Economics of Business Strategy - American Express - Case Study Example

INTRODUCTION American Express has adopted substantially a comprehensive model of motivation and has applied it within all administrative levels. The efforts applied by the management and the employees depends upon the magnitude of the reward, with addition of the perceived energy that an employee believes is fundamental for making the chances of receiving the incentive brighter. The company regards performance the major criterion for towards intrinsic and extrinsic rewards. However the management tasks have not just been restricted towards employees, rather much focused has been laid on adopting such policies and applying such management expertise particular the risk management for improving the overall financial results of the company. The managerial practices of the company are more products oriented so as to facilitate the customers, and provide them with different opportunities for making most out of their purchasing power. The company has also restricted itself from applying such policies where chances of bankruptcy are dominant, and have shifted towards consumer service. The management in particular operational management related to the decision making is widely practiced and encouraged by the company, the employees at the mediocre level, are involved with decision making, however such employees work within certain monetary limit. All this has made the company achieve laurels, 'We continued to strike what we believe is an appropriate balance between achieving our net income growth targets and investing in our future. In 2004, we delivered record earnings while increasing spending on marketing, promotion, rewards and card member services by 30 percent from a year ago. This increase came on top of a stepped-up level of investment spending in 2003' (Audit Repot 2004). MANAGEMENT STRATEGIES OF AMERICAN EXPRESS American Express has incorporated different management strategies for optimization of their performance, and economic gain. The bank has implemented several different policies that minimized and reduced the indirect cost (goods and services other than raw materials, or "direct" expenses). The company's adopted policy has been to reduced and control expenses, such as office supplies, computer equipment, express delivery, and telecommunications. 'Our new survey and drafted policies shows that we as banking giant see the light at the end of the tunnel for an economic turnaround' (Anr Williams, senior vice president and general manager, U.S. Middle Market, American Express Corporate Services). The general manager further added that, 'At the same time, financial executives say that bank is challenged by rising expenses, and they're searching for new ways to control them - regardless of the economic climate'. The bank is involved in Expenses Management, and focused mainly upon corporate cost-saving strategies. The company believed that cutting indirect costs and generating new revenue sources were equally important strategies in improving the financial health of their organization. The bank has encouraged and motivated their employees to participate enthusiastically towards compliance to those policies, the employees are urged to submit timely expense reports, desired employee adherence. 'Over the past several years, the institution have made strides in taking control of spending for travel, office supplies, computer equipment and other indirect expenses', (Anr Williams). 'But the push for profitability in these tough economic times has prodded the institution to expand their cost-control expertise and implement more effective solutions - such as new technology and innovative payment systems'. The web technology has emerged as an effective solution to cater for the surging expenses, the technology provided improved control and greater efficiency, and is being adopted by all the departments of the institution. The institution has adopted following practices for improving expenses management, and variety of strategies have been implied for streamlining the processes. The effective strategies are listed below, 1. The bank has adopted certain policies with reference to the needs and requirement of the employees, and those spending policies have been followed strictly. 2. The expenses of the institution have been centralized, and the management has to report all the current and expected expenses to the central manager. Such policies have been issued and strong compliance with policies and processes are desired. 3. The Web based technology has been introduced and implemented to improve expense report filing and data access. 4. The institution has introduced the practice of corporate cards to meet the indirect expenses, including travel and entertainment spending. 5. The company has leveraged their spending through corporate system. The main objective of the company's management program include, Policy and Shift Management The senior management is involved in the endorsement and development of travel policy that is well communicated to the customers. Preferred Supplier Programs The Corporate Expenses Management supported their company's prevalent supplier programs; the support has been offered towards consolidating volume under a meetings expenses management program or enhances the preferred and common supplier programs with interaction of service providers. Compliance Management The company has influenced the employee's purchasing behavior by actively managing the customer's compliance to the policy and preferred supplier programs. Payment Platform The company has understood the need of identifying and consolidating the meetings expenses, and has therefore standardized the payment platform. The goal of the policy has been the introduction of new controls, leveraging expenses related to vendor negotiations, and controlling the compliance and adherence with the policy and preferred supplier programs. Data Consolidation The collection of data is significant, data is important for enforcing well managed program which can be gathered through card product, corporate software or through meetings management technology applications. The company has concentrated on collecting the data related to: final spend, savings, budgeting, preferred supplier usage, compliance and benchmarking data. Bench Marking It enables the corporation to remain competitive, and allowed the meeting management program managers to evaluate and convey the program results. Technology The technology enabled and supported the company's overall goal. It played important role for improving the process efficiencies, preferred supplier controls, tracking spend data, reducing costs, and conditioning the servicing of meetings and events. 'Once corporate demand for meetings is centralized and total data on spend is compiled, a corporation will be in a much stronger position to track purchasing, leverage its volume and negotiate with suppliers in both its meetings and transient travel programs', (Roseman). The American Express has implemented core strategies for laying the foundation of best in class meeting expense management program. The strategies have been implemented to reduce company's direct expenses towards meeting arena, and to control the meeting spending, while adhering to the management policies. "Corporate meetings are the next frontier for cost-savings in travel management," said Jay Roseman, Vice President of American Express, 'Corporations can achieve significant bottom-line savings through a strategic approach to managing their meetings spending. By systematically examining their meetings spend and implementing a disciplined approach to managing this category, as we've mapped out in our strategy, companies can create programs that will lead to reduced costs, greater control over spending and a high degree of compliance with corporate policies'. American Express has assessed the meeting processes, and has evaluated a strategic roadmap for supporting the program goals, and assisted the implementation of policies and procedures, and achieved results through saving summaries and core performance indicators. The company policy states, 'strategic approach to corporate meetings management helps clients achieve savings, process enhancements and greater oversight of meetings spend'. The administration of American Express Company has adopted the role for preparing and transparent presentation of its Consolidated Financial Statements, the statements are prepared in conformity with the principles of accounting that are acceptable internationally, the statements include the amounts on the basis of the best judgment with reference to management. The company's management company's management also determines the accuracy and consistency of related financial information drafted and proposed. The company has maintained a system of internal control over financial reporting and surveying for providing reasonable certainties and assurances with respect to authenticity and reliability. 'The concept of reasonable assurance is based on the notion that the cost of the internal control system should not exceed the benefits derived' (American Express Financial Report). All this is applied in recognition of the company's responsibility towards the integrity and objectivity of the data in financial record. The Internal Control System is based on the ethical standing and encompasses, 1. An organizational structure with well stated lines of responsibility, policies and procedures. 2. Code of Conduct. 3. Reasonable and careful selection of employees, and their periodic evaluation and training. The auditors are assigned with the responsibility of monitoring and assessment of the effectiveness of the internal control system. The findings are then conveyed to the management and the Board of Directors annually. The external auditors are involved in the task 'to express an opinion on the year-end financial statements and, with the coordinated support of the internal auditors, review the financial records and related data and test the internal control system over financial reporting'. The Audit Committee of the Board of Directors are completely engaged with the internal auditors, management and independent auditors to review the task and evaluate the company's financial controls and audit and reporting practices. ANALYSIS OF STRATEGIES The American Express adopts highly organized structure of Board approved policies for managing the consumer credit risk. The board approved policies is based on all aspects regarding credit extension, comprising approvals, authorizations, line management and prevention of fraud. The policies of the organization guarantees consistent adoption of credit management principles and asset quality's standardized report. The policy also ensures loss recognition metrics across domestic and international portfolios. The bank has introduced sophisticated proprietary scoring and decision making models for supporting credit risk management. The bank has developed certain committee that leads the company's overall risk management activities, by evaluating and monitoring the corporate-wide risk. The committee works on the formation of enterprise-wide risk management policies and practices. Regular Risk management occurs at business level, where the processes and infrastructure related to the evaluation of the risk are integrated and merged with the business goals. The independent risk management leaders in collaboration with business unit managers work as a team for making decisions with reference to the assumption of risks that are within established limits and confined to an individual business unit. The company has evolved a process for providing increased scrutiny through risk management governance structure, this requires higher level of consent for exposures, much ahead of defined risk thresholds, or that may influence the performance of different business units. American Express has employed different financial tools for managing the company's exposure to the fluctuations in the interests and foreign rates. The Derivative Instruments focuses on foreign exchange spot and forward contracts, foreign currency options, interest rate swaps, futures and forward rate agreements. The Derivative Instruments are applied for managing the particular interest rate and foreign exchange exposures related to deposits, long-term debt, equity, loans and securities holdings. 'At December 31, 2004, interest rate products with notional amounts totaling approximately $11.6 billion for trading and non-trading purposes were outstanding. Notional amounts outstanding at December 31, 2004 for foreign currency products were approximately $28.2 billion for trading and non-trading purposes. Additionally, equity products with notional amounts of $582 million were outstanding at December 31, 2004' (American Express Communal Annual Report). The bank conducted the regular audit operations in conformity with the standards of the Public Company Accounting Oversight Board (United States). According to the standards it is obligatory upon the bank to obtain sufficient assurance regarding the nature of effective internal control over the financial reporting in all respects. According to the company's Annual Report for 2004, 'We believe that our audit provides a reasonable basis for our opinion. The Company's reserves for losses relating to card member receivables represent management's estimate of the amount necessary to absorb losses inherent in the Company's outstanding portfolio of receivables. Management's evaluation process requires certain estimates and judgments. Reserves for these losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management's judgment regarding overall adequacy'. The company has introduced analytical model which caters for several factors including write-off rates for various stages of receivable aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period and average bankruptcy and recovery rates. For the adjustment of the calculated (through analytic model) reserves, the management take into account the level of coverage of previous due accounts, and other economic indicators like unemployment rate, consumer confidence index, purchasing manager's index, bankruptcy filings and the regulatory environment. If the amount is termed uncollectible from the customer, the card member's receivable balances are write-off. The bank has also write-off bankruptcy and deceased accounts. According to the Communal Report, 'To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, loss experience could differ significantly, resulting in either higher or lower future provisions for losses, as applicable'. The bank in case of hedge transaction, has formally documented risk management objectives and strategies. At inception, the bank evaluates 'whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items' (Communal Report), and in case if the derivative is incomparable with the hedge, the bank intends to discontinue the practice of hedge accounting. The company views Risk Management as an area of fundamental significance. The application of risk management policies resulted in the outstanding performance of American Express' business card. The bank strengthened their investment portfolio, and reduced the high yield investment, the company shifted from corporate lending to consumer activities. The bank has made significant progress, and has applied different efforts to enhance the business activities and strengthened the company's position towards long term success. The company has applied efforts in following domains, 1. 'growing the advisor force and improving the economics of its distribution network 2. broadening its asset management reach internationally through the Thread needle 3. acquisition and the creation of a global fund of hedge funds platform 4. significantly enhancing its investment management leadership, talent and infrastructure 5. strengthening its balance sheet and lowering its risk profile by reducing high-yield bond holdings in its owned investment portfolio 6. accelerating new product development in asset management, insurance, annuity, brokerage and financial planning and advice services'. (Communal Report) The company has emphasized on the following core values for raising its share holding values. 1. 'Driving growth, whether organically, through related business opportunities or through joint ventures and acquisitions; 2. Delivering returns well above the Company's cost of capital; and 3. Maintaining stability in results through forward planning, flexible expense management and risk management, controls and compliance' (Audit Report). The company has to necessarily undertake risk management for driving profitable growth. The Company has established transparent limits with reference to risk management, enhancing investment and decision making and adapting to unacceptable risks. The risk management plays vital role in the company's formulation of efforts and strategies for creating shareholder value. The company views following as core sources of risk, 1. Credit Risk, 2. Market Risk, and 3. Operational Risk. The listed risk factors are inter-related and experienced by the company's business units irrespective of geographical domains. On the basis of the listed risks, the company intends to introduce the centralized management system at enterprise level. The management has already adopted strict principles with reference to credit; market and operation risk for shaping the company's business strategy and secure the objectives related to the shareholder value. According to the company's top management the profitable growth can be achieved by underwriting credit risk. The established parameters can be incorporated for managing the market risk. However, keeping the company's business activities within the acceptable limits caters for the operational risk. REFERENCES 1. American Express Communal Report 2004. 2. Sutton, Dave Sutton, Tom Klein - Business & Economics., Enterprise Marketing Management: The New Science of Marketing 3. 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