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

Effectiveness beats Efficiency in Strategy Firms need new revenues not just cost cuts 

Efficiency slowed profit deterioration

Effectiveness will replace efficiency as the main strategic goal of UAE companies in 2018. At least, it will for the successful companies. 2017 was the year of efficiency, as companies learnt to do what they used to do with less. Less money, less time, fewer people. Efficiency cut costs and slowed down profit deterioration. As important a step as that was, it was a stepping stone to the important strategic goal of effectiveness. In simple terms, efficiency is getting things done whereas effectiveness is getting the right things done. After all, there’s no point finding cheaper ways to reach a goal if it is the wrong goal.

Effectiveness leads to profit growth

Effectiveness looks at where new revenue, and profit, are going to come from as, opposed to efficiency’s focus on costs. There is nothing wrong with working to achieve efficiency first, as it gives the company time to understand the new external environment. But there comes a time when cutting costs no longer works. In the end, sustainable profit growth is driven by increases in revenue, not decreases in cost. So how do companies become effective? What does it even mean? It means evolving, even transforming if necessary, so as to adapt to the new realities of the economy.

Executives might ask what can they do to generate revenues in a challenging economy? A simple example, just to make a point, is this: take advantage of all the efficiency initiatives. Cost cutting means downsizing, so moving companies will thrive. But what else can happen? Property management companies might provide a discounted rent during the time a client is unemployed. Continue reading

EU's tax blacklist of UAE questionable It is not clear if the UAE is violating something it agreed to or if the EU is trying to unilaterally enforce rules on the UAE

Earlier this year an ambassador from an EU country asked me if I invested in the EU. I informed him that I didn’t.

When he asked me why, I pointed out that the EU had treated two of their members, Greece and Britain, abhorrently, and had tried to punish both countries in ways that made no sense to me. I explained that if the EU could treat its own members in such a way then how could I trust the EU not to treat me similarly?

It seems like my analysis was prescient as last week the EU included the UAE in a so called blacklist of tax havens. As an investor and a businessman, let me explain how the EU mishandled this and what the impact might be.

In terms of handling the situation the EU was reported as only saying that the UAE was not participating in some information agreements. Interestingly, the EU never mentions whether the UAE is a signatory to these agreements. So it is not clear if the UAE is violating something it agreed to or if the EU is trying to unilaterally enforce rules on the UAE. This needs to be cleared up. It is ironic, if not hypocritical, for the EU to publicly accuse the UAE of opacity but for the EU not to similarly provide transparency to these public accusations. Publicly announcing that the UAE is on a so called blacklist and then sending a private letter to the UAE Government is, quite simply, unethical. It either all stays private or it all becomes public. Continue reading

Nike's CSR, Shuaa's acquisitions, and the Fed's impact on our economy.

I am once again in New York. The energy of this city is phenomenal. No show, no PR, just execution. One interesting experience is the discussion that people are having with me regarding Nike’s What will they say about you? campaign, which shows a video montage of Muslim women in hijab playing sport. The effect on Americans that I have met with is clear: Nike, a global American merchandising group, has unequivocally stated that wearing a hijab is neither a bad thing nor does it imply that women are inferior. Talk about corporate social responsibility (CSR)!

The genius of Nike is that their CSR is not limited to charitable work, important as such contributions are. Nike used their global brand to reverse an unfortunate wave of prejudice. While mayors in France are banning the hijab, Nike is celebrating the hijab in the most powerful way possible. Nike’s genius is thinking out of the box and blending CSR with commercial acumen that led to the announcement of a Nike hijab. You don’t have to be a brand expert to understand the power of a Muslim hijab emblazoned with one of the most powerful western commercial symbols on earth, a symbol not of consumption and excess but one of strength and power. There are, as usual, people offended on all sides. But that doesn’t change the effect, it just proves Nike’s strength of character in doing the right thing.

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Saudi Vision 2030 must tap rich parts of the private economy

Using Saudi Vision 2030 as an example, in a previous article I pointed out that economic reform is difficult to get perfectly right on your first try, but I also pointed out that complaining about it without trying to provide solutions is usually an ineffective strategy for providing feedback to the decision makers. Especially since Thursday, when the Saudi government unveiled its budget in a manner providing a large increase in transparency and comprehensibility. The state continues to improve its part in achieving Vision 2030.

The Arab Spring, Brexit and the probable demise of EU 1.0, and Donald Trump’s plans are a product of the mismanagement of economic reform. This is not an article about politics and I take no sides here. This is an article about economic reform and how it has the power to change history. The idea here is to provide different ways of looking at economic reform to create tools that might be useful to all stakeholders.

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A long-term plan for a stronger UAE economy

Eid Mubarak.

It has been difficult this year to find topics on the economy or business to be positive about. For Eid Al Adha I feel that a more optimistic article is called for. So let us look to the future and to what might be.

One happy future is having oil prices to return to US$100+ and remain there. That would have an immense positive effect on the economy. But then that isn’t looking to the future. With, among many other factors, shale oil production costs dropping and Iran increasing output capacity, this isn’t an optimistic future. It is a fantasy.

I, however, believe that we can have an optimistic future without the need for massive oil price increases. I am not saying that it is an easy path but it is a realistic one. It consists of bringing together a host of solutions and interweaving them into a single integrated plan for the economy. You will recognise individual ideas that I have discussed in detail already. Now it’s time to put these pieces together into a plan.

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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.