Strategic Issues in Financial Services - Essay Example

Strategic Issues in Financial Services Introduction There is increased confidence regarding banks by customers even to the point of satisfaction being described as more than it was before the onset of the credit crisis. However, the trend is in both directions. Whereas some banks have intensified their efforts to regain the foothold on the banking sector, some have done little. This is reflected by the number of people who have said that they love some banks in comparison to others. There are 13 banks that were involved in the annual JD Power and Associates Retail Banking Customer Satisfaction Survey (Osullivan 2010, pp. 2). Out of these, the Cooperative Bank of England performed exemplarily and emerged tops. Abbey was rated as the worst bank in the UK. In addition, Bank of Scotland, HSBC, Clydesdale and Barclay’s banks were considered as performing below par. The National Building Society and RBS were the other banks that were considered as being best performers. The rating of the banks was done based on six distinct parameters. The ease of problem resolution, convenience to the customer, transactions, the offering of products like account openings, account statements and the fees that the bank charged were the six parameters used. The overall confidence in the banking sector is considered to have improved, this despite the fall of the Northern Rock as well as the recent credit crunch. The survey further stated that only a quarter of the respondents would not recommend their bank to others and the same number believed that the stability of the banking sector had changed little. Despite the overwhelming support that the sector has regained in the last year, a sizeable number of the 3,300 respondents in the survey stated that the fees charged by their banks were the major factor for their withheld support. In the last couple of years, the credit crunch has negatively affected the performance of the banking sector with some international banks requiring bailout. The collapse of the sub-prime lending bubble led to a fallout that affected many banks globally. However, some banks managed the crisis considerably well, assisted by sound strategies. In this discussion, the focus is on the leaders and laggards that emerged from management of the economic crisis. The leader in the discussion will be the Cooperative Bank that was considered as the best bank in the UK by the JD Power and Associates survey. The same survey pit HSBC as performing below average and this will be the laggard in the subsequent discussion. Formerly, people did not consider the extent of global integration. However, the multiple collapse of many institutions in the global scene presented a picture of how much integrated the world really is. Governments intervened with massive bailouts and other monetary regulations that were aimed at stabilizing the financial situation. As if to worsen matters, the effects were further strained by the recession that followed. It is in this background that the best strategies for survival and growth are tested. Both the Cooperative Bank and HSBC operated against this backdrop. What was regarded as the norm had to change drastically in order to guarantee business considering the mistrust that the crisis created. The Cooperative Bank was not spared. It made losses on its risky investments but the amount it made in losses cannot be equated to the amount that private banks like HSBC incurred (Cogan 2008, p. 7). The characteristics of the bank that made it suffer less involve the fact that its customers are also its members and are the ones that own it. The strength in this principle is that all approaches must be driven by consensus and are not reliant on a single stakeholder as is the case with HSBC. There is also a concomitant view that is for the long-term and also a stance that is risk-averse that allow the bank to be more conservative in terms of the strategy adopted towards retail banking. The Cooperative Bank does not engage in the distribution of its profits and as such, the profits are used to grow its reserves which is why the bank contributes to the stability of the financial system nationally as it is one of the highly capitalized institutions in Europe. Both the Cooperative Bank and HSBC have a set of unique core competencies as well as other features specific to them. HSBC is the largest banking consortium in the world and was rated as the most prestigious and profitable bank in 2007. Furthermore, the bank is the largest in terms of the assets that it has globally. Although the bank is operational in 87 countries, its performance in most markets has been well below par. Most of the company´s branches have struggled to realize over $100 million in profits (Sara & Margot 2011, pp. 11). As such, they have been unable to have any substantial returns on investment. The bank was also the major lender in the sub-prime market through its HSBC finance affiliate. The economic crisis that hit that sector of the market caused the company billions in losses an occurrence that has affected the bank in the near past with a reversal in the original strategy imminent. On the other hand, the Cooperative Bank, although lacking in the immensity possessed by HSBC has stuck to its model of customer centricity and has tried to cash in on those models now regarded as the “new” characteristics in reference to the financial system globally. The bank has performed well because it has endeavoured to be proactive and innovative in its strategies, management and relationships with customers. In the past, occurrences have shown that the Cooperative Bank is able to reinvent itself and adapt to changing economic and financial realities. Analyzing Strategies The Cooperative Bank has been forced to rethink its strategy since the financial crisis in 2007. The bank has identified a number of areas strategies that have formed the basis for their performance in the recent past. The need to be proactive and innovative is at the core of this strategy (Groeneveld & Sjauw-Koen-Fa 2009, p. 7). This means that the bank has realized that its position currently does not guarantee it future success. Most of the banks that have suffered due to the economic crisis have retreated in order to regroup. This means that the inevitable reorganization will result in meaner and leaner competition. In a bid to counter this, the management is encouraging its employees to come up with ideas for the future. The other point is on the improvement on the levels of efficiency. The distribution networks form the basis here as the bank examines the costs and benefits against shrinking margins. The integration of both the physical as well as virtual distribution networks is the strategy adopted here that is aimed at personalizing the relationships with customers. This requires extensive training for staff to make sure that they are well equipped to deal with client needs. The bank has also crafted a strategy for ensuring that the uniqueness of its products is communicated swiftly to clients before the services and products are copied by the competitors which is very easy in the sector. Focus on core activities is important and so is the efficient service to customers. The bank has also adopted a strategy that is aimed at reconciling its domestic activities with those of the international market. The national interest which is referred to as the cooperative might be diluted by the international interests becoming larger and that will be against the goals of the bank in general. The international business is put in check so that it does not substantially increase and in turn create a risk destabilizing the overall business. The bank also strives to ensure that there is a balance between the central management and the local delivery mechanisms. This is in order to ensure that the dealings in the bank are transparent and involving. The HSBC has been reviewing its strategy for the last couple of years. Inside the last 5 years, the bank has been forced to change its strategy in order to dilute the effects of the credit crisis. The strategy that the bank implemented in the earlier part of the last five years was focused on the bank becoming the world´s local bank. This strategy was characterized by massive expansion of the bank in a number of new territories and in all facets of the business most of it in retail banking. In 2007, when banks were required to increase their capital bases, HSBC was among the first to do that (Seib 2008, pp. 5). In that year, it made massive profits and announced a rights issue which set up funds that were geared towards the acquisition of banks that were struggling to survive. The bank opened many branches in the 87 countries of operation among them buyouts of existing banks all in its strategy of retail expansion. The bank later revised its strategy and no longer aimed at being the world´s local bank. This was followed by succession rows where the new management reversed the strategy and instead of massive expansion, the bank began retrenching people and aiming to sell most of its underperforming branches in the world and instead focus on Asia, Mexico, Brazil, Turkey, Singapore and the UK. Evaluating Strategies The Cooperative Bank has had a good run in terms of survival. Its strong base and culture ensures that the bank does not take unnecessary risks. The bank has identified a number of strategies that it aims to pursue in order to remain in its strong competitive position. The company is looking towards the reorganization of its distribution networks. This entails the integration of the physical and virtual delivery systems. In doing this, the bank will ultimately cut costs and in turn improve service delivery (IFC 2007, p. 67). The strategy may also require a costly platform for sustainability. So far, the bank has performed well and its strategies seem to have been on point to prevent the bank from suffering massive losses. In most cases, the advice is that if anything is not broke, then there is no point in fixing it. Brainstorming and forecasting future trends should be some of the tools used to improve on the systems that are already existent and that are functioning properly. The strategy of ensuring aggressive marketing of products and services before they are replicated by the competition is also a good way of ensuring that the bank increases its market share before the competition regroups. The global credit crunch was followed by a set of new rules. This was characterized by many banks shifting their focus from wholesale banking to the domestic markets and retail banking in order to shore against global market dynamics. This strategy is also being implemented by HSBC. The initial strategy was aimed at capitalizing on its strengths which entailed massive assets and a strong global reputation. However, the strategy did not yield the desired results. The bank aimed at providing retail banking opportunities all over the world (Treanor 2007, pp. 6). However, this strategy has become increasingly blurred by the dynamics in the global economy. The latter strategy where the bank aims at concentrating on emerging markets as well as its traditional markets in East Asia is an option that is bound to improve the standing of the bank in those regions. The new strategy by Gulliver is bound to cause some unexpected results due to the job losses that will follow especially with the unemployment levels being at an all time high. Despite this predicament, analysts concede that it is the best option for the bank to move forward. They cite that specialization in a single market is better that taking risks in spreading investments among a wide range of markets. From the foregoing discussion, it is clear that the Cooperative Bank is the leader. This decision has not however been made in vacuum as there are several criteria that have been used to support the decision. These criteria include proactive and innovativeness in its strategies used by the bank, management and relationships with its customers, as well as the culture of the bank. To begin with, the Cooperative Bank unlike other banks, adopted proactive and innovativeness in its strategies which were able to help the bank adapt to the changing financial and economic realities. Such strategies involves, improvement on the levels of efficiency as well as management encouraging its employees to come up with ideas for the future. Secondly, the Cooperative Bank characteristics of customer involvement made the bank suffers less due to the fact that its customers are also its members and are the ones that own it. Consequently, all approaches are driven by consensus and are not reliant on a single stakeholder as is the case with HSBC; this makes Cooperative Bank the leader. Finally, the strong base and culture of Cooperative Bank ensures that the bank does not take unnecessary risks. In case the bank undertakes a risky venture it is well secured since traditionally, the bank does not engage in the distribution of its profits and as such, the profits are used to grow its reserves. This reserve contributes to the stability of the banks’ financial system making it the lead bank. References Cogan, D. 2008. Corporate Governance and Climate Change: The Banking Sector. Ceres, Boston Groeneveld, H. & Sjauw-Koen-Fa, A. 2009. Co-operative banks in the new financial system. Economic Research Department of the Rabobank Group, Utrecht 7 International Finance Corporation (IFC) 2007. Banking on Sustainability Financing Environmental and Social Opportunities in Emerging Markets. World Bank Group, Washington D.C. Osullivan, A. 2010. “The best – and worst – UK banks revealed.” This is Money. Available at: retrieved from http://www.thisismoney.co.uk/money/saving/article-1641411/The-best-and-worst-UK-banks-revealed.html#ixzz1lEMrpPKp [Accessed on 2nd Feb, 2012] Sara, S.M. & Margot, P. 2011. “HSBC Strategy Shift Cuts Jobs, Branches.” The Wall Street Journal. Available at: http://online.wsj.com/article/SB10001424053111903520204576481533557357692.html [Accessed on 2nd Feb 2012] Seib, C. 2008. "HSBC quick to comply with refinancing demands.” The Times, London Treanor, J. 2007. "Taiwan gives HSBC £750m to take on Chinese bank." The Guardian, London Read More