Abbey National Bank - Essay Example

Abbey National bank Plc EXECUTIVE SUMMARY This report aims at the strategic management process involved in one of the leading bank of United Kingdom – Abbey National Plc. The scope of the report includes the stages involved in strategic formulation, strategic implementation and evaluation. The subject matter revolves around the key issue – environmental challenge and the strategies to be implemented in order to overcome this issue. It had been a valuable source of learning and it gave an in-depth visibility to the various aspects of an organization which proves to be of greater importance when it comes to the growth of a firm. CONTENT  Background  Key Issue a) Identification b) Justification  Methodology  Analysis of External Environment a) General b) Industry Analysis c) Competitors Analysis  Analysis of Internal Environment a) Tangible resources b) Intangible resources c) Capabilities’ d) Core competencies e) Strengths f) Weaknesses  Business- level strategy of the organization  Strategic Options a) SWOT Matrix b) BCG Matrix c) Grand Strategy  Evaluation a) QSPM  References. BACK GROUND: Abbey is one of the UK’s leading personal financial services company. It offers a full range of personal financial services including mortgages and savings, bank accounts, loans and credit cards, long term investments policies, critical illness and unemployment cover, and household finance. The company operates in the UK, Europe, and the US. It is headquartered in London, UK and employs about 25,000 people. Abbey is one of the leading providers of mortgages, savings, protection and self- invested personal pensions in the United Kingdom and is one among the largest bank in UK. The Groups principal activity is the provision of major financial services and residential mortgage lending. The Groups financial services includes Banking and Savings which provides residential mortgages, savings and banking & consumer credit; Investment Protection consists of three principal segments: protection, investment and savings & pensions; General Insurance includes non-life insurance products and residential home insurance; Treasury Services was structured into three business areas: Asset and Liability Management, Financial Products and Short Term Markets; Group Infrastructure comprises Central Services, Financial Holdings and the results of certain small non-core businesses and Portfolio Business Unit which includes Wholesale Banking (Roy, 2005). Key Issue: a) Identification: Around the world, financial services organizations are driven to increase revenues while decreasing costs. They need the ability to quickly go to market with new products, deepen customer relationships, increase revenue per customer, and improve the accuracy of their strategic decision making. At the same time, they need to control operational and compliancy costs, ensure interoperability of existing applications and infrastructure, and provide seamless interactions with their customers. All within an increasingly complex compliance environment. High-performance financial institutions understand the link between operational performance and financial performance. The ability to uncover and turn vital insights into operational value levers—such as customer- facing activities, exposure to credit risk, and market share—and link them to financial value levers like operating margin, loan-loss ratios, and cost of assets in a timely and accurate fashion is key to optimizing overall performance and driving value creation b) Justification: Abbeys goal is to be the leading provider offering only personal financial services in the UK via both direct and intermediary channels.  Abbey intends to offer the highest level of service and advice to UK consumers, many of whom feel that they have not been well served by the UK banking industry .The combination of the heritage and familiarity of the Abbey brand backed by the experience, expertise and a system of Santander is driving Abbeys plans to become the best bank in the UK. The state-of-the-art in strategic management through the corporate brand sees Abbey as using their brand as the uniting symbol of their differentiated direction and values. The next stage will be for them to integrate brand values into their balanced business scorecards or other performance measurement systems. They will set targets for managers and staff related to the delivery of brand values in their daily work and their reward/bonus systems will recognize achievement in upholding brand values. Having implemented all that, Abbey could then start to report externally on the performance of their brand, demonstrating publicly how they have increased shareholder value. As long as shareholder value continues to be the yardstick by which equity markets evaluate company performance, and as long as intangible assets constitute over 80 percent of the companies market value, there will be unceasing pressure on company directors in financial services to show effective management of their most important intangible asset, their brand. Methodology: A large bulk of data and information was gathered from the research about Abbey National plc. It covers the general principles and processes leading up to the production of the statistics, and details the progress of Abbey National plc on a collection of work programmes aimed at improving the techniques. The objective of the research is to monitor changes which have been observed, as well as those foreseen in the future. It also serves to identify the factors that are believed to be effective on these changes. Analysis of External Environment: Strategic assessment requires an understanding of both the external business environment and of internal resources, capabilities and culture. The purpose of the external analysis is to understand what may affect the future of the enterprise as a whole from outside itself. The external analysis may often be usefully considered at three levels:  General changes in the business environment;  Change within the industry;  known activities of immediate competitors and other specific events. 1) Analysis of the overall business environment: PEST analysis The PEST analysis is the most common approach for considering the external business environment in general. PEST (Political, Economic, Social and Technological change) roughly defines the scope of what is required but the word PEST is no more than a convenient mnemonic. Each of the four broad areas subdivides into a longer list of areas that are likely to be worth considering. The underlying thinking of the PEST analysis is that the enterprise has to react to changes in its external environment. This reflects the idea that strategic requires a fit between capabilities and the external environment and so it is necessary for an enterprise to react to changes. Political change might be expected to include, for instance, general changes in the domestic political climate, the effects of European integration, the after – effects of the breakup of the Soviet Union, government change, world power shifts as well as specific legislation and regulation. Economic change is likely to include the effects of economic cycles, patterns of world trade, currency conversion rate changes, commodity prices, changes in capital markets, labor markets and rates, and economic effects on suppliers and particular groups of customers. Social changes include the effects of demographic patterns, tastes and habits, and concerns about the environment and sustainable development. Environmental concerns are increased over the last couple of decades and are now a major issue for many businesses. Technological change covers the effects of technological change on products, processes, and distribution channels. 2) Industry Analysis: The second level of external analysis is likely to focus on the “industry”. The changes in the overall business environment will affect all the players in the industry but will often tend to benefit some players more than others. Michael Porter made one of the most thorough attempts to analyze the economic forces within an industry. Porter works has an important place in the positioning school which sees the fundamental role of strategy as positioning the enterprise for the future. Porter’s five forces framework are – the threat of entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the degree of rivalry between existing competitors (Roy, 2005). Most products, services, and the industries supplying them have a life cycle from birth, through growth, then to maturity and eventual decline. Analysis of life stages may give useful insights in those industries where there is a discernible and predictable life cycle pattern. Lifecycles may form a useful basis for analysis if, for instance, competition is based on the introduction of new products or if an industry as a whole is moving from maturity towards decline. The life cycle view of the world has its roots in a biological or environmental view of the nature of strategy. The general principles are those of building on strength, defending against weakness, and recognizing the underlying importance of the life cycle. The life cycle model can be used for analyzing individual product decisions or for the overall positioning in market area. The general conclusion to be drawn from the model tends to be that in a maturing industry, there is a tendency for the total number of competitors to decline as the stronger players acquire the weaker. This pattern of consolidation is observed in Abbey National Plc. 3) Competitor Analysis: The third level of external analysis is likely to consider competitors both individually and in groups. Analysis of the internal environment: The analysis of the external environment needs to be matched by a rigorous internal analysis of resources, capabilities, and competence. Resources are tangible, visible and relatively easy to measure. Resources include plant and machinery, patents, brands, and skilled people. Resources are rarely unique to the enterprise and may usually be acquired. Capabilities are less tangible and result from the organization of resources, internal systems, and skills. The distinctive abilities are visible to the competition and so vulnerable to imitation over time. Distinctive capabilities are those capabilities that are rare enough to be distinctive to customers from among competitors. Core competence is the rarest and most valuable internal attribute of all. Core competence is a group of related capabilities that confers competitive advantage. The ability to differentiate between general capabilities and true core competence can make difference between success and failure. The tests for core competence include: - essential to corporate survival in short and long term. - invisible to competitors - difficult to imitate - unique to the enterprise - result from a mix of skills, resources and processes - a capability which the organization can sustain overtime - marketable and commercially viable - few in number. There is wide range of frameworks and techniques for internal analysis just as there is for external analysis. The overall purpose of internal analysis is to identify those particular characteristics of the firm that will either allow it to meet existing or future customer requirements better than the present or future competitors (Roy, 2005). Business level strategy of the organization: A business strategy describes how a particular business intends to succeed in its chosen market place against its competitors. It therefore represents the best attempt that the management can make at defining and securing the future of that business. A good business strategy will meet six tests of quality: - It will be correctly scoped - It will be appropriately documented - It will address real customer needs - It will exploit genuine competencies - It will contribute to competitive advantage - It will lay the ground for implementation. In 2003, as a result of market research, Abbey set about simplifying its products to provide a range of easy to understand products and services. This initiative followed on from Abbey’s attempt at diversification into other financial products and markets that had resulted in substantial financial loses for the company, then trading as Abbey National plc. The most important change involved taking a new, critical look at this over-complex market. Abbey uses a range of methods to communicate with its personal customers including:  letters to all customers written in a simple intelligible language  new literature, check books and credit cards.  new advertising built around the theme ‘turning banking on its head’ Abbey has set out to transform banking practice by adopting a customer-led approach rather than a product-led approach. A key part of Abbey’s strategy is to continue to research and develop new tangible products and services, which actively demonstrates its commitment to “turn banking on its head” (Tony, 2000). Strategic Options: BCG (Boston Consulting Group): BCG largely built its reputation as a management consulting firm by applying the methods of portfolio analysis. This technique offered untidy conglomerates a method of reviewing their portfolio of past acquisitions. Certainly the management control systems were designed to control each separate business as an entity. Questions about scope of the enterprise as a whole and the relationships between the different businesses needed a new approach. The investors were becoming more suspicious of conglomerates and portfolio analysis offered a basis for planning some needed rationalization. SWOT Matrix: Its main strength is its expert knowledge of finance. This meant that it should focus on this area. Its main weakness is its size. As only the sixth largest bank it could not offer the same range of products as bigger banks. This meant that it should offer a simple range. Its main opportunity was to provide simpler products which customer would better understand. Its main threat is from other banks, who might want to take over Abbey, so it needed to become stronger. -> Performance Measurement: The year 2005 had been a successful year for Abbey, a comparative approach reveals an excellent progress in reducing costs across the business, and clear signs of sustainable revenue growth were also indicated. The year indicated an increase in the market share of new business in mortgages and savings and various measures taken in the area of significant opportunities – such as current accounts, unsecured personal loans and investments – had a good outcome in building momentum. The key highlights of the profit performance for the year 2005 are – - profit before tax of £596 million (2004: £ (21) million), with a net attributable profit of £420 million (2004: £ (151) million) - trading profit before tax of £775 million increased 34% compared to £579 million in 2004, with the second half performance benefiting from an increase in revenues combined with lower costs resulting from the cost reduction programme; - trading income was slightly ahead of 2004, and better than originally targeted at the start of 2005. During the year trading income has benefited from increased fee income, partially offset by a modest decline in spreads; - trading expenses were £224 million lower than 2004, a reduction of 13%, well ahead of the original targeted savings for 2005 of £100 million - a reduction in the trading cost: income ratio of 9.3% to 60.6% (2004: 69.9%); lending provision charges (after adjusting for 2004 write-backs) were higher by £54 million - reorganization and other charges of £266 million (2004: £546 million), including the cost of compensation following remediation of £70 million relating to endowment misselling - total customer loans of £99.3 billion, up 4%, and retail deposits of £62.0 billion also up 4% compared to 2004 and - a return on equity of 14.2%; (aboutabbey.com) In order to achieve a similar or more profitable outcome this year, it is highly important for Abbey to utilize their resources optimally and make full use of the opportunities – i.e., work on increasing the market share of their new products current accounts, unsecured personal loans and investments. A detailed description of the product related activities – such as brand share, sales, target market, market share etc is required in order to view the current situation and also to define measures and strategies to gain fruitful outcome. The financial services industry sells the products it thinks customers want. It then tries to persuade them to buy. This is called a product – led market. Abbey carried out market research at many instances to know what customers really wanted. It then provided the products. This is called a customer-led market. Thus we see ‘customer’ is given high importance and strategies have to be implemented to retain the existing customers and attract new customers. One of the pre-requisite to gain customer satisfaction is to provide simpler products which the customers can better understand. Communication plays a pivotal role, it is an essential practice to make the customer understands the benefits of the products and services offered. Besides this, the other major task is related to branding (Tony, 2000). Traditionally, branding is a concept associated with physical products and consumer packaged goods companies. A quantum leap is occurring in the influence of brands in financial services. Mega merger mania and global deregulation is driving the rise of global brands. Many large banks are re-branding all its global retail operations under one corporate brand. In the UK, market shifts such as the increasing consumer interest in financial decision-making and the Internet as a channel, are forcing companies to invest in brand building exercises with consumers. At the same time, powerful consumer brands such as Virgin and Sainsburys in the UK have successfully launched financial services with no previous experience, but with loyal consumer relationships. Branding is transforming the way financial services are communicated, just as surely as IT systems are transforming the way banks do their business -- and assisting new brands to set up banking without branches. The main reason behind this being that the brand is fast becoming the major competitive asset for financial services companies and also the role of the brand within the management of business is changing dramatically and the way businesses operate is changing as a result. Although some long- established banks and insurance companies still see their brand merely as an aid to awareness and recognition, the new entrants and those institutions that are radically transforming themselves put the brand at the center of their corporate strategy. This means they are aligning all their communications, operations and systems to their brand mission and values. In addition, they are working to make all of their employees effective ambassadors for the brand. These companies say that the brand symbolizes all that makes them different, so they are trying to ensure that their individuality is transmitted in all their activities. One such company which is working rigorously in improving its brand image is Abbey and due to this it is able to make its position stronger in the present market (James, 1996). The changing role of brands from a marketing tool to an organizational principle for business is part of an historical trend. Brands were first regarded merely as trademarks (brand names and logos), which differentiated one product or service from another. Abbey implements a large number of strategies on brand management and the concept of brand differentiation is extended into whole visual identity systems with guidelines for everything from packaging to advertising. The idea behind this is to differentiate the look of the products offered. More recently, it has been recognized that brands define ongoing relationships through the power of their personalities and values, which further differentiate the branded products and services from their competitors. Initially, In Abbey only the customer relationship was considered. Now, the leaders in brand management recognize that brands define relationships with all their key audiences - notably investors and employees. They also acknowledge that relationships and values relate to behaviors. Thus in one way the employees have a relationship with their brand that is the counterpart of the intended customer relationships. Thus the recognition that Abbey’s brands now serve as much more than just an identity system can be illustrated by the concept of the "brand iceberg." Like a real iceberg, only a small proportion of the brands mass and power is visible. The rest is intangible and hidden. Here ,effective brand management requires attention to the hidden brand elements as much as to the visible ones. This is the main measure which is highly advisable to be followed in Abbey in order to maximize their profits and retain their position in the market. This is not just through its visual expression but also through intangible elements such as proactive investor relations and employees who deliver the brand values in customer interactions. Consequently, they ensure that all the interdependent elements of brand management have been revised to reinforce the brand strategy. -> Branding Strategies: Abbey has three choices when it comes to brand strategy. It can introduce – 1) Line extensions: Abbey can introduce additional items in a given product category under the same brand name, such as an additional service , a guaranteed growth plan, a more simpler and profitable savings scheme and so on. The line extensions can be introduced as a low-cost, low – risk way to introduce these new products in order to meet consumer desires to utilize excess capacity. 2) Brand extensions: This defines that Abbey can use one of its successful brand name to launch new or modified products in a new category. Brand extension gives the new product instant recognition and faster acceptance. The main advantage in following this branding strategy would be incurring low advertising costs (Tony, 2000). -> Multibrands: Multibranding offers a way to establish different features and appeal to different buying motives. Abbey can introduce additional brands in the same category. However this strategy is not highly advisable as it involves high risks – i.e., each brand might obtain only a small market share and none may be very profitable. Thus we conclude that if Abbey adopts either of line extensions or brand extensions strategies more benefits could be derived. A mixture of both the strategies may really proved to be highly beneficial in maximizing the profits and minimizing the risks. Once the branding strategies are identified, a good and effective market programme for the brand in terms of product, price, place and promotion needs to be defined and implemented. Basically there are four clear types of brand use among financial institutions around the world. These are – Visual Identification, New Subsidiary Development, Catalyst for Corporate Change and Centerpiece of Corporate Strategy. The key difference between the first type of brand use and the others is that at the visual identification system level, the brand is externally focused only and little attempt is made to incorporate any core brand values within the management of the business itself. At the other levels, a greater or lesser effort is being made to address and inspire the workforce and other audiences (such as investors) through the brand. At the second and third stage, there is an active attempt to inculcate the brand values into employees working approaches. At the fourth stage, the values have been integrated into the business processes and into corporate policies. The brand development team includes service, operations and sales people as well as marketing. Brand managers share responsibility for customer satisfaction, internal communication and monitoring/evaluation of the brand. -> Product: Current accounts, unsecured personal loans and investments are the three main products to be looked at this time. A development strategy is highly essential in order to give a successful launch to these products. An effective branding decision is another pre-requisite. -> Price: Abbey follows the concept of customer-led market. Pricing on services and related activities should be done in such a way that it is proves to be profitable both to the company and the customer. -> Place: The main area of market which Abbey is targeting at is UK. It is to be noted that Abbey is ranked sixth among the largest banks in the United Kingdom. The basic targeted market segment is thus UK and it is highly essential to follow different strategies in order to retain this position in the market. UK Retail Principles: When the UK market is targeted it is required to keep align with certain specific UK retail principles. These are: - Customer satisfaction - Market Positioning - Employee - Process of Incidence - Financial management -> Promotion: Brand extensions could be the best practice to be followed in order to minimize the marketing or promotional costs involved in launching a new product or service. -> Actions Needed: The critical actions advisable for Abbey to maximize the value of its brands is as follows – - Understand and bridge the gap between banking and marketing mentalities by establishing the financial value that brands bring to the business. - Demonstrate ongoing, visible commitment to the brand across the whole senior management team. - Align internal communications with brand values. Make the message meaningful and inspirational. Repeat it often and through multiple media. - Manage the brand with a high and wide degree of participation, but control it centrally until the brand values are second nature to all. - Build the brand philosophy and values into recruitment, training and HR practices as well as business processes. - Measure brand performance in a manner that encourages customer bonding and not just awareness. Use employee performance appraisals to encourage behavior in line with the brand values. Those financial institutions that have succeeded in building a powerful corporate brand have done so through strong management and have used it to generate greater shareholder value, including the power of the brand in mergers. REFERENCES: - -> Girden, E.R. (1996).Evaluating Research Articles: From start to finish. -> James.E.Finch, 1996: The Essentials of Marketing Principles. -> Randall Geoffrey, 2000: Branding – A Practical guide to Planning your Strategy. -> Stephenson Roy, 2005: Marketing Planning for Financial Services -> Tony Proctor, 2000: Strategic Marketing – An Introduction. -> William J Winston, 1986: Marketing for Financial Services. -> www.abbeyplc.com -> www.abbey.com Read More