotion strategy from pull to push will help the business more. The bank needs to run a promotional campaign for the use of the internet banking and the ATM in order to decrease the number of customers in the branches. The increase of the sales force will give the seals force the opportunity to implement the CRM and service quality. Customer relationships are the key to the marketing strategy (12). In addition, they need to develop a new rewarding system for the seals force to motivate them (Bounce structure schema). By applying these points, the implementation of the marketing strategy will be more efficient.

Conclusion:

By using the organizational analyses, textbook and other references, I understand the main points in the module. I have demonstrated my understanding of the theory by applying it to my organization marketing strategy. I have given brief general information about the bank and at the end of the brief I have conduct a SWOT analysis. I have discussed the marketing management strategy of the investment services group by explaining the market. I explained the group strategic objective, group general attack strategy, their segmentation strategy, and their positioning strategy along with my recommendation. I did use the Boston Consulting Group (BCG) approach to determine whether the Investment Services Group portfolio is healthy or not. I have used Porter 5 forces that determine the intrinsic long-run profit attractiveness of a market. In addition, I have analysed the marketing strategy by using the 4Ps and 3Ps and I have comment on it. Finally, the ethical issues and how the group can deal with it. I have give my recommendation to the organization in order performs better.

References:

Philip Kotler, Marketing Management, 11^th ed., Chapter 3 p 60.
(www.brs-inc.com).
Philip Kotler, Marketing Management, 11^th ed., Chapter 14 p 407.
Edgar H. Schein, Organizational Culture and Leadership, 2nd ed. (San Francisco: Jossey-Bass, 1992), 3-27.
Philip Kotler, Marketing Management, 11^th ed., Chapter 10 p 295.
Micheal Treacy and Fred Wiersema, The Disciplines of Market Leaders, (Reading, A: Addison-Wesley, 1994).
Management Centre. (2002), Strategic Marketing, University of Leicester.
(http://luna.pepperdine.edu/test/homepg.html).
Principles of Financial Services Branding, American Marketing Association, (www.marketingpower.com).
Morgen Witzel, Management A-to-Z: AIDA, (www.ft.com).
Philip Kotler, Marketing Management, 11^th ed., Chapter 22 p 700.
(http://marketing.about.com/library/weekly/aa070203a.htm).

Strategic Analysis and Choice

2012-02-16T09:15:00.000+03:00

1. Introduction

In this assignment, I shall attempt to critically examine the strategic decision making process in the organization that I am working for, which is Arab National Bank, in Riyadh, Saudi Arabia, in order to determine whether the organization’s strategic decision-making process could be considered rational or not. I am going to give a brief overview about the bank, models of decision-making, decision and system thinking, the strategy decision-making, the relation between the psychology and decision-making and prescriptive schools. After that, I will critically examine the strategic decision making process within the bank by taking some examples of decisions. Because I am working for a strategic business unit (SBU), which is the Investment Services Group, the core for my examination will be the business and functional strategy. Rational or irrational is what I shall determine and I will justify my answer. Finally, I will write my conclusion indicating the limitation of the sample.

2. The Organization (Arab National Bank)

Arab National Bank is a joint- stock company established in 1979, by changing the ownership of Arab Limited Bank’s branches in Saudi Arabia, owned 60% by Saudi citizens and 40% owned by a foreign partner. Its mission statement is ‘Financial solutions for a better life’. Its objective is to offer the best financial services that satisfy the customer’s needs and to make continuous growth on the return of the capital employed by the shareholders. The market is very attractive; Arab National Bank is one of the strongest in the industry, and wants to invest its best resources in support of their offering. The bank is following Michael Porter’s 'generic' strategy, which is A Focus Strategy (1). The bank has many strategic marketing alliances. Our strategy is the Market- Challenger Strategy. Arab National Bank’s strategic objective is to attack the market leader. The following table shows the growth in the bank’s business.

	1^st Half 2003	1^st Half 2004	% Growth
Net Profit	377 Millions SAR	576 Millions SAR	53%
Return on Equity	18.8%	26.6%	41%
Return on Assets	1.68%	2.19%	30%
Loans	17,547 Millions SAR	24,460 Millions SAR	39%
Customer Deposits	31,457 Millions SAR	37,834 Millions SAR	20%
Provisions Coverage Ratio	113%	154%	36%
Market Capitalization	11,340 Millions SAR	19,190 Millions SAR	69%

(3.75 Saudi Riyals (SAR) = 1 US Dollar)

3. Decision Making

3.1 Models of Decision Making

Before I proceed writhe the models of decision-making, we need to understand the definition of it. Decision-making is weighing up the relative attractiveness of each alternative (2). There are two types of decisions, programmed and non-programmed. The programmed are made frequently, the non-programmed are made infrequently. There are different models of decision-making but some of them are based upon highly structured idealisations about how rational decisions should made. Rational refers to the idea of consistency. In other words, if the same amount of information is presented to two different decision makers in two different places and both of them act rationally, their decisions would be the same. However, we must take into consideration that what is rational with one decision maker could be irrational with another. Essentially, decision models are classified as:

Rational model

The rational model is the model that gives the decision makers clear steps to choose the best choice.

Bounded rational model

This model is based on the decision maker accepting a solution which is good enough rather that the best.

Evolutionary model

Henry Mintzberg observed the way in which decisions are actually made. He concluded that there are many feedback loops within the rational decision making process. Decisions evolve from a complex pattern of feedback loops.

Political model

This approach acknowledges that an organization made up of many different interests. For example, the stakeholders do not necessarily share the same goals of the organization.

Garbage can model

This was first proposed by Cohen, March and Olsen in 1972. This approach views an organization as a collection of problems and solutions. Problems flow through organizations; solutions exist within organizations.

3.2 Decisions and Systems Thinking

A system is an inter-related set of elements. One executive has expressed the systems thinking this way, ‘When you trace back the stories, you will find out that all the changes came from hundreds of little things that individuals were doing differently’ (2). Effective systems thinkers do not act as individuals. We have to know that there are two types of systems, closed and open systems. We live in a very complex world and the organization should be a learning organization. Modelling is an important management activity. Modelling helps the decision makers to structure problems and enable them to reflect upon possible consequences of their decisions before taking action. Modelling can be quantitative or qualitative, but we should keep it simple and avoid mega models. The Bounded rational model would solve the limited cognitive capabilities of individuals but there are other psychological considerations that need to be taken into account. Each individual will have his or her own particular view and interpretation of reality. Therefore, different individuals will bring different perceptions to the organization.

3.3 Strategic Decision Making

The strategy is the unifying theme that gives coherence and direction to the actions and decisions of an organization. When formatting a strategy the strategic decision maker has to make an assessment for the situation using subjective and imperfect information. There are three levels of strategy: corporate, business, and functional (3). Peter Drucker argues that a company that thinks strategically is one which produces satisfied and loyal customers. Peter Drucker describes the sequence of steps involved in the decision making process (4):

1. Classifying the problem

2. Defining the problem

3. Specifying the answer to the problem

4. Deciding what is right, rather than what is acceptable, in order to meet the boundary conditions

5. Building into the decision the action to carry it out

6. Testing the validity and effectiveness of the decision against the actual course of events

The nature of the decision making process that result in strategies is explained by Henry Mintzberg. After a very helpful survey on this, he suggested that 10 schools of thought about the strategy process could be identified (2).

3.4 Prescriptive Schools (Mintzberg)

I shall attempt to give a brief about each school of thought:

The design school

Strategies are the result of conscious creative thinking based on conceptual modelling. In the design school, strategy is ‘grand strategy’. The CEO is the architect of the strategy and controls the strategy making process.

The planning school

Strategies are the result of the formal planning process led by the senior management team. Strategic decisions are an integral part of the planning process. Mintzberg’s critique this approach because it assumes that the future can be predicted, the strategic planning can be separated from operational management, and hard data analysis and techniques can produce novel strategies.

The positioning school

Strategies emerge from an analytical process that produces knowledge about the trends in the particular industry and than respond to those trends by establishing an appropriate strategy. Mintzberg’s critique is that this approach is too deterministic and the analytical frameworks constrain creative thought.

The entrepreneurial school

Strategies are the products of visionary, strong entrepreneurial leaders. As a result, the process of strategy making is a mystery.

The cognitive school

Decisions are the outcomes of semi-conscious cognitive processes. They are not as conscious and deliberate as the rational prescriptive approach suggests. Mintzberg emphasised the need to understand better, how experience informs strategic thinking.

The learning school

When strategies are implemented, the decision maker learns what works well and what does not. Strategies are adapted in the light of learning. Learning is a process of finding out what works, understanding why it works, and than developing this new knowledge into action and behaviour. This is Mintzberg’s preferred approach.

The political school

Strategies emerge from the power-plays within an organization. The dominant strategy that emerges is that aligned with the preferences of the most powerful group within the organization.

The culture school

The culture school sees strategy emerging from a collective decision-making process in which all members of the organization share a common set of values and beliefs. In this case, organizational life is idyllic and free from power politics and strife.

The environmental school

Changes in the external environment determine strategic decisions. Strategy is a passive process that responds to changes in the external environment.

The configurational school

This is a collage of many of the other schools. Any particular strategy depends upon a number of factors.

Mintzberg contrives these schools of thought and they are analytical and artificial. Their purpose is to focus thinking upon the strategic making process. Mintzberg has found that there is a great discrepancy between what they actually do and what management theory says they should do (5).

4. The Examination of the Strategic Decision Making Process

4.1 Introduction

In this part from the assignment, I will critically examine the strategic decision-making process in Arab National Bank by taking some of their decisions as a sample for my examination. I am working for the one of the SBU’s in the bank, which is the Investment Services Group. Therefore, the levels of business and functional strategy will be the core for my examination. I must explain that the decision making process is not open to every one in the organization. As a result, in some part of my examination I will adopt series of assumptions. Despite continuing concerns about the international economic environment, Investment Services has witnessed an exceptional growth in the last 3 years. We continue to offer a comprehensive range of investment products – primarily in Saudi and International share brokerage, investment funds and insurance. I will use some examples of decisions for my examination but firstly. I shall attempt to evaluate those decisions in order to link the theories, my analysis and the outcome of it to justify my answer to whether the decision making process in the group could be considered rational or not.

4.2 Evaluation

Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed. Non-programmed decisions are made in response to situations that are unique (6). The Group did recently face some problems; I am going to explain how they solved these problems in order to examine the decision-making process. In each of these problems, the Group did follow the logical steps of the rational model. I will explain these steps, the Group decision in each problem and the evaluation of the decision.

One of the problems, which the Group did face recently, was the huge trend in the local market towards Islamic Investment Services. This trend has tremendously increased after September 11^th and the international war against terrorists. Many Saudis along with other Muslims got the feeling that this war was against them not against terrorists. As a result, a huge amount of Saudi money held abroad returned to the local market. Their existing lines of services do not have such variety to satisfy this trend. Therefore, they must solve this problem. By following the logical steps, they found that this problem is unique so it requires a non-programmed decision. They recognize the problem as an increase in demand for Islamic Investment Services, where its current services were limited. The Group’s strategic objective is to attack the market leader by offering the best financial services that satisfy the customer’s needs and to make continuous growth on the return of the capital employed by the shareholders. Developing some of the existing service to comply with the Islamic principle, adding a new range of Islamic services or not respond to the trend were the alternatives that the Group should choose from. After the evaluation of these alternatives concerning the Group’s objectives, they decided to add a new range of Islamic services. The Group did implement their decision and they are reviewing it regularly. If we want to evaluate this decision, by using Mintzberg schools of thought, I could say that the Group are following a Prescriptive school, which is the positioning school. This school is associated with Michael Porter’s 'generic' strategies; all the SBU’s in the bank are following 'generic' strategies, which is A Focus Strategy (7). This banking industry now is Oligopoly and soon will become in a Monopolistic Competition- so currently it is a stable industry in Saudi. Mintzberg’s criticism of this school is that the analytical framework constrains creative thought. Investment Services has witnessed an exceptional growth in the last 3 years. Therefore, we could say that this decision was truly an effective decision. If we look to the outcome of the decision, we would say that yes, there is an exceptional growth with Group business in the last 3 years but there is also a decrease in the Group market share. They just focused on solving the problem and they did not take in consideration their current resources. They should know that “Customer relationships are the key to the marketing strategy” (8). I think if the Group did an assessment of the internal environment, they would not take this decision. The effectiveness of this decision depends upon the quality and quantity of the available resources. In recent years, the necessary internal resources that enable the organization to achieve its strategic objective has become known as the ‘resource-based approach’ to strategy. Therefore, I could say that the Group decision was not an effective decision. The market is growing but our market share is decreasing so we should ask ourselves is this what the Group was looking for?

Anther problem is that the local equity brokerage business is increasing rapidly over the last few years and the Group is facing a lack of licensed brokers. The huge amount of Saudi money held abroad returned to the local market after September 11^thwas the main reason for this increase in the local equity market. Besides that, the Saudi government started its privatization plan in many sectors, which made the local equity market more attractive than before. The local equity market index achieved 14% in 2002, 51% in 2003, 94% in 2004, and 49% up to date in 2005. The number of customers increased more than 10 times during this period and the demand for the local equity brokerage is still increasing. The contribution of the local equity brokerage business to the bank’s profit is more than 20% and still increasing. Therefore, the threat is huge from the lack of licensed brokers. If we want to define the problem, we find that the licensed brokers are leaving the bank in order to get a higher wages from other banks. Therefore, the problem is the Group should decide how to maintain the existing brokers and how to attract licensed brokers from other banks. This problem is a programmed one and the Group’s objectives are clear. Because of the power-plays within the organization, they decided to recruit licensed brokers from the other banks to increase the number of licensed brokers and to avoid losing their customers. This decision did not solve the problem but increased it because the existing brokers found themselves being paid less than the new ones. If we start to evaluate this decision by using Mintzberg’s work, I would say that this decision was the result of the political school of thought. This decision did solve a part of the problem, which is the lack of the licensed brokers. The most important part, which is why we were losing our licensed brokers to the other banks, the Group did not solve. This part was requiring the joint efforts from the Group and their Human Resources management, in order to review the salary structure and rewarding system of the brokers to maintain the existing brokers and to attract new brokers. An on job-training program for fresh graduates was developed so they can be eligible to get the brokerage licenses from the Central Bank. The local equity brokerage business in tremendously increasing and most of the experts believe that this growth will continue for the next decade and the Group should be ready to meet that challenge if they want to achieve their strategic objectives.

The last problem in my evaluation is that the Group along with rest of the bank are facing a huge pressure from the Saudi government toward all the banks to increase the number of Saudi staff and decrease the number of expatriates within the banks. This pressure was the result of the increase in the unemployment percentage of the Saudi citizens. The problem is how to increase the numbers of Saudi staff without affecting the Group’s objective. The problem is unique and it requires a non-programmed decision. From many alternatives, the Group decided to attract fresh graduated Saudis from local and international universities and offer them positions within the Group and the chance to sponsor them for higher education. The implementation of this decision was successful and the result was great. During the last 5 years, the Saudis staff ratio increased from 60% in 2000 to 86% in 2005. If I want to evaluate this decision, I would say that this decision is representing Mintzberg’s learning school, which is Mintzberg’s preferred approach. This decision is an effective decision that could be justified from the successful outcome.

4.3 Rational or Irrational

To search for the optimal strategy, there is one best way, assumption, predictability and clear objectives are some of the features of the Rationalist School. As a joint-stock company, the stockholders have competing views about what is the most appropriate means of achieving the organization’s objectives efficiently and effectively. Therefore, how we could say that all the Group decisions are rational? The question for this assignment was whether or not and to what extent the organization strategic decision-making process can be considered rational. Most of the researches that had been conducted in the Western world and still more researches need to be done on other societies. What is rational in a Western mind could be irrational in our culture. Since values arise from basic psychological characteristics of men, it is not the existence or non-existence or values that distinguishes a man from his neighbour. Further, the variety of experience that makes contemporary life makes conflict in values an inescapable adjunct to living (9). The Arabic culture, specially the Islamic culture, is different in a sense of what could be accepted in our culture is not necessarily accepted in the Western world. The government, the religion, the relationships, and the regulations are the major factors that have a great influence in the decision-making process within my organization as well as in the rest of the societies.

The first problem in my evaluation is a good example of the influence of the religion on the decision. That decision was a result of the logical steps provided by the rational model but the outcome from this decision cannot justify the rationality of the decision. The rationality is searching for the best decision but I did justify that it can be better. Furthermore, is there a truly Islamic investment service or not. Many Western experts believe that the only genuinely Islamic banking is practised by the venture capitalists in London and New York. This is the rational Western thinking about Islamic banking but we do have truly Islamic Investment services. The Islamic religion does offer many alternatives for the investment services. The investor could buy any equity if the liability of the specified organization is not more than 30% of its capital and the investor could sell any material to a buyer on an instalment basis with a profit margin but not as an interest. Therefore, the rationality in our culture could be irrational in the Western mind, where interest is the dominant element.

The second problem is another example of the factors that have a great influence on the decision making process from the power-plays within the Group. The decision was not rational and the Group did not have a choice because of that, they have been forced to take this decision.

The last problem is a pure example for the rational decision-making process. The evaluation for this decision is justifying the rationality of the decision and its process. There were no factors to influence this decision.

I would say that the Group is following the logical steps of the rational model in all of their decisions but I cannot say that all of their decisions are rational. We must take into consideration the limitations of the rational models. Many factors in our culture have great influence in the decision-making process; many decisions were supposed to be rational but with the influence became irrational. I did justify that if there were no influences, the Group are trying to make its decision rational.

5. Conclusion

By using the textbook and other references, I was able to understand the decision-making process. I have demonstrated my understanding of the theories by applying it to my organization. I have given brief general information about the bank. I did a brief review on the models of decision-making, decision and system thinking, the strategic decision-making, the relation between the psychology and decision-making and prescriptive schools. I critically examined the strategic decision-making process within the Investment Services Group by taking some examples of decisions. I did discuss the major factors that have a great influence in the decision-making process in the Group. I explained what can be rational in a Western mind is not essentially rational in our culture and I justified by using the example of the Islamic investment services. I proved that the Islamic banking does exist. I linked the question, the theories, the analysis, and the outcome of it to decide if the decision-making process in the Group can be considered rational. I did justify that if there were no influences, the Group is trying to make its decisions rational.

6. Limitation of The Sample

This assignment is based on a specific part within the bank where I am working, which is the Investment Services Group. Therefore, my conclusion could possibly be faulty because of the limitation of the sample. We should also keep in mind that what is rational in a Western mind could be irrational in our culture. I did take an example in my assignment trying to prove that there are major differences between our culture and the Western culture with regard to what is rational, and what is not. My conclusion cannot generalize on the whole bank; more research would be needed especially in our society’s ethics and cultural background.

7. References:

(www.brs-inc.com).

Management Centre, Module 2 MBA, Strategic Analysis and Choice, University of Leicester.

Thompson & Strickland, Crafting and Executing Strategy, 12^th Ed, Chapter 2.

Peter Drucker (1967), The Effective Decision, Harvard Business Review on Decision Making.

Mintzberg, Henry, The Manager’s Job: Folklore and Fact, Harvard Business Review, March-April 1990.

Richard Daft, Management, 6^th Ed., Chapter 9 p.273.
Philip Kotler, Marketing Management, 11^th Ed, Chapter 4.

(http://marketing.about.com/library/weekly/aa070203a.htm).

Chris Argyris, Interpersonal Barriers to Decision Making, Harvard Business Review on Decision Making.

Can Bancassurance Add Value to Banks and Insurers in Saudi Arabia? MBA

2012-02-16T09:14:00.002+03:00

Acknowledgements

Many thanks to my wife Ettab for her continued support and patience whilst I have spent many hours researching, analysing and writing up this project. Without her, I would not have been able to even contemplate completion of the dissertation and I am eternally indebted to her. I also thank my three children for being so understanding when I needed to be locked away in a room to complete another section of this dissertation.

I would like to thank all those that who took part in the research. A number of very senior personnel people gave up their time to take part and for that, I am very grateful.

In addition, I would like to thank my friends Zaki Salami, Basil Laboucharder, Jeremy Lewis, Maurice O’ Neill, Samir Mufti, Riyadh Al Shubail and Mohammed Al Fadli for their belief in me. I could not make it without them.

Finally, I would like to thank Mr. Philippe Riewer from Stafford Associates, Mr. J.P. Brewis and his colleagues of the University of Leicester, who via the university Web Board offered much advice from the initial research objectives and the dissertation layout.

Executive Summary

Bancassurance is defined as the selling of insurance products through a bank distribution network. The business of Bancassurance, the convergence of a bank’s distribution system with the value chain of an insurance company, has the potential of providing significant advantages to both. Chief among them is the broadening of the revenue base of the bank and the creation of a new channel for the insurance company. Even within this welcoming environment, however, success is not automatic. This dissertation has focused on specific areas of Bancassurance business model, which are the Driving Factors of Bancassurance, Bancassurance Model, Bancassurance Disadvantages, and The Bancassurance Success Factors. The view of this research project is to understand how a Bank and an Insurer under the partnership business model in KSA are viewing these areas. The aim therefore has been to answer four questions that will explore the view of this research project. These areas may appear to be independent of each other; however, the research finding shows that they are intrinsically linked in many ways. A number of Bancassurance managers from a Bank and an Insurance company, who adopted the Bancassurance partnership business model, were interviewed to understand their views to the specific areas of this research project. This research project shows throughout the interviews that there is a lack of understanding for the definition of the Bancassurance, a limited knowledge for the diriving factors of Bancassurance, short term vision for the strategic relation and unclear awareness of the key succsse factors. Banks and Insurance companies in KSA need to move beyond the early stage toward a more integrated business model. The model chosen has to be consistent to the overriding strategy for Bancassurance and objectives for this particular business. Execution excellence is the key to success. Banks and insurers should focus on what is important and adopt a relentless ambition to build a leading Bancassurance business. To have a sucessful implemintation of the Bancassurance strategic relation, both parteies need to have a clear understanding of the definition of Bancassurance. After that, they both need to identify their driving factors for forming this strategic relation. The best way of entering Bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. I have recommend the a roadmap for both banks and insurer to creat a sucssful strategic relation via Bancassurance. However, There is no one magic formula to Bancassurance.

Chapter – 1 –

Introduction

Increasing competition and changing nature of customers' needs are stimulating the drive for sound marketing strategies in financial services,(Cooper and Edgett, 1996). Being able to develop marketing strategies that achieve sustainable competitive advantage has been a managerial challenge in financial services sector. The market for insurance products continues to grow in the light of the accession of Saudi Arabia (KSA) to being a full member of the World Trade Organisation (WTO). The government strives to attract foreign investors to partake in a number of industries to the Kingdom. The introduction of new regulations in the Saudi insurance market have created a new and increasingly competitive business environment. The Bancassurance market in KSA has its beginnings in the provision of personal financial savings plans starting in late 1998. Since then the Saudi Arabian Monetary Agency (SAMA) had encouraged local banks to collaborate with insurance companies in the field through Bancassurance. The production levels of Bancassurance in KSA kept expanding and are expected to account for 30% of the market by 2010, (Nadkarni, 2006). The expansions of banks’ offering in addition to general insurance products such as motor insurance occurred only in the year 2002/3. However, the absence of an impact study on the competitive advantage of Bancassurance for both the bank and insurer coupled with personal interest as an employee within the industry, led to this study. It is hoped that the findings of this study would highlight the competitive advantage of such business model for a bank and an insurer in KSA while dually facilitating the growth of the financial service industry.

1.1 Bancassurance Overview

Bancassurance is the evolution of the traditional financial sector by utilizing alternative distribution channels to push a particular financial product onto customers. Naturally, as the financial sector has struggled globally to sustain any real growth, corporations have not only looked into alternative distribution channels but also developed new, or bundled, financial products. Insurance is a key component of the concept ‘Bancassurance’, as the word implies, but it is also a unique financial product. A bank can add insurance to its range of services to make the bank a one-stop financial shop. Insurance is an obvious diversification for banks to enhance revenues and profitability. Bancassurance is a good fit for the KSA market because insurers in KSA are seeking other methods of distribution as more insurance companies join the market and the competition escalates The close relationship with customers will make it easy for the bank staff to present insurance as part of the financial planning and wealth management strategies of customers. The marginal cost of using bank personnel to promote insurance products may be much less than the costs of having agents prospecting for new clients. Additionally the banks can then earn commission from insurance sales and this can provide a good return for a relatively low amount of additional work.

Unlike common financial commodities such as loans or credit cards, insurance is an unsought product and is ‘sold’ rather than ‘bought’, so the personal-selling support and advertising appear comparatively important, (Kotler, 2003). Bank staff dealing with customers should be encouraged to identify potentially interested customers. The emphasis on Bancassurance for retail bank branches is retail products, attractively packaged and sold in volume. Based on the above, it is noted that through the Bancassurance strategy, the traditionally separate banking and insurance services are combined to deliver bundles of financial services to the customer base.

1.2 Dissertation Objectives

Bancassurance has continued to be widely discussed, being presented either as a new paradigm for the financial services industry or as unsuccessful business model, mixing two kinds of activities that is structurally different. Each announcement of a merger, acquisition or partnership involving a bank and an insurer offers an opportunity for each lobby to reaffirm its own view, (Fitch Ratings, 2006). Bancassurance aim is to develop strategic relationships between a bank and an insurer that should help both parties to achieve a competitive advantage over their competitors. Most recent literature and research on Bancassurance has built upon the Bancassurance business models and the source of wealth gain on the international level. However, the objective of this study is to provide an analysis for the Banccassurance partnership business model in Saudi Arabia , with the aim of evaluating its implemention and examining the value added to banks and insurers by adopting such business models.

1.3 Research Question

Through the literature review a number of interesting areas of the Bancassurance business model were identified, which are:

1. The Development of Bancassurance

2. The Driving Factors of Bancassurance

3. The Bancassurance Model

4. Bancassurance Disadvantages

5. The Bancassurance Success Factors

Based on the above, the research has been broken down into modules that give rise to the following sub-questions:

· Why do Saudi banks develop a strategic business relationship with insurers via Bancassurance?

· What are the disadvantages of this relationship, for both insurers and banks?

· Can Bancassurance increase the competitive advantage for a bank and insurer in KSA through value added?

· What are the key elements to make Bancassurance partnership model successful?

1.4 Personal Interest

This area is of personal interest to me as I am currently employed as a Bancassurance Manager for an insurance company in KSA. In addition, I was the Bancassurance manager for two different banks in KSA over the last 9 years. Therefore I have a personal interest to investigate the future of Bancassurance in KSA and to define how this model could add value to the financial services idustry. Therefore as an insider familiar with both banks and insurance companies that constitue Bancassurance, I would relish the opportunity to investigate and question their application from a more objective viewpoint.

1.5 Dissertation Structure

During the course of this dissertation, the research questions will be answered through a series of steps aimed at providing a methodological process of research. Chapter two is a thorough review of the history of the financial service industry in KSA and where its now stands. This is necessary to give a contextual understanding of this dissertation. Chapter three is a thorough review of the literature on the Bancassurance business model. Through this review, a number of themes are identified which form the basis of the research upon which the analysis and conclusions are based. Chapter four describes in detail the type of research to be undertaken, in this case a semi-structured of interviews, and why and how these were employed. Chapter five presents the findings from this research under each of the themes identified via the literature review. Chapter six analyses the research findings and makes comparisons against those of the literature review. Chapter seven summarises the outcomes of the research and makes recommendations for possible changes in adopting the bankassurance business model in the KSA finaincial service indurstry and the direction for further research.

Chapter – 2 –

Financial Service Industry in KSA

To understand more about the context in which this dissertation exists, I feel it is appropriate to discuss the financial service industry of KSA.

2.1 Commercial Bank in KSA

(Al-Hamidy, 2006), Foreign banks’ presence in Saudi Arabia can be traced back to 1926, when the Netherlands Trading Company, later to become Algemene Bank Nederland (ABN) began operations. It enjoyed a virtual monopoly until the late 1940s. In 1947, Banque Indo Chine opened a branch, followed by the Arab Bank Limited (1949), the British Bank of the Middle East (1950) and the National Bank of Pakistan (1950). In October 1952, the Saudi government established SAMA with primary responsibility for monetary stability. Following SAMA’s creation, the government followed an open and liberal policy and permitted the opening of new foreign bank branches, including Banque de Caire, Banque du Liban et d’Outremer and First National City Bank of New York. This first wave of foreign banks linked Saudi Arabia firmly with the global financial markets and encouraged a competitive domestic environment. During this period, three domestic banks were also licensed. The National Commercial Bank was licensed in 1953; Riyad Bank started operations in 1957 and Al-Watany Bank in January 1958.

By 1975, 10 international banks with 29 branches were present in the Kingdom. These institutions operated as branches of their parent companies but, in 1976, the Saudi government decreed that these should become incorporated as local banks with majority Saudi shareholdings. Consequently, in 1976 the Council of Ministers (the final legislative authority) offered foreign banks operating in the Kingdom a chance to form joint venture banks with Saudi shareholders. This decision required foreign banks to convert their branch operations to Saudi joint stock companies in which they could retain up to a 40% shareholding. In subsequent years, all foreign banks accepted these proposals and formed joint ventures, as there were a number of favourable incentives offered.

Following these changes, during the period from 1982 to 2000, no new foreign or domestic banks with one exception for a domestic bank were granted a license, as the government believed that the existing branch network adequately served the country. Nevertheless, the Saudi banking system currently has a presence of more than a dozen foreign bank shareholders from many parts of the world. Their shareholdings range from less than 1% to 40% of a bank’s total capital. In addition, there are international banks with full branch operations.

In past five years, Saudi Arabia has licensed a number of GCC (Gulf Cooperation Council) banking institutions, as a result of a decision of the GCC Summit to permit reciprocal opening of their banking markets. In this connection, Gulf International Bank of Bahrain was granted a license in September 2000 to open a branch in Saudi Arabia. This was followed by branch licenses for the Emirates Bank International, the National Bank of Kuwait, the National Bank of Bahrain and Bank Muscat. The government has also decided to allow major international banks from different parts of the world to obtain banking licenses. The entrance of these institutions into the Saudi banking market should enhance competition, support the transfer of technology, improve financial services in all sectors and create employment opportunities. This is part of the Saudi government’s vision for a dynamic financial sector, which will also benefit from the participation of non-bank investment and brokerage companies under the recent Capital Market Law, and the participation of insurance companies under the new Cooperative Insurance Law.

2.2 KSA Insurance Market

Saudi Arabia

's first exposure to insurance was during the 1920s through foreign agencies operating in the eastern and western provinces. In 1931, the government devised a regulation governing insurance on imported goods. Gradually, insurance had increased in the Kingdom during the 1950s, which was mainly driven by the need to have optional insurance to cover risks related to governmental construction projects, however the economic prosperity during the 1970s owing to the soar of oil prices had given solid grounds for the insurance industry to develop. The massive infrastructure projects essentially attracted insurance agencies to the market and the number of insurance providers multiplied.

(Swiss Re No.7/2006), The Saudi insurance market is emerging with USD 1.4 billion market in 2005 and it projected by many experts to grow to USD 4 billion by 2010. According to a survey conducted by the Institute of Banking on the Saudi insurance market in 2003, the largest share comes from motor insurance, which accounts to 32% in 2003 followed by medical insurance with a share of 22% and property insurance with a share of 17% (Institute of Banking, 2003).

The cooperative insurance is an accepted Islamic concept form of insurance. Essentially, it is founded on mutual-like approach where a group of societal (Maysami and Kwon, 1999) Insurance companies operating in Saudi Arabia are required under the new regulations of 2004 to adhere to this approach. Out of the 70 insurance companies working in the Saudi market, only 15 companies are officially recognised to operate.

While KSA ranks second in amongst Arab insurance industries, the Saudi insurance market represents 0.5% of the GDP, which is low compared to some regional countries (Arig, 2003). The insurance industry directly employs more than 2,500 employees out of which Saudi nationals represent 36% (Institute of Banking, 2003). Generally, the market in KSA is considered underinsured, the fact that attracts many foreign insurers to this market.

Different distribution channels existent in the Saudi insurance market; which are direct sales, independent brokers, agents, franchise and Bancassurance. Since the launch of Bancassurance in KSA, nine banks formed a strategic relationship with insurane companies to introduce Bancassurance products to their customers. Five years ago, Bancassurance was a new word and, everybody wondered how to spell it, but today everybody knows. Awareness has reached people. It continues to expand and I believe that all the banks will eventually become involved; otherwise, they will lose valuable income potential. However, religious beliefs undermine the insurance business in KSA. Consumers tend to buy insurance to comply with regulation.

Chapter – 3 –

Literature Review

3.1 The Development of Bancassurance

3.1.1 Definition of Bancassurance

Bancassurance in French means the selling of insurance products by banks through their own distribution channels. The word is a combination of "banque or bank" and "assurance" signifying that both banking and insurance is provided by the same corporate entity. According to Wikipedia, Bancassurance is the term used to describe the sale of insurance products in a bank. A great many people have tried to come up with a comprehensive definition of the term "Bancassurance". It is often defined as the distribution of insurance products by banks but, in fact, it is much more than that, especially if we consider the history and practices of all the different Bancassurance operators around the world. Bancassurance is ordinary insurance with a more powerful distribution network that has a strong affinity with its private and business customers. Florido (2002) suggested that Bancassurance is defined as, any level of cooperation between banks and life insurance companies in selling their products to their target customers. The executive director of ING Group, Huizinga (1993) observed, “Bancassurance is the distribution”. A number of insurance and financial institutions have researched the spread of banks selling insurance and defined Bancassurance. According to a periodical issued by the Swiss Reinsurance Company (Swiss Re No.7/2002), Bancassurance is defined as the distribution of insurance products by banks. Munich Re (2001) points out that Bancassurance is the provision of insurance and banking products and services through a common distribution channel and/ or to the same client base. The usage of the word picked up as banks and insurance companies merged and banks sought to provide insurance, especially in markets that have been recently liberalized. It is a controversial idea, and many feel it gives banks too great a control over the financial industry.

3.1.2 History of Bancassurance

Genetay and Molyneux (1998) provide an excellent overview of Bancassurance in Europe and document its historical roots dating back to the 1800s. As discussed by these authors, Daniel (1995) differentiates three periods of banassurance development: (1) prior to 1980, banks sold closely related insurance products, such as consumer credit, home property, and currency theft insurance; (2) after 1980, banks expanded into savings insurance products, including (for example) endowment contracts in France that paid a lump sum at a future point in time; and (3) in the 1990s banks made major progress in traditional insurance activities, including various annuity investment contracts and combined savings and insurance contracts (known as whole-life insurance) in the United Kingdom. Significant entry by banking firms in Europe during the 1990s into insurance activities was primarily motivated by deregulation of the financial sector under the 1989 Second Banking Coordination Directive. Effective in January 1993, this Directive allowed financial institutions in European Union (EU) countries to operate in member countries without obtaining a license from the regulatory authorities in a guest country. EU competition among so-called universal banks and large retailers entering financial services has led to cross selling of multiple services. Banks increasingly have used relationship pricing wherein customers purchasing a number of financial services receive better pricing than single-product customers. In this regard, Bancassurance has been growing more rapidly in Europe than banking-securities combinations,Staikouras (2006). According to Focus (2005), The first countries to venture into the field were Spain and France. In the early 70s, ACM (Assurances du Crédit Mutuel) Vie et IARD (life and general insurance) were officially authorized to start operations, a watershed event in the history of insurance. It was their idea to bypass the middleman for loan protection insurance and to insure their own banking customers themselves. They thus became the precursors of what – 15 years later – would become “Bancassurance”. However, from a purely historical point of view, the real pioneers were the British with the creation of Barclays Life in September 1965. This subsidiary was not a great success in the UK, and nor, for that matter, was the concept of Bancassurance.

3.2 The Driving Factors of Bancassurance

In fact, there are a number of driving factors lying behind the formation of Bancassurance strategy. Banks see Bancassurance as a way of creating a new revenue flow and diversifying its business activities. By entering insurance and expanding non-interest-income (i.e., fee income), banks can diversify some of their net interest rate margin risk without sacrificing profitability. The economies of scope is another factor.Banks may be able to sell insurance at a lower cost than the independent, small agencies/brokerages by targeting its existing, sizable customer base; taking advantage of their significant brand awareness within their geographic regions; and using their existing employees as an insurance sales force. Cost economies of scope might exist also with respect to transaction costs. In addition, by diversifying their business into insurance, banks might fully exploit their brand name and provide “one-stop banking” for its existing customers. The latter increases the number of products per customer and reduces the possibility of losing customers to competitors. The entrance of banks into insurance might provide deeper penetration into the insurance market, especially the middle-income market.

Estrella (2001) examines direct measures of potential diversification gains from consolidation of financial firms. His results indicate that there may be bilateral diversification gains from mergers involving the banking and insurance industries. Estrella points out that these gains are not limited to life insurance as suggested by the previous authors, but extend to nonlife insurance companies, which actually lead to larger diversification gains than with life insurance companies. He also shows that life insurance and nonlife insurance have relatively large correlations with regard to each other, but also with regard to large banks. One of the main reasons that banking-insurance combinations enhance diversification is not lack of commonality, but that the insurance industries are already highly diversified compared to other financial sectors. Also, Boyd (1993) used hypothetical cross-product mergers and simulations and found risk reduction effects from these deals.

The emergence of Bancassurance contributed to overall efficiency, an increase in economies of scope and an increase in productivity of both banks and insurance companies in some of the European countries. Similarly, to what Swiss Re, (No.7/2002) reported, that Bancassurance has led to lower, report or stable distribution cost compared with career agents in Asia. Economies of scope may arise from both the production and consumption of financial services (Saunders and Walter, 1994). A larger scale production of elements common to these various financial services can lead to cost advantages through economies of scale. Several specific cost advantages which have been identified include: gains through concentration of risk management, administration functions, and integrated product development; marketing economies in the common delivery of different services; better information access and sharing of information across different product groups; reputational and pecuniary capital to be shared across different products and services; and enhanced potential for risk management through diversification gains. On the consumption side, economies of scope may derive from: the potential for lower search, information, monitoring and transaction costs; negotiating better deals because of increased leverage; and lower product prices in a more competitive environment. The empirical evidence on the existence of economies of scope between banking and insurance service is very limited, however. One of the few studies is Carow (2002). He analyzed the Citicorp - Travelers Group merger that increased the prospects for new legislation removing the barriers between banking and insurance. He finds that the merger resulted in a positive wealth effect for institutions most likely to gain from deregulation. Life insurance companies and large banks (other than Citicorp and Travelers Group) had significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers were insignificantly different from zero.

According to Capita (2006), Banks have a number of competitive advantages in the provision of insurance products. First, they have much better information on individual consumers—seen as key to pricing risk effectively. Second, the banks may be able to bring enormous economies of scale, particularly if they are part of a major global network. Michael Porter identified two basic types of competitive advantage, which are cost advantage and differentiation advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Figure 1 shows the changing in the competitive marketplace that financial institutions are faceing.

FIGURE 1. Competitive marketplace

(Source: Robert Daly, 2003)

According to Capgemini Analysis (2006), customers have become more self-sufficient, price-sensitive, and less loyal . Moreover, insurers and distributors can no longer assume a satisfied customer will be loyal when the relationship is tested. Figure 2 shows the changing customer trends.

FIGURE 2. Changing Customer Trends (Past 5 Years)

(Source: Capgemini Analysis, 2006)

Munich Re (2001) summarizes the reasons why banks have decided to enter the insurance industry area: (1) The intense competition between banks, against a background of shrinking interest margins, has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products; (2) Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts; (3) The need for more efficient utilization of branches and bank employees is today as pressing as ever. According to Benoist (2002), life insurance products can bring immediate added value to a retail bank's customer service process and the bank sales force can sell them effectively; (4) Analysis of available information on the customer’s financial and social situation can be of great help in discovering customer needs and promoting or manufacturing new products or services; (5) The realization that joint bank and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products; (6) There is a strong need for customer loyalty to an organization to be enhanced; (7) The increasing pressure on public pension systems and an increasing need for additional retirement provisions or long-term investment products; and (8) Banks are used to having long-term relationships with their customers. This allows similar skills to be practised and the bancassurer can make use of the best that each partner has to offer; (9) Bancassurers can have a competitive advantage over traditional insurers (non-bancassurers), derived from the provision of customer service through automated teller machines (ATMs). In particular the bancassurer can provide its customers with an ATM card that can be used to gain access to any ATM and request information such as cash values, unit price, policy status, next premium due date, loan accounts, surrender values, etc.

With regard to the other player, the insurance companies distribute their products through retail bank branches. They pay commission to the bank, like making payments to their agents and agencies. Nevertheless, Donne (2003), elaborated on the advantages for the insurers in a Bancassurance relationship on six aspects:

1. Ability to tap into banks’extensive customer base;

2. Reduced reliance on traditional agents by making use of the various channels owned by banks;

3. Shared services with banks;

4. Develop new financial products more efficiently in collaboration with their bank partners;

5. Establish market presence rapidly without the need to build up a network of agents;

6. Obtain additional capital from banks to improve their solvency and expand business.

However, Focus (2005) elaborated more two advantages for the insurance companies. Firstly, the insurance company often benefits from the trustworthy image and reliability that people are more likely to attribute to banks. Secandly, the insurance company also benefits from the reduction in distribution costs relative to the costs inherent in traditional sales representatives, since the sales network is generally the same for banking products and insurance products. Equally, Donne (2003) observed that banks have what insurers want: distribution, branch network, customer base, databases, regular contact, brand, reputation and customer loyalty. Of course, not everybody in the market agrees. Mr Claude Tendil, Chairman of Generali France, expressed this in an article published by La Tribune on February 28, 2005, where he admitted that he was “still hostile to the Bancassurance model” since, in his opinion, “it works in only one direction, to the benefit of the banks”.

To sum up, Bancassurance represents a strategy by which banks and insurers co-operate in a more or less integrated way to work the financial markets (Swiss Re No.7/2002). For both banks and insurers, there is a great opportunity to learn and to make improvements in their own operation.

3.3 Bancassurance Model

The Bancassurance model shows the ways in which the banks and insurance companies enter into Bancassurance. It refers to the operating structures for the banks to market insurance products (Smit and Lugt 2000; Swiss Re No.7/2002; Florido 2002; Nigh and Saunders 2003). The choice of a suitable model depends on the related laws of nations and the objective conditions of both players. However, the simplest structure of Bancassurance is through a distribution agreement, which is commonly used in KSA. Integrated Bancassurance has developed in parallel to the dramatic expansion of the European life insurance market since the mid-1980s. This expansion has relied mostly on savings-type insurance products, a significant portion of which are very close to traditional banking products such as fixed-income securities or mutual funds. Europewide, Bancassurance has been far more successful selling savings-type products than risky products such as those relating to longevity or disability.

There is no single way of entering into Bancassurance which is “best” for every insurer and every bank, Munich Re (2001). The choice of a suitable Bancassurance model depends on the particular cultural and regulatory environment of the host country. As in all business situations, a proper strategic plan drafted according to the company’s internal and external environmental analysis and the objectives of the organization is necessary before any decision is taken. There are many ways of entering into Bancassurance. The main scenarios are the following, Munich Re (2001):

v One party’s distribution channels gain access to the client base of the other party.

This is the simplest form of Bancassurance, but can be a “missed opportunity”. If the two parties do not work together to make the most of the deal, then there will be at best only minimum results and low profitability for both parties. If, however, the bank and the insurance company enter into a distribution agreement, according to which the bank automatically passes on to a friendly insurance company all “warm leads” emanating from the bank’s client base, this can generate very profitable income for both partners. The insurance company sales force, in particular usually only the most competent members of the sales force, sells its normal products to the bank’s clients. The cooperation has to be close to have a chance of success. For the bank the costs involved – besides those for basic training of branch employees – are relatively low.

v A bank signs a distribution agreement with an insurance company, under which the bank will act as their appointed representative.

With proper implementation this arrangement can lead to satisfactory results for both partners, while the financial investment required by the bank is relatively low. The products offered by the bank can be branded.

v A bank and an insurance company agree to have cross shareholdings between them.

A member from each company might join the board of directors of the other company. The amount of interest aroused at board level and senior management level in each organization can influence substantially the success of a Bancassurance venture, especially under distribution agreements using multidistribution channels.

v A joint venture: this is the creation of a new insurance company by an existing bank and an existing insurance company.

v A bank wholly or partially acquires an insurance company.

This is a major undertaking. The bank must carefully define in detail the ideal profile of the targeted insurance company and make sure that the added benefit it seeks will materialize.

v A bank starts from scratch by establishing a new insurance company wholly owned by the bank.

For a bank to create an insurance subsidiary from scratch is a major undertaking as it involves a whole range of knowledge and skills which will need to be acquired. This approach can however be very profitable for the bank, if it makes underwriting profits.

v A group owns a bank and an insurance company which agree to cooperate in a Bancassurance venture.

A key ingredient of the success of the Bancassurance operation here is that the group management demonstrate strong commitment to achieving the benefit.

v The acquisition (establishment) of a bank that is wholly or partially owned by an insurance company is also possible.

In this case the main objective is usually to open the way for the insurance company to use the bank’s retail banking branches and gain access to valuable client information as well as to corporate clients, allowing the insurance company to tap into the lucrative market for company pension plans. Finally, it offers the insurance company’s sales force bank product diversification (and vice versa). This form is used in many cases as a strategy by insurance companies in their effort not to lose their market share to bancassurers.

The best way of entering Bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. Whatever the form of ownership, a very important factor for the success of a Bancassurance venture is the influence that one party’s management has on that of the other. An empowered liaison between respective managements, with regular senior management contacts, as well as sufficient authority to take operational and marketing decisions, is vital. Regular senior management meetings are also a vital element for a successful operation. There must be a strong commitment from the top management to achieving the aims in the business plan. Figure 3 shows the degree of integration in structuring Bancassurance.

FIGURE 3. Bancassurance Structure

(Source: Swiss Re No.7/2002)

All range of Bancassurance business models mentioned above that exists in the world falls into the following three main categories, Fitch (2006):

1. Partnerships ( Distribution Agreements)

In this model, the insurance company distributes its products partly, though not exclusively, through a banking channel. In addition, there is no dedicated legal entity to underwrite this business, which is in practice directly accounted for on the insurer’s balance sheet. In line with efforts to strengthen revenue capacity and promote business differentiation, banking institutions have formed strategic alliances with other types of financial institutions. This model is usually implemented when either regulation or tax treatment does not allow a close integration of banking and insurance activities. Under this model, the insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. The business logic for such a model is the recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers while being unable or unwilling to develop such expertise internally.

2. Joint Ventures

This business model relies on a more or less balanced shareholding between one or several banks and an insurance group in a joint venture insurance company. This joint venture distributes its products only through the network of its banking parent(s). In addition, the relationship between the bank and the insurer is sometimes reinforced by a strategic shareholding. The joint venture typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. In addition, the bank also benefits from the joint venture's profitability through dividends paid. As in the case of the partnership model, the business logic for creating a joint venture is a recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers with an intention to build up expertise in this area. Typically, the joint venture is granted exclusive access to market insurance products through the bank's network. However, the joint-venture business model is also very popular in non-life insurance.

3. Captives ( Financial Services Group)

According to this model, an insurance company markets its products almost exclusively through the distribution channel of its banking parent. In such cases, the ownership by the bank in the insurer is typically very high, often 100%. The captive insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. In addition, the bank also benefits from the insurer's profitability through dividends paid. When compared to the partnership model or a joint venture, the logic for the captive business model is the recognition by the bank of a real need to be in a position not only to offer (mostly life) insurance products to its customers but also to keep the full know-how and profitability of the business in-house. The insurance captive becomes an important tool of the bank's marketing policy and is a separate legal entity only due to regulatory constraints. Nevertheless, it is very important that the bank management has sufficient understanding of the insurance business. Depending on the group structure, the insurance captive may be a direct subsidiary of the bank or a sister company, both owned by the same holding company. This difference in terms of legal structure generally reflects the significance of the business written by the insurance captive through non-group channels. All over the world, new financial groups with substantial banking and insurance activities, emerge. In the US, where the regulatory environment still prohibits the full integration of banking and insurance activities, the merger between Citicorp and Travellers Group, completed at the end of 1998, has increased the interest in the topic. It is thought that the Travellers-Citicorp merger could push other firms into similar partnerships and removes the legal barriers, separating banks from insurance companies.

Figure 4 shows the benefits of these models.

FIGURE 4. Benefits of Bancassurance Models

(Source: Swiss Re No.7/2002)

However, Many large European institutions are structured as “conglomerate” with separate bank and insurance subsidiaries held by a common holding company. The fact that conglomerates very visibly run both banking and insurance activities does not necessarily mean that there is much interaction between the two. Thus, Fitch (2006) prefers to use the term "Bancassurance" only when the two businesses are run in an integrated manner. Figure 5 shows the distribution of Bancassurance deals by operating models in Asia.

FIGURE 5. Bancassurance Models in Asia

(Source: Swiss Re No.7/2002)

3.4 Bancassurance Disadvantages

The advantages and disadvantages of Bancassurance depandes on the way banks and insurer structure their relation. Thousands of pages of analysis have been written describing the different techniques and methods used to make the above ventures successful. However the obstacles to overcome include the cultural differences between the bank and insurance employees, and concern the different ways in which these two entities function. Banks are demand driven organisations with a reactive philosophy whereas insurance organisations are usually need driven and adopt an aggressive and proactive selling philosophy. Such cultural differences must be understood, respected and lived with. Another major obstacle is the remuneration method employed where bank employees get a fixed salary as opposed to insurance agents who are to a great extent given bonuses based on their level of production and therefore, have an incentive to promote insurance products. Further to the obstacles outlined above, the bank is responsible for its share of the underwriting risk and faces the possibility of dissatisfied customers. If the insurance company provides poor quality service, such as bad claims handling, or high prices, the dissatisfaction of the clients will be reflected on their approach towards the bank, by threatening to leave the bank if their insurance needs are not satisfied. Of course no one can avoid the risk of a Bancassurance venture failing, and if that happens the clients who had already been approached by the insurance company using the bank’s client base may be tempted to stay with the insurance company or insurance agent after abandoning the bank. This could also arise if independent agents involved in the sales process, represent more than one company therefore leading to a change of insurance company. This exactly scenario occurred in KSA with Bancassurance relation on the market. As we have disscussed the Bancassurance models, there is no single pattern to follow in creating a Bancassurance operation. There are different development models, which can be divided into 3 main categories. In other word, the disadvantges of Bancassurance must be linked to the model adopted by the bank and the insurer to structure their relation. According to Foucs (2005), we could sum up their disadvantages into the following:.

1. Partnerships (Distribution Agreements)

· Lack of flexibility

There is a possible diffecality in launching new product. The nuture of the relation does not allow any parties to launch a new product without optaining approvals.

· Culture clash

There is a possibility of differences in corporate culture. This may have an impact on the communication and sales.

· Limeted control

Both parties can not control the level of services that is offerd at the other party end. This would effect the orgaization reputation if the service level was not up to the standard.

· Easy of exit due to the lack of commitment

· Limited customer ownership

· Low accsess of profit

2. Joint Ventures

· Difficult to mange on the long term

· Potaional confilact

3. Captives ( Financial Services Group)

· Substantial investment

As we can see from the above, the level of integration decreses the disadvantges. However, many pepole belives that all the adveantges favour the bank and disadvantges are disportiontely borne the insurance companies.

3.5 The Bancassurance Success Factors

Services have not been easy to define (Lovelock, 1999). A widely mentioned definition of services has been provided by Kotler “A service is any activity or benefit that one party can offer to another, which is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product”. Gronroos, (1998), defines the services as “an activity or series of activities of more or less intangible nature that normally, but not necessarily, take place in interactions between the customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems.” As may be observed from the above definitions, a service can hold characteristics that distinguish it from manufactured products. A service is individually perceived on the basis of rational assumptions by customers and providers, and often described by abstract expressions such as trust, feeling, security, and experience (Gronroos, 1998). This exemplifies one of the characteristics suggested to distinguish services from goods namely intangibility. The others are inseparability, heterogeneity, perish ability, and ownership. Intangibility highlights the fact that services are often not possible to feel, taste, see, hear, or smell before they are purchased; they are impalpable. Intangibility is closely related to the concept of comprehensibility, since a service is not easily defined, formulated, or grasped mentally. Moreover, services can often not be separated from the provider, as they are, at least to some extent, produced and consumed simultaneously and thus the customer participates in the production of the service. Services are often characterized as heterogeneous, as it is difficult to achieve standardization of output; services are perishable and cannot be stored; and a customer always has access to or the use of a service, but not ownership of the activity or facility, (Cowell, 1985).

3.5.1 Factors Affecting Insurance Marketing

Insurers are essentially different from other services because they pledge to cover the customer against damage or loss of a named asset. Insurance service is distinguished by the following factors:

1. Perish ability

Insurance products cannot be stored and sold in a direct manner, unlike manufactured products. This stresses the need to manage demand as well as the marketing mix, (Meidan, 1982).

2. Inseparability

A great deal of the rendering of insurance services entails the customer to be part of it. The customer is required to provide information in order for the insurer to provide an offer, issue or alter a policy, or submit a claim, which has a major impact on the way distribution channels are managed, and how service are priced and promoted. This factor makes it necessary for insurers to be alert about quality and focused on satisfying the customer’s needs.

3. Heterogeneity

Most insurance products are based on individual customer profiles, which make it difficult to avoid variation in the offerings of products. Gabbott and Hogg (1994) observe that variability in services affects the insurer’s ability to establish patterns of consumer behaviour, which is a central aspect of any marketing endeavour.

4. Fluctuation in Demand

The factors influencing the customers’ demand of insurance varies from disposable income, inflation rate, levels of assets ownership and regulations from a macro perspective, to competition and perception of risk, from micro perspective. Therefore, high elasticity can be the nature of insurance products, giving the price more significance in dealing with demand changeability (Meidan, 1982).

5. Balance of Growth and Risk

Selling insurance services the organisation undergoes a risk. This is why it is necessary to check the balance between expansion, sales and circumspection.

6. The Impact of Regulations

Regulations implemented by the governments play a pivotal role in shaping the attributes of the insurance markets. The size, competition and the product are examples that may be sensitive to legislations. (Meidan, 1982)

3.5.2 Critical Success Factors

Critical success factors (CSFs) are defined as “those things that must be done if a company is to be successful”. CSFs must be important to achieve overall corporate goals and objectives, measurable and controllable by the organisation to which they apply, relatively few in number, expressed as things that must be done, applicable to all companies in the industry with similar objectives and strategies, and Hierarchical. Few companies in the industry only attain competitive advantage, but failure can happen, if the CSFs are not accommodated which mean that the business objectives are not achieved. (Jaramillo and Marshall, 2004) The techniques in identifying critical success factors are either industry versus company or macro versus micro. At the most general level, the emphasis is on industry and macro issues in order to scan the environment to provide sources that will be the determinants of a firm and/or industry’s success. Methods include environmental scanning and socio-political consulting services. Industry-level analysis stresses the factors in the basic structure of the industry that significantly affect any company’s performance operating in that industry. Industry structure frameworks such as Porter's (1985) Competitive Strategy Framework are applied. Alternatively, micro-level consultations with industry experts and insiders to identify how firms compete are conducted. Company-specific studies investigate a target firm’s competitive strengths or weaknesses, or those variables that have been instrumental to a firm’s success in a particular industry. Methods used include subjective assessment at the functional level using strategy and capability checklists, and subjective managerial assessment of factors affecting performance during the firm’s history. Although specific guidelines are limited, it is suggested that criticality should be defined in terms of major activities, investment required, or profit impact. Thus service consumption and production have interfaces that are always critical to the customers' perception of the service and consequently to their long-term purchasing behaviour. In the service marketing literature, the management of these interfaces is called interactive marketing a service firm wants to keep its customers, interactive marketing, i.e. the marketing effect of the simultaneous service production and consumption processes, must be positive. Hence, for the long-term success of a service firm the customer orientation of the service process is crucial. If the process fails from the customers' point of view, no traditional external marketing efforts, and frequently not even a good outcome of the service process, will make them stay in the long run. Only a low price may save the situation, at least for a while. (Gronroos, 1998) In the financial services, Cooper and Edgett (1996) examined the critical success factors for new services and concluded that the CSFs are a defined, systematic, and formal new product process in place, clearly defined stages, activities specified within each stage, go/kill criteria specified for each decision point, a standard list of deliverables to each gate, and clearly specified and visible decision-makers at each gate. Another study conducted by Keck (1995) with the objective of identifying the critical success factors for captive insurance companies came to the results that extrinsic rewards, motivation to achieve peer recognition, office delegation, willingness to spend money to run the business effectively and goal-oriented management were the critical success factors. Freund (1988) suggested three critical success factors for insurance marketing. First is the ability to achieve critical mass volumes through existing brokers and agents. This can be accomplished through establishing strong relationship with intermediaries and focus on telemarketing and agent compensation. Performance indicators include policies in force, new business and share of business of intermediaries. Second, follow leader’s product within six months, which can be made via strategic joint ventures, sound underwriting skills and agility in IT development. This is measured by time to market, percentage of products launched and elapsed time to develop IT applications. Third is to manage product and product line profitability, which can be attained through improving cost accounting and controlling loss ratio.

3.5.3 Bancassurance Keys to Success

The reality of Bancassurance is multifaceted. A clear success in many markets such as France, Spain or Italy, it remains a marginal player in other countries. However, it is not so easy to understand why it fails to develop in the same way everywhere. Because the keys to success are numerous, variegated and sometimes surprising! It is also difficult to establish priorities and identify determining factors, because each country’s situation, history and culture contributes, and sometimes runs counter, to the studies devoted to this question. Figure 6 shows Critical success factors according to the research conducted by Electronic Data Systems.

FIGURE 6. Critical success factors

(Source: Electronic Data Systems, 2006)

According to Focus (2005), there appears to be no “miracle recipe” but a certain number of facts that they have been able to establish, after analysing a number of cases of Bancassurance around the world. Also, the study conducted by The Boston Consulting Group and Project Advisory Committee (1999) highlights the critical success factors for the Bancassurance. The critical success factors that are highlighted in these two studies can be loosely grouped into the following themes:

Aggressive goals

By setting aggressive targets, Bancassurers have exhibited strong levels of commitment to their insurance and investment businesses, making the substantial necessary up-front investments such as sales force training, new product development, and acquisitions, to achieve their goals.

Strong senior management leadership and support

Committed top management has been key to enable the cultural transformations of banks and to ensure the successful integration of non-traditional products into the bank product line. Because of the significant organizational changes required to adopt the Bancassurance model, senior management must be actively and consistently involved throughout the redesign and cultural change process.

Close integration between the insurance company and the bank

There is absolutely no doubt that this integrated model has enabled Bancassurance to establish a crucial competitive advantage. Bancassurance is based on a particularly efficient management model that is totally integrated with the banking business. A close and strategic integration of the insurance business with the bank allows a bank to more fully control the design and development of both products and sales and administrative processes. Insurance and investment subsidiaries of successful Bancassurers are not typically managed as separate, stand-alone businesses, but are managed as integral parts of the retail bank.

Simple, easy-to-understand products and a standardized, streamlined selling process

Bancassurers have understood that off-the-shelf insurance products would not be successful with their mass-market customers. Bancassurers customize policies not only to meet the basic needs of their customers, but also to standardize the sales process by making products easy for both customers and salespeople to understand. Banco Bilbao Vizcaya, a major Spanish bank, for instance, has developed a sales software program that is connected to its central insurance system. Within a few minutes of answering a series of scripted questions, the salesperson can receive an underwriting decision from the system, and the contract is printed, sold, and signed on the spot.

Integrated, generalist sales force

A key factor in the successful implementation of the Bancassurance model has been the tight integration of the sales force into the branches. Under the generalist model, sales professionals are trained to sell basic banking, insurance, and investment products. Experience at several European banks indicates that the best generalist salesperson can be as much as five times more productive than the average life insurance agent can.

Effective training programs

To prepare a generalist sales force to sell a broad range of products, successful Bancassurers have invested in focused training in the sales process and insurance and investment product knowledge. Training also includes any necessary preparation for licensing examinations.

Clear, meaningful incentives

Successful Bancassurers set branch sales objectives that include both traditional and non-traditional bank products to encourage branch personnel to give the new products “shelf space” and to focus on those products that are the most profitable for the bank.

Effective sales support systems

Given the increasing complexity of the product lines and the sales process, integrated information support systems must be developed to provide an effective customer experience. This means building appropriate customer databases and integrating information and transaction processing systems to provide customers with a seamless experience regardless of which products or services are being provided.

Insightful and effective customer segmentation

Purchasing criteria will vary by segment and by product, and it is critical for each bank to understand its target segments’ values and decision-making processes. In investments, consumers focus on performance and convenience, and switch mutual funds more often than insurance products. For insurance products, banks may have an easier time gaining share with young, uninsured consumers who have not yet developed brand loyalty. In insurance, consumers often rely on a strong brand name to convey history and stability. A challenge for banks is consumer concern about bank commitment to insurance, given bank mergers as well as a lack of history in the business.

Leveraging existing bank resources and capabilities

Because of the close integration between their banking and insurance operations, Bancassurers are able to reduce costs by sharing and leveraging resources across the two value chains.

3.5.4 Customer Satisfaction

Bancassurance operators have put the customer at the very heart of their thinking and development strategies. This means:

Providing a full range of financial products and services (banking and insurance) through a single sales network
Offering high-quality advice through readiness to listen and accurate information
Quickly meeting customer needs by a branch-based IT system but also easy access to the service, sometimes 24/7, with telephone support centres or Internet platforms
Providing know-how and follow-up (especially claims management) as good as the best traditional insurance providers

Chapter – 4 –

Methodology

The objective of the research is to provide an analysis for the Banccassurance partnership business model in Saudi Arabia , at the aim of evaluating its implementation and examining the value added to banks and insurers by adopting such business model.. The research project is based on a combination of in-depth, semi-structured interviews, a document search, and an extensive literature review and this approach known as “Triangulation”, (Bell, 2002). Triangulation refers to the practice of cross-checking or confirming data and findings by using more than one research method. The term comes from activities like navigation and cartography and literally refers to the practice of taking three points of reference to be sure of a particular location. I will triangulated my findings by checking the semi-structured interview data against data from documents like organizational memos, company annual reports, trade journals and press reports.

The reason for this multi-method approach was to ensure some level of accuracy in the research findings..As stated by Bryman (2003), the results of an investigation employing a method associated with one research strategy are cross-checked against the results of using a method with the other research strategy, which should result in greater confidence in the findings.

The reason for selecting semi-structured interviews as the qualitative research method is the adaptability they offer, something that cannot be achieved through questionnaires. Often, the way a respondent answers a question, e.g. tone of voice, body language etc. can provide information that would otherwise go unnoticed. In addition to that, the culture differences in KSA will be a huge a barrrier in using a quantiative research method such as self-completion questionnaires or survey. In other words, The quantiative research method are not taken seriously in KSA and the output of it could effect the finding of this research. Also, the semi-structured interviews should allow me to ensure a greater level of accuracy in the research findings. Also, many other studies into Bancassurance have been conducted using in-depth interviews with insurance and banks executives , and so I take some comfort in adopting a similar approach.

4.1 Primary Data

4.1.1 Sample

As I was interested in talking to Bancassurance Managers (In banks and insurance companies), Insurance Channel Managers (Insurance companies), Customer Service Managers (Banks) and Retail Managers (Banks), the sample frame was limited to one bank and an insurer as less than four banks are adopting the Bancassurance partnership business model. I have conducted 12 face-to-face interviews with managers. Although a sample of 1 out of a the 4 business relation that are adopting the Bancassurance pertnership business model doesn’t allow for the generalisations of the finding, it did prove enough to provide enough rich data to answer the research questions.

4.1.2 Pilot Interviews

The purpose of the pilot interviews was to evaluate the questions used in the interviews. I have used three of my colleagues for the pilot interviews, which they have been employed as Bancassurance Managers for both banks and insurers in KSA. The pilot was conducted as follows:

· Prepared 1st draft interview schedule

· Carry out 1st pilot interview

· Carry out 1st draft analysis of interview

· Prepare 2nd draft interview schedule

· Carry out 2nd pilot interview

· Carry out 2nd analysis of interview

· Commence interviews with survey sample

During the discussions with the pilot interviewees, the following items were examined (De Vaus, 2004):

v Variation

Do the pilot respondents give similar answers to questions?

v Meaning

Checking to see the respondents understand the questions

v Redundancy

Checking to see if there are any unnecessary questions

· Non-response

Checking if there are any questions that the pilot respondents were hesitant to answer

The pilot interviews proved to be very useful. Several questions were modified or replaced as a direct result of the feedback received from the pilot respondents. The pilot interviews were particularly useful in identifying questions that were too similar. It also showed that the questions are often taken as a means of opening a discussion on a particular subject, which then elicited much more detailed insights and opinions.

4.1.3 In-Depth Interviews

Interviews were conducted with six manager’s responsible for Bancassurance in a bank and anther six manager’s responsible for Bancassurance in an insurance company. The aim of these interviews was to criticaly eveluate the implemention of the Bancassurance partnership business model; and examine the value added to banks and insurers by adopting such business model, and identify key elements that make Bancassurance successful. The interviews were semi-structured with the various questions based on a number of areas developed via the literature review, in order to ensure that all of salient areas were covered. These questions were designed to uncover facts rather than opinions, which can often be unreliable, changeable and always subjective. Although the semi-structured approach should make recording and analysis of the interviews easier than that of a totally unstructured interview, the aim was to keep to interviews as informal as possible to allow the exploration of ideas that may not have been considered. The questions, or interview guide were prepared along the lines of those suggested by Bryman (2003):

· The topics covered were divided into the same subject areas as the literature review. This approach allowed for easier comparison to the findings of the literature review and also ensured that there was a reasonable flow to the interview.

· The questions asked, although not too specific, were designed to ensure that the research questions could be answered.

· Language used in the interviews was of a nature that the interviewees would understand.

· I made sure that no leading questions were asked. This is a fundamental point as with my background in the industry, it would have been easy to approach the interviews with preconceived ideas on what the outcome would be and therefore lead interviewees into giving the answers I expected.

· Before the actual interviews took place, I asked for and recorded background information on each of the interviewees, such as position, length of service, previous employment etc to allow for their responses to be contextualised.

4.1.4 Analysis

Bryman (2003) suggests the two most common strategies of qualitative data analysis are:

v Analytical Induction

“Where the researcher seeks universal explanation of phenomenon by pursuing the collection of data until no cases that are inconsistent with a hypothetical explanation (deviant or negative cases) of a phenomenon is found.”

v Grounded Theory

“Theory that was derived from data systematically gathered and analysed through the research process. Two central features of grounded theory are that it is concerned with the development of theory or out of data and the approach is iterative or recursive meaning that data collection and analysis proceed in tandem, repeatedly referring back to each other.”

The approach I adopted was loosely based on Grounded Theory; the data collected in each interview was coded, i.e. broken down into component parts. In addition, data was continuously compared to previously collected data so that emerging concepts could be elaborated upon in future interviews.

4.2 Secondary Data

The literature review is based on academic journals, professional reports and books that are relevant to the research area. The literature covers four main areas, which are the development of Bancassurance, the driving factors of Bancassurance, Bancassurance models, Bancassurance disadvantages, and Bancassurance success factores. I have triangulated my findings by checking the semi-structured interview data against data from documents like journals, professional reports, books and press reports.

4.3 Research Limitations

Mostly the lack of time and resources had their influence on this research project in many aspects. The scarcity of up to date published research about Bancassurance in KSA was a factor that affected drawing conclusion that are more comprehensive. The partnership business model is the focus; however when found relevant reference to the Bancassurance is made to allow establishing a broader view. Several issues will not be discussed in further detail due to the word limit.

Chapter – 5 –

Research Findings

I have interviewed six managers from a bank and six managers from an insurer, which they are responsibles for Bancassurance. Therefore, the research findings will represent both sidies.

5.1 The Development of Bancassurance

5.1.1 Definition of Bancassurance

Regarding the Bank, Four interviewees stated that the defination of Bancassurance is selling saving and protection plans through the bank network. According to them, the saving and protection plans are life insurance based on the investment and it is the type of products that fits with the bank services. The bank cannot be turned into an insurance company. However, the other two interviewees stated that the defination of Bancassurance is using the bank network to sell insurance products. They stated that Bancassurance is an international trend in financial services and the bank should take an advantage of such opportunity to maximize the use of the distribution network.

Regarding the Insurer, only one interviewee stated that the defination of Bancassurance is the selling of insurance products by banks through their own distribution channels. He reported that Bancassurance is an important distribution for the insurance companies and it is a world wide trend. The rest of the interviewees stated that the defination of Bancassurance is selling isurance products to the bank as a customer or using the bank as a distrbuter to our products. According to them, all business that could be done with or through the bank is a Bancassurance.

5.1.2 History of Bancassurance

All interviewees from the Bank and the Insurer reported that the level of Bancassurance business generated was below expections. Bancassurance business up to 2001 was only the saving and protection plans (Life insurance). However, the driving license insurance was added in 2002. Reponses from all can be loosely grouped into one of following themes:

1. Religion

Under the Islamic religion, conventional insurance is forbidden. The customers were looking to productas that comply with the aslamic relegion. Banks and insurers tried to overcome that in the saving and protections plans by change the investment choice for the customers to Islamic funds and market these plans as an investment plans. However, the customers were still questioning the life insurance. On the other hand, customers were only taken the driving license insurance because it is compulsory.

2. Awareness

There is still a huge lake of insurance awarenss in KSA.

3. Products

The number of insurance products that are offerd through the bank are limeted life insurance and the driving license compulsary isurance.

However, all interviewees reported that they believes that market is changing so fast and they could deal with these reasons.

5.2 The Driving Factors of Bancassurance

There have been a number of factors which have lead to the development and success of Bancassurance. All interviewees from the bank reported that as markets open up and competition escalates in KSA, the banks have to look beyond traditional activities to remain competitive. During the interviews, the Bank driving factors were discussed at length with each interviewee. Reponses from all can be loosely grouped into one of following themes:

· Bancassurance offers another area of profitability to banks with little or no capital outlay.

Despite the fact that Banks believe that competition is about to happen on a large scale in the KSA market, all agree that competition has an impact on their profits.

“In the Bancassurance partnership business model (distribution agreement), we do not need capital outlay at all and we will make mony from this relation.”

“ By Bancassurance, we are opening a new area of profitability to the bank.”

“We are maximizing the use of our net work by offering Bancassurance products”

· A desire to provide one-stop customer service.

“The bank should be turned into a financial supermarket where the customer can find all what he needs”

“ The customer is saving for his family future but he can not get the peace of mind without the life insurance. Therefore, it is a must that he could find all what he needs in one place”

“ One-stop service is the new trend in financial services”

“ The challenge is to offer all financial products that customer would need”

· Opportunities for sophisticated product offerings.

“We need to have a competative advantge by adopting the Porter differentiation strategy”

“ The customer awareness is increaseing in KSA and he is looking to the bank that are offaring more value added products”

“ We need to have a product lines that would attract more customers”

· Diversify and grow revenue base from existing relationships.

“The objective is to increase the income from the existing relation and we do that by offering a range of different services.”

“The other big thing is that it provides us with an additional income stream. For instance, we use the Bancassurance as income source through the added value.”

“We need to maximize our profit from the existing relation with our customers"

· Diversify risks by tapping another area of profitability.

“ We are reducing the risks by our diversification strategy”

“ By diversifying the sources of income you reduce the risk”

· The realisation that insurance is a necessary consumer need.

“Every one need insurance”

“ There is a big trend in the KSA market toward insurance”

“ Many insurance services has become compulsory in KSA”

· Bank aims to increase percentage of non-interest fee income

“ The big challenge for banks in KSA is to increase the non-interest fee income”

“It is difficlut to increase the non-interest depositis in KSA under the current market conditions. Therefore, Banks needs to look for the non-interest fee income”

On the other hand, all interviewees from the insurer reported that as the KSA insurance markets open up and competition escalates, the insurance companies have to look beyond traditional distribution channels to remain competitive. They stated similar reasons for why insurance companies needs Bancassurance:

· This new distribution network will allow the insurance company to extends its customer base.

“ The partnership business model will allow us to increase our customer abse.”

“ As much as the bank will sell the Bancassurance products our customer base will increased”

· Minmizing the risk through diversifiication.

“ The diversification strategy in distrubition channel will minmize the risk”

“Having four channels is better than having three”

· Low distribution costs.

“ The best channel ever”

“ The distribution costs on Bancassurance are much lower than the other channels”

Both parties believe that the value added from these driving factors would increase the competitive advantage for a bank and insurer in Saudi Arabia.

5.3 Bancassurance Model

All interviewees reported that the Bancassurance relation can be strauctured into the follwong forms:

· The Bancassurance partnership business model (distribution agreement), the insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. The average commision paied from insurance companies to banks was a range from 8% to 20%, with the average being 14%.

· The captive model where a bank starts from scratch by establishing a new insurance company wholly owned by the bank.

According to them, the most commen model used is the Bancassurance partnership business model, as the majority of banks prefer it. During the interviews, the Bancassurance partnership business model advantages were discussed at length with each interviewee. Reponses from all can be loosely grouped into one of following themes:

1. No capital investment reqiured.

2. Operations start quickly.

Just one interviewee reprted anther reson, which is the bank can terminate the relationship at any point of time without losing monay.

On the other hand, all interviewees from the insurer reported that same advantges like the bank members in the interviews. However, two interviewees stated another reason, which is the insurer under this business model will not limet the relation to one bank. This should allow the insurer to evaluat the relation with different banks and foucs on the profitable one.

5.4 Bancassurance Disadvantages

During the interviews, the Bancassurance disadvantages were discussed with each interviewee. Reponses from all can be loosely grouped into one of following themes:

1. The lack of shared vision

As the bank staff reported, the insurance company is looking only for the prmium. However, the insurer staff reported that banks is looking for the value add to increase customer saticfaction.

2. The differences in corporate culture,

As they stated, the corporate culture is different between the two organizations and this causes a lack of coumincation.

3. The lack of innovation.

Banks staff reported that insurer are not willing to come up with new products that would attract more customers to banks. Insurers are only focusing on the sample product. However, insurer staff reported that the bank is not cooprating to make this happen

4. Customised products.

As they stated, insurers are copying the international products and they are not trying to develop customized products for the KSA culture.

However, only two of the interviewees reported that they can not see any disadvantages from their relation with insurers via Bancassurance.

5.5 The Bancassurance Success Factors

During the interviews, the Bancassurance success factors were discussed at length with each interviewee. Reponses from all can be loosely grouped into the following themes:

Offer products close to traditional bank products; blend features

“The insurer should work closely with the bank to develop product that would complement the traditional bank products.”

“The insurer should be focusing in creating insurance products with blend feature.”

Market to customer views of wants and needs

“We need to market the idea not the product.”

“The marketing activities should be focusing on the customer’s views of wants and needs.”

Leverage bank customer knowledge and relationships actively

“We have to leverage our bank customer knowledge.”

“By leveraging customer knowledge and relationships actively we will able to increase our performance.”

Build specialized marketing support

“The marketing support is the key to success.”

“We achieve our goals without a specialized marketing support.”

Build multi-product customer relationships

“We have to build a multi customer relation through different products.”

“Creating a multi product relation with the customers.”

Differentiate customer segment marketing

“The marketing activities should take in consideration the different customer segments.”

Base marketing on service over price

“We should focus in our marketing activities on the service over the price.”

“In Bancassurance, we are offering service.”

A well integrated opartion

“ A well integrated opration is the key to sucsses.”

“ An integrated opration would be a competitive advantage.”

On the other hand, all interviewees agreed that Bancassurance will have a succssful future in KSA. They all stated that it will continue to grow rapidly in KSA with the increase of insurance awareness in KSA. They also stated that banks and insurers should adopt these keys to make this relationship successful.

Chapter – 6 –

Analysis of Research Findings

6.1 The Development of Bancassurance

6.1.1 Definition of Bancassurance

As described in the literature review, a great many people have tried to come up with a comprehensive definition of the term "Bancassurance". It is often defined as the distribution of insurance products by banks but, in fact, it is much more than that, especially if we consider the history and practices of all the different Bancassurance operators around the world. According to a periodical issued by the Swiss Reinsurance Company (Swiss Re No.7/2002), Bancassurance is defined as the distribution of insurance products by banks.

The research results show that, Four out of six interviewees from the bank, they are understanding the Bancassurance as the selling of saving and protection plans through the bank network. They can see only Bancassurance as life insurance products only. The other two interviewees from the bank stated that the defination of Bancassurance as described in the literature review. Regarding the Insurer, only one interviewee stated that the defination of Bancassurance as described in the literature review. The rest of the interviewees were understading the defination of Bancassurance to be dealing with the bank as customer or as a distributor to their products.

It is clear that there is a misunderstanding for the definition of the term "Bancassurance" in both sides. The lack of understanding for the concept of Bancassurance would affect the way that both parties would adopt the relation. On the bank's side, the understanding of the definition are limiting the way that banks are looking to Bancassurance as life insurance only. However, the literature review does not limit Bancassurance to life insurance only. On the other hand, the insurer is looking to the Bancassurance as a mixed relation between customer relation and distributor relation. However, there is huge difference between the two relations. As described in the literature review, Munich Re (2001) points out that Bancassurance is the provision of insurance and banking products and services through a common distribution channel and/ or to the same client base.

6.1.2 History of Bancassurance

As discussed in the literature review, the Bancassurance model was a succssful business model in many countries. However, there are no avilable data to eveluate the history of such a model in KSA. The research results show that all interviewees agreed that the implemaination of the Bancassurance business model was not succssful for three reasons, which are Religion, Awareness, and Products. However, if we linked those reasons to the understanding of the Bancassurance definition we will understand the reasons behind that. The KSA banking experience was based on life insurance as discussed in the literature review and that affected the development of the Bancassurance in KSA. Adopting the western Bancassurance products without taking in consedration the culture difference also led to that.

According to the Economist Intelligence Unit (2006), a clear understanding of the local culture is critical in exploring new markets. Life insurance activities have not been popularly practiced in KSA insurance market, this could be attributed to different factors such as religion, culture, and costs, according to Swiss Re (No.5/2006) life insurance represent 1.2% from the total KSA insurance premiums in 2005. Understanding the local culture is vital to the successful implementation of Bancassurance.

As discussed in the literature review, the new insurance regulation along with the increase in the number of compulsory insurance product would have an impact on the Bancassurance business in KSA. On the other hand, all interviewees reported that they believe the market is changing so fast and they could deal with these reasons.

6.2 The Driving Factors of Bancassurance

The follwing driving factors were identified via the interviews with the bank members:

· Bancassurance offers another area of profitability to banks with little or no capital outlay.

· A desire to provide one-stop customer service.

· Opportunities for sophisticated product offerings.

· Diversify and grow revenue base from existing relationships.

· Diversify risks by tapping another area of profitability.

· The realisation that insurance is a necessary consumer need.

· Bank aims to increase percentage of non-interest fee income

As discussed in the literature review, these findings concur with those of Estrella (2001) , Swiss Re, (No.7/2002), Munich Re (2001), Saunders and Walter (1994), and Capita (2006). The emergence of Bancassurance contributed to overall efficiency, an increase in economies of scope and an increase in productivity of both banks and insurance companies in some of the European countries. Similarly, what Swiss Re, (No.7/2002) reported, that Bancassurance has led to lower, report or stable distribution cost compared with career agents in Asia. Economies of scope may arise from both the production and consumption of financial services (Saunders and Walter, 1994). The combination of banking with insurance (Bancassurance) is an important change and offers in principle large economies of scope, in terms of sales channels, product development, risk management, marketing, etc. However, Munich Re (2001) added more reasons for why banks have decided to enter the insurance industry area: (1) Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts; (2) The need for more efficient utilization of branches and bank employees is today as pressing as ever; (3) There is a strong need for customer loyalty to an organization to be enhanced; and (4) Bancassurers can have a competitive advantage over traditional insurers (non-bancassurers), derived from the provision of customer service through automated teller machines (ATMs)

On the other hand, the follwing driving factors were identified via the interviews with the insurers members:

· This new distribution network will allow the insurance company to extends its customer base.

· Minmizing the risk through diversifiication.

· Low distribution costs.

As discussed in the literature review, these findings concur with those of Donne (2003) and Swiss Re, (No.7/2002). The insurance company will reap the benefits of this synergy by exploiting the sources of new business made available by the branch network of the bank to geographically distant clients. The insurance company must aim at taking full advantage of the customer data base and at the same time realise that it can now benefit from this cheaper distribution network. In addition, a wider range of products will be made available, including products which were impossible to be developed and promoted through the bank’s channels before the venture. Last but not least, the insurance company should also be in a position to exploit the economies of scale and low marginal costs. According to Donne (2003) and Focus (2005), the following factors would be added the finding from the interviewes with the insurer members: (1) Shared services with banks; (2) Develop new financial products more efficiently in collaboration with their bank partners; (3) Establish market presence rapidly without the need to build up a network of agents; (4) Obtain additional capital from banks to improve their solvency and expand business; and (5) The insurance company often benefits from the trustworthy image and reliability that people are more likely to attribute to banks. Equally, Donne (2003) observed that banks have what insurers want: distribution, branch network, customer base, databases, regular contact, brand, reputation and customer loyalty.

To sum up, these draiving factors represent the advantages of the Bancassurance relation, which is the bases behaind such strategic relation. The economies of scale and scope are an important driving factor behained this strategic relationship. However, It appears that both parties are not fully aware of the advantages of this relation. This lack of awareness for the benefits of this relation would affect the way that both parties are welling to contribute to make this relation works.

6.3 Bancassurance Model

The follwing models were identified via the interviews with the bank members:

· The partnership business model (distribution agreement)

· The captive model ( Financial Services Group)

As discussed in the literature review, these findings concur with those of Smit and Lugt 2000; Swiss Re No.7/2002; Florido 2002; Nigh and Saunders 2003; and Fitch 2006. However, all range of Bancassurance business models mentioned above that exists in world falls three main categories. The third one is the Joint Ventures model.

Also, we found out from the interviews that the most commen model used in KSA is the Bancassurance partnership business model. The advantages of this model are:

1. No capital investment reqiured.

2. Operations start quickly.

Another interesting point was that only one interviewee reported another reson, which is the bank can terminate the relationship at any point of time without losing significant financial loss. As discussed in the literature review, these findings concur with most of the literature review.

As discussed in the literature review, the Bancassurance model shows the ways in which the banks and insurance companies enter into Bancassurance. It refers to the operating structures for the banks to market insurance products (Smit and Lugt 2000; Swiss Re No.7/2002; Florido 2002; Nigh and Saunders 2003). The choice of a suitable model depends on the related laws of nations and the objective conditions of both players. In other words, the model adopted would be affected by the understanding of the definition and the draiving factors behind forming this strategic relation.

6.4 Bancassurance Disadvantages

The follwing disadvantages were identified via the interviews :

1. The lack of shared vision

2. The differences in corporate culture,

3. The lack of innovation.

4. Customised products.

However, only two of the interviewees reported that they can not see any disadvantages from their relation with insurers via Bancassurance.

As discussed in the literature review, these findings concur with those Foucs (2005). The advantages and disadvantages of Bancassurance depandes on the way banks and insurers structure their relation. Thousands of pages of analysis have been written describing the different techniques and methods used to make the above ventures successful. However the obstacles to overcome include the cultural differences between the bank and insurance employees, and concern the different ways in which these two function. According to Foucs (2005), we could sum up the disadvantages of the other two Bancassurance models identified on the literature review into the following:.

· Joint Ventures

1. Difficult to mange on the long term

2. Potential confliact

· Captives ( Financial Services Group)

1. Substantial investment

As we can see from the above, the level of integration decreses the disadvantges and this should be linked to the understanding of the definition and the driving factors behind forming this strategic relation. However, we should notice that many pepole belive that all the adveantges are in favour of the bank and disadvantges are only for the insurance companies.

6.5 The Bancassurance Success Factors

The follwing success factors were identified via the interviews:

· Offer products close to traditional bank products; blend features

· Market to customer views of wants and needs

· Leverage bank customer knowledge and relationships actively

· Build specialized marketing support

· Build multi-product customer relationships

· Differentiate customer segment marketing

· Base marketing on service over price

· A well integrated opartion

As discussed in the literature review, Services have not been easy to define (Lovelock, 1999). A widely mentioned definition of services has been provided by Kotler “A service is any activity or benefit that one party can offer to another, which is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product”. Gronroos,(1998), defines the services as “an activity or series of activities of more or less intangible nature that normally, but not necessarily, take place in interactions between the customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems.” Services are often characterized as heterogeneous, as it is difficult to achieve standardization of output; services are perishable and cannot be stored; and a customer always has access to or the use of a service, but not ownership of the activity or facility, (Cowell, 1985). According to Meidan (1982, insurance service is distinguished by different factors, which are Perish ability, Inseparability, Heterogeneity, Fluctuation in Demand, Balance of Growth and Risk, and The Impact of Regulations. However, critical success factors are defined as “those things that must be done if a company is to be successful”. According to Jaramillo and Marshall (2004), the techniques in identifying critical success factors are either industry versus company or macro versus micro. At the most general level, the emphasis is on industry and macro issues in order to scan the environment to provide sources that will be the determinants of a firm’s and/or industry’s success.

The keys to success for Bancassurance are numerous, variegated and sometimes surprising! It is also difficult to establish priorities and identify determining factors, because each country’s situation, history and culture contributes, and sometimes runs counter, to the studies devoted to this question. As discussed in the literature review, these findings concur with those Focus (2005) and The Boston Consulting Group and Project Advisory Committee (1999). However, the following themes would be added to the finding from the interviews:

· Aggressive goals

· Strong senior management leadership and support

· Effective training programs

· Clear, meaningful incentives

· Effective sales support systems

The Bancassurance operators have put the customer at the very heart of their thinking and development strategies. The bank and the insurer need to have a full awareness for the key sucsess factors of this relation to maxmize the outcome.

Chapter – 7 –

Conclusions

This dissertation has focused on following areas of Bancassurance business model:

· The Driving Factors of Bancassurance

· Bancassurance Model

· Bancassurance Disadvantages

· The Bancassurance Success Factors

The view is to understand how a Bank and an Insurer under the partnership business model in KSA are viewing these areas. The aim therefore has been to answer four questions:

• Why do Saudi banks develop a strategic business relationship with insurers via Bancassurance?

• What are the disadvantages of this relationship, for both insurers and banks?

• Can Bancassurance increase the competitive advantage for a bank and insurer in KSA through value added?

• What are the key elements to make Bancassurance partnership model successful?

These areas may appear to be independent of each other; however, the research shows that they are intrinsically linked in many ways.

The first objective of this research project is to identify why Saudi banks develop a strategic business relationship with insurers via Bancassurance. The combination of banking with insurance (Bancassurance) is an important change and offers in principle large economies of scope, in terms of sales channels, product development, risk management, marketing, etc. The emergence of Bancassurance contributed to overall efficiency, an increase in economies of scope and an increase in productivity of both banks and insurance companies. The driving factors represent the advantages of the Bancassurance relation, which is the bases behaind such strategic relation. The economies of scale and scope are an important driving factor behined this strategic relationship. Through the interviews many driving factors for the bank and the insurer were identified. However, the literature reviews did allow us to identify more driving factors. These factors are important to be taken in consideration by the bank and the insurer as motive for them to develop a strategic business relationship with insurers via Bancassurance. Moreover, the main driving factors for both the bank and the insurer are to create a competitive advantage in the market. This did prove that that Bancassurance could increase the competitive advantage for a bank and insurer in KSA, which was the third objective of this research project. In addition, we have identified that the advantages of this relation are depending upon the way banks and insurers are structuring their relation. Through the interviews and the literature reviews, we were able to identify different business models of Bancassurance that could be adopted by the two parties to structure their relation. However, we were able to identify from the literature reviews that the level of integration on the Bancassurance relation has an impact on the advantages and disadvantages of such relatioship. The view of this research project is to understand how a Bank and an Insurer under the partnership business model in KSA are viewing these areas. Therefore, we were able to identify from the interviews and the literature reviews the advantages and disadvantages of the Bancassurance relation under the partnership business model. That was the second objective of this research project. The final objective of this research project is to identify the key elements to make Bancassurance partnership model successful. This study has identified, throughout the interviews, a number of crucial factors for successful services in Bancassurance. However, the literature reviews did allow us to identify more elements. These elements are important and it should help both parties to maximize the outcome of the Bancassurance relation under the partnership business model.

7.1 Recommendation

The Banks and Insurance companies in KSA need to move beyond the early stage toward more integrated business model. This research project shows throughout the interviews that there is a lack of understanding for the definition of the Bancassurance, a limited knowledge for the diriving factors of Bancassurance, short term vision for the strtegic relation and unclear awareness for the key succsse factors.

To have a sucessful implemintation of the Bancassurance strategic relation, both parteies need to have a clear understanding of the definition of Bancassurance. After that, they both need to identify their driving factors for forming this strategic relation. The best way of entering Bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. Therefore, I would recommend the following roadmap for both banks and insurer to creat a sucssful strategic relation via Bancassurance:

Ø Define the strategic objectives and goals of this relation (driving factors)

Ø Evaluate and select the appropriate Bancassurance model that meets the Company’s goals

Ø Develop criteria for evaluating distribution partners

Ø Evaluate and rank partners

Ø Negotiate and sign agreement that should have a fair Financial terms and conditions that will make all parties believe the financial terms and conditions are fair as well as attractive.

Ø Detail business plan that is adopting a phased approach in the implementation.

Ø Define fiscal targets

Ø Identify impact on:

1. Organization

2. Sales capabilities

3. IT systems

4. Front-end and back-office processes

Ø Detail customer needs and behaviours

Ø Refine Bancassurance products to meet customer needs, Keep the product simple, and sell the benefits.

Ø Deploy capabilities required for selling and delivery of Bancassurance products

However, There is no single way of entering into Bancassurance which is “best” for every insurer and every bank, Munich Re (2001). The choice of a suitable Bancassurance model depends on the particular cultural and regulatory environment of the host country. As in all business situations, a proper strategic plan drafted according to the company’s internal and external environmental analysis and the objectives of the organization is necessary before any decision is taken.

There is no one magic formula to Bancassurance. The model chosen has to be consistent to the overriding strategy for Bancassurance and objectives for this particular business. Execution excellence is the key to success. Banks and insurers should focus on what is important and adopt a relentless ambition to build a leading Bancassurance business.

The final recommendations are on further research. This study primarily focuses on specific areas on the Bancassurance business models. Future research may look deeper into more specific issues in the KSA market such as the examination of the ‘gaps’ between customers’ expectations and perceptions, channel choice, cultural influences, the Islamic Bancassurance ”Bank Takful” etc., which presumably should also be helpful for the Bancassurers in the industry.

7.2 Reflection

The process of clearly defining the research objectives and preparing a time plan, both as part of the project proposal, were the key to the project’s success as it meant there was always a clear focus. However, I have changed sub-questions of the research to focus more on the research objectives based on the tutor comments of my proposal. I have also included more justification for the reason for choosing such research methodology as per the tutor comments. The issues encountered impacted the length of time taken to revise the research based on these comments.

On the other hand, the main issue encountered was the availability of relevant research in the chosen area for the Saudi market. The Bancassurance is still a new business model in Saudi Arabia as it is only 7 years old and most of the banking experiences on it were not successful in general

The final issue is the potential for bias during the research, particularly as I am working for the last 7 years in Bancassurance business and the last 4 years of them as Bancassurance manager with two banks and most recently for an insurance company. Therefore, I have tried to avoid leading questions in the interviews and I maintained an objective approach when conducting the analysis. However, as Gavron (1996) found, ‘It is difficult to see how this can be avoided completely, but awareness of the problem plus constant self-control can help’.

Regarding ethics, confidentiality was important and I have agreed with those that I have already interviewed that individuals and company names will not be mentioned in the dissertation.

Overall, I found the whole project experience to be mostly an enjoyable one. I have improved my time management, planning, self-motivation and research skills and hope to use these to my advantage in my career in the future.

Chapter – 8 –

Bibliography

Al-Hamidy, A (2006), ‘Banking sector issues in Saudi Arabia’, BIS Papers No 28 August 2006.

Arig, (2003) Annual Review of the Arab Insurance Market 2003, Unpublished Paper. Bahrain: Arig.

BELL, J and C OPIE (2002), Learning from Research: Getting more from your data, Oxford, OUP.

Benoist, G. (2002) ‘Bancassurance: The new challenges’ The Geneva Papers on Risk and Insurance Vol. 27 No. 3 (July 2002), pp. 295-303.

Boyd, J.H., Graham, S.L., and HEWITT, R.S. (1993) ‘Bank holding company mergers with non-bank financial firms: Effects on the risk of failure’ Journal of Banking and Finance 17 (1993), pp. 43-63.

Bryman, A. and Bell, E. (2003), Business Research Methods, Oxford: Oxford University Press.

Capita Insurance Services (2006), Structural Change in the General Insurance Industry, Unpublished Paper, UK: Capita Insurance Services Ltd.

Capgemini Analysis, (2006), WORLD INSURANCE REPORT: 2007, Unpublished Paper, Capgemini and the European Financial Management & Marketing Association (EFMA) publications.

Carow, K. A. (2001) ‘City corp.-Traveller group merger: Challenging barriers between banking and insurance’ Journal of Banking and Finance 25 (2001), pp. 1553-1571.

Cooper, R., and Edgett, S. (1996) ‘Critical success factors for new financial services’ Marketing Management, Vol.5, No.3, pp-26-37.

Cowell, D., (1985), The Marketing of Services, Heinemann, London.

Daniel, J, 1995, Les Enjeux de la Bancassurance, Second edition, Editions de Verneuil, Paris.

Donne, Nicholas (2003) Exploiting the Synergies of Banks and Insurers to the Insurers’ Advantage, Eyeing World- Class Standards In Insurance- The Asian Approach, CEO Insurance Summit Paper, Unpublished Paper, Singapore: Insurance Communications Pte. Ltd.

Electronic Data Systems, (2006), Fit to travel? Unpublished Paper Prepared for the Global Financial Leadership Forum, New York: November 2006.

Economist Intelligence Unit, (2006), From products to services, Unpublished Paper LONDON: The Economist Publishing.

Florido, Miguel (2002), Bancassurance in Europe, Windsor (Connecticut, USA): LIMRA Europe Ltd.

Fitch (2006), Bancassurance or not Bancassurance? Unpublished Paper, Fitch Ratings Special Report, (February 2006).

Focus (2005), Analysis of Bancassurance and its status around the world, Unpublished Paper SCOR Group publication (October 2005).

Freund, Y. (1988) ‘Planner's Guide: Critical Success Factors’ Planning Review Vol. 6, No.4, pp. 20-25.

Genetay, N., and P. Molyneux, (1998), Bancassurance , London: Macmillan Press, Ltd.

Gabbott M. and Hogg G. (1994) ‘Consumer behaviour in services: a review’ Journal of Marketing Management, Vol.10, No 2. pp. 311-324.

Gavron, H. (1996), The Captive Wife, London: Routledge & Kegan Paul.

Gronroos, C., (1998) ‘Marketing services: the case of a missing product’ The Journal of Business & Industrial Marketing, Vol.13, No.4, pp322-343.

Huizinga, H. (1993), Banking and Insurance: An Ideal Combination? , London: The Insurance Perspective.

Institute of Banking, IOB, (2003) Annual survey of Saudi Insurance market Unpublished Paper, Riyadh: IOB.

Jaramillo, F., and Marshall G.W., (2004) ‘Critical success factors in the personal selling process’ The International Journal of Bank Marketing, Vol. 22, No.1, pp. 9-25.

Keck, K., Leigh, T., and Lollar, J., (1995) ‘Critical success factors in captive, multi-line insurance agency sales’ The Journal of Personal Selling & Sales Management, Vol.15, No.1 pp. 17.

Kotler, Philip (2003), Marketing Management (11th Ed.), New Jersey: Pearson Prentice Hall.

Lovelock, C., Vandermerwe, S. and Lewis, .L (1999) Services marketing a European perspective, London: Prentice-Hall.

Maysami, R. and Kwon, W., (1999) ‘An analysis of Islamic takaful insurance: a cooperative insurance mechanism’, Journal of Insurance Regulation Vol.18, No.1, pp. 109-132.

Meidan, A., (1982) ‘Marketing Strategies, Organisation and Performance Control in Insurance’, The Journal of Risk and Insurance, Vol. 49, No. 3. pp. 388-404.

Munich Re Group (2001), Bancassurance in Practice, Unpublished Paper Germany: Munich Re Group Publications.

Nadkarni, S (2006), “Shopping around”, Policy The Voice of Middle East Insurance, Vol 3, No. 6 (Nov/DEC 2006), p. 22-24.

Nigh, John O. and Mark V.T. Saunders (2003) Bancassurance Around the World, Financial Service Emphasis, Philadelphia: Tillinghast.

Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press.

Robert Daly ( 2003), “Bancassurance in Europe”, Unpublished Paper, Society of Actuaries.

Saunders, A. and Ingo Walter. (1994). Universal Banking in the United States, Oxford: Oxford University Press.

Smit, Marijn and Johan van der Lugt (2000) Bancassurance: A Match made in Heaven? London: ABNAMRO Equities (UK) Limited.

Staikouras S.K., (2006) ‘Business opportunities and market realities in financial conglomerates.’ The Geneva Papers on Risk and Insurance Vol 31, 124-148. The Geneva Association.

Swiss Re NO.7 (2002), Bancassurance developments in Asia –shifting into a higher gear, Unpublished Paper Zurich: Swiss Re Research & Publications.

Swiss Re No.5 (2006), World insurance in 2005: moderate premium growth, attractive profitability, Unpublished Paper Zurich: Swiss Re Research & Publications.

Swiss Re NO.7 (2006), Securitization – new opportunities for insurers and investors, Unpublished Paper Zurich: Swiss Re Research & Publications.

Appendix A

Potential of the Saudi Arabian Insurance Market from a Reinsurance Perspective

Source: Munich Reinsurance Company, the Saudi Arabian Insurance Industry Summit, February 2006

Saudi Arabia’s non-life penetration (premiums in percentage of GDP) is below global trend

Saudi-Arabia‘s premium growth is still behind other countries of the region

Appendix B

The Saudi Economy: 2006 Performance, 2007 Forecast

Source: www.samba.com

Appendix C

Primary Future Market Threats (distributor view)

Source: Capgemini Analysis, 2006

Appendix D

Insurance density and penetration in the emerging markets in 2005

Source: Swiss Re No. 5/2006

End

International Marketing

2012-02-16T09:11:00.001+03:00

"A thorough understanding of culture is pivotal to effective international marketing but culture frequently is under theorised and conceived in reductionist simplistic dualisms."

Critically discuss this statement with reference to examples. In your answer you will need to review and examine how culture is conceptualised in text books, journal articles and in marketing practice. All answers to this question should consider the implications for development international marketing theory and the utility of theory for marketing practice.

2. Introduction

Companies sometimes assume that what works in their home country will work in another country. They take the same product, same advertising campaign, even the same brand names and packaging, and with virtually no chance to try to market it the same way in another country. The result in many cases is failure. Why? Well, the assumption that one approach works everywhere fails to consider differences that exist between countries and cultures. This will takes us to have anther look to the following statement, “A thorough understanding of culture is pivotal to effective international marketing but culture frequently is under theorised and conceived in reductionist simplistic dualisms.”, and critically discuss it with reference to example. My discussion will be based upon the material covered on the module and my own example to support the arguments. In my analysis, I will examine how the culture is conceptualised in the text books, journal articles and in marketing practice. However, the analysis will consider the implications for development international marketing theory and the utility of theory for marketing practice. Finally, I will put my recommendation and conclusion.

3. A Borderless world

The world is rapidly shrinking with the advent of faster communication, transportation, and financial flows. Products developed in one country—Gucci purses, Mont Blanc pens, McDonald’s hamburgers, Japanese sushi, Chanel suits, German BMWs—are finding enthusiastic acceptance in other countries[1]. Thomas Middelhoff of Germany’s Bertelsmann AG, which purchased

U.S.

publisher Random House, put it this way: “There are no German and American companies. There are only successful and unsuccessful companies[2].” Companies that choose to supply globally need to be aware of the particular opportunities and threats that globalization presents to them. International corporation include popular names like: Citicorp, Coca Cola, IBM and Exxon receive more than 50% of their annual profit from oversees operations. Andrew S. Grove, chairman of Intel Corporation, “You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or Die”. Globalization of the world economy is a market condition that demands bold offensive strategies to protect positions previously won. In other words, companies should adapt the globalization or it will not be able to compete in the era. Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000. In fact, these companies today control one-third of all private-sector assets and enjoy worldwide sales of $6 trillion. International trade now accounts for a quarter of U.S. GDP, up from 11 percent in 1970[3].Many companies have conducted international marketing for decades such us Nestlé, Hallmark, Coca-Cola, Procter & Gamble’s and many others but do the result of their international marketing activities are the same? The answer is no. The assumption of one approach works everywhere fails to consider differences that exist between countries and cultures.

4. Aspects of Culture

Culture is the patterns of behaviour and thinking that people living in social groups learn, create, and share, where culture distinguishes one human group from others. The people's culture includes their beliefs, rules of behaviour, language, art, technology, styles of dress, ways of producing and cooking food, religion, and political and economic systems. In the following I will highlight the main aspects of culture:

Material culture

It represents all physical which are made and it is useful guide to the society’s standard of living.

Educations

The level of education in a new market has a large implication on the promotional campaigns.

Religion

The religions differences must be respect on both marketing and business practice. The sensitivity of such differences could cause the company a big fail to enter such market.

Social organization

The suitable product on a developed country sometimes it is not the same on a less developed country.

Language

Yes, English is international language but there many other language around the world. On the advertising, If the translation is not conducted by a native speaker you business could be negatively affected.

Aesthetics

The standard of public taste is different from country to anther. Many advertising for medical products on the Middle East was not accepted for this reason.

Ethics and mores

Ethics and mores are generally driven by religion and many examples could be observed about that.

Political system

The political systems in the host country need very careful examinations where the marketing strategy involves the setting-up of revenue-earning assets overseas.

Economic systems

These are usually the out come of the political stances of one kind or anther.

Legal system

Many of the third world countries have become more attractive for investors when they reduced the entry barriers.

McDonald’s has been highly successful in markets outside the

United States

, partly because it has been adept in altering its menu of offering to cater to local tastes. Why? The answer will be the local culture. This objective framework (Leaping) has a negative aspect, which culture incompatibility. By ignoring this risk you could lose. Therefore, companies should take in consideration the culture differences before they start with international marketing activities. Understanding of culture is pivotal to effective international marketing and it has a critical impact on the international marketing strategy.

5. Characteristics of culture

Anthropologists commonly use the term culture to refer to a society or group in which many or all people live and think in the same ways. Likewise, any group of people who share a common culture—and in particular, common rules of behaviour and a basic form of social organization—constitutes a society. Thus, the terms culture and society are somewhat interchangeable[4]. However, the main characteristics of culture are:

Culture is prescriptive: It prescribes that kinds of behaviour considered acceptable in the society. Same of these characteristics create problems for those products not in acceptable within the consumer’s cultural beliefs.
Culture is socially shared: Culture cannot exist by itself as all the members of a society must share it.
Culture is learned: Culture is something that can not be inherited genetically but it must be learned and acquired.
Culture facilitates communication: Culture is one useful function to facilitate communication. However, culture may also impede communication across groups because of a lack of shared common culture values. This is one reason why a standardized advertisement may have difficulty communicating with consumers in foreign countries.
Culture is enduring: because culture is shared and passed along from generation to generation, it is relatively stable and somewhat permanent. Old habits are hard to break, and people and people tend to maintain its own heritage in spite of continuously changing world.

Culture is based on hundreds or even thousands of years of accumulated circumstances. Each generation adds something of its own of culture before passing the heritage on to the next generation. However, culture is constantly changing it adapts itself to new situations and new sources of knowledge.

The work of Hofstede (1994) and Trompenaars and Hampden-Turner (1997), although criticised in terms of methodology and recency, does illustrate major cultural differences between emerging and developed markets[5]. Schutte and Ciarlante compared Hofstede’s and Trompenaars dimensions between Asian and Western markets and found that of Hofstede’s dimensions, Asian markets reflected higher power distance, and greater collectivism than in western markets[6]. They found with Trompenaars dimensions that Asian markets reflected more focus on relationships, on group rights, on the indirect expression of emotions and a view of status being due to position rather than to individual efforts. Subsequently Hofstede and Bond came up with an Asian cultural dimension of Confucian Dynamism[7]. These findings were supported by another study that compared the fourteen least developed with the fourteen most developed countries by Fletcher and Melewar[8]. These findings are illustrated in Table 1.

Table 1. Comparison between Developed and Emerging Markets

(Source: Fletcher and Melewar)

This is shows up to what extent culture understanding is pivotal to effective international marketing.

6. The impact of Culture on International Marketing Strategy

There is culture influence on marketing strategies and this could be observed from many examples. Standardization or adaptation, these are the two extreme of the international marketing strategies. In the following, I will try to give examples of the culture impact on the main component for the marketing strategy:

6.1 Product

According to Dubois[9], marketers designing product strategies have to take the impact of culture into account mostly in the area of positioning, product presentation, and packaging. How marketing efforts interact with a culture determines the success or failure of a product. This strategy could be impacted by the material culture of the host country. For example, General Foods squandered millions trying to introduce packaged cake mixes to Japanese consumers but they failed because they have not considered the culture differences. The company failed to note that only 3% of the Japanese homes were equipped with ovens[10]. Anther example, Campbell Soups lost $30 million in Europe before it accepted the idea that British and

U.S.

soup consumers were different in three important ways[11]:

1. British soups consumers have different taste preferences. Campbell soups made no attempt to modify the taste of their soups for the British palate

2. British soup consumers had not been educated to the condensed soup product concept. Because of the smaller can size.

3. British soup consumers did not respond the same way to U.S. advertisement as

U.S.

consumer did.

If we talk about a religion like Islam for example, we will notice that it is forbidden to eat ham or drink alcohol. This should be known by any international company before they start to offer such products in any Moslem country. Therefore, standardisation of the marketing strategy can not works all time and the culture influence should be taking seriously in consideration

6.2 Promotion

Advertising and promotion require special attention because the play a key role in communicating product concepts and benefits to the target segment. Culture is subjective people in different cultures often have different ideas about the same object. What is acceptable in one culture may not necessarily be so in another. Companies can run the same advertising and promotion campaigns used in their home market or change them for each local market, a process called communication adoption. However, if the adoption will cover the product and the communication it is called dual adoption. Communication could be impacted by:

· Language

Procter & Gamble’s Crest toothpaste initially failed in Mexico when it used the

U.S.

campaign[12]. Mexicans did not care as much for the decay-prevention benefit, nor did scientifically oriented advertising appeal to them. Also, A U.S. toothpaste manufacturer promised its customers that they would be more “interesting” if they used the firm’s toothpaste. What the advertising coordinators did not realize, however, was that in Latin American Countries “interesting” is another euphemism for “pregnant”. Anther example from

Spain

, Chevrolet’s Nova translated as “it doesn’t go.” A laundry soap ad claiming to wash “really dirty parts” was translated in French-speaking Quebec to read “A soap for washing private parts[13].”

· Food

Chase and Sanborn met resistance when it tried to introduce its instant coffee in

France

. In the home, the consumption of coffee plays more of a ceremonial role than in the English home. The preparation of “real” coffee is a touchstone in the life of the French housewife, so she will generally reject instant coffee because its causal characteristics do not “fit” into the French eating habits[14].

· Values

In 1963, Dow Breweries introduced a new beer in Quebec, Canada; called “kebec” the promotion incorporated the Canadian flag and attempted to evoke nationalistic pride[15]. The strategy backfired when major local groups protested the “profane” use of “sacred” symbols.

· Religion

England

’s East India Company once caused a revolt when it did not modify a product[16]. In 1857, bullets were often encased in pig wax, and the tops had to be bitten off before the bullets could be fired. The Indian soldiers revolted since it was against their religion to eat pork. Hundreds of people were killed before order was restored. In

Saudi Arabia

, there are no advertising for contraceptive products because of the religion[17].

· Social Norms and time

A telephone company tried to incorporate a Latin flavour in its commercials by employing Puerto Rican actors. In the ad, the wife said to her husband, “run and phone Mary. Tell her we will be a little late.” This commercial has two major cultural errors. Latin wives seldom dare order their husband around, and almost no Latin would feel it necessary to phone to warm of tardiness since it is expected

6.3 Price

With regard to pricing, Buzzell argues that three dimensions of culture are at work[18]:

Values which affect the propensity to bargain
The legal framework which determines the extent to which fixed resale prices are to be allowed
Customs which command margins taken by trade intermediaries

These dimensions affect the overall price level of a product. A Gucci handbag may sell for $120 in Italy and $240 in

USA

. Why? Gucci has to add the cost of transportation, tariffs, importer margin, wholesaler margin, and retailer margin to its factory price. The acceptance of the price is impacted by the culture as you can’t sell a can of Coca-Cola for 75 cents on poor countries.

6.4 Place

Distribution channels within countries vary considerably[19]. Selling soap in Japan is different than Africa because of the local distribution systems. The size and the character of the retail units are different from country to anther.

The Development of Global Culture Rapid changes in technology in the last several decades have changed the nature of culture and cultural exchange. Local culture and social structure are now shaped by large and powerful commercial interests in ways that earlier anthropologists could not have imagined. Early anthropologists thought of societies and their cultures as fully independent systems. But today, many nations are multicultural societies, composed of numerous smaller subcultures. The impact is there and it is pivotal.

7. Culture Dimensions

Cultural dimensions are the mostly psychological dimensions, or value constructs, which can be used to describe a specific culture[20].More precisely:

Cultural dimensions are sometimes not specified. Culture refers to a broad category of variables which are not defined
Culture is sometimes presented as being the factor responsible for cross-national differences which are otherwise unexplained.
Cultural dimensions are only loosely identified. For instance, some authors will use almost interchangeably terms like values, attitudes or norms.

In turn, marketing dimensions may not be defined precisely enough. For instance, an assessment of the cultural impact on distribution cannot be performed meaningfully in broad terms. Even if these concerns were properly addressed, a key issue would remain: how to identify commonly shared traits in societies before attempting to investigate their impact on marketing variables? Existing studies presume that the differences observed in the measurement of cultural variables between countries reflect real differences in commonly shared attributes in each country[21]. This may not necessarily be the case. It should first be established that commonly shared traits of each country have been isolated. As a matter of fact, Inkeles and Levinson in their discussion of national character warn that "...it appears unlikely that any specific personality characteristic or any character type will be found in as much as 60-70 percent of any modern national population[22]." One would suspect that the same would hold true with respect to cultural traits relevant to consumption behaviour. Unfortunately, the dangerous road to national stereotyping is paved with plenty of statistically significant yet irrelevant findings.

8. Cross-Cultural Analysis

Cross-cultural analysis defined as the systematic comparison of similarities and differences in the material and behavioural aspects of cultures. In marketing, cross-cultural analysis is used to gain an understanding of market segments within and across national boundaries. The purpose of this analysis is to determine whether the marketing program, or elements of the program, can be used in more than one foreign market or must be modified to meet local conditions. Cross-cultural analysis most often involves identifying the effects culture may have on family purchasing roles, product function. Product design, sales and promotion activities, channel systems, and pricing.

9. Recommendation

Whether a firm is pursuing a national-market or global-market strategy, culture analysis is interested in increasing the effectiveness and efficiency of its marketing programs within and across foreign markets. It must therefore know to what degree it can use the same product, pricing, promotion, and distribution strategies in more than one market. Unfortunately, there is a conflict in implementing such activity effectiveness and efficiency. Market effectiveness is achieved by adapting marketing programs to the local culture, while doing so will add additional marketing and production costs. Efficiency, on the other hand, is achieved by minimizing marketing program changes across markets. Therefore, the firm minimizes marketing and production costs and strengthens its competitiveness with its competitors. The economic and competitive implications of both goals need to be taken into account when making program adaptation decisions. Both goals depend on understanding the cultural context of each market and the degree to which they are culturally similar. Therefore, global companies need to develop a capability to conduct cross-cultural analysis. Such a capability can help these companies optimally balance the competitive benefits to be derived from effectiveness and efficiency.

To question the usefulness of what has been written to date by academics on the impact of culture on international marketing appear unfair after this review. There is obviously little firm ground on which to stand, and little way, for example, to tell an inquiring business person what she or he should do with her/his price or her/his packaging should she/he attempt to enter the Ruritanian market[23]. Yet, what has so far been done is far from useless since at least it sensitibilizes the interested party to the relevance of the cultural dimension, and points to some areas of concern in terms of specific cultural variables and their likely incidence on marketing variables.

There is no doubt that the international marketing process do faces a large set of variables as it take place over different countries and it does act in different environments. One of the most determinant environments to the success of the international marketing process is Culture, which hold the reason for many human acts and behaviour. Reaching to that point international marketer should study deeply culture treaties of a country the company is planning to act in. so that special amendments in the organization overall plans and actions is made to act in accordance with the new market variables.

Beyond that, in order to answer more specific questions the inquirer is still warmly recommended, as is suggested in most textbooks, to consult with knowledgeable foreign nationals, distributors, consultants and the like, and to indulge in appropriate testing and market research[24].

10. Conclusion

I have tried in this assignment by using the textbook and other references to discuss how culture is pivotal to effective international marketing. By using my own example, I have discussed how culture is under theorized. The examples demonstrated how culture differences were under estimated in the implementation of the international marketing activities. I have used many books and journal articles to examine how culture conceptualized. I did consider in my argument the implications for the development of the international marketing theory.

In turn, most of the assignment was based on reviewing the textbooks and journal articles, which can be noticed from the amount of references used. Finally, I have included my recommendation as commonly suggested in most textbooks.

However, I believe that this topic needs more investigation in order to add value to the development of the international marketing theory and the utility of theory for marketing practice.

[1] Kotler, Marketing Management, The Eleventh Edition p383, Prentice Hall Publications

[2] Joseph B White, “There Are No German or U.S. Companies, Only Successful Once.” The Wall Street Journal ( May 7, 1998), A1

[3] John Alden,” What in the World Drives UPS?” International Business (April 1998):6-71.

[4]http://www.wowessays.com/dbase/ad3/ler19.shtml

[5] Richard Fletcher, The Impact of Culture and Relationships on International Marketing at the Bottom of the Pyramid, University of Western Sydney

[6] Schutte, H. and Ciarlante, D., 1998. Consumer Behaviour in Asia. Macmillan Business Press, London

[7] Hofstede, G. 2001. Culture’s Consequences, Comparing Values, behaviours, Institutions and Organizations Across Nations, 2nd edition, Sage Publications, Thousand Oaks, CA.

[8] Fletcher, R. and Melewar, T.C. 2001, The Complexities of Communicating with Customers in Emerging markets, Journal of Communications Management, 6 (1) 9-23.

[9] Dubois, Bernard (1987), "Culture et marketing", Recherché et Applications en Marketing, 11-1, 47-64.

[10] Sally A. Martin Egge,” Creating an environment of mutual respect within the multicultural workplace both at home and globally” Journal of Management Decision , Vol. 37, No. 1 ( Feb., 1999), pp. 24 – 28.

[11] http://www.foodcontamination.ca/fsnet/1996/9-1996/fs-09-23-96-01.txt

[12] Kotler, Marketing Management, The Eleventh Edition p385, Prentice Hall Publications

[13] Richard P. Carpenter and the Globe Staff. “What they Meant to say was….,”Boston Globe, August 2, 1998, p.M6.

[14] Hugh Dauncey (2003),” French Popular Culture: An Introduction”, US: Oxford University Press.

[15] Frederick Elkin, “Advertising Themes and Quiet Revolutions: Dilemmas in French Canada”, American Journal of Sociology, Vol. 75, No. 1 (Jul., 1969), pp. 112-122

[16]http://www-scf.usc.edu/~efinnega/hist.html

[17] Ira M. Wasserman and Chikako Usui, “Indicators of contraceptive policy for nations at three levels of development”, Journal of Social Indicators Research, Volume 12, Number 2 / February, 1983, pp. 153-168.

[18] Buzzell, Robert D. (1968), "Can You Standardize Multinational Marketing?", Harvard Business Review, November-December, 102-113.

[19] Kotler, Marketing Management, The Eleventh Edition p400, Prentice Hall Publications

[20] http://en.wikipedia.org/wiki/Cultural_dimensions

[21] Jean-Emile Denis,” Culture and International Marketing Mix Decisions”, University of Geneva.

[22] Inkeles, Alex, and Daniel J. Levinson (1969), "National Character: The Study of Modal Personality and Sociocultural Systems", in G. Lindsay and E. Aronson (Eds.), The Handbook of Social Psychology, Vol. 4, Addison-Wesley, Reading, MA.

[23] Jean-Emile Denis,” Culture and International Marketing Mix Decisions”, University of Geneva

[24] Usunier, Jean-Claude (1993), “International Marketing”, Prentice Hall International (

) Limited: Hemel Hampstead.p233.

Business Process and System Management

2012-02-16T09:10:00.000+03:00

2. Introduction

In the first part of this assignment, I will discuss why the organization should consider BPR, what the objectives of implementing BPR are, and the different methodology that can be used. After that, I will try to explore the problems of managing change and resistance throughout the implementation, which will demonstrate my critical assessment to the proposition that the reengineering discourse is dependent upon a partial remembering of the past in order both to normalize power relationships within organizations and to represent the present as a success. In the second part, I shall suggest how the BPR programme might be implemented in a department within an insurance company in

Saudi Arabia

. The insurance approval process is an important process in the insurance industry. However, I will support my argument with an example from an international insurance company that adopted similar BPR programme. Than, I will critically assess the on-going effects such an implementation might have upon existing control systems within the organization. Finally, I will write the conclusion.

3. Part I

3.1 Business Process Reengineering (BPR)

BPR was first introduced to the business world by Frederick Taylor when he published his article The Principles of Scientific Management in the 1900s. Following on from the earlier ideas of Time and Motion Studies pioneered by Frank and Lillian Gilbreth, Scientific Management was the first step to the introduction of BPR which turned out to be unsuccessful due to the many issues which were not resolved[1].Michael Hammer and James Champy introduced their book "Reengineering the Corporation", which gave the birth to the term business process reengineering.

Business Process Reengineering (BPR), also know as Business Process Redesign[2], Core Process Redesign[3], Process Innovation[4], or Business Engineering[5], is a concept within the field of change management. Numerous definitions of BPR are found in the literature. However, all definitions agree that the processes start with the customer and their satisfaction. The most cited definition of a business process is probably Hammer & Champy definition. They defined BPR as "'the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service and speed..."[6]. They have characterised the tree driving forces behind reengineering as the three Cs, which are Customer, Competition and Change. However, Johansson et al added three more, which are Cost, Technology and Shareholders[7].

Organizations benefit from BPR in three ways: cost savings, time savings, and reductions in defects. The two cornerstones of any organization are the people and the processes. BPR is the key to transforming how people work. What appear to be minor changes in processes can have dramatic effects on cash flow, service delivery and customer satisfaction. The following organizations are an example[8]:

Citibank increased profits by over 750 percent by reengineering a credit analysis system.
A reengineering effort at CIGNA RE sped up document processing, even though the number of employees was reduced almost by half.
Kodak reduced the time required to develop a camera by more than half. Given the compelling benefits of a successful reengineering effort.

It is not difficult to understand why so many companies are pushing reengineering efforts.

3.2 The Objectives of Implementing BPR

The overriding objective is to achieve a step change in performance. Performance improvement relates to internal efficiency and competitive advantage. Internal efficiency is achieved by examining how we can run the business with fewer hand-offs, barriers, formal communications and less waiting time. Competitive advantage often involves working with the customers on assisting them with their business so that you can both be more effective. BPR has three key target categories[9]:

● Customer Friendly: One of the main goals of introducing BPR is to get a competitive edge and that can only be gained by providing the customers more than what the others in the market are asking for.

● Effectiveness: Whatever product or service the business might be providing to the customer is successful, and then the customers would automatically want to buy that product or service again.

● Efficiency: How efficient is the company that is manufacturing the product before introducing it to the market to minimise costs? This is one of the key categories that are believed to be more important than any others.

3.3 BPR Methodology

There are two approaches to BPR that can be found in the literature. The methodology originally prescribed by Hammer and Champy is a top-down approach[10], which suggests that the BPR team should focus on determining how the strategic objectives of the organization can be met without letting its thinking be constrained by the existing process. The other approach outlined by Harrington is a bottom-up approach which advocates modelling the existing process to gain understanding of it, and then streamlining it appropriately to meet the strategic objectives[11]. The focus is on changing the as-is process by identifying opportunities for improving it. In practice, a BPR team will ordinarily need to adopt a mixed approach. If the top-down methodology is used as the basis, there is still a need to understand the current functionality and to define carefully the transition path from the current to the preferred future process. With a bottom-up methodology, BPR teams can spend too much time on detailing the current process and lose innovative thinking. A mixed approach would encourage the team to consider high-level changes without being cluttered by the details of the current process.

3.4 The Discussion

According to Hammer and Champy, BPR is about beginning again with a clean sheet of paper[12]. In other words, that in implementing BPR the history should be ignored and we should concentrate only on the future. However, the ‘past’ must be forgotten but a particular framing of the ‘past’ is to live on in the memory of an infinitely superior reengineered present/future. Furthermore, Hammer and Champy’s prescriptions are replete with such contradictions and as the language of ‘one dimensional thought and behaviour’[13], reengineering ‘closes itself against any other discourse’ and seeks to ‘assimilate all other terms to its own’[14]. Therefore, is it assumed that after the implementation of BPR both corporate and individual identity will be as one and interests will be the same? By looking to the proposition, we will find that the work of Hammer and Champy support the proposition, which based on partially remembering the past to form the present as success. However, McCabe proved in his work that such subjugation is unlikely because employees do not passively imbibe representations of the past/present. The human factor should be taken seriously in consideration to implement a successful BPR. According to McCabe, Memory is to be selectively wiped. The memory of antagonism and inequality is to be rubbed out whilst the memory of inefficiency and inflexibility is to be retained so that the new will seem all the better. Yet the intense disciplinary control over work, large scale redundancies, and temporary and insecure forms of employment, contradict and undermine such a partial memory loss. According to McCabe, these conditions fan the flames of memory just as the reproduction of antagonistic and bureaucratic relations compound the sense in which the past lives on. Therefore, BPR presents a big problem than some managers and gurus seem to assume. This should take us to the proposition that seems to ignore this problem.

According to Knights and Willmott, analysts have generally failed to expose relations of power and domination that underpin the construction and reproduction of what may appear to be a "shared system of norms and values" within work organizations. Whether the focus has been upon the organization as a whole or upon occupational' 'communities" located within it[15], understanding has generally been limited to perceiving corporate cultures as founded upon mutuality and consensus, not upon coercion and compliance. The tendency to overlook (or naturalize) asymmetries of power in organizations has been most transparent among writers who have promoted "culture" as the most recent panacea for the managerially defined problems of commitment and competitiveness. The studies of organizational culture and symbolism might usefully attend to forms of power that categorize or differentiate individuals, mark out their identity (e.g., as managers), and generally subject them to "a law of truth" that those in power recognize and others are obliged to recognize in them[16] . From this perspective culture is as lifeless and mechanical as the concept of reengineering itself – subject to the dictates of clock time, precision and schedules. It reflects a belief that boundaries can be drawn whereby staff will forget the past and even their everyday life experiences. However, people can not forget their past and life experience. Therefore, we should not adopt any thing that incompatible with lived experience in implementing a BPR programme. As proved in McCabe work, within such simplistic prescriptions lie the seeds, if not the bloom, of continuity, diversity and dissent; for culture is a creative living process rather than a programmable destination to be arrived at. According to Knights and Willmott, culture is explored in terms of how it emerges from constant processes of contest and struggle whilst recognizing that ‘unity and division’ may exist ‘in tandem’[17]. The approach rejects an understanding of culture as stasis whereby change is seen as a shift from one discrete end-state to another (i.e. past, present, future)[18]. Of course, gurus and practitioners prefer end-states because they are easier to communicate, extol and understand. Employees, and culture, are not objects that can be switched from one state to another but are continually in process. Davenport offers more pragmatic approach towards BPR as he is stressing that the management should take human ‘enablers’ into account[19]. More recently, Davenport and Stoddard have revised their position and have questioned whether a ‘clean slate’ approach towards reengineering can be adopted[20]. The problem according to them is the cost of designing an entirely new approach. For these gurus, ‘cost’ is the only limitation, what is not in question is whether management is capable of exercising power over others, so as to deliver intended outcomes. Change is seen as the transitory phase between two discrete domains, of a manufactured past and present, but this fails to grasp the interconnectedness of culture as lived experience. Their understanding of time ‘does not live or breathe’ or recognize that people live in such a way that ‘encompasses memories in the present of the past as well as expectations and desires in the present of the future’[21]. Reengineering then, traffics in a mechanical view of the world, where memories can be re-written or replaced like so much water or oil. Therefore, studying the organizational culture is something important to have a proper implementation to any BPR programme. The proposition that we are discussing should take this factor in consideration.

However, the most serious problem in reengineering business processes is resistance to change. Many people will go to great lengths to avoid adapting to new ideas and ways of doing things. Hammer and Champy see poor management and unclear objectives as the main problems to Business Reengineering success. Only just recently they acknowledge people’s resistance as a major obstacle to Business Reengineering`s successful implementation[22]. According to Wellis and Rick, It is argued that management have ‘concentrated on processes’ when introducing BPR and have ‘ignored the people who make them work’[23].The prescriptive reengineering literature is replete with ‘cultural’ messages, however, its approach towards, and understanding of culture, is poorly theorized and inadequately developed.

To summarized, Hammer and Champy supported the proposition, which based on partially remembering the past to form the present as success. However, McCabe proved in his work that such subjugation is unlikely because employees do not passively imbibe representations of the past/present. The human factor was ignored on the work of Hammer and Champy. However, Davenport did offer more pragmatic approach towards BPR as he stressed that the management should take human ‘enablers’ into account. More recently, Davenport and Stoddard have revised their position and have questioned whether a ‘clean slate’ approach towards reengineering can be adopted, which was adopted by Hammer and Champy. This should take us tot that human factor should be taken seriously in consideration to implement a successful BPR. The approach of clean sheet of paper is really questioned because people can not forget their past and life experience. The memory is not just the reproduction of antagonistic and bureaucratic relations compound the sense in which the past lives on. Therefore, BPR presents a big problem than some managers and gurus seem to assume. Also, we have found out that analysts have generally failed to expose relations of power and domination that underpin the construction and reproduction of what may appear to be a "shared system of norms and values" within work organizations. The proposition failed to grasp the interconnectedness of culture as lived experience. We should not adopt any thing that incompatible with lived experience in implementing a BPR programme. The human factor and the studying of organizational culture are something important that should be taken in consideration in the implementation of a BPR programme.

4. Part I I

In this part of the assignment I shall suggest how the BPR programme might be implemented in a department within an insurance company in

Saudi Arabia

. The insurance approval process is an important process for the channel management department in the insurance company. Finally, I will critically assess the on-going effects such an implementation might have upon existing control systems within the organization.

4.1 Process for Optimization

The insurance approval process within XYZ insurance company in

Saudi Arabia

is a critical process. In most of the retail insurance products, the insurance approval process is automated. However, the rest of the insurance products the approval process is a manual process. I shall suggest how BPR programme might be implemented.

4.2 Proposed BPR Programme

As mentioned earlier, BPR main objective is to achieve a step change in performance. However, the BPR program has three key target categories, which are Customer Friendly, Effectiveness, and Efficiency. By adopting Davenport methodology[24], I shall outline briefly a sequence of five high-level activities for BPR program:

Identifying process for innovation, the process mentioned above is the process that requires innovation.
Identifying change levers, enabling technology should have a serious impact on the process.
Developing process visions, BPR is driven by a business vision which implies specific business objectives such as step change in performance, cost reduction, time reduction, control and output quality improvement.
Understanding and improving existing processes:

Describe the current process flow

The current process within XYZ insurance company for that type of products can be briefly explained as follow:

Þ The sales forces of the various distribution channels approach the prospective customers to market our insurance services or the customer approach the one of the channels.

Þ The channel member should manually fill the required form for the specific product and obtain a copy for the required document from the insurance underwriter.

Þ These documents shall be forward by faxed or mailed to a specific insurance underwriter based on the insurance covers required.

Þ Upon the insurance underwriter assessment, a quotation shall be produced and forward to requester through the channel.

Measure the process in terms of the new process objectives

This process is a time consuming activity as it requires a lot of manual works, which it takes on average between 5 to 30 days to have an approval. Also, it shows a great lack of control by the channel management.

Assess the process in terms of the new process attributes

The new process attributes should allow us to overcome the weakness of the current process and it allows the organization to increase the level of business.

Identify problems with or shortcomings of the process

The main problem of the current process is that the customer could be approached twice or evens more by different quotations. In other words, the insurance underwriter assessment is taken in consideration the commission granted to the channel while producing the quotation. However, the commission granted is different from channel to channel. This should result different quotations for the same insurance coverage.

Identify short-term improvements in the process

The short-term improvement for the current process that could be suggested is to have a shared database for the requested quotations among the various insurance underwriters within the organization. Also, unifying the required forms for the various insurance products should be easier to the end user.

Assess current information technology and organization

The level of information technology within the organization is encouraging to adopt the new BPR program.

Designing and prototyping the new process:

· Brainstorm design alternatives

The suggested alternative is to have software that should facilitate the requests from the various distribution channels to the insurance underwriters within the organization. This software would give the organization a great control on that activity.

· Assess feasibility, risk and benefit of design alternatives

It will help the organization to achieve their business objectives in performance, cost reduction, time reduction, control and output quality improvement.

· Select the preferred process design

· Prototype the new process design

· Develop a migration strategy

· Implement new organizational structures and systems

The five high-level reengineering activities mentioned above can be decomposed into a set of lower-level activities. In steps four and five, I add a listing of the second level activities corresponding to the redesign. In addition, I did put my comments to explain these activities further. However, the proper implementation requires more information and analysis.

4.3 The Effects on the Existing Control System

There are many reasons organizations don’t manage processes well. When different departments are involved, it’s not unusual for power struggles to arise over ownership of and responsibility for different aspects of the process. The current business process in XYZ insurance company demonstrates that clearly. There are different department involved on the process. However, the focus on the new BPR programme is clear to overcome that obstacle.

The new BPR programme will be Preventing employees from abusing processes; traditional organizations fill each process with checking and control activities. However on the current process, establishing these non-value added control points along a process increases the process duration and cost. The new BPR programme will separates checking and control steps from each individual process. According to Hammer and Champy[25], conventional processes are replete with checking and control steps, which add no value but are included to ensure that people aren’t abusing the process. For instance, in a typical insurance approval process, the channel member checks the request form to ensure that all the necessary information is fulfilled in the request form. After reengineering, this control activity is removed from the insurance approval process. Instead, the insurance approval process is controlled by the software that will be designed to facilitate the process. With the implementation of the process on an automated workflow management system, the need for these controls is considerably reduced. The processes enacted are managed by the system and managers need not stop the process to check the status of work. They can simply query the workflow engine for status information and can electronically communicate with the assigned employee.

Mutual Benefit Life is an example for the effect of new BPR programme on the existing control system in any organization. Mutual Benefit Life reengineered a thirty-step insurance approval process performed by 19 people in five different departments. Approvals took from five to 25 days[26]. A case manager now has the power to grant approval and performs the entire approval process. Mutual Benefit Life eliminated several layers of supervision and control, and the supervisors who remain are responsible for facilitating the work of case managers. Case managers are also supported by an expert system and by specialists who help them with particularly difficult applications. Turnaround time improved dramatically since there is no need to pass applications from one person to another. There are fewer errors, and costs decreased substantially. Case managers handle twice the volume of new applications, allowing the company to eliminate one hundred field positions.

To summarize, the new BPR programme will eliminate these non-value added control points. The need for these controls is considerably reduced with the implementations through an automated workflow management system. There will be fewer errors, and the costs will decrease substantially.

5. Conclusion

In this assignment by using the textbook and other references, I have discussed the propositions that the reengineering discourse is dependent upon a partial remembering of the past in order both to normalize power relationships within organizations and to represent the present as a success. However on the second part, I have suggested a BPR programme for an insurance company in

Saudi Arabia

along with my critical assessment for the on-going effects upon the existing control system.

6. Limitation of the Sample

My answer to the questions in this assignment is based on a limited amount of references. Therefore, my assessment could possibly be limited because of the limitation of the sample. Regarding part two from the assignment, we should also keep in mind that BPR is purely a Western study and the possible the on-going effect of implementing a BPR programme upon the existing control system in Western world could be different in our part of the world due to culture differences. In addition, the BPR is a new business practice in

Saudi Arabia

and the culture has a great influence on it. Therefore, I would recommend more research to be conducted in this regard.

End

[1] http://www.answers.com/topic/business-process-reengineering

[2] Davenport, T.H. & Short, J.E. (1990). The New Industrial Engineering: Information Technology and Business Process Reengineering. Sloan Management Review, 31(4), Summer, 11- 27.

[3] Kaplan, R.B. & Murdock, L. (1991). Core Process Redesign. The McKinsey Quarterly, 2, 27-43.

[4] Davenport, T.H. (1993). Process Innovation. Harvard Business Press, Boston, MA.

[5] Meel, J.W. Van & Bots, P.W.G. and Sol, H.G. (1994). Towards a Research Framework for Business Engineering. In Classon (1994).

[6] Hammer, Michael & James Champy (1993), Reengineering the Corporation: A manifesto for business Revolution, Harper Business, New York.

[7] Johansson, H.J., McHugh, P., Pendlebury, A.J., and W.A. Wheeler III. 1993. Business process

reengineering: breakpoint strategies for market dominance. Chickster,

: Wiley.

[8] http://www.findarticles.com/p/articles/mi_m4153/is_n3_v52/ai_17178856/print

[9] http://en.wikipedia.org/wiki/Business_process_reengineering

[10] Hammer, Michael & James Champy (1993), Reengineering the Corporation: A manifesto for business Revolution, Harper Business, New York

[11] Harrington, H.J.; Business Process Improvement, McGraw-Hill, USA, 1991

[12] Hammer, Michael & James Champy (1993), Reengineering the Corporation: A manifesto for business Revolution, Harper Business, New York

[13] Marcuse, H. (1964). One-Dimensional Man. Boston, MA: Beacon Press.

[14] McCabe, D. (2004) 'A Land of Milk and Honey'? Reengineering the 'Past' and 'Present' in a Call Centre' Journal of Management Studies 41:5,827-856.

[15] Van Maanen, J., and Barley, S. (1984) "Occupational Communities: Culture and Control in Organisations." Research in Organisational Behaviour, 6,287-365.

[16] Foucault, M. (1982) "The Subject and Power." Critical Inquiry, 8, 777-95.

[17] Young, E. (1989). ‘On the naming of the rose: interests and multiple meanings as an element of

organizational culture’. Organization Studies, 10, 187–206.

[18] McCabe, D. (2004) 'A Land of Milk and Honey'? Reengineering the 'Past' and 'Present' in a Call Centre' Journal of Management Studies 41:5,827-856.

[19] Davenport, T. H. (1993). Process Innovation: Reengineering Work through Information Technology. Boston, MA:Harvard Business School Press.

[20] Davenport, T. H. and Stoddard, D. B. (1994). ‘Reengineering: business change of mythic proportions’. MIS Quarterly, June, 121–7.

[21] Jaques, E. (1990). ‘The enigma of time’. In Hassard, J. (Ed.), The Sociology of Time. London:

Macmillan.

[22] Davenport, T.H., 1996. Business Process Reengineering: The Fad that Forgot the People. In: Fastcompany Magazine World Wide Web

[23] Wellis, R. and Rick, S. (1995). ‘Taking account of the human factor’. People Management, October,

30–4.

[24] Davenport, T. H. (1993). Process Innovation: Reengineering Work through Information Technology. Boston, MA: Harvard Business School Press.

[25] Hammer, Michael & James Champy (1993), Reengineering the Corporation: A manifesto for business Revolution, Harper Business, New York

[26] http://www.findarticles.com/p/articles/mi_m4153/is_n3_v52/ai_17178856/print

Strategies in Action

2012-02-16T09:07:00.002+03:00

1. Introduction

In the new global environment, with grater competition from more and more product and choices, alliances are not just a planning option but a strategic necessity. As Jim Kelly, CEO of UPS, which has a number of global alliances, puts it,” The old adage’ If you can’t beat ‘em, join ‘em’ is being replaced by ‘Join’ em and you can’t be beat[1].’” Companies discovered that they need strategic partners ‘alliances’ if they hope to be effective. Even giant companies often cannot achieve leadership, either national or globally, without forming alliances with domestic or multinational companies that complement or leverage their capabilities and recourse such as the Star alliance, which brings together 15 airlines. This is the globalization era and all companies now are thinking globally specially with new countries joining the World Trade Organization every year. Despite the many good reasons for pursuing alliances, a high percentage end in failure. A study by McKinsey & Company revealed that roughly one-third of 49 alliances failed to live up the partners’ expectations[2]. In this assignment, I will discuss the benefits and risks for an organization of employing strategic alliances to expand into new markets. My discussion will be based upon the material covered on the module and my own example to support the arguments.

2. A Borderless World

Why companies such as Wal-Mart, Federal Express and America online want to pursue a global strategy, despite failures and losses? They recognize that business is becoming a unified global failed as trade barriers fall, communication becomes faster and cheaper. Thomas Middelhoff of Germany’s Bertelsmann AG, which purchased U.S. publisher Random House, put it this way: “There are no German and American companies. There are only successful and unsuccessful companies[3].” Companies that choose to supply globally need to be aware of the particular opportunities and threats that globalization presents to them. Globalised corporation include popular names like: Citicorp, Coca Cola, IBM and Exxon receive more than 50% of their annual profit from oversees operations. Andrew S. Grove, chairman of Intel Corporation, “You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or Die”. Globalization of the world economy is a market condition that demands bold offensive strategies to protect positions previously won. In other words, companies should adapt the globalization or it will not be able to compete in the era.

Strategic Alliances

A strategic alliance is a specific form of collaboration between two or more companies. The term “strategic alliance” can mean many things. In its broadest sense, it can apply to virtually any form of collaboration between two or more firms, including one or more of the following activities:

Design contracts
Technology transfer agreements
Joint product development
Purchasing agreements
Distribution agreements
Marketing and promotional collaboration
Intellectual advice

Perlmutter and Heenan defined a global strategic partnership as an alliance following a specific pattern. Start with two or more organization develops a long term strategy to a reciprocal relation than the relation is organized along horizontal and finally the participating retains their identities. Borys and Jemison developed a model capable of exploring alliances more. They found that there were four insights necessary as a framework for farther study:

The breadth of the partnership
The permeability of the organization boundaries.
The interdependence of partner operations in the value chain
The nature of the partnership’s stability mechanisms.

Levitt, Morone, Drucker and others have suggested that the driving forces behind this globalization of strategic alliance behavior are the activity of marketing and technology. Many strategic alliances take the form of marketing alliances[4]. These fall into product or service alliance, promotional alliance, logistics alliance and pricing alliance. The value chain theory shown in the following diagram[5] was very useful for the organizations to understand the competitive dynamics of all its activities.

Porter’s first model was the first step toward an integrated model of strategic management that includes the main elements of the competitive arena. The alliances between the strategic cores are: upstream alliance with suppliers, downstream alliance with customers, diversification alliance with substitutes and / or new area of business, and horizontal alliance with compotators Compared to other types of company-to-company relationship, strategic alliances often have the following characteristics[6]:

Usually a non-equity, loosely structured relationship
Each partner retains its business independence
One Company will take a lead role in any contract or marketing and the others will be "partners" in the work. They could work as sub contractors or suppliers to the main company
The alliance can be struck between companies which would normally be considered competitors
The relative size of the partners is not a significant factor
Each partner must contribute distinctive “core strengths” e.g. technology, manufacturing capacity, access to distribution

Strategic alliances can be combined with other agreements, such as licensing of technology.

What’s less clear to these companies is how to overcome the many challenges inherent in implementing joint ventures and alliances. In 1991, we assessed the performance of 49 joint ventures and alliances and found that only 51% were “successful”—that is, each partner had achieved returns greater than the cost of capital. A decade later, in 2001, we assessed the outcomes of more than 2,000 alliance announcements—and the success rate still hovered at just 53%, despite studies that have highlighted the well-known reasons for JV failure: wrong strategies, incompatible partners, inequitable or unrealistic deals, and weak management[7].

Conceptual Framework of Strategic Alliances

We should be aware that there are three ways of conceptualize international strategic alliance, which are structure, function and objective[8]. The most common way is the one that focuses on the structure. Joint venture, minority-equity, licensing and non-equity contractual are some of the organizational form chosen for collaboration by the organization. The functions way often collapsed into four primary categories, which are technology, finance, markets, and productions. The last way is by objectives which six managerial objectives. The six managerial objectives are learning, leaning, leveraging, linking, leaping and locking out. These frameworks should help to explain the benefits and where the risk could occur.

The Benefits of Employing Strategic Alliances

Whether a company realizes the potential of alliance and collaborative partnerships with foreign enterprises seems to be a function of six factors[9]:

Picking a good partner
Being sensitive to culture differences
Recognizing that the alliance must benefit both sides
Ensuring that both parties live up to their commitments
Structuring the decision-making process so that actions can be taken swiftly when needed
Managing the learning process and than adjusting the alliance agreement over
time to fit new circumstances

Most alliance with foreign companies that aim at technology- sharing or providing market access turn out temporary, serving their purpose after a few years because the benefits of mutual learning have occurred and because the business of both partner have developed to a point where they are ready to go their own way[10]. Four key benefits can be expected from a strategic alliance:

Increased leverage

Strategic alliances allow you to gain greater results from your company’s core strengths Example; Sun Microsystems has leveraged its capabilities impressively through a multitude of alliances[11]. Some alliances survived for a long time, others were short-lived; some were narrowly focused and a few broader. Sun's partners included Fujitsu, Toshiba, Oracle, Netscape/AOL and IBM. But none of these partners or individual alliances accounts for Sun's success. Rather, the way Sun integrated alliances into a coherent strategy and managed them over time allowed it to get the most from partnerships. Anther example; the relation between The NBA and Coca-Cola is a marketing alliance (promotional alliance) and also between Coca-Cola and the FIFA has help Coca-Cola to increase leverage. The Coca-Cola core strength is its own brand as worldwide leader in the soft drinks industry. By forming a strategic alliance with such international sports organization, Coca-cola leverage in the industry will be increased further.

Risk sharing

A strategic alliance with an international company will help to offset your market exposure and allow you to jointly exploit new opportunities. Reduction of risk in alliances can be[12]:

Spreading the risk of a large project over more than one firm
Enabling product diversification and thus reducing market risk associated with being reliant on only one product
Enabling faster market entry and quicker establishment of a presence in the market, which in turn allows a more rapid pay back of investment
Cost subaddivity, i.e. the cost of the partnership is less than the cost of investment undertaken by each firm alone. In strategic alliances slack and expertise can be combined which lower costs

Alliances are always friendly and generally have a strong focus on mutuality, with equal commitments and balanced risk-sharing by the partners. This win/win attitude is often missing in mergers, which can be one-sided and hostile from the start. Today's alliances not only help companies share the costs of risky projects, they also help them hedge risks, mitigate the costs of responding to unpredictable trends and, most importantly, buy and shape options to exploit future opportunities. The best example to see the benefits of strategic alliance risk sharing is considering what occurred in Wells Fargo’s 1995 take-over of First Interstate. Not wishing to go to the altar with Wells Fargo, First Interstate gave golden parachutes with two years’ salary to hundreds of executives and granted all other employees’ severance packages double the industry average. The resulting mass exodus among First Interstate employees left branches under-staffed and produced serious erosion of the customer base. The hostility behind this debacle would not exist in an alliance and this is explaining one of the six reasons why alliance works better than acquisitions by Dorothy Langer

Opportunities for growth

Strategic alliances can create the means by which small companies can grow. By “Marrying” your company’s product to somebody else’s distribution, or your R&D to a partner’s production skills, you may be able to expand your business overseas more quickly and more cheaply than by other means. Example; Vodaphone AirTouch PLC and Bell Atlantic Corporation in 1999 agreed to a collaborative partnership to create a wireless business with a single brand and common digital technology covering the entire U.S. market and to work together on global synergies in handset and equipment purchases, globally roaming agreement, and the development of new products and technology. Today both companies business growth tremendously and they have and they operate and invest in 25 countries. Consumer-product Company Amway is anther example, which expanded into Australia in 1971. In the 1980s, Amway moved into 10 more countries. By 1999, Amway had evolved into a multinational juggernaut with a sales force of more than 3 million independent distributors hauling in $5 billion in sales. Today, Amway sells products in 43 countries worldwide. Its goal: to have overseas market account for 80% of its sales[13].

Greater responsiveness

By allowing you to focus on developing your core strengths, strategic alliances provide the ability to respond more quickly to change and opportunity. Example; after fewer than 15 years of existence, AOL has a huge market value of well over $100 billion. This startling record of success is attributable, in large part, to AOL’s web of alliances and partnerships, which have helped it, become the world’s largest provider of on-line services. Through a portfolio of partners, AOL gains access to products, content, technology, and global customers—assets that create a network of increasing returns and help explain the company’s prodigious market cap. Each new alliance for content makes AOL more attractive to subscribers, and this in turn attracts more advertisers and content partners. In 1997, for example, AOL formed an innovative alliance with Tel-Save to market long-distance service to AOL’s customers. The alliance was received positively by the market. Likewise, in October 1997, long before AOL acquired Netscape Communications, the two companies announced an alliance to launch a co-branded instant-messaging service. Airbus Industries is anther big example to the greater responsiveness, one of the world’s two leading makers of commercial aircraft, was formed by an alliance of aerospace companies from Britain, Spain, Germany, and France that include British aerospace, and Aerospatiale. Airbus has been announced the biggest commercial aircraft company as they have received the biggest number of plans request for 2005 and this is their fifth year on the row.

The Risks of Employing Strategic Alliances

Achieving effective collaboration between independent companies, each with different motive and perhaps conflicting objective, is not easy. The company must weigh several risks:

High commitment – time, money, people

In early 1999, when Renault CEO Louis Schweitzer bid $5.4 billion for a controlling stake in Nissan, he took the risk because he believed he had a manager who could shore up the Japanese carmaker. In June 1999, Ghosn flew to Tokyo with 40 Renault executives. On the one hand, they had to win over demoralized Nissan executives. But they also had to fix the company fast -- Nissan had lost money for six of the past seven years, its market share had fallen for 27 consecutive years and its debts totaled $20 billion. The functional international strategic alliance between Renault and Nissan Motor Co. Ltd was not a risk free decision as it required a huge commitment from Renault toward a company that a have a big amount of liabilities. This risk sharing decision was not easy with a company like Nissan Motor Co. Carlos Ghosn is credited with the dramatic turnaround of Nissan Motor Co. Ltd., of which he is president and CEO. This April, he adds the title of president and CEO of Renault to his duties. French automaker Renault holds a controlling interest in Nissan. A huge risk was involved and a tremendous effort, from a $5.6 billion loss in 2000 to $2.5 billion profit in 2001. On the other hand, if it did not work will with Carlos Ghosn what will happen?

Culture differences

McDonald’s has been highly successful in markets outside the United States, partly because it has been adept in altering its menu of offering to cater to local tastes. Why? The answer will be the local culture. This objective framework (Leaping) has a negative aspects, which culture incompatibility. By ignoring this risk you could lose. Procter & Gamble’s Crest toothpaste initially failed in Mexico when it used the U.S. campaign[14]. Mexicans did not care as much for the decay-prevention benefit, nor did scientifically oriented advertising appeal to them. Hallmark cards also failed when they were introduced in France. The French dislike syrupy sentiment and prefer writing their own cards. The risk of culture differences could cause the organization to fail.

Difficulty of identifying a compatible partner

The best explanation to that if you are welling to use the structure framework by chosen the joint venture collaboration you need to have a partner first. Identifying the compatible partner is not an easy task and the best example to the Starbucks and PepsiCo. Starbucks and PepsiCo were forced to rethink the direction of their joint venture after the first product it introduced, a carbonated coffee drink, received mixed results in early tests with customers. “We had a great partner, a leveraged organizational model, but no product,” one Starbucks executive recalled. A lot of money and effort will be wasted easily if the organization failed to find the compatible partner. Therefore, we should understand that it is not easy to find a compatible partner and that kind of risk should be taken in consideration.

Potential for conflict

The long term goals of a strategic alliance today could be changed over time, which would result a conflict. That kind of framework could be harmful if we did not take in consideration such possibility over longer term. Example; Senior management at TRW Koyo Steering Systems, a JV manufacturer of automotive components, followed a policy of “equal communications” with each of the parent companies (TRW Automotive and Koyo Seiko). When Arvind Korde, CEO of the JV, needed to communicate facts or issues to one parent, he always copied the other parent, thereby promoting openness and trust. And Korde and his team were quick to react to problems. One year into the venture, the JV was on the verge of securing its first customer, which exposed the parent companies’ difference of opinion around pricing. TRW, which was focused on profitability more than growth, argued for higher margins and prices. Koyo Seiko sought to build market share and maximize the scale of its global relationship with key Asian customers. “This was a real turning point for the JV,” Korde recalls. “Despite our early success, I wasn’t sure we would make it out of there alive[15].” What we could be notified from that the organization should weigh this kind of risk before making the decision.

A small company risks being subsumed by a larger partner

The objectives framework based on the objective learning has its positive and negative aspects. Positively, it is inexpensive but is this we are looking for and is the positive could overweight the negative. The partner opportunism is the main negative point. This could put a huge pressure on the company as it will increase the shareholder expectation. I would say that will not be for the benefit of the organization and it could affect their future plans.

Strategic priorities change over time

If you used the same example in “Potential for conflict “, the strategic priorities of both companies did change over time. After a year Structure framework ‘Joint Venture’, TRW priority was focusing on the profitability more that the growth and Koyo Seiko priority was sought to build market share. As a result, the companies strategic priorities at the time of the alliance could be change over time. “This was a real turning point for the JV,” Korde recalls. “Despite our early success, I wasn’t sure we would make it out of there alive .This change could have a negative affect over one of the partner as he did not take such risk in consideration.

Payment difficulties

That type of risk could be noticed on the organizations, which are adopting functional international strategic alliance. This risk could affect the whole business of the organization and the Boo.com is a good example that demonstrates to what extent that affect could be harmful. The Boo.com raised $135 million in venture capital that it used to build high-tech e-commerce sites in seven languages in 18 countries. Boo.com constricted satellite offices in six cities. After months of delay, monthly sales of $1.1 million a month could not make up for mounting expenses, which ran to an estimated $1 million a week. At a liquidation auction, the company was purchased by American e-retailer fashionmall.com for less than $500,000[16].

Political risk in the country where the strategic alliance is based

The objectives framework based on the objective locking out could give a temporary competitive hiatus. It will be really attractive to make strategic alliance on a country full with oil such as Iraq and Iran but you should be aware that the political risk with such company now are huge. Iraq and Iran are representing how far the political risk should be taken in consideration seriously. A lot of international organization had suffered from the United Nation decision against Iran back on 1980. Those companies did lose a lot due to the political risk, which they did not take in consideration. The same thing happened again in Iraq for other companies, when the war was started in

Iraq

. Even today, both countries are attractive to companies but the political risk is huge. Therefore, the political risk is important and it should be weigh before companies start to think about strategic alliance.

If the relationship breaks down, the cost/ownership of market information, market intelligence and jointly developed products can be an issue.

The best example to explain such risk is what happened to AT&T and British Telecom. AT&T and British Telecom spend $10 billion in forming their joint venture to build an Internet-based global network linking 100 major cities. The structure framework, which may include joint venture, could represent a big lose for both parties. What would happen to AT&T and British Telecom if did not work well with them or between TRW Automotive and Koyo Seiko? The financial lose that could happen if such relation break down is huge. Therefore, any organization before adopting that type of framework they should consider the amount of risk involved.

Entering into a strategic alliance requires commitment above all else – in hours as much as dollars. It also takes time to build a strong alliance. Identifying and reaching agreement with the right company can be very time consuming, and developing a strong relationship can take years.

Conclusion

By using the textbook and other references, I did talk about the new borderless world that we live on today. I did discuss what the strategic alliance in general is than I have explained what the three different framework of the strategic alliance are. Through the example that I have used, I tried to discuss the benefits and the risk of the strategic alliance. I have demonstrated my understanding the benefits and risks involved.

End

[1] Julia Cohen Mason, “Strategic Alliances: Partnering For Success,” Management Review, ( May 1993):10-15

[2] Stratford Sherman, “Are Strategic Alliances Working?” Fortune, September 21, 1992,pp. 77-78

[3] Joseph B White, “There Are No German or U.S. Companies, Only Successful Once.” The Wall Street Journal ( May 7, 1998), A1

[4] Kotler, Marketing Management, The Eleventh Edition p108, Prentice Hall Publications

[5] www.marketingteacher.com

[6] http://www.marketnewzealand.com/

[7]James Bamford, David Ernest, and David Fubini, Launching a World-Class Joint Venture, Harvard Business Review ( Feb 2004)

[8] Stephen Preece, Incorporating International Strategic Alliances into overall firm Strategy, The International Executive, VOL. 37 (3), May/June 1995,p261-p277

[9] Doz and Hamel, Alliance Advantage, chapter 4-8.

[10] Thompson and Strickland, Crafting and Executing Strategy, The Twelfth Edition, p217

[11] Benjamin Gomes-Casseres, Strategy must lie at the heart of alliances ,FT Mastering Management, p.14-15, October 16, 2000

[12] Glaister K.W. &. Buckley P.J 1996, “Strategic Motives for International Alliance Formation”, Journal of Management Studies, Vol 33, No. 3, pp. 301-332

[13] Kotler, Marketing Management, The Eleventh Edition p387, Prentice Hall Publications

[14] Kotler, Marketing Management, The Eleventh Edition p385, Prentice Hall Publications

[15] James Bamford, David Ernest, and David Fubini,Launching a World-Class Joint Venture, Harvard Business Review ( Feb 2004)

[16] Sarah Ellison, “Boo.com: Buried by Badly Managed Buzz,” Wall Street Journal, May 23,2000,p.B10

Finance and Growth Strategies

2012-02-16T09:06:00.000+03:00

Introduction

In this assignment, the first question is about projects evaluations. In my answer to this question I will try to demonstrate my understanding to the concept of project valuation by using the different formulas in order to get the answered required. In the second question, I am going to talk about the seven identifiable strategies that can be used in developing an organization and the problems associated with each strategy. In my answer to question two, I shall attempt to use some examples to support my discussion. Finally, I will write my conclusion indicating the main point that I include it in the assignment.

2. Question (1)

Provide an evaluation of the following two proposed projects. They both have expected lives of 5 years. The required rate of return on both projects is 12%. The expected cash flows from each project are as follows:

	Project A	Project B
Initial Outlay	-£110,000	-£110,000
Year 1	20,000	40,000
Year 2	30,000	40,000
Year 3	40,000	40,000
Year 4	50,000	40,000
Year 5	70,000	40,000

2.1 What recommendations would you give to a management team, which is considering whether or not to invest in these projects?

Project A
Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5
-110,000	20,000	30,000	40,000	50,000	70,000
DF[WAS1]	0.89286	0.79719	0.71178	0.63552	0.56743
PV[WAS2]	17,857.14286	23,915.81633	28,471.20991	31,775.90392	39,719.87990

Project A total PV =

141,739.95292

Project B
Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5
-110,000	40,000	40,000	40,000	40,000	40,000
DF[WAS3]	0.89286	0.79719	0.71178	0.63552	0.56743
PV[WAS4]	35,714.28571	31,887.75510	28,471.20991	25,420.72314	22,697.07423

Project B total PV =

144,191.04809

	Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5	NPV[WAS5]	IRR[WAS6]	PI[WAS7]
Project A	-110,000	20,000	30,000	40,000	50,000	70,000	31,739.95292	0.20970	0.28855
Project B	-110,000	40,000	40,000	40,000	40,000	40,000	34,191.04809	0.23919	0.31083

Terminology

C = Cash Flow

t = time period of the investment

r = “opportunity cost of capital”

Internal Rate of Return (IRR) - Discount rate at which NPV = 0.

Profitability Index = NPV/ Investment

Project (A)

IRR = 20.97%

PI = 31,739.95292/110,000= 0.28855

Project (B)

IRR = 23.919%

PI = 34,191.04809/110,000= 0.31083

According to my analysis to these two projects, I will recommend to the management team to invest in project (B). Project (A) displays a lower NPV and would be unlikely to be selected unless other factors are presented and the equations revaluated.

2.2 What is the payback period on each project? If a 3-year payback period is required which of the projects should be accepted?

Payback Period is the time until cash flows recover the initial investment of the project. Therefore, the payback period for project A is four years and three years for project B.

	Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5	Payback
Project A	-110,000	20,000	30,000	40,000	50,000	70,000	4 Years
Project B	-110,000	40,000	40,000	40,000	40,000	40,000	3 Years

The payback rule specifies that a project be accepted if its payback period is less than the specified cutoff period. The cutoff period required is three years. Therefore, project B should be accepted according to the payback rule.

2.3 What are the criticisms of the payback method?

This method is very flawed, primarily because it ignores later year cash flows and the present value of future cash flows. The payback rule says only accept projects that “payback” in the desired period or less but a big mistake could be done. An example of this mistake that if we have two projects with an equivalent payback period and we choose any of these projects as per the payback rules. The payback method explicitly takes into account the time value of money; it still ignores what might happen after the payback horizon. A project may be rejected even if the expected cash flows from the desired period and beyond are very large, as might be the case in a research and development project. A project might be accepted even if there is a large cleanup cost that would have to be paid after the payback horizon. We should choose between them the project with the highest NPV value.

2.4 What is the discounted payback period for each project?

	Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5
Project A	-110,000	20,000	30,000	40,000	50,000	70,000	Discounted Payback
PV		17,857	23,916	28,471	31,776	39,720	5 Years
Project B	-110,000	40,000	40,000	40,000	40,000	40,000	Discounted Payback
PV		35,714	31,888	28,471	25,421	22,697	4 Years

2.5 What is the logic that lies behind the net present value?

Every investor requires a specific rate of return, which is based on his or her time preference. The net present value NPV method, which is on of the discounting methods, is founded on the concept of the time value of money. Therefore, a project is only accepted if it generates a rate of return more than the minimum required by the investor. As a result, I could say that the logic that lies behind the net present value method is the opportunity costs. The NPV as it is founded by the concept of the time value of money will give us the tool to evaluate the opportunity costs.

2.6 What would happen to the net present value for each project if the required rate of return:

(i) Increased?

If we increased the required rate of return to 14% from 12% for project A, the NPV for project A will decreased from 31,739.95292 to 23,586.56653.

Project A
Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5	NPV
-110,000	20,000	30,000	40,000	50,000	70,000
DF	0.87719	0.76947	0.67497	0.59208	0.51937
PV	17,543.85965	23,084.02585	26,998.86065	29,604.01387	36,355.80651	23,586.56653

(ii) Decreased?

If we decreased the required rate of return to 10% from 12% for project A, the NPV for project A will increased from 31,739.95292 to 40,642.96403.

Project A
Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5	NPV
-110,000	20,000	30,000	40,000	50,000	70,000
DF	0.90909	0.82645	0.75131	0.68301	0.62092
PV	18,181.81818	24,793.38843	30,052.59204	34,150.67277	43,464.49261	40,642.96403

2.7 Determine the internal rate of return for each project.

Internal Rate of Return (IRR) - Discount rate at which NPV = 0.

Project (A)

IRR = 20.97%

Project (B)

IRR = 23.919%

	Initial Outlay	Year 1	Year 2	Year 3	Year 4	Year 5	IRR
Project A	-110,000	20,000	30,000	40,000	50,000	70,000	0.20970
Project B	-110,000	40,000	40,000	40,000	40,000	40,000	0.23919

2.8 How should risk be taken into account?

All the investment decisions that have been taken previously in this question were assuming that all future cash flows are known for certain but this assumption rarely happen in reality. Future returns cannot usually be predicted with total accuracy. The most common methods that are used when dealing with risk are sensitivity analysis and use of probabilities. We should keep in mind that no investment project is totally safe. The market condition could affect the investment decision that built upon certainty. Therefore, choosing a specific project based on the assumption that the future cash flows in known our investment decision could be wrong in the market condition change toward growth or even recession. As a result, the risk should be taken in account when we are dealing with project valuation by using sensitivity analysis and probabilities. The expected value of a project “ENPV” is one of the common tools that are used to deal with uncertainties but ENPV will not make the decision for us. The ENPV will only summaries the information of the possible outcome and the actual decision will depend on the attitude to risk in the organization.

3. Question (2)

“A company is considering how it might grow and develop. What strategies are available to it and what are the problems associated with each strategy that it should be aware of.”

3.1 Introduction

In my answer to this question, I am going to talk about the seven identifiable strategies that can be used in developing an organization. While I am demonstrating my understanding to these strategies, I will try to identify the problem associated with each of them that the management should be aware about it. I shall attempt to support my argument by some real example. Finally, I will write my conclusion.

3.2 Main body

There are seven strategies that could by used to develop an organization (1):

Forward integration defined as gaining ownership or increased control over distributors or retailer.
Backward integration defined as seeking ownership or increased control of a firm’s suppliers.
Horizontal integration defined as selling ownership or increased control over competitors.
Vertical integration defined as either backward or forward integration (or both together).
Concentric diversification defined as adding new, but related, products or services.
Conglomerate diversification defined as adding new, but unrelated, products or services.
Horizontal diversification defined as adding new, unrelated products or services for present customers.

As we can see from these definitions, the developing strategy could be either Integration or Diversification.

In theory, the integration can be total from the raw ore to the distribution of the final products to consumers but diversification is adding something new. Vertical integration is the joiner of two or more successive stages of production. Efficiencies, avoiding government restrictions and to take advantage of monopoly-related conditions are the three categories of reasons why firms adopt vertical integration. Vertical integration is favoured by companies that desire a high level of control over their channels. For example, Sears obtains over 50 percent of the goods it sells from companies that it partly or wholly owns; Sherwin-Williams make paint but also own and operate 2,000 retail outlets (2). Often a business’s sales and profits can be increased through backward integration (acquiring a supplier), forward integration (acquiring a distributor), or horizontal integration (acquiring a competitor).

The aim of integration in this case for expanding firm is to capture these profit but we said previously often. In some cases, the more threat of integration may lead suppliers to reduce their prices for components, or customers to offer more attractive terms. We should understand that if one’s suppliers appear to be earning excessive profits, there is no guarantee that a firm integrate backward will be able to achieve such returns. Control over suppliers “may” reduce costs but over integration can cause the opposite effect (3). One of the most known examples of that is Nissan, before it has been taken over by Renault; backward integration caused the opposite effect to them. The integration by existing suppliers will increase the capital requirement of entry into a market and will put potential entrants at a cost disadvantage. Mergers, acquisitions and joint ventures can be methods used to allow companies to achieve company diversification strategies.

Acquisitions and Mergers are the quickest way for a company to diversify. Growth through diversification can be achieved in two ways, either by internal expansion or externally by acquiring, consolidating with, or merging other firms. A purchase of another business is an acquisition. A sales contract is executed under, which the buyer assumes all or some of the seller's assets and assumes all, some, or none of the seller's liabilities. The sale of the RCA computer division to Sperry-Univac in 1971 was through acquisition. A merger is absorption of one company by another company, including all its assets and liabilities. In 1937, Nash Motors absorbed the Kelvinator Corporation, and changed its name to Nash-Kelvinator Corp. Then, in 1954 , the Nash-Kelvinator Corp., changed its name to American Motors, and merged with the Hudson Motor Car Company (4).

The 1990s witnessed record levels of mergers and acquisitions not only in the

U.S.

but worldwide. In 1998, there were approximately 9,200 mergers and acquisitions involving

U.S.

companies. These activities had a value of about 1.3 trillion dollars, representing a 13 percent average annual increase in the number of such individual transactions over the last three years. Joint ventures have become a key method utilized by companies to expand or strategically increase a segment of their business. As a part of this, some companies may want to grow fast and move quickly through mergers, acquisitions and joint ventures, sometimes failing to look at what they are buying or joining into. Records were set both in numbers and in the size of the combinations, such as the Daimler-Chrysler and Exxon-Mobil combinations, and the previous example Nissan- Renault. Despite the popularity of such efforts, varieties of retrospective studies have shown that mergers and acquisitions create shareholder value only in a surprisingly small proportion of the cases (5). HP and Compaq is will know example of these unsuccessful mergers.

As we mentioned before, the integration can be total from the raw ore to the distribution of the final products to consumers but diversification is adding something new. The aim of integration is to capture more profit but control over suppliers or distributors “may” reduce costs but over integration can cause the opposite effect. Yes, Acquisitions and Mergers are the quickest way for a company to diversify but there are some limitations to that. The internal growth will reduce equity position to investor's and it will take the organization time to build additional market share and profit. On the other hand, the external growth as it requires stockholder’s consent it may also require added funds to accommodate acquisition to needs and the integrating acquires firm into operations can be a problem. However, another leading strategist, Igor Ansoff, argued that a company should first ask whether a new product had a “common thread” with its existing products. He defined the common thread as a firm’s “mission” or its commitment to exploit an existing need in the market as a whole. Ansoff noted, “Sometimes the customer is erroneously identified as the common thread of a firm’s business (6). As a result, we should be aware about these type of problems associated with the strategies that could be used for organizational development before we make our development decisions.

3.3 Conclusion

In my answer to this question, I tried to describe and discusses the strategies that could be used for organizational development. I explained the difference between the integration and diversification. I used some example to demonstrate to the reader my understanding to the problem associated with these strategies.

4. Conclusion

By using the textbook and other references, I was able to answer the questions. In question one; I did demonstrate my understanding for the formulas and how to deal with this type of questions. In question two, I explained the seven strategies that could be used for organizational development. I did support my discussion with example in order to identify the problem associated with these strategies.

5. Limitation of the Sample

My answer to the question 2 in this assignment is based on a limited amount of references. The topic of organizational growth and development is so important and it requires more research. Most of the research in this topic is purely a Western study and we do need to make more research about in our part of the world, as the result could be different concerning the problem associated. Therefore, my conclusion could possibly be faulty or incomplete because of the limitation of the sample. My conclusion cannot generalize on all Muslim countries; more research would be needed.

6. References

Management Centre, Module 4 MBA, Finance and Growth Strategies, University of Leicester.
Philip Kotler, Marketing Management Millenium Edition, 10^th Ed, Chapter 13.
Brealey and Myers, Principles of Corporate Finance, Sixth Edition, Chapter 33.
http://www.mgmtguru.com/mgt499/TN8_2.htm
ERICH A. HELFERT, FINANCIAL ANALYSIS: TOOLS AND TECHNIQUES,

Page 411

6. Igor Ansoff, Corporate Strategy (New York, 1965), 106–9.

[WAS1]The Formula is:

DF= 1/ (1+ r) ^t

When:

R= rate

T= time

[WAS2]The Formula is:

PV= FCF * DF

When:

FCF= Free cash flows

[WAS3]The Formula is:

DF= 1/ (1+ r) ^t

When:

R= rate

T= time

[WAS4]The Formula is:

PV= FCF * DF

When:

FCF= Free cash flows

[WAS5]The Formula is:

NPV=Initial Outlay+ Total PV

[WAS6]The Formula is:

Internal Rate of Return (IRR) - Discount rate at which NPV = 0.

[WAS7]The Formula is:

Profitability Index = NPV/ Investment

Implementing Strategies

2012-02-16T09:04:00.000+03:00

. Introduction

In this assignment, the first question is about the theories of the leadership and the second question is about the leader-follower relations. In the first question, I shall attempt to discuss the Traits Theory, Behavioural Theory and Contingency Theory briefly in order to demonstrate my understanding for these theories. After each theory, I will critically evaluate the usefulness of the theory for the business in the twenty first century. In the second question, I am going to talk about the different types of change to be context specific while I am describing and discussing the importance of effective leader-follower relations in the management of change. In the assignment, I shall attempt to use some examples from to support my discussion. Finally, I will write my conclusion indicating the main point that I include it in the assignment.

2. Question (1)

“Briefly discuses three theories of leadership, critically evaluate the usefulness of these for business in the twenty first century?”

2.1 Introduction

In my answer to this question, I will briefly discuss three theories of leadership, which are the Traits Theory, Behavioural Theory and Contingency Theory. While I am demonstrating my understanding, I shall attempt to critically evaluate the usefulness of each theory with regard to the business in the twenty first century. At the end, I will write my conclusion, which will include the result of my evaluation.

2.2 Main Body

What is a leader? Industrial/Organizational psychologists do not seem to be able to agree on a definition. One way to understand leadership, however, is through the differences between a leader and an authority. Authorities are those who hold formal positions that give them the power to direct the behaviour of their subordinates. Managers, supervisors, and bosses are authorities. They may or may not also be leaders, depending on whether they rely solely on their official positions when applying influence on others. A true leader does not use force and coercion to direct his or her followers toward a common goal. There are many leadership theories and I will discuss some them in my answer to the question.

2.2.1 The Traits Theory

The Theory

The Traits theory premise that leaders are born and not made encouraged researchers to look for the key traits or characteristics demonstrated by leaders. They did this by, in the first instance, by comparing the traits of those people who were leaders with the traits of those people who were followers. Secondly, they tried to differentiate the characteristics of those leaders deemed to be effective from those of leaders deemed to be ineffective (1).Early research on leadership was based on the psychological focus of the day, which was of people having inherited characteristics or traits. Attention was thus put on discovering these traits, often by studying successful leaders, but with the underlying assumption that if other people could be found with these traits, then they, too, could also become great leaders (2). The personality traits helped Ralph Szygenda transforming General Motors into the first totally weird car company (3). The trait approach is one of the only leadership theories that focus exclusively on the leader. However, is it only traits that will make a leader?

Evaluation

Pioneer leadership researchers were confident that personality traits essential for leadership effectiveness could be identified through research. Because the trait approach focused exclusively on the leader, however, and not on the followers or the situation, researchers failed to discover any traits that would guarantee leadership success. If we take a look to leaders like Mother Theresa, Bill Gates, and Nelson Mandela, we will find that we cannot find common traits between them. Therefore, we should ask ourselves is the leader or the follower or even the situation. It is nearly impossible to develop an inclusive list of leader traits, and no conclusion can be made regarding the connection between a particular trait and leadership effectiveness. Although a connection between personality traits and leadership effectiveness was discovered,cause and effect were not addressed (4). Early trait theorists failed to acknowledge that being in a leadership role might facilitate the development of leadership traits. In addition, the theory neglected to account for why some individuals might be effective leaders in certain circumstances yet not in others. The trait approach is not particularly useful for the business in the twenty first century because it presumes that personality traits are relatively stable across time, which cannot be happen. It consequently fails to offer a guideline for leadership development. In other words, you should accept what you have because there is no way that you could develop. How we could relay on today business on theory that has not been proved. Traits do not help us to train future leaders because we are accepting the belief that ability is bestowed upon some at birth and therefore cannot be learned. With the complexity of today business, we cannot focus only on the leader but we need to take also in consideration the follower. The traits theory cannot offer us what we need in today business.

2.2.2 The Behavioural Theory

The Theory

The behavioural theory based on that leaders can be made, rather than are born. Successful leadership is based in definable, learnable behaviour. The behavioural perspective of leadership holds that anybody who demonstrates the appropriate behaviours can be an effective leader. The underlying premise here is that it is behaviour and not traits that determines the effectiveness of a leader. Leaders can be made (by learning the appropriate behaviours) and are not necessarily born (1). There are important research programs on leadership behaviour were conducted at Ohio State University, the University of Michigan, and the University of Texas (5). Researcher at Ohio State University surveyed leaders to hundreds of dimensions of leader behaviour. They identified two major behaviours, called consideration and initiating structure. At the same time, University of Michigan took a different approach by comparing the behaviour of effective and ineffective supervisors. Blake and Mouton of the University if Texas proposed a two-dimensional leadership theory called leadership grid that builds on the work of the Ohio state and Michigan studies. The "Managerial Grid" has its advantages and disadvantages. It focuses on observable actions of the leader in order to determine if the leader's main concern is for production or for people. This provides a more reliable method for studying leadership than the trait approach. The Managerial Grid, however, adopted the universal approach. It aims at identifying the most effective leadership style for all situations, which is not supported by evidence in real organizations

Evaluation

Behavioural is a big leap from Trait Theory, in that it assumes that leadership capability can be learned, rather than being inherent. This opens big gates to leadership development. However, Can we relay on this theory to determine leadership effectiveness. Is it possible that the same style would work as well in a gang or group of friends, and in a hospital emergency room? The styles that leaders can adopt are far more affected by those they are working with, and the environment they are operating within, than had been originally thought. By looking to the business today, it is difficult to relay on the behavioural theory for the leadership development for the business in the twenty first century. The behavioural theory did not define a clear relationship between style and performance outcomes. Therefore, two different leaders in same organization adopting the same style their performance outcome is not essentially the same. The behavioural theory has failed to find a universal style suitable for all situations. I could say that this theory along or companied with the traits theory failed to determine leadership effectiveness. Therefore, it may be suggested that we should relay on them because of the uncertainty. Just imagine a big organization like ChevronTexaco is relaying on a theory like for their leadership development plan. Uncertainty is something unacceptable for today business.

2.2.3 Contingency theory

The Theory

The leader's ability to lead is contingent upon various situational factors, including the leader's preferred style, the capabilities and behaviours of followers and various other situational factors. The style selected by a leader in any given situation will depend upon two variables, the personal characteristics of the leader, and how confident that leader is in his or her own abilities. Contingency theories are a class of behavioural theory that contends that there is no one best way of leading and that a leadership style that is effective in some situations may not be successful in others. There are six contingency theories: the LPC Contingency model, Hersey and Blanchard’s situational leadership model, the path-goal theory of leadership, the multiple linkage model of leadership, leadership substitute theory, and Vroom and Yetton’s normative decision model.

Fiedler’s contingency model ‘least preferred coworkers’ is on of these models, which divides the leadership situation into three variables which is leader-member relationship, task structure, and position power. These may be either advantageous or disadvantageous to the leader depending upon the style of leadership chosen. The following table explains how it could be either advantageous or disadvantageous (6).

	Leader-Member Relations	Task structure	Leader's Position-power	Most Effective leader
1	Good	Structured	Strong	Low LPC
2	Good	Structured	Weak	Low LPC
3	Good	Unstructured	Strong	Low LPC
4	Good	Unstructured	Weak	High LPC
5	Poor	Structured	Strong	High LPC
6	Poor	Structured	Weak	High LPC
7	Poor	Unstructured	Strong	High LPC
8	Poor	Unstructured	Weak	Low LPC

Evaluation

Contingency theory does not explain why individuals are more effective in some situations than others; also, contingency theory does not explain what to do if there is a mismatch between the leader and the situation he or she faces. Effective leaders could be promoted or moved to new roles that do not fit them on the strength of performance in a role they did. Therefore, with the complexity of today business the contingency theory is not useful up to a certain limit. It stills a step ahead in the way of leadership development. We still are asking for more specially with the tremendous development in the business today. Researchers often find that Fiedler's contingency model falls short on flexibility. However, Fiedler's contingency model is an important model because it established a brand new perspective for the study of leadership. Nevertheless, is this what we need for the business in the twenty first century? I could say that the contingency theory is useful as it gives us a direction to the leadership development but still more researches needs to be done in order to increase the usefulness of it.

2.3 Conclusion

Leadership studies can be classified as trait, behavioural, contingency, and transformational. Earliest theories assumed that the primary source of leadership effectiveness lay in the personal traits of the leaders themselves. Yet, traits alone cannot explain leadership effectiveness, which I did explain in my evaluation to the traits theory. Thus, later research focused on what the leader actually did when dealing with employees and it was the first step toward understanding the relation between the leader and the follower. The behavioural theory of leadership sought to explain the relationship between what the leaders did and how the employees reacted, both emotionally and behaviourally. However, as a result of my evaluation I found out that we cannot always account for leadership in different situations. Thus, contingency theories of leadership studied leadership style in different environments. However, contingency cannot account for the inspiration and innovation that leaders need to compete in today's global marketplace. I lot of research needs to be conducted in the field leadership development.

3. Question (2)

“Describe and discuss the importance of effective leader-follower relations in the management of change? Your answer should take account of the different types of change in order to be context specific.”

3.1 Introduction

In my answer to this question, I shall attempt to describe and discuss the importance of effective leader-follower relations in the management of change. I will do that by explaining the two types of change, which is the Evolutionary and Revolutionary change, and the importance of the relation on each of them. At the end, I will write my conclusion.

3.2 Main Body

The extent to which a leader can lead is directly related to the extent to which followers are prepared to follow, yet followership is not a role permanently assumed by a person or a group of people, it is a transitory state through which even leaders pass. For any vision to be realised, the roles of both the leader and follower must be proactive, they must positively seek mechanisms and methods, which will propel them and others closer to the goals (1). The reciprocal nature of the leader–follower relationship is based on the notion that the thoughts and actions of the followers are influenced by the leader and that the thoughts and actions of the leader are in turn influenced by the followers. There are two types of follower behavioural, which are actively and passively. Followers behaving actively integrate themselves fully in the organisation were they are in control of their own successes and failures and it is not left to fate. However, followers behaving passively tend to have an external locus of control. They are guided through life by fate, chance and coincidence. The importance of the forces of change and resistance was pointed out already in the 1940s by the psychologist, Kurt Lewin, who showed how the force field can be used to explain human behaviour (7). Lewin maintained that it is fruitless to concentrate on changing the behaviour of individuals because the individual in isolation is constrained by group pressures to conform. Consequently, the focus of change must be at the group level and should concentrate on factors such as group norms, roles, interactions and socialization processes to create ‘disequilibrium’ and change (8). Lewin also recognized the need to provide a process whereby the members could be engaged in and committed to changing their behaviour. Therefore, the importance of the leader-follower relation is enormous and I will try to discuss more in details concerning the two types of change. According to Miller, the types of change fall into two broad categories, viz. evolutionary and revolutionary.

“Evolutionary change is gradual, incremental, and narrowly focused, and revolutionary change is rapid, dramatic, and broadly focused”

(George and Jones, 1996:608

3.2.1 Evolutionary Change

Description

Evolutionary change is an organisational change process that blends in with the current organisational values, beliefs, structures, systems and styles. Evolutionary change progresses at a speed with which the organisation is comfortable, allowing for the involvement in the process of all those people affected by the change (1).

Leader-follower relations

Evolutionary change is a gradual, staged, socio-technical approach. Gradual is the key word for the evolutionary change. Followers should be proactive and contribute to the development and maintenance of the leader-follower relationship. Followers should actively live by the organizational values of openness, honesty, confrontation of problems, participation, feedback, commitment, learning, and innovation. Leaders and followers should mutually agree to these organizational values. The relationship between the leader and the people who is affected by the change, the follower, is important because they could behave actively or passively. If the followers behave actively, the evolutionary change will become more effective. However, the leader should justify the need for change in order to gain the followers support for the change. The influence of the leader on the followers is important because they needs to feel comfortable with the speed of the change as they are the people that will be affected by the change otherwise they will resist it. On the other hand, if they behave passively the leader should develop the relation with follower in order to influence their behaviour to become active. Leadership-followership under perpetually changing conditions presents a challenge because of the surprise in and imponderability of events. Such chaos is evident in a system that is unstable at every point. Yet there can be order, and even a form of structure, in the absence of predictability (9). As a result, we could say that the relationship between the leader and the follower is the key player toward the final goal, which is change.

3.2.2 Revolutionary Change

Description

Revolutionary change is change that transforms an organisation. To achieve such magnitude of transformation, the change process should impact all the major organisational change levers, namely organisational structures, organisational culture, organisational processes, and organisational systems (1). In order to support the change processes, the behaviours of everyone within the organisation need to change substantially. Revolutionary change cannot be accomplished gradually, comfortably but it needs to be explosive in the way it impacts the organisation. Theorists argue that radical or revolutionary change is best suited to a situation of organisational crisis – where people perceive a real threat of loss they will be far more willing to take on board the discomfort and uncertainty of revolutionary change. To support the revolutionary change effectively, there is a need to bring in an external agent who can direct the process and implement the results. Those people affected by the change are wholly excluded from the process for two reasons, which are they have behavioural and cognitive rationales for retaining the status quo, and they are likely to be influenced by other stakeholders who would also like to retain the status quo

Leader-follower relations

The leader-follower relations should be excluded in order to have a proper implementation for the revolutionary change. A good example to revolutionary change is what with Nissan in

Japan

. Renault moved Carlos Ghosn to Nissan in

Japan

in 1999 and has vowed to quit if the automaker is not profitable by March. His so-called Nissan Revival seems to be working. However, Ghosn is definitely an iconoclast. He passes up power breakfasts to stay home and eat with his four kids. He defies Japanese business etiquette and shakes hands with every employee he meets, not just top managers. Moreover, he has cut thousands of Nissan jobs, shut the first of five domestic plants, and auctioned off prized assets such as Nissan's aerospace unit. However, his radical moves have made him Public Enemy No. 1 to Japanese traditionalists, not to mention the influential Japan Auto Parts Industries Assn., which has publicly rebuked Nissan's new management (10). As an outsider in charge of one of

Japan

's largest companies, he has been extremely successful from a $5.6 billion loss in 2000 to $2.5 billion profit in 2001. He was voted Man of the Year 2003 by Fortune magazine's Asian edition. He is also on the board of Renault, Alcoa, Sony, and IBM and CEO of Renault, Nissan's parent and largest shareholder, in 2005, succeeding Louis Schweitzer (11). Therefore, I could say that this example demonstrates the revolutionary change with a situation of organizational crisis. It is important to have a respectable relation with your follower but they should be excluded from change process because they could affect the change by their behavioural and cognitive rationales for retaining the status quo. It will be difficult to convince the follower because most likely they can see the need for a change.

3.3 Conclusion

In my answer to this question, I tried to describe and discusses the importance of effective leader-follower relation. I did explain that to what extent it is important in the evolutionary change. A high-quality leader-follower relation is very important for the organizational change in the evolutionary change but it may be agreed that it should be excluded with revolutionary change. There are some challenges inherent in the leader-follower relationship in today's changing organizational contexts. The importance of leaders understanding the impact of their own culture on their leadership behaviour, as well as being able to understand how culture impacts on their followers and the expectations followers have of them. Leaders and managers are moral agents who can help others get in touch with their spirituality. Such self-directed contact with one's core set of values makes for a deeper awareness of purpose. The role of leader involves making moral value judgments, and showing concern for ethical, responsible action. With this goes a willingness to be accountable, rather than standing aloof as a distant power figure; otherwise, the sense of leader-follower identity in a mutual effort can be severely undermined.

4. Conclusion

By using the textbook and other references, I was able to answer the questions. In question one; I did demonstrate my understanding for the theories of leadership while I was evaluating its usefulness in the twenty first century. In question two, I explained the importance of the leader-follower relations in the evolutionary change, however it should be excluded in the revolutionary change. I did support my discussion with example.

5. Limitation of the Sample

My answer to the questions in this assignment is based on a limited amount of references. Therefore, my conclusion could possibly be faulty because of the limitation of the sample. We should also keep in mind that what is leadership theories is purely a Western study and what could be acceptable in Western mind could be unacceptable in our culture due to religion influence. In addition, the leader-follower relations, in our culture the religion has a great influence on it. My conclusion cannot generalize on all Muslim countries; more research would be needed especially in our cultural.

6. References

Management Centre, Module 3 MBA, Implementing Strategies, University of Leicester.

(www.changingminds.org).

Alex Taylor,” Ralph’s Agenda,” eCompany (July 2000), 96-101.

Northouse, Leadership: Theory and Practice, 29.

Richard Daft, Management, sixth Ed., Chapter 16 p.520.

http://changingminds.org/disciplines/leadership/theories/fiedler_lpc.htm

California Management Review, Choosing the Right Change Path, winter 1994, pp.29-55.

Journal of Management Studies 41:6 September 2004

http://www.academy.umd.edu/publications/klspdocs/follower_intro.htm

http://www.businessweek.com/2001/01_02/b3714015.htm

http://en.wikipedia.org/wiki/Carlos_Ghosn.