Threat of Substitute Products or Services - Essay Example

?Strategic Management Table of Contents Strategic Management Table of Contents 2 Introduction 3 About the Company 3 Industry Analysis 4 Industry Life Cycle 6 Future Outlook 7 Porter’s Five Forces Model 9 Bargaining Power of Buyers 10 Bargaining Power of Suppliers 10 Threat of new entrants 11 Threat of Substitute Products or Services 11 Rivalry among existing Competitors 11 References 13 Introduction The project aims to bring forth analysis of the present condition and circumstance in which HSBC has been operating. The purpose for choosing HSBC is because of the wide range of services and products that the company offers and the unique strategies through which the company operates. The project primarily focuses on two aspects. Firstly, an industrial analysis has been made with regards to the present opportunities and threats confronting the company. Based on the industrial analysis, it presents which the position in the industrial life cycle in which it belongs. Focusing on the opportunities and threats emerging from the industry analysis and the present position in the industrial life cycle where it belongs, the project makes an analysis of the future outlook of the company. It presents the future strategies that the company should resort to. Secondly, it makes a competitive analysis of the industry also. This is done using the Porters’ Forces Model which emphasizes on the factors like the suppliers and the buyers bargaining powers, the threat of new entrants, the entry of substitute products and services in the industry and the existing competition between the rival firms. About the Company HSBC is considered one of the largest financial and banking services providers in the world. The company’s international network is comprised of 7500 offices across 87 nations in Europe, Asia Pacific, America, Middle East and Africa. The company serves more than 100 million customers through its wide range of financial services. Among its major services are Commercial Banking, Personal Financial Services, Global Banking and markets and finally, Private Banking. It is listed in the stock exchanges of London, Paris, New York, Hong Kong, and Bermuda. The company holdings are shared among 220,000 numbers of shareholders across the world located in 124 nations and their territories (HSBC-a, 2011). The company has a unique international pedigree. A number of HSBC’s companies had started operations years ago and they have all attained extreme success and prosperity. The company is named after the founding member, Hong Kong and Shanghai Corporation Limited which was set up in the year 1965 for financing the upcoming trade between Europe and China (HSBC-a, 2011). Industry Analysis The global financial industry including banks suffered a major setback after the advent of the financial crisis that engulfed the entire financial markets. After a period of continuous slowdown the banking industry is expected to witness positive growth rates following improvements in the overall macroeconomic outlook of the world. This was mainly possible because of the strong support provided by the governments to bailout the financial institutions who were on the brink of a severe crisis. A study by the Boston Consulting group pegs the total value of market capitalisation of the global banking industry at 6.4 trillion US dollars which is more than double of the figures of the previous years. The total shareholder returns offered by the banking industry was at its highest since the onset of global recession in 2003 and as valued at 47.1 percent (The Boston Consulting Group, 2010, p.1-2). Figure 1: World Economic Outlook Projections (Source: Reserve Bank of India, 2011, p.17) The figure above indicates a strong positive outlook for the forthcoming years. The interesting part of this is that along with the developing economies the positive trend can also be traced to the developed economies who bore the maximum brunt of the economic recession (Reserve Bank of India, 2011, p.15-20). The analysis of the markets reveals a situation of considerable opportunities and threats for the participants of the banking industry. Figure 2: Market Capitalisation of Top Ten Global Banks (Source: The Boston Consulting Group, 2010) The opportunity of the banking industry lies in the markets of the emerging economies. These economies due to their strict regulatory regimes and controlled credit policies were largely unaffected by the economic crisis. This represents opportunities for financial organizations like HSBC to tap the markets of these economies when the primary markets in Europe and US are showing signs of slump in growth rates. These economies like India and China are said to be on the path of fast growth rates thereby offering immense potential to the participants of the industry. Opportunities for banks also exist in diversifying their product lines. Private banking is one area that can reap considerable advantage for the banking industry. In the absence of AAA credit ratings private banking can emerge as an alternative to the revenues generated from credit markets. Consolidations in the form of horizontal mergers and acquisitions and consolidations on an inter industry basis can actually help in generating numerous opportunities for the participants of the banking industry (Brasher, n.d., p.6-8). The analysis of the market also reveals considerable threats for the participants of the banking and financial industry. The most important of these constitutes the challenges of refinancing after the government bailout packages are stopped. According to a report approximately 8.5 trillion US dollars would be required over the next five years in order to meet the maturity demands. The industry is also prone to market sentiments and fluctuations which can have a choking effect on the sources of funds available to the banks. Adherence to regulatory frameworks and risk management including implementation of the Basel II norms also appears to pose formidable challenges. Threats also emerge from the interbank and call money rates with the widening of LIBOR and other interbank offering rates. The reduction of the gap between LIBOR and the index swap (overnight) may also take a toll on the revenues of the banks. Sovereign spreads in nations like Greece also emerge as a threat for the organization (HSBC) as the catapulting effects may be observed in the primary and secondary markets (Reserve Bank of India, 2011, p.15, 17, 19). Globalisation apart from providing numerous opportunities also represents an area of threat for the banks. The main issue with regards to the threat from globalisation emerges from the fact that the regulatory frameworks would follow a national and regional approach while the financial markets would take up a global role. This may lead to issues in integrating and devising appropriate regulatory frameworks and their subsequent adherence in the future (CIMA, 2010, p.2). The analysis of the opportunities and threats reveals considerable areas of importance to HSBC with regards to its aspect of maintaining profitability and sustainability in the continuously fluctuating and competitive business environment. It is therefore important for the firm to analyse the industry life cycle in an attempt to leverage the opportunities and ward off the threats. Industry Life Cycle The industry analysis of the banking industry is a rather complicated process with a number of aspects being on the different phases of the life cycle. Aspects like unit banking are on the phase of decline, however areas like electronic banking, ATM’s are in their growth phase displaying large scale opportunities for the participants of banking industry like HSBC. Figure 3: The Industry Life Cycle (Source: Roussakis, 1997, p.153) In general it can however be stated that the banking industry is in its stage of maturity. The nature of banking industry with regards to its universal importance makes it one of the most important sectors of business and economy across the globe. Banking industry has been in existence since time immemorial however traditional banking including deposits and credit facilities has grown to the stage of maturity with the demands and attractiveness reaching a point of saturation. However with the advent of new products and technologies combined with the essential nature of the products of the banking industry makes it remain in the stage of maturity without actually going into a phase of decline. However in order to maintain a healthy bottom line and to maintain profitability it is essential that the participants of the banking industry like HSBC must devise strategies so as to create greater potential for its products. The stiff competition prevailing in the markets makes it essential to undertake product development and modifications so as to ensure viability and sustainability in the long run. Future Outlook The analysis of the opportunities and threats of the market as well as the industry life cycle reveals considerable opportunities for profitability however, certain challenges also exist which calls for the need to ensure greater strategic planning so as to ensure sustainability. In order to generate sustainable advantage HSBC must firstly look forwards towards diversifying into new markets particularly the emerging economies. These nations have considerable potential and have been less severely affected by the impact of the global financial crisis. Strategies for entering new market also includes consolidations as well as an effective strategy of mergers and acquisitions which would help in gaining advantage in the new markets and help HSBC in maintaining its bottom line profitability when markets in developed nations have become largely dormant. These funds could be used to act as a resilient measure when the bailout packages stop coming and would also help in better risk management and lowering the spread of risk. The organization should also try to improve its compliance aspect by implementing the BASEL II norms which would help in better risk management. Credit policies should be drafted with much restraint with greater focus on reducing nonperforming assets. In addition to this data related issues like privacy and security should also be taken care by the organization. In addition to these measures another significant measure would be to diversify its product offering into newer products. Aspects like ATM’s internet banking should be given more importance. Third party products like bank assurance and cross selling of other financial product would help the firm to generate revenues from its existing client base. HSBC must also put its focus on catering to the needs of high net worth individuals through specialised banking products. The high net worth individuals hold immense potential and aspects like portfolio management and wealth management would help in generating a large volume of revenue when credit markets have shrunk. Personal banking products like personal loans, insurance and mutual funds could be cross sold to the exiting client base. Effective credit rating and monitoring must be carried out so as to induce greater compliance so as to reduce the number of nonperforming assets (Delloite, 2008). Finally HSBC must undertake a strategy of repositioning which would help in bringing the company’s products under the growth stage. Effective strategies for product repositioning would include modifications of the existing product lines. This would include specialised products like privilege banking in which existing product like savings accounts would be modified with greater facilities. Aspects like mobile banking and internet banking should also be focussed upon to gain market advantage. Portfolio and wealth management must also be given more focus and importance as they are still in their growth stage. HSBC must also focus towards increasing its focus on maintaining customer relationships so as to provide an opportunity for cross selling other products. Third party revenues would boost up the revenues of the firm as well as move the company into the growth stage of the industry life cycle. This would largely help in improving the bottom line as well as help in generating sustainable competitive advantage in the turbulent business markets. Porter’s Five Forces Model Porter’s five forces provide the framework for industry analysis and the development of business strategy. As per Porter, the model is applied at the industry level. The structure of the industry is shaped according to the Porter’s five forces, which is shown in the diagram below. Figure 4: The five forces that shape industry competition (Source: Miller, 2010, p.6) The model is primarily based on the fact that a corporate strategy to be incorporated by an organisation must meet the threats and opportunities. Primarily the competitive strategies should be based on the complete understanding of the structure of the industry and the way it keeps changing. Porter has identifies the five different competitive forces that gives shape to the industry and the market. These forces mainly determine the competition and its intensity and hence, the attractiveness and the profitability of the same. The objective of each of the corporate strategies should be to try and alter or modify the above competitive forces. This accounts for the way in which it would be able to improve its position in the market. Following from the information from the analysis of the five forces, the company’s management decides how to exploit or influence particular characteristics of the industry (Recklies, 2011). Bargaining Power of Buyers The position of retail clients in the market is found to be strong. Competition existing among the banks allowing the retail clients to have access to deposit accounts denominated in China's Yuan was about to take off after HSBC took an aggressive step. Similar moves were undertaken by HSBC in Japan, Malaysia and Hong Kong for retail customers to open accounts with very little money. The above aspects shows that the retail clients of the company are said to have strong bargaining power (Jethnani, 2011). The aim was to make use of the existing demand from the retail customers and allowing them to gain access to the Yuan and providing them with the possibility of diversifying. The company made a soft launch for the company’s premier customers having a minimum of $200,000 in assets and the response which was generated was alarmingly encouraging. “These clients were given 0.25 per cent on top of the promotional rates on Yuan-denominated time deposits” (Jethnani, 2011). The position of the corporate clients of the company has also been improving. The wholesale banking division of the company has been working towards the provision of a wide range of products and services to be provided to the institutional and corporate clients of the company. Moreover this has been effective in strengthening the global position of the company (HSBC-b, 2011). Bargaining Power of Suppliers HSBC effectively maintains favourable relationship with suppliers. However, the company does not compromise on the principles based on which it makes dealings with suppliers. In this case, the suppliers are said to have very little power to bargain with the company. However, the principles maintained by the company are honest and based on ethical standards. In case of a diverse supplier, the company allows a supplier diversity program which gives them a strong footing in the market. The company in turn benefits from the diversity and cost effectiveness of the products and services and options available to them (HSBC-c, 2011). Threat of new entrants Recently the UK market has witnessed increased competition to sell mortgages, current accounts, credit cards, savings products and personal loans. The threat has been mainly coming from the BOS, one of the largest mortgage lenders in the country. HBOS has been implementing very aggressive advertising and pricing strategies to grab as much market share as possible. It has also been planning to curtail the interest rates on the personal loans and credit cards which are unlike the incumbents who are required to strike a balance between the new and the old customers (Kollewe, 2005). The present strategies have been significantly effective in boosting its market share in all areas of retail banking. With the introduction of the high interest bearing accounts HBOS successfully increased the share of its current accounts from 9% to about 14% (Kollewe, 2005). This threat has prompted the banks to banks like HSBC to make their marketing strategies more sophisticated and have been “seeking to emulate retailers in offering promotions” (Kollewe, 2005). The company launched a January sale during its opening of branches in Christmas. It was the first to launch a package of financial and banking products allowing the average customers to save ?2,500. Threat of Substitute Products or Services One of the major rivals of the company is Barclays and both are ready to shift their headquarters to New York or London. Speculations have become intense according to the most recent publications. Since the advent of the financial downfall, SEBI has been trying to build investor confidence in mutual funds. The emphasis has greatly shifted to the capital market and the need for a regulator for the same. Apart from Singapore and Hong Kong, the Indian capital market is the only one which does not have any settlement issues. That is why; SEBI has been trying to make the markets more attractive and favourable for retail investors. Moreover, the Union Bank has also been trying to enter into a new area of the business of wealth management. Once the business fall in place, it is expected that it would try to target the large international players. Thus HSBC might suffer a loss in the Asian market (The Economic Times, 2011). Rivalry among existing Competitors Among the top competitors of the company is Standard Chartered. In fact HSBC’s strategies have been primarily shaped by the tough competition posed by Standard Charted Bank. Both banks have been greatly relying on the Asian region for their earnings. The profitability in the region is mainly squeezed by the domestic and international competitors (Menon, 2011). As per the estimates provided by PricewaterhouseCoopers LLP Chinese lenders like the Industrial & Commercial Bank of China Ltd. are relying mostly on their domestic market leaving the overseas lender with a share of 2%. The company in confronted with a lot of pressure as the international and mainland Chinese banks have been becoming more aggressively. Competition across Asia and Hong Kong have been responsible for the drop in the bank’s net interest margin which is the difference between what the bank earns on loans and what it pays on funds and deposits. In fact, analysts have commented that the bank has been replacing the more profit seeking loans in the United States with the less lucrative ones in the Asian market (Menon, 2011). The bank has been facing major difficulty spreading operations in Asia because of the existence of stiff competition in every market. Asian markets have shown lower losses over loans and rapid rise in property prices creating the environment of extreme margin competition for banks (Menon, 2011). References Brasher, J. (No date). Global Banking Industry. Retrieved April 11, 2011 from http://media.wiley.com/product_data/excerpt/34/04713931/0471393134.pdf. CIMA. (2010). The global banking sector: current issues. Retrieved April 11, 2011 from http://www.cimaglobal.com/Documents/Thought_leadership_docs/Global_banking_sector.pdf. Delloite. (2008). Global Banking Industry Outlook. Retrieved April 11, 2011 from http://www.deloitte.com/assets/Dcom-Albania/Local%20Assets/Documents/al_fsi_banking_260606.pdf. HSBC-a. (2011). About HSBC. Retrieved April 12, 2011 from http://www.hsbc.com/1/2/about. HSBC-b. (2011). Equities & Global Investment Banking. Retrieved April 12, 2011 from http://www.hsbc.co.in/1/2/corporate/equities-global-investment-banking/global-investment-banking. HSBC-c. (2011). Supplier Information. Retrieved April 12, 2011 from http://www.hsbcusa.com/supplier_information. Jethnani, H. (2011). HSBC offers yuan accounts to retail clients. Retrieved April 12, 2011 from http://www.asiahoreca.com/Singlenews.aspx?DirID=130&rec_code=686782&title=HSBC%20offers%20yuan%20accounts%20to%20retail%20clients. Kollewe, J. (2005). Business Analysis: New entrants turn up the pressure on Britain's high street bankers. Retrieved April 12, 2011 from http://www.independent.co.uk/news/business/analysis-and-features/business-analysis-new-entrants-turn-up-the-pressure-on-britains-high-street-bankers-486572.html. Menon, J. (2011). HSBC, Standard Chartered Likely to Report Margin Squeeze in Asia. Retrieved April 11, 2011 from http://www.bloomberg.com/news/2011-02-25/hsbc-standard-chartered-likely-to-report-margin-squeeze-in-asia.html. Miller, S. (2010). Marketinganalyse Von Puma. GRIN Verlag. Recklies, D. (2011). Porters 5 Forces. Retrieved April 11, 2011 from http://www.themanager.org/pdf/p5f.pdf. Reserve Bank of India. (2011). Global Banking Developments. Retrieved April 11, 2011 from http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/02CPT081110.pdf. Roussakis, E.N. (1997). Commercial banking in an era of deregulation. Greenwood Publishing Group. The Boston Consulting Group. (2010). Creating Value in Banking 2010. Retrieved April 11, 2011 from http://www.bcg.com/documents/file58127.pdf. The Economic Times. (2011). Union Bank plans entry into wealth management business. Retrieved April 11, 2011 from http://articles.economictimes.indiatimes.com/2011-03-27/news/29194775_1_wealth-management-business-kbc-asset-management-union-bank. Read More