Last Updated 07 May 2020

Banking Marketing

Category Investment, Money
Essay type Research
Words 9435 (37 pages)

A: Background of Discussions

From the study conducted herein, it could be observed that there are several factors that affect the process by which depositors, the main client of banking institutions consider the services with which banks are operating. Among the said aspects is that of the strength and the competency of the service that the banks provide and the fact that the said institutions are showing concern to the values that are most important to the clients.

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Privatization of the banking institutions has actually been considered by many banks around the world as the major process by which the banking industry could regain the trust of the human society. Likely, in this section, the impact of such change in the said industry and how the consumers’ loyalty could be gained by the bankers shall be discussed so as to be able to clarify the right procedures that must be considered to increase the competency of banking marketing approaches.

Banks are directly connected with overall economic conditions. So they reflect the health of the economy and the direction it is taking. All indicators show that the world’s economies, especially those of the Western world and Japan, are in a very serious state. Never have so many countries had such economic difficulties at the same time. French president Valéry Giscard d’Estaing summed up the feelings of many. He warned that the world was in the grip of a general economic crisis and that “all the curves are leading us to catastrophe.” (Bonin, 2003, 31)

Country after country has been hit with rampant inflation, money shortages, declining real income of workers, persistent unemployment and poverty (Bonin, 2003, 21). The seeds for this condition were sown decades ago. But the situation was made much worse by the recent fourfold rise in oil prices. Now nearly every oil-importing nation has been going deeply into debt to try to pay its staggering oil bills. Thus, after several European banks closed and others, including a Swiss bank, suffered sharp losses, The Wall Street Journal said: “The system is sick.” It added:

“Not even the highly vaunted Swiss banking system is immune . So is anything really safe today? . . .(Berger, 2000, 13)

“There never has been a time when so many imponderables hung over markets and over those elements which control actions of markets. . . .(Bonin, 1998, 14)

“When even the biggest Swiss bank is clipped in a foreign exchange deal, then one might well ask: What’s the world coming to? Pessimists already are answering the question.” (Berger, 2000, 41)

B: History of Banking and the System’s Failure

THE phrase “as good as money in the bank” once meant that the investment or possession was considered to be very safe. This comparison was made because banks were regarded as very safe places to put money (Drakos, 2002, 14). But times have changed. Today many people are not so sure about the safety of the money they have in banks. And there is good reason to feel that way. The financial experts are not so sure either. (Fries, 2003, 17)

The Wall Street Journal declared in a headline: “Fears About Stability of the Banking System in West Are Spreading.” It noted that many banks in the Western industrial nations are in trouble. Their financial position has deteriorated. An increasing number of economists feel that the banks are in worse shape now than at any time since the Great Depression that began in 1929 ( Bonin, 2003, 16) .Recent bank failures have been a shock. In October 1974 the Franklin National Bank in New York was declared insolvent. It had been the nation’s twentieth-largest bank, the largest to collapse in the history of the United States.

Several others closed during the year. In Germany four banks failed, including the largest private bank, I. D. Herstatt. Some other European banks closed, while still others announced huge losses. And a growing number of banks were stretched to the limit of their resources (Masson, 2001, 13). These problems brought to mind the grim days of the Depression. At that time banks all over the world failed. In the United States about half the banks closed, 4,000 in 1933 alone. Most of these banks however never reopened. (Fries, 2003, 31)

Why are so many banks troubled? Why have some of the largest failed? For much the same reason that any business or individual fails financially. That happens when expenses grow faster than income; and when it continues too long, bankruptcy ensues. Bank expenses include such things as the interest paid out to depositors, the salaries and benefits to employees, and the cost of operating buildings. But some banks have lately added another growing cost: they have relied more on borrowing money themselves so that they could loan it out to others.

But the cost (in interest payments) to the bank borrowing such money is usually high. During 1974, in a period of recession, banks were hurt in other ways (Crystal, 41). Some made too many high-risk loans. When borrowers could not pay the loans back as scheduled, or at all, due to bad business conditions, the banks incurred losses. Also, banks that had money invested in such things as stocks and bonds suffered when these lost value. And some banks lost very heavily by speculating, and guessing wrong, on foreign money markets, where the exchange rates of currencies fluctuate in relation to one another.

During the year some banks were additionally hurt by withdrawal of money by depositors. Out of fear, or to invest in other areas that brought greater returns, money was pulled out of some banks in substantial quantities. This meant that the bank did not have that money to loan out to make a profit, and income suffered. Hence, for a variety of reasons, bank expenses have mounted. But in too many cases income has not kept pace. Resources were stretched thin. And for some banks it stretched too far, like a balloon that has been inflated too much and bursts.

The startling bank problems during 1974 have officials worried. Among the things that concern them is how so many authorities could have been caught unawares (Clarke, 1999, 31). Business Week noted: “Now there are the recriminations and the questions about how not only the banks but also the banking regulators could have made so many wrong guesses over the past 10 years.” This business publication further commented:

“Taken as a whole, the [U.S. banking] system is in more trouble today than at any time since the 1930s, with a distressing number of banks over-loaned, over-borrowed, over-diversified, and undercapitalized. . . .(Clarke, 2000, 16)

“There may very well be an unprecedented wave of bank mergers and consolidations as weaker fish seek shelter, and there almost certainly will be some failures.” (Bonin, 1998, 14)

Why all this economic instability? There are various factors, of course. But of all the answers, one stands out above the others. It is repeated by economists over and over again as being a main cause of the problems: too much debt! For decades now, people, businesses and governments have been living far beyond their incomes. They have been borrowing more and more money to finance their affairs.

Their desires have grown faster than their ability to pay. To make up the difference they have resorted to ever-increasing amounts of debt. But sooner or later the time comes for debts to be paid off. If income does not raise enough, debts cannot be paid. And if more money cannot be borrowed because of becoming a bad credit risk, then failure or bankruptcy follows. That is what is taking place now to a growing number of individuals, businesses, and even banks. In the book The Coming Credit Collapse, investment adviser Alexander Paris writes:

“There does indeed exist a single fundamental cause of all the financial ills. They may all be traced to a long trend of excessive credit [debt] growth, which is rapidly approaching its final phase. . . . (Buch, 2000, 31)

“Over the entire postwar period [since 1945], the amount of credit outstanding has grown at a rate that, on the average, has consistently been two to three times faster than the growth in the nation’s ability to produce goods and services. Moreover, the rate has been accelerating in recent years. . . .(Buch, 2000, 32)

“This trend in credit has resulted in a growth in demand that has been highly artificial and, through its primary and secondary effects, has been responsible for most of the economic and financial problems facing the investor today.” (Buch, 2000, 33)

Business Week also singled out this basic cause, saying:

“The United States, like the world around it, is in sad shape today. Having borrowed too much in the expectation of perpetual plenty, Americans are desperate for answers to questions for which there are no pat answers. . . .(Buch, 2000, 33)

“The world’s great economies were running out of control long before [the huge price rise in oil] . . . and all that the oil situation has done is to hasten an inevitable day of reckoning.” (Buch, 2000, 34)

The extent of debt has become truly staggering. During 1974 the debt in the United States reached over two and a half trillion dollars! That is more than the total value of goods and services produced in an entire year. Of that debt, corporations owe about one trillion dollars, the federal government about $500 billion, state and local governments about $200 billion, consumers about $200 billion, and the mortgage debt was about $600 billion (Drakos, 2002, 15). Now corporate debt amounts to more than fifteen times after-tax profits, about double what it was in 1955.

Household debt is about 93 percent of income left over after other basic expenses are paid, a huge increase in recent years. And the mount of money available in the entire country is only a small fraction of the total debt (Drakos, 2002, 18). The world’s debt is estimated to be over $10 trillion. It is not likely that it will ever be paid back. The debt psychology has permeated every corner of the economy. The Western world is so geared to debt that living within current income would wreck it as easily as would continued inflation.

Why so? If borrowing were cut back to pay current bills, people would not buy as much, nor would businesses or governments (Drakos, 2002, 21). Production would have to be cut back drastically. Masses of people would be thrown out of work. The industrial way of life, which has concentrated so many people off the land and into cities, could not absorb such shocks.

The “prosperity” of the Western nations has been built on borrowed money. It has not been genuine. Now the bills are coming due and cannot be paid. And that is an aspect of the problem that frightens leaders. So many people, businesses and governments are near bankruptcy that even a small number of them failing could start a chain reaction that would bring the Western world’s economy to its knees. The New York Times observed: “The impact of a staggering increase in oil prices on top of already soaring inflation and rising deficits in payments abroad has sent governments reeling everywhere.”

With debt at such an all-time high, major defaults could wreck the banking system (Buch, 2000, 21) . Business Week noted that “corporations are sick—and they are sick largely as a result of their overdependence on debt.” Consumers are also “sick,” as are most governments—due to debt. Every bank lives with the knowledge that if a few major customers that have borrowed money cannot pay it back, the bank can be in deep trouble (Buch, 2000, 24). If, due to economic difficulties, many businesses and individuals default on their payments, there is no way that any government can make up the difference, since most governments are also deeply in debt, much of it owed to banks! (Buch, 2000, 25)

For instance, during 1974 a U.S. federal agency, the FDIC (Federal Deposit Insurance Corporation) insured individual bank deposits up to $20,000, then later in the year raised this to $40,000. But this agency had only about $5 1?2 billion in its reserve, while the deposits it “insured” were nearly $470 billion! Obviously, the closing of even a small number of banks would bankrupt this insurance agency. Yet banks themselves are much to blame for their present condition (Fries, 2003, 14). Investment adviser Alexander Paris states: “The banking system has been a willing partner in the long postwar financial deterioration that has occurred in the United States and the world.”

He observes that the financial health of the banking system “by all measures, has deteriorated steadily throughout the entire postwar period, and all former limits of propriety have been far exceeded in the pursuit of profit maximization.” (La Porta, 2002, 13) The situation that the banks are dealing with right now could be noted to have a strong impact on the development procedures of the different countries around the world especially that of the situations on the economic standing of the developing countries. What are these notable impacts and how are they being dealt with by the economic officers of the different nations today?

Avoiding the Cash Flow Shortage

Business organizations today are encouraged to join in the bandwagon of globalization procedures. This procedure of advancement however requires particular ways by which the organization should spend some funds to be able to assist their own organization in meeting the challenges of global trading transactions. Of course, to be able to meet the said progressive procedures, the entrepreneurs are expected to at least invest on the said processes. However, not every entrepreneur is able to measure the great probabilities and the possibilities of the said procedures.

Some may even have an over expectation in terms of what they have particularly invested in their business for the sake of having an assured success in the future.  This is when the problem usually begins to rise. The fact is that there are numerous entrepreneurs who are not able to gauge their company’s monetary capability at a reasonable scale of their resources and the capital that they have primarily business organizations into failure during the past decades. This is primarily the reason why there is a certain need in studying what the probable causes are for this particular situation to occur and how far does SGR or sustainable growth rate affect the situation as well as the other way around.

 Cash and Its Role in Banking Institutions

Cash or money is the main reason why business entities exist. Most likely, the idea is supported by the fact that money is the main root why organizations for-profit have been primarily established within the human society. The said business entities are pre-established to actually regulate the money or the wealth that the human society possesses. Most likely, the thought is provoked by the fact that money is needed by people to be able to live in a money-driven society.

Hence for distribution and balancing of the wealth allocation in the society is primarily hosted by business ventures. To understand the picture of the idea better, the diagram below shall give an overview of the said cycle:

What is Cash Flow Shortage?

Cash flow shortage is a business state that indicates the idea that there is a certain imbalance within the inflow and outflow of the cash funds of the organization. This is when the outflow [expenses and liabilities] of the organizational operations have a higher rate compared to the inflow [revenues and income] of the money in the company. Constant observation of the way money enters and gets out of the organization is not a process that is enough to keep the said balance.

Once the balance is destroyed, there is an indication that the cash that flows inside the company could not support the amount of cash that flows out the said organization. What are the said outflows that primarily affect that the operational engagements of several business organization? These are the expenses that business organizations are actually involved with in their continuing operations as a business entity. What are the said expenses primarily made up of?

(a)Employee Payments

Each organization is responsible for giving their employees or their staff the rightful payment that they are due. The efforts that they put forward for the sake of the organization’s progress are equivalent to a certain amount of salary that has primarily been promised to them by the organization.

(b)PRODUCTION Cost Expenses

This may include the cost of the production procedures that are completed by the organization [for manufacturing organizations] or it may include the processing expenses of the company with regards their completion of several other business operations that they need to finish for the sake of servicing to the needs of their clients.

(c)Rent or Amortization expenses

This refers to the payment that common organizations have to pay their landlords or their realtors to be able to remain in the physical establishments that they are currently staying in.

(d) Liability Interests

Every business establishment has their own liabilities that may have primarily resulted from earlier loans or other monetary responsibilities against other organizations. This may result to too much higher interest rates that would actually cause higher rates of expenses for the organization.

These expenses mainly affect the capability of the organization to handle further more responsibilities outside of the expenses that they are already handling. Hence, the rate of growth that they are trying to achieve may not be that easy to attain anymore. To what does this particular situation result to?

The Causes behind the Dilemma of Cash Flow Shortage

Mostly, especially referring to cash or monetary issues, the problem is usually rooted from the administration themselves. The administration with which the owners of particular business organizations are joined with, usually face huge dilemma when it comes to over estimating the profits that could be brought about by the investments made by the company with regards the capital that they have primarily invested for the establishment of the business.

Hence, as a result, since they preempt that there would be huge amount of inflow that would likely be turned in within the organization’s fund after a particular operational year, they [the administration personnel] tend to spend more than what they particularly can change through the annual revenues of the organization. As per commented by be Scott Allen in his article entitled “Cash (flow) really is king”, he said that cash and its effects on a particular business organization certainly identifies its role in contributing to the advancement of different business entities.

Hence, the owners of the business [the entrepreneurs] who are less able to evaluate their capabilities based on money are usually not able of committing or achieving the success that they ought to attain. Scott gave at least two main reasons why there is a certain existence of monetary flow dilemma among business organizations today. He mentioned the two major reasons as follows:

  1. Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses.
  2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.

(Source: Allen, Scott, 2004, Internet)

Certainly, keeping the two major reasons in mind, it could be noted that the main reason of this dilemma on money is particularly resulted from the fact that business owners lack the knowledge on how much pressure on money their company could actually take.

Primary Results of Cash Flow Shortage

According to Scott Allen, “cash” being the primary king in the business industry is noted as the main source of the existence of any business organization. It could be observed that there needs to be a certain consideration given to how a particular business organization tries to regulate the funds that they already have and the amount of revenue that they receive from annual operations. Not being able to do this particular task may result to several destructive outcomes for the business.

As continued by Scott Allen he said that “Employees can't wait on paychecks until your customers pay. Your landlord doesn't care that you're talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.” (2007, Internet)

From the said statement of Allen, it could be noted that the shortage of cash flow within business organizations actually affects the way the organization particularly operates for the sake of its stake holder’s concern. The stake holders particularly referring to the customer, the employees, the administration as well as the supporting organizations of the said business company have a strong contribution to the progress of the business. This is the reason why it is very important on the business organization’s part that the welfare of the said stakeholders are given ample attention by the  administration of the business organizations concerned with the situation discussed herein.

Aside form this, the inability of the administration to identify the elements that primarily contribute to the cash flow shortage in the organization actually affects that capability of the whole business company to advance further towards higher profit inflow of the monetary funds taken from revenues of the said company. How then could the said elements be further identified? This is where the understanding of SGR or Sustainable Growth Rate could be applied by the entrepreneurs who are facing the said dilemma being discussed within the context of this paper.

What is SGR or Sustainable Growth Rate?

Each business organization is entitled in being able to attain progress as they continue operating as an entity of employment within the society. It could be observed that there are things needed to be considered though when the progressive state of business is aimed to be achieved. Hence, the capability of a certain organization to achieve continuous growth is then measured through the use of the scaling brought into existence by the utilization of the formula that is used to calculate the SGR percentage of a certain business organization.

The SGR formula or model examines the capability of different business organizations in attaining the primary goals of progress that it aims to achieve. This particular model of evaluation is more likely much integrated on the realistic views on the said business probabilities. Through the said realistic views, the capabilities and the limitations of the organization could then be measured well thus making it easier for the owners of the business to predict the future issues that may arise that in some point may result to either the progress or the failure of the organization.

The SGR formula primarily is the calculation of the expenses that are expected from the company and the revenues that are scheduled to be achieved by the organization in an annual-based operation. To understand the formula better, it appears this way:

SGR = ROE * Earnings Retention Rate

= (Profit Margin * Asset Efficiency * Capital

Structure) * Retention Rate

= [(Net Income/Sales) * (Sales/Assets) * (Assets/

Beginning of Period Equity)] * (1 – Dividend

Payout Ratio)

From the given formula, it could be observed that there exist the different elements of business operations that are involved within the procedure of gaining the best interest there is for the organization’s profit to be able to ensure the progress of the said business entity. The evaluation of the business based on the real scenario that the organization is undergoing would actually lead to direct realization of the fact that the company could only take a certain pressure on expenses based from the funds that are available for the organization to make use of.

Hence, through this, the administration of the organization would have a better time spent on actually balancing the cash flows in and out of the business (Hasan, 2003, 16). Furthermore, the article entitled “Sustainable Growth: Is There Room to Grow?” asses the importance of the said process of business growth evaluation:

This metric assumes that over the evaluation period: (1) the company will grow sales as rapidly as market conditions permit; (2) management is unwilling to sell new equity; and (3) the company maintains it current capital structure and dividend policy. As growth requires commensurate increases in assets for support — without equity issuance, any asset increases must be funded with added liabilities or from retained earnings. Thus if financial policies are unchanged, the rate of shareholder equity growth will limit sales growth.

(Source: A Deloitte Research Viewpoint, 2001, Internet)

From the cited comment above, the progress of each business organization as mentioned herein could be observed to be continuously depended on the different variables of monetary flows within the organization. Identifying the elemental factors that contribute to this particular progressive procedure then is indeed an effective way of calculating and evaluating the company’s main asset that could be considered by the administration as a primary source of organizational progress.

The said scale of monetary funds could be noted as the primary source of the integration of the organization’s monetary expense limit with the expected revenue returns that the organizational administration personnel themselves have set for the company to reach. From the calculations made through the use of the SGR formula, the company owners as well as investors could actually gauge the procedures by which the organization would most likely be able to flourish as an organization that is dependent on growth and elemental progress based on the integrated capabilities of the organization and the employees as well.  (Claessens, 2001, 16)

 The Impact of SGR in Cash Flow Shortage Situations

Among Fast Growing Business Entities

It is much certain that the business organizations should know of their capabilities especially in terms of monetary regulations. The cycle of the coming in and the going out of the revenues that the organization receives in annual business operations could actually be redefined and balanced through the application of the SGR calculation model stated earlier. Through the said calculation, it could be noted that the percentage of growth that the company is expected to attain in every year could be gauged as the fund or monetary release limit of the organization itself.

As for a fact, organizations could use the result garnered from this particular formulation of fund control to be able to measure the expenses that they spend every now and then for their business operations. From the calculations, the limits of the spending process could be garnered thus making it easier for the business administration to allocate the monetary funds of the organization to the different responsibilities that they primarily need to attend to every now and then.

Hence, as a scale of growth, SGR calculation models actually assist in assessing the possibilities and the probabilities with which the business could actually attain its peak success. Of course, being faced with the different cash or monetary issues in business industries is considered normal especially for entrepreneurs that are primarily involved in a fast progressing industry. The consequences of becoming a member of the competitive world of business usually involve the difficulties of handling the different problems on money and operational limitations. Of course, every business entrepreneur aims to make amends with the limitations that they have in terms of operating as a social entity that is conformed to the different difficulties brought about by business competition.

It could then be observed that models of evaluation such as the SGR calculations could actually help in the process of making a particular organization grow at their own pace. Knowing the different factors of progress that could still be taken into consideration by the organization is a sure hope-giving thought that even though the competition is tight, a newly established business entity could still grow in fast manner as it has a strong basis upon the basic knowledge that it needs to consider with regards the effective balancing of the monetary funds of the organization.

Solving the Business Monetary Issues

In connection with the implementation of the SGR system, business entrepreneurs are also expected to have a clearer view on the difference of profit and cash flow. Profit primarily pertains to the revenues that a particular business organization makes in a year or so which is actually generated as a part of the original monetary fund of the organization to be able to continue operating in the business industry. On the other hand, cash flow refers to both the coming out and the coming in of monetary assets within the business. Expenses are actually referred to as outflow of cash assets while revenues in terms of profit are considered as inflow of cash assets within the business.

It is very important to track down the activities of the organization basing from these particular factors of the business as they are considered within the SGR calculation model as primary contributors to either the progress of the failure of the business within the field of industry that it is competitively stationed at. The capability of the organization to stay within the competition is also usually gauged through the said elements of monetary assessment procedures. To be able to help in the process, Scott Allen adds this particular method of projecting the cash flows within an organization:

  1. Start with the amount of cash on hand - your current bank account balance(s) plus actual currency and coin.
  2. Make a list of anticipated inflows - customer payments, collection on bad debts, interest or investment earnings, etc. List not only the amount, but also when it will be coming in.
  3. Make a similar list of anticipated outflows - payroll, monthly overhead, payments on accounts payable or other debt, taxes payable or set aside for future payment, equipment purchases, marketing expenses, etc.

(Allen, 2004, Internet)

From the noted process of projecting cash flows, it is then obvious that the systematic approach in tracking the monetary engagements of a particular business organization is very important in scaling the SGR competencies of a particular business. It is suggested though this particular procedure that the constant attendance to the capabilities, the limitations and the assets of a particular business organization should continuously be noted as an important part of the annual assessment and evaluation of the monetary as well as operational procedures adapted by the said business entity.

From this particular point of view, the importance of SGR has been actually established. Its capability of identifying the status of a particular business as with scaling the possibilities by which it could still grow could actually assist the entire business entity in reaching its peak success within the industry that it is primarily involved with. Through the procedures suggested herein, the competitive status of any business organization could certainly be retained in their reputation as growing entities of social progress in the human global community.


From the presentation of the review of the literatures used in this paper, it could be concluded that there are indeed different elemental factors within the business industries that affect the growth of a particular business organization. There exists both internal and external factors that affect the process of advancement especially of those organizations that have just been recently established. Jumping into the bandwagon of business competition is always a risk especially to new entrepreneurs. Money investing is one of the primary decisions that the said business r=enthusiasts certainly need to decide upon. The constant attention then given to the competitive status of the organization could be gauged in its monetary competence.

Certainly, the SGR calculation model as presented herein could actually be noted as one of the most effective procedures there is in making a balanced report and schedule of activities in spending the business funds as well as expecting revenues in return of the expenses. Joining business entities certainly is a serious decision that an investor must make. The SGR reports that a company could come up with and thus be able to present to the prospect investors would actually help the investors decide if they are really to invest in the said business or not. True, SGR could determine either the failure or the progress of a particular business entity.

How the Privatization of Banks Affect the

Cash Flow Programs among Development Countries

As noted earlier, the cash flow within organizations or industries within the human society is affected by different elements of input and output of major funds towards the monetary systems present in the society. This includes the banking systems adapted by the human communities. Among developing nations, it is very important that the banks are able to support the balance that they need to improve the country with. To be able to do this particular responsibility on the part of the Government administration of countries, several national programs pursued privatizing the said institutions so as to allow a better cash flow control between the owners of the banks and the human society as well.

Most likely, the occurrence of such situations has been measured by economists as primary source of major developments among less-economically stabled nations around the world. With regards this particular fact, several diagrams shall be presented as follows so as to support the proof needed to show the importance of privatization of banks among developing countries around the world.


From this particular diagram, it could be noted that privatization of the different sectors that make up the systems of the different developing communities around the world have a strong impact on the overall progress of the entire nation in terms of economic stability.  It could be noted that through the years of applying the culture of privatizing the different sectors of industries within the different countries around the world, several progressive measures of economic stability had been fulfilled. The completion of the said programs made it possible for the banks to regain their reputation of standing as the foundation of financial strength of the different nations.

In this regard, seeing the importance of privatizing financial institutions with the impact of national development into the economic systems of the developing countries around the world implies the fact that bank privatization indeed leaves an important part of growth element for different countries around the world.  Giving this a focus on the part of the economic watch groups around the world; bank privatization should be given attention continuously as it may as well become the key reason that could appraise the economic situations of the different developing areas around the world today.

C: Increasing Internal and External Loyalty in the

Banking Industries and Improving Marketing Approaches of the Institution

Having more customers for a certain company is among the most important goals of any business organization. Certainly, it is thus considerably rightful to consider that the consumers too have their own goals, their own expectations from both the products and the services that they receive from different companies providing the said necessities to them. Once the companies are able to provide the expectations of the said consumers, the loyalty of their regular customers is gained, thus the profit of the said company improves.

However, this is not an easy task for any management group. Since this involves a more strategic approach. As it is said by much business experts, this process of gaining people’s loyalty to a certain company is more of an indirect management process. With regards to this, Frederich Reichheld authored a book entitled “The Loyalty Effect: The Hidden Force behind Growth, Profits, and Lasting Value” to highlight the necessary factors that would contribute to a successful people-influencing strategies.

The author Frederich Reichheld is known for his enthusiasm in creating ways by which business owners could get the best results from their business organizations. Almost all the books that came form the said author has been aimed in making business activities more effective not only for the business owners but also for the customers of the different

companies. By so doing, Reichheld has been able to garner a title in the business industry as one of the best selling writers of the century. His views have been proven practical and many readers of his book who chose to apply what they learned from his books have proved his suggestions effective. In the paragraphs to follow, the necessary contents of his book mentioned earlier shall be tackled and examined. The effectiveness of some of the main suggestions of Reichheld with regards to gaining loyalty would also be discussed. The main theme of the book authored by Reichheld shall be analyzed and distinguished as to how it directly could affect the human business activities.

IN his first lines as the introduction of his book, Reichheld stated: “LOYALTY IS DEAD, the experts proclaim, and the statistics seem to prove them out” (1). Certainly, at first glance, it could be seen how much the author views loyalty as a factor of the human society, which is near enough to being extinct. It may occur to the readers that whatever the author has to say with these opening lines may as well be themed against the possibilities of having an existing loyalty among men especially in the business industries. However, the preceding words of the author towards the chapter of his book lead the reader into another point of view.

The entire theme of the book is however in contradiction to the reality of reasons that the first sentence suggests. As the author tries to etch his ideas wit regards t loyalty, it becomes quite obvious how much he believes that loyalty is but a simple attitude that could be created and gained by people even in the filed f business. With so much competition among the companies involved in service and production activities in the business world, it is indeed hard to say that it is possible for one company to be able to gain TOTAL LOYALTY both from their own people and their consumers as well.

However, Reichheld suggests the other way around. To him, honesty is but a sense of trust and respect, which could be cultivated through the utilization of several strategies of business owners with regards to the activities they ought to do for the sake of their customers. True, it may not seem to be that easy. Yet it is not an impossible factor to consider of happening either.

At the first lines of this paper, it could be recalled how much business owners crave for gaining profit from the activities that they do everyday. OF course, this is normal. Nobody puts up a business simply because he or she wants to serve. Certainly, what a business enthusiast has in his mind upon establishing any business organization is the profit he ought to have upon the completion of his plan of putting up a business. However, according to Reichheld, there is more to a business than just the wanting of profit. In other words, gaining profit may be the main goal, but to be able to reach that certain goal, a company must be able to shift its priorities and still receive the best results in connection with the profit-oriented idealism of business organizations.

Although seeing the world situations today, implying such fine idealism may not be that easy to apply. A strong contributing factor is the rapid technological and economic development in society during the 20th century. An article in the German newsmagazine

Die Zeit stated that we live in a “dynamic epoch and not, as during former centuries, in a world characterized as being static.” The article explained that this has led to a system of market economy, which is based on competition and propelled by selfishness.

“This selfishness,” the article continued, “could not be stopped by anything. In its wake grows the brutality that marks our daily life, as well as corruption, which in many countries has reached right up to the government. People think of themselves and the maximum gratification of their desires.” Sociologist Robert Wuthnow, of Princeton University, found through in-depth polling that Americans today are more focused on money than they were a generation ago. According to the study, “many Americans fear the yearning for money has overpowered other values like people’s respect for others, honesty at work and participation in their communities.”

Greed in society has further increased because many business executives have granted themselves huge wage increases and lucrative retirement benefits while urging their employees to be moderate in their wage demands. “The problem with the pursuit of profit among business leaders is that their attitudes are infectious and that they lower the moral threshold among people in general,” observes Kjell Ove Nilsson, associate professor of ethics and theological director at the Christian Council of Sweden. “Of course, this has a devastating effect on morals—in society as well as on the personal level.”

However true that greed governs the business industries today, Reichheld still believes that with ample practice and shifting of priorities, loyalty could still be a possible existing aspect in the business world today.

According to Reichheld, there are necessary steps to follow with regards to the priority shifting process that has to be considered by business owners if they are wanting loyalty form their people and their consumers as well. The following is the list of the principles included in the ‘six bedrock’ strategies that Reichheld refers to his book as an effective way of being able to shift one’s point of view on profit:

  • Preach what you practice

This refers to the ability of the administrators to educate their employees well. This education does not only include the necessary matters of concern in business industry they are joined with but this is also designed to teach everyone in the company with regards to what is really happening in and out of the organization. This process builds up trust as the company unfolds the supposed ‘company secrets’ to their valuable force, the employees. By doing so, they are able to satisfy the need of their employees to have the feeling of self-worth, meaning they are able to understand that they play a big part in the company and that they are well appreciated by the organization they chose to work for.

As trust between the employees and the administrators are established, the more loyalty comes into the picture and succeeds the quest for being established.

  • Play to win-win

Consumers play the greatest part in reaching the goal of gaining profit for the company. The ‘win-win’ principle refers to the fact that even though companies see the consumers as ‘money providers’, they should also see the worth of their consumers when it comes to receiving fine service and products from them .

This means that both party wins in each transaction that the company and their consumers get into. The consumers should realize the fact that what they have paid for have been worthy enough because of what they received from the company. Hence, knowing this, they are able to establish fine relationship with the company and loyalty is established as well.

  • Be Picky

In business, one of the most important activities being done is decision making. Being picky simply refers to the ability of the management of a business organization in ‘choosing’ which services or features of products specifically meets the needs of their core stakeholders.

This part of decision making though must be viewed as an equalizer between the employees and the consumers of the company. Being picky involves the ability of the management or the administration to chose what is best for both their employees and their consumers. This would inspire the employees serve even better and the consumers appreciate the products and services more frequent.

  • Keep It Simple

Everything must be clear, appealing yet understandable. Whatever the company considers with regards to the changes that they ought to take, everything must be attractive or appealing enough for both the employees and the consumers to accept. Being simple and clear though is the main reason why certain processes could be called ‘appealing’ to others. It must cater to the general public which means it should be able to give both the needs of the employees of the company as well as the consumers’ expectations in an equal manner.

  • Reward Right Results

Once the aim or the purpose of the strategies are met, it helps a lot if the management would be able to come up with reward policies especially for the employees who are working hard for them. This could be in a form of an award, recognition or monetary rewards. However, it would

be, it is designed to help the employees realize their worth or their importance to the company.

  • Listen Hard-Talk Straight

Although there is a sense of authority, it should always be remembered by administrators that there is a need to listen. There is a need to remain open minded for other people’s suggestions. This goes back to the first principle of letting other’s feel that they are of worth to the company.

Applying these six principles mainly helps the business owners to identify their needed adjustment with regards to their shifting of priorities. It is indeed important that the business administrators are able to distinguish the exact aspect in which they should improve themselves to be able to receive fine results. According to Reichheld, “Companies with faithful employees, customers and investors share one key attribute. That is the application of the ‘six bedrock principles’ listed above. Yes, these principles have been proven effective by the people who opted to apply it in their own business activities.

After knowing the necessary principles of success leading to gaining loyalty from all sectors involved in a business organization, Reichheld further elaborates his subject by concentrating on the main reason why loyalty is needed. As he says, there are two main reasons why loyalty is necessary and how it is beneficial especially for business

institutions. The two reasons are as follows:

  • The primary mission of loyalty is to create value for clients (Reichheld, 32)

This mainly points out the responsibility of each business organization towards their clients. Since their clients give them the chance to gain profit, they are supposed to do the best they could to give their clients the worth of their expenses. By doing so, they are showing importance to the clients and are also gaining the approval of their customers thus establishing loyalty.

  • The most precious asset of any company is its employees dedicated to making productive contributions to client value creation (Reichheld, 33)

Being able to gain the loyalty of the employees is also a key factor to being a strongly established organization. Once the employees are faithful and loyal to the organization they work for, they are willing to offer the best performance they could give for their companies as those companies too are able to satisfy their wants and are able to provide them with what they need.

These two principles of loyalty sets up the foundation for the implication of the six bedrock principles. Being able to recognize the importance of each sector making up the success system of any business is indeed a necessary step for business owners to take if they are serious enough in gaining the pleasing approval of both their consumers and their employees and in the end gain profit for then organization as well.

Methodology and Data Analysis

‘Loyalty may indicate a continuing, reliable faithfulness and allegiance, secure against wavering or temptation.’ ‘Loyalty implies faithfulness to one’s pledged word or continued allegiance to the institution or the principles to which one feels himself morally bound; the term suggests not only adherence but resistance to being lured and persuaded away from that adherence. True, the loyalty of one may impress and influence others, but it is exhibited, not for that purpose, but because of one’s allegiance. Nor must one person’s loyalty be the controlling factor to force others to the same conclusion.

This is the reason why in business ventures, it is indeed reasonable to say that loyalty may not be that easy to gain, however, once it is already received it is much worthwhile of keeping. The certainty though of one’s loyalty towards a company is not that easy to keep. There are necessary steps to take to be able to hold on to a consumer or an employee’s loyalty and keep the fine relationship get going. Here are some of the outlined guidelines of the book of Reichheld with regards to this matter:

  • Make customer value, not profit, the goal.
  • Loyal customers are more profitable than new customers are. Break up the potential customer base into segments and find out which ones are more likely to be loyal. Target these customers.
  • Find and keep the right employees. Getting the right customers will bring you a profit. Invest that profit in loyal employees who will continue to increase value to your customers. Companies with the highest employee loyalty consistently have the highest customer loyalty.
  • Find investors with long-term perspective.
  • Learn from defections. If customers or employees are leaving the company, find out why. Take actions to correct problems. Learn from mistakes.

(Based From: Reichheld, 41-45)

Taking these five major guidelines to keeping one’s loyalty towards a business organization shall help well in the growth of the organization basing from its acceptability to the society or to the market it opts to serve.

The reports of several companies who were able to recognize the importance of the factors, which were listed in Reichheld’s book, is supported by actual results. These are as follows:

As for example, in Florida, the construction industry which primarily involves people from the engineering, architecture and laboring industries, certainly depend upon the customer satisfaction and later on the loyalty of the clients that they serve. With the tough competition that the said industry has been going through, it could be noted that this particular character or capability of the organization is the primary measurement of their assured existence within the industry.

The percentage of the appeal shown by the consumers towards the companies is indeed a proof that there could still be loyalty in the business industries. Consequently, this could only be resulted form ample application of equally loyal service towards the clients from the company. It could also be based upon the way the administrators loyally treat their employees at work. Yes, respect does not only beget respect, it also results to loyalty as it helps in the foundation of trust between the sectors of business organizations.

However, why is it that even though there are those companies that apply the said principles suggested by Reichheld, there are still some failures that occur with regards to loyalty and its establishment between consumers and companies?

Here are some excerpts from the book that could help explain the situation well:

  • "One common barrier to better loyalty and higher productivity is the fact that a lot of business executives, and virtually all accounting departments, treat income and outlays as if they occurred in separate worlds. The truth is, revenues and costs are inextricably linked, and decisions that focus on one or the other -- as opposed to both -- often misfire." (Reichheld, 54)

This mainly shows how much there is a need to determine an organization’s priority. Whether it is profit or service. Whatever the company may choose, it should occur to them that however they might want it to happen; loyalty could only be achieved from a selfless thought for the consumer’s sake.

  • "Companies cannot succeed or grow unless they can serve their customers with a better value proposition from the competition. Measuring customer and employee loyalty can accurately gauge the weaknesses in a company's value proposition and help to prescribe a cure." (Reichheld, 121)

Being able to provide the consumers and the employees with what they need and what they expect is the key factor to a successful establishment of loyalty towards the company.

  • "While every loyalty leader's strategy is unique, all of them build on the following eight elements: Building a superior customer value proposition, finding the right customers, earning customer loyalty, finding the right employees, earning employee loyalty, gaining cost advantage through superior productivity, finding the right [capital sources], and earning [their] loyalty." (Reichheld, 214)

Yes, loyalty could only be expected from the people making up an organization as well as from the people evolving around it if the organization itself realizes its responsibility to provide its stakeholders with what they demand from the same organization. This is what is pointed out by Reichheld in his book. He mainly sends a message to business owners that profit could only be achieved once the stakeholders of the business organization are served well.

Summary of the Chapter

Many people put money into banks. In turn, the banks lend the money to other people or businesses that want to borrow it. What is left is kept in cash or is invested in buildings, equipment and securities (usually government securities). The portion kept in cash is usually a very small percentage of total assets. What would happen if bank depositors in great numbers went to their banks and asked for their money back in cash? If that happened on a large scale, the banking system would be unable to honor its obligations; nor would any government insuring agencies.

Aside from such a possible catastrophe, most of the people presume that they can get their money back at any time by merely asking for it. But many banks can legally withhold money for 30 days. A typical regulation of this kind may read: “The bank may allow monies to be withdrawn from savings accounts at any time without notice, but it reserves the right to demand notice of withdrawal not to exceed thirty days on any or all accounts.” (Nikiel, 2002, 13)

So, in difficult times, money would be unavailable for 30 days. Yet, at present, banks are generally as safe as most places to keep money. As major element of national progress, privatizing these financial institutions naturally bring up the possibility of making it certain that progress among developing countries could still be attained through making business entrepreneurs handle the process of balanced wealth distribution within the human society at present towards the future.

Certainly, through increasing the loyalty of both the internal and external stakeholders of the banking institutions, the success of banking marketing could be expected to affect the entire human society thus making the camaraderie between the two aspects of human social living more competent in producing social and industrial success towards the future of banking procedures.


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