AIB Strategic Development since the 1980s Using SFA Criteria - Case Study Example

Critically evaluate AIB's strategic development since the 1980's using SFA criteria The principal objective of AIB during these years was to grow insize and profitability, while realising that this would need to be done outside of their country of origin, Ireland. The banking sector in Ireland was not big enough and there were already too many large players for AIB to hope to achieve its objectives in the national market. Logically therefore AIB turned to other foreign markets, notably the UK which presented two interesting features: a market that was an order of magnitude bigger; and a language and context compatible with AIB's development up to that point. The strategic development pursued by AIB to achieve objectives of growth displayed a number of separate components that suggest that at the beginning, there were several autonomous strategies. The significant difference of AIB's entry into the Polish market compared to its activities in the English-speaking countries of Ireland, UK and US points to this. Whereas the UK and US market entries were planned as niche-marketing strategies, the entry to the Polish market was opportunistic. It is questionable whether the diversity of the expansion that it undertook was underpinned by a real understanding of its own capabilities. In this sense, AIB's strategic management, while demonstrating flexibility, also lacked other desirable characteristics such as harmonisation, and concentration and coordination of resources (Thompson 2005) AIB's realisation that niche marketing would be a strong marketing tactic outside of Ireland is an indication of certain marketing strengths within the organisation. Coming from a generalist banking position within its country of origin, Ireland, AIB correctly avoided the trap of trying to be a generalist contender in other countries in Europe, especially as legislation at the time made it difficult for most banks to be a force outside of their own national boundaries (Johnson & Scholes 2007). AIB's niche marketing and beachhead strategy in the UK was an example of entrepreneurial marketing inspired by the understanding of focusing on one sector to differentiate their presence and to clearly position AIB in the UK (Ries & Trout 2001). Its move to replicate a successful UK model was a natural one. The US market was almost an order of magnitude bigger than even the UK market and the language was once again English. AIB had the sense to see that a further beachhead could be the Irish expatriate community and exploited this possibility successfully (Moore 2002). However, its failing once again in strategic management may have been in not recognising the fundamental differences in the US, already strongly deregulated compared to Ireland, the UK and Europe. The "halo effect" of a positive start in an specific context (serving the Irish community in the US), the unjustified assumption that speaking the same language meant playing by the same rules and omitting to take account of a substantial difference in distance and time zones may have been the factors that led to a markedly hands-off attitude by AIB Group in Dublin. Choice of strategy here was sub-optimal in terms of efficiency and communication, even if AIB managed to preserve the distinctiveness that had already served it well (Thompson 2005). The strategic management methods of AIB relating to its US operation of AllFirst seem all the more curious when compared to the way that the entry to the Polish market came about. AIB had had significant management involvement in Eastern Europe, admittedly as "position filling" initially for the World Bank, but which developed into a network of coordination and control, and possibly of management development (Harzing 2001). It was this network that was instrumental in the opportunity coming about to twin with a Polish Bank. With this management strength that was the result, AIB was in a natural position to reinforce control and beneficial exchange with its US operation. However it took the Rusnak trading scandal with AllFirst to open AIB Group's eyes to their shortcomings here. Even if they did not opt for international transfer of managers, they could still have applied the basic principles of correct delegation where as well as giving sufficient autonomy to local operations, the ultimate responsibility is with the order-giver (Peters & Waterman 2004). Notwithstanding shortcomings in management, AIB showed a constructive pragmatism during these years by adopting a general position of "local presence, local branding". The local presence was reinforced by decision-making being devolved to the UK country branches and tactical measures such as making the bank manager directly available by phone to customers. A similar approach was taken in the US, where AllFirst's success was attributed to its nimbleness in keeping up with the changing US regulation in banking. To resume these points, we can suggest that AIB got one half of its expansion strategy right and the other half, although wrong or non-existent (lack of correct control and governance) only became a real problem when a local entity, Rusnak in AllFirst, exploited this weakness. The shorter-lived venture in Singapore seems to have been put in place for a mix of historical and opportunistic reasons. Once again the language factor may have influenced AIB's decision making here, English one of the principal languages of this city-state. The cited reason for pulling out of Singapore, that of impending consolidation backed by the Singapore government (Johnson & Scholes 2007), is difficult to accept at face value. AIB and Keppel, the other holding partner, both saw their presence in Singapore as niche marketing, just as they were both, as parent companies, generalists in their home countries. Therefore AIB and Keppel were not complementary in this sense and yet both wanted to pursue the same goal. AIB may simply have mistaken Keppel as a good partner, failing to do strategic due diligence on the political and cultural aspects that might have identified competitive conflict. In general, AIB displayed greater aptitude at a tactical level during this period than at a strategic management level. Even though acceptability for shareholders was high until the AllFirst scandal and feasibility was proven somewhat in hindsight, suitability as a criterion lacked clarity and did not seem to correspond to any preliminary SWOT analysis by AIB. The added value to AIB from its expansion strategy has been variable. Results range from the positive by design in the UK and Poland, to the positive by accident from the resale of the stake in Singapore, to losses both lesser (resale of Govett) and greater (Rusnak trading fiasco). However, by building up a net positive increase in value (Johnson & Scholes 2007), AIB can claim "net value" justification for its albeit imperfect expansion strategy. It was in the execution of the strategy that AIB failed to demonstrate follow-on strategic management, being forced to rely on deep pockets to bail itself out of the AllFirst treasury trading disaster. The experience from this program of international expansion brought about changes within the AIB Group as a whole. There was relatively high top management turnover (REF J& S), coinciding with a change of managing director. AIB also stepped back from the more direct presence that it had in the US, to become more of an investor in the activities of M & T Bank that effectively bought out AllFirst. It is notable on the AIB Group Internet site that a relatively large section is devoted to a discussion of the group's corporate governance policy and in particular how it compares to corporate governance regulations defined by the US. Recommend a set of objectives and a strategic development plan for AIB (2005 - 2012) and justify recommendations. In order to understand the alternatives, before making a recommendation on objectives, we first examine the situation of AIB using the TOWS model (Threats, Opportunities, Weaknesses and Strengths) - see also matrix in Appendix A. The external threats that AIB faces after the last decades of the twentieth century are those of a hostile takeover in the wake of consolidation and liberalisation in Europe, and competition from its archrival, the Bank of Ireland. AIB has already been mooted as a takeover target for the Spanish Santander Bank, although no further information was evident to indicate whether this would be hostile or friendly. However, AIB assets, predominant position in Ireland and presence in expanding Eastern Europe could all well appeal to a larger bank identifying this as ready-to-go business strategy obviating the need to make its own (Johnson & Scholes 2007). Competition from the Bank of Ireland domestically could also threaten AIB's financial stability, as a large percentage of its profits (43% profitability) originate from its customer base in Ireland. Interruptions or limitations to revenue and profit flow here would have a consequential effect on the other business initiatives of AIB. The opportunities open to AIB lie in the areas of which are defined geographically, as opportunities are open up by the liberalisation of the banking sector in Europe, and financially by investing in other banks and financial organisations. By cross-pollination between the corporate headquarter and subsidiaries, AIB also has the opportunity to considerably strengthen its strategic management, so as to better and faster define strategy for action as the banking sector changes and replicate best practices between the different business units (Edstrm & Galbraith 1977). Internal weaknesses of AIB are still centred on its skewed understanding of management command and control and the lack of attention paid to the correct reporting procedures. By comparison, AIB has other proven strengths in business expansion and niche marketing, and currently operates from an established power base in its own national boundaries. Financially it is strong, with current 20.7% return on equity and 3 billion euros of net profit in 2006 (AIB 2008). AIB has a fundamental choice to make. Not a big enough player to do everything outside of Ireland, it will have to decide whether to bet on being a smart investor, leveraging its funds to buy into other banks and financial ventures, or continue its niche marketing approach with innovative positioning. Any hybrid version involving both dimensions would need to be restricted, possibly in geographical scope or proximity, to avoid the lack of control that preceded the AllFirst fiasco. We examine the two possibilities in the light of the criteria of sustainability, feasibility and acceptability (SFA). The sustainability criterion focuses on the TOWS analysis and the strategic logic behind each of the two choices. If AIB continues to pursue niche marketing, it is unlikely to have the managerial bandwidth to cope with determined takeover attempts made upon it. Indeed, perseverance with niche marketing may increase AIB's attractiveness as a takeover target. On the other hand, niche marketing would reduce AIB's dependence on revenue and profit from its domestic market, as well as allowing it to pursue and replicate current successes in this area. Stepping back to take on a predominantly investment role, AIB would find itself more in tune with and better able to resist takeover attempts. Indeed it might better attempt takeovers on some of its potential predators, although AIB management would still need to move up a learning curve to do this. An exclusively investment role would mean stopping its niche marketing activity which is quite embedded in its culture as a corporation. It is at this point that we can see that both possibilities have advantages and disadvantages with no clear winner. This begs the question: what if it was possible to take the positive aspects of both and suppress the shortcomings AIB could pursue a strategy of investment, strengthening its management capabilities and at the same time advise the other banks that it buys into on how to do what AIB already know so well, the innovative niche marketing. The replication of AIB success would then be done though other entities, with AIB reaping the benefits as an investor and shareholder. Turning to the feasibility of the three possibilities that we now have (investment, niche marketing or the combination referred to above), we examine these choices with respect to funding, capability and competitors. Funding of investments would be a process that builds upon itself: making good investments generates profit to make bigger and better ones. For niche marketing activities, the same idea holds good. Capabilities come over differently. For niche marketing, the capability per se is proven, but lacks necessary management skills underpinning. For investment, the capability is nascent but similar skills will need to be developed inside AIB anyway if it is to continue to determine its own future. Competitors such as the Bank of Ireland and the Royal Bank of Scotland may be less nimble, but with deeper pockets. The combination strategy allows for investment with a management differentiator to increase investment value. Acceptability is addressed in terms of risk and shareholders. For niche marketing, the risk is of the management / control component being pushed into the background, and shareholder confidence already suffered with the AllFirst scandal of five years ago. A pure investment strategy has risk because AIB is on a learning curve: it does not have the inherent knowledge to guarantee success in this domain. The combination strategy mitigates the risk of the investment strategy by injecting proven methods into the mix, avoids problems such as AllFirst on condition that AIB does due diligence on its prospective partners and investments and satisfies shareholders by buffering AllFirst type problems by AIB holding albeit large but minority stakes in different ventures. SMART objectives could then be based on: Offer and secure sale of majority stakes (over 50%) in current niche marketing ventures for sale to other banks by end of year 2008 Develop core strategic management and consulting expertise in niche marketing to be retained as consultants in at least two major projects of this type (minimum 100 million euro investment per project) by end of April 2009 Seek out and secure commitment from or sale to friendly minority stake investors (no individual stake bigger than 7%) to consolidate at least 50% of the financial structure of AIB against possible hostile takeover, by end of 2008. Question 4: Strategic Alliances, joint ventures, licensing agreements and franchising can be crucial to an organisation's success as long as they are managed effectively. Discuss, using Thorntons to illustrate your answer. Strategic Alliances, joint ventures, licensing agreements and franchising are all ways in which a company can compensate for a lack of product, service, brand awareness or distribution. They involve two or more independent entities in each case entering into an agreement. Strategic alliances and joint ventures can also bring combinations of management or production capability to bear in situations where either partner on its own would be deficient in the necessary resources. The form that the agreement takes and the optimal management required depends on which one of these options is chosen (Business Link 2008). Thorntons in the UK is an example of a company that, with differing results, has used the majority of these possibilities. We discuss the advantages and disadvantages using this company as an example, and bringing in others where appropriate. The business activities of Thorntons, a high-class manufacturer of chocolate and related products, are centred on key values for the company: high quality and customer satisfaction. While it has the product and the brand awareness, Thorntons has sought to increase retail distribution possibilities and with this in mind has engaged in different initiatives to this end. Franchising has been one of the initiatives. On the face of it, Thorntons' offering is well suited to distribution via franchisees. The high quality chocolate theme is distinctive, has broad national appeal, is a relatively easy product for franchisees to handle and does not require much in the way of initial set-up (Thorntons 2008). The franchising operation has, however, not been without its headaches for Thorntons as there have been difficulties in maintaining quality. Franchising requires strong and focused management in order to ensure that franchisees are correctly representing the franchising company and its concept. Thorntons also put in place what were strategic alliance agreements, however they too have met with mixed success. These agreements were with Sainsbury's and Asda supermarket chains for a revamped version of the Thorntons products, and with Marks and Spencer's for the Thornton branded product. The revamped version caused doubt in the consumer's mind as to whether it was the genuine article or not, and the alliance was stopped. The fundamental management problem for Thorntons in these different ventures has been transferring the brand image of the company. In the case of the franchisees, differing levels of receptivity caused variations in success (and failure). In the case of Sainsbury's and Asda, Thorntons appears to have tried to have shoehorn a high-end product into a lower-end distribution channel. As such, these operations were not of crucial importance to Thorntons, because in their absence, Thorntons still does relatively well (Thorntons 2008). There are other cases where the success of such agreements was of much greater significance to the companies concerned. In the electronics sector, Ericsson and Sony constructed a joint venture (one of the models that Thornton has not used) in order for both to survive in the mobile phone sector and to stop having to each manufacture mobile phones at increasing thinner margins. The Sony Ericsson joint venture currently enjoys success, each of the two companies having contributed equity, management and technology, and sharing in the revenues and the costs (Sony Ericsson 2008). In a joint venture, the separate joint venture company that is formed is relatively autonomous. It stands or falls by the quality of its own internal management, which may be composed of executives who transferred from on or other of the parent companies. Strategic alliances on the other hand, such as the one between Thorntons and Asda, have a much looser relationship. Their advantage with respect to a joint venture is that they are typically quicker and easier to set up, as no separate company is put in place and the two companies making the strategic alliance remain independent entities. Management requirements are different: instead of a separate command and control structure, the two (or more) partners must make the alliance work according to a contract defining the responsibilities of each one (Business Link 2008). The other type of partnership referred to, that of licensing, has not been put into practice by Thorntons. It may be the most problematical of the different types of agreement in this context. Thorntons already experienced quality issue with franchising of a product that it manufactured itself. Licensing agreements where Thornton's products were then produced under license by other companies would only have compounded this problem. It is unlikely that any management solution exists in such as case to make licensing satisfactory for licensor and licensee. There are arguably cases where failure to license its product has cost a company dearly in terms of market share and consequent revenue. Apple is an example of this in the computing sector. Refusing to follow Microsoft's example of licensing its operating system to a plethora of computer manufacturers, Apple changed its mind too late and after mixed results with Apple clones, went back to being the sole licensee of its own software and relatively small, while Microsoft went on to global dominance. Management played a major role here, as it was CEO Jobs' autocratic decision not to license Apple's software and a succession of undecided CEOs in the interim that finally curtailed Apple's licensing (BBC 2008). In management terms, strategic alliances, joint ventures, licensing and franchising all obey the same basic management criteria as any other business development. They all require clear thinking on the objective to be achieved, the resources available, the nature of the agreement to be put in place and the compatibility of the two organisations to work together. Sony and Ericsson hit it off. It is perhaps more than a coincidence that the Swedish as a nation are sometimes referred to as the "Japanese" of Scandinavia. Other joint venture case studies show that even when sound business logic supports the creation of a joint venture, differences in corporate or country culture can make success difficult even between countries as evolved as Japan and the US (Culture At Work 2008). If these ventures are not necessarily critical to a company's success in a survival sense, what management approach can at least make them score highly in added value In the cases of licensing and franchising, constructive control is key for success. While the licensees or franchisees need also to be encouraged, they are handling an extremely important asset of the licensor company, that of its image and reputation, and close attention must be paid by the licensor. For strategic alliances to bring appreciable benefit, management involvement needs to start early and be maintained in a two-way cooperative mode. Finally, for joint ventures, as an independent venture, there is a case to be made for "arms-length" relationships with both parent companies with independent governance by the joint venture of itself. References AIB Group. Retrieved April 29 2008, http://www.aibgroup.com/servlet/ContentServerpagename=AIB_Group/GHPHomepage BBC. Retrieved April 29 2008, http://news.bbc.co.uk/2/hi/in_depth/business/2000/microsoft/636824.stm Business Link. Retrieved April 29 2008, http://www.businesslink.gov.uk/bdotg/action/detailtype=RESOURCES&itemId=1075411648 Culture-at-work.com. Retrieved April 29 2008, http://www.culture-at-work.com/usjapan.html Edstrm, A. & Galbraith, J.R. 1977, Transfer of Managers as a Coordination and control Strategy in Multinational Organizations, Administrative Science Quarterly, vol. 22 (June), pp. 248-263 Harzing, A. 2001, An Analysis of the functions of international transfers of Managers in MNCs, www.harzing.com (retrieved 31st March 2008). Johnson, G. & Scholes, K. 2006, Exploring Corporate Strategy: Text and Cases, Financial Times/ Prentice Hall Moore, G. 2002, Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers, Harper Business Essentials. Peters, T.J. & Waterman, R.H. 2004, In Search of Excellence, Profile Business. Ries, A. & Trout, J. 2001, Positioning: The Battle for Your Mind, McGraw-Hill Professional Sony Ericsson Company. Retrieved 2008, http://www.sonyericsson.com/cws/corporate/home Thompson, J.L. 2005, Strategic Management: Awareness, Analysis and Change, Thomson Learning Thorntons Company. Retrieved April 29 2008, http://www.thorntons.co.uk/ThorntonsSite/pages/cm/cm.aspsCCPage=Franchise_An_Introduction Appendix A INTERNAL FACTORS EXTERNAL FACTORS TOWS Matrix for The Allied Irish Bank (AIB) Strengths Proven niche marketing model that can be replicated Strong financial base and assets Weaknesses Management too "hands off" Failure to maximise certain natural (or) advantages in multi-national experience Opportunities Liberalisation of banking sector in Europe Rapidly changing global banking market SO - Strategies Replicate niche strategy as consulting investors rather than direct players Move into more Eastern European countries WO - Strategies Bring in new or train up existing managers to manage strategically Increase inter-country management exchanges and transfers to increase best practices globally Threats Possible Hostile Takeover Competition in home market from Bank of Ireland and others ST - Strategies Encourage friendly minority stakeholders Continue investment program Involve shareholders in plan, restore / increase confidence. WT - Strategies Consolidate and extend corporate governance Leverage this to reinforce defence and react strategically to competition Read More