VAT’s Impact on Business Strategy

Disclaimer: I am not an expert on VAT and I am not providing advice. I am simply trying to expand the discussion around VAT from how it is applied to what it might mean to business strategy.

The first point that I want to discuss is the idea that this is a value added tax levied by the government and collected by various vendors and suppliers. From my understanding this is a legally correct definition. The problem is that this phrasing does not change the laws of supply and demand. If the price of a good or service moves, it matters not why it has moved in terms of the effect of demand. Price up, demand is usually down. Continue reading

My Zawya Story, 2nd Edition

In 2012, Zawya, a UAE-based business media company, was sold to Thomson Reuters for a 20 times cash return by Saffar, a low-profile private equity company. I am the founding chief executive of Saffar and became chairman of Zawya after we acquired it, between 2001 and 2011. This is my story of how I bought a bankrupt, London-based company with five employees, moved it to the UAE, built it into a profitable company with more than 200 employees and then sold it to a global competitor, thus generating a 35 per cent annual rate of return over an 11-year period.

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Ipic-Mubadala merger does not have to follow a template

Ipic and Mubadala, two major Abu Dhabi investment funds, have been mandated to merge. The outcome does not have to be a single company. In this article I will look at an innovative option for the Ipic-Mubadala merger to result in more than one company and how such a multi-result merger can support Abu Dhabi’s Economic Vision 2030.

I recently wrote in detail on what strategies the NBAD-FGB merger could take and in a subsequent article I delved into a major challenge such a merger might face. The detail was possible because both NBAD and FGB are listed companies and have strong disclosure requirements.

When discussing Ipic and Mubadala, we are talking about two privately held institutions and as such there is less public information at this time. This does not stop us from conducting a thought experiment, if you will, to try to understand the options available.

The key issue we will look at today is that a merger does not have to be about acquiring market share or new business lines. A merger can be about rationalisation and refocus.

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Mediocrity as a strategic goal for UAE banks?

For some time, and as mentioned in previous articles of mine, I have wondered how there could be over 50 banks in the UAE, around half of which are full operating banks, given a population of circa 8 million, over half of whom are blue collar workers not in need of banking services. Basic economic theory would suggest that competition would lead to mergers or banks withdrawing from the market until the supply of banking services dropped to a level commensurate with the level of demand for banking services.

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Keep a close eye on strategy – what’s yours?

What is strategy? In particular, what is strategy as it applies to the GCC?

At the simplest level there are four types of strategy. First is do the same thing; second is build on what you, or others, have been doing; third is do something new; and, fourth, covered in a previous article of mine, is adapt to market threats and opportunities.

In my experience the most prevalent approach in the GCC is to do the same thing. Sometimes there are superficial changes that are meant to masquerade as strategy building on current business, but in the end it is simply doing the same thing. A bank expanding into retail or Islamic banking from a corporate banking base, a real estate developer building units targeted at middle-income buyers as opposed to high net-worth individuals or hospitality moving from five-star hotels to four and three-star hotels are such examples.

A true extension strategy of building on something that already exists is Apple and the iPhone. The core demand for the iPhone came not from new technology but from packaging various services into a single unit. Mobile phones and MP3 players already existed and were in widespread use. Less known, but nevertheless well developed, were personal digital assistants, such as those developed by Palm. Frankly, the I-mate series of smartphones operated in ways similar to the iPhone. Apple simply improved on these technologies and backed the iPhone with the iTunes service.

A good way to understand whether the extension strategy you apply is a true strategy or simply something superficial is to look at your market penetration or your pricing power. A personal example comes from the strategy that we deployed for Zawya, the business media company in which I was a private equity investor and chairman.

We kept a close eye with each product that we deployed, whether it was a new database, analytical tool or news. If we captured market share we poured more resources into it, but if we didn’t get any market traction we cut the product. By 2008, Zawya had more Middle East screens than Reuters and Bloomberg combined, according to our surveys.

In terms of pricing power, the best example was after the global financial crash of 2008. As you would expect, Zawya’s main clients were in the financial services sector and therefore it would make sense that we would lose revenue. However, as we were delivering far more value per dollar spent relative to our competitors, our subscription base was not only resilient, but we actually increased our prices in January 2009 and increased our revenues tremendously. Our product was relatively price inelastic.

Extension strategies are plentiful in the GCC. But a strategy of doing something new seems to be rare if not completely elusive. We do not seem to be able to launch a Facebook, Twitter or Uber other than as a copy of something launched elsewhere. Don’t get me wrong, we don’t just take an idea, we improve upon it – I love Careem’s ability to book a car in advance and to prepay cash, both features not included in Uber in the UAE last year, when I was extensively using the two services. But we are not developing new core concepts.

We have seen governments in the region push for more innovation. I feel the issue is a lack of a deep venture capital source of funds, which is critical to developing innovative companies. For the UAE, this stems from three main sources. The first is the reticence of entrepreneurs to sell equity in their start-ups early on. The second is restricted options for expatriates in owning 100 per cent of their company, at least if the company is allowed to do business in the UAE. The third is that when an entrepreneur or start-up is funded and the investment does well, then the venture investors do not exit. Ever. As a result, investors willing to finance new ventures do not recycle their money.

The solution could well be a change of the company regulations. Anyone investing in private equity should be familiar with the concept of a limited partnership, whereby one party, the general partner, has near complete control of the business and the limited partners simply participate in the economics.

Bloomberg LP, the global media giant, has such a structure. The “LP” stands for “limited partnership”. A second change is clear: allow 100 per cent foreign ownership outside the free zones. Saudi Arabia allows it for most sectors, why can’t we?

The focus on strategy, so far, in the region seems to have been focused on competence in developing strategy. The reality may well be legal and cultural structural constraints in the market.

This article was originally published in The National.

Trump Applies Business Strategy to his Political Campaign

This entry is part 1 of 3 in the series Trump

Donald Trump’s political strategy is to apply basic business methods and it is working spectacularly. Some people are shocked by his success and this is due to their cognitive dissonance, they cannot accept that Trump, who they revile, can be so successful. This is exactly the same as the Microsoft detractors’ inability to accept over 20 years of Microsoft’s market dominance.

The core of Trump’s strategy is his brand. Trump has had two phases of building his brand which is recognisable by every voter in the United States.

The first phase of Trump’s brand building was around his business success which not only resulted in financial success it also resulted in massive brand enhancing wins such as iconic skyscrapers across the US named after him and several popular business books. Although Trump stumbled in his business and personal life, his ability to recover from these setbacks only enhanced his brand as a resilient winner.

The second main phase of Trump’s brand building is his entertainment persona. The main vehicle was the hit reality TV show The Apprentice which he hosted for 14 seasons. To understand how successful this was – at its peak it had over 20 million viewers weekly, Trump reportedly received US$3 million per episode and he received his own star on Hollywood Boulevard. That is a lot of exposure.

Not as well known internationally, but critically important in understanding Trump’s current political strategy, is his involvement with World Wrestling Entertainment (WWE). The WWE are experts in understanding a large Republican demographic and Trump made sure that he was well received by them before talking to them politically.

No other contender for the Republican nomination has anywhere near the exposure that Trump has on a national scale. How do you compete with 14 seasons of a hit TV show? Trump is instantly recognizable in name as well as in person, and people will prefer that which they know. Trump didn’t build momentum in 2015, he entered the race going full speed. To truly understand the success of Tump’s rebrand, in 1999 a New York Times/CBS News poll found that 70% of Americans viewed Trump unfavourably.

The next part of the business strategy that Trump is applying to his presidential candidacy is the ruthless exploitation of his competitive advantage.

One example of such a competitive advantage is the asymmetric professional standing and goals of Trump relative to his competitors. By and large the rest of the candidates, Republican and Democrat, are lifetime politicians. For them, not being elected president is a big setback in their professional careers.

The competitive advantage here is that all of Trump’s competitors become risk averse and in particular they fear Maverick Risk, which is the risk of straying too far from the herd. This allows Trump to take the lead in setting the policy agenda as his perceived risk of failure is far less. In business parlance, Trump is willing to take the necessary risks to innovate. You might not like his innovation, but boy is he innovating.

The highly regarded business book The 7 Habits of Highly Effective People repeatedly reinforces the idea of focussing on your circle of influence, i.e. concentrating your resources on things that you can affect and ignoring things that you cannot change. Trump does this relentlessly.

An instructive example is what happened when Trump talked about immigration. The backlash that I read in some of the media and heard on television led me to believe that Trump was vehemently against all immigrants. Intrigued I investigated further and after reading what Trump actually said it was clear that his stated position was far less aggressive than some reports. Whether you agree or reject Trump’s position is not important for this analysis, what is important is his response.

Trump’s response was genius. He ignored the reports. Trump has clearly decided that there are certain segments of American society that he will not reach and simply is refusing to waste time or weaken his message to his core demographic. Business translation – Trump is designing his product for his current and potential clients and is refusing to dilute the product in the hopes of attracting hardcore holdouts. Far too many businesses build products that their clients should want instead of what they do want. If the demand exists and is unfulfilled, take advantage of it.

The conventional view of the left and some of the right is that Trump is a flash in the pan who is simply rabble rousing. In business it is a dangerous decision to dismiss the success of a competitor as being temporary. Let me offer some alternative interpretations that might be more in line with the intelligence and skill that Trump has shown over his lifetime.

Perhaps Trump’s real goal isn’t the presidency. Perhaps he wants to corner a demographic that is under served and use that as a bargaining chip to negotiate the vice presidency or a cabinet post. This happens in business all the time, for example Yahoo bought Maktoob predominantly to acquire the reportedly 16 million Middle East users.

On the other hand perhaps Trump does not believe in his policies and is only marketing them to get elected President. Once he is in he might have different plans. Not unheard of in the world of politics but also quite well known in the world of business. Microsoft propelled the word “vapourware” into the global consciousness by repeatedly promising products and features that never materialise. Off plan real estate sales that never materialise are not unheard of either.

The overarching business lesson here is that Trump has shown that conventional business strategy is so robust that it can be applied to politics to spectacular initial success. What is frightening is that the career politicians cannot recognise Trump’s tactics as a cohesive business strategy.

If you like this post, you might also like: The Trump Trade and Fox News: Manipulative not News.

This article was originally published in The National.

Mover’s Advantage: Of Sony, Google and Emirates Airlines.

Sony was a first mover in personal stereos. Emirates is a last mover in airlines. Which strategy has the advantage: First Mover or Last Mover?

When I was a child, I was frequently admonished with the old adage that “The early bird catches the worm.” I analysed this and one day responded to my teacher “But doesn’t the early worm get eaten by the early bird?”

In the 1970s teachers were not enamoured of 8 year olds talking back to them. Worse was if said 8 year old eloquently blew apart a foundational aphorism that the adult world depended upon to mould young minds with.

To my chagrin, when I turned thirty and even more now that I’m in my forties, people continue to resent logic intruding into their personal reality.

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Adapt and progress: Learning from Germany’s Fifa World Cup 2014 success

There is a saying: insight comes after action far more often than action comes after insight.

Decision-making under uncertainty is a normal part of business. One could argue that it is at the core of managing a business. It is simply impossible to assemble all the data relevant to a decision. Other barriers include some of the data being in the future as well as being generated continuously, which could lead the decision-maker to wait indefinitely.

This leads us to another saying: paralysis by analysis.

The uncertainty surrounding decision-making provides an excuse for the timid to avoid making any real decisions whatsoever. Only by raising the spectre of risk can decisions be made. For executives, since full information can never be acquired no decisions are made. Sound familiar?

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Crisis Response Strategies

This entry is part 3 of 3 in the series Strategy

In a world of uncertainty management is constantly evaluating potential risks as they unfold and deciding how to respond.

At one end of the response spectrum is what might be called the Anglo-Saxon Fast & Furious model: ignore all risks until they become an existential threat of such dire proportions that there is only one available response and it is blatantly clear to all involved.

At the other end of the spectrum is what might be called the Asian Ancient Wisdom model: treat everything as an existential threat at all times and avoid taking any proactive decisions whatsoever lest it lead to greater danger.

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