1 Table of Contents
Table of Contents...................................................................................................1 ABSTRACT.............................................................................................................. 5 CHAPTER 1 - INTRODUCTION.................................................................................6 1.1 BACKGROUND...............................................................................................6 1.2 JOHNSON ARABIA........................................................................................11 1.3 OBJECTIVE...................................................................................................13 1.4 PROJECT AIM...............................................................................................13 1.5 RESEARCH QUESTIONS...............................................................................13 1.6 SCOPE.........................................................................................................14 CHAPTER 2: LITERATURE REVIEW........................................................................15 2.1 INTRODUCTION...........................................................................................15 2.1.1 Defining recession................................................................................15 2.2 WHY A RECESSION OCCURS.......................................................................17 2.2.1 Three Ds’ of recession..........................................................................17 2.2.2 The four fundamental Bs of recession..................................................18 2.3 MEASUREMENT OF RECESSION...................................................................20 2.4 INDICATORS OF RECESSION.......................................................................20 2.4.1 Employment.........................................................................................21 2.4.2 Output..................................................................................................21 2.4.3 Industrial Production index (IPI)............................................................21 2.4.4 Capacity utilization rate (CUR).............................................................22 2.4.5 Interest rates........................................................................................22 2.4.6 Producer Price Index (PPI)....................................................................23
2.5 RECESSION EFFECT ON ECONOMY..............................................................23 2.5.1 Recession and full employment............................................................24 2.5.2 Recession and Unemployment.............................................................25 2.5.3 The multiplier effect.............................................................................26 2.6 LESSONS FROM HISTORY............................................................................27 2.7 STRATEGIES TO COUNTER RECESSION.......................................................27 2.7.1 Research the customer........................................................................28 2.7.2 Continue advertising............................................................................28 2.7.3 Adjusting product portfolio...................................................................28 2.7.4 Lowering extra budget.........................................................................29 2.7.5 Lower the stock holding.......................................................................29 2.7.6 Increase Cash flow...............................................................................30 2.8 STRATEGIES TO GAIN COMPETITIVE ADVANTAGE DURING RECESSION......30 2.8.1 Good cost.............................................................................................31 2.8.2 Thinking out of the box........................................................................31 2.8.3 Bad cost............................................................................................... 32 2.9 EFFECT OF GLOBAL ECONOMIC CRISIS ON UAE..........................................32 2.10 UAE AFTER RECESSION.............................................................................33 2.11 SUMMARY................................................................................................. 36 CHAPTER: 3 RESEARCH METHODOLOGIES...........................................................38 3.1 INTRODUCTION...........................................................................................38 3.2 RESEARCH APPROACHES .........................................................................39
3.2.1 Qualitative Approach............................................................................40 3.2.2 Quantitative Approach.........................................................................42 3.3 DATA COLLECTION TECHNIQUES................................................................44 3.3.1 Primary data.........................................................................................44 3.3.2 Secondary data....................................................................................48 3.3 LIMITATIONS OF THE RESEARCH.................................................................49 3.4 CHAPTER SUMMARY....................................................................................51 CHAPTER 4: FINDINGS and ANALYSIS..................................................................52 4.1 DATA COLLECTION, HANDLING and ANALYSIS............................................52 4.2 SURVEY FINDINGS.......................................................................................53 4.2.1 Division Manager..................................................................................53 4.2.2 Sales and Marketing Manager..............................................................56 4.2.3 Operation Coordinator/ Debt Collector.................................................58 4.3 SECONDARY FINDINGS...............................................................................61 4.3.1 Analysis of the financial statements for Johnson Arabia LLC................61 4.3.2 Implications of Recession on Dubai......................................................66 4.3.3 Broader Implications of the recession on Johnson Arabia.....................67 CHAPTER 5: CONCLUSION....................................................................................69 5.1 SUGGESTIONS FOR FURTHER RESEARCH...................................................72 LIST OF REFERENCES...........................................................................................74 APPENDIX I - SURVEY QUESTIONNAIRE................................................................80 APPENDIX II – FINANCIAL ANALYSIS.....................................................................88 APPENDIX III - SURVEY FINDINGS.........................................................................92
ABSTRACT The research was conducted to identify the implications of the recent global economic recession on Johnson Arabia LLC and to evaluate the measures taken by the company in light of the recession through primary and secondary research. Through the implementation of a survey questionnaire and analysis of financial reports, it was observed that the recession has had serious implications on Dubai and that while Johnson Arabia LLC has realized the presence of the recession but has not managed to bring counter-measures to a significant position. There is a need for Johnson Arabia LLC to focus efforts on internal matters so that strategies designed to counter the recession can be implemented effectively.
CHAPTER 1 - INTRODUCTION 1.1 BACKGROUND The UAE, when considered in a broad perspective, can be considered as an open economy known for functioning with a high per capita income. The Emirate of Dubai is also known for its extensive economic diversification that has allowed it to decrease its reliance on oil and gas to as low as 25% of its GDP (The World Factbook 2010). There is no doubt in the fact that oil and gas still holds a profound position in the transformation that the UAE has undergone. The UAE government is known for giving attention to creating jobs and expanding infrastructure. Dubai’s Free Trade Zones attract investors from across the world with zero taxes and lenient ownership laws. Dubai's GDP is composed of the primary, secondary and secondary sector. During the early 2000s, Dubai’s reliance on the secondary sector of the manufacturing industries experienced stability while reliance on the primary sector experienced a decline in face of an increasing reliance on tertiary sector. The active tertiary sector observed significant growths in the communication, real estate, financial services, and real estate, storage, transport, hotel and construction industries. Reliance on labor also experienced a significant increase while an increase in the availability of labor was observed alongside a decline in labor productivity. The sectors of Construction, insurance, trade and banking in particular experienced an increase in capital productivity where the construction sector produced nearly four units of output per every unit of input. During the same time, the construction industry in Dubai became one of the eight essential sectors contributing to the development of the Dubai
7 economy. By 2003, the construction industry, alongside the mining, handicrafts and trade sectors, had become the industry providing the highest returns on investment. The construction industry was going through a favorable boom at this point. The sectors of education, hotel and finance were accounted as the sectors with the least return with surveys by the Dubai Municipality recording returns as low as thirty percent. The GDP was observing an average annual growth rate of nearly eight percent while the capital spending on fixed assets was growing by an average annual growth rate of almost half of that. Also, government revenues acquired from the oil and gas sector, profits from public enterprises and other sectors accounted for over eighty percent of the government's non-tax revenue. The early 2000s saw an average annual growth rate of twenty seven percent in the total exports of goods while total imports showed an average annual growth rate of nearly eighteen percent. Trade in services showed eleven percent average annual growth rate in imports as well as in exports. Dubai's economy is one that is built so that reliance on oil for GDP growth decreases with time so the non-oil products can acquire the concentration required in order to develop. Major economic sectors in this regard remain construction, services and trade. Labor and capital have been brought into use to make up for deficiencies in other factors of production. Over the years, growth in Dubai has been observed as one that is fundamentally driven by investment. Production processes for Dubai generally rely heavily on imported capital goods and while risk taking does not provide a significant amount of incentive, activities such as short term rent seeking and wealth play significant roles as drivers of the economy. The GDP dropped by almost 4% in 2009 when oil prices fell and asset prices deflated as a result of credit tightening. The Central Bank and relevant authorities attempted to soften the
8 blow caused by the recession by encouraging liquidity growth in the banking sector. The Dubai real estate market and construction industry in particular experienced a considerable decline in business volumes. Foreign investors become concerned for the solvency that Dubai holds when it was revealed that there was a deficiency of cash in meeting debt obligations (The World Factbook 2010). It came as no surprise that Dubai chose to take large scale measures to solve its debt problem through a multibillion dollar bond program that was estimated at approximately $20 billion. Dubai had to be supported extensively in order to soften the blow dealt by the recession. Proof of this can be witnessed in the fact that Dubai has to be allotted an additional loan of $10 billion in late 2009 by Abu Dhabi. Efforts were made to further decrease the reliance of GDP growth on oil and gas as well as on a large human capital base. The recession is not one that has had implications on any specific industry in Dubai. The fact of the matter is that the implications of the recession are multilateral and have affected different industries in the region. Oil prices saw a significant drop and banks began to become hesitant in their lending operations (Shostak 2008). The oil profit based economy began to show some of its first signs of the implications of the global recession in the form of plummeting stocks in the Dubai stock market by June of 2008 (Worth 2008). As a direct result of the recession, Dubai began putting construction projects on hold while others were considered for cancellation in cases where funding had not already been lined up (Elliott and Stewart 2009). This is because of the fact that expatriate and investor confidence began to drop and people began to pull out their money from the Dubai stock market, making development projects run out of financial resources (Singh 2009). Although the recession that hit Dubai is not one that can be considered to be the same in its severity as has been observed in the case of the United States
9 and other European economies, it comes as a significant blow to the Dubai economy and the growth to which it had become accustomed to and known around the world for (Heyer 2009). "In the U.S., the challenge is about keeping the banks going, [In Dubai] the economy has been overheated, a correction is needed, and it's about making sure the slowdown happens in a smooth, orderly manner" (Worth 2008). Around October 2008, Dubai was announcing plans to build new structures and to engage in rapid development plans. The projections and forecasts were ones based on optimism and there was very little concern if any at all for the potential implications of the global recession (Hunters 2008). However by the end of the same year, the global recession had far more devastating consequences on Dubai’s economy than had been expected. Layoffs had to be put into place in order to cut losses in a desperate attempt to cut costs (Dubai Chronicle 2009). The layoffs caused massive delays in construction and development projects in the region and several of them had to be subjected to a rescheduling (White 2009). Dubai suffered an extensive loss of man power as a result and while some of the unemployed struggled to acquire new jobs, many of those from abroad headed back home. Development plans as expansive as the Burj Dubai experienced share prices plummet by as much as 80% as a direct result (The Strait Times 2008). Banking and Financial Institutions dealing in Islamic Banking and Financing managed to survive the immediate and more harsh repercussions of the recession through the fact that Islamic Banking does not incorporate mortgage based banked securities and credit-default swapping, both of which have been identified and established as primary reasons that led to the inflation (Sacirbey 2009).
10 Islamic Banking and Financing therefore comes across as more safer and ethical when considered in light of the fact that conventional banking tends to give an advantage to the seller while Islamic Banking tends to keep a just balance between the buyer's and the seller's advantage in a business transaction (Tutton 2009). While institutions engaged in Islamic Banking and Financing did not suffer as much from the recent recession, the fact remains that Dubai has been far from impervious from the implications of the recession. The tourism industry has plummeted and foreign investment has decelerated significantly. Dubai is known for its exquisite high end and posh hotel industry that thrives upon a strong tourism industry. The global recession has reduced tourism and has therefore brought consumers to a point where they refrain from spending too much of their disposable income. As a result, hotels in Dubai are being forced to invest in aggressive marketing and promotional efforts to encourage people to come to Dubai. As bookings continue to decline, the hotel industry in Dubai is experiencing its lowest booking rates at a time when it is accustomed to its highest influx of customers (USA2UAE 2009). The Dubai tourism industry experiences its peak season during the first quarter due to its mild winter climate that appeals to Western European, Russian and Scandinavian tourists amongst many others (HSBC Bank Middle East 1998). It is necessary to highlight at this point that by the end of the previous decade, the Dubai hostelling industry was entering a maturity phase and the provided facilities were being subjected to expansion, up-gradation and development to cater to expanded influxes of tourists. The recession in Dubai holds a considerable degree of relevance when considered in light of the fact that Dubai comes across as a ground where investment from the West and a major
11 part of the East comes in. Investors from Iran, Saudi Arabia, Iraq, the US, Europe and other regions can be expected to come to Dubai to invest aggressively in development projects. The tax concessions that Dubai offers make Dubai the ideal investment ground for investors across the globe. It is apparent therefore that the implications of the global recession have had an extensive impact on multiple areas of the Dubai economy and that these implications are not ones that can be subjected to an underestimation. The recession has put a stop to the acceleration with which the Dubai economy was developing and it comes as no surprise that almost every industry in Dubai suffered significantly. 1.2 JOHNSON ARABIA Johnson Arabia's foundations date back to 1976 in South Africa where the establishment of Johnson Crane Hire brought forth a company that has developed through decades of experience with the provision of offshore lifting solutions to a diverse variety of projects. One of the most recent expansions by Johnson Crane Hire came in 2004 in the form of Johnson Arabia in the Middle East which comes as a direct result of a joint venture between Murray and Roberts and the Kanoo Group. The purpose of the expansion of Johnson Crane Hire into Johnson Arabia was to allow Johnson Crane Hire to relieve its reliance on the South African Market through enhanced activities in crane trading and to capitalize on the development opportunities that came forth as a result of the venture underlying the expansion. With its head quarters in Dubai, Johnson's Arabia provides cranes and Aerial Work Platforms for lifting jobs that may pertain to fixing, cleaning or construction tasks. Johnson started functioning with hiring out only crane. Through their dedication and commitment in 2004
12 they launched their Aerial work platform department. Today Johnson has almost over 100 cranes and over 300 aerial work platforms with the total number of employees exceeding 250. Johnson Arabia has taken part in projects such as the Mall of Emirates, the Burjuman Centre Extension, the Ibn Batuta Shopping Mall, and the Hatta Prison amongst others. Projects such as the Dubai Mall, the expansion of the Dubai International Airport, the Emirates Hangers and the Palm Jumeriah are only a few of the ongoing projects in which Johnsons Arabia is engaged in. Major competitors of Johnson Arabia include Al Faris Cranes, Al Jaber Cranes and Rapid Access. Apart from the rivalry part because of the trust and faith customers have in Johnson Arabia they have a huge market share in the crane industry. At Johnson customer satisfaction is priceless and it strives to provide its customers value added lifting solutions which are aligned with safety, maintenance, availability, reliability and cost effectiveness. Johnson Arabia vision is to be the best and leading lifting solutions service provider and keeping in mind their progress it’s not far away. The organizational structure for Johnson Arabia is one that follows a relatively simple hierarchical. The structure starts from the General Manager of the company, and branches out to the Finance and Administration Director. The Finance and Administration Directors although on a broader level, hold the same relevance as the heads of sales and operation departments for Cranes and Access Work Platforms. It is imperative to highlight that each of the Crane and Access Work Platform areas comprises of a Sales and Operations department of its own. The operations departments for Cranes then branches out further into the
13 Workshop department and the Operators division for Cranes while the Operations department branches into the Workshop Department for Access Work Platforms. 1.3 OBJECTIVE The objective of the research is to develop a clear comprehension of the implications of the global recession on Dubai and subsequently on Johnson Arabia LLC in order to establish upon the measures that were taken and their utility to Johnson Arabia LLC. This analysis shall allow the research to reach conclusions in the form of recommendations for Johnson Arabia LLC to sustain its performance in the Middle East and to continue capitalizing on its new venture. 1.4 PROJECT AIM The research aims at acquiring a sound understanding of the implications of a global recession on a thriving and well established economy. Johnson Arabia LLC, for this purpose, has been considered as an example of a well established company operating in the East that has seen influences as a result of the recession. 1.5 RESEARCH QUESTIONS The research shall be carried out to explore and answer the following questions: • How did the recession have an influence on the Dubai economy and what were the implications? • • What were the implications of the recession on Johnson Arabia LLC? What measures did Johnson Arabia LLC take to deal with the recession?
14 • How adequate were the measures when considered in comparison to measures taken by other development companies in Dubai? • What is the current standing of Johnson Arabia LLC when considered in light of the implications of the recession? • What alternate measures could have been taken by Johnson Arabia LLC in response to the recession? • What further measures can be taken by Johnson Arabia LLC to sustain and develop its position in the Middle Eastern market? 1.6 SCOPE The scope of the research is defined through the fact that the research aims to develop an analysis of the measures taken by Johnson Arabia LLC in response to the recession and their effectiveness. The scope shall therefore be limited to the effectiveness of these measures and to the formulation of alternate measures that could have been taken to respond to the recession.
CHAPTER 2: LITERATURE REVIEW 2.1 INTRODUCTION 2.1.1 Defining recession Carrying out a research on the implications of a recession would be injustice to the objectives of the research and the effort made in lieu of the research. However, when attempting to define the exact definition of a recession, there are numerous definitions available, each of which attempts to shed light on a recession through a different macro-economic perspective. It is therefore preferable to consult a number of definitions on the subject before establishing any one as the threshold by which the research is to be conducted. Knoop (2004) defines recession as two or more successive quarters of negative GDP growth of an economy. According to this definition recession comprises of two or more consecutive quarters of negative GDP growth which means that an expansion in the economy would result if there would be two or more consecutive quarters of positive GDP growth. This means that the peak of an expansion is that point at which the level of GDP of that particular economy reaches its ceiling point after which it starts to decline. Hence the peak of an expansion would end up in the commencement of recession. Similarly the channel of recession is the point at which the GDP falls to its lowest point after which it starts to increase again.
16 Similarly another definition of recession is provided by Burns and Mitchell, according to them recession is nothing more than a significant extensive decline in economic activity that impacts the various sectors of the economy (Stock 1993). Frank and Bernanke (2006) define a recession as “a period in which the economy is growing at a rate significantly below normal is called a recession or a contraction” (p. 701). This definition can be observed as one that is similar to one given by Downing and Clark (2003) according to whom “a slowdown in the overall level of economic activity is called a recession” (p. 432) and Gwartney, Stroup, Sobel, and MacPherson (2006) who establish a recession as “a downturn in economic activity characterized by declining real GDP and rising unemployment” (p. 171). However, a more comprehensive definition of recession comes across as one given by Nordhaus (2005) when he defines a recession as the “recurring period of decline in total output, income and employment, usually lasting from 6 months to a year and marked by widespread contractions in many sectors of the economy” (p. 468). Similarly, Godin (2001) attempts to provide a comprehensive perspective on recession when he states that “a recession is a period in the economic cycle when business activity and spending are receding. The strength of the economy is on a downhill side, and people are feeling a bit uneasy about their prospects” (p. 24). The most comprehensive definition of a recession however was observed to be one given by Tucker (2010) when he defines a recession as “a downturn in the business cycle during which real GDP declines, business profits fall, the percentage of the workforce without jobs rises, and production capacity is underutilized. A general rule is that a recession consists of two consecutive quarters in which there is a decline in real GDP" (p. 150).
17 2.2 WHY A RECESSION OCCURS The question arise that why recession occurs, the answer to the question have been provided by two main schools of thoughts that is the monetary economist and the Keynesian economist. The monetary economist or more famously known as the neo classical economist believes that large decrease in the money supply usually results in recession. The explanation given in this regard is that unexpected and sudden decline in the money supply will decrease the spending power of the public and hence resulting in recession. On the other hand the neoKeynes economist believes that when there is a tendency in people to save more than consumption spending the result would be a decrease in total spending and the economy wouldn’t have funds to circulate in the market and hence recession would occur (Wessels 2006). 2.2.1 Three Ds’ of recession Economic analysts summarize all these factors and jot them into three Ds’ for a slowdown to become a recession. These three Ds’ includes 1. Duration 2. Depth 3. Diffusion. By duration it means that the slowdown period should be considerably long, depth means it should have a substantial decline in the economic activity and diffusion means that the slowdown effect should be visible on all the sectors of the economy rather than on just a single sector or region.
18 Usually all these events are recorded by the National Bureau of Economic Research NBER and every member of the committee must exchange their thoughts on the various aspects of this definition to label that particular affair as recession period. However, Farago (2002) perceives that a recession occurs after a high point in the level of economic activity and ends as the economy reaches its trough. What is evident till now is that the economy runs in a cycle where it goes into expansion when the economics conditions are at its peak and consequently goes into recession if there are any abnormalities in the economy (Farago 2002). 2.2.2 The four fundamental Bs of recession To have a better understanding the definition and basic concept of recession a very good explanation is given by Farago (2002) which is known as the four Bs. 1. Bubble 2. Buzz 3. Bust 4. Bandage The origins of a recession can be tracked to the formation of a bubble. The bubble therefore represents the foundation of the recession. Farago (2002) says that bubble means tentative excess in the economy causes certain sectors of the economy to grow at a very unhealthy rate means growing at a rate which is not normal. This expansion could be because of overproducing, overtrading, overspending etc and that is why it is called excess. History of recession tells us that the major factor that causes the bubble was the unhealthy demand of
19 buying commodities for resale rather than for personal use. A classic example can be given of the real estate bubble that occurred in the early 1990s’ when the prices of land became quiet cheap and most of the people started buying real estate to generate profit through reselling. The problem came when there were too many people that invested in the same commodity with the same purpose of making profit which left the market without buyers. A similar kind of scenario developed with the IT industry it happened so unexpectedly that everyone started investing the IT sector which created a bubble and eventually that bubble busted. The second one is the Buzz in the market, as the name suggests buzz is what the people are talking about in the market also the speculations that are being created about a particular sector or stock which they believe is booming becoming hot. Farago (2002) believes that the impact of this buzz can be very decisive and it can lead to various changes in the economy. For example if a buzz is created in an unstable economy what would be the general reaction of the people that the public would start to pull out their money from the market. The third B is the burst of that bubble which in fact is the recession. One thing that should be kept in mind is that a bubble in a single sector of market is most unlikely to cause a recession (Mochizuki 1995). What is recommended is that the consumers should keep an eye on the bubble and should be aware of their spending in that particular sector (Calverley 2004). What generally results after the burst is that productivity goes down and unemployment elevates. The last and the final phase of the recession is the bandage, as it’s very much understood by the name that bandage is the post recession stage where steps are taken by the government and other policy making authorities to bring the economy back on track. To summarize it briefly it could be said that recession is that state of an economy in which the rate of output decreases to a level that is relatively lower than what it would have been in
20 normal circumstances. A boom is a condition in which output is growing at a very swift rate. The beginning of a recession is called the peak and the ending point is known as the trough. Economic instability causes recession and expansion and it’s hard to predict their severity and length. They have widespread impact and in some cases it can go global affecting most of the similar industries. Unemployment rises very sharply during recession as the bubble is busted there in no demand of certain products and hence organizations have no other option then job cuts. Apart from that an obvious reaction to recession is the increase in inflation (Frank 2006). 2.3 MEASUREMENT OF RECESSION One thing that has been common till now is that recession is nothing more than a contraction in GDP and an adequate increase in unemployment. While there is no general instrument on the basis of which recession could be measured economist judge recession in terms of the behavior of the GDP how it’s reacting and fluctuating in the economy, whereas the general public evaluates the recession by the pattern of unemployment (Gittins 2009). Normally the economic indicator of recession includes production, employment, real income etc. 2.4 INDICATORS OF RECESSION With the history of recession under over economist around the world started to works on the indicators that were the major players in causing recession. The need for this study was to develop an understanding about recession, making predictions about recession and eventually making some arrangements before the recessions (Farago 2002). In reality it is quiet difficult to predict the economy and there could be multiple factors that can work simultaneously in causing recession. Among the major indicators some of them are given below which include employment, output level, industrial production index (IPI),
21 capacity utilization rate (CUR), interest rates, producer price index (PPI), duration, and consumer price index (CPI). 2.4.1 Employment It is fairly clear that if the unemployment rate of an economy is increasing it means that the economy is heading towards a recession. Reason for this is because when the economy would not produce much they won’t need the work force and eventually it would result in job cuts (Farago 2002). 2.4.2 Output As we have discussed before output or GDP is the representative of the value of all the total good and services produced in a certain territory in one year. The GDP could be presented in two ways the first one is in terms of money value which would give the picture of the market value of all the goods and services that were produced in that time period. In this kind of calculation inflation is not adjusted which means that that if there is an increase in the general price level it would not show that increase. The other type of calculation shows a much closer picture of the economy reason being in this GDP the inflation rate is adjusted so it shows the ground reality of what is really happening on ground. This is also known as real GDP and it shows the growth in the economy (Farago 2002). 2.4.3 Industrial Production index (IPI) As the name suggests this is the economic indicator which deals with the results of the industrial production of that economy. As we all know industries plays a major role in the economy of a country and the industrial sector is a major stakeholder in the improvement of an economy. The industry helps the economy in manufacturing the required goods that are in
22 demand of that nation and apart from that it also helps in producing those items that are in demand by the foreign countries and hence generating valuable foreign exchange for the country. The industrial production index measures the total output of the manufacturing sector, by manufacturing goods we means that the tangible products the physical form of products that were produced during that course of year. How the industrial production index could be an indicator for recession the answer to this question is quiet simple that if the industrial production index is low this means that the industry is not in good shape and they are not performing up to their potential and if the IPI is on the higher side of the graph is would mean that the industry is on the right track and no further actions are required (Farago 2002). 2.4.4 Capacity utilization rate (CUR) This is the third one on the list and economist believes that is interrelated with the industrial production index. Basically the capacity utilization rate is the calculation of the output produced by the manufacturing industries. The CUR measures the proportion of the industrial facilities that are being used by the industry in order to produce the desired results. By facilities it means the plants equipment machinery and other thing used for the production purpose. If the overall production of the economy would increase it would result in the increase of CUR which would show the demand of the equipments and similarly if there would be a decrease in production the industry would not be looking at the CUR (Farago 2002). 2.4.5 Interest rates Interest rates are also an important factor that contributes in predicting a recession. In the pre recession period what government does is that it increases the interest rate in order to slow
23 the economy which is growing at an abnormal rate. When the interest rate gets high automatically the investments that were made by the private sector takes a break which ultimately results in the stability of the economy. The state bank of the country can reverse this action when there is an opposite situation means when there is no investment done by the public. The state bank drops down the interest rate so that the public can get encouraged by this and starts investing their money in the market (Farago 2002). 2.4.6 Producer Price Index (PPI) The producer price index is the index which measures the price level at the wholesaler’s end only. What is does is that it measure the prices at the producer end and then compares it with the selling price which gives a good idea about the inflation rate (Farago 2002). 2.4.7 Consumer price index (CPI) The consumer price index gives a more comprehensive analysis of the price fluctuations in and economy over a long period of time. The CPI measures the aggregate price change that was recorded in a pre defined product or services. It records the price change in the food items, beverages, transportation, apparel, beverages, education, customer care, entertainment, and other daily use products and services. The CPI is an important indicator in defining when a recession is going to end (Farago 2002). 2.5 RECESSION EFFECT ON ECONOMY According to the financial dictionaries recession mean a drastic slowdown of the economy. History tells us that recession is caused by the combination of domestic and overseas factors but domestic problems are more important. As discussed before recession does not mean a slowdown in any particular sector but it effects almost every sector of the economy with the
24 likes of banking, information technology, automobile, service sector, insurance companies, tourism, manufacturing firms, etc. As a result of this most of the organizations reduced their workforce and increased their working hours in order to improve their productivity which is affected by the loss of workforce (Garg 2009). The Keynes theory of recession was put into practice by many of the economist and presented their own view regarding the dynamics of recession. According to these economists recession results when there are economic imbalances between the investments and consumption. The rational provided to support this idea is that entrepreneur or investors plan their investments in the shape of plants, equipments, inventories etc. All these investments are based upon their final sales and the profit that would be generated by these sales. In a state of recession when people are trying to save rather than consume the demand would automatically falls which in other words means investment would also decrease and would end up in recession. 2.5.1 Recession and full employment Another concept which is related with recession is of full employment. An economy which is operating at its full potential is said to be at full employment means that all the workforce of that country is contributing towards the economy. Output is said to be at its full potential or full employment level when the labor and other sources of input are utilized at its maximum level. According to this school of thought recession occurs when GDP falls considerably below the full employment level. Because of these two types of recession occur the first one is one in which output falls significantly below its full employment level and the second one is the condition when the economy’s potential level of output falls (Wessels 2006).
25 The first type of recession takes place when output falls below it full employment level and consequently unemployment rises. This usually occurs when consumers and investors are hesitant in their aggregate spending. In the second type of recession the economy’s potential output falls different factors play their role in the decline of the full employment output. Another definition tells us that recession is that state of an economy when the growth of the economy is significantly below normal rate. It is also stated as contraction by some authors and it turns in to depression when the time duration gets prolonged. Some economist argue on the fact that recession only occurs when the real GDP falls down the normal rate in fact they believe that recession could also occur when the real GDP is below normal level and it’s not negative as well. The key point which needs to be understand here are the terms peak and trough. By peak we mean the beginning of the recession as the economy is at its highest level and cannot go beyond and trough means the end of the recession period prior to recovery when the economy again gets stable and goes towards its peak (Frank 2006). 2.5.2 Recession and Unemployment With recession comes unemployment both these phenomena are directly related to each other. The question that bubbles in the mind is why is that so? Reason for this is because recession in other words means the total output or GDP of an economy crashes. When the economy would crash automatically it would have an effect on the purchasing power of the people, and the trend of saving would increase in the general public rather than spending, which would eventually result that people would not be interested in buying and the sellers in the market would be left begging, and at last they would have no other option then to reduce the workforce (Seidman 2004).
26 Usually the after effects of recession follows as most of the people are laid off and as discussed before the unemployment level increase in this period .Those who survive do not experience any increase in their pay scales, the organization’s profits and revenues falls down the stock market have a negative effect etc (Seidman 2004). 2.5.3 The multiplier effect John Maynard Keynes is considered as the most influential economist of the century. Keynes proposed a theory which is very famous and widely used throughout the economical world. Keynes projected the idea of spending money which we don’t have which is also known as the income expenditure multiplier effect (Keynes 2006). The Keynes multiplier model applies this function in the function implies that the amount that people would spend depends on the level of their income. According to Meierding (2009) "[John Maynard Keynes'] multiplier effect is based upon those receiving income from government spending it again in return. Those who receive income from them must spend it in turn so that the money spent by government multiplies a number of times". Keynes believed that people needed to be employed specially when there is a slowdown in the economy and at this moment the government has to play its role in order to keep the people in working because the private sector would be hesitant in spending which would result in lower investment and lower investment would mean fewer jobs (Farago 2002). Keynes contended that aggregate demand for goods might be inadequate during economic turndowns which would lead to unemployment. In this situation the government policies should be used to boost the aggregate demand which would eventually result in increasing the economic activity and eradicating unemployment. By government policies it means that when
27 there is a downturn in the economy and not much happening in the economy the government should borrow money and start spending to run the economic cycle. When the economy enters such a state of distress, it is natural to expect a decrease in aggregate demand. This decrease in aggregate demand in turn results in a directly related decrease in consumption. 2.6 LESSONS FROM HISTORY Historical background of recession goes way back in the last century. The Second World War was a major landmark in the history of recession and it ended up in the creating the global economy into a bubble. Because of the destruction that was caused by the war there was a massive increase in the productivity and employment rate. Many economist around the world thought that the economy would again be in difficulty after the war would get over and the soldiers would return to their home. However the post war scenario pasted a completely different picture when the consumer demands for products rose because of the massive demand that was flooded by the victims of the war. Unfortunately this bubble economy that was created because of the war couldn’t resist the pressure and soon busted. The pace of the expansion was so massive that the economy couldn’t survive it failed to maintain stability in the process (Farago 2002). 2.7 STRATEGIES TO COUNTER RECESSION In our discussion till now we have discussed that when recession occurs it means that consumer spending will become fragile and hence the manufacturer or service providers would find it difficult in this period. Companies should keep in mind the following factors in times when there is a recession and redefine their strategy accordingly
28 2.7.1 Research the customer This is one of the most important strategies which should be adapted by the organizations in times of recession. The reason for this is because at this point of time the organization needs to know the most about the customers. Because of recession customer preference changes and organization should know what exactly the customers are looking in this condition and then redefine their strategy in response to the recession. Normally during recession the consumers approach is a bit tentative, they take more time in searching for products that are long lasting and durable. Negotiation gets stiffer at the point of sale and consumers have a tendency to postpone or delay purchases. At this point of time the brands position in the consumer’s mind plays a very important role. If the consumer have a good image of the brand chances are that they’ll go for it and hesitancy would be minimum (Quelch 2007). 2.7.2 Continue advertising Another thing that should be done is to maintain advertising. The rationale is very simple because the competitors would be backed off and they would be cutting off their advertising budget the media would be open for the organization and proper time would be given on their advertising. Studies also shows that brands that increase their advertising during recession can enhance their market share rather than in good times. Psychologically also the consumers are uncertain in times of recession and a reassuring advertising campaign would uplift their morale to start spending. Favorable rates for advertising can also be achieved because of the lack of competition in advertising (Quelch 2007). 2.7.3 Adjusting product portfolio The organization should revise their products as for which one is getting much attention by the consumers. Products that are multipurpose are preferred by the consumers (Quelch 2007).
29 2.7.4 Lowering extra budget Organizations should take the approach in this regard of their personal life. In the time of recession organizations should look around and decide for what counts is and is not essential. While designing strategies to counter recession managers should ask themselves a simple question what would I have done if my personal income would have dropped? The answer to this question is fairly simple you would have given a hard look at your expenses and cut it down to the most essential ones (Young 2009). The same approach should be taken by the organizations like for instance organizations often pay private medical insurance to their employees but should the organization be paying for the medical expense at this time? The staff would not object to this action as it is far better not to have a medical insurance then having no job in recession. Steps like this can be taken and the employees should be taken in confidence that the business is going through hard times and as soon as the recession period would be over all the perks would be back into their normal position (Young 2009). 2.7.5 Lower the stock holding This is another good practice which could be adopted by the organizations in recession. Specially in the case of manufacturing companies as stocks are assets but it does not help the cause of cash flow until and unless it’s fast moving. Another reason for lower the stocks is because it’s a general understanding that during recession the consumers would not be very active in spending so the need to put such a high number of stocks would cost the organization some money. Experts believe that the organization should develop a (JIT) just in time relationship with their suppliers. This would save the extra cost which is caused by the
30 warehouse and these funds could be utilized in the business as stock is dead money until it’s sold (Young 2009). 2.7.6 Increase Cash flow The most important thing that the organization should have in times of recession is the amount of money they have in their reserves. So experts believe that organizations should try to do transaction in cash rather than on credit terms and as far as payment is concerned try to avoid it by paying the suppliers with invoices. All this depends on the business and customer base that the organization has (Young 2009). 2.8 STRATEGIES TO GAIN COMPETITIVE ADVANTAGE DURING RECESSION As we have discussed before that organizations should focus more on customer preference and build a strong marketing campaign just to make a point that the organization would not fear the recession but they’ll face it. But it is always difficult for organizations when the recession hits the market. It’s a difficult decision to make major investment, or to launch a new product. This aggressive and bold strategy would prove out to be a clear message for the competitors that the organization is thriving continuously. In other words we can say that these bold tactics would provide profitability during the bad times and superior growth when the recession period is over (Roberts 2003). “The natural reaction of many businesses experiencing a downturn in their revenue is to cut costs in areas like advertising and promotion. Our findings prove that they should do exactly the opposite if they are to ride out the recession and thrive thereafter (Roberts 2003, p. 33).” Economists have defined two types of costs among which the organization has to make a decision which one to go forward with. These costs are tagged as good costs and bad costs.
31 2.8.1 Good cost The costs that come under the heading of good costs include the costs that are associated with marketing, quality and new product and services. Among these costs the importance of marketing is most highly rated. It’s a natural tendency that when businesses are facing hard times or financial crisis they cut the marketing budget and call them as expense. Indeed it is an expense but an expense which proves out to be quiet fruitful when the recession is over. A research was conducted by PIMS (Profit impact of marketing strategy) which showed that those businesses that increased their marketing spending were not much profitable during recession but as the recession period was over and recovery started their profitability went up dramatically faster than it was before recession. Apart from that organizations that boosted their marketing spending during recession were able to gained market share three times quicker as compared to those businesses that decreased their marketing spending during recession. One thing that should be kept in mind while developing marketing strategy in recession is the customers’ intention or customer preference. This would help the organization to get a better know how about the customers preference and what exactly they are looking for. Hence these organizations would develop themselves according to the perceived customer value. “During a market recession improving customer perceived quality of your offering relative to competitors also pays off in better profits and growth (Roberts 2003, p. 35).” 2.8.2 Thinking out of the box Product innovation has also a major contribution in most of the cases during recession. Research has proven that R&D spending both in times of recession is worthy enough for
32 growth. A bit of research in the market to better understand the customer choice would always be fruitful. 2.8.3 Bad cost As far as bad costs are concerned they include the high manufacturing cost related with administration and high working and fixed capital. 2.9 EFFECT OF GLOBAL ECONOMIC CRISIS ON UAE The recession caused significant implications on the UAE Financial Markets as fluctuations showed tendencies towards sharp declines, contributing to a decrease in market capitalization and the price earning ration at the Abu Dhabi Securities Market (Central Bank of the United Arab Emirates 2009). The overall implication on the UAE financial market was that the share prices came down to levels lower than those observed in other emerging economies. As a result of the global recession, economic growth fell to almost 3.4% in 2008. Advanced economies that are powered by strong industrial infrastructures experienced a decline in the rate of growth. In 2008, the USA's growth came down to 1.1% to 2.0% while the rate of growth in Japan came down to 0.3% from 2.4%. France experienced a decline from 2.2% to 0.8% with Germany recording a decline from 2.5% to 1.3% (Central Bank of the United Arab Emirates 2009). Economies that were following the Euro experienced a decline from 2.8% to 2.5% in terms of economic growth while the UK fell from 3.0% to 0.7%. Asian Economies also experienced a decrease where the average economic growth fell from 5.6% to 2.1%. The implications of the recession were also observed in the area of global trade of goods and services. Trade across the world experienced a downward turn when it was recorded at 3.9% in 2008 as opposed to 5.0% in 2007.
33 The recession in the UAE remained less violent in its impact since high oil prices provided the UAE with vital funds alongside the Central Bank's decision of allowing companies based in the UAE access to liquidity support facilities. These measures were taken by the Central Bank in collaboration with the Ministry of Finance (Central Bank of the United Arab Emirates 2009). As the global recession has its effect worldwide the economic turndown has also dented the construction market especially companies located in Dubai and Bahrain had severe impact on the economy. It is estimated that four projects which were valued around AED 17 Billion were terminated during the last financial year. The causes of these terminations were quiet different it ranged from impact from client financing, the feasibility of the projects, and the risk factor associated with the contractors (Murray and Roberts 2009). Details of projects that were affected by the recession includes the Tameer Towers which was supposed to be build in Abu Dhabi and valued around AED 6.2 Billion but the project was terminated by the client even before the foundation was complete. Another example of recession effected project is of Trump International Hotel and Tower on Palm Jumeirah the project appreciated around AED 3.3 Billion and it was terminated by the clients even thought the substructure work was partially completed (Joshi 2009). 2.10 UAE AFTER RECESSION Ever since the recession has hit the UAE some of the major changes that can be observed as policy changes are that interest rates have climbed substantially and banks and other financial institutions are very hesitant in providing loans to the general public. This is not the case with only loans mortgages are also considered as high risk by the banks and they are very reluctant to provide it to the customers. This attitude from the financial institutions has an overall
34 effect on the market. Making fewer funds available to the customers and companies is increasing the risk of recession in UAE. This trend followed by the banks could be analyzed quiet well by understanding the concept of the banks that when a bank views a loan as high risk or the environment is like such that the banks considers providing loans as danger what they do to avoid giving loans is they increase the interest rates. When the interest rate becomes high on loans then the public has to think twice before applying for a loan. Similarly when the banks see loans as low risk they decrease the interest rate so as to enhance the borrowing trend in the public. The current situation which the UAE is facing is that the government has dropped the interest rates in an attempt to boost growth. According to Andrew Clare who is a professor at Cass Business School said that “This may be the first sign that people are thinking you can't get back to the debt-fuelled halcyon days of 2007” (Elliott 2009). Another technique which is used by the banks is to increase the spread between what the customers would get if they deposit the money and what they will have to pay if they want to borrow money from the bank. What the UAE government needs to do now is to lower down the interest rates reason being to encourage the public in spending the money rather than to save. As we have discussed before that during recession there is a general tendency of saving rather than spending. How the government change this trend is by decreasing the interest rates and persuading the public to spend so that the money could enter the system and the economy of the nation can be back on its track. Another reason of Dubai’s recession is of its tourism industry. It’s obvious that during an economic slowdown people would travel less and a major chunk of Dubai’s economy depends on the tourist activity so this also makes up a reason of recession. The effect of tourist not coming for visiting Dubai in recession would be far more than any other country
35 reason being that around 17-22% of Dubai’s GDP is based on tourism as compared to any other country where only 5-10% of the total GDP depends on tourism (UAE Lists 2008). In this regard what the authorities should do to attract the customers is to shift their approach and they can do this by providing lower prices, better packages, and improved values all these would prove out to be very handy in a recession time when the visitors have a smaller budget to travel with. Another very important issue that needs to be discussed especially in the case of Dubai is that when people are jobless they spend less this is quite obvious. But in the case of Dubai if the people lose their job they are also on the verge of losing their visa which would force them to leave the country within 30 days of visa cancelation. What happens now is that it’s very difficult to find a new job in a market downturn so spending becomes almost next to impossible. So in the UAE getting money out from the unemployed will not just be less but it would almost disappear which in other words means that more people would lose their jobs (UAE Lists 2008). In short we can say that loosing you job in recession periods in Dubai would ruin the personal life of an individual but besides that individual the economy of the whole country would also be dented. According to an estimate around 15% of the tourist visiting UAE have relatives or friends in UAE when those people would leave the country the tourism industry would be daunted because they won’t be coming to the country and hence won’t be spending money in the UAE’s economy so the whole industry which is associated with the tourism activity would get affected. Dubai’s government restructured its decision making process in order to draw a line between the financial crisis the committee would cover the economic development. As the property
36 market crashed in Dubai in 2008 the neighboring Abu Dhabi aided Dubai with $10 billion to recover from the property slump (Kerr 2010) If we looks with a broader perspective this recession would hit Dubai more than the western markets. The outflow of people in other words mean outflow of revenues because the expatriates with themselves brings an awful lot of revenue in the shape of their spending, their bank deposits, their sending, income generated from them in the shape of taxes and other utility bills etc. to stop this outflow of people the visa policy should be revised and the contribution that these immigrants are making towards UAE’s economy should be acknowledged or otherwise the consequences would be very hard to face by the locals. 2.11 SUMMARY To summarize all that have been discussed previously it could be said that a business cycle is just like a roller coaster. Despite of the fact that business cycles differ in intensity and duration there are four phases of a business cycle which are peak, recession, trough and recovery. It starts with a peak then drop down to the bottom then again stats to climb and after that it reaches another peak. Although it’s very difficult to predict the current level of the economy it could be said that the economy operates in anyone of these phases. Through research economist have derived some indicators that helps in the forecasting of a recession but nothing can be said for sure (Tucker 2008). Recession is the downturn in any economy during which real GDP declines the business profits falls, the potential output is not generated and majority of the workforce faces unemployment. Peak time of an economy is the time at which the real GDP reaches its maximum. Trough is the time just after the recession the real GDP in this time is on the lower side. And the last phase is of the recovery in which the real GDP again starts to regain its
37 previous position, organizations again starts to generate profit and the unemployment level starts to move towards full employment. One thing that should be remembered is that real GDP means total value of the goods and services produced in an economy in which price changes as compared to the previous years are adjusted. Price adjustments include both inflation and deflation.
CHAPTER: 3 RESEARCH METHODOLOGIES 3.1 INTRODUCTION Research methodologies are a very important step as far as the analysis element is concerned. Research has always been given a very important status because of the results that has been derived from these methodologies helps the researcher in developing a proper conclusion. The primary purpose of conducting a research is to investigate or inquire systematically over a subject and the ultimate objective of conducting a research is the attainment of knowledge. In organizational perspective research is conducted to better understand the dynamics of the environment which would help the organization in making effective decision making. As this paper deals with the strategies to counter recession therefore emphasizes is laid on the qualitative research and then deriving conclusion from this research. This section of the paper would deal with the different types of research techniques and their implications. Moreover the best possible methods of the research are identified and selected in completion of the project. The selection of the appropriate medium of research is very crucial reason being the whole research and the conclusions and the findings of the papers depends upon this section. There are quite a bit of methods that are used for research purposed but the important part is to select the correct medium for your research that best suites the paper and a method which answers all the aspects of the research question (Creswell 2008). The reason because of which the establishment of a credible research methodology serves a pivotal role in the research is that the research methodology dictates the techniques that the study will make use of in the collection, handling and analysis of data as well as the
39 underlying logic behind them. As a result, it stands to reason that the establishment of a research methodology that is incompatible with the data types incorporated into the research may cause the study to conclude upon inaccurate findings and interpretations. In terms of credibility, the credibility of the research methodology translates into the reliability of the findings of the actual research. It is because of the same reason that the research methodology is carried out before drawing out the findings. More often the research methodology in researches is established once a credible and adequate of the research variables has been established so that the methods of data collection, handling and analysis can be established as ones that are most compatible with the type of data. Fundamentally, the establishment of a research methodology incorporates the establishment of the nature of the perspective that the research shall follow before beginning work on the findings. This generally involves the analysis of different research approaches to deduce the one that is the most appropriate and for which the research does not become vulnerable to potential limitations. For this reason, the establishment of the research methodology cannot be considered to have been completed unless a comprehensive and brief analysis, if not a thorough and in-depth one, is carried out for the potential limitations of the research. For this research in particular, special attention shall be given to the limitations of the research in this chapter as well as in the last chapter to provide a thorough insight into the limitations of the research. 3.2 RESEARCH APPROACHES The two most widely used research approaches are the qualitative approach and the quantitative approach. Both of these researches are considered as the fundamentals of business research also experts believe that they are the backbone of a research.
40 3.2.1 Qualitative Approach The qualitative approach brought into use when the research is one that incorporates the use of opinions, ideas, perceptions and attitudes. More specifically, the variables brought into use in a qualitative approach are ones that are not expressible completely through numerical terms. While their polarity may be specific they cannot be measured in terms of their magnitude. Data acquired for use in a qualitative approach is one that is generally acquired from sources such as survey questionnaires, interviews, films, case studies, direct observation techniques and the like. Quite often the data brought into use in the qualitative approach is based on opinions and tendencies. The qualitative approach therefore allows the research to evaluate the causes because of which the subject phenomenon exists. In essence, the qualitative approach tends to consider the attributes of research variables for their qualities, traits and their subsequent relationship with each other. On the other hand the qualitative approach helps in having insight into problems or cases. Qualitative approach mainly uses questionnaires and surveys that are designed in a fashion that takes into consideration the population and its respondents as well. Qualitative research is mainly applied in scientific areas to test the objectivity of the data as well as the application of the data to the selected sample of the population (McBurney and White 2006). However, the qualitative approach is not without its limitations. These limitations arise from the fact that the qualitative approach tends to rest on extensive approximation as a result of the absence of precision. This approximation serves to leave room in the research where the comprehensive coverage of all variables significant to the research is concerned. Also, applying the qualitative approach in scenarios where the research involves specific variables serves to deprive the research of accuracy. Expressing measurable quantities in qualitative terms serves to cause confusion and uncertainty. However, due to its complex nature, the
41 qualitative approach is implemented through one of its two sub-classifications that allow the research to establish a focus. 188.8.131.52 Deductive and inductive Approaches The broader aspect of research that is mainly used by different organizations to conduct research includes the deductive approach and the inductive approach. The deductive approach focuses on a specific hypothesis and after that analysis over hypothesis is developed. The deductive approach normally follows a set pattern according to which first and foremost an objective of the research is made after that a statement of purpose of the research is developed which focuses entirely on the objective of the research. When both the objectives are achieved then the research proceeds and in the end the research hypothesis is either accepted or rejected. The deductive approach is very frequently used when it comes to exact sciences like physics and chemistry. The reason behind this is because these sciences provide pre established laws which offer a base for the researcher to further elaborate the developed hypothesis (Jackson 2007). The deductive approach is also known as the top down approach, reason being that in the deductive approach the pattern of the research moves from more general to more specific. The pattern of a deductive approach is as follows • • • • Theory Hypothesis Observation Confirmation
Figure 1: Deductive Approach
42 Similarly the inductive approach is an arrangement of research which covers various situations and circumstances and deduces ideas out of it the pattern of the inductive approach is completely different as compared to the deductive approach. The first step is to make observations about certain variables after that these observations are broadened to get more views out of it. After these observations have been applied a hypothesis is applied in the scenario and in the end on the basis of these hypotheses and some theories result is derived. The inductive approach follows a bottom up approach. At the end of the study certain theories and conclusions developed the steps which are included in this approach are given below. • • • • Observation Pattern Tentative Theory
Figure 2: Inductive Approach 3.2.2 Quantitative Approach In this technique the researcher primarily uses claims for developing knowledge like the use of cause and effect thinking. In this process specific variables are identified and hypotheses are developed upon which the research is carried on. Different observations are also given way and testing of theories is also an essential part of the quantitative technique. In other words we can say that the quantitative approach focuses more on the numbers and the statistical techniques and its goal is to test the phenomenon that whether the theory holds true
43 or not. They are measured and expressed in terms of quantity and precise measurement is done. The quantitative approach is one that is based on the analysis of research variables on the basis of their precise quantitative. The quantitative approach tends to shed light on currently present standings of the research variables. More than often the quantitative approach is brought into use to ascertain whether or not a particular relationship between the research variables exists or whether the relationship shall progress in a specific manner with time. It is for the same reason that the quantitative approach more than often incorporates the use of statistical techniques. The use of statistical techniques allows the quantitative approach to be used for researches in which forecasting has to be performed. The scope of a quantitative approach hence becomes a function of the statistical techniques that the research shall incorporate in further stages. A luxury that the quantitative approach provides the research is that it makes the research compatible with data incorporated in researches performed in the past. A variable, if studied in a recent research in the past and subjected to the quantitative approach, can be brought into use in an ongoing research, hence allowing the research to develop a retrospective perception of the subject of the study. It would not be justified to bring the discussion on quantitative research to a close without considering the specific limitations that are present for it. The quantitative research, on the basis of being highly specific, becomes ineffective in cases where the variables are ones for which the data cannot be expressed in numeric terms. The data has to be expressible in numeric terms. For instance, a research incorporating opinions, attitudes and behaviors observed through direct observation may not give accurate findings and conclusions if subjected to the quantitative approach since it will call for the conversion of non-numeric
44 data into numeric data. This conversion will add complexity to the research, hence reducing the credibility of the findings. 3.3 DATA COLLECTION TECHNIQUES Data collection is a very important aspect of every research and it helps to analyze and evaluate the hypothesis. There are two sources through which these date are being gathered. These sources are named primary sources and secondary sources of data collection. Further explanation on both of these methods is discussed below. 3.3.1 Primary data By primary data we mean to say that the data which is collected specifically for the purpose of the current research and this data did not exist in the past prior to the current research. Primary data as compared to secondary data has many advantages like for instance the biggest advantage of primary data is that primary data is relevant to the nature of the problem which is on hand currently, as it has been collected for the very purpose. Secondly the primary data is coincided with the current scenario it is much more accurate and enough to fulfill the requirement of the research. Apart from the advantages primary data has two major disadvantages first and foremost the time which is required to collect accurate and relevant data according to the current research. After that the conversions of that data into information then analyze and interpret that data. Another disadvantage which is associated with the usage of primary data is the cost involved with it. A very common practice which is adopted by most of the researchers in this regard is the questionnaire technique. Designing a survey questionnaire is not everyone’s job and a questionnaire which should properly demonstrate each and every aspect of that problem. It may require hiring professional researcher which would design the questionnaire to be
45 effective (Goodwin 2007). Also the cost related with transportation and traveling is also inducted in this section. The major techniques to collect the primary data include the survey research and observation. The survey research includes personal interviews, telephonic interviews, mail questionnaire and online questionnaire. Interviews can be one on one or it can be with a group of people sitting together (Myers and Well 2002). In this research we have also used the survey questionnaire as our primary source of data collection. The primary objective of using the survey questionnaire as source of data collection was to get first hand information from the employees of Johnson Arabia LLC and the impact that was brought on their work after the recession. A comparison of work life before recession and post recession was identified in the questionnaire. The questionnaire is divided into three sections the first section comprises of the demographic data which included the name of the participants their designation age and sex. The second part was the close ended questions in which the participants have to answer the questions in yes or no. the other part included the open ended question in which the respondents were given free hand in writing the answers. Some questions were also designed on the likert scaling format in which the participants have to rate the question according to their preference. The range was between 1-5 where 1 was labeled as least important and 5 were tagged as most important. Multiple choice questions are also a part of the questionnaire. By adding the multiple choice questions in the questionnaire the respondents have a large amount of possible answers from which they can choose their preferred choice. Also a major chunk of the questionnaire is developed on the likert scale or the rating scale. The likert scale enables the respondents to prioritize or rank their choices. If there are a number of choices which the researcher believes through experience and research that would apply in a particular scenario then the rating scale is preferable as the choices can be ranked
46 as most important to least important. Likert scales are a measure of gauging the opinion of the respondents on a particular topic (Trochim and Donnelly 2006). The questionnaire is designed in such a manner that in the beginning open ended questions were asked like what is the general understanding of recession in the mind of the participants, what comes to their mind when they hear the term recession. How their work life changed when the recession occurred, what was the general reaction of the organization to the recession phenomenon etc. after that the questionnaire asked the impact of recession in that particular industry that is the crane industry. In this regard the questions were divided into two parts the first part was on likert scaling in which the participants pointed out their opinion and in the second part they provided the explanation of their choice that why they choose any option in the first part. After that the questionnaire became narrow and tried to find out the impact of recession on that particular organization that is Johnson Arabia LLC. Once the questionnaire entered in this mode questions like effect of recession on company’s sales, effect of recession on the customer base, effect of recession on the company’s style of operating business, and effect of recession on the organization’s decision making were discussed. After that the questionnaire moved towards the other important organizational tools like recession effect on the finances of the company, the recruitment and selection policies, compensation and benefits, cash flows etc. also what did the employees thought about the business in the time of recession means that were the feared the recession or they decided to fight the recession. This was the end of part one of the questionnaire in which questions were asked to develop a general framework of the impact of recession in the mind of the employees. The second part of the questionnaire deals with the strategies and tactics that were formulated by the
47 organization in order to cope with recession. Both the sections of the questionnaire are correlated with each other as the first part identifies the issues and the second part discusses the remedies of those issues. The first question in this regard is a general open ended question which asked the respondents to tell the strategies that were developed by the organization to cope up with recession. The answer to this question would give us a clear picture of the organization’s approach towards recession mean that was the organization aggressive in nature or defensive approach was adapted. Moving forward the question was asked that how well the strategies were implemented were the employees were taken into confidence by the upper level management regarding the changes that were going to be taken place in the company. And most importantly were there any bottle necks in the change process because this is a fact the when ever there is a change resistance occurs and how well the management dealt with the resistance After that we tried to figure out that what was the focal point of the strategy means that what was the organization’s approach towards the recession what were they focusing on were the thinking about decreasing the workforce, or working on a new marketing and promotional strategy, or going for a merger, or cutting their cost etc. This was the most important section of the questionnaire which also leads us towards the end of this eventful activity. The question that what were the changes that were observed after the implementation of these strategies and what did the organization learn from this current global recession and their contingency plans that they have developed in order to deal with such situation in the future.
48 3.3.2 Secondary data As the name suggests secondary data is the type of data which has been researched or published or it exists prior to the current research. The data which is drawn from this research is not similar with the research that is on board, means that the secondary data that has been acquired by the researcher is developed keeping in mind the data and scenario of that particular case. This means that the data will differ from what the research actually requires and this is the major disadvantage of using secondary data. After this the issue of availability arise means that there are certain topics on which finding secondary data is relatively difficult, and the researcher has to conduct their own research to acquire the necessary data and information. Another very important disadvantage which is being associated with the usage of secondary data is its reliability. Accuracy has become a major concern now days with so many sources available the researcher has to absolutely make sure that the data which has been selected for the research comes from a reliable source. It has been observed often that the data which is gathered from secondly sources are faulty and it becomes quite difficult for the researcher to rectify it or judge the credibility of the source. Despite the number of disadvantages attached with the secondary data researchers still make frequent usage of the secondary data in their researches. This is mainly because the secondary data is relatively inexpensive and it can be found or gathered from various sources. Example could be taken of a car manufacturer and the research the company has to conduct on demographics, lifestyles, buying patterns of the population before launching a new product. It would not be regarded as a wise decision if the company decides to use primary source of information in its survey when there are tons of information available in this regard on various sources like libraries or the internet. Apart from that a major advantage of using secondary data is that it saves time and in today’s competitive business environment time is
49 considered as a very significant factor as far as getting competitive advantage over the rivals (Trochim and Donnelly 2006). There are numerous sources of secondary data such sources includes internal sources within a company like for instance report by the sales force, customer database, account and financial history etc. external sources of secondary data could be journals from libraries, internet, newspaper, trade journal, online journal, reports by the government agencies, government statistics, census report, corporate publications etc. Furthermore secondary data includes the international reports designed for various economical indicators. 3.3 LIMITATIONS OF THE RESEARCH When there is information which is unstructured and undefined in its initial stages certain limitations can come up. The research aims at providing an insight into areas of study that were previously not explored. But one cannot neglect the number of obstacles that pertain either with the subject of the research, the process of the research or the researchers. One of the biggest limitations of this report is the primary resource which means the participants that have been questioned for the research, their selection and responses should also be taken into account. Subjectivity to certain issues is also a limitation. However it should be kept in mind that a considerable amount of time and energy has been consumed by the researcher in pursuit of authenticity, accuracy and correctness of the research. The interview survey questionnaire technique has been adapted in the qualitative analysis performed in this research and it’s essential to throw some light on this fact that the interview technique incorporates a very low number of limitations.
50 Interview technique helps the cause to the best reason being that when an interview is being carried out the participant can be viewed live and changes are that the interviewer can capture significant amount of facial expression. The high degree of involvement of this non verbal communication is one of the most important limitations in this approach. This is because that the non verbal expressions like the gestures and the body language also speaks in a way that it in order to attain an idea of the intensity of the given answer. The reason why the interview technique is being labeled as limitation is because the researcher may misinterpret an expression given by the interviewer. Also the usage of certain words like short, small and heavy causes a significant amount of error in the research. This is because of the fact that the perception behind such relative words may be different to the researcher and the research study participant. Also the factor of random sampling and its error should also be kept in mind since the larger the sample size the more accurate result would be delivered. This is because of the fact that a large sample size provides a deeper and more insight understanding of the population’s perspective. A limitation which should not be ignored is the researcher’s own subjectivity. The degree of knowledge, information, expertise and the interpretational skills that the researcher possesses serves to have deep implications o the research. It is therefore advised that the interpretations upon which the research is conducted should be considered and the limitations should be kept in mind significantly if the research conclusions are read by user to make any decision.
51 3.4 CHAPTER SUMMARY Research methodology does not simply focuses on the methods used to acquire the information but it also incorporates the methods used for the analysis of the information. It also provides a passage for the different analysis that can be used in the research. However it should be kept in mind that the limitations that each research methodology incorporates and these limitations should be considered not only when the research is being carried on but once the research has reached a conclusion.
CHAPTER 4: FINDINGS and ANALYSIS 4.1 DATA COLLECTION, HANDLING and ANALYSIS The data collection for primary data was carried out through the surveys conducted. The data was subjected to tabulation in order to make analysis all the more convenient and to ensure that no handling errors occurred. The Responses to the questionnaires were successfully acquired from the Division Manager, the Sales and Marketing Manager and the Operation Coordinator/Debt Collector. All three personnel belonged to Johnson Arabia and were part of the higher management at Johnson Arabia. Data collection for secondary data took place through official publications released by the government and other regulatory bodies of Dubai. This approach was selected in order to make use of precise statistics in an attempt to ensure credibility for the research. Reports published by financial institutions based in Dubai were also brought into use in the formulation of the secondary findings for this research and special attention was given to the assurance of the credibility of the data extracted from those reports and publications for incorporation in this research. The secondary findings were developed so that the foundations for the study formed in the earlier stages could be brought into use to validate the presence of current economic trends in Dubai.
53 4.2 SURVEY FINDINGS 4.2.1 Division Manager According to the responses give by the Division Manager, it was observed that Recession fundamentally comes across as a contraction in which the organization moves from operation on a nominal base to one in which there is contraction aimed at bringing about correction. The Division Manager perceived the recession as one that served to bring about a positive reaction in the organization and that brought forth the significance of effective and efficient risk management. The Division Manager considered the severity of the economic recession to have been of a severe nature for the industry. The next question sought to acquire an elaboration of the degree to which the recession had been intense and the Division Manager, after identifying the industry to be that of construction, elaborated that the recession had a negative implication on the construction and had brought the industry to a standing where no improvement had been observed until now. This came in compliment to the response to the next question in which the respondent was asked whether or not whether or not the recession had managed to have an effect on the organization; the response to which was recorded to be in affirmative. It is of the utmost importance to highlight at this point that this question was one that was augmented into the research in an attempt to highlight whether or not the recession had had an implication on the organization while earlier questions had sought to establish the reaction of the organization to the recession. The exact implications of the recession, as per the Division Manager's response was one that had little impact in its initial stages but was beginning to show long term consequences. The Division Manager was also observed to be
54 of the opinion that the current economic recession had indeed had implications on the organization and had not only effected the organization but also the manner in which the organization perceived and performed business. However, the recession did not change the actual decision making process in the organization but did instigate the development of systems to deal with circumstances of such severity in the future. This was further warranted through the Division Manager's affirmative reply to the question that sought to determine whether or not the organization's cash flow had experienced any changes as a result of the recession. However, the Division Manager also noted that the recession has served to bring about a considerable degree of changes and while the recession may have made it difficult for the organization to acquire new business, the organization had chosen to respond by hiring new staff. It was also observed that the organization had chosen to avoid the option of salary cuts and reduced working weeks by exercising reduced overtime working hours and by abolishing all expenses without which the organization could do. The Division Manager was of the opinion that the incidence of growth during recession is not an impossible phenomenon but can only be established if the organization is experiencing an increase in its market share. It is perhaps because of the same reason that the sales volume acquires pivotal significance during times of recession as opposed to gross profit, reputation, increase in employment and others. The hiring of new staff was further justified through the fact that the organization had chosen to expand into new areas of business while concentrating on customer retention as a means to introduce new influxes of revenue. The Division Manager was observed to give the highest priority to entrance into a new global location when confronted with the task of prioritization of the factors that could help an organization during times of recession. Second on the respondents priority list were mergers and acquisitions while the addition of new products
55 and services came as third on the respondents list of priorities while the option of the expansion of the distribution took fourth place. The fifth and last on the respondents prioritization was the option to bring about an increase in advertising and promotion. Having developed an understanding of the factors that were of the most importance for the subject organization during the recession, the questionnaire further proceeded by inquiring upon the factors that could be considered to be the most imperative to the business in the recession period. The Division Manager expressed that customer retention was the most important factor, followed by the training and development of employees. Second most important to the organization was the need for increase in the training and development of employees while the third most relevant factor was the need to bring about an increase in the customer base through advertising and promotion. The second least relevant factor was the redesigning of tasks while the least relevant factor was the need for hiring specialized professionals. When asked about how the strategies outlined above had been implemented, it was observed that it was implemented through the establishment of new departments and is one that is still underway. Furthermore, the Division Manager expressed that while communication had taken place between the higher management and the lower hierarchy before the implementation of the strategies, the strategy had nonetheless run into hurdles during its implementation. The Division Manager concluded by expressing that the recession and the measures taken in reaction to it had allowed the organization to develop a contingency plan in order to cope with such a situation in the future.
56 4.2.2 Sales and Marketing Manager According to the responses given by the Sales and Marketing Manager, a recession is a scenario in which banks no longer have the funds available and a rise in bankruptcy and unemployment is observed. The Sales and Marketing Manager further asserted that the overall reaction of the organization to the current recession was one in which the organization underwent nervousness in response to any internal changes that took place in the organization. The Sales and Marketing Manager, much like the Division Manager, identified the intensity of the recession as one that was of a severe nature. In his elaboration, the Sales and Marketing Manager found the severity to be present in the fact that the recession had caused a decrease in projects causing supply rental companies to aggressively pursue those that did not come under the fold of the deceleration. Also, payments became late which caused relations between companies and their clientele to experience damage. According to the Sales and Marketing Manager, the recession most definitely had an implication on the company's sales and this effect was visible through the decrease in the number of telephonic enquiries. Furthermore, the Sales and Marketing Manager observed the effects of the recession to have a domino effect on the customer base since a decrease in projects were observed to be causing a decrease in the work available and clients began to consider cheaper options. This, according to the Sales and Marketing Manager had considerable implications on the company and it came as no surprise that the decision making process of the company experienced a change. The Sales and Marketing Manger perceived that the recession caused the company to take on an attitude in which each customer inquiry and lead is now pursued more aggressively than it would have been pursued before.
57 The Sales and Marketing Manager confirmed that the recession had affected the organization's cash flow and as a result had made it difficult for the organization to win new business contracts. It is important to realize at this point that unlike the Division Manager, the Sales and Marketing Manager considered recruitment as a highly unlikely action during times of recession. The Sales and Marketing Manager also considered the subsequent implications on compensation management to be no surprise in light the recession. To the Sales and Marketing Manager, growth during times of recession can be acquired by allowing existing personnel to engage in multi tasking and engaging them in planning and strategy. The Manager considered creativity to be an imperative element in looking after existing customers. The Manager considered Sales to be the most important factor that should be considered as a prime indicator of growth during times of recession and further asserted service to be of an equivalent relevance. The respondent did not oppose to the idea that an organization can undergo growth during times of recession. The Sales and Marketing Manager appeared to follow a stringent belief according to which each new job is given the relevance that the last available job would be given. In the same regarded, the Sales and Marketing Manager considered the provision of exemplary service to be equally imperative and chose to address pricing in a manner such that consumers could be given more flexibility without taking the edge away from the company as well. When asked about the establishment of the most relevant factor with regard to the overcoming of the recession, the Sales and Marketing Manager considered expansion of the distribution system to be a highly critical element. The Sales and Marketing Manager further considered the hiring of specialized professionals to be the least imperative measure to take during times of recession, followed by the redesigning of tasks and the training and development of employees as comparatively important factors. The second most important factor on the Sales
58 and Marketing Manager's priority in times of recession was the necessity for an increase in the customer base through advertising and promotion while customer retention came as the most important factor during times of recession. When asked about the effectiveness with which the strategies highlighted above were implemented, the Sales and Marketing Manager observed that the organization needs to become more customer focused in order to implement the strategies effectively. Also, the Sales and Marketing Manager believed that no hurdles were encountered during the implementation of the strategy, perhaps as a result of the highlighted fact that the higher management had chosen to consult the lower hierarchy before implementing the strategies. The Sales and Marketing Manager, unlike the Division Manager, did not observe the organization to have developed a contingency plan as a result of this recession so that it could be used in similar circumstances in the future. 4.2.3 Operation Coordinator/ Debt Collector The responses give by the Operation Coordinator/ Debt Collector held that a recession is one in which business activity slows down as a result of financial constraints. The overall reaction of the organization to the recession, according to the Operation Coordinator/ Debt Collector, was observable in the form of the changes in the manner in which the company chose to deal with its customers. The Operation Coordinator/ Debt Collector, much like the Division Manager and the Sales and Marketing Director, believed that the recession was one that was of a severe intensity and most definitely had had implications on the company. The recession served to dramatically reduce the number of ongoing construction projects in the industry. The Operation Coordinator/ Debt Collector believed that this reduction of ongoing projects had served to
59 reduce the need for equipment rental companies such as Johnson and had therefore brought down its utilization in projects. The Operation Coordinator/ Debt Collector, in agreement to the Division Manager and the Sales and Marketing manager, further noted that the recession had caused a decrease in sales to be observed. In his personal perspective the Operation Coordinator/ Debt Collector expressed an increase reliance on the projects that were scheduled to take place but had been postponed on account of the recession. The Operation Coordinator/ Debt Collector considered the recession to have affected the manner in which the company is doing business and in his elaboration, stated that the recession had caused the company to become picky about whom to perform business with. It was therefore no surprise that the Operation Coordinator/ Debt Collector considered the recession to have brought about a change in the decision making process of the organization. The organizations cash flow, according to the Operation Coordinator/ Debt Collector, was affected by the recession in addition to the fact that the recession made it difficult for the company to acquire new business contracts. The Operation Coordinator/ Debt Collector further noted in answer to a recruitment related question that the slowing down of business activities had caused the process of recruitment to come to a stand-still. When questioned about the status of compensation management in response to the recession, the Operation Coordinator/ Debt Collector noted that Johnsons Arabia generally engaged in half yearly and annual bonus policies but the recession had caused these bonus policies to be only partially implemented. In the eyes of the Operation Coordinator/ Debt Collector, the performance of a business during times of a recession can only be identified as growth in the event that the business is present as the market leader despite the recession.
60 A fact that merits highlighting at this point was that while the Operation Coordinator/ Debt Collector answered in affirmative when asked whether it is possible for a business to grow during times of recession, unlike the Division Manager and the Sales and Marketing Manager, the Operation Coordinator/ Debt Collector chose to give primary relevance to the reputation of an organization in order for an organization to observe growth during times of recession. In the area of countering recession, the Operation Coordinator/ Debt Collector expressed that an aggressive policy towards the collection of money and the acquisition of new jobs was the strategy upon which the management had chosen to focus upon in an attempt to counter the effects of the recession. The Operation Coordinator/ Debt Collector, similar to the Division Manager and the Sales and Marketing Manager, believed that entering new geographical locations was the best option that a company could exercise during times of recession. When asked to prioritize across a number of factors that are relevant for a business during periods of recession, the Operation Coordinator/ Debt Collector expressed that customer retention is the most imperative factor. However, it is imperative to note that the respondent gave primary relevance to the redesigning of tasks. This was followed in relevance by the significance of an increase in customer base through advertising and promotion. The factor that held the fourth position in terms of relevance was the training and development of employees while the hiring of specialized professionals came across as the least relevant factor for an organization during times of recession. The Operation Coordinator/ Debt Collector further expressed that the strategy outlined above had not been implemented concretely which had resulted in the generation of circumstances in which little or no improvement was being observed. The Operation Coordinator/ Debt Collector expressed that even though the higher management had indeed consulted the lower
61 hierarchy before implementing the strategies, hurdles had been encountered. Also, the reaction given by customers in response to the implementation of the strategy was one that yielded little or no productivity since the consumers were in no condition to pay up. 4.3 SECONDARY FINDINGS 4.3.1 Analysis of the financial statements for Johnson Arabia LLC This section shall present a detailed discussion on the company's financials for the past few years. For the purpose of analysis, a ratio analysis was carried out which incorporated the current ratio, the debt to total asset ratio, the debt to equity ratio, assets to equity ratio and net cash flow to asset ratio. This analysis shall be carried by making use of the company's balance sheets. Balance sheet is the primary source of information for the stakeholders of the company. Basically it is the summary of the organization’s performance over a period of time. Balance sheet is one of the most important financial statements of a business or institution which shows the assets, debts and owner’s investment in the business as of a specific date. Assets are divided in to two major categories which are the current assets and the fixed assets. Usually assets are categorized according to their liquidity, means that how soon they can be converted into cash. As far as the debt part is concerned it shows the liability that the organization has. Debts are recorded in the balance sheet according to how soon they would be paid. In short we can say that the balance sheet show two sides of the business’s financial situation number one what the business owns and number two what the business owes. What the business owns is called the assets and what the company owes is called the liabilities and the value of the shareholders equity. Both the assets and the liabilities and equity should be equal to balance the book. The importance of balance sheet could be
62 analyzed with the fact that the investors plan their investment after having a look at the balance sheet of that particular company. Following are some of the variables which are identifies from the balance sheet of Johnson Arabia which gives a comprehensive look of the overall growth of the company. 184.108.40.206 Ratio analysis: As we have discussed before that financial statements plays a vital role for the organization as the investor’s decision making and their future interaction with that business depends on the financial position of that company. Apart from that the financial ratios are a useful tool for the management of the organization as well reason being it shows the overall position of the organization. It also tells that how healthy is the business and what is the performance of the organization for a specific period of time. For this particular analysis the ration which has been selected is the liquidity ratio. The information for the liquidity ratios are acquired from the balance sheet and their primary purpose is to measure the liquidity of a company on a particular date.
2004 Current Ratio Debt to Total Assets Debt to Equity Ratio Assets to Equity Net Cash flow to Assets Net Cash flow to Equity 8 4.5 3 18.33% 83.11% 6 1.63 0.50 2.2 3
2005 1.74 0.18 1.0 8 2.7 5 12.94% 35.71%
2006 2.28 0.41 0.8 8 2.1 4 12.92% 27.77%
2007 2.11 0.43 0.8 7 2.0 5 15.23% 31.14%
2009 2.68 0.35 0.5 1.6 28.04% 46.36%
63 Table 1: Ration Analysis 220.127.116.11.1 Current ratio In this regard the first analysis which has been done is the current ration of Johnson Arabia. The current ratio can be obtained by dividing the total current assets of the company by its total current liabilities. This ration expresses the working capital relationship of the current assets which means that what is the relationship between the company’s liabilities to its assets. It we look at the current ratio analysis of Johnson Arabia over the years it could be seen that there is a growing trend which means that the company is going towards the right direction as their relationship with assets to liabilities is on a decline. Because in current ratio the current assets and current liabilities figures are taken it shows that the result which would be generated would be for one year. If we further elaborate this it could be said that the current ratio would tell that weather or not the company have enough resources to pay its liabilities over the next year. The trend which we see in Johnson Arabia’s current ratio is on a higher note like for instance if we take the current ratio for the year 2005 it is 1.74 which in other word means that for every AED in current liabilities Johnson Arabia have 1.74 AED in its current assets. This shows a growing trend for the company as they have the capability to pay off their liabilities within one year and still left with their assets. Overall the current ratios of Johnson Arabia gives a good picture of the organization and the growing trend which could be observed from the chart also depicts the fact that the liquidity part of the company is pretty much safe. 18.104.22.168.2 Debt to total asset ratio It is also known as the total debt ratio. As its name suggests this ratio shows how much the company is in debt. For example if we take Johnson Arabia’s debt ratio figures for the year
64 2006 it shows 0.41 which means that for every AED in total assets Johnson Arabia has 0.41 AED of debt. This also shows the company is doing well as far as the debts to assets are concerned. This ratio also leads us to the conclusion that the lower the debt ratio will be the higher its chances are to go up in comparison to the previous or the base year. As far as the debt ratio of Johnson Arabia is concerned it is quite evident from the graphs that it is one the declining side which in other words means good news for the business as their debts are consistently low to its assets. Throughout the five year data of Johnson Arabia which has been acquired it’s very clear that every year their debts are getting lesser as compared to their assets which is a very healthy sign form the company’s perspective. 22.214.171.124.3 Debt to equity ratio The next tool that has been used as a part of the analysis is the debt to equity ratio. This ratio is obtained by dividing the total debt with the total equity. This ratio measures how the company is dealing with its debt against the capital which is being implanted by the owners of the company. If the liabilities part of the ratio exceeds the equity or net worth of the ration than it means that the creditors have more stake in the company as compared to the shareholders. The debt to equity ratio shows the proportion between equity and debt which the company is using to finance their assets. A higher debt to equity ratio means that the company has a hostile policy in financing their growth with debts. One thing which should be remembered in this regard is that if the ration is greater than one than it shows that the company’s assets are mainly financed by debt and similarly a ration which is less than one shows that majority of the asset’s financing is done with the equity. If we analyze the debt to equity ratio of Johnson Arabia it shows that there is mixed trend in this section. This means that in the year 2004 the debt to equity ratio is 2.28 which is above 1 and it shows that the investors were quiet happy in investing their money with Johnson Arabia and they had their
65 trust maintain with the company. Similarly if we move forward the debt to equity ratio for Johnson Arabia is constantly at its decline this shows that now the company is financing most of its assets through their own money. Apart from that the impact of recession can also be measured from these ratios. in the earlier stages the ratio is high but in the later part like in 2007 which was the beginning of recession it has dropped to 0.88 which in other words means that due to the recession the trend changed and people were going more towards saving rather than investing and similarly in 2009 it has further dropped to 0.57 which shows that there is a continuous fear in people’s mind and they are not ready to invest. This shows that the banks have also become hesitant in providing loans and as a result of that they have increased their interest rates just to discourage the borrowing trend. To summarize it could be said that this is a good situation as the company is not much dependent on borrowing and gradually becoming self sufficient to generate their own money. 126.96.36.199.4 Assets to equity ratio: The assets to equity ratio primarily tells that how much of a company’s total assets are owned by the company means what is the ration of the possession of the company’s asset’s and how much of them are influenced or financed through debts. In other words it also shows the relationship between the value of the assets of the company and the portion which is owned by the shareholders. In the case of Johnson Arabia it could be seen from the graphs that there is declining trend which indicates that in the last few years the company is depending on the owners’ investment more than their own. 188.8.131.52.5 Net cash flow to asset: This is another important financial ration which measures that to what extent the company is able to generate cash from its current operational activities. In the case of Johnson Arabia it is
66 evident from the figures in the table that the company has a growing trend as far as the generation of cash through operations is concerned. In the last year that is the year 2009 the percentage of cash flow with assets is at the highest of all and the reason for this could be the fact that because of the recession most of the banks were banks were reluctant to pay loans, so companies were on their own to generate funds for the businesses and its effect can be shown on the table. 184.108.40.206.6 Net cash flow to equity: This ratio measures the amount which can be paid to a company’s shareholders after incurring all expenses and investments. In other words we can say that how much cash is available with the company to pay to their equity shareholders. Johnson Arabia’s cash flow to equity has been up and down in the year 2004 when economic conditions were pretty much stable the cash flow to equity percentage was 83.11% which means that this amount of money was available with the company to pay to their shareholders. Gradually we can see from the table that it is coming down and again in the year 2009 it is getting stable. 4.3.2 Implications of Recession on Dubai Dubai's GDP was experiencing a growth rate of almost 17.9% from 2000 to 2006. However, the growth rate slowed down to almost 6% in 2009 (AME Info FZ LLC 2008). The Dubai Financial Market underwent a considerable decline as a result of the recession. The decline was recorded to be almost 72% at the end of 2008 when considered in comparison to market performance in 2007. An indication of declining performance can be observed in the fact that the market recorded its peak in January of 2008 and its trough in December of 2008. The steepest decline in performance was observed in the utilities sector where the market declined by almost 84%. This was followed in its decline by the real estate
67 sector which came down by a staggering 82.6%. In the same difference of 2008 and 2007, the telecommunications sector experienced a decline of 70.7%. The financial investment sector declined by 69.9% according to a report by the Dubai Financial Market (2008). Furthermore, the Dubai economy saw a complete decline overall in the sectors of banking, consumer staples, transportation, insurance and materials sectors. It is imperative to highlight at this point that the Dubai Statistics Center defines the construction sector for Dubai as the activity that include engineering contracts in maintenance, renovation and construction of projects that may be residential or nonresidential as well as others such as water networks, bridges and roads (Abdelgalil 2005). According to the Dubai Statistics Center for the Government of Dubai (2009), the Gross Domestic Product at Basic Constant Prices for the Emirate of Dubai was standing at 223,344 million AED in 2006 while it grew to 243,998 million AED in 2007. In 2008, the Gross Domestic Product at constant prices grew to 257,870 million AED in 2008. It is important to note that the Gross Domestic Product in the case of Dubai is showing a downward trend in terms of the percentage of growth over the years. Essentially, the Gross Domestic Product experienced a growth of 9% in 2007 which fell to 6% in 2008 (Government of Dubai 2009). Furthermore, the construction sector in particular grew from recording economic activity of 18118 million AED in 2006 to 21058 million AED in 2007. In 2008, the construction sector recorded a further growth of 24798 million AED. 4.3.3 Broader Implications of the recession on Johnson Arabia The recession had direct implications upon the manner in which Johnson Arabia operates and perceives the business environment. As a result of the recession, Johnson Arabia was forced to take on a highly competitive approach towards the market in which business is carried out by engaging in business deals that are lucrative and decidedly beneficial to Johnson Arabia
68 rather than engaging in a broader customer acquisition strategy. Johnson Arabia began to focus on customer retention in its attempts to realize the significance of adequate risk management. Special attention was given to pricing in order to ensure that potential consumers are not left with a reason to hesitate when they consider hiring Johnson Arabia's services. While all of these were steps that Johnson Arabia took in order to streamline its position in the market, it became equally important to bring about internal changes as well. Johnson Arabia deviated from its customary six month and bi-annual bonus programs and bonuses were not given out at their regular volume. The company also brought the recruitment process to a stop. Besides these measures, special attention was given to areas where costs could be cut but the company ensured that no employees had to take any salary cuts. These measures while not exactly unwelcomed, did not stop the employees from feeling restless. The internal environment at Johnson Arabia LLC has now become highly sensitive since employees have begun to feel uncomfortable about potential layoffs and are new recruitment policies. Similarly, while Johnson Arabia has realized the need for a contingency plan to be developed and put into place for any recessions in the future, the current changes in the operations of Johnson Arabia are still far from complete in their implementation and are in a state where no conclusive evaluation of the status of their objectives can be acquired.
CHAPTER 5: CONCLUSION The research was aimed at developing an understanding of the implications of a global recession on a thriving and well established economy. The study began by establishing a background and giving an introduction to the case-study chosen for the research: Johnsons Arabia LLC. Research objectives and research questions were identified before proceeding to the literature review. The literature review defined recession and its causes followed by a discussion on the measurement of recession and the indicators of recession. The effect of a recession on an economy was observed through discussion on recession and its implications on employment and unemployment as well as the multiplier effect. The literature review also spanned a discussion on recession in a historical context before moving on to a discussion on the strategies that are employed by organizations to counter recession. A number of different strategies were highlighted after which the discussion moved on to elaborate on the strategies that an organization can bring in to use to acquire a competitive advantage during times of recession. Having established a strong foundation the literature review proceeded by elaborating on the effects of the global recession on UAE in particular. The literature review was brought to a conclusion through a brief discussion on the current standing of UAE's economy after it has undergone the effects of the recession. The next stage was the identification of the research methodology in which different research approaches were discussed before moving on to the establishment of the approach that was most suited to the study. Different data collection techniques were also discussed along with a discussion on the limitations of the research.
70 It was observed through the survey findings that the responses given by the respondents could be placed along a categorization in which the implications of the recession on Johnson Arabia and the measures taken by the company could be perceived as those that were internal and external in nature. In light of the primary findings, the recession influenced Johnson adversely through a deceleration in growth of the core construction market. The halting of ongoing projects and shelving of projects that were in the pipeline caused a decreased need for rental services for products such as those provided by Johnsons Arabia. The implications of the recession on the company were no doubt ones that registered with the company as those of a severe nature. While all responses acquired showed that the recession had served to bring forth a downward trend in the industry, numerous dissimilarities were observed between the responses given by the respondents in numerous areas. Firstly, the recession was observed to be one that realigned the organization in a manner with risk management and stringency in policies but served to create internal unrest according to the sales and area manager. Externally, the company became all the more cautious in its dealings while internal measures were taken in the form of increased aggression towards business leads. However, while no internal cutbacks in salaries were introduced, the regular bonus plans were not fully followed. Another area in which dissimilarity was observed was that of recruitment and selection in which the respondents, other than the division manger considered recruitment as a highly unlikely function in times of recession. Also, growth was observed to be present when an organization is able to derive maximum productivity from its personnel while developing itself in the market.
71 Entry into new geographical regions was observed as the favored option to take during times of recession, followed in relevance by expansion of the distribution system. Similarly, it was observed that Johnsons Arabia considers an increase in Sales volumes as a primary determinant of growth. Customer acquisition and customer retention strategies were observed to hold undeniable when considered in light of the management approaches that experience an increase in significance when a company is going through recession. Regardless of the measures for Johnsons Arabia that were suggested by the respondents, it was observed that there was a significant absence of implementation since almost all the respondents highlighted a need for continued implementation and identified the counterrecession strategy as one that was still fairly underway and was in no condition where conclusive determinations for its outcome could be made. There was a strong need identified for the implementation of a sustained strategy to counter the effects of the recession. The study served to prove that a recession serves to have significantly adverse implications on an economy and that it serves to introduce a decrease in growth for the industries within the economy. This decrease in growth is one that contributes to the shelving of pending projects and the halting of ongoing projects which in turn leads to a decrease in the demand of the utilities, products and services utilized by the industry in its operations. In the case of Johnson Arabia LLC, the decline in the construction industry contributed to a decline in the need for the products and services provided by Johnson Arabia LLC. The implications were observed to have taken place in distinctively external and an internal perspective for Johnson Arabia LLC. Internally, Johnson Arabia observed a tendency towards change in which the organization attempted to become all the more committed and devoted towards its objectives. Systems were developed and managers sought to acquire maximum productivity from personnel.
72 Decision making procedures were influenced and company attempted to cut costs and expenditures by introducing reductions in bonus programs for employees besides other expenditures that the company could do without. However, it was observed that there was a strong need for concrete implementation for strategies such as these. Put concisely, it was observed that there was a strong need for recession management to adequately introduce the strategies that were meant to assist Johnson Arabia LLC in countering the implications of the recession. 5.1 SUGGESTIONS FOR FURTHER RESEARCH While this study was not one that was designed to be extensively exhaustive, it is one that attempted to be as thorough as possible in its research in order to ensure credibility of its findings. In its attempts to do so, the research covered numerous areas and topics that were although covered, were deemed to ones that merited an extensive research. Carrying out an in-depth research in these areas would have caused the research to deviate from its actual objectives. It was therefore considered appropriate to present such instances as suggestions for further research in the future. Research in these areas can be connected to this study or can be carried out as an extension of it. One of the areas where a need for further research was required was the implications of the recession on rudimentary change management techniques. This recommendation for research is being made in light of the fact that a lack of practical implementation was observed in the case of the strategies that Johnson Arabia developed in the face of the recession. This may have come about as a result of ineffective change management. However, considering the expertise that Johnson Arabia brings in the field, it becomes evident that it is the recession that made it difficult to carry out the implementation of the measures that were established to
73 counter the recession. This study therefore suggests a research into change management principles in light of the need for realignment of the measures towards the circumstantial scenario that takes place in times of a recession and hence recommends the need for change management principles to be applied in the same regard.
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APPENDIX I - SURVEY QUESTIONNAIRE Questionnaire Dear Respondents, You are hereby invited to complete a survey questionnaire which is being carried out as a part of my MBA dissertation. Objective The objective of the research is to develop a clear comprehension of the implications of the global recession as they fell upon Johnson Arabia LLC. Sponsor The research is sponsored by the researcher himself. Responses The questions are divided into three groups’ Demographic Multiple Choice and Descriptive. All participants are required to answer all questions. Time Required Completion of a survey questionnaire is approximated to take 15 to 20 minutes of your precious time.
Name: Age: Sex: Organization: Designation: _________________________________ 1. What is your understanding of recession?
2. What was the overall reaction of the organization to the current recession phenomena?
3. Which one of the following options describes best the severity of the economic recession in your industry? Severe Moderate Normal Almost negligible Please elaborate on your answer
4. Do you think the current economic recession has an effect on your organization? Yes No
82 5. What was the effect of recession on company’s sales?
6. What was the impact of recession on your customer base?
7. Did the current economic recession made any significant changes in the way of doing business? Yes No
8. Did recession change the process of decision making in your organization? Yes No Please elaborate your answer
83 9. Was the organization’s cash flow affected by recession? Yes No
10. Is it difficult for organization’s to win new business contracts during recession? Yes No
11. What was the effect of recession on recruitment and selection of the organization?
12. What is the effect of recession on the compensation management of the organization?
13. Please explain what you understand by growth during recession?
14. What is the most important factor which you consider as growth during the time of recession? Sales Increase in employment Gross profit Others Reputation
15. Is it possible to grow you business at the time of recession? Yes No
16. What are the strategies that are designed by the management to counter recession?
17. How well the strategies were implemented?
85 18. Did the higher management consult the lower hierarchy before implementing the strategies? Yes No
19. Were there any hurdles during the implementation phase? Yes No
20. Rank the following as most important to least important for your business during recession period where 1 is least important and 5 is most important
retention……………………………………………………..1…..2…..3…..4…..5 • Increase customer base through advertising and promotion…….
……..1…..2…..3…..4…..5 • Training and development of employees…………………………..
…..1…..2…..3…..4…..5 • Redesigning
tasks……………………………………………………...1…..2…..3…..4…..5 • Hiring specialized
21. Form the list below pick one option that you think would help the organization overcome this recession period? • Addition of new products and
services………………………………..1…..2…..3…..4…..5 • Entering a new geographical location…………………………………
1…..2…..3…..4…..5 • Expanding the distribution
system…………………………………….1…..2…..3…..4…..5 • Increasing the advertising and
promotion……………………………..1…..2…..3…..4…..5 • Mergers and acquisitions………………………………………………
22. What were the customer’s reactions after applying those strategies?
23. Did your business grow after the implementation of these strategies? Yes No
24. Is there any contingency plan designed by the organization to cope up with this kind of situation in the future? Yes No
APPENDIX II – FINANCIAL ANALYSIS
Table 2: Assets
Chart 1: Assets
Table 2: Liabilities
Chart 2: Liabilities
Variable Cash Flow from Operational Activities
2009 7680503 9
2007 2559868 8
2006 1412072 7
Table 3: Cash Flow from Operational Activities
Chart 3: Cash Flow from Operational Activities
Variable Shareholde r's advances
2009 13700000 0
2007 13700000 0
Table 4: Shareholder’s Advances
Chart 4: Shareholder’s Advances
Variable Total Equity
165680193 82212240 50393073 18785832 10953713
Table 5: Total Equity
Chart 5: Total Equity
Variable Retained Earnings
2009 16523019 3
2007 8176224 0
2006 5039307 3
2005 1833583 2
2004 Average 900371 16236252.5 3 5
Table 6: Retained Earnings
Chart 6: Retained Earnings
APPENDIX III - SURVEY FINDINGS Subject of question Understanding of recession Reaction of organization to recession Intensity of recession -elaboration Affected the organization Affect on sales Affect on customer base Caused changes in business mannerism -elaboration Decision making process affected Cash flow affected Made it difficult to win new business Affect on recruitment and selection Compensation management Growth during recession is Division manager Contraction Realigned the organization Increased awareness of risk management Severe Downward trend in construction industry Yes Little Steady downward trend observed Severe Yes Systems had to be put in place Yes Yes Yes Growth continued, new staff hired No salary cuts Increase in market share Sales and area manager Banks have no more funds left Nervous with internal changes Severe Downward trend in construction industry Yes Inquiries became less Severe, domino effect Yes Aggressive stance had to be taken Yes Yes Yes Unlikely Unlikely Existing staff multitasks Operation coordinator/debt collector Slowdown in business activity Stricter collection policies Severe Downward trend in construction industry Yes Significant Sales went down Customer base became smaller Yes More cautious in dealing with clients Yes Yes Yes Unlikely Not fully given Leading the market inspire of
1 2 3 4 5 6 7
8 9 1 0 1 1 1 2 1
93 3 1 4 1 5 1 6 the recession Factor of growth during recession Business growth during recession Management strategies to counter recession Sales Possible Expansion Customer retention New revenue streams Entering new geographical location Hiring specialized professionals Training and development of employees Increase in customer base through promotion Redesigning tasks Customer retention 1 9 2 0 2 1 2 3 2 4 How well strategies implemented Higher management consulted lower hierarchy Any hurdles during implementation Customer's reactions Did business grow after implementation Still undergoing Yes Yes N/a N/a Sales and service Yes Customer retention Price flexibility Expanding distribution system Customer retention Training and development of employees Redesigning tasks Increase in customer base through promotion Hiring specialized professionals Needs improvement Yes No N/a N/a Reputation Yes More aggressive in collecting money More aggressive in getting new jobs Entering new geographical location Customer retention Redesigning tasks Training and development of employees Increase in customer base through promotion Hiring specialized professionals Still undergoing Yes Yes Customers had no funds to give N/a
1 7 1 8
One option to help during recession Most important during recession
94 2 4
Contingency plan for future