Strategic Management of Lloyds Banking Group - Case Study Example

Strategic Management of Lloyds Banking Group Name Institution Date 1.0 Introduction 1.1 Lloyds Banking Group’s Core Business Following the acquisition of HBOS plc by Lloyds TSB Group plc in 2009, the bank was renamed Lloyds Banking Group plc (LBG). With a staff of over 140,000 people, over 3,000 branches, and a presence in 30 countries, the bank is presently the largest retail bank in the United Kingdom (Winston, 1982). The bank presently operates more than 30 million current accounts. It is estimated that one in every Small Business Enterprise in the UK banks with LBG. LBG’s product portfolio ranges from current and savings accounts, to credit cards, personal credit facilities, as well as life assurance and pensions. LBG’s acquisition of HBOS presented numerous challenges to the bank, foremost being how the two bank’s pre-existing networks could be converged and how this would influence the new organization’s risk profile. 1.2 Lloyds Banking Group’s mission, vision and corporate objectives Lloyds Banking Group’s vision seeks to set the direction for all the organisations stakeholders. Its main objective is to unlock the organisation’s potential by making it more agile, leaner and more transparent. It aims at delivering the expectations of its stakeholders and positioning it as the best banking option for its customers. The Group’s vision is expressed in its values. The three main values that the organisation upholds include putting customers first, keeping it simple, and making a difference together (Winston, 1982). The banks objective is to strive to develop positive and long-term relationships with its customers. To this end, the bank seeks to simplify business processes, and to communicate proactively and clearly in an effort to improve the experience of customers in general. By simplifying its mode of operations, the bank aims at improving the quality and delivery of its services by dedicating more resources and time in meeting customer expectations and concerns. 1.3 Brief history of Lloyds Banking Group’s Lloyds Bank was established in June 1765 at Birmingham. Trading under the name Taylors and Lloyds, the bank remained a private entity until the middle of the 19th century. Following the amalgamation process that characterized the British banking sector, the bank took advantage of the emerging market environment to expand and grow throughout the midlands. Through acquisitions and mergers, the bank had established a presence across England and the wales by 1923. By mid 1970s, the bank had established itself as one of the four leading domestic banks in the UK, and a significant player on the international stage as well. Subsequently, the bank came up with Lloyds Bank International, a subsidiary that would be responsible for Lloyds Bank Group international and foreign business, as well as the retail operations of Lloyds Bank California and National Bank of New Zealand (Stonham, 1993). By the mid-1970s, Lloyds Bank Group had established itself as not only a traditional banking business in both deposit taking and domestic and international lending, but in domestic and international payments as well. 1.4 Summary of the business issues that the company is facing. Following the merger of Lloyds and HBOS, which were both large banking entities, there was serious concern over an eminent collapse of HBOS if it did receive substantial support. Subsequently, the merger indeed proved unviable and the enlarged banking group needed an injection of over £20.6 billion in taxpayer funds. This intervention resulted in EU’s concern over the impact of state aid on competition (Borio, & Filosa, 1994). According to the European Commission, the enlarged banking entity commanded a larger market share of the total PCAs at about 20 to 30%. Following the intervention by the state, the Group's share of both the PCA and Mortgage markets had been significantly reinforced especially after acquiring HBOS (Bose, & Morgan, 1998). Besides the acquisition having enabled LBG to increase its total market share, it had also enabled it to eliminate any competition on some segments of the UK market, which was essentially very concentrated and in effect featured very low switching rates. In an effort to address the concerns advanced by the commission, LBG was compelled to create and divest a business entity with total assets of about £51 billion and £70 billion. The ring-fenced entity that was code-named ‘Verde’ was to consist of the TSB brand, Lloyds TSB (Scotland) banking license, and the bank’s branches (inclusive of all banking businesses associated with all branch employees and customers. Verde was also to include the Cheltnham and Gloucester (C&G) branches, all branch employees, all C&G saving accounts, as well as C&G mortgages that were associated with customers based in the branches. Additionally, all supplementary branches and associated branch business that numbered over 6000 had to be divested. In pursuit of a trade sale, LBG embarked on getting interested and suitable buyers at least by 30 November 2011. The divestiture was to be completed by 30 November 2013. In the event that a disposal through a trade sale had not come through by the agreed date, the government’s position was that it moves on to appoint a divestiture trustee, which would be permitted to sale off the assets at no minimum price. The government also gave LBG the go ahead to dispose of the assets through an initial public offering (IPO). The failure of LBG’s strategy is largely associated to stringent barriers to entry and expansion in U.K.'s retail banking market, a factor that led to worse outcomes for customers 2.0 Detailed Analysis of the Business Issues 2.1 Lloyds’s strategic management process The Group’s primary priority has been to put in place a new and more agile organizational framework that the implementation of its new strategy. The objective has been to create a much more flat organizational structure in which the leadership team is closer to the customer and enhanced cooperation of the Group’s businesses. In this rearrangement, the heads of Lloyds TSB, Retail Product and Marketing and Halifax community banks, now report to the Group Chief Executive. In an effort to streamline services to SMEs, the Commercial business that previously was of Wholesale has been also been realigned to report directly to the Group Chief Executive. Besides the new organizational structure, the Group has invested more resources to strengthen the functioning of its core businesses. Measures that have initiated to this effect include; expansion of the senior team, improved control, and centralization of support functions to enhance efficiency and service, and the introduction of new governance to facilitate faster and better decision making on key business components such as cost, pricing, investments and other non-core businesses. At the core of its strategic direction are the need to improve customer satisfaction, as exemplified in ardent efforts to reduce the number of complaints received and the added investment in reinvigorating Halifax as the brand leader in the industry. Measures to improve the Group’s balance sheet have entailed a reduction in both government and central bank facilities through acceleration of the Groups’ reliance on non-core assets. 2.2 Lloyds’s current strategy TSB’s business strategy is largely focused on the consumer sector, and the expansion of the business current account (BCA) business was not regarded as a strategic priority. The Group’s SME customers largely comprised sole traders at 40%, while 30% comprised business customers, clubs and charities. In retrospective, the Group’s lending market share was less than 1%. Lloyds Banking Group’s current strategy is an emergent development in consideration of the fact that it is a response to changes that have happened in recent years. The group’s strategy plans and actual business differs materially from previous plans, expectations, objectives and intentions. The main factors that prompted changes in strategy include: unexpected changes in the business and economic conditions both in the UK and internationally; market related trends and fluctuations in exchange rates; unexpected variations in stock markets and currencies; and difficulties in accessing adequate sources of financing. Other difficulties in the Group’s strategic direction are related to inadequate liquidity and funding, fluctuations in the Group’s credit ratings, difficulty in deriving cost savings, and rapidly evolving consumer behavior in spending, borrowing and saving. The bank has also been adversely affected by fast-paced technological changes that have evoked unprecedented cyber risks, failed internal and external systems and processes, changes in laws and regulations especially about taxation and accounting standards, and unfavorable government decisions concerning legislation and regulation (Jones & Farquhar, 2009) 2.3 Why stakeholder needs were not met by the strategy The TSB Banking Group plc (TSB) business is composed of assets that were divested from Lloyds Banking (LBG) during the restructuring process that followed the merger between Lloyds TSB and HBS in January 2009. Just like the rest of the banks, TSB faced significant barriers to expansion, especially concerning customer acquisition. A key challenge of the business was an inadequate modern banking platform that was purpose built. The Group launched a new interest-bearing account in 2014, which enabled it to win 9% share of the market and an additional 200,000 PCAs of stock, but this did not reflect a lasting or meaningful impact on the industry’s dynamics. Of critical concern was the increase in costs that accrued from the terms of the new arrangement with LBG, particularly due to the high investment in the shared IT platform and the subsequent reduction in temporary profitability enhancements that had been instituted following the recommendations that were advanced by the Office of Fair Trading (OFT) in 2013. These developments seriously strained the amount the business could channel in customer acquisition ventures in the future. Secondly, the PCA customers that the business had potential to acquire from other banking entities could take could only be profitable in the long-term. Subsequent to these developments, TSB accepted an offer from Banco de Sabadell to purchase all shares in TSB Banking group plc. The strategy employed by Lloyds’ of balancing acquisition and divesture was put into question following its unsuccessful attempt to acquire Midland bank in 1987(Jones & Farquhar, 2009). This marked the end of an era when the bank’s benchmark for success was its assets. The bank was compelled to redefine its strategy in responding to drastic changes in the market place and the challenges attributed to new competition from traditional and emerging entrants. The Groups’ expansion strategy was further limited by the high cost of extensive geographical distribution, subsequently compelling the company to opt for more converged international largely focused on the UK market. This was in consideration of the fact that a large physical presence aw no longer cost effective especially with improvements in telecommunications. 2.3.1 Figure 1: Lloyds Banking Group Share Price Chart Source: AJ Bell Media 2.3.2 Figure 2: Lloyds Banking Group Company financials Assets £(M) 2014 2013 2012 2011 2010 Reporting date 31 Dec 2014 31 Dec 2013 31 Dec 2012 31 Dec 2011 31 Dec 2010 Tangible assets 8,052 7,570 7,342 7,673 8,190 Intangible assets and goodwill 8,950 9,630 11,608 11,850 12,879 Investments and other non-current assets 26,986 10,097 24,814 6,268 5,521 Total non-current assets 43,988 27,297 43,764 25,791 26,590 Inventory / Work in progress 0 0 0 0 0 Trade and other receivables 510,072 522,001 551,915 610,714 648,604 Cash and Equivalents 50,492 49,915 80,298 60,722 38,115 Other current assets and asset held for resale 250,344 247,817 248,575 273,319 278,265 Total of all ASSETS 854,896 847,030 924,552 970,546 991,574 Liabilities £(M) 2014 2013 2012 2011 2010 Short term liabilities 0 0 0 0 0 Long term liabilities 0 0 0 0 0 Other liabilities / pension etc. 804,993 807,694 879,868 923,952 944,672 Total of all LIABILITIES 804,993 807,694 879,868 923,952 944,672 Net assets £(M) 2014 2013 2012 2011 2010 Net assets 49,903 39,336 44,684 46,594 46,902 Equity £(M) 2014 2013 2012 2011 2010 Share Capital 7,146 7,415 7,042 6,881 6,815 Minority Interests 1,213 347 685 674 841 Retained earnings 5,692 4,088 7,183 8,680 11,380 Share premium account 17,281 17,279 16,872 16,541 16,291 Other Equity 18,571 10,207 12,902 13,818 11,575 Total EQUITY 49,903 39,336 44,684 46,594 46,902 Cash Flow £(M) 2014 2013 2012 2011 2010 Cash from operating activities 10,353 -15,531 3,049 19,893 -2,037 Cash flow before financing 2,631 -31,140 18,281 26,825 -4,435 Increase / Decrease in Cash -1,650 -34,261 15,169 23,589 -3,390 Income £(M) 2014 2013 2012 2011 2010 Turnover 29,892 37,985 38,906 26,812 43,467 Cost of sales 0 0 0 0 0 Gross Profit 0 0 0 0 0 Operating Profit 2,514 3,156 -570 -3,542 11,686 Pre-Tax profit 1,762 415 -570 -3,542 281 Profit / Loss for the year 1,499 -802 -1,343 -2,714 -258 Source: AJ Bell Media 2.4 Reasons behind the failure of the Group’s strategy Lloyds’ strategy was very successful and distinctive especially in the 1980s and during the recession of 1989 and 1992. However, after this, these gains rapidly began to be reversed. The decline in the Groups fortunes has been attributed to inadequate accounting performance, the economic recession, ineffective changes in the line of command, emergence of better performing competitors, and unprecedented changes in accounting standards (Jones & Farquhar, 2009). The economic recession and the subsequent decline in real estate value that was witnessed in Britain in the 1990s negated prospects of shorter asset growth, a core aspect of Lloyds' business strategy. The prolonged decline in commercial and residential real estate market posed a substantial challenge, typical examples being the Canary Wharf and the increase in non-performing loans and mortgages (Heffernan, 1996). The bank's loan collateral continued to lose value especially in the small business sector, while at the same time there was a sharp decline in real estate business agency. 2.4.1.1 External Environmental Analysis Porters five forces analysis represents a framework used in analyzing the level of competition within an industry and how it influences the development of an organization’s business strategy. The forces define the attractiveness of an industry. An industry is considered unattractive if a combination of the five forces leads to a decline in profitability. As highlighted in figure 3, porter’s five forces include the threat presented by substitute products, or services, the threat of more established rivals, the threat of emerging new players in the industry, the impact of suppliers’ bargaining power, and the bargaining power of consumers (Khandekar & Sharma, 2005). Figure 3: Porter five forces The competitive framework within the banking sector is particularly unique, as rival companies can easily offer prospective customers with monetary benefits and assistance to attract them from other banks (Humphrey & Pulley, 1997). The threat of new entrants has not been very significant, apart from the mergers and acquisitions that have created larger organisations such as the Lloyd banking group. Similarly, the bargaining power of customers has had little effect on the scope of competitiveness in UK’s banking sector. The threat of substitute products is perhaps the biggest threat to an organisations competitiveness and profitability. Lloyds bank offers different types of account, which are very similar to what rivals offer. The company has indeed invested vast resources in research, development and marketing of new products to counter the threat of new products that are being rolled out by rival banks. 2.4.1.1.1 External issues In reference to the concept of PEST (Political/Legal, Economic, Socio-cultural and Technological) analysis, Lloyds' strategic direction has been greatly influenced by political and legal aspects. As it has been the case of Lloyds, the threat of intervention by the Monopolies Commission has significantly influenced its expansion strategy, as the merger resulted in a significant increase in market share, which other players in the industry regarded to be unfair domination. As noted by Alistair Darling, U.K. Chancellor of the Exchequer, a situation where there was no competition due to the monopolistic nature of the finance market was going to result in perhaps less than a half a dozen key players and that would imply a reduction in choices available to consumers. 2.4.1.2 Internal Environment Analysis 2.4.1.2.1 Issues involving employees and management Lloyds’s managers conceded that they had grossly misjudged and underestimated the length and impact of the recession on the real estate business. Other commentaries have blamed the Group’s woes on its inability to attract and retain competent people in senior management positions, and actions and omissions by the organization’s directors. A major component of Lloyds TSB’s current corporate strategy is appreciation of the diversity of its workforce. The company has now focused on creating a work environment where different socio-cultural attributes are positively regarded and valued. This is exemplified in how the company has explored employed a gender balance strategy to enhance its business performance and image. The company’s diversity programme is considered a significant component of its effort to keep its position as a leading employer. The programme is regarded to be a key element of the company’s objective of developing a first-class reputation and maximizing its market share. 2.5 Leadership style of the CEO and senior management The Lloyds Banking Group’s strategic direction largely depends on how the CEO and his top management team embrace a more devolved leadership approach. Such changes would require a comprehensive and carefully planned model of sharing power and responsibilities. If well executed, this approach would help to minimise the impact of indirect access for top managers, and enhance the benefits of a shared and collective leadership framework. A bold step from the Group’s CEO is his public acknowledgement of challenges, a factor that has exemplified his genuineness and authenticity as a leader. He conceded he takes issues a bit too personally and is often prone to micromanagement. His primary objective on coming back was to decentralise power and influence across the Group’s management structure. Several investors in the Group had reiterated their waning confidence in the CEO’s ability. The CEO has however reiterated his intention to meet shareholders and discuss his plans 2.5.1 The relationship between strategic management process and Strategic Human Resource Management Rapid changes in the environment, increased competition in product and service innovation and shifting investor and customer expectations, and forces related to globalization have made it imperative that human resource practices be accorded significant strategic importance (Khandeka & Sharma, 2005). HR departments now need to be incorporated in an organization’s overall strategy and be part of the strategic planning process. This requires that HRM functions be designed in a way that they are more consistent with the organizations goals and objectives. According to Fraser, Gup, and Kolari (1995), the drastic change in the competitive environment has compelled organizations to recognize the significance of strategic human resource management. In as much as business activities and processes have become more complex and modernized, it is critical that leaders of organizations reckon it may not easily achieve the required growth and efficiency unless there are effective HRM strategies that complement the organizations mainstream activities (Fraser, Gup, & Kolari, 1995). 2.5.2 The impact of an adverse SHRM policy on the informal group Organizations can be able to generate substantial competitive advantage if human resource management functions can be used to diagnose and complement an organization’s strategic objectives. Effective management of human resource functions can enable organizations to employ a systematic organization of specific HR measures to directly influence employee behavior in ways that results in effective implementation of competitive strategies (Winston, 1982). The consequence of failing to explore the best-fit and best practices in SHRM is likely to have a profound negative impact on the overall understanding of how it can enhance organizational performance though benefit ant increased competitive advantage. More importantly, adverse SHRM policies are likely to course a detrimental disconnect between the organizations strategic direction with its external and internal environment, ultimately compromising its economic and shareholder value. Inappropriate SHRM policies are likely to result in lack of a clear strategic direction, which may negatively affect the organization’s market share value and reduce employee commitment and motivation 2.5.3 How SHRM policy caused the failure of strategic change program After Lloyds Banking Group CEO António Horta-Osório took a break apparently to recover from exhaustion, it signalled to other corporates the importance of having in place a clear SHRM policy and leadership framework that allowed for delegation and sharing of responsibilities. This would help to minimise stress and associated incapacity to deliver on the expectations of stakeholders. After the CEO returned to work, it was a given that the organisation would witness a significant shift in management style. On his return to work, Horta-Osório who is reportedly details-obsessed immediately announced his plans to reduce the number of senior executives that reported directly to him. 2.6 Summary of the analysis and conclusions Collett and Maher (1997) point out that SHRM focuses on formulating HR strategies and plans within the broader context of organizational strategies in a way that is responsive to the organizations changing external environment. The essence of this approach is that HRM functions be interpreted and adopted to ensure the most effective fit between HR strategies and corporate strategy. The overall theme of SHRM should therefore be to forge an integration of HRM functions with broad organizational objectives and responses to the rapidly evolving external environment. 3.0 Recommendations 3.1 Needs of the informal group (stakeholders) Since 2011, the Group’s strategy has focused on supporting its customers and delivery of stronger, more stable and more sustainable returns for its shareholders. This has involved a series of rapid strategic adjustments aimed improving the company’s organizational structure and strengthening its balance sheet. The company’s strategic shift needs to refocus its franchise on a more multi-brand strategy, improvement in customer satisfaction and increased support for SMEs. 3.2 How to change/modify/create strategic capabilities Developing strategic capabilities to meet the needs and expectations of stakeholders depends on two fundamental pre-conditions. Foremost is consistency and organisation in approach. New strategic approaches need to be implemented across the organisation in a way that ensures coherence in power sharing, effective coordination and appropriate communication. Secondly, it is imperative that the organisation engages qualified and capable managers that the CEO and the top leadership can rely on and delegate to. 4.0 Bibliography Borio, C. E. V. and Filosa, R. (1994) "The Changing Borders of Banking", Monetary and Economics Dept. (WP 23), Bank for International Settlements, Basle. Bose, P. and Morgan, A. (1998) “Banking on Shareholder Value: An Interview with Sir Brian Pitman”, cKinsey Quarterly, 2, 86-95. BZW (1992) Lloyds Bank: Company Report. London: Barclays de Zoete Wedd Securities, September. Collett, N. J. and Maher, P. (1997) "A Dark Horse Merger – Lloyds TSB Case Study", Manchester Business School, mimeo. Fraser, D. R.; Gup, B. E. and Kolari, J. W. (1995) Commercial Banking: The Management of Risk. Minneapolis/St Paul: West Publishing Co. Heffernan, S. (1996) Modern Banking in Theory and Practice. Chichester: John Wiley & Sons. Humphrey, D. and Pulley, L. (1997) "Banks' Responses to Deregulation: Profits, Technology, and Efficiency", Journal of Money, Credit, and Banking, 29(1), 63-73. Jones, H. and Farquhar, J. (2009) “Putting it right: service failure and customer loyalty in UK banks”, International Journal of Bank Marketing, Vol. 25 Iss: 3, pp.161 – 172. Khandekar, A. & Sharma, A. (2005). Managing human resource capabilities for sustainable competitive advantage, Education & Training, 47 (8/9). Lloyds TSB: Case Study. The Work Foundation. January 2005. Stonham, P. (1993) "The HSBC Holdings/Midland Bank Takeover", European School of Management, Cranfield: European Case Clearing House (293-003-1). Winston, J. R. (1982) Lloyds Bank (1918-1969). Oxford: Oxford University Press. Read More