External and Internal Environment - Assignment Example

External and Internal Environment

Introduction

The fundamental principles that govern business prospects incline on profitability and the ability to achieve sustained growth for expansion. Incomes obtained in the form of profits propel the business to meet its operational costs and increase activities for improved profitability. The ability of a business prospect to enjoy profitability is influenced by the environment of operation. These are categorized as the internal and external environment (Ireland, Hoskisson & Hitt, 2014). Variability in internal environmental factors such as finance, strength of employees, strategic risks and state of technology used, innovation, organizational, and operational structure of the business predicts whether a company would survive in an economy. On the other hand, the state of external competition, legal, political, socio-economic, and technological factors forms external environmental factions that influence business. Favorable environmental factors support business profitability and growth hence significant survival. The inverse is yielded in the unfavorable environment pitting the closure of the prospect.

Security Exchange Commission and EDGAR Data Base

As a strategic move to safeguard corporates from the unfavorable business environment in the United States of America, Federal Laws demand publishing of financial filings by every company to the Security and Exchange Commission (SEC) (Debreceny et al., 2005). The information provides real-time market pricing and volumes of products yielded by corporates for the shareholders and other firms in the industry. Information on the stock volume published on SEC files acts as market movers in determining the volatility in the product market. Investors and corporates would then make bets and predictions on the general trend of the economy. Therefore, annual SEC investigations predict market pricing for the economy meaning that no competitor would set their pricing.

For effective information delivery on corporates, the United States Securities and Exchange Commission formulated the Electronic Data Gathering Analysis and Retrieval (EDGAR) System. The interface of this program permits the assembly, transmission, validation, acceptance together with the dissemination of public documents. Important business information is published by management firms, public companies, and sole proprietors as demanded by the SEC securities regulations. Once received, EDGAR analyzes the information and then disseminates it to the interested public corporations and individual subscribers.

To adequately assess the external and the internal factors that influence companies and organization, a study was made in the banking industry. More specifically, Bank of America, as a corporate in the industry was adopted for the survey. The annual financial report as published on the EDGAR database helped in defining the company regarding market capitalization, asset and liquidity profile as well as operational structure of the bank.

The banking sector as an industry plays a vital role in the economy. Their impact as an aid to trade justifies their indispensable value in structuring the financial and stock market in many established and developing countries (Farrell, 2010). Their clientele portfolio includes corporates, employees in private and public sectors, sole proprietorship entrepreneurs, and students. Nonetheless, the area over the recent past has witnessed loss as a result of the global economic recession. Moreover, inadequate liquidity has led to placement of these banks under receivership and even closure.

Bank of America boasts on its size as it is one of the largest financial institutions in the world. It serves small and middle market business, individual consumers, investors, governments and large corporations. Its areas of service are in banking, investment, asset management as well as management of risks in products and services. The Annual financial report is filed on Form 10-K while Quarterly reports on Form 10-Q. Current financial reports are obtained in Form 8-K, and these are as per the requirements of the Security Exchange Act (1934) (Farrell, 2010).

The bank provides a range of bank and non-banking services in segments that fall into five categories. The first type is under Commercial and Business Banking (CBB). This is based on the retail service of the baking that includes deposits and withdrawal of funds (Ireland, Hoskisson & Hitt, 2014). The second category is on Consumer Real Estate Services (CRES) that takes into account mortgages, as the third classification is on Global Banking. The fourth group is in Global Wealth and Investment Management (GWIM). Finally, the last category combines all these segments under one operation.

Parts of the General Environment that would rank highest in their influence on the Bank of America and its effects

Political and legal requirements significantly affect the operation of the Bank of America. Taxation and licensing coupled with the policy of SEC are just examples of the factors. The bank is mandated to pay annual corporate tax which limits its ability to make and save more revenues. Besides, the government regulations tend to protect the depositors who are the clients and not the banks (Debreceny et al., 2005). Financial regulatory strategies such as the Financial Reform Act signed into law on 21st July 2010 altered the way banks do their business. It increased the operational costs of the bank through increased taxation. The intent of ths led to reduced revenue. Nevertheless, other legal requirements such as debit interchange fees, limitation on propriety trading, liquidation control, and credit risk retention are just among the factors that the Bank of America has to bear with.

The other environmental factor is the economic factors. These relate to the inflation rates and interest rates. Consequently, the state of the economy determines the operation of the banking sector. Inflation and deflation alter the business profitability regarding interest rates. During inflation, the interest rates on lending increases. However, loans borrowed before the inflation are paid at higher interest rates after inflation. Hence, inflation hardest hits banks, leading to lots of losses on customers who default on loan payments.

The bank has no alternative but must comply with all the necessary legal requirements. The only way is to increase on a range of services they offer to their clients as a way to attract more capital (Ireland, Hoskisson & Hitt, 2014). On the economic factor, especially interest rates and the inflation rates, it is a policy of the bank to take insurance covers for all the loans rendered to its esteemed clients. These takes care of inflation and deflation rates coupled with loans that the customers default in paying.

Five forces of Competition Significant for the Bank of America and how the bank has addressed the two major forces

Just like any business entity, Bank of America experiences various challenges in its operation. These are categorized as internal and external environmental factors. One of these factors is competition. The bank receives stiff competition from emerging and established banks in America. The other competitors are the credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies, e-commerce, and other Internet-based companies.

With these enterprises, the bank competes for customer service, reputation, price, interest rates on loans and deposits, lending limits, quality and range of products offered to the clients. Services that provide convenience to the customers are also factors that the bank competes for with other financial providers.

The forces within the competition model are categorized into five. They include; threats of new entrants, bargaining power of suppliers, bargaining power of buyers, rivalry among competing firms, and threats of substitute products form the driving forces. As concerning the Bank of America, threats of a new entrance and rivalry among competing firms are the examples of competition deemed significant. New and emerging financial institutions in America present with latest taste appeals woes loyal customers to shift to the new banks. Similarly, rivalry and competition prompt many financial institutions to do expensive advertising and invest more on technology in a bid to improve the customers’ convenience. All these factions reduce revenue to the bank due to increased expenditure on publicity and technology.

The bank has devised effective ways in managing these factors that negatively influence its operation (Debreceny et al., 2005). First, in the context of competition, it has tried as much as possible to attract new and potential customers through massive advertising and the improvement on the range of services they offer to the customers. Also, the bank has tried as much as possible to retain the loyal customers through motivation, managing compensation, and other costs incurred by the clients.

With the same two forces in mind, predict what the company might do to improve its ability to address these forces in the near future

Unhealthy competition for example through the rivalry of the competing firms has the benefit to clients and limitations to the firms. In a way that would propel revenue generation for the Bank of America, several strategies could be adopted. The Bank need to focus on the customer-centered approach to improve on the taste appeals for their service. As a strategy, mobile banking platforms need to be embraced and diversified such that the customers can transact services at the backyard of their homes and offices without going for retail services at the banking hall (Ireland, Hoskisson & Hitt, 2014). To counteract the impacts of a new entrance, Bank of America need to increase the number of outlets both internally and through franchising in the global market. Moreover, more advertising services should be utilized to continue reminding the loyal clients and to attract new clients.

External threats affecting this corporation and the opportunities available to the corporation. Give your opinions on how the bank should deal with the most serious threat and the greatest opportunity.

The influence of the external factors predisposes threats to the Bank of America. The general economic and Market conditions risk pose as significant threats. Consequently, the business could fall prey of the US and international financial markets. These include the level of volatility in the short-term and long-term interest rates, inflation rates, and household incomes. Others include fluctuations in equity and capital markets, liquidity in the global financial markets, and investor confidence. In addition, unemployment’s rates and consumer spending stand out as the determinants of clientele profile.

Liquidity risks also pose as external threats. These are the potential inhibitors that would limit the ability of the bank to meet its obligatory financial roles. Particularly, change in credit rating may restrict the bank from access to funds or capital markets. This would increase borrowing costs or prompt the need for additional collateral or additional funding.

The opportunity for this would mean that the bank maintains its deposits, increases the borrowing costs, and sell its current and fixed assets on favorable terms. It would therefore increase the total value of the liquidity hence; counteract the negative effect of competition.

Bank of America’s greatest strengths and most significant weaknesses. Strategies to take maximum advantage of its strengths, and the strategy to fix its most significant weakness

On an average liability assessment, 2012 year-end and average deposits increased from $72.2 billion and $12.0 billion respectively. The rise was occasioned by growth in the non-interest-bearing deposits as a result of a high number of clients. Shareholders’ equity also increased by $ 6.9 billion and $ 6.6 billion for the year-end and average shareholding respectively on the same year. These are among the greatest strengths of the bank due to the availability of liquidity. The clientele number is also very high.

The weakness to the bank falls on the interest incomes which are deducted thereby decreasing on the total revenue. In a bid to maximize its strengths, the bank needs to increase the number of shareholders (Farrell, 2010). The share capital would provide liquidity to the bank. Also the value of equity needs to be reduced slightly as this increases the chance of entrance by many shareholders. Likewise, home loans for clients should be readily availed as they yield incomes with interest rates.

The company’s resources, capabilities, and core competencies

Security of the Bank of America is determined by the value of Variable Interest Entities (VIEs) and the impaired loans value. These loans stand out as liabilities to the bank as occasioned by the default on payment. Continuous securitization of loans through debt security analysis and servicing of impaired loans limits the instances of bankruptcy to the bank. The aim of this lies on transferring the risk of credit to the third party, who happen to be the insurance firms. Intrinsically, shareholders’ equity tend to be higher as at the year 2012 in relation to common stock. In particular, a total of 50 million and 400 million of shares of common stock tend to be affordable in servicing liquidity.

The company’s value chain to determine where they can create value using the resources, capabilities, and core competencies discussed above.

Management in accounting, as well as reporting, paves the way for the value chain analysis for the Bank of America. The net income generated from the business varies upon revenue and cost allocations. It utilizes an activity-based costing model and fund transfers that reflect on the result of the business.

The bank’s overall interest rates use various cash instruments to control the fluctuations in incomes and capital arising from market rate volatility. The aim of this is for the bank to do away with disequilibrium in interest rates and earnings which would affect capital. The bank’s internal fund transfer goes hand in hand with deposit pricing (Debreceny et al., 2005). This tends to incline on having adequate liquidity for retail, mortgage, and credit services offered by the bank. With the net value of deposits, the bank draws more clientele through the sale of shares. Share capital earns dividend to the shareholders and the bank. Sustainability is therefore achieved by the bank.

Conclusion

The ability of corporates and business entities to make profits is a factor of how they undertook their management strategies. These strategies delve on the analysis of the environmental determinants that influence on the business (Farrell, 2010). As outlined, the Bank of America as a financial entity encounter challenges both in the internal and external structure. Its ability to control the internal factors faces minimal challenges vis-à-vis the external factors.

Competition singled out as the significant external influence that the bank had to fight. However, improvement in quality of service delivery was one of the important steps that the bank undertook as a way to attract new clientele and build the confidence of the loyal customers (Ireland, Hoskisson & Hitt, 2014). Although, challenges still arise regarding the impaired loans and volatility in the product market. Management of deposits and control of the harmful influence of the impaired loans are the basis for sustained growth achievement over the past decades. Moreover, increased number of shareholders and clients also reflect as the growth factors.