Table of Contents
Executive Summary
2
Introduction
2
Environmental Analysis of Banking Industry
2
The Paradox of Market and Resources
5
The paradox of responsiveness and synergy
6
The paradox of globalization and localization
7
Conclusion
8
Bibliography
9
Appendices
11
Executive Summary
The main aim of this report is to critically analyse the current and future strategies of HSBC according to the current and future environment. In order to accomplish this task, first of all research will be done on the key drivers for change in the Banking industry considering appropriate external and internal environmental analysis and then draw specific strategic opportunities and threats for the industry to respond to. In the second part of the report, the current or intended strategies of HSBC will be presented and critically evaluated as to whether they are ‘fit for purpose’ or not. As part of the critical analysis, the strategies of HSBC will then be evaluated using the perspectives of Business Level Strategy, Corporate Level Strategy and The International Context. Finally, conclusions will be reached in relation to the findings of the analysis.
Introduction
According to its annual report 2010, HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$199 billion at 31 December 2009. Through its subsidiaries and associates, HSBC provides a comprehensive range of banking and related financial services. Headquartered in London, HSBC operates through long-established businesses and has an international network of some 8,000 properties in 88 countries and territories in six geographical regions: Europe; Hong Kong; Rest of Asia-Pacific; the Middle East; North America and Latin America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases, and by consumer finance operations.
Environmental Analysis of Banking Industry
The banking industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services.
The PESTEL framework analyses the key factors which are likely to impact the industry as a whole in the near future and are as follows:
Political Factors
· There has been a huge political backlash in the US and the UK against financial institutions for causing the financial crisis.
· Several proposals have been made in both countries and worldwide to break up banks that are “too big to fail”
Economic Factors
· Economic indicators in the UK remain weak and the risk of the country slipping back into recession in 2010 remains, thus delaying the recovery.
· Inflation in the UK is rising and is well above the BoE's target of 2% hence sparking fears of increased interest rates which means lower margins for banks on interest profits
· In France, unemployment is rising and there are concerns about the public deficit.
· Middle East economic conditions are to a large extent driven by volatile oil prices.
· Latin America growth is estimated to have fallen by 2.7% in 2009, though growth may resume in some pockets in 2010.
· The euro crises also needs to be considered and national bonds are at an all time low in Spain, Greece and Ireland which have been on the verge of bankruptcy
· Chinese and Indian economies have shown resilience and have maintained a steady growth rate of around 8%
Social Factors
· The main social factor to be considered is the decrease of trust in banks due to financial losses suffered by investors, who may be more inclined to invest elsewhere leading to negative sentiments and loss in Market Cap.
· Financial losses affecting banks and investors on a global scale have resulted in less credit being available to customers. In the UK this is coupled with increases in living costs resulting in less money being saved.
Technological Factors
· Technology has revolutionised the way banks interact with their customers. Telephone and Internet banking are already well established. M-banking (banking via mobile telephone) and interactive television are yet to realise their potential, but the introduction of Third Generation (3G) wireless format services and increasing market penetration by digital television should correct this. (DataMonitor 2010)
· Technology is making it easier for customers to access information. The wide availability of financial information, especially through personal finance-related sites on the Internet, has simplified the task of comparing products offered by the banks. Customers, therefore, are less likely to be doggedly loyal to their current-account providers than in the past.
· Internet security still remains a concern despite the developments. Online banking losses increased 14% in 2009 to reach £60 million in 2009. The increase was largely attributed to criminals targeting vulnerabilities in customers’ personal computers, rather than targeting the banks’ own systems, which are more difficult to attack. The number of phishing incidents was also up by 16% in 2009. (Mintel 2010)
· Developments in back-office systems have allowed banks to target the marketing of financial products more effectively. New technology, such as data mining and data warehousing, are increasingly being used to cross-sell various financial services to customers who may have several different types of account or investment.
Environmental Factors
· Need to reduce the carbon footprint has taken utmost importance world over. Companies all over the world are finding ways to reduce their carbon footprint. In the banking industry, paperless transactions have become the norm. E-Cheques and E-Statements are being encouraged.
Legal Factors
· The Basel Committee on Banking Supervision has issued a comprehensive reform package to address the lessons of the crisis which includes proposals on strengthening global capital and liquidity regulations and the resolution of systemically significant cross border banks such as HSBC. The reforms could be implemented by 2012.
· China’s main bank regulator has ordered lenders to conduct regular stress tests on an array of business lines since last year, in one case requiring them to predict the impact on their balance sheets and operations in the event of a 60 per cent fall in house prices in major cities.
The key drivers of change for the banking industry would be the emerging markets of India, China, Brazil and Russia. The recent financial crisis has shifted the centre of business from the West to the East and more companies are investing in emerging economies. Banking regulations also can see several financial institutions moving base from centres of power such as the US and UK to tax havens like Malta and the Middle East.
SWOT Analysis
HSBC is Europe’s biggest bank in terms of lending assets and market capitalization. In the UK, the group has a leading direct banking business. It also has leading market positions in financial services and several consumer finance operations. The group leverages its market leadership in geographies and product segments to gain a competitive advantage. However, weak economic conditions and increased competition could reduce the group’s revenues and profitability.
Strengths
· Global scale and deep international network helps capture global trend benefits
· Diversified revenue mix reducing volatility impact
· Brand strength helps charge premium and retain globally valuable clients
Weaknesses
· Lapses in operational security could hurt customers’ confidence
· Asset quality deterioration and poor operating performance of HSBC Finance Corporation
Opportunities
· Portfolio management likely to improve overall enterprise value
· Investments in emerging markets likely to increase growth rate and profitability
· Low interest rate mortgages likely to increase revenues and market share
Threats
· Regulatory changes could increase compliance spending and alter business plans
· Competition for retail deposits likely to increase funding costs
· Economic conditions in several geographies still weak and so could undermine growth
(For detailed discussion please see appendix 1)
The Paradox of Market and Resources
DeWit & Myers (2010) state that there must be a fit between an organisation and its environment. This point is often expressed in terms of the classic SWOT analysis tool which suggests that a firm's strategy should match a firm's strengths and weakness to the opportunities and threats encountered in the firm's environment. The key to success is alignment of the two sides. Yet fitting internal strengths and weaknesses to external opportunities and threats is often frustrated by the fact that the two sides pull in opposite directions - the distinctive resource base and activity system of a firm can point in a totally different direction compared with the developments in their current markets.
The strategic management literature comes with strongly different views on how managers should proceed. The variety of opinions among strategy theorists is dauntingly large, with many incompatible prescriptions being given. On the one side of the spectrum, there those managers who argue that the market opportunities should be leading while implying that the organisation should adapt itself to the market position envisioned. This point of view is called the "outside-in perspective". At the other end of the spectrum, many managers believe that the competition eventually revolves around rival resource bases and that the firms must focus the strategies on the development of unique resources and activity systems. They argue that product market positioning is a tactical decision that can be taken later. This view is referred to as the "inside-out perspective". (Detailed discussion of literature in Appendix 2)
There is a good mix of both perspectives in the strategy making of HSBC. On one end of the spectrum, HSBC’s strategic direction reflects its position as ‘The world’s local bank’, combining the largest global emerging markets banking business and a uniquely cosmopolitan customer base with an extensive international network and substantial financial strength as stated in its annual review 2010. According to Bloomberg, "HSBC is one of world’s strongest banks by some measures." When HM Treasury required all UK banks to increase their capital in October 2007, the group transferred £750 million to London within hours, and announced that it lent £4 billion to other UK banks. The standard reports that in March 2009, it announced a £12.5bn (US$17.7bn; HK$138bn) rights issue to enable it to buy other banks that were struggling to survive. For the third time in a row, HSBC was awarded the title of most valuable banking brand in the world in 2010 by the Banker magazine and Brand Finance. As per the Economic Times, HSBC has a brand value of $28.5 billion and as per its annual review this HSBC brand and global networks will be leveraged to reach new customers and offer further services to existing clients;
On the other end of the spectrum, according to HSBC’s annual report 2010, the Group’s strategy is aligned with the key trends which are shaping the global economy. In particular, HSBC recognises that, over the long term, developing markets are growing faster than the mature economies, world trade is expanding at a greater rate than gross domestic product and life expectancy is lengthening virtually everywhere. HSBC’s strategy is focused on delivering superior growth and earnings over time by building on the Group’s heritage and skills.
As a result of the global economic crisis, and in particular the sub-prime market collapse in the US, HSBC is expanding its focus on emerging markets, especially Asia Pacific as per Euromonitor 2010. The company’s Asian heritage and the less severe exposure of these markets to the global financial downturn are key factors. HSBC is targeting growth in China, India, Indonesia and Vietnam, and has already picked up assets and strengthened partnerships in the region. It has also been linked to ING and RBS Asian operations.
The paradox of responsiveness and synergy
Corporate level strategists constantly struggle with the balance between realising synergies and defending business unit responsiveness. To achieve synergies, a firm must to some extent intricate the activities carried out in its various business units. The autonomy of the business units must be partially limited, in the interest of concerted action. However, integration comes with a price tag. An extra level of management is often required, more meetings, extra complexity, potential conflicts of interest, additional bureaucracy - harmonisation of operations costs money and diminishes business units ability to precisely tailor its strategy to its specific business environment. Hence, for the corporate strategist, the challenges to realise more value creation through multi-business synergies than value destruction through the loss of business responsiveness (E.g. Campbell, Goold and Alexander, 1995; Prahalad & Doz, 1987). The tension arising from the particularly conflicting demands of business responsiveness and multi-business synergy is called the paradox of responsiveness and synergy.
Corporations need to capture multi business synergies and they need to ensure each business unit's responsiveness to its competitive environment. in other words, corporations need to be integrated and differentiated at the same time - emphasizing the whole and respecting the parts. Striving towards synergy is a centripetal force, pulling the firm together into an integrated whole, while being responsive to business demands is a centrifugal force, pulling the firm apart into autonomous market focussed units (Ghoshal and Mintzberg, 1994). The strategic management literature comes with strongly different views on how strategists should proceed. On the one side of the spectrum, there are those strategists who believe that multi business firms should be viewed as portfolios of autonomous business units in which the corporation has a financial stake. This point of view is referred to as the "portfolio organisation perspective", At the other end of the spectrum there are strategists who believe that corporations should be tightly integrated, with a strong central core of shared resources, activities and/or product offerings keeping the firm together. This point of view is referred to as the "integrated organisation perspective" (Detailed discussion of literature in Appendix 3)
The HSBC Holdings portfolio consists of various business units spread around the world ranging from HSBC Finance in the USA to HSBC Bank in Malaysia. The entities which form the HSBC Group provide a comprehensive range of financial services to personal, commercial, corporate, institutional and investment, and private banking clients. The analysis shows a distinct portfolio organisation perspective, as per Michael Geoghegan’s presentation at Meryl Lynch, the HSBC Group operates as a number of local banks around the world, which explains its advertising tagline "The World's Local Bank." In response to ongoing discussions about the survival strategies for banks, and the suggestion of "Living Wills" HSBC explains its structure as "separately incorporated and capitalised" the structure is based on a lead bank in each region, which has responsibility for the group's operations in that area. According to its CEO, HSBC has a transparent and manageable structure. It runs a Holding Company with separately capitalized banks, each self-funding, and with a separate balance sheet. Each bank is locally incorporated with its own CEO, local Board, and supporting committees. The principle of this structure is that the parent group capitalizes the subsidiaries with Tier 1 capital, and they provide dividends on a regular basis, and the parent group provides additional capital when opportunities arise. In this way, the parent group is better able to monitor the return on equity, the liquidity structure of a particular country, region, or business while keeping the subsidiary autonomous.
The paradox of globalization and localization
According to Tallman and Yip (2001), there are three major strategic issues for MNCs operating globally. The first is geographic spread, which is the original issue about internationalization process of the firms such as various modes of entry. The second is local adaptation or localization, which is about the level or degree MNCs adapt to the specific local circumstances. The last is global integration. This issue is to what extent the MNCs integrate their business operations between different national markets. The last two questions, being combined together, constitute the paradox of globalization and localization which always puts many decision makers of MNCs into a dilemma. The paradox of globalization and localization is a common issue for MNCs operating and competing worldwide. The tension lies in whether regard the global market as a whole or respect the local differences in the specific national or regional markets.
International managers cannot afford to neglect being responsive to local conditions yet at the same time they need to realise cross-border synergies to create additional value. Striving for cross-border synergies on a global scale will interfere with being locally responsive and vice versa. There is a wide spectrum of positions on the question of how the international context will develop. On the one side of the spectrum, there are managers who believe that globalization is bringing Lennon’s dream of the "world living as one" closer and closer. This point of view is called global convergence perspective. On the other end of the spectrum are managers who believe that deep rooted local difference will continue to force firms to "do in Rome as the Roman's do". This point of view is referred to as the international diversity perspective. (Detailed discussion of literature in Appendix 2)
HSBC seems to be following the international diversity perspective. According to its website, The HSBC Group has a significant presence in each of the world's major financial markets, with the Americas, Asia Pacific and Europe each representing around one third of the business. With around 8,000 offices in 87 countries & territories, 210,000 shareholders, 300,000 staff and 128 million customers worldwide, HSBC arguably has the most international presence among the world's multinational banking giants.
In a comment by its CEO at the Meryl Lynch Summit, HSBC's strategy for Personal Financial Services is to focus on the segments where HSBC has unique strengths, based on either global reach, or scale, or both. In order to do this, both HSBC's position and the market characteristics in each country are key components of how it can compete in personal banking in each of these markets in a way which delivers the greatest efficiency and the biggest opportunities for growth. First, there are about a dozen markets where it has scale to operate as a full service bank to generate attractive returns. In a further 30 countries, participation will focus on premium banking and wealth management, where brand, global reach and relationships with Global and Commercial Banking, provide it with an advantage. The third model is network participation, where in important markets which have potential for international connectivity will be focussed on delivering HSBC Premier services. HSBC is of the opinion that this differentiated approach to different markets will result in revenue growth.
The “One HSBC Program” created in 2007 is a core strategic initiative