What Can We Learn from Failing and Failed Strategies - Coursework Example

What can we learn from failing and failed strategies? Understandably, we would want to learn about and from successful business ventures. However, as learning entails being exposed and getting knowledge also from “what is not,” the stories of and about failing or failed industry strategies are similarly indispensable. For reasons of semantics, at the outset, we make clear our terminologies. First, the words “failing” and “failed” do not have special meaning. They simply need to be grasped as antonym of the word “success”. Second, strategy is defined differently though complimentarily. For purpose of facility of our discussion, we at our inception adopt a conventional and general definition of the term. Strategy is a “direction and scope of an organization over the long term, which achieves advantage for the organization through its configuration of resources within a challenging environment to meet the needs of markets and to fulfill the stakeholders’ expectations” (Johnson, Scholes, & Whittington, 2008, pp. 3). To limit our deliberation, let us posit that in this paper the word “strategy” is particularly referring to corporate strategy. This is so because the word “corporate” is embracing all the levels and kinds of business strategies and is actually the most general level of strategies in any organization. Likewise, it is deemed useful to note in here that other nomenclatures may be used in this paper – such as strategic management, business policy, and organizational strategy – and still refer to (corporate) strategy. In this paper, too, we shall dwell on two banking institutions that have either failed or is at present showing signs of failing. These are the Lehman Brothers, which used to be the fourth largest US investment bank until its September 15, 2008 filing of bankruptcy, and Bank of America, which after its acquisition of Merrill Lynch was perceived as the strongest, in addition to its being the largest, bank in the US, but in 2009 was recipient of the largest amount for bail out by the US federal government. These two banks, then, are to be compared with Hong Kong Shanghai Banking Corporation (HSBC) – a bank that has been almost unscathed from the problem of sub-prime mortgages. These three banks were all major players in the US sub-prime mêlée. However, their eventual fates were diverse. Finally, we shall try to cocoon our discussion with what a strategy-as-competition-perspective has to offer, leading us to learn from the strategies of the three banks that we consider. Lehman Brothers Holdings, Inc. (Lehman, for brevity) used to be the fourth largest investment bank in the US and a major name in dealership of fixed-interest trading in the Wall Street. Its century-and-a-half of experience of investing banking was rendered ineffectual by its heavy investment in securities linked to the US sub-prime mortgage market. Its trouble pertinent to sub-prime initially became apparent in August 2007 when it closed BNC mortgage, Lehman’s sub-prime lender, citing that poor market conditions (in mortgaging) “necessitated a substantial reduction in its resources and capacity in the sub-prime space” (Kulikowski, 2008). In the same quarter of 2007, Lehman revealed that it would write down as much as $700 million as part of its adjustment of its values in investment in residential mortgages and commercial property (BBC News). In 2008, that Lehman was having unprecedented losses to the continuing sub-prime mortgage crisis was very obvious, accounted for by the bank’s holding on – with unclear reason -- to large positions in sub-prime and other low-rated mortgage tranches when securitizing the underlying mortgage. The results were staggering: $2.8 billion losses in the second fiscal quarter of 2008 and selling off of $6 billion worth of assets; Lehman lost – in the first half of 2008 alone – 73% of its share price (Anderson & Dash, 2008); in August 2008, the reported loss of Lehman was $7.8 billion – its biggest net loss in its history – topped by $54 billion exposure to hard-to-value mortgage-backed securities (BBC News); its shares nosedived 45% to $7.79 specifically on 9 September 2008 (AFP, 2008); and on 15 September, 2008, Lehman folded up, representing the largest bankruptcy in the US history (Mamudi, 2008). Since our concern in this paper is corporate strategy, and since corporate strategy is inclusive of organizational culture, we have to note in here that just before the collapse of the Lehman, executives at Neuberger Berman sent e-mail memos suggesting that, among other things, the top people of the bank forgo multi-million dollar bonuses as a gesture of embracing accountability for their recent performance. However, the proposal was straightforwardly dismissed by the top management. Bank of America (BofA), on the other, is the largest financial services in the world (after acquiring Merrill Lynch) (BBC News) and one of the largest bank by market capitalization (Charlotte Business Journal). And, yet, in 2008, the BofA is one – and the top – beneficiary of government subsidy in the total amount of $20 billion aid and $118 worth of guarantees against bad assets – that is, residential and commercial mortgage investments, derivatives and corporate debt (BBC News). These funding from the federal government is expected to absorb the losses of the bank. Banking authorities are unanimous in their idea of what precisely went wrong (BBC News). Putting the blame on BofA’s underestimation of the levels of debt that it was taking on as a result of (its) deal (with Merrill Lynch), Cassandra Toroian of Bell Rock Capital said, “They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal.” Peter Hahn of the Cass Business School reportedly thought aloud, “It’s a question for (BofA’s) management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence.” Gary Townsend of Hill-Townsend Capital added his stake, “It comes down to the cost of acquisition and the risks associated with the deal.” HSBC Holding plc is a public limited company and, in 2008, was adjudged both as the world’s largest banking group and the world’s largest company according to the composite measure of the Forbes magazine (Forbes, 2008; HSBC, 2008). With its expansion into the US in 2002, HSBC acquired Household Finance Corporation (HFC), a US credit card issuer and subprime lender (Scent, 2009, Plunge Probe). Perceived as the HSBC’s killer move, the acquisition – which, in effect, began the role that HSBC has had in the sub-prime crisis drama – it was noted that banking historians would conclude that it was the deal of the first decade of the 21st century (The Banker, 2003). But, eventually, it was proven that that specific business strategy of HSBC was not a dream deal after all. In fact, in March, 2009, HSBC shut down its finance arm in the US after the HSBC management admitted that their takeover of the HFC was “an absolute disaster” (Menon, 2009, HSBC Rues Household Deal, Halts US Subprime Lending). Nonetheless, HSBC has been successful so far in weathering the storm of the subprime compared to other banks – particularly, in this paper, Lehman Brothers and the Bank of America. To Bloomberg’s estimation (cf. Menon, 2009, HSBC to Raise $17.7 Billion as Sub-Prime Cuts Profit), in terms of liquidity and profitability, “HSBC is (still) one of world’s strongest banks by some measures”. HSBC has likewise bolstered its Tier 1 capital – a measure of bank’s financial strength – when it was very quick to comply in October 2008 with the UK government requirement about banks’ recapitalization program by transferring around £750 million to London within hours and announcing that it was open to lend more or less £4 billion to other UK banks (see Seib, 2008). Besides, in March 2009, HSBC made public its $5.73 billion profit in 2008 and that a “war chest” in the amount of £12.5 billion rights issue was just within reach so that it could acquire other banks that were struggling to survive (Scent, 2009, HSBC Seeking to Build ‘War Chest’). Having provided the aforementioned notes on the three banks that we consider in this paper, we now proceed to use a theoretical framework as we make sense of the obvious lessons that these past and present banking institutions are ready to afford us. To help us accomplish our task, we are embracing the metaphor of strategic management as competition. And we consider Mintzberg (1994, pp. 29) and his description of strategy as “a pattern of actions over time”. Accordingly, as a pattern (of actions over time), strategy “is a consistency of behavior over time. (That is,) a company that perpetually markets the most expensive products in its industry pursues what is commonly known as a high-end strategy, just as a person who always accepts the most challenging of jobs may be described as pursuing a high-risk strategy” (Mintzberg, Ahlstrand & Lampel, 1998, pp. 9). Mintzberg does more than mean that strategy is the way things are done; that is, it is not strictly speaking related or pertaining to organizational culture. For while to many a strategy is a plan, it is to Mintzberg a pattern that blends intended responses with responses that emerge out of the changing environment. As such, strategy as pattern of behavior is synonymous to a ploy insofar as “a ploy is an attempt to gain a competitive advantage by means of taking some identifiable (pattern of) action” (Edwards, 2008). With this understanding of strategy, strategic management is a process of analysis. Basically a style that is characteristic of the military and industrial organizations, strategic management is considering the business organization within its total context (or its industry) and its concern is to determine how the organization can improve its positioning within that context or industry. Rightfully, organizational strategy – as understood from this prism – is engrossed with hard economic facts and is number-oriented (see discussions on the ten schools of [strategic management] thoughts in Mintzberg, Ahlstrand and Lampel). Given our metaphor, we can more easily understand a strategic lapse that seemed to be constant in the three banks that we’ve considered. Because it is said that the principal delimitation of strategy as analytical process is the difficulty of predicting rightly, we realize that it is indeed the unpredictable condition of the market environment that must have caused the demise of the Lehman, the faltering of the BofA and the initial losses of the HSBC. And, understandably, the three banks had their shares of “missteps”. Some decades ago, these banks were making money out of their practice of sub-prime mortgage until the whole crisis began. According to Greenspan (2008), the global intermediation started to break in 2007 after the disclosure was made about the financial institutions holding the toxic securitized American subprime mortgages that shocked the market participants. While banks struggled to respond to the situation, all their efforts fell short as symbolized by Lehman collapsed in September 2008. Fearing for their own solvency (read: survival), banks ceased lending – which caused the virtual standstill of almost all credit-financed economic activity. In the prior decades, holders of the liabilities of banks in the US were secure with the protection of a modest equity-capital cushion. This made the banks very free to lend. In the summer of 2006, for instance, the average book capital for banks was at measly ten basis points. And it was enough, nay, even exceeding the requirements of the highest regulatory capital standards in the US. Because at present investors were fearful of the economic realities in the US, they are understandably requiring a far larger capital cushion for (unsecured) lending to any financial intermediary. And this fear of the investors translated into movements in the LIBOR/OIS (Overnight Index Swap), which measures the market perceptions of potential bank insolvency and, hence, of extra capital needs. These movements referred to the rise from a long-standing ten basis points (as mentioned earlier) to around ninety points by the autumn of the same year. And, after the news regarding the Lehman Brothers, it riveted to three hundred sixty-four (364) basis points on 10 October, 2008. Definitely, the three banks were mistaken in their initial steps. Lehman’s ploy proved to be extremely disastrous; BofA’s misstep consisted of acquiring Merrill Lynch; and that of HSBC was carefully corrected by closing down its financing arm in the US. Part of the market condition that we have to consider is the intervention by the government (see BBC News) – that, accordingly, is part of the often-neglected factors of social, political and cultural dimensions of environment as strategy as analytical process is, as said in the preceding, is figure-centered. In the US, the federal government extended favorable terms – that is, extending a $30 billion loan – to JP Morgan Chase to acquire Bear Stearns. Too, the US federal government nationalized Fannie Mae and Freddie Mac to guarantee about $5.3 trillion of mortgages. But when it comes to Lehman, the US decided for a shock therapy and took the decision to let Lehman falter. Accordingly, the rationale for this was long-term; that is, if all the banks are bailed out, they will be enticed unceasingly to take more and more risks. Instead, the federal government opted to support the financial system in other ways, such as announcing measures to ease access to emergency credit for struggling financial companies and broadening the range of collateral that financial institutions can put up to obtain central bank loans – which, obviously, the latter being clearly advantageous to the banking system. Having discussed the external environment within which the three banks operated, we have to shift our attention to the internal environment. And what makes sense along this line is the apparent overestimation of BofA’s own resource competence. Undoubtedly, BofA is very big – and, thus, it can really acquire other faltering banks. However, should we believe the experts in the field, its need for US federal government’s subsidy is a direct result of its acquisition of the Merrill Lynch. That means, that it acquired Merrill Lynch and that it is in need of government – or taxpayers’ – money are not mere coincidence. It really means bad management strategy. Of which HSBC was likewise guilty. And HSBC’s management was upfront in recognizing their mistake, and taking acts to repair. As a final note, there are still a couple of items that are interesting to raise here. First, the ploy that these three banks engaged themselves into – the practice of extending high interest loans to borrowers with credit score that is below 620 – is essentially and ethically questionable. While subprime can always be defended as a legitimate and even socially – and economically? – viable option of bringing within reach of all members of society a funding font, it is and will always be without dispute an extremely high risk venture. And high risk ventures are bringing in high percentage of returns. High returns are good for the banking entities, but with high probability of foreclosures and the rampant predatory practices (Bankrate.com, 2003) that are endemic in subprime it is clearly disadvantageous to the clients. While the preceding point is debatable, we put forward here that business people’s pattern of behavior must be peppered by elements of ethics. Finally, a behavior of banking people that further effectively eroded the confidence of people as indicated by public opinion is so essential to be forgotten. 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