Strategy of Commercial Banks Operating in the International Environment - Coursework Example

Strategy Introduction Commercial banks operating in the international environment face certain challenges in their operation. The market is very muchchallenging and competitive for banks. This report is intended to give a clear idea into some of the challenges faced by international banks. The banks are very keen on expanding their markets world wide. As they tend to move outwards the strategies are to be changed to that extend that it becomes competent enough to survive in the market. The banks are playing a very interesting game of mergers and acquisitions in order to expand and capture new markets. The advantage behind merger and acquisition is that expansion of the bank is possible easily since the acquired bank will already be having a good market share in its country or locality. “In America the ten biggest commercial banks control 49% of the countrys banking assets, up from 29% a decade ago” (Survey: international banking. 2006). The customers and investors considers mergers and acquisitions to be a very positive. As a result more and more investors are attracted towards banks that are about to be acquired by other giant banks. The top ten international banks in the world in terms of assets are UBS, Citigroup, Mizuho Financial Group, HSBC Holdings, Credit Agricole, BNP Paribas, JPMorghan Chase, Deutsche Bank, Royal Bank of Scotland and Bank of America. In this report first of all the environment in which the international banks operate is analysed. In this portion is included the challenges faced by the banks for survival. Later on in the report the opportunities of the banks in the emerging market is analysed. In those are included the potential market for the banks all over the world. Literature framework Examination of the external environment: The external environment for banks is highly competitive. The banks all over the world are trying different strategies for being distinctive in the market and to improve the market capitalization. The case of Chinese banks can be seen at first. Banks in China are focused on minimizing the state control over it. For this they are selling off more shares to the outsiders that include the foreign banks and other business enterprise. The motive behind this is that if there is more state control over the banks they will be focused more on domestic expansion. But when the investments are open for foreign investors the international customer base of the bank will increase leading to better international presence for the bank. When the case of Chinese banks is this the one in Russia is focused on improving the balance sheet position that means they are accelerating the performance of the banks through domestic operations itself. This effort has made the banks of Russia grow at a rate of 40% per year. This is in fact a very good growth rate. Banks in Japan are the one that has improved capacity through continuous Mergers and Acquisitions. The scenario is very competitive as almost 11 old banks in Japan have been acquired by 3 new Banks. This shows the managerial expertise of the new banks. The banks that are acquired by the new banks are the ones that have been in the country for years. But they lacked the managerial expertise to survive in the market with new generation banks that have a highly standardized system of management. It is evident from the ‘thinking big’ survey that almost 49% of the banking assets of America are controlled by the top 10 banks in the country. This is also another proof for the expert management in the industry as the top 10 banks include many new generation banks. Mergers and Acquisition is one of the leading strategies that are being used by the banks for their survival. The customers and investors are also becoming very choosy as they derive their own formula to invest. That is they focus more on the small banks as they are sure that at one point of time the bank is going to be acquired by another biggest player that will help the investors to be part of the acquiring bank. The banks are possible to avail many advantages through this mergers and acquisitions. One of the most important advantages is the capacity maximization. When a bank that has presence all over in India is being acquired by an American Bank they don’t need to spend any additional expenditure to penetrate into the country as the acquired bank already has presence in the country. Procurement of human resources is also not an additional expenditure. Additional expenditures are to be incurred only on advertising and accounts settlement process. But one of the important challenges that the banks will face is that the change in the process. The changing of the systems and activities of the acquired bank is often a complex task. The acquiring bank finds it very difficult to exercise immediate control over the acquiring bank. Another advantage of merger is about the awareness of the new market. If a bank in China is being acquired by an American Bank the American bank need not conduct any market survey for knowing the Chinese market as the Chinese bank that is acquired is already well aware of the market. This reduces the additional burden of acquiring bank for conducting market research. The resources of both the banks are shared by them in order to benefit both. The usual practice of the bank is to lend the money that has been collected as deposits from the public. So usually the bank maintains a good parity between the loan and deposits received. In this case if the acquired bank is facing any shortage of funds as deposits in order to lend it can take the deposited amount of the acquired bank. Another most important factor is being considered by the whole CEO’s in banking industry as a reason for the merger. That is merger with other bank in order to avoid the possibility of takeover of their bank by any other strong bank. The primary reason for the banks to increase its capacity is to avail better advantages from the government. When the size of the bank is bigger the Government of the country in which the bank operates will take more interest in its welfare. Therefore, they will draft new rules and regulations to their advantage. So when the Government shows more interest to such banks an assurance of the quality of services of the bank is being made in the minds of the general public. This will lead to an increase in the customer base. There is very minute chance for such banks to fail in the market in any crisis. It is also a rebirth to the banks that are about to fail in the market when it is being acquired by some other strong banks. Though the international banking scenario is quite attractive it faces the following challenges. Dollarization Restructuring of sovereign debt Poor banking practices Interest rates variations Dollarization is one of the challenges that are being faced by the banks in the present era. “A high degree of dollarization particularly makes banking systems more prone to runs and makes runs more difficult to stop” (Ingves 2003). The customer base of the bank will be lost when the customers become aware that there is limited supply of Dollars. The banks in the dollarized economies thus face crisis. Debt restructuring is another major challenge that the new generation banks face. If a company having a large proportion of debt in its capital structure restructuring such debts will affect the capital structure of the banks. Undercapitalization occurs when immediate restructuring is done on it. But mergers and acquisition is a possible solution for this problem as the banks will have more fund and better capital structure in order to restructure the debts of the bank. Poor banking practices are another major problem that is faced by the banks. Some banks commit mistakes in the way they practice the banking. Some times the lending practices of the banks are not satisfactory as they go in excess or sometimes very limited. Some banks take more risk in business operation which can also be hazardous for the bank. When the banks focus more on improving the market share it tends to focus less on profitability. Some bank managers hold very little shares of the bank. This practice is also hazardous because lower the shareholding of the managers lower will be their interest in the affairs of the bank. Interest rates variations are another challenge that most banks face. Interest rate never stays fixed. It fluctuates due to any happenings or due to the effect of any matter related to the economy. Therefore, when any such fluctuation occurs the bank has to change the policies continuously. This is not a one time process because every time a fluctuation in the interest rate occurs the banks are burdened with the process of continuously changing the policies. Attractiveness of emerging markets: Apart from the challenges faced by the banks the market is also highly promising for them. Both American and European banks have very good prospects in the emerging markets. European banks are at a very high growth phase at present. The banks in Europe post a very high increase in the profitability and return on capital as compared to its previous year’s profits. One of best examples for that is Deutsche Bank that was able to earn a Return on Capital of about 25% compared to a mere 16% during the year 2004. Deutsche Bank is the biggest bank in Germany. The European banks also have a very good asset base. The total assets of the European banks for the year 2004 were $28 trillion according to the survey conducted by international monetary fund. This amount is more than the market capitalization of stock markets of the country. European banks are planning to move foreword with their strategy of Mergers and acquisitions for their market expansion. “While cross-border banking mergers in Europe have not often materialized, the 2005 acquisition of Germanys HVB by Italys UniCredit CRDI.MI and the looming takeover of Hollands ABN AMRO have shown such tie-ups are possible.” (Robbins 2007). The banks are competing for making more and more acquisition. Every bank focuses on winning the bid for acquisition as lose of the bid is going to cost the bank more. The banks are highly motivated to expand the domestic markets through merger with any domestic bank. Most of the banks are voluntarily inviting bid for being acquired by as they look for capacity maximization. The banks in Europe have not only been engaged in domestic mergers but merger with those of the international brand. The merger of the European banks with the domestic as well as the overseas banks is giving them wider greater chances for further expansion in the future. Through their cross border merger they have gained managerial expertise in competing in the global environment. The introduction of common currency in Europe was highly advantageous for the banks. The value of the mergers between the European banks was almost equal to the one that will be made in America. These are again putting a positive future for the European Banks. The cross border mergers for European banks are becoming easier. Europe has witnessed many of such kind of mergers in the past. The major reason behind the banks focusing overseas is that the domestic mergers have already reached a limit. There are no better banks to be acquired in the domestic markets. The scenario can be examined by using Porter’s five force analysis. “Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates” (Porters five forces. 2007). The following are the five forces as laid down by Porter. Rivalry: Rivalry refers to the competition in the industry. It refers to the various types of rivalry in terms of its intensity and its effect on the total environment of the industry. The model also speaks about the method of surviving in the competitive environment. Threat of substitutes: Threat of substitute is another model laid down by Porter. The substitutes are the products that are used as substitute for a particular product. That is coffee is used as a substitute for tea. Buyer power: Buyer power is the third model lay down by Porter. This refers to the influence of the customers on the industry. It refers to the situation where there are very strong buyers and the demanding power of the buyers on the price of a product. Supplier power: Supplier power is related to the relationship between the buyers and the suppliers. For the industry the suppliers refer to the persons who supply raw materials to the industry. The power of the supplier speaks about their power to demand more price from the industry to which they supply raw materials. In short it is related to the bargaining power of the suppliers. Entry barrier: This is the last model of Porters five forces. It refers to the entry of any foreign companies in the domestic industry. This force is also told as threat of entry. The threats that are imposed on the companies that operate in the domestic market due to the entry of foreign companies are referred through this force. Now the scenario can be analyzed by Porter’s five forces. The first one is the Rivalry. The European and American banks are facing stiff competition from the rival banks of other nations. The banks have very good prospects in the future and in order to tap all the profits in future the banks should formulate better policies in order to wipe away the rivalries from the battle field. Banking companies have faced stiff rivalry in the takeover battle too. The case of take over battle of BBVA and ABN AMRO on Banco Nazional Del Lavore and Banca Antonveneta is an example for the rivalry existing in the industry. The bid was given up due to the launch of rival bids by Bank of Italy. The rivalry is not only in the case of bid battle but also in the real operating market. The Banks should at that instance focus on competing with the rivals through better strategies such as differentiation in the product and improving features of the existing products. Threat of substitutes refers to the products that can be used as a substitute for another product. Considering the banking industry there is less number of substitute products. The threat from substitute products is limited in case of the industry. But in some cases the investments in stock markets, insurance, mutual funds etc are considered as substitutes as these are being adopted by the general public since the interest on bank deposits are comparatively lower. However comparing to other industries threat of substitutes are lower in the Banking industry. Buyer power: Buyer power is the next major force. Buyer power refers to the bargaining power of the buyers. The impact of the buyer power in the banking industry is higher. The reason for high rate of buyer power is the high rate of rivalries in the industry. As there are more and more banks the customers have become very choosy. This phenomenon has made many banks bring their products to the advantage of the customer’s in order to increase the customer base. As a result the customers have plenty of attractive packages of products before them. So for the European and American markets to capture more and more markets they need to alter their products in order to make it competitive enough with that of the rivalries. Supplier power: Supplier power relates to the bargaining power of the suppliers in the industry. However in the banking point of view there is less scope for supplier power as there is no regular supplier of raw materials for making final products in the banking industry. Entry barrier or threat of entry: This is one of the worst threat that then banks face. It refers to the threat of the foreign banks that enter the domestic markets. This threat is challenging not only the European and American banks but also the banks all over the world. The trend of overseas expansion is accelerating the threat of entry. Threat of entry is not regulated as the entry by foreign banks is always beneficial to the economy of the country. Therefore, the only solution in this regard is to make the domestic banks more competitive than the new entrants. Conclusion: The analysis of the banking industry scenario has drawn necessary attention towards one of the most important challenge that is being faced by the banking industry. That is the stiff competition. The whole international market is at a highly competitive environment. Competition is not only in the field of product supply but also in the war for bid. The competition by the companies for takeover or mergers and acquisition shows that in the future banking environment survival is there only for the big players. It is by anticipating this fact that many small banks are now interested in the bank being taken over by any large player. This will help them to reach international market which is not possible if it decides to stay alone in the market. Apart from the porters five force analysis a small STEP analysis can also be made inorder to prove the competitive situation and the complicated environment. Social or cultural factors are the first one in the step analysis. There are certain customers who bank with any particular bank since they have been used to it from a very long time. Such people associate that to a culture and it shows it is difficult to move such customers from them. Second one is the technological advances. The international banks uses most modern technologies in banking and therefore small banks find it difficult to survive. Economic trend, the third one in the STEP analysis has greater influence on the banking industry. There are cases where the banks should change their policies according to the fluctuation in the economic condition. The last one in the STEP analysis is the one that has the greatest influence that is the Political and legal factors. The strong banks in the industry usually try to influence the government to frame rules to their advantage. This may sometimes be harmful for the small banks. Works cited Survey: international banking. Thinking big. Economist.com. 2006. 13 Dec. 2007 . Ingves, Stefan. Banking crisis from an international perspective. Recent challenges. International monetary fund. 2003. 13 Dec. 2007 . Robbins, Mathieu. European Banks Say M&A prospects to keep pace. Reuters. 2007. 13 Dec. 2007 . Porter’s five forces. A model for industry analysis. Strategic management. Quick MBA. 2007. . Read More