Uncertainty over payments to bondholders of the world’s biggest sukuk, or Islamic bond, the $3.5bn deal from Nakheel, the emirate’s property developer, could pose grave problems for the standing of Islamic finance. Yet most investors think the fall-out will hit the Middle East region rather than sharia-compliant financing, which avoids the use of interest, or riba, in line with religious rules.
For a start, Islamic finance has seen strong growth this year as more sharia banks have been launched and more markets open up to products that are structured to pay investors profits or rent. China, the world’s most populous nation, with 80m Muslims, has started to wake up to the opportunities of Islamic finance. It recently awarded its first licence for Islamic banking to Bank of Ningxia, which could pave the way for sharia-compliant financing in the vast Chinese retail and wholesale sectors.
The potential for growth is huge. Of the 1.6bn Muslims in the world, only 14 per cent use banks. By comparison, 92 per cent of US households use banks: in the UK it is 95 per cent.
As the emerging Muslim nations grow and become more sophisticated, more of their citizens will start using banks and financial institutions, and many will want to do so in line with their religion. Growth among the 57 Muslim nations is much higher than in the rest of the world.
The crisis, however, has helped encourage bankers to become more realistic about what products can be adapted from the conventional world. For example, excitable pre- credit-crunch talk of Islamic hedge funds has faded as it has become increasingly clear that developing products, involving speculative bets on the direction of the market, is extremely difficult as they are so far removed from the principles of Islam, which forbids gharar, or gambling.
There is a tension in the interpretation of sharia between the more liberal scholars in Malaysia and the more conservative ones in the Middle East. In Malaysia, they are inclined to say: ‘We can allow a little bit of interest’, whereas in the Middle East all interest is bad.
In spite of the hurdles, however, Islamic finance has come a long way since it was launched in its modern form in the 1970s. It is now attracting many non-Muslim investors in the west, as well as more Middle Eastern and Asian funds.
London is also establishing itself as a financial centre for Islamic finance.
A growing band of western insurers – from Allianz and Aviva to Munich Re and Swiss Re – have been establishing sharia-compliant operations in recent years as they look to compete with established Islamic insurers in the Middle East and Asia. Sharia-compliant insurance, or takaful, is seen as one of the areas of Islamic finance with the best potential growth because it is a product that should appeal to all market areas from individual Muslims to businesses and large corporations. Takaful, which is conceived as a form of mutual assistance and risk-sharing, came second after Islamic retail loans as the products offering most potential revenues. Only 5 per cent of the total insurance market in Saudi Arabia is family takaful. Islamic medical insurance dominates the market, accounting for 57 per cent of Saudi premiums. It is mostly bought by large corporations on behalf of their expatriate employees. The insurance is compulsory and companies must buy it from a Saudi takaful company, such as HSBC’s separately constituted and Saudi-listed HSBC Amanah.
More recently, Islamic equity funds have proliferated thanks to the development of ‘sharia screening’. Islamic funds and indices filter out excessively indebted companies, and those that are involved in conventional finance, gambling, pornography and alcohol.
However, the industry continues to be plagued by differences of opinion on the finer points of interpretation – hamstringing its growth, bankers say. Malaysian scholars are often seen as more liberal than their Gulf peers, and the Iranian Islamic sector, one of the largest in the world, is completely separate from the rest of the global Islamic finance sector. Debates on religious compliance may be a permanent fixture of the industry, experts say. After all, Islamic finance is an attempt to reconcile modern finance and economics with centuries-old religious principles that are interpreted differently across a diverse Muslim world.
Source: Financial Times Special Report, December 8, 2009
When the cultural differences are well known, it has been shown that people are less able to get along together when these differences are deeply rooted in the past. This, of course, does not necessarily mean that people from different cultural regions are unable to cooperate effectively. For example, despite negative impressions and political problems between the
© Noordhoff Uitgevers bv
Flemish and the Walloons, people from both sections of the community seem to be able to work together very well.
Hofstede’s research results make it possible to predict to a certain extent whether an international merger will cause problems related to national cultural differences. Mergers between British and French companies are fraught with difficulties due to major cultural differences. Mergers between German and Dutch companies and between Belgian and Dutch companies seem to experience similar difficulties. Mergers between Dutch and British companies are relatively straightforward in comparison.
In the light of the possible consequences of cultural differences, it is important for an organization to devote a great deal of time and effort to the development of its own company culture and to the selection and training of employees who will fit into this.
Mini case study 2.2
Don’t lose your way in the rush for foreign markets When overseas customers come knocking, most UK
entrepreneurs embrace them with open arms. After all, who wouldn’t want to boast that they have clients ‘or offices’ in New York, Milan and Delhi, as well as Huddersfield and Derby?
However, business experts say it is common for companies to overreach themselves when expanding internationally, putting pressure on finances and staff. Maureen Berry, founder and managing director of The Strategy Business, a company offering entrepreneurs advice on how to enter foreign markets, says companies must be clear on their strategy: ‘This means identifying markets where further investment is worthwhile because there is actually a real demand for the company’s skills or products.’ Berry has 23 years’ experience in international marketing and says owners should gather extensive local information on their particular sector. ‘Who are the competitors, what is the size of the industry and what are the routes to market?’
Entrepreneurs nervous about opening offices overseas could go down the franchising route instead, so long as their service is straightforward to learn and duplicate, and provides sufficient returns for all parties … One of the biggest barriers to UK companies going global is language.
According to a recent study, web users are four times more likely to purchase from a site in their own language, but businesses are warned to beware of translation blunders.
Colgate, for example, introduced a toothpaste in France called Cue - also the name of a French adult magazine.
Taking a business beyond the UK’s shores can seem exciting and risky, but with a well-planned strategy in place, globalisation is a realistic possibility for any entrepreneur.
Source: The Sunday Times, March 16, 2008
2.4.6 Network organizations
At the beginning of the twenty-first century it is possible to see the beginnings of a new type of organization with new roles and assignments for managers and employees (and also, for example, for unions). This new organization form is called the dynamic network model (sometimes referred to as inter-organizational networks or organizational webs).
CASE
dynamic network model
© Noordhoff Uitgevers bv
What is a dynamic network?
The best way of understanding a dynamic network is to consider a practical example of one.
Consider the following situation. A piece of ice hockey equipment is designed in Scandinavia, made ready for production in the United States, adapted according to the demands of the entire North American market, manufactured in Korea and distributed by a multinational sales network, with first deliveries originating from Japan. Where and what is ‘the organization’ in this case? Product design, process development, production, sales and the distribution functions each take place in a different location and in a number of different organizations (which may only be linked for this particular project).
For example …
This sequence of events is said to be taking place in a network organization (see Fig 2.6) made up of discrete but interrelated parts consisting of a number of collaborating organizations. The role of the center as an intermediary does not have to be an independent function; it can be taken over by any of the other participants. The coordination of the entire network of important components is the main issue.
Figure 2.6 The dynamic network
organization
Designers Manufacturers
Agents
Suppliers Distributors
Source: After Miles, 1989
‘Networking’ – the building up of contacts and connections – becomes increasingly important in fast-developing economies. Whether this concerns the tracking down of the right materials, the bringing together of the designers and an appropriate location for manufacturing or the hiring of temporary personnel, the ability to bring together people and components fast and efficiently (often with the help of a computer) is the key factor behind the organization’s flexibility.
The more networks are used, the more refined and efficient they become. They can thus be used more often as a useful tool for expansion, supply and outsourcing. With a network approach, organizations can be more flexible and can adapt more quickly to innovations and shifts in the demand for products or services.
The network is not a new concept. In many lines of business relatively stable networks of suppliers, manufacturers and distributors already exist. What is new is the speed with which the network can now be built up.
network organization
Networking
© Noordhoff Uitgevers bv
2.4.7 The new business model: ICT, unbundling and rebundling
The changes that have recently been taking place in the ‘traditional’ industries – or value adding chains – are epitomized in the developments that have taken place within the automobile industry.
As a traditional producer of automobiles, Ford has always been product oriented and has carried out all of its activities itself, from steel manufacturing right up to sales. Until recently, mass manufacturing has enabled optimization of these processes. The last decades, however, have seen an increase in the number of specialized production chain processes. Departments specializing in certain processes (for example, cabling and lighting) have grown up,
sometimes becoming autonomous units. There has been an increasing amount of outsourcing and price-conscious purchasing. Apart from such factors as price and quality, upstream suppliers are increasingly being selected on the basis of their flexibility in adapting to product specifications (= ‘co-sourcing’), a trend which can be expected to continue. Similar
developments are taking place downstream. Distribution, marketing and sales are being taken over by specialized companies according to a formula agreed upon beforehand. Importers and dealers are selected with an eye to value and do not have much room to negotiate. Automobile producers like Ford, General Motors and others are becoming ‘chain producers’ who derive their market leverage from product development (together with carefully selected partners) and usually their financing power. In recent years, outsourcing the original core task, namely production (= assemblage) has even been under consideration. The process can be described as ongoing and extensive leveling out of the organization.
From ‘push’ to ‘pull’ and multi-channel distribution
Traditional ways of doing business are usually ‘push’ driven. In other words, a product or service is supply guided from the supplier to the customers, with each of the consecutive links in the chain adding more value. However, processes have become more and more demand guided: the ‘pull’ model. In this model, the customer exerts the main influence, driving the chain from downstream until the so-called customer decoupling point is reached.
The picture is also becoming more complex, with companies downstream using more than one distribution channel to sell products or services to various target groups or market segments, generally in different versions and/or different brands: so-called multi channel distribution. Often this is done in collaboration with other parties such as franchise partners or independent intermediaries. Collaboration upstream also takes place via outsourcing of parts through partnerships with upstream suppliers.
The traditional chain model is no longer representative of the complex relationships that have arisen between all kinds of old and new market parties. Collaboration is the hallmark of the new business model: everybody connected through network relationships is in a collaborative relationship. This new model (see Figure 2.7) is characterized by far-reaching segmentation of business functions, both on the supply side as well as on the demand side. New roles have arisen and existing roles have changed. Sometimes various roles will be filled by the one party, as has always been the case.
An analysis of current business models will show they have changed in three main ways. These new ways have been largely brought about by ICT. The relationship with the customer has changed, the relationship with suppliers and other business partners has changed, and the relationship with intermediaries (distribution channels), both on the supply side as well as on the demand side, has changed. New developments such as the Internet which have made information more accessible have brought new parties into the equation. The traditional intermediaries have also regrouped (via disintermediation and reintermediation; see Section 10.4.7). ‘Unbundling’ – outsourcing of core processes until recently part of the chain – is another recent development, though the opposite process is also occurring in the form of mergers (‘rebundling’) or via vertical integration of companies which carry out consecutive parts of the operational management chain.
value adding chains
outsourcing
co-sourcing
chain producers product development
push driven supply guided demand guided pull model downstream
multi channel distribution
upstream
segmentation of business functions
intermediaries
disintermediation reintermediation unbundling rebundling
© Noordhoff Uitgevers bv Figure 2.7
The new business model
Physical distribution
Franchise partner Bundling of
supply or demand
distributor intermediary
e-business partner supplier
aggregator navigator
customer
company
Electronic services
Purchase of goods and services Information and
advice function
New roles and old patterns of separation and joining
The newspaper industry constitutes a good example, since until recently its core processes were part of an integrated chain which included customers (readership and advertisers), production and product development (news, opinion pages etc) and the extensive infrastructure (print facilities and distribution via the company’s own transport). In the United States, unbundling (differentiation) has led to the outsourcing of an increasing number of individual stages of the process and to a growth in entrepreneurial activity.
Related to specialization is the removal of units which perform a distinct phase of the process (product innovation, for example) from the main company processes. The units become independent, specialized companies that focus on specific techniques: in the field of bio technology, for example, the mapping of gene patterns. The companies from which they originally came then link up financially or enter into alliances with these new niche players.
One of the tendencies of our present times is for large composite companies to redefine their traditional roles, and if needs be, rearranging their business activities into core and non-core activities. These will be both business-to-business (B2B) directed and customer-directed business activities (B2C). Many organizations are reviewing their positions and roles within the vertical industrial column and asking themselves whether they want to remain (or become) a supplier, a coordinator, a niche player or a dominant market party. On both the sale and purchase side, horizontal collaborative relationships are being explored and other sectors that offer some potential for collaborative relationship are investigated (look at the examples of Unilever and Ford, for example). Partners for performing the whole or parts of the primary process are also being looked for. The main issue is whether the company should do it itself or whether it should be outsourced, even if it involves a core activity. This is essentially an issue of value adding.
unbundling (differentiation)
niche players redefine traditional
roles B2B B2C dominant market
party
© Noordhoff Uitgevers bv
2.4.8 Strategic partnering
In recent years, an increasing number of strategic partnerships have been set up between American, Japanese and European-based companies. This rise in the incidence of partnerships can be explained by the need for increased flexibility in organizational structures due to developments such as the following:
• The increased internationalization of markets which introduces new competitors to existing geographical markets
• The ever increasing complexity of technology which increases the amounts of money needed for investment in research and development
• The increase in the speed with which successive innovations are launched, shortening the pay-back period of these investments
The funding of research and development thus requires a strong market position. Companies with large market shares should be able to raise the required funding quite easily. Small companies have to find ways to resist such competition.
Figure 2.8 Three aviation alliances
dominate global air traffic
Source: NRC Handelsblad, 15 february 2008
1) Air France and KLM have merged 2) Air France collaborates with Delta 3) KLM collaborates with Northwest Skyteam
1 2 3 4 5 6 7 8 9 10 11
Air France (FRA)1) 2) KLM (NL)1) 3) Delta Air Lines (US)2) Northwest Airlines (US)3) Aeroméxico (MEX) Korean Air (KOR)
China Southern Airlines (CHN) Continental Airlines (US) CSA Czech Airlines (CZ) Alitalia (FRA)
Aeroflot (RUS) Oneworld
1 2 3 4 5 6 7 8 9 10
American Airlines (US) British Airways (UK) Cathay Pacific (CHN) Finnair (FIN) Iberia (SPA) LAN (CHI) Qantas (AUS) Malév (HON) Royal Jordanian (JOR) Japan Airlines (JAP) Star Alliance 1
2 3 4 5 6 7 8 9
Air Canada (CAN) Air New Zealand (NWZ) All Nippon airways (JAP) Asiana Airlines (KR) Austrian Airlines (AUS) BMI (UK)
LOT Polish Airlines (POL) Lufthansa (DE) SAS (SCAN)
10 11 12 13 14 15 16 17 18
Singapore Airlines (CHN) South African Airways (ZA) Spanair (SPA)
Swiss Inter. Air Lines (CH) TAP Portugal (POR) Thai Airways (THA) United airlines (US) US Airways (US) Varig (BRA)
1 3 4 8 1 1617
5
18 6
2 6
2 113 14 5 10
8 8
9 7
9 4 11
9
7 6 3 6
4 10 3
15 10
11 5 7
2 12
6.
<7($0
oneworld
:;(9(330(5*,
© Noordhoff Uitgevers bv
This is sometimes possible by adopting a strategy of specialization by collaborating with other companies in a strategic partnership arrangement. In other cases, a company has to become an international competitor itself.
Strategic partnering is the only way in which a company can ensure that it is able to react in a flexible way to fast changing circumstances within the organizational environment or even to survive. With strategic partnering the partners who have entered the collaboration maintain their independence and their own identity and the effect on the competitive position of the partners will be noticeable in the long term. Strategic partnering and mutual cooperation can take many forms (see Section 4.4).
Many forms of strategic collaboration are possible. We have already looked at the strategic alliance of Corus (IJmuiden) and Peugeot/Citroởn. Strategic alliances are common in the airline industry. Every large airline company has found partners or is searching for some to extend their coverage (see also Section 2.4).
Even the small European ‘flag carriers’ are subject to airline consolidation, with such companies as Alitalia, Austrian Airlines, Brussels Airlines (the successor to Sabena), SAS all changing hands at an international level.
The high fuel costs and weakening economies of recent times have made a lot of companies as well as politicians realize that expansion is necessary. While the major European aviation powers Air France/KLM and Lufthansa have taken the necessary steps, the Chinese and Russian players have also become aware of the opportunities open to them.
The automobile industry is also a rich source of mutual alliances. Volvo and Renault are working to establish a truck alliance. Volvo has joint truck manufacturing ventures with Mitsubishi in Asia and Renault has a monitoring interest in Nissan. In September 2002, Daimler Chrysler gained a 43% interest in the truck division of Mitsubishi as well as a 50%
interest in the truck division of the South Korean company of Hyundai that was sold in 2004, while at the same time starting alliances in China. In 2002, GM took over Daewoo for 1.2 billion dollars. With this takeover, GM acquired production facilities in Asia, the world’s fastest growing automobile market.
In 2009, Volkswagen acquired an interest in Porsche and Volkswagen – whose goal is to become the world’s biggest company – is attempting to overtake Toyota by acquiring an interest in Suzuki. General Motors has divested itself of Saab. Fiat is going to collaborate with Chrysler. The Swedish company Volvo, until 2009 part of the Ford company, may end up in Chinese hands, while Jaguar and Land Rover have been sold by Ford to Tata, the Indian company.
Worldwide alliances
At the global level, about 37,000 alliances are formed per year. About 35% of the value of companies on the stock exchange is produced by alliances. The average success rate of alliances is 52%. The main failure factor (accounting for 55% of failures) is a mismatch between one company’s strategies and those of its partner. Operational problems account for 52%. As contributing factors, about the same percentage (52%) mention mismatch of cultures, with 45% mentioning mistrust between partners.
Strategic partnering can be the key to new technologies, skills and competencies. At the same time there is a danger that knowledge and skills will be ‘borrowed’ by a better organized partner. Partnering with a competitor can bring significant advantages, but at the same time caution is vital. In the long term, there is a real danger that one of the partners will lose out (see Section 4.5).
alliance
joint ventures
Exhibit 2.2