Organization Analysis Focusing on the Key External Factors of Mastercard - Case Study Example

Organization Analysis FOCUSING ON THE KEY external FACTORS OF MASTERCARD Monica Asuako MGMT 670 11/04/15 Dr. IJOSE Turnitin score: MasterCard operates in a macro-environment that is molded by general economic conditions, political legal and regulatory influences, technological influences, social cultural forces as well as natural environment that affect MasterCard’s competitiveness. The five forces model is important in determining the makeup and strength of competitive pressures affecting MasterCard in the credit card industry. Industry driving forces are constantly influencing change industry. MasterCard belongs to a strategic group comprising Visa, American Express and Discover. The Organization’s key success factors influence MasterCard’s capacity to prosper in the market. There are various opportunities that the company needs to utilize while identifying ways of dealing with threats. This paper presents an analysis of the key external factors that have implications for successful implementation of MasterCard’s strategy and goals. It examines the organization’s industry and the competitive conditions affecting it now or likely to do so in future. 1. Credit Card Industry MasterCard operates in a thriving industry that processes huge transactions. EMI (2015) estimates that the credit card industry conducted transactions worth USD 4 trillion in 2014. This is a significant amount of money that has influenced startups to make concerted efforts to acquire a slice of the market share, targeting traders and consumers. The industry is well founded and drastic changes are not expected in the near future. The complexity of the industry and the well established players creates barriers to entry for startups. It is characterized by a complex sequence of exchanges between diverse industry players that control every credit card payment. MasterCard and Visa are the main players in the credit card industry and are critical to the entirety of the chain since they are not involved in processing the payments per se. The companies basically provide a platform for the execution of credit card systems. There are other players in the industry such as ‘First Data’ company that are involved in the actual dispensation of credit card transactions and are also well established in the industry. 2. Macro-environment General Economic Conditions The global economies have experienced a remarkable shift from cash and check payment to a more advanced and secure form of electronic money transfer. Initially, the inventions were concentrated on the developed economies with significant purchasing power such as the US where giant credit card companies Visa and MasterCard among others are well established. However, recent trends indicate greater penetration of these companies in emerging markets as consumers’ appreciation of the benefits of cashless payment continues to grow. MasterCard internalization strategy has been facilitated by successful partnerships with banks in foreign countries. The US remains the single largest geographic market for MasterCard and therefore any changes in the economy have a direct impact on the company’s gains. For example, EMI (2015) observes that a 9.2% increase in unemployment in the US affected consumer spending leading to a significant drop in the company’s gains by 4.3% in June 2008. This was as a result of the 2008 economic crisis in the US. Weakening of the US dollar also had a direct negative impact on the gains. The Euro zone crisis has also adversely affected consumer behavior with less spending hence reduced gains for the company in the region. Russian economy has deteriorated in the past two years as a result of sanctions. The country recorded 54% cashless transactions in its overall trade in 2013. However, MasterCard continues to expand in other emerging economies in Asia and Africa (McKelvey et al. 2005). Political Legal and Regulatory Influences The new regulations in the US credit card industry concerning transaction dispensation and fees are likely to influence the predominance of Visa, which is the greater competitor for MasterCard that takes second position in the economy. The new laws call for card-issuers to allow traders to choose no less than two independent debit networks for transaction dispensation thereby limiting the networks from bargaining special deals with banks, which is a strategy that Visa has used over the years to maintain leadership in the US market. Debit card transaction fees were reviewed downwards by the Federal Reserve to 21 cents for every swipe. Debit card issuers will accumulate 5 points per transaction equivalent to 2 cents. In foreign markets, MasterCard is benefiting from new regulatory frameworks promoting cashless payments in developing economies such as India, Indonesia and Egypt among others (Visa, 2011). Technological Influences Technological advancements have spurred growth in the global mobile transactions that account for 85% of all cashless transactions. MasterCard has set up strategies to partner with telecommunications companies and mobile telephone firms such as Apple to encourage increased card usage. The developed Western economies are technologically advanced and most of them are functioning at above 70% cashless. The new technology hub in New York is facilitating MasterCard’s new strategy of applying technology to spur growth. The MasterPass is a digital wallet that has been developed through this initiative. Other technological inventions from the T-hub include the Digital Enabled System as well as the Start Path. The partnership with Apple Pay is also founded on technology. The company is utilizing virtually all new inventions in the credit card industry to enhance competitiveness (McKelvey et al. 2005). Social Cultural forces Globalization has led to significant interactions between cultures, with Western cultures having a greater influence on the developing world. International travel has enhanced cross-border transactions that have promoted credit card usage. Increased participation of consumers globally in the formal trade has been encouraged by inter-cultural linkages and developments in communication technology. Nevertheless, recent events such as terrorist attacks and Ebola scare have adversely affected global travel patterns thereby reducing credit card usage. Strengthening or weakening of foreign currencies against the US dollar also affects the gains of MasterCard and other credit card companies. Culture is also associated with reluctance in the usage of cash transactions over cashless payments in some global economies such as Japan and Germany which are developed economies with less than 80% cashless payments (EMI, 2015). Natural Environment MasterCard upholds integrity of the natural environment, especially energy conservation and greenhouse gas emissions in its supply chain. The plastic and paper companies that produce the cards must adhere to the standards set for environmentally responsible business. They are expected to ensure efficiency in energy utilization and engage in activities that do not adversely affect the environment such as the use of hazardous materials. The company promotes the ideology of recycling and re-using in the production cycle. The environmental strategy is aimed at adhering to the requirements of the U.S. Environmental Protection Agency and also to participate in addressing the global concerns of global warming and climate change (Green, 2009). 3. Five-Forces Model Supplier Power Supplier power is one of the competitive forces that influence the credit card business. For many years there have been few players dominating the market leading to high power among individual suppliers. The reason for few suppliers was that they enjoyed economies of scale as most of them had already established significant market share, which was predominantly divided between Visa and MasterCard. The two companies formed partnerships with the largest banks locking out most of the other smaller banks. They still remain the major competitors in the credit card industry with Visa taking the lead and MasterCard coming in second place (Arthur, 2015). Buyer Power Buyer power is fueled by the number of buyers in the market as well as the significance of each buyer in the credit card industry. The ease of changing between rival suppliers is also a critical determinant of buyer power. Buyer power in the credit card industry has been significant in controlling suppliers to develop customer focused strategies to attract a large consumer base. Banks have been focusing on development of features that are likely to attract more consumers as credit cards continue to be accepted as an effective payment method. American Express was positioned as the credit card of choice for the affluent in the efforts to woe more in the high end market but MasterCard’s strategy focusing on different customer segments has made it the second largest competitor in the industry (Green, 2009). Substitute Threat Substitutes continue to play a significant role in shaping competition in the credit card industry. Cash payments pose a major threat as customers can settle their bills whenever they need to unless they are effectively convinced regarding the benefits of always using the credit card. Players in the industry must engage in partnerships with telecommunication firms that are also providing an easy mode of payment and customers. Customers will always seek services from the company that offers them maximum utility at reasonable costs. Online platforms are also reducing the credit card consumer base as through innovative partnerships with banks. (Oster, 1999). New Entrants The threat of new entrants cannot be overemphasized as technological advancements provide new strategies of doing business. Entry in to the cashless payment business is not difficult as long as an aspiring firm is able to adhere to the monetary regulations and also convince customers of secure and efficient services. Mobile money transfer is the latest entrant in the industry while many other companies are well established in online payments (Daniels, 2015). Competitive Rivalry Competitive rivalry is based on competitor abilities especially if the services offered are the same. A company must be able to successfully differentiate its products to provide a range of alternatives for consumers. MasterCard has succeeded in differentiating its payment services to suit different customer needs. These include; The MasterPass, the Digital Enabled System as well as the Start Path. The company has also maintained competitiveness through strategic partnerships with globally recognized companies such as eNett International, Apple Pay, C-SAM and Basware among others to offer inventive payment solutions (EMI, 2015). 4. Industry Driving Forces Changes in the Industry’s Long-Term Growth Transformations in the credit card industry’s long-term growth rate have led to changes in the demand and supply leading to companies entering the market while others exit. For example, changes in the buyer power has driven American express that initially focused on affluent travelers to change as customers found better ways of settling their bills such as through online booing and payments. The rising demand in credit card services has increased competition for MasterCard as new entrants strive to acquire a share of the market. Competitive rivalry has increased and the company has to develop strategies to maintain its already large market share and to continue its dominance in emerging markets (McKenna, 2007). Increased globalization Competition in the credit card industry has continued to shift from the American market to other emerging markets globally. Visa, which is the largest company in the local market, has also set pace as a leader in the global market triggering international competition with MasterCard. The companies are partnering with local firms in their internationalization strategy, which is being welcomed in many developing countries that are promoting cashless payment (EMI, 2015). Emerging Technologies Internet technology has transformed the credit card business through providing a new platform for advertisement thereby generating a global demand for credit cards. Online shopping and payments have been accepted world over allowing MasterCard to reach a wider global market. Mobile telecommunication is also adding value to the credit card industry through important partnerships. People across the globe are able to work online and receive payments promptly through credit cards. Technology has therefore played a considerable positive role in driving change in the industry to the advantage of MasterCard (McKenna, 2007). Changes in Buyer Demographics Initially, credit cards were mainly used by affluent business people and hence the market was narrow. However, there has been a significant shift in credit card use from the affluent to regular middle income shoppers that form the bulk of the credit card consumer base. MasterCard is currently targeting young consumers who are excited about exploring the offerings of the outside world, contributing a significant market especially with the advancements in internet technology (Oster, 1999). Product innovation Players in the credit card market are striving to maintain competitiveness through innovations in their product design and marketing. They are encouraging new buyers to try their products as rivalry continues to grow. MasterCard continues to maintain technological innovations as well as partnering with innovative companies, which have helped to strengthen the company’s market position (McKenna, 2007). 5. MasterCard’s Strategic Group MasterCard, Visa, Discover and American Express are in the same strategic group as they share competitive strategies and bear a resemblance to each other. They offer the same services and virtually share the distribution channels. They also offer services of the same quality and price range and their products are targeted at the same consumers (Green, 2009). High Geographic Coverage                 Low Strategic Partnerships Few Many 6. Strategic Moves of Rivals Visa, the main rival has embarked on a strategic move towards mobile payment platforms, with the most recent being hosting Visa PayWave supported accounts in a protected, computer-generated cloud. This move is aimed at expansion of the companies support for mobile payments internationally. It will offer financial institutions and associates a broader choice in giving consumers secure ways to make payments with smartphones. The company is focused on establishing dominance in digital payments (Visa, 2011). In 2015, American Express CEO’s comments indicated lack of confidence in the long-term growth of credit cards. He asserted that credit cards could soon be replaced by new payment methods including EMV cards and Apple Pay (EMI, 2015). MasterCard needs to utilize the opportunity to acquire American Express that seems to lose confidence in the credit card industry. According to Horowitz (2005) Morgan Stanley had contemplated selling the Discover credit card division if it failed to record growth. However, recent trends indicate growth in credit card loans especially to private students, household loans and un-secured debt-consolidation credits, but the company’s stocks went down by 8.5% in the first quarter of 2014 (Daniels, 2015). It therefore qualifies as a nominee for MasterCard’s acquisition strategy. 7. Key Success Factors MasterCard’s operations are technologically driven with the company investing in continuous innovations to maintain global competitiveness. The company has been able to offer efficient and secure payment solutions through technological innovations. The high level of global presence has enabled the company to enjoy economies of scale in its operations. Quality control is a significant component of MasterCard’s operations making it offer reliable services to consumers. Reliability is a key aspect that is sought by consumers in financial transactions. The company has a high utilization of fixed assets totaling $615 million as at December 2014 with an average asset turnover of 0.7 per annum. Skilled labor is a major key success factor, with the company taking advantage of the high-tech skills in the US and Asian economies such as China and India. A global distribution network has enhanced the company’s global presence creating a celebrated and esteemed brand name (McKelvey et al. 2005). 8. Threats and Opportunities Threats Opportunities Growing intensity of competition with Visa being the biggest competitor Global economic downturn leading to complex economic policies New entrants in the market offering alternative payment methods such as PayPal, Moneybookers and Amazon Increased unemployment rate in the US, Eurozone crisis and inflation in other global economies such as Russia lowering purchasing power hence lower gains for MasterCard Cybercrime lowering customer confidence in online transaction affecting MasterCard business   Emerging economies globally are moving towards cashless payments providing more opportunities for global expansion With technological advancements in virtually all aspects of life, inclination towards digital currency is growing rapidly Growing trend in online payments boosts MasterCard business Enhanced data mining tools increases the prospects for MasterCard’s market There is higher preference for debit cards over credit cards due to extra costs in the latter hence the potential for Strategic partnerships with telecommunication firms will expand MasterCard’s market coverage and will also boost competitive abilities (EMI 2015) 9. Evaluation of Current Strategy The credit card industry’s growth potential is high and MasterCard’s current strategy is unlikely to capitulate to the competitive forces especially being the second largest in the industry coming after Visa. New regulations in the industry have suppressed Visa’s competitive edge, which has offered MasterCard an opportunity for growth in the US market. MasterCard is a well-entrenched leader in the large US market and this leadership is expanding in to emerging markets raising the company’s prospects for profitability. Good returns on investment for shareholders are guaranteed by the firm’s ability to outcompete many rivals apart from Visa (Arthur, 2015). 10. Conclusions and Recommendations MasterCard is positioned competitively with a lower level of vulnerability compared to other players in the industry such as companies dealing with hardware development. Mobile money transfers are posing a significant threat to developers of Point-of-sale hardware as they are relatively user friendly. Emerging payment companies such as PayPal, Monebookers and Leaf are also posing a threat to the card reader and register merchants. Severe market dynamics are adversely affecting traditional players in the credit card industry but MasterCard is unlikely to be affected as the MSPs that are contracted third parties are replaced by new inventions. It is important for MasterCard to take advantage of partnership opportunities with innovative companies to successfully penetrate the global market. References Arthur, T. A., (2014-2015). Strategy: Core Concepts and Analytical Approaches, Burr Ridge, Illinois, McGraw Hill Education. Daniels, S. (2015), Discover CEO David Nelms compensation falls, Crain Communication, Inc. Retrieved 10th April 2014 from EMI (2015), 10 Credit Card Trends to Watch in 2015, EMI Strategic Marketing, http://emiboston.com/ Green, J. (2009) “A Time to Reflect” Cards & Payments 22:1, 6 Horowitz, J. (2005) Morgan Stanley Might Consider Selling Discover Credit-Card Unit, Wall Street Journal. Retrieved 10th April 2014 from McKelvey, S., McDonald, M. and Cramer R. (2005). “MasterCard and Major League Baseball: Metrics for Evaluating a Most ‘Memorable’ Promotion” Sport Marketing Quarterly McKenna, A. (2007). “Payments Industry Gives Retailers the Loyal Treatment” Cards & Payments Oster, S. M. (1999). Modern Competitive Analysis, New York: Oxford University press. Visa (2011), Visa Moves Beyond the Point-of-Sale - Delivers Personal Payments to U.S. Account Holders, Visa Inc. Retrieved 10th April 2014 from Appendix A Appendix B Read More