Driving Forces Of The Jamaican Economy

Driving Forces Of The Jamaican Economy The purpose of this research is to do an analysis of the investment setting of the local economy . This will be done through an analysis of the macro economy, industry analysis and company analysis. This research seeks to identify the three industries which have the greatest potential for growth for the period 2013- 2016. From the three industries identified, the industry with the greatest growth potential will be analysed further and a company chosen from this industry for fundamental analysis. The results presented from the research should be treated as conclusive but rather as an hypothesis or best guess for the direction of the economy during the period 2013- 2016. Economic Analysis is the study of general economic conditions that is used in the valuation of common stock. The macro economy is the environment in which all firms operate and it has a great influence on profits and the firms relative performance within the industry. Driving Forces of the Jamaican Economy Jamaica is a small developing economy with a lot of potential for growth if resources are used more effectively. Over the years it is evident that the economy has been growing, however, there are areas that seem to be crippling. The major drivers of growth in the economy are agriculture, forestry and fishing. On the other hand it is expected that mining, quarrying, hotels, restaurants and electricity will expand. Over the past years the contribution of agriculture to GDP ranges from 6.5% 8.5%. If this number is to grow the economy would have to get in the frame of mind of eating what we grow which will help to decrease imports, however exports would have to increase since it would not be beneficial to stop importing but do nothing about exporting. Industries make up 29.5 % and services makes up 64.7% of GDP. The economy depends mostly on services which include restaurants and hotels which make up the greater portion of GDP. However the country generates most of its foreign exchange from tourism and bauxite. Although the economy is growing it would be better if there were not so many hindering factors. These factors include crime and corruption, large-scale unemployment and underemployment. Instead of seeing a decline, the economy is experiencing growth in those factors, and these affect the economy negatively. According to a paper on national security it stated Jamaica has a culture of crime, this high crime rate in the economy causes there to be fewer investments which results in a slow growth of the economy. As a small economy with so much potential to grow but little resources and few modern technology there are some corrective measures that should be in place if the economy should grow. According to Paul Allen a business reporter these measures include: embracing competitiveness and taking the necessary measures to achieve and maintain it, companies need to move away from targeting the local market and focus more internationally, make better uses of resources invested in economic activities and adopting policies that encourage innovation and cohesion. In implementing these measures the economy will be sure to see growth. It may not show currently but it will show over a period of time if implemented at the right time and with the right precautions. Unemployment Unemployment rate is the percentage of the total labour force that is unemployed but actively seeking employment and willing to work. Decreasing unemployment in Jamaica has always been one of the major economic factors that the Jamaican government have always tried to solve. The graph  [1]  shows the movement of unemployment rates between the years 2009-2013. The figures show a gradual increase in unemployment over a three year period and also a forecasted increase over a two year period. According to the PIOJ in an article in the Jamaican Observer dated August 22, 2012 the economy is going through a transformation in which sectors growing the fastest are the ones shedding jobs due to modernisation taking place. Compared to other Caribbean countries Jamaica has been experiencing the slowest economic growth and the country will continue to face challenges for years to come. To combat this problem the current government will be maintaining a broadly market friendly policy stance and reducing Jamaicas high unemployment rate a priority. They have found $4 billion funding for the Jamaican Emergency Employment Programme (JEEP) in the efforts to solve this problem and as such the projections for unemployment for 2012 and 2013 are 13% and 14% respectively. Interest Rates Interest rate is a rate which is charged or paid for the use of money and is often expressed as an annual percentage of the principal. The lending interest rates for Jamaica over three years are graphically represented  [2]  . These figures show a gradual decrease in interest rates which can have both negative and positive effects. Low interest rates increases borrowing by consumers and thus increase consumer spending, it will prompt investors to invest more in equities and businesses will be able to finance expansions and so on at cheaper rates all of which will help to expand the economy and increase GDP as they can borrow for less money to finance these activities. On the other hand lower interest rates also indicates that persons will begin to save less as they will not be receiving much return and it can also weaken the dollar. According to Bryan Wynter the Governor of The Bank of Jamaica, He stated in an article dated June 14, 2012 Jamaica will sustain low levels of interest rates. Jamaica is expected to continue stable/decreasing levels of interest rates. Interest rate for Jamaica is currently 17.55% as of August 2012. GDP Gross Domestic Product is the measure of the economys total production of goods and services. Rapidly growing GDP indicates an expanding economy with ample opportunity for a firm to increase sales. The Jamaican economy is heavily dependent on services which accounts for about 60% of GDP. GDP in Jamaica 2009 was reported at -2.6 % this shows that the level of production in the economy was declining compared to -1.7 % in 2008. In 2010 GDP was -0.6% this contraction was reflected in low economic demand, job losses and reduced disposable income. In 2011 however GDP increased to 1.3 % this was due to improved international economic conditions, particularly in the first half of the year. Domestic demand for goods and services, although weak, continued to improve throughout the year, it was also influenced by sustained growth in remittance inflows to Jamaica. According to the Bank of Jamaica, GDP is projected to be within the range of -0.5% to 0.5%. Inflation According to Mankiw inflation is the overall increase in price levels. Inflation may cause the value of investments to fall. Government deficit and rising cost of productive inputs are causes of inflation in Jamaica. When the governments expenditure exceeds its revenue, the government is said to be running a fiscal deficit. In order to finance this deficit, the government has the option of either borrowing from the Bank of Jamaica or borrowing from local or international financial institutions or from the general public. If the government borrows heavily from the local sources outside the Bank of Jamaica, it may lead to an increase in domestic interest rates. If the government decides to borrow funds from the Bank of Jamaica to finance its deficit, the process of printing money may have to be done. This is not a preferred option as the process usually leads to inflation because it represents an increase in money balances without a corresponding increase in the quantity of goods in th e economy, that is, more money chasing too few goods. Inflation also arises out of increases in the cost of production inputs. The price of any final good or service will depend upon the cost of the inputs used to produce that good. The more expensive the inputs are to the producer, the higher the cost of the product to the consumer. This therefore means that continued increases in the cost of productive inputs would result in continued increases in the price of the good and hence causes inflation.  [3]   According to the Bank of Jamaica the inflation rate in 2009 was 10.2 % which decreased from 16.8% in 2008. This decline was a result of the declining in prices of import commodities and an increase in productivity and output in the agricultural sector. In 2010 however inflation increased to 11.7%, this was a result of domestic weather shocks this included drought conditions and a tropical storm which affected food supplies. In 2011 inflation decreased to 6.0% this was influenced by the impact of excess supply on agricultural prices which means there was a high supply of agricultural produce. Domestic demand also was remained low during this period. Projected inflation for year the years 2012 to 2013 is estimated to range from 10% to 12 %. National Debt Debt to GDP According to Ken Chaplin in an article dated Tuesday November 15, 2011, the country is not doing well when a lot of its economic and financial activities are measured against the GDP for instance the debt. In 2008 Jamaica had a debt to GDP ratio of 128 percent. Total debt for 2010 was 128.3% of GDP compared with 129.3% of GDP in 2009. The projection for 2011/12 is 122.8% of debt to GDP and the projection for 2015/16 is 95.1 percent of debt to GDP.  [4]   Total debt stock for 2009 was $1,434,755.8 million compared with $1,570,368.30 in 2010 and a projected $1,639,502.5 in 2011. All of these figures broke the debt ceiling of l00 percent. In 2009 the domestic debt ratio to GDP was 68.4%, in 2010 66.1%, and for 2011the projection is 65%. As far as external debt is concerned, the debt to GDP ratio was 60.9% in 2009, 62.2% in 2010 and the projection for 2011is 57.7%. The government projects that by the year 2015/16 the debt to GDP ratio will be 95.1%, but this is not sufficient. In every respect the extent of the debt is a heavy burden with which the country is struggling to maintain. Industry Analysis An industry analysis is an analytical tool used to identify various attributes within an industry. In Jamaica we have many industries, and there success and growth are often dependent on a number of factors. The more common factors considered for an industry include the level and type of technology employed, type of labour force employed, government regulations and the like. The three industries identified in this research paper, are the three industries that the authors of this paper felt had a better chance to do better than all other industries during the period 2013- 2016. These industries are the financial industry, manufacturing industry and the telecommunications industry. These three industries have shown the greatest potential for sustained growth over the projected horizon. Financial Industry The finance sector is regulated by the Financial Regulations Division (FRD) this division deals with the development of the regulatory framework, which influences the operations of the countrys financial sector. Jamaicas financial sector is made up of merchant banks, commercial banks, credit unions, building societies that are license under the financial institution act. The sector also includes non-deposit taking institutions including insurance companies, development bank and securities dealers. The Bank of Jamaica Financial Stability Report for 2011, states that the general financial stability environment in 2011, although remaining stable, was dominated by higher credit risks. The credit risk conditions permeating the financial markets in 2011 were affected by domestic economic conditions pertaining to uncertainty surrounding the status of the Stand By Arrangement with the International Monetary Fund (IMF), deteriorating debt indicators, the delay of other key economic reforms and the less than favourable strength of economic recovery. It further stated that the annual change in Jamaicas gross domestic product (GDP) returned to positive growth rates at end 2011. In addition, economic activity appeared to be trending to levels recorded prior to the international financial crisis that started in 2007. Improved performance was reflected within the financial sector for 2011. Compared to 2010, profitability rose for financial institutions. Increased profits were mainly due to: activities in the banking sector which realized accelerated growth in the asset base; continued reduction in risks related to the cost of financing in 2011, despite low aggregate demand and unfavorable performance on interest bearing assets; and lower market interest rates during 2011, thus generating lower interest expense relative to 2010. Despite several risks identified for the period under review, the financial sector was adequately capitalized. Two of the major risks were the protracted uncertainty due to the status of reviews of the countrys medium term programme by the International Monetary Fund; and the evident increase in Non-Performing Loans, specifically to corporations. This industry is driven by technology, as is evident from the various machines utilized by the various financial institutions to ensure the continued operations of its business. This technology includes internet banking and telebanking facilities which allow customers to shop and pay bills from the comfort of their own home. Manufacturing Industry The manufacturing industry is comprised of any and all organizations that engage in production activities. In view of this definition, this industry would include organizations involved in food processing such as Grace Foods and Lasco Manufacturing, outdoor signage companies such as National Outdoor, furniture making companies and the like. The manufacturing industry, also known as the secondary industry, employs a lot of labour especially unskilled labour which is used to produce the wide variety of manufactured goods found within our local economy. Technology is also employed to this sector to aid in production but, the industry remains very labour intensive and is the main source of income for many within the local economy. The contributions made by the manufacturing industry as showed steady declines since 1990 at 21.3% to 8% in 2011. The importance of this industry is however underscored by the president of the Jamaica Manufacturing Association as the largest contributor to GDP of all the goods producing sector. This industry is regulated by the Jamaica Manufacturers Association, which is responsible for ensuring that companies within this industry are properly licensed to do business and also acting as an agent of the government on behalf of the stakeholders of this industry. Since the Jamaica debt exchange in 2009, businesses and individuals who formerly depended on earnings from government debentures have had to shift their focus as they desire to gain greater returns on capital. The industry has benefitted from this has some manufacturing businesses have sought to increase their capacity, and in so doing generate more income. (Edwards, 2010) The major players in this industry enjoy greater market share and economies of scale. Nevertheless the industry is not yet saturated and more and more players are entering the market with a view to earning income and gaining greater market share. There are little barriers to entry within this industry and it has become a worthwhile alternative employment for those who did not benefit from an acceptable level of secular education. In recent times the financial stability of Jamaica seems to be hinging on an IMF deal. As a result vision 2030 which is a mandate of sorts for growth in the manufacturing industry has taken on greater meaning. It is the desire of the government to see this industry expand it capacity and export more and import less. (Edwards, 2010) Telecommunications Industry In 1986 LIME then known had Cable and Wireless Jamaica enjoyed a monopoly position within the industry. This was however sanctioned by an act of parliament, and in 1999, CWJ was asked to give up their monopoly status and liberalize the market. (Country Profile Jamaica, 2007) By the end of 2005 Jamaica was described by the International Telecommunication Union (ITU) as having the highest usage of cell phones than any other country within the American region. The Jamaican mobile sector which includes companies such LIME and Digicel are credited with the extensive growth in the telecommunications industry, despite the global recession during the periods 2007-2011. According to (Business Wire, 2011) the mobile sector is poised for strong growth during the periods 2011- 2016. Factors contributing to this projected sustained growth are the 3G and 4G deployments by the mobile sector. As noted by (Country Profile. Jamaica, 2007), in 2007, Digicel was market leader with a customer base of 1.7 million Jamaicans and LIME followed with a customer base of 700,000. In the ensuing years there have been slight fluctuations, but Digicel remains as market leader. The telecoms industry in Jamaica is regulated by the Fair Trading Commission (FTC) and the Office of Utilities Regulation (OUR). The fair trading commission asses the market and ensures that as companies within this industry interacts fairness exists and that no entity is able to cause negative impacts to other players in the market. The Office of Utilities Regulation focuses on the interaction between industry players and the consumer society. At times they may set rates for service providers or approve rate increases. However, as a result of the competitive nature of this industry, there is not much if any interference from the regulator in this regard. As mentioned before there is a high level of competition within this industry with the major competitors being, LIME vs. Digicel, LIME vs. Flow, LIME vs. Digicel vs. Flow, and offcourse the list goes on. Success in this industry is however dependent on technology employed and the corporation with the greatest investment in technology is poised to see the greatest return on investments. In Depth Analysis of chosen Industry (Manufacturing) In the view of the members of this group, the manufacturing industry is positioned to do better than the other two industries assessed during the periods 2013- 2016. Our decision was drawn from past and present activities within the economy and we hypothesize that the manufacturing industry will be the leading industry at the end of the projected period. Manufacturing in Jamaica has grown from small beginnings to the well oiled machinery that now exists. In times past it was about trial and error. Bringing things to the market and hoping that sales would be made. This industry is however faced with the reality that it does not have unlimited resources for trial and error. As a result, corporations within this industry have diversified to gain greater economies of scale. Within this industry we have food processors. Leading in this area are companies such as Jamaica producers, Grace Foods, Lasco Manufacturing, Polyfoods and offcourse the list goes on. We have beverage companies such as Pepsi, Jamaica Beverage, Wysinco, Grace and still others. Not to be outdone is the industrial giant Tankweld Metals which produces all type of steel to be used in the construction industry. Time would not allow us to go into every sub sector within this vast and expanding industry. This industry benefits from various government concessions as an inducement to ensure sustained growth of the sector. In the vision 2030 that was drafted, the manufacturing industry was viewed as a critical area that the government would be looking to make investments in to ensure growth of the sector, through its manufacturing task force (vision 2030, 2009). As noted by (Country Profile Jamaica, 2005), the manufacturing industry is the second largest contributor to GDP growth. Despite this second place status on the issue of GDP growth, the industry is still growing and there are incentives available for growth which underlay the potential for it to become an industry leader during the projected period. A recent occurrence that has had a negative impact on the manufacturing industry includes the recent passing of hurricane Sandy. Hurricane Sandy has washed away crops, blown down structures and damaged parts of some factories. This has caused setbacks within the industry and may inevitably lead to increases in cost of products produced. However in times past, these situations have levelled off and normalcy returned. Similarly the effects of Sandy will be a thing of the past. Social Influences The manufacturing industry is impacted by the need of many to have employment in order to support their families. Many secondary school graduates first job is in the manufacturing industry as unskilled labourers. There they have an opportunity to learn industry relevant skills that will benefit them in later years. The Manufacturing industry however is not to be viewed as a day-care centre for the nations youth. It is in fact a very well paying industry for those who have qualified themselves in that area through skills training or tertiary learning. The success of this industry will inevitably depend on those individuals with new knowledge and innovative ideas to keep it moving forward. A very important part of the economy is growth in gross domestic product. The more developed this industry becomes, the greater will be GDP. Of special note also is the fact that the manufacturing is the single largest employer of human labour. Technology Employed Like other industries, the manufacturing industry is aware of the benefits derived from the use of technology in its operations. The use of technology in this area is complemented by human labour, the two works hand in hand. In times of long ago, the adage many hands make work light had real meaning. It took many hands to get things done at that time. In this modern economy, the usage of technology has increased capacity within the various companies within the manufacturing industry. As a consequence many have had to learn how to operate and maintain these machines in order to secure their employment within the industry. Others have left to find their place in other industries such has the service industry. It is with the aid of technology that firms within this industry can gain economies of scale. These include industry giants such as Grace Kennedy, Lascelles, Lasco and much more. Regulatory Environment In Jamaica, there are incentives to be gained from the government if the thing being produced is deemed to be in the national interest (Chen-Young). Government officials have on numerous occasions spoken about the need for Jamaicans to capitalize on the benefits that can be gained from producing more and importing less. Linked to its national policy, we are admonished to be self sufficient to the extent possible. On a more serious note we have the Bureau of Standards, This institutions sets the standards that must be met for goods that are to be used by the public (bsj.org.jm). In the case of building blocks built by Carib Cement, there is a certain level of pressure that each block should be able to withstand before it breaks. The standards set by the Bureau are in the best interest of the nation and they are not burdensome to implement. Forces Driving Competition Mr Porter identified five forces which drive competition within an industry, these are also known as Porters five forces. These are the; bargaining power of buyers, bargaining power of suppliers, threat from potential entrants, threat from substitutes of products or services, and intense competition among existing companies within an industry. Bargaining Power of Buyers As a result of the buyers knowledge of the market and the competitors thereof, the buyer is able to make demands on the business. Buyers are more sensitised to the various facets of the manufacturing industry and the many niche markets that have sprung. The buyer therefore has the option to shop around and get the best deals. Bargaining Power of Suppliers Suppliers are aware that they do not have a monopoly market on raw materials needed by companies within the manufacturing industry. As such suppliers seek to form partnerships with companies in order to secure further business. As such the bargaining power of suppliers is moderate. Threat from Potential Entrants Threat from potential entrant is low. This is because a sizable investment is needed to enter this market and not everyone can afford to set up shop and manufacture their own goods to be sold to consumers. Threat from Substitute Products There is a high level of threat from substitute products. As a result the consumer can go elsewhere if not satisfied with what is being offered for sale. This forces the company to be sensitive to the needs of consumers since there needs can be filled elsewhere which would result in a loss of revenue. Intense competition among existing companies within the industry There is intense competition within the industry, with the exception of those that operate as monopolies. In every subsector of this industry, there is intense rivalry and the consumer only stands to benefit. Those that have however established themselves within the industry see favourable returns despite the intense rivalry. These companies include Pepsi and Wysinco from the beverage sector. Company Analysis The company chosen from the industry that is believed to outperform the other two industries is Lasco Manufacturing. This company exists as a major player within the food manufacturing sector of the manufacturing industry despite being quite young when compared to its major competitors. It has as its vision, to become a global corporate leader through innovation and entrepreneurship. Lasco Manufacturing came into existence as a consequence of a decision that was made to reorganize the Lasco companies in the year 2010. The board of directors entered into and amalgamation agreement which in effect led to Lasco Foods being made responsible for its own activities the name was thereafter changed to Lasco Manufacturing. The chairman for the Lasco manufacturing company is Mr. Lascelles Chin; he is also the founder of the Lasco Affiliated Companies. A recipient of the Order of Jamaica for the work he did in the development of commerce in Jamaica. This man along with his qualified team of directors and committed staff are positioned to take this company to new heights during the projected period of 2013- 2016. Economic and Industry Influences Lasco Manufacturing, like all other business are affected by the economic climate. The countries inability to secure an IMF deal will result negatively on its operations as it relates to its importation of raw materials for its business. The countries net international reserves are getting low and this may lead to further downgrades in on Jamaica as a place for doing business and Lasco Manufacturing will be affected. The recent passage of hurricane Sandy left damages that the government is still paying some of which will remain unchanged. Many manufacturing companies including Lasco Manufacturing were affected by Sandy. Food prices are expected to rise and this company will not escape this reality if it comes to fuition. The economy has been in worst state before and was revived, the authors of this paper are confident that normality will return to Jamaica and this company will continue to thrive. There has been an influx of brands which are rival to our company under consideration. However the Lasco brand is an household name and as a result still enjoys a favourable position within the market. The company however has to maintain a strategic focus because not all consumers will be loyal to a brand and as the consuming public become more educated and aware they will make greater demand on the producers of goods and services. Structural Influences Firms Competitive Strategies SWOT Analysis A SWOT analysis is a tool used to make an assessment of the strategic position of an organization. This assessment is used as a guide to position or reposition the organization in a profitable direction, taking into consideration availability of resources. Strengths Dominates the powered milk market. Well recognized brand locally. Company is more distribution oriented; this is positive considering the high manufacturing cost in Jamaica Weaknesses Products have a stigma of being low ended. Concentration in one product type; milk powder. Low regional diversification, revenues are concentrated in Jamaica. Alliance between chairman and managing director. Opportunities Tax break from listing on the JSE for the next 10 years. Stronger profit growth to fund retooling and business expansion. Threats Though Lasco benefits from weak demand, continued weakness in the Jamaican economy could impact them. Favourable Attributes of the Firm Generally, the favourable attributes of a company look at its unique qualities or characteristic that makes it the preferred choice for its customers and it is this same uniqueness that lures its potential customers. The major qualities or characteristics that contribute to a companys favourable attributes are its competitive advantage, exceeding management styles and market leadership. Competitive advantage can be further subdivided into differentiation advantage and cost advantage. Differentiation advantage is when the company offers superior product and services at the same price in the market. In contrast, cost advantage is when the company offers the same goods and services like its competitors but for a lower price. Above average management speaks to the level of managerial approach which is used within the company and it also looks at the level of mentorship that the existing managers can provide to the next generation of managers. The attribute of market leadership gives an o verview of the overall marketing styles which the company uses to builds its reputation and thus making it a priceless entity. ( Annonymous, 2008) Now when we use the definition of favorable attribute to scan Lasco manufacturing limited it was observed that it portrays numerous qualities which contributed to its uniqueness. In the first place, it can be seen that Lascos attribute of competitive advantage exemplifies a cost differentiation style in which it offers a variety of low price products on the market. The majority of these products which they offer are a part of the food basket of the average Jamaican consumers and so they have created a guaranteed market in that spectrum. This attribute has branded Lasco products as cheap and therefore gives them a huge competitive advantage among some of the major manufactures in Jamaica such as Seprod Ltd, Nestle and Grace Kennedy

Personal Narrative Essay - The Ski Trip :: Personal Narrative Essays

The Ski Trip Standing in awe, cold air permeated through my hair. The smell of fresh and minty pine scent complimented the beautiful vantage of the wilderness. With my boots wedged in the snow, a shiver took over my body. This is was a place of peacefulness and tranquility. Never before had I been so close with nature. Facing the north was the vast forest. To the left and right, only the crystal white snow was visible. While looking up, I caught a glimpse of the old ski lift, the solo apparatus which was my passport to this great adventure. All that could be heard was the sweet chirping of birds nestled upon tree branches. "This is indeed a moment to remember." I thought to myself. Being that close to nature could put anyone in a state of nirvana. As I stood admiring the clear blue sky and the world around me, I was interrupted by my friends' constant taunting, "Come on, let's go!" They were not rookies. They had experienced the sport of skiing and the atmosphere around it and were not as enthusiastic toward the surroundings as I was. Their calls became louder, with annoyance. I stepped up to the edge of a great slope. The steepness of this colossal block of snow I stood upon, was frightening. The only was to go was down. I took a deep breath with no worries, for this was not the first time I was confronted with a suicide mission. In a heartbeat, the exhilarating feeling of going downhill on a pair of thin skis took over.

How to Increase Retail Sales Essay

1 Introduction One of the challenges for companies that have invested heavily in customer data collection is how to extract important information from their vast customer databases and product feature databases, in order to gain competitive advantage. Market basket analysis (also known as association rule mining) is one of the data mining methods (Berry and Linoff, 2004) focusing on discovering purchasing patterns by extracting associations or co-occurrences from a store’s transactional data. Several aspects of market basket analysis have been studied in academic literature, such as using customer interest profile and interests on particular features of the product for the product development and one-to-one marketing (Weng and Liu, 2004), purchasing patterns in a multi-store environment (Chen et al., 2004), or point at certain weaknesses of market basket analysis techniques (e.g. Vindevogel, Van den Poel and Wets, 2005). Market basket analysis has been intensively used in many companies as a means to discover product associations and base a retailer’s promotion strategy on them. When different additional brands are sold together with the basic brands, the revenue from the basic brands is not decreasing, but increasing. â€Å"Buy two, get three†sales promotion campaigns are very successful, if market basket analyses are used in order to determine the right products to be promoted. â€Å"Buy a product, get a gift† sales promotion campaigns are successful, if a basic product and a gift are related and the basic product has high margin rate. Based on market basket analyses, sets of products are defined and sold together with discount. Limitedbrands organizes internal competition in up-selling. Our paper – a case study – presents and analyses the application of market basket analysis in a major trade company in Slovenia. 2 The company Merkur, d. d. Merkur, d. d. is a trading company (Merkur, 2005) that has for years ranked among the top companies in Slovenia dealing in items for home improvement, home services as well as lawn and garden. Merkur, d.d. has recently strengthened its position on the foreign markets through the supplies of goods to industrial enterprises, and by the establishment of its own retail network abroad. Merkur, d.d. is the mother company of Merkur Group. The Group consists of two Slovenian subsidiaries and six subsidiaries abroad (Zagreb, Sarajevo, Skopje, Munich, Milan and Warsaw). Besides that, the group also includes two offices (Moscow and Belgrade). Merkur plans to further strengthen its position on the domestic market, spread its sales to the foreign markets, especially to the markets of former Yugoslavia, and develop a high-quality range of products. The company is organised in  several large departments: Wholesale, Retail Sales, Sales to Foreign Markets, Purchasing, Logistics and Supporting Services. Customers include construction companies, trading organisations, installation companies, industrial enterprises, craftsmen and small entrepreneurs, as well as end consumers. The company makes almost 60% of its sales revenues by selling goods wholesale. To make the sales quick and efficient, the Wholesale Department has been divided into four sales sub-divisions. At present, Merkur has 38 retail sales centres in Slovenia. Specialisation increases the effectiveness of sales, so two types of Merkur sales centres were developed: MERKURDOM focusing on ordinary households, and MERKURMOJSTER intended for DIY (do-it-yourself) users. More information about MerkurDom and MerkurMojster is available on Merkur internet site: www.merkur.si. 2.1 Characteristic figures of the company The scope of the company Merkur, d.d. can be shown through the following figures: The sales programme consists of about 200.000 active items (more than 120.000 items on stock), divided into 5 sales programmes, 74 lines of goods, 720 groups of goods and 5.600 basic goods classifications. Around 80% of sales are done with the top 12.000 items and 80% of stock is held on the top 20.000 items. The Purchasing Department issues more than 250.000 purchase orders with 1.200.000 items annually. Merkur purchases goods from more than 2.000 suppliers. About 80% of purchases are done with the top 200 suppliers. Wholesale has business relations with more than 2.500 buyers – organizations. About 80% of wholesale sales are done with the top 800 buyers. Wholesale issues approximately 400.000 invoices with total 2.200.000 items annually. Retail sells goods to 13.000 buyers / organizations and to about 500.000 end consumers. More than 70% of sales to end consumers are personalized with the Merkur loyalty card called the â€Å"Merkur Card of Trust†. Retail issues 6.000.000 invoices with more than 20.000.000 items to end consumers annually. In the period from 1993 to 2004 Merkur achieved 19% average annual growth in revenues, 20% average annual growth in net margin and 27% average annual growth in profit from operations. Today Merkur is the sixth largest Slovenian company in revenues. 3.1 The history of DW&BI in Merkur Merkur started to implement data warehousing and business intelligence (DW&BI) in 1999 with a project called KAS (Commercial Analytical System) (Svetina, 2002). Before 1999, different analyses and reports were performed in Merkur’s transactional information systems, much of the analytical data was held in Excel spreadsheets and Access databases. In the past, Merkur twice attempted to implement DW&BI technology, but failed because proposed technology was still too difficult to use for the majority of the users. In 1999 Merkur started with a major business process reorganization and, therefore, better and new business analyses were needed in order to make better decisions. The need for a DW&BI system emerged, so the KAS project was given high priority. Merkur started to design analytical data models for sales data and succeeded in integrating sales data from wholesale, retail and sales to foreign markets in one unified data model. The IT department proposed Microstrategy DW&BI technology, which was installed and tested in the beginning of the year 2000. The technology was found to be appropriate and the decision was made to implement DW&BI with Microstrategy solutions. The first power users (sales analysts) were educated and the first KAS sales analyses were used in the decision-making process. In the beginning the ETL (extract – transform – load) process was carried out on monthly basis, but by autumn of 2000 the company started to perform ETL process daily. Later in the year 2000 the purchasing analytical system was introduced as well. In 2001, the data warehouse was upgraded with data on Merkur’s business plans. Sales and margins were planned on a very low organizational level. The annual plan fact table has more than 1.000.000 records, so the salespersons’ performance is measured very accurately. Because the technology is easy to use, the number of KAS users increased up to 100. In 2002, the implementation of a very large and complex analytical module followed, containing inventory data. The inventory levels of each item in every warehouse on a monthly basis is stored in KAS and enables detailed inventory analyses and detection of critical items. Also, data on Merkur’s partner’s  debts and liabilities was added to data warehouse, which enables accurate cash flow management. Item price calculation elements and different prices were imported in KAS in 2003, so critical prices can be detected and all inconsistencies eliminated. Many minor additions to the system were also made over the last few years. All the time Merkur tries to use adequate analytical and data mining methodologies in order to improve the whole system of business reporting. From the DW&BI history we can see a controlled step-by-step development of the KAS system. Such way of development gives opportunity for good definition and implementation of analytical contents and enables Merkur to make many better business decisions. The KAS system brings Merkur an important competitive advantage, which enables the growth of the company. Improved decision making can be demonstrated through different measurable key success factors which are improving constantly. Key success factors such as net margin, net margin per item, net margin per customer, number of new customers and others are measured in KAS. These factors are always accessible for KAS users and help them to make better decisions. 3.2 DW&BI technology Since 2000 Merkur has used the Microstrategy DW&BI technology. Microstrategy provides ROLAP solutions, which enable a step-by-step approach in data warehouse development and processing large amounts of data. The data warehouse is implemented in an Oracle relational database. This means that the same database technology is used in both transactional and analytical information systems. Therefore, Merkur’s IT department can focus in one database platform instead of two or even more. Oracle technology was used in Merkur before the implementation data warehouse was started, so the implementation of this technology was fast and smooth. In Merkur the  following Microstrategy tools (Microstrategy, 2005) are used: MicroStrategy Intelligence Server is the heart of the BI system and provides reporting and analysis for the whole enterprise. This BI server provides the full range of BI applications through unified metadata and a single integrated server. MicroStrategy Administrator consi sts of a suite of tools that provide the systems management environment for business intelligence. It maximizes uptime of BI applications. Its tools give an environment for developing, deploying, monitoring and maintaining of systems. MicroStrategy Architect is a rapid development tool that maps the physical structure of the database into a logical business model. These mappings are stored in a centralized metadata repository. MicroStrategy Desktop is the business intelligence software component that provides integrated query and reporting, powerful analytics and decision support workflow with a desktop PC. MicroStrategy Desktop provides an arsenal of features for on-line analysis of corporate data. Reports can be viewed in various presentation formats, polished into production reports, distributed to other users and extended through a host of ad hoc features including drilling, pivoting and data slicing. The interface itself is customizable to different users’ skill levels and security profiles. In Merkur, the Desktop solution is used by 13 power users (analysts). MicroStrategy Web provides users a highly interactive environment and low maintenance interface for reporting and analysis. Using this intuitive HTML-only Web solution, users access, analyze and share corporate data through any web browser on any operating system. MicroStrategy Web provides ad hoc querying, quick deployment and rapid customizability, making it even easier for users to make informed business decisions. In Merkur, Microstrategy Web is used by 90 end users of KAS. MicroStrategy Narrowcast Server is a proactive information delivery server that distributes personalized business information to users via email, pagers and cell phones. It includes an intuitive self-subscription interface that enables users to specify what information they want to receive, as well as when and how they want to receive that information. Narrowcast Server is becoming more and more important in Merkur because of its efficiency. 3.3 Merkur’s DW&BI system today Presently, KAS; Merkur’s DW&BI system, is five years old. The development of the system continues constantly and there is still much content throughout the organization which must be implemented in the BI system. The most important content to be implemented in the future are the following: Integral data from Merkur’s finance and accounting system (the finance and accounting analytical system) Relevant business data from Merkur’s subsidiaries Data from Merkur’s human resources analytical system Data from Merkur’s e-business analytical system Data from Merkur’s logistic analytical system Presently in KAS (Merkur Commercial Analytical System – KAS, 2005): †¢ 13 power users (analysts) and 90 end users; of both groups, 50 users have the ability and knowledge to set-up their own reports. †¢ Up to 30.000 reports are run on KAS on monthly basis. †¢ KAS consists of the following objects: o 137 tables o 433 attributes o 1.195 metrics o 5.611 reports †¢ Over 35 automated services are run on the Narrowcast Server The KAS system enables many sophisticated business analyses such as market basket analyses, described later in this paper. 4 Market basket analysis and the used methodology Market basket analyses are an important component of analytical system in retail organizations. There are several definitions of market basket analysis. In a broader meaning, market basket analysis targets customer baskets in order to monitor buying patterns and improve customer satisfaction (Microstrategy, 2003). The following analytics can be used: attachment rates, demographic baskets, brand switching, customer loyalty, core items, items per basket, in-basket price, revenue contribution, shopper penetration and others. In a narrower meaning, market basket analysis gives  us the answer to the following question: which goods are sold together within the same transaction or to the same customer? By analysing this information, we try to find out recurring patterns in order to offer related goods together and therefore increase the sales. We can track related sales on different levels of goods classifications or on different customer segments. In this paper, the narrower meaning of market basket analysis will be taken into consideration, focusing on the use of these analyses in Merkur. It has to be noted that several other terms are also used to describe market basket analysis: related sales, cross-sell, up-sell. The distinction between these terms is very unclear and the same terms are often used in different meanings. What can we gain from market basket analysis (Limitedbrands, 2004)We get the ability to learn more about customer behaviour. We can make more informed decisions about product placement, pricing, promotion and profitability. We can find out which products perform similarly to each other. We can determine which products should be placed near each other. We can find out which products should be cross-sold. We can find out if there are any successful products that have no significant related elements. 1. Discover the selling documents (transactions) with the item, for which we want to perform market basket analysis. This logic is valid, if we want to carry out item-related market basket analysis. We can also perform good classification or even loyalty card holder-related market basket analyses, which will be shown later in this paper. 2. Discover all the items in relevant selling documents and their selling quantities, prices, number of transactions and other relevant data. As an example, an item related market basket analysis will be presented. We want to analyse sales related to item ‘209525 Decorative lamp Saturn II’. In the first step we determine the selling documents with this item. The partial result is shown in the table 1. Further, the result of the first step is used as a filter in the second step, which results in a table with items, sold together with item 209525. 5 Areas of market basket analyses In Merkur different kind of market basket analyses are done. Analyses are adapted to various business needs, and some of them are discussed in the following sections. In every section, the relevant examples of analyses are presented and opportunities for business action discussed. 5.1 Marketing and sales promotion campaigns When sales campaigns are prepared, promoted items must be chosen very carefully. The main goal of a campaign is to entice customers to visit Merkur’s retail centre and buy more than they usually do. Therefore, we must choose the right items and offer the right prices or other conditions. Margins on promoted items are usually cut, therefore, additional non-promoted items with higher margins should be sold together with promoted items. As we could see from the example in Section 3, item ‘209525 Decorative lamp Saturn II’ is quite adequate to be included in a promotion. Together with it many other items are sold, so we can allow a lower margin of promoted item. Of course, there are some other criteria for an item to be included in a campaign, such as: †¢ Where on the item life cycle curve is the item situated? †¢ What is our brand promotion policy? †¢ Can we reach an agreement with the supplier (producer) to assure larger quantities and better prices? Table 4. Sales promotion market basket analysis In table 4, data from a New Year’s promotion campaign is shown. The: campaign was done through public advertising. Paper catalogues of promoted items were sent to households, there were also commercial spots on TV and radio, and advertisements in newspapers. Because of advertising a certain number of customers came in Merkur retail centres in order to buy the promoted items. Additionally, they also bought many non-promoted items (70% opposed to 30% of revenues and 75%  opposed to 25% of margins) with much higher % of margin (29,08% opposed to 21,81%). This means that promoted items generated sales of non-promoted items. There are also many possible ways for organizing campaigns using direct marketing tools for the interaction with Merkur loyalty card holder. This issue will be discussed in Section 5.5. 5.2. System solutions offering Market basket analyses are also used to combine more items in a set or a system, because the majority of customers are interested in buying and using them at a time or in a short period of time after the purchase of a particular item. By designing sets and systems of related items a company can increase sales and also cut down costs of sales transactions, so that various discounts can be offered to customers. This results in a typical win-win situation. A retailer must know the needs of customers and adapt to them. Market basket analysis is one possible way to find out which items can be put together in sets and systems. Table 5. Classification Group ‘Kitchen extractor hood’ market basket analysis In Table 5 we can see groups of goods which were sold together with the group ‘Kitchen extractor hood’. In the related groups are also different kitchen appliances like refrigerators, dish washers, kitchen-ranges, taps, dishes etc. This means that Merkur should design and offer the customers different kitchen systems. These systems should include kitchen furniture,  major and small kitchen appliances and kitchen utensils. Such a system should be displayed in one place in a retail centre where customers could choose from whole system solutions to just several parts (items) of these solutions. 5.3. Placement of goods in retail stores Market basket analyses give retailer good information about related sales on group of goods basis. As we can see in Table 5, the majority of kitchen appliances groups are related. Customers who buy a kitchen appliance often also buy several other kitchen appliances. It makes sense that these groups are placed side by side in a retail centre so that customers can access them quickly. Such related groups of goods also must be located side-by-side in order to remind customers of related items and to lead them through the centre in a logical manner. In Merkur, two basic concepts of retail centres are used: MerkurDom specialises in high-quality items for home improvement and garden, MerkurMojster specialises in high-quality products aimed at DIY users, craftsmen, and entrepreneurs. Centres are also classified by size as small and large centres. For each of these concepts, standardized placement plans were developed. Market basket analyses represent one segment of tools for decision making considering placement of goods. It can show us where we should change the placement of goods. After the change we can measure the business effects of the change. 5.4. Education of salespeople The interesting results of market basket analyses must be presented to the salespeople in retail centres, because the employees must be aware of them and they should use them in the process of selling. Every salesperson has some knowledge about related items from his or her experience. With market  basket analyses we can structure this knowledge and use it to teach less experienced personnel. Merkur invests a lot in education of salespeople through both internal and external sources. Knowledge from market basket analyses is widely used in internal education. 5.5. Segmentation of customers As mentioned in Section 1.1., more than 70% of sales to end consumers are personalized with the Merkur loyalty card called â€Å"Merkur Card of Trust†. This data enables us to answer the following question: What did consumers who bought item (group) X in period 1, buy in period 2? If we identify customers who bought item X today, we can anticipate what they will buy, for instance, in next three months, and we can advertise them the right products. A typical example is shown in Table 6. We analysed loyalty card holders who bought ceramic tiles in the period from April to June 2004. In Table 6 we can see product groups which were bought by the same card holders in the period from July to November 2004. They bought different bathroom and kitchen accessories and central heating elements. It would be very useful, if Merkur organized a targeted marketing campaign for this specific group of customers in July 2004 and promoted these products. There are many other possibilities and opportunities in Merkur to use loyalty card-based market basket analyses as a support tool for direct marketing campaigns. Merkur usually organizes non-targeted common campaigns, in which the majority of Slovenian households are included. But lately Merkur also started to implement direct marketing methods and therefore an effective data warehouse and business intelligence system is essential. This helps many interesting marketing ideas to be implemented. 6 Conclusion The practice in Merkur proves that market basket analysis is a very useful for marketing campaigns, good placement definition and education of sales personnel. Merkur uses market basket analysis throughout the promotion campaign process. When a sales promotion is prepared, market basket analysis is used to define the right products and the right prices for the campaign. Related non-promoted items are also defined in order to place them in the vicinity of promoted items and therefore increase sales. When sales promotion finishes, its results are carefully analysed in order to discover opportunities for next promotions. Merkur widely uses market basket analyses to manage the placement of goods in retail centres. Related products and product groups are placed together in such a manner that customer can logically find items he/she might buy. The findings of market basket analyses are an important part of the process of teaching the salespeople of Merkur. Sales personnel must be aware of related products in order to increase satisfaction of customers and intensify sales. Market basket analyses are just a part in the holistic approach to the execution of marketing development strategy in Retail in Merkur. The analytical process is integrated in other marketing activities and analysts are an important part of Merkur marketing development team. Team work is crucial for successful use of such analyses. Beside of the organization of the Merkur marketing process, a capable DW&BI system is needed. The BI system must have good performances when processing large amount of data. It also has to be scalable and flexible, but, above all, the BI system must be user-friendly so that different marketing specialists can use it without any problems.  Fortunately, Merkur’s KAS is such a system. But there is still much work to be done. We demonstrated that market basket analysis in Merkur can be done and that it brings useful results. In the future a working direct marketing strategy must be developed based on data already available in KAS. Then an organization and information systems for efficient execution of this strategy have to be established. 7 References Berry, M.J.A., Linoff, G.S.: Data Mining Techniques: for Marketing, Sales and Customer Relationship Management (second edition), Hungry Minds Inc., 2004  Chen, Y.-L., Tang, K., Shen, R.-J., Hu, Y.-H.: â€Å"Market basket analysis in a multiple store environment†, Decision Support Systems (article in press), 2004, accessed through www.ScienceDirect.com Limitedbrands: Achieving Greater Efficiencies with Market Basket Analysis, Microstrategy World 2004 Conference, Miami, 2004 Microstrategy: Business Intelligence in the Retail Industry, Microstrategy World 2003 Conference, Las Vegas, 2003 Microstrategy Web Site: http://www.microstrategy.com/Software/, Microstrategy, 2005 Merkur Commercial Analytical System – KAS, internal document, Merkur, 2005 Merkur Web Site: http://www.merkur.si/ang/podj.html, Merkur, 2005 Svetina, Marko: Izdelava in uporaba market basket analiz, http://www.muson.net/Konferenca_login.asp?mni=12, Konferenca MUS 2004, Ljubljana, 2004 Svetina, Marko: Kome rcialni analitski sistem v podjetju Merkur d.d., Konferenca Poslovna inteligenca in upravljanje odnosov s strankami, Ljubljana, 2002 Vindevogel, B., Van den Poel, D., Wets, G.: â€Å"Why promotion strategies based on market basket analysis do not work† (article in press), Expert Systems with Applications, 2005, accessed through www.ScienceDirect.com Weng, S.-S., Liu, J.-L.: â€Å"Feature-based recommendations for one-to-one marketing†, Expert Systems with Applications, Vol. 26, 2004, pp. 493-508.

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