finance as a competitive advantage for an organization

Finance as a competitive advantage for an organization

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(Part 1)

Introductory Part


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1.0 Abstract

Today much attention has been directed to a better service and the best product and how this

can be achieved through utilizing the limited resources. This research paper identifies the

competitive advantage concepts and models, competitive strategies and the use of Finance

and financial resources practices that have a significant impact on the organizational

performance. Understanding sources of competitive advantage has become a major area of

research in the field of business. Finally a summary of practical criteria of best practice for

competitive advantage is presented and a general discussion and recommendations have

been drawn.


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1.1 Introduction

The firm is regarded as a cohesive organism, which learns to adopt or find better ways of doing

things essentially in response to its environment. The question then is what really the firm should

do to maintain or to optimize its situation in its environment? Should it focus on its financial

situation, its technology, or its human resources? It means that sources of competitive advantage

depend on, from financial resources to technology resources and to human capital. In other

words, success does not depend primarily on the size of the budget or the products supporting

technologies. It really depends on amount of financing, way of financing, strategy of financing,

employee’s attitudes, competencies and skills; their ability to generate commitment and trust,

communicate aspirations and work in complex relationships. Now we know one of the sources of

competitive advantage which is the Financing, then what do we have to do to achieve

competitive advantage through it? The answer lies in competitive strategy and financing

practices. Then what is the competitive strategy? And what are the human financing practices.


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1.2 Origin of the report

Each professional degree needs practical knowledge of the respective field of discipline to be

fruitful. Our BBA program also is similar, relating to the exchange of theoretical knowledge into

the real life practical situation. Project Report (BUS 498) of East West University is a Graduation

requirement for the BBA students. The main purpose of Project is to get the student reach in the

depth of a particular study. In the preparation of the Project, main challenge was to translate the

theoretical concepts into real life experience.

The Report and the study have following purposes:

To get and organize detail knowledge of a particular topic.

To experience the real business world.

To compare the real scenario with the lessons learned in the University.

To fulfill the requirement of BBA Program.

The report entitled "Finance as a competitive advantage for an organization", a study on

competitive advantage that Finance plays in an organization. The main purpose of the

preparation of the report is to gain the practical knowledge about competitive advantage of

finance.

To accomplish the Project, I was placed under the guidance of Laila Zaman, my academic

supervisor. The report topic was approved by the supervisor to satisfy the organizational

requirements and fulfillment of the Course BUS 498. As a requirement of the completion of the

project, I had to submit this report, which includes an analysis of Finance as a competitive

advantage for an organization.


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1.3 Objectives of the report

The objective of the report can be viewed in two forms:

Main Objectives

Specific Objectives

1.3.1 Main Objectives

This Project report is been prepared primarily to fulfill the Bachelor of Business Administration

(B.B.A) degree requirement under the Department Business Administration, East West

University and the main objective were to prepare a paper on the specified topic implementing

the knowledge that has been gathered over the semesters in East West University.

1.3.2 Specific Objectives

More specifically, this study entails the following aspects:

To provide a brief overview of the term Competitive Advantage.

To analyze the resource Finance and its competitive advantage in an organization.

1.4 Scope of the report

The report plots a chronicle outline of Finance and its operation. The information consists of the

observation and study knowledge acquired throughout the semester. The report also

particularizes the research focus, Finance as a competitive advantage for an organization. This

report has been prepared according to extensive analysis of financial statements and review of

literatures.


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1.5 Methodology

1.5.1. Project Design:

At first I got the report design and structure from my academic supervisor and moved for the

next steps.

1.5.2. Data Collection:

Both the primary as well as the secondary form of information is used to prepare the report. The

details of these sources are highlighted below.

1.5.3 Primary Sources:

I have collected primary data through the following ways:

Face to Face conversation with the respective officials of Agrani and Dhaka Bank Limited.

1.5.3. Secondary Sources

Different written documents

Different Journals.

Web site

Annual Reports of Agrani and Dhaka Bank Limited.


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1.6. Limitations of the report

The Study was limited by a number of factors. Some Constraints are given below-

Getting the information and interpreting it, on the basis of my understanding and then

implementing it.

I tried to contact with some high officials for more detailed information and consultation but

they could not manage time for me.

Lack of Co-Operation from the officials from confidential Point of view.

Shortage of information and lack of help and cooperation from Grameenphone and Robi.

1.7 Data Analysis

Efficiency / Profitability Ratios

Return on Asset (ROA)

Return on Equity (ROE)


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(Part 2)

Organization Overview


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2.1. An Overview of Agrani Bank Limited (ABL)

Agrani Bank Limited, a leading commercial bank with 910 outlets strategically located in almost

all the commercial areas throughout Bangladesh, overseas Exchange Houses and hundreds of

overseas Correspondents, came into being as a Public Limited Company on May 17, 2007 with a

view to take over the business, assets, liabilities, rights and obligations of the Agrani Bank which

was a nationalized commercial bank (NCB) of Bangladesh established on 26 March 1972 under

the Bangladesh Banks (Nationalization) Order 1972 by taking over two abandoned Pakistani

banks - Habib Bank and Commerce Bank. With its head office in DHAKA, the bank started its

operational activities with an authorized capital of Tk .30 million and paid up capital of Tk 10

million. The paid up capital has increased to Tk 30 million in December 1973. In 31st December

2013, the banks authorized and paid up capital were Tk. 5 billion and 1 billion respectively.

Agrani Bank Limited has been maintaining around 903 number of correspondent including

Exchange Houses located in different parts of the world to facilitate our international trade and

other transactions of trade and remittances globally. The expatiate Bangladesh who are working

abroad, can easily take the opportunity to remit their hard earned foreign exchange to their

respective beneficiaries utilizing our correspondent services.

Agrani Bank Limited started functioning as a going concern basis through a Vendors Agreement

signed between the ministry of finance, Government of the People's Republic of Bangladesh on

behalf of the former Agrani Bank and the Board of Directors of Agrani Bank Limited on

November 15, 2007 with retrospective effect from 01 July, 2007.

Agrani Bank Limited is governed by a Board of Directors consisting of 13 (thirteen) members

headed by a Chairman. The Bank is headed by the Managing Director & Chief Executive

Officer; Managing Director is assisted by Deputy Managing Directors and General Managers.

The bank has 11 Circle offices, 29 Divisions in head office, 62 zonal offices and 910 branches

including 27 corporate and 40 AD (authorized dealer) branches.


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2.2. An Overview of Dhaka Bank Limited (DBL)

Dhaka Bank Limited is the leading private sector bank in Bangladesh offering full range of

Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital Market

Services. Dhaka Bank Limited is the preferred choice in banking for friendly and personalized

services, cutting edge technology, tailored solutions for business needs, global reach in trade and

commerce and high yield on investments, assuring Excellence in Banking Services.

Dhaka Bank Limited is a scheduled bank that was incorporated under the Companies Act 1994,

started its operation on July 1995 with a target to play the vital role on the socio-economic

development of the country. Aiming at offering commercial banking service to the customer's

door around the country. This organization achieved customers’ confidence immediately after its

establishment. Within this time the bank has been successful in positioning itself as progressive

and dynamic financial institution in the country. This is now widely acclaimed by the business

community, from small entrepreneur to big merchant and conglomerates, including top rated

corporate and foreign investors, for modern and innovative ideas and financial solution.


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(PART 3)

CONCEPT

AND

THEORETICAL FOUNDATION


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3.1 Competitive Advantage

When a firm is implementing a value creating strategy not simultaneously being implemented by

any current or potential competitors, then we can say the firm has a Competitive advantage. And

when a firm is implementing a value creating strategy not simultaneously being implemented by

any current or potential competitors and when these other firms are unable to duplicate the

benefits of this strategy, then we can say the firm has a sustained competitive advantage (Barney

1991). There are two major models that have to be considered. The first one is the position or

environmental model and the second one is the resource-based view model.

3.2 The Position or Environmental Model

In order to achieve a competitive advantage, the firm is required to make a choice about the type

of competitive advantage it seeks to attain and the scope within which it will attain it. Choosing

the competitive scope or the range of the firm’s activities can play a powerful role in determining

competitive advantage because it aims to establish a profitable and sustainable position against

the forces that determine your industry competition.

3.2.1 What is competitive strategy?

Porter 1985 defines the competitive strategy as the positioning of a company in its competitive

environment. Also Porter has posed two important questions:

1. What is the structure or the attractiveness of the industry which the company is in?

2. What is the company’s position in its competitive environment?

To answer the first question a company, as an organization, should analyze their industry by

focusing on the following points (industrial analysis):

Begin with understanding your industry.

Focus attention on significant force.

Watch out for industry change.


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To answer the second question (competitive position), the following question should be asked:

How does a company achieve superior performance?

To be a superior performer in the engineering industry or any industry, the company must have a

sustainable competitive advantage which its rival cannot copy or duplicate.

The competitive advantage can be sustained in one of the two ways (Porter 1985):-

1. Either the company can be lucky enough to come up with something that its rivals cannot copy

which is very rare, or

2. The company is improving so fast that its rivals cannot catch up.

Porter shows that there are five competitive forces which play a major role in the company

success or failure

1. The entry of new competitors,

2. The threat of substitutes,

3. The bargaining power of suppliers,

4. The bargaining power of buyers, and

5. The rivalry among the existing competitors.

The collective strength of these five competitive forces determines the ability of firms in an

industry to earn on average, a rate of return on investment in excess of the cost of the capital.

Porter also notes that a business can develop a sustainable competitive advantage by following

two strategies; cost leadership strategy or differentiation strategy.


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Cost Leadership Strategy: the primary focus of a cost leadership strategy is to achieve low

costs relative to competitors. Lowering costs lead to lowering prices, which can increase demand

for products or services, but if the product or services cannot be produced at a lower cost it also

reduces profit margins. To compete based on cost, managers must address labor, materials,

overheads, and other costs, and to design a system that lowers the cost per unit of the product or

service. Often, lowering costs requires additional investment in automated facilities, equipment

and employees skill.

Differentiation Strategy: The primary focus of a differentiation strategy is creating uniqueness

such that the organization’s goods and services are clearly distinguished from those of its

competitors. In other words the focus is on creativity and innovation which have long been

recognized as necessary for bringing the required change to obtain the competitive advantage.

Schuler and Jackson 1987 have emerged from Porter discussion of competitive advantage three

competitive advantage strategies that organizations can use to gain competitive advantage:

Innovation strategy: the primary focus here is developing products or services different from

those of competitors or offering something new and different. A vital component of any

innovation strategy is getting employees to broaden their skills.

Quality enhancement strategy: the primary focus here is enhancing the product and/or

services. Quality enhancement often means changing the processes of production in ways that

require workers to be more involved and more flexible.

Cost reduction strategy: firms typically attempt to gain competitive advantage by being the

lowest cost producer.

The question is who brings the innovation, quality and the cost reduction strategy to the firm? It

comes from the right employee who is motivated by the right human resources practices. In the

next sections we will deal with the issues of how the right employee is employed and motivated.


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3.3 The Resource-Based View Model

3.3.1 What are the firm resources?

Firm resources include all assets, capabilities, organizational processes, firm attributes,

information, knowledge, etc. controlled by a firm that enable the firm to conceive of and

implement strategies that improve its efficiency (doing things right) and effectiveness (doing the

right things). In the language of traditional strategic analysis, firm resources are strengths that

firms can use to conceive of and implement their strategies. Firm resources can be conveniently

classified into three categories: physical capital resources, human capital resources and

organizational capital resources. Physical capital resources include the physical technology used

in a firm, a firm’s plant and equipment, its geographic location, and access to raw materials.

Human capital resources include the training, experience, judgment, intelligence, relationships

and insight of individual managers and workers in a firm. The organizational capital resources

include a firm’s formal reporting structure, its formal and informal planning, controlling, and

coordinating systems, as well as relations among groups within a firm and between a firm and

those in its environment (Barney 1991: 101).

The resource-based view of the firm is presently being touted as an alternative theory of strategy

to that developed by Porter 1985. Instead of focusing on positioning in the product market, it

argues that firms achieve sustainable competitive advantage by developing resources, which add

unique or rare value, which can’t easily be copied by others. Thus the firm with superior access

to physical resources, which others cannot buy, holds a superior advantage. For example, a

manufacturing firm, which invents a superior process technology, holds an advantage over its

rivals and to invent something finance is one of the major factors.


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3.4 Sustainable competitive advantage

"Sustainable competitive advantage is the unique position that an organization develops in

relation to competitors that allows it to outperform them consistently” (Hofer and

Schendel,1978). A sustainable competitive advantage (SCA), is when a firm possesses value-

creating processes and positions that only cannot be easily duplicated or imitated by other firms

that leadto the production of above normal rents. SCA is different from competitive advantage

(CA), because it provides a long-term advantage that is not easily replicated. Therefore, a

sustainable competitive advantage is one that can and must be maintained for a significant

amount of time even in the presence of competition (www. wikipedia.org). Sustainable

competitive advantage will allow the maintenance and improvement of the company's

competitive position in the market. It enables business to survive against its competition over a

long period of time. Sustainable competitive advantage can be built up over a period of time

based upon some unique competencies. They can be based upon knowledge, know-how,

experience, innovation, and unique information use (Lowson, 2002).According to Coyne (1986),

competitive advantage will be meaningful only if it is felt in the marketplace and the

differentiation must be perceived as an important buying criterion to a substantial customer base.

Therefore, such advantage will be sustainable, only if it cannot be imitated (Barney, 1991).


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3.4 Finance

The science is that describes the management, creation and study of money, banking, credit,

investments, assets and liabilities. Finance consists of financial systems, which include the

public, private and government spaces, and the study of finance and financial instruments, which

can relate to countless assets and liabilities. Some prefer to divide finance into three distinct

categories: public finance, corporate finance and personal finance. All three of which would

contain many sub-categories.

The study of finance can also take many forms, depending on the field or area of finance which

one wishes to study. For instance, economics is considered a pillar of financial science, where

both macro and microeconomic factors affect virtually levels of financial decisions and outcomes

at all levels. Additionally, the study of behavioral finance aims to study the more "human" side

of a science considered by most to be highly mathematical. This illustrates that the study of

finance can, at times, be more art than science.

3.5 Finance’s role in the organization


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Finance is important to an organization as the firm has to know how viable it is and balance

profit with costs. The goal of any finance function is to achieve three benefits: business support

service, lowest costs and effective control of the environment. Money is the lifeblood of a

business and finance is the nerve center. Finance is required to promote or create a business, gain

assets, develop products, run market surveys, advertise. The conventional view of finances

focuses on being reactive, efficient, quantitative and risk averse. New innovative views focus on

being vision-oriented, opportunity and growth focused, intuitive and risk-taking. The sub-groups,

or functions, listed below make up the organizational structure of a typical finance department.

Budget and Forecasting: Budgeting and forecasting relate your business to the outside

community. Driven by earnings and growth estimates, stock prices rely on timely data

forecasting to achieve optimal price and market capitalization. Small businesses benefit from this

knowledge even though not publicly traded. Knowledge of raw material requirements, personnel

and staffing demands, and expansion requirements force entrepreneurs to thoughtfully consider

their needs.

Bookkeeping: Also referred to as the close, Finance, Money Business and Stock Market website

defines bookkeeping as the “process by which all subsidiary ledges and journals of the

organization are summed up for a given time.” A close can be small and simple or incredibly

long and complicated depending on the size and complexity of the company. Your company

should be able to close within a few hours, so the process can happen daily.

Reporting: Any company with shareholders or outside financing should have standard external

reporting requirements. External reports focus on how banks, shareholders and the general public

all relate to the organization. Stockholders rely on reports of data forecasting and budgeting

when determining when to buy and sell, so accurate data defines the entire process.

Payables and Receivables: The finance department manages all cash flow into and out of a

business. Vendors and creditors need payment correctly and on time to keep things running

smoothly. You need to stay liquid--the right amount of cash on hand--at all times and finance

must maintain payment plans that keep everything on track.

Expense Management: The expense management group monitors and audits all employee-

initiated expenses. Expenses can include travel, lodging, entertainment, and food. The group is


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responsible for outlining and enforcing policies related to employee expenses and, in many

cases, implements an automated expense management system to improve efficiency.

Treasury: Also known as cash management, the treasury group manages all of the company's

assets to maximize liquidity and reduce risk. The group is responsible for ensuring that a

company has a steady cash flow and also for securing any funding that may be needed. The

group may also explore investment options for excess cash.

Tax: The tax function is responsible for managing and planning for all tax-related expenses. The

circumstances that surround tax management can be complicated, especially for a company that

operates globally. The function also ensures that all tax payments are in compliance with any

government requirements to avoid interest fees or penalties.

Internal Audit: The internal audit group oversees a company’s financial operations to ensure

that they are in line with internal and external policies and regulations. Legislation such as the

Sarbanes-Oxley Act of 2002 has increased pressure on finance functions to improve reporting

performance and internal audit quality/frequency.

Payroll: The payroll group, which is commonly outsourced or carried out within the HR group,

is responsible for the administration and documentation of all salaries, wages, bonuses and

deductions (payroll tax, social security) received by employees.

Decision making: Finally, the finance department should be called upon to provide information

to assist managers in making key strategic decisions, such as which markets or projects to pursue

or the payback periods for large capital purchases. The finance department can often contribute

an objective perspective based on special financial assessment techniques.

In summary, some organizations know the finance department should be considered a resource to

assist managers in the running of the business. With the growing popularity of outsourced

finance departments, it is possible for even small businesses to have access to all of the benefits

of a full finance department, through part time professionals, at a fraction of the cost of

employing a full time finance department.

3.6 Necessity of Finance


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Finance is the lifeblood and nerve center of a business, just as circulation of blood is essential in

the human body for maintaining life; finance is a very essential to smooth running of the

business. It has been rightly termed as universal lubricant that keeps the enterprise dynamic. No

business, whether big, medium or small can be started without an adequate amount of finance.

Right from the very beginning, i.e. conceiving an idea to business, finance is needed to promote

or establish the business, acquire fixed assets, make investigations such as market surveys, etc.,

develop product, keep men and machine at work, encourages management to make progress and

create values. Even an existing concern may require further finance for making improvement or

expanding the business. Thus the importance of finance cannot be over-emphasized and the

subject of business finance has become utmost important both to the academicians and practicing

managers.

There are 4 key roles in any organization in present day scenario:

• Steward – Has control over assets of the organization with meeting all compliance standards to

mitigate business risks involved in the process

• Operator – Create a strategic framework to monitor the efficiency of finance process which in

turn will drive cost effectiveness factor across the organization

• Strategist – Acting as a strategic advisor to align the organizational goals in tandem with

achieving the operational realities by means of measuring and analyzing organization

performance with interpretation of financial information in the organization.

• Catalyst –Acting as change agent to execute and monitor necessary changes to achieve the

overall strategic objectives of the organization be means of aligning all the above 3 key roles in

tandem

3.7 Financial stability – why does it matter?

Following the introduction of entity-based regulation there is a new emphasis on the firm itself

rather than simply on the individuals making up the firm. As a result, a fundamental shift has

taken place that now sees the SRA, as regulator, insisting that firms should be financially stable.

The SRA has identified financial stability as one of the prerequisites for meeting Outcomes-

Focused Regulation. This shift in regulatory emphasis comes at a time when legal businesses are

already faced with financial challenges caused by new competition, increasing costs and

downward pressures on fees – and at a time when it is also becoming more difficult to find

external finance and younger solicitors are reluctant to take on the risks of partnership. This latter


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trend makes succession planning more difficult for some firms. There has never before been a

time when so many difficult commercial and financial challenges have been faced by so many

firms at the same time. Little wonder, then, that financial stability is a concern for the regulator

and for many firms within the legal profession. Baker Tilly’s Professional Practices Group

recently carried out a survey of firms to assess their understanding of financial stability and the

results are presented in this report.

The importance of being financially stable: Accounting policies are the basic building blocks to

understanding reporting of performance. Choice of accounting policies can have a fundamental

effect on the results of any firm and should be reviewed regularly to ensure they remain the most

appropriate to the circumstances of the reporting entity, though it’s fair to say that it takes more

than choice of accounting policy to make a bad business look good for any length of time

without the accounts being misleading (and therefore not compliant with GAAP). Accounting

Standards have been developed to ensure that the users of accounts can assess the financial

performance of organizations. Accounting principles and policies are designed to give a measure

of consistency and reliability to reported results in organizations. Even though there are

(relatively limited) choices of accounting policy for some transactions, comparability between

firms is possible if clear disclosures of policies are made. Statements of principles for financial

reporting require that accounting policies are selected that comply with applicable Accounting

Standards and which result in the preparation of accounts that provide relevant and reliable

information to users by showing a true and fair view of the results and state of affairs of the

business.

One of the biggest indicators of financial stability is proper assessment and open disclosure about

going concern combined with reliable reporting of assets and liabilities. Accounts are just a snap

shot at a point in time and while these help assess the position of a firm it is what may happen in

the future that is key and relevant to financial stability


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3.8 Improving performance:

Insufficient profits may lead to financial instability. How much profit is sufficient depends

entirely on what the partners want to earn. If the business earns less than the partners require then

the firm will be heading towards financial instability. If the partners take drawings in excess of

available profits, they create overdrawn current accounts owed by the partners to the firm. So not

only are the drawings reducing the firm’s available working capital, but the partners are also

creating personal liabilities to the firm. It is a mathematical certainty that if a firm does not make

a profit (and/or drawings exceed profits) then the firm will run out of money. But it is not

inevitable that a poorly performing business will become financial unstable. Identifying that

there is a performance problem as early as possible is the key to avoiding financial instability.

Corrective measures can be taken, provided the firm is willing to take a close look at itself and is

prepared to make changes.


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(PART 4)

FINDINGS AND ANALYSIS


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4.1 Findings & Analysis

Financial statement Analysis involves a comparison of a firm’s performance with that of other

firms in the same line of business, which usually is identified by the firm’s industry

classification. Generally speaking the analysis is used to determine the firm’s financial position

so as to identify its current strengths and weakness and to suggest action the firm might pursue to

take advantage of the strength and correct any weakness.

The main objective of the project is to analyze the Finance as competitive advantage for an

organization. Here i tried to identify the financial performance of Agrani and Dhaka Bank

Limited in the last three years (2011-2013) by using ratio analysis. So that, I can identify the

strength and weakness of bank based on the financial performance in the last three years (2011-

2013) and present my observation about the importance of finance in an organization.

Mainly here I want to show a vivid picture of financial performance of Agrani and Dhaka Bank

Limited and for this reason it is necessary to know how both the banks are performing through

any specific financial performance analyzing tool. To evaluate performance I have gone through

ratio analysis which will help to make proper evaluation. Basically for analysis I have chosen

some ratios and gathered the information to calculate the ratios from income statement and

balance sheet for last three years. Lastly I have interpreted the result.

The financial performance analysis of Agrani and Dhaka Bank is given below:

4.2 Efficiency/Profitability Ratio


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4.2.1 Return On Asset (ROA)

ROA is an indicator of a company’s profitability. ROA is calculated by dividing a company’s net

profit in a fiscal year by its total assets. It is known as an Efficiency or Profitability ratio.

ROA is expressed as a percentage and calculated as:

Return on Asset = et ro it

sset

Return on Asset

Year- 2011

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

2,499,897,603.00

2,242,648,272.00

Asset

348,820,708,845.00

105,037,213,825.00

Return on Asset

0.72%

2.14%

Comparative Analysis:

In 2011 ROA of Dhaka bank was 2.14% compared to 0.72% of Agrani bank’s. Reason behind

this difference is that, where Dhaka bank invested 105,037,213,825.00 taka on assets and had a

return as profit of 2,242,648,272.00 taka, Agrani bank had a return of profit 2,499,897,603.00

taka which was higher than Dhaka bank but its investment in assets was thrice of Dhaka bank as

a result it had a lower ROA than Dhaka bank in 2011. Due to the crisis in stock market and

unprecedented rise in default loans was the main reason of such low ROA of Agrani bank

compared to Dhaka bank as Dhaka bank’s internal portfolio management and a continuous

monitoring by the central bank helped rein in such default loans.

(Note: Dhaka bank calculates ROA on their Consolidated Balance sheet and profit & loss account.)

1. Annual Financial Statements of Agrani Bank Limited 2011- Pages: 04 & 06

2. Annual Report of Dhaka Bank Limited 2011- Pages: 145 & 147


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In 2012 ROA of Agrani and Dhaka bank fall drastically compared to the ROA of 2011.Agrani

bank had experienced a negative ROA whereas Dhaka bank had a minimal ROA. A net loss of

taka 18,620,572,069.00 was the main reason of such negative ROA of Agrani bank. Though both

the bank had an increased amount of investment in asset than 2011 but return as of profit didn’t

been earned. The fall of ROA in 2012, was caused by an economic downturn, coupled with a

reduced interest spread and a lower net profit after tax, relative to total interest revenue. The

return on asset drastically fell in 2012 because profits took a huge hit from the failing capital

market and shrinking net interest margin which was 3.83% & 4.30% in 2011 fall to 1.61% &

4.10% in 2012 of Agrani bank and Dhaka bank respectively. The interest spread fell as interest

on deposit soared, but the interest on loan could not increase as much, due to the lending cap.


3. Annual Report of Agrani bank Limited 2012 – Pages: 150 & 152


Return on Asset

Year- 2012

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

(18,620,572,069.00)

788,629,626.00

Asset

378,716,418,928.00

133,616,109,915.00

Return on Asset

(4.92%)

0.59%


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In 2013 both bank experienced a U-Turn in term of ROA compared to previous year. The ROA

of Agrani bank increased due to a huge investment on asset through lending to government,

which were a safe lending. An increase in interest margin from 1.61% to 3.43% continuous

monitoring by central bank and unearthing many irregularities of Agrani bank in different

branches and by taking corrective actions, Agrani bank experienced a huge profit of

9,048,998,601.00 taka as a result it had a ROA of 2.04%. Dhaka bank also enjoyed an increase in

their interest margin from 4.10% in 2012 to 4.32 in 2013. But the investment on asset was lower

than Agrani bank for lending cap on private commercial banks. And we can find an increase in

interest spread, net profit after tax, relative to total interest revenue in case of both the banks.




Return on Asset

Year- 2013

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

9,048,998,601.00

1,981,495,178.00

Asset

444,156,584,716.00

145,400,273,725.00

Return on Asset

2.04%

1.39%


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Fig 1: Return on Asset of Agrani and Dhaka Bank ltd. (2011-2013)

Interpretation:

From bank to bank comparison we can see that both the banks experienced fluctuation in their

ROA in different years which is really not a healthy scenario. We can see that Dhaka bank was

in better position than Agrani bank in 2011 and 2012 but in 2013 Agrani bank was more efficient

than Dhaka bank to generate return from its investment in asset. The higher the ROA, the better

the management is. In 2011 ROA of Agrani bank was 0.72% which is lower than Dhaka bank’s

2.14%. In 2012 ROA of Agrani bank was negative (4.92%) and ROA of Dhaka bank was 0.92%

and was in better position than Agrani bank. In 2013 Agrani bank was in better position with a

ROA of 2.04% compared to Dhaka bank’s 1.36%. And we can conclude saying that as a private

bank with better finance division with excellent management Dhaka bank enjoyed competitive

advantage with Agrani bank and were in better position than Agrani bank.

4.2.2 Return On Equity

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

2011 2012 2013

0.72%

-4.92%

2.04% 2.14%

0.59% 1.36%

Return On Asset (ROA)

Agrani Bank

Dhaka Bank


29

This ratio shows the amount of net income returned as a percentage of shareholders equity.

Return on equity measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity= et Profit

quity


ROE rises and falls with net profit. A combination of higher revenues and lower costs usually

results in higher net profit. Top-line revenue growth may lead to higher net profit, as long as

costs remain the same as a percentage of revenue. But in case of Agrani Bank in 2011, the equity

investment almost 3 times higher than the Dhaka bank but the profit generated by Agrani bank

was not so much higher compared to Dhaka bank’s profit. That’s why, when Dhaka bank

enjoyed a ROE of 24.13%, Agrani bank had only 9.64%. The main reason was the cost that

increased with the net income in terms of Agrani bank. But Dhaka bank have shown excellent

managing capability to keep their cost same as a percentage of revenue though they had to face

increased provisions by central bank and operating expenses along with Agrani bank in 2011.

(Note: Dhaka bank calculates ROE on their Consolidated Balance sheet and profit & loss account.)

7. Annual Financial Statements of Agrani Bank Limited 2011- Pages: 04 & 06


Return on Equity

Year- 2011

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

2,499,897,603.00

2,242,648,272.00

Equity

25,942,624,046.00

9,293,796,879.00

Return on Equity

9.64%

24.13%


30


The main reason behind the significant fall of ROE in Agrani bank in 2012 was its net loss in

that year since ROE directly linked with net profit. Agrani bank had to face net loss Due to the

crisis in stock market, unprecedented rise in default loans, hit from the failing capital market and

shrinking net interest margin. Though Dhaka bank were in better position than Agrani bank in

2012 with a ROE of 8.06% compared to Agrani bank’s (259.94%), Dhaka bank had experienced

a fall in their ROE in comparison with their ROE of 2011. The sharp fall in 2012 is attributable

to a combination of two factors. Firstly, a fall in return is evident from the drop in the interest

spread and net profit margin. Profitability fell due to an increase of interest on deposits and loss

in capital market investments. Return on equity fell faster as total shareholder’s equity rose

significantly in 2012.



10. Annual Report of Dhaka Bank Limited 2012- Pages: 188 &189

Return on Equity

Year- 2012

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

(18,620,572,069.00)

788,629,626.00

Equity

7,163,476,171.00

9,786,311,177.00

Return on Equity

(259.94%)

8.06%


31


In 2013 Agrani bank made a significant turn bank and had an increase in interest margin from

1.61% to 3.43% continuous monitoring by central bank and unearthing many irregularities of

Agrani bank in different branches and by taking corrective actions, Agrani bank experienced a

huge profit of 9,048,998,601.00 taka. ROE 25.39% and Dhaka bank were also in profitable

situation with a ROE 16.45%. But in that year Agrani bank was more profitable. The reason of

lower ROE of Dhaka bank compared to Agrani bank was total shareholder’s equity rose

significantly in 2013 but profit didn’t have a proper rise.




Return on Equity

Year- 2013

Agrani Bank ltd.

Dhaka Bank ltd.

Net Profit

9,048,998,601.00

1,981,495,178.00

Equity

35,640,935,877.00

12,044,815,846.00

Return on Equity

25.39%

16.45%


32

Fig 2: Return on Equity of Agrani and Dhaka bank ltd. (2011-2013)

Interpretation:

From bank to bank and year to year comparison and analysis we can see that both the banks

experienced fluctuation in their ROE in different years which is a poor sign of any kind of

financial institution. We can see that Dhaka bank was in better position than Agrani bank in 2011

and 2012 having a RO of 9.64% and 24.13% respectively compared to Agrni Bank’s 24.13%

and (259.94%) but in 2013 Agrani bank was more profitable than Dhaka bank to generate more

profitability from its shareholders investment because The higher the ROE, the better the

organization. In 2013 Agrani bank a ROE of 25.39% and Dhaka bank had 16.45%. Every

organization want to have a RO of 15% as it’s a standard one but we can see that only once in

last three years both the banks were having ROE equal or above 15%. We again conclude saying

that as a private bank with better finance division with excellent management Dhaka bank

enjoyed competitive advantage with Agrani bank and were in better position than Agrani bank.

-300.00%

-250.00%

-200.00%

-150.00%

-100.00%

-50.00%

0.00%

50.00%

2011 2012 2013

9.64%

-259.94%

25.39% 24.13% 8.06% 16.45%

Return On Equity (ROE)

Agrani Bank Limited

Dhaka Bank Limited


33

Part (5)

Recommendations


34

5.1 Recommendations

For achieving a competitive advantage through the Finance Division the following

recommendations can be made:

1. The organization should use an analytical framework for strategic management because it

provides identification of the relationship between key variables that should be analyzed and

assistance of the practitioners to analyze and initiate appropriate policy in their own context.

2. As mentioned earlier technology is an important factor in achieving competitive advantage

but is worthless without the knowledge and talent of the operators using it.

3. Making communication system effective and wide and easy procedures for individuals to

raise grievances and receive reply.

4. The Controllers group is responsible for safeguarding the firm's assets and there should be

always such a team in finance division.

5. There should be a Tax team, the Tax teams work in offices around the world to ensure that

the Firm complies with the tax laws of the countries in which we do business.

6. Corporate Treasury manages the firm’s liquidity, secured and unsecured funding programs,

as well as the level and composition of its consolidated and subsidiary level equity capital.

7. Credit protects the firm's capital against counterparty default and advises clients on credit

ratings.

8. Market Risk Management and Analysis measures, analyzes and controls the market risk of

the firm globally. To achieve competitive advantage the firm must manage market risk after

proper analysis.

9. Continuous investment on research and development from Finance division.

10. Financing after proper research.

11. Keep good connection with other divisions.

12. Manage finance from best option where lest interest is needed than competitors.


35

Part (6)

Conclusion

References

Bibliography


36

6.1 Conclusion

As this report clearly shows, many companies, especially high-performing ones, are aspiring to

establish intelligent finance functions. They are seeking to better integrate finance into the

decision-making activities of all parts of the organization, changing finance professionals from

back-room financial reporters into more forward-thinking analysts and trusted advisors to

decision-makers at every level and function of the organization and such is happening as Finance

plays an important role to achieve competitive advantage for an organization.


37

6.2 References

1. Barney, J. 1991,”Firm resources and sustained competitive advantage” Journal of Management, Vol. 17, No 1

2. Child, J. 1972” Organisation structure, environment and performance: the role of strategic

choice”, Sociology.

3. Coff, R.W., 1994,”Human Assets and organization control: implication of the resource-

based view” John M. Olin School of Business Washington University.

4. Annual Report of Agrani bank Limited 2011, 2012 and 2013

5. Annual Report of Dhaka bank Limited 2011, 2012 and 2013

6.3 Bibliography

1. www.google.com

2. www.investopedia.com

3. www.agranibank.org

4. www.dhakabankltd.com

http://www.google.com/

http://www.investopedia.com/

http://www.agranibank.org/

http://www.dhakabankltd.com/

finance as a competitive advantage for an organization

Economy & Finance

competitive advantage

competitive strategy

competitive strategies

strategy of financing

use of finance

finance plays

practical knowledge

human financing practices