Management Process and Functions - Research Paper Example

Corporate Strategy: Tools of Analysis to Let HSBC Ride Through the Global Financial Crisis Introduction Global finance is in the doldrums because of a conglomeration of negative factors led by the sub-prime mortgage crisis in the US, which saw the so-called housing bubble burst starting in 2006 to bring liquidity problems to the entire global banking system. It is by now a well-accepted proposition that whenever the US economy sneezes the whole global economy catches a cold. So when US banks began to experience high default rates on the repayment of "sub-prime" mortgages, which were granted to high-risk borrowers with lower income and less credit history than "prime" borrowers, domestic banks began to reduce their lending activity or to lend at a much higher interest rates. By July 2008 as a consequence, major banks and other financial institutions around the world had reported losses reaching $435 billion. The problem on sub-prime mortgages was exacerbated by the steady depreciation of the US dollar, whose value against the euro, for example, crossed the $1.48 threshold in November 2007 to settle at $1.50 (Phillips, 2007). While the US Federal Reserve showed no intention of intervening to strengthen the dollar, banks stopped issuing covered bonds and the London Interbank Offered Rate (Libor) hit a premium for treasury bills not seen since the dark days of the first oil crisis in 1987. The continued weakening of the US currency gave banks and financial institutions little incentive to sell dollars, completing the scenario for rising global inflation. Such a climate of uncertainty in the global economy, specifically in the banking sector, serves as backdrop for this paper as it examines the corporate strategies by which HSBC Holdings plc, one of the world's largest banking and financial services organisations, can emerge a winner through the use of appropriate models and tools of analysis. 3 Tasks: 1) Provide a critical appraisal of the major corporate strategies of HSBC since 2005, based on the known models and tools of analysis. 2) Evaluate HSBC's position in the global banking industry, in which banks and financial institutions struggle under a climate of difficulties. 3) Propose a forward strategy for HSBC using appropriate models and tools of analysis. Previous Strategies HSBC Holdings plc is the mother company of a wide array of banks and financial institutions that include the HSBC plc in UK; the Hong Kong Shanghai Banking Corp. Ltd. and Hang Seng Bank Ltd. in Hong Kong; HSBC Finance in France; the Household International and HSBC Bank USA NA in the US; HSBC Bank in Brazil; Grupo Financiero HSBC in Mexico; and the HSBC Private Banking Holding (Suisse) SA in UK, Hong Kong, Switzerland, Monaco, Luxembourg, Singapore and Channel Islands. The Group's corporate strategy finds expression in the marketing pitch attached to its logo that proclaims HSBC as "the world's local bank." This campaign to differentiate the HSBC brand was launched in 1999 and started to guide all banking operations in 2005. The strategy projects HSBC as a financing institution with an international pedigree and world-class expertise, which sophistication is nonetheless used for the full benefit of the smallest local clients and their communities. In effect, the HSBC based its strategy not only on product leadership and operational excellence but also on customer intimacy, the three value disciplines that drive corporate strategy (Green, 2003). That sort of makes the Group a high-street bank that serves low-end clients as a matter of preference. The banking clientele composed of ordinary people is a market segment usually identified in an RFM analysis to formulate a firm's corporate strategy. RFM stands for recency, frequency and monetary value and is often conducted to analyse customer behaviours and define market segments. In essence, RFM analysis asks how recent and frequent are the transactions done for a particular type of customers, together with the monetary value of these transactions. Obviously, the earlier RFM analysis conducted by HSBC showed that this market segment is the more profitable focus of its corporate strategy and operations. RFM analysis is commonly conducted along with financial analysis to assess a firm's profitability, solvency, liquidity and stability. This is done by comparing the firm's recent financial performance against future prospects and against the performance of competitors. A financial analysis is based on financial reports and similar documents drawn by top management to guide business decisions. If the RFM and financial analyses show that catering to the market with "local" configuration is good for the firm's profitability, solvency and stability, then it becomes the linchpin of that company's corporate strategy. As part of the strategy that implies strong affinity with socially oriented banking, HSBC has placed community and sustainability high on its list of priorities. This reflected in the Group's entry into the Dow Jones Sustainability Index in 2001 and its 117th ranking in the Community Environment Index. In addition, the firm's charitable donations as of end-2005 were valued at $81.4 million. In 2007, the Group created the Climate Change Centre of Excellence whose main purpose is to stimulate greater understanding of the scientific, regulatory and economic implications of climate change. The centre also serves as implementing arm of the HSBC Carbon Finance Strategy, which was established in 2006 to incorporate climate concerns into the bank's financial services business. For these efforts, the US-based coalition of investors and environmental groups CERES listed HSBC in 2008 as among the top 3 banks with an active climate change governance policy, together with Barclays plc and ABN Amro (De Backer, 2008). Such distinctions received by HSBC could not justify its unique corporate strategy if the firm's bottom line suffers but it improved rather than harmed its profitability. As of December 31, 2006, the Group had amassed $1,861 billion in total assets, the largest in its 143-year history. Current Position The banking industry is reeling under the aftershocks of the US sub-prime mortgage crisis and the weakening dollar. Some manifestations of these difficulties are the scores of mortgage lenders that have filed for bankruptcy, the forcible resignations of the CEOs of Citigroup and Merrill Lynch, and the increasing number of mergers between banks (Gold & Feldman, 2007). Since 2007, at least 100 mortgage companies have shut down, suspended operations or were sold. As a result of the mounting delinquencies, the credit collection industry in fact grew by 9.5 percent in 2008, even as thousands of bank employees found themselves on the streets. From July 2007 to March 2008, various financial institutions laid off over 34,000 employees, with some 40,000 workers in London's financial district expecting to lose their jobs. So far, this general malaise in the banking sector has yet to affect HSBC. HSBC Holdings is currently listed as a blue-chip company on the London, New York, Hong Kong, Paris and Bermuda stock exchanges. It is ranked 29th in the Interbrand Top 100 brands, 4th in Fortune Global 100 Accountability Ratings, and has been a member of good standing of the Financial Times Stock Exchange 100 since 2001. The FTSE 100 Index comprises the largest UK companies with a capitalisation of over 60 billion each, and HSBC is currently ranked third according to size of capitalisation. With HSBC in the top six spots are British Petroleum, Vodafone, Royal Dutch Shell, GlaxoSmithKline and the Royal Bank of Scotland. Of the six top firms, only HSBC and Royal Bank of Scotland are engaged in banking and financial services. From the evidence, HSBC outpaces its competitors in terms of income and profit, dividends and shareholder returns, size of customers and shareholders. The annual income and profit before tax of the firm average $92.8 billion and $20,960 million, respectively, while an average $7,750 million is given away as dividends yearly. On shareholder returns, the rate for HSBC is 111.3, which is not far from the benchmark figure of 120.8. From the latest count, HSBC shares of stock are held by about 100,00 investors in 100 countries, while it serves over 125 million customers worldwide through some 10,000 offices in 82 countries. The range of capabilities and services the company offers includes foreign exchange, fixed income, equities, derivatives, risk advisory, corporate and investment banking, equity sales and trading, and debt capital markets. In these core businesses, HSBC does not "over-promise" and "under-deliver" as part of its corporate strategy (Green, 2003). Forward Strategy With the current uncertainties in the global banking industry, the best forward strategy for HSBC is to avoid acquisitions in the meantime, which it has done on many troubled companies in the past. Global inflation is rising and under such a condition, research shows that only one of five mergers and acquisitions work well and that at least half of M&As actually destroys shareholder value (Green, 2003). This can be confirmed by any of the tools of strategic analysis that assess the SWOT factors, the so-called 5 Forces and performance. SWOT analysis is a strategic planning method that specifies the objectives of a business and then identifies the internal and external factors that could influence the achievement of those objectives (Institute for Manufacturing, online). It examines the perceived strengths and weaknesses of the organisation in relation to the opportunities that it can exploit and the threats that it needs to overcome. In the case of HSBC, the major source of its strength is its well-honed knowledge and expertise in global economics and local markets and cultures, which enable the bank to deliver innovative solutions. Another strong point is the Group's team of top-notch experts in corporate banking, investment banking, project and export finance, asset and structured finance, trade finance and payments and cash management. A possible weakness is service standardisation, which may prove difficult for a global bank with about 10,000 branches in 82 countries. How can all these branches or subsidiaries provide the same quality of service based on the specifications of the head office in London The problem should be given appropriate solutions in the proposed forward strategy, which is exactly why a SWOT team should consist of experts in a broad range of disciplines, such as accounting, executive management, sales, engineering and ombudsman. A SWOT analysis commences by setting the objectives and asking the question: What does HSBC want to do or where does it want to go The second phase is a scan of the environment, which means assessing the present situation, the product portfolio and the product/service life cycle. As earlier noted, the present situation is generally unfavourable for the banking industry and so HSBC's line of products and their life cycle need to be examined to determine if one product in the portfolio has to be expanded or deleted, or if the product has reached the "decline" stage in its life cycle (Armstrong, 1996). In marketing theory, the four stages of the product life cycle are introduction, growth, maturity and the inevitable decline. The environment scan in a SWOT analysis is followed by an assessment of the existing strategies to see if there is any gap between performance and objectives. If there is such a gap, the SWOT analysis defines the strategic issues and develops a revised strategy that sets the critical success factors. Plans are then prepared for the implementation of the new strategy, after which the results are monitored periodically (Probst, et al., 1999). The entire process has some similarities with the 5 Forces analysis, especially in the treatment of potential threats to a business. This tool of analysis, which was developed by Harvard economist Michael Porter in 1979, focuses on the threats posed by horizontal and vertical competitors. Three of the 5 forces are identified as the threats from horizontal competition, which are the threats of new products, of established rivals and of new entrants. The two forces from vertical competition are the threats posed by suppliers and customers. These five forces often affect a company's ability to serve its customers and make a profit. Porter's 5 Forces analysis is used by strategy consultants when making qualitative evaluation of a firm's strategic position because it determines the firm's competitive intensity and, hence, the attractiveness of a market (Institute for Marketing, online). In this view, a market is attractive if there is an overall industry profitability but unattractive if there are negative forecasts that drive down overall profitability. Bibliography 1. Armstrong, M. (1996). "Management Process and Functions." London: CIPD. 2. BBC (2007). "The US Sub-prime Crisis in Graphics." 21 Nov. 2007. 3. De Backer, W. (2008). "Climate Security Still Low Priority for Global Banking Sector." Business and Climate Change, 11 Jan. 2008. 4. Green, S. (2003). "Restoring Confidence in Capital Markets." Speech at the 33rd International Students' Committee Symposium, Switzerland. 5. Gold, G. & Feldman, P. (2007). "A House of Cards - From Fantasy to Global Crash." Lupus Books: London. 6. Greenacre, M.J. (1984). "Theory and Applications of Correspondence Analysis." London: Academic Press Inc. 7. Grant, R.M. (2005). "Contemporary Strategy Analysis." Blackwell Publishing Ltd: Oxford, UK. 8. Institute for Manufacturing. "Porter's Generic Competitive Strategies." Available8 online at: www.ifm.eng.cam.ac.uk 9. Kay, J. (1998). "Strategy Bites Back: It is Far More, and Less, Than you Ever Imagined." Financial Times, 5 Aug. 1998. 10. Phillips, J.D.W. (2007). "Rush to Gold as Global Banking Crisis Unfolds." The Market Oracle, UK. 11. Probst, G., Raub, S. & Romhardt, K. (1999). "Managing Knowledge." Wiley: London. Read More