The Effects of Macro and Micro Environmental Forces on Lloyds Banking Group - Case Study Example

The effects of macro and micro environmental forces on Lloyd’s Banking Group BY YOU YOUR SCHOOL INFO HERE HERE Introduction Lloyd’s Banking Group Plc is a British financial business that was created through an acquisition of HBOS in the year 2009. Lloyd’s has a long history of operations in the United Kingdom that started in the year 1765 and, today, the business has diversified to include mortgage lending, life insurance provision, pensions, general retail banking, commercial banking and credit cards. The institution operates in a financial services industry with considerable competition and an industry that provides 11.6 percent of all government tax receipts (PWC 2012). Lloyd’s Banking Group boasted revenues of £23.5 billion in 2012 (Lloyds 2012). In an effort to end the 2008-2010 recession, the UK government was concerned that Lloyd’s, one of the largest banks in the country, was about to collapse. As a result, the UK government injected billions of Pounds of capital into the bank to prevent its bankruptcy in exchange for a substantial equity stake in the institution (Simpson 2009). As a result, by 2014, Her Majesty’s Treasury (the Exchequer) was a 24.9 percent shareholder of the institution, after selling £6.9 billion worth of shares, or 7.8 percent of its total equity stake (Live Mint 2014). Not all in UK society approved of these measures and for such a significant taxpayer-funded holding of a major retail and commercial banking facility. Even though the institution is now more financially-stable, the problem, today, is that Lloyd’s Banking Group has been the target of negative media publicity that has eroded its marketed brand reputation in UK society. The institution has been condemned for allegations and evidence of money laundering, tax evasion, and rising volumes of consumer complaints received by the Financial Ombudsman. In a UK environment where consumers and corporate investors are closely watching the ethical business behaviours of UK firms, brand erosion at the macro-level and micro-level is a massive concern for a business reliant on funds and investment from UK customers. This assignment explores the macro and micro concerns facing the financial institution with an emphasis on the marketing implications for Lloyd’s and provides a recommended strategy for the institution to respond to these conditions and flourish. An exploration of the micro and macro environment Michael Porter, a world-renowned business strategist and theorist, identified five micro-environment forces that pose threats to a business. These include competitive rivalry intensity, buyer power, supplier power, threat of new market entrants and threat of substitutes (Porter 1987). For Lloyd’s Banking Group, buyer power and competitive rivalry are the most significant issues that impact the institution. It was proven that Lloyd’s Banking Group was guilty of money laundering when the bank determined it could skirt U.S.-based laws which strictly banned UK banks from conducting financial transactions with Iran. The company conducted wire transfers with Iranian government whilst deliberately removing key information about these transactions in an effort to conceal the originator of the capital. As a result, to avoid litigation, Lloyd’s agreed to a settlement with the U.S. government for $350 million (Mollenkamp 2010). Additionally, in December 2014, Lloyd’s was determined to have the highest risk, as determined by the European Banking Authority, of illiquidity which was determined by stress tests under review by the Bank of England (Digital Look 2014). The company continues to face well-publicised scandals, with receipt of a recent fine of £28 million for having a sales culture that exerts considerable sales pressure on commercial and consumer customers, which was issued by the Financial Conduct Authority (Salmon 2014). Even worse, the institution is adopting a new savings account simplification strategy which is designed to consolidate available account options to consumers. However, this is being criticised in the media as being a ruse to cut a higher savings interest rate and cut out old savings accounts that are currently being given a higher interest rate (Boyce 2014). Additionally, with the probability that Lloyd’s will fail its stress tests, it is now predicted that Lloyd’s will be unable to provide shareholders with a dividend in 2014 (Scuffham 2014). Not only would this mark six years of consecutive fiscal years without a dividend for investor, but this falls on the heels of Lloyd’s publicising early in 2014 that it would finally be providing dividends by 2014 as a result of superior financial performance. The significant volume of scandals and controversy facing the bank speaks testament to why buyer power is a considerable threat to the institution. The financial services industry is highly saturated with competitive forces. The company competes with major UK banks such as HBC, Barclay’s, The Royal Bank of Scotland, JP Morgan Chase, Credit Suisse, and a plethora of smaller lending and investment firms offering loans, savings, credit cards and investment services to consumers and commercial customers. Therefore, the switching costs to consumers are significantly low to select a competing institution to service their financial needs. Switching costs are the negative costs that are encountered by customers when changing brands (Farrell and Klemperer 2007). Customers of Lloyd’s, recognising liquidity weaknesses, high risk, and scandals with Lloyd’s are defecting to other businesses with a better risk track record and providing superior returns for investors and depositors. In 2013, Lloyd’s Banking Group lost 103,000 customers to competition and banks with superior brand reputations (Christie 2014). Today, Lloyd’s maintains the highest lost customer ratio as compared to 16 different banks providing services to the UK, representing a tremendous competitive disadvantage for this financial institution that is unparalleled in the banking sector. In the UK market, buyers have the ability to place pressures on banks and other financial institutions to provide superior rates of interest returns, provide higher quality services, or provide other differential advantages if these firms want customers’ business and loyalty. Many other banks are responding to Lloyd’s weaknesses, such as TSB that is offering the highest savings rate to customers under its innovative Classic Plus Account that provides a five percent interest rate to savings customers (Christie 2014). Lloyd’s still pays only four percent interest on savings accounts and mandates that consumers pay a whopping £1500 a month simply to get this much lower rate (Christie). Competitive rivalry is substantial as a threat to Lloyd’s with banks responding to more incentivised account set-up and guarantees that are favourable to the current economic status of UK consumers. Lloyd’s appear to be dismissing the defection rates of its existing customer base and continues to maintain its existing service ideologies that are gaining considerable disfavour with multiple consumer demographics. The firm’s competition, Halifax, is offering customers a £100 thank you gratuity for opening an account at this bank and Santander is giving consumers a three percent cash-back guarantee when using the institution to pay their household bills (Money Super Market 2014). These are just a handful of relevant examples of how competition is responding to Lloyd’s oversight in providing more valuable services and products to consumers and commercial customers whilst Lloyd’s remains rather stringent in maintaining an existing business model that is not deemed valuable to consumers. Competing financial institutions recognise the significant buyer power of multiple UK markets and respond accordingly to gain interest and build incentives to defect from Lloyd’s Banking Group. Stagnation of services is not a critical success factor in the financial services industry and competition is being more proactive and innovative in providing new incentives for potential customers to reject Lloyd’s in favour of their own, unique service offerings. A SWOT Analysis of Lloyd’s Banking Group Before a business can determine a new competitive strategy, it must consider its strengths and weaknesses (at the internal level) and recognise potential opportunities and threats that could impact the future strategic position of the firm. Table 1 conducts a SWOT Analysis of this struggling financial institution. Table 1: SWOT Analysis of Lloyd’s Strengths Very strong brand recognition in the UK built on over 200 years of operations in the country. Very strong asset portfolio exceeding £847 billion. Rewards for excellence and performance in the mortgage loan industry. A cost reduction strategy enacted by executive leadership through 2017 that includes closing branches in favour of mobile banking opportunities and cutting labour expenditures to open capital availability. Executive-level competency in divesting non-performing businesses that improves cost management. An A1 (favourable) credit rating by Moody’s. Weaknesses A stock value of less than £5 and a neutral outlook in the capital markets for improvement of this value. Minimal international diversity which makes the institution over-exposed to the domestic UK economy. Rising consumer complaints Considerable negative publicity for a variety of scandals and controversies. A total of £46.3 billion in impaired loans leading to a weakening of total assets quality. Problems with earnings visibility impacting shareholder confidence. Opportunities The ability to create innovative services and ROI for commercial customers and UK consumers. Acquisitions to improve asset volume Closure of domestic branches to facilitate a competent mobile transaction model as a means of cost management. Repurchase of stock shares outstanding to improve stock value for shareholders. International diversification to minimise risk exposure. Threats Growing buyer power Intensive competitive rivalry with competition regularly adjusting service concepts and ideologies to gain consumer loyalty. Uncertainty in the UK economy about GDP growth and consumer disposable income levels. More corporations moving their accounts and investments to overseas banks. Mortgage and credit card loan defaults at the consumer level. Greater government regulatory powers and oversight of banking operations which force institutions to reserve more capital to ensure liquidity and minimal risk to shareholders and other stakeholders. As shown by the SWOT Analysis, there are substantial threats and weaknesses to the institution. More government influence and regulatory authorities as a result of recessionary austerity packages and transfer of authorities to monitor banking institutions pose substantial macro-level threats to how Lloyd’s governs its operations and strategy developments. Furthermore, in an uncertain economic environment that is just now beginning to show signs of recovery from the recession, consumers are not yet experiencing economic liberation which impacts their savings volumes that impacts deposit-based capital growth for Lloyd’s. Can the superior strengths of this business model serve to offset these tremendous risks and weaknesses in an environment where the brand reputation of the firm has been significantly eroded? Formulating a responsive strategy Marketing-related brand reputation problems are the most significant strategic issue facing the firm which is causing the business to lose its commercial customers and UK consumers faster than any other bank. Damage control is required to rebuild social conviction and trust in the bank in an environment where tremendous negative publicity is plaguing the institution. One company in the UK, the fashion retailer Abercrombie & Fitch, was the subject of similar-level negative media publicity regarding its alleged unethical and immoral business activities. As a result, a once high-performing brand with years of revenue growth found itself embroiled in a situation where its stock value fell 60 percent (virtually overnight) and the company was forced to close hundreds of stores overseas (Huffington Post 2012). In many respects, the intensity and pervasiveness of negative publicity mirrors this situation. Lloyd’s needs to recapture its positive brand reputation in order to attract consumers and potential commercial customers. There is a growing trend in what is referred to as ethical consumption, whereby customers of a business are more willing to buy products and services from businesses that illustrate a strong set of ethical ideologies and moral corporate behaviour. A recent study by Oh and Yoon (2014) surveyed customers and found that the majority of participants were more attracted to companies with an altruistic philosophy. Globe Scan (2009) asserts that ethical consumers are even punishing firms that are perceived as being unethical and rewarding companies with high moral standards. It is recommended, therefore, that Lloyd’s develop a radical new public relations campaign that focuses on promoting the ethical beliefs and values of the firm in order to rebuild its highly-tarnished reputation. Lloyd’s can benchmark the successes of the UK supermarket chain, Sainsbury’s, that developed a longitudinal strategy for ethics and general corporate social responsibility that included development of steering groups that reported directly to executive managers and the Board of Directors toward improving the ethics-based identity of the company. These groups included Climate Change, Community, and Human Resource steering groups (Sainsbury’s 2012). Activities toward improving the ethical climate of the business were regularly reported in industry reports, media sources, and public relations communications to illustrate to consumers that the firm maintains the utmost virtue and integrity; which has given the firm greater market share and consumer interest. This should be the first step in repairing the brand. Supplementing a new ethics-based public relations campaign should be innovation of service concepts to better satisfy the consumer segment in the UK. In an uncertain economic environment, consumers are becoming more price and value sensitive when selecting financial institutions to manage their deposits and other banking transactions. Lloyd’s maintains a high asset value and the capital resources needed to provide consumers with more viable and valuable deposit rates and competitive loan rates. It has been proven that such competition as Halifax, Santander and many others are providing consumers with incentives to select savings accounts with these competing institutions (Christie 2014). Lloyd’s needs to supersede these actions by lessening the monthly deposit volumes needed to gain a higher interest rate and develop savings policies that maximise return-on-investment for consumers. Utilising a well-developed, national promotional (advertising) campaign, these incentives can capture the attention of consumers of varying demographics. Why Lloyd’s has been so dismissive of these evolving consumer demands for higher interest rate availability is uncertain, however with a well-enacted ad campaign and more favourable savings policies would assist consumers in perceiving a more customer-centric business model necessary to gain their loyalties. The company can also develop a deposit-matching strategy that further incentivises long-term patronage for both commercial customers and consumers. Using a longitudinal and tiered strategy, this could accomplish retaining customer deposits for a longer period of time that would improve its deposit-backed credit rating. For instance, Figure 2 illustrates such a strategy. Figure 2: A tiered deposit matching strategy Period Advantage Offered Account Opening £150 thank you courtesy immediately upon depositing at least £1500. Six Month Anniversary £100 thank you courtesy regardless of balance for accounts in good standing. One Year Anniversary Bank will match 2 percent of total current deposited balance (up to £100,000). Two Year Anniversary Bank matches 3 percent of total current deposited balance (up to £100,000). Five Year Anniversary Bank matches 4 percent of total current deposited balance (up to £200,000). Such a deposit-matching strategy is feasible based on the earnings that a financial institution achieves with consumer and commercial deposits and promotes more long-term loyalty toward the bank to achieve these incentive rewards. To illustrate, a consumer that maintains two years loyalty to Lloyd’s Banking Group carrying a balance of £28,000 pounds would receive £840 as a reward for maintaining patronage and favouritism toward the banking group. The company can also develop new loan criteria for consumer and commercial loans that loosen credit restrictions to procure loans. Since the recession, banks and other lending institutions have been tightening these restrictions which is making it more difficult for small business owners and general consumers in the UK to procure personal and business loans. This is a feasible strategy to gain more consumer interest in selecting Lloyd’s Banking Group as the company maintains the ability to use securitisation practices such as the credit default swap to hedge against risk. By lowering the credit scores of consumers needed to get low-interest or higher-interest loans, and using appropriate advertising of these efforts to better service the needs of consumers, the bank will be securing more long-term capital growth by increasing the volume of loans provided. The main problem is that Lloyd’s needs to differentiate from the saturated competitive environment and making loan-granting more simplistic for consumers could very well change consumer opinion about the bank and its emphasis on being a lender focused on improving consumer lifestyle. Conclusion As shown by this essay, micro and macro-level environmental conditions impact Lloyd’s ability to be competitive and achieve growth. High intensity competitive rivalry for offering consumers innovative incentives to maximise their return on investment, such as providing thank-you deposit matching rewards, are causing Lloyd’s to lose customers at an exponential rate. Coupled with macro-level government oversight and increasing regulations to ensure limited risk causes Lloyd’s to have to lock-up more of its assets and capital to ensure liquidity in a fashion not experienced prior to the recession. As a result, higher deposit volumes as well as more commercial customer patronage and loyalty is critical to ensure that Lloyd’s is able to pay shareholders a dividend and improve its financial capital growth position. When coupled with a brand damage strategy to correct a significantly-growing brand reputation, the firm can achieve confidence and conviction from commercial clientele and consumers that underpins a long-term relationship with the institution. Lloyd’s maintains adequate capital, assets, and diversity of business portfolios to sustain a deposit matching scheme, create effective and widespread advertising campaigns, and provide this value to consumers in a very uncertain and volatile UK economy today. Revenue growth as a result of increased conviction in the business would satisfy government’s oversight and expectations about bank performance that would also give Lloyd’s greater positive publicity, illustrating to society and to shareholders that the firm is taking radical steps to improve its liquidity risks and ensure prospects for future stock share growth and value. If the financial institution is to remain competitive, it must repair the damage to its reputation, recapture lost consumers and gain new market interest, and build a competitive advantage that can outperform the pace by which other banks and financial institutions are capturing new customer patronage. References Boyce, L. (2014). Savers put on alert to check their rate as Halifax or Lloyd’s Bank prepare another simplification of accounts that could cut your return, The Daily Mail. 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