Strategic Financial Management-Barclaycard - Case Study Example

STRATEGIC FINANCIAL MANAGEMENT BARCLAYCARD Introduction Barclaycard is UK’s most powerful and well known credit card brand that spans over a wide gamut of services including providing consumer lending services, processing of card payments for retailers as well as merchants, issuing of credits, and charging cards to its corporate clients as well as the United Kingdom Government. It has its presence in several countries across the globe including, Americas, Central Asia, Africa and Europe. The Barclaycard UK, operates in tandem with other parts of the flagship company Barclays including UK retail banking, Barclays Commercial Bank, and International Retail and Commercial Banking so as to leverage its distribution capabilities. Barclaycard provides the following products / services in the UK: Barclaycard branded credit cards and loans Barclays Partnerships FirstPlus secured lending Barclays Partner Finance Barclaycard Partnerships According to the latest company estimates2, nearly 10.1 million people in the UK carry Barclaycards, of which 565,000 are Barclaycard Business corporate card holders and currently the number of Barclaycard International cards in issue totals 7.6 million. The company has business relationships with close to 93000 retailers and merchants and 24 million outlets that accept Barclaycards globally. 2. Resource Analysis The detailed resource analysis involves an analysis of financial, marketing, operations and HRM policies of the company so as to provide an insight into the company’s strategic positioning and overall business performance in the above mentioned key areas. 2.1 Financial Overview The Barclays group showed significant performance during the financial year 2007 in spite of adverse market conditions. The reduction of 1% in profit before tax was well compensated by the 3% rise in the profit before business disposals. The overall profit growth exceeded that of the previous year with a continuous development in its UK businesses as well as substantial investments in the international branches. The strategic decision of diversifying its business portfolio paid off well in terms of generating good shareholder value, which led to a declaration of an annual dividend amounting to 22.5p per share totaling 34p during the year, amounting to a total 10% increase. Key Performance Indicators A sharp reduction of 11% in the retail impairment charges on loans and advances was observed during the year which fell from £1,809m in 2006 to £1,605m in 2007. There was a marked improvement in the Barclaycard impairment charges to an astonishing 21% which fell from £1,067m in 2006 to £838m in 2007. This reduction could mainly be attributed to the factors such as reduced flows into delinquency, reduction in the levels of arrears and lower charge – offs in UK cards. There has been a steady increase in the number of Barclaycard credit card holders in UK since the past two years which grew from £9.8m in 2006 to £10.1m in 2007. Contribution of Barclaycard to group profits On the basis of the financial information presented above it could be clearly analyzed that the Barclaycard has delivered a resilient financial performance in the face of adverse economic climate as compared to the past year. The breakthrough performance in the midst of a turbulent market could only be achieved on account of its robust financial strategy of achieving superior growth by diversifying its profit base. The company has made has achieved outstanding progress towards achievement of its goals which includes re-establishing itself as a leading UK credit card brand and an equally aggressive expansion strategy in its international cards businesses. There are currently 8.8m international cards in use and 10.1m UK customers. According to a recent survey by ACG, Barclaycard tops the list of the top 10 credit card companies the beating Capital One to the second spot3. Rank Name of the Credit Card Issuer 1 Barclay Card 2 Capital One 3 HBOS 4 Lloyds TSB 5 Natwest 6 HSBC 7 American Express 8 Egg 9 MBNA 10 Co-operative Bank 2.2 Marketing Analysis The marketing analysis of Barclaycard involves a detailed analysis of its marketing strategies as well as the marketing mix; product, price, place and promotion, as these very elements play a crucial role in the company’s growth and increasing its profitability. Barclaycards key marketing strategy is centered on attaining a leadership position in the global services industry by offering world class services to its local and international customers across the globe. The company follows a strict adherence to its strategic policies which involves anticipating the needs of its customers and clients and serving them to achieve their respective goals. This policy is based on the principle of earn, invest and grow. Besides its strategic partnerships, affiliations and co – branding activities in the past several years has proved to be quite profitable for the company which has led to Barclaycard being the number one player in the UK credit cards industry. Products: The company offers a range of products that are specifically designed to serve all categories of customers, keeping in mind their individual tastes and preferences. The company gains added advantage over its competitors through its product differentiation strategies and by offering a wide variety of products to choose from. For instance, the Barclaycard offers twelve different varieties of cards with varied schemes and offers to facilitate its customers to choose a product that suits their tastes and preferences / lifestyles. Pricing: Barclaycard offers wide range of credit cards with flexible repayment options. The company offers several discount options with its retail partners, doesn’t charge any annual fee and hence is quite cheap and affordable. The products are competitively priced and added to it the wide range of products and its global reach the customers worldwide are drawn towards accessing the benefits extended by these products. Promotion: Barclaycards UK has several products to offer and thus promotes its products according to the usability and attractiveness to the individual customers. It caters to the needs of both individual as well as business customers and hence its products are designed and promoted accordingly. For instance, the Barclaycard Flexi-Rate is offered with convenient payment options and attractive offers such as 0% interest on balance transfers and 0% interest on purchases for a period of three months, the Barclaycard Graduate Credit card is promoted as the best choice for students over 21, the Barclaycard Charity Card is promotes charity amongst the philanthropic customers, while the Barclaycard Football Credit Card especially caters to the sports lovers. Such offers and schemes are designed to attract customers and cater to a wider range of client profiles. Place: The Barclaycard offers services in all the major cities across the globe including countries in Asia Pacific, Americas, Africa and Europe. The wide geographical scope plays a crucial role in the profitability of the company as it generates huge amount of revenues from these economically viable zones. 2.3 Operations Analysis Barclaycard credit cards can be used in over 29 million company outlets across the globe. In the UK Barclaycard range of services include branded credit cards and loans, Barclaycard Partnerships, as well as secured lending operations while internationally the company manages cards and loans operations on behalf of Littlewoods Financial Services, GUS and Sky. It issues cards in 16 countries including USA, Germany, Spain, Italy, Portugal and South Africa. 2.4 HRM Barclays follow two different yet mutually dependent aspects of sustainability; one of providing sound and enduring returns to its shareholders and the other of providing the best possible services to its customers. The company thrives on its strength of recruiting the best talent available in the industry which further boosts its drive to sustain its leadership position in the immensely competitive industry. The company provides wide range of leadership and development programs for its employees to sharpen their skills and ensure a fair and equal treatment irrespective of their gender, age, or ethnicity. The composition of UK ethnic minority employees has increased significantly over the years from a meager 7.2% in 2001 to 12.3% in 2007. The company is now focusing on narrowing the gender bias gap especially at the top management level. The composition of women employees at the top management level currently comprises of 20.6%. The company also believes in disability mentoring which is evident from the statistics of the disabled employees presented below4. 3. Environmental Analysis 3.1 Porters Five Forces Analysis Threat of New Entrants: Economies of scale: Medium The companies in the credit card industry enjoy low – medium levels of economies of scale since the product is easy to manufacture and does not involve high levels of technological knowhow. However, the amount of capital required is huge, since it requires setting up a high end distribution network with tie-ups and affiliations with third parties. Thus, those companies that fulfill the capital requirement criteria, for instance financial institutions such as banks, credit lending institutions, co-operatives etc; can easily enter the industry. Product Differentiation: Medium There is not much scope of product differentiation in the credit card industry as they are usually differentiated by the APRs as well as services. Barclaycard credit cards for instance, provide a wide variety of cards that cater to different sets of target customers ranging from students to sports lovers to environmentalists. But these services are more or less similar to those provided by its competitors, limiting the scope of product differentiation to medium to low levels. Capital Requirements: High The capital required for entering into this industry is huge as it is required of the credit card companies to have huge amount of cash reserves to facilitate the initial outflow of cash prior to making payments. This criteria, restricts the entry of new players to a certain extent. Barclaycard is a dominant player in the industry and is able to maintain its strategic market positioning due to the vast amount of capital reserves that the company enjoys. This is partly due to the fact that it is not a separate company but a business segment of its flagship company Barclays Inc. which is a hugely successful financial service provider in the UK with branches across the globe. Switching Cost to Buyers: High The switching cost to buyers is quite high as there are a large number of existing players in the market offering similar services thus, leaving the customers to a wide variety of services to choose from. Besides, the availability of cheap substitutes is a threat to the company as the consumer loyalty is significantly affected and retaining the existing customer base requires a huge amount of capital at the disposal of the firms. Access to Distribution Channels: Medium to High The credit card industry cannot function independently. It requires the co-operation and co-ordination with the other firms such as distribution channels comprising of retailers who accept those credit cards as a valid mode of payments. The credit card companies need to have a vast network so as to broaden its reach and lure customers in availing their services. Thus the third party affiliations are indispensible for the players in this industry to facilitate their overall growth and development. Government Policies: Medium The impact of governmental policies on the credit card issuers is substantial in determining their profitability as the regulations laid down by the government could adversely affect the rates charged by the credit card companies to the customers. Thus government intervention could largely affect the company’s standing in the industry. Threat of Substitute Products: The threat of substitutes is medium to low as there are hardly any substitutes available in the industry that possess the same qualities as the credit card. Although the credit card industry is facing stiff competition from debit cards but the popularity of credit cards is still intact. Credit cards facilitate flexible usage and easier money transactions. But the sheer number of players in the market could cause the customers to switch to an alternative product if the services are not up to the best satisfaction of the consumer. Determinants of Buyer Power The size of the buyers is unequal and the demand is based on alliances with the card types accepted by the retailers, rather than with individual firms. The switching costs among the buyers is also low since a high amount of capital investment is required to switch the infrastructure for instance changing the magnetic electronic swipe cards to the smart card requires too much capital which is the main reason why retailers have not readily adopted this method of payment. The credit card falls in the category of undifferentiated or standard product / service. Hence if the retailers insist on accepting a particular brand of credit card the profitability of the others in the industry could be severely affected. Determinants of Supplier Power The suppliers in the credit card industry are largely fragmented. Thus if the retailers accept a card with of a particular brand then subsequent strategic alliances by the new entrants with the existing retailers could open up avenues for further growth and development of the newly established business since the new card could be easily accepted and integrated into the existing system by the retailers. Rivalry amongst firms Since approximately 50% of the UK adult population owns a credit card it is possible for competition to enter different markets targeting different income segments or compete against the same market groups. The UK credit card market still has ample scope of development and can accommodate several more players hence the nature of competition isn’t fierce as is observed in other industries. However, a potential threat to the UK credit card industry is the foray of international players in the English markets, which are providing lower APRs and hence are posing direct threats to the existing players. Besides there exists high exit barriers in the industry owing to alliances with several third party vendors such as retailers and distributors make it difficult for the existing players to make an exit in the face of extreme competition. 3.2 PESTIE Analysis Political and Legal Factors Global Factors The portfolio is reasonably well diversified, assisted by increases in business levels in a range of European, African and Asian countries. Risk tendency at 2007 year-end reflected an increase in portfolio size as well as some weakening in credit grades, evidenced by wider spreads in wholesale credit and potentially more difficult conditions in some of the international retail portfolios in 2008. Employment Laws One of the guiding principles at Barclaycards is developing the best people in such an intensely competitive industry and to find, develop and retain the best talent. The company is committed to diversity as a way of helping to ensure that it attracts the best people. It also has a wide range of development and leadership programmes for employees and a policy that ensures that they are all treated with respect, regardless of age, race, sexuality, gender or disability. Economic Factors Dislocation in the credit markets had an impact on all major interest rate, equity and foreign exchange markets, which also experienced higher volatility. In order to maximise shareholder value through optimising both the level and mix of capital resources, Barclays operates a centralised capital management model, considering both regulatory and economic capital. Decisions on the allocation of capital resources, conducted as part of the strategic planning review, are based on a number of factors including returns on economic and regulatory capital Diversification across risk types remaining significant, reflecting the broad product mix. Higher market volatilities in the fourth quarter led to an increase in DVaR at year end, and will contribute to higher average DVaRs in 2008 Socio – Cultural Barclays has always been a proud and committed investor in its communities. In 2007 the company invested £52.4 million in communities around the world and 44,000 Barclay’s employees in 26 countries were involved in the fundraising and volunteering initiatives. Its flagship programme, Banking on Brighter Futures, enabled us to use our skills and expertise, as well as money, to maximum effect helping people improve their economic prospects, especially those in poverty, disadvantage, and debt. Projects ranged from supporting elderly people in the UK who are in financial difficulty through to helping Ugandan women affected by HIV/AIDS to set up their own businesses. The company believes that “This is not just about good works: the more we help individuals and communities improve their economic circumstances and financial literacy, the better the environment in which we operate.” It is planning to invest $150 million over the next five years in the Banking on Brighter Futures programme. 1,500 projects will be supported around the world, and employees will be encouraged to volunteer 150,000 hours of their time on projects focusing on financial education, entrepreneurship, employment and financial inclusion. Technological Barclaycard To Test Cobranded Transit Card On NFC Phones5 Barclaycard has issued 5,000 of its UK customers with credit and debit card readers designed to help cut fraud and reduce exposure to phishing attacks6. The company is using Applixs BI technology, TM1 to help reduce the level of risk it and its customers - face from fraud by identifying and reacting more quickly to threats. TM1 will also soon be used to enable Barclaycard to analyze the risk of cards being intercepted as they are sent to customers and optimize the companys spending on secure delivery7. Ecological As a major financial services organization, Barclaycard takes a lead in helping their clients thrive in a lower-carbon future, and use our position to press for appropriate policies and regulatory frameworks to deal with climate change and plane to be 100% carbon neutral globally by next year. The company is quite committed to increasing their energy efficiency, and reducing carbon footprint on an ongoing basis, as well as helping its supply chain reduce emissions. An example is Barclaycard Breathe, a new card that gives consumers incentives when they buy green products, and donates half its profits to environmental projects. 4. SWOT Analysis Strengths Most powerful credit card brand in the UK8 First credit card issuer in the UK and has successfully achieved economies of scale owing to a high market share9. Enjoys a high Brand status, since the name itself is synonymous with credit card due to its widespread popularity amongst the customers and retailers alike. A well-established distribution network, through Barclays Bank, other financial institutions and large retail organizations which made its product available to a wide range of potential customers.10 Strong strategic alliances with other major players in the industry such as Visa to facilitate better customer service11. Strong financial backbone to venture into a new market with the introduction of credit cards. Weaknesses Provides low annual transaction value per card as compared to its competitors12. New credit card issues are susceptible to increased bad debt in the Barclays Bank. As a new type of payment method Barclaycard must convince critics that uses of such a card is reliable and not susceptible to fraud. Opportunities Only 54% of UK adults owned credit cards, leaving ample scope for market penetration. Rapid technological developments have improved security and flexibility of payment by plastic systems thereby adding to its popularity. Being a major player in the industry, Barclaycard has established itself as a trusted brand amongst a vast database of customers which in turn has resulted in increased customer loyalty. the current economic situation of the country is positive for the growth and development of the credit card industry with favorable government policies and healthy competitive scenario. Threats New entrants such as industrializing societies and financial institutions offering similar products. Low annual percentage rate cards being offered by new entrants. Cannibalization of the credit card market by debit cards and electronic purse (smart) cards. Increased availability of other forms of credit. Increased opportunities for potential credit card fraud. Identity theft 5. Analysis of Alternative Solutions Risk Assessment and Mitigation Risk Assessment and Mitigation Alternative Risks and Probability Consequence and Severity Mitigation Techniques and Strategies Look at the major requirements and try to quantify its overall business value Difficulty in accessing required resources Difficulty in defining scope changes in terms of cost/ benefit Poorly defined project deliverables Consequence: The new project policies might have to be kept on hold in case of absence of clear and concise project definition Severity: High Investigate the actual business requirements and accordingly quantify their values Review a prior similar project and compare the values delivered or benefits achieved Launch the project only after the values are defined and explained clearly Improve customer commitment levels Low customer confidence in the business value Harder to identify and allocate required resources for achieving better customer satisfaction Consequence: Loss of customer confidence in the business value might lead to low customer turnout ratio, reduction in customer database and loyalty and increased switching costs Severity Medium Creating aggressive policies to keep the customers engaged and communicate the business values to the potential customers as well as the perceived benefits. Devise methods to improve and increase customer participation Improve and enhance product / service functionality New designs and policies might be found tedious or difficult to comprehend by the customers The newly devised solution might have limited value as opposed to those perceived by the customer Complicated product / service policies might drive away the customer Consequence: Increased cost to the organization on account of failure of the new business model, leading to adverse effect on its brand value and ultimately its competitive positioning in the marketplace Severity: Medium - Low Gather customer approval for the proposed business model – product / service through surveys and research. Try to incorporate changes that are innovative yet tested, that can go down well with the customers of all segments Employ best in the business marketing heads to devise innovative products. Initiate suitable and appropriate changes in business policies Policy changes might affect the existing product line The new policy changes might not be fully integrated during the initial phase. Substantial changes in business policies might lead to destructive results. A sudden change in the business policies might hamper the internal workings of the organization in the initial stages leading to communication gaps and confusion amongst the stakeholders involved. Document all the proposed organizational policies and ensure its viability Communicate clearly the proposed benefits to be derived from the new policies and the purpose of its implementation Include the successful implementation of new policies and processes as part of the performance criteria for managers Pros and Cons of Alternative Solutions Alternative Pros Cons Improve customer commitment levels Increased customer confidence in the product / service Enhanced customer loyalty Increased opportunities and broader market for selling the product / services Might take longer to design and implement new strategies Failure of the planned policies might lead to loss of confidence in the business value The customers might undermine or reject the new proposals, if not well developed. Implement major changes in the organizational structure by implementing new business policies. Reshuffling of old and outdated policies might lead to a better and smooth functioning organization New policies might lead to designing of new and innovative ideas and counter policies to combat the latest industry trends. Facilitate better and smoother communication between the stakeholders leading to faster resolving of key issues ultimately leading to better and faster decision making process. Organizational uncertainty might lead to problems such as insecurity among the employees Might cause confusion and chaos, leading to delay in decision making Might affect the employee morale due to the fear of loss of jobs Enhance Product / service functionality through technological innovations Increased Profitability Increased customer database Better competitive positioning of the organization Might lead to downsizing its workers Reduced Productivity Degeneration of product quality Optimal Solution Implementation Plan: Action Item Deliverable Timeline Who is Responsible Business Analysis: focus on collecting relevant customer data 4 weeks Chief Marketing Officer Needs Analysis: Listing all the needs of the customers 4 weeks Chief Marketing Officer Product Evaluation: Compare the product / services with that of the competitors 3 weeks Marketing Team Product Configuration: Develop a system in accordance to the organizational requirements 8 weeks Chief Technology Officer Pilot Implementation: Pilot Test the system 8 weeks Chief Technology Officer Final Implementation: Implement the new system and communicate the change to users 2 weeks CTO and CMO Evaluation: Evaluate the results 2 weeks CEO Evaluation of Results End-State Goals Metrics Target Implementation of proper policies for ensuring steady revenue flows. Increased profitability Effective marketing strategies and implementation of corrective developmental policies Facilitating proper unification of all the stakeholders involved in order to enable them to share and pursue a common vision, and realize its ultimate goal – improved customer satisfaction Well informed and professionally trained management team with a clear vision working towards attainment of a common goal. Better results in the form of increased employee productivity and reduced conflicts on issues and ideas central to all the stakeholders. The utilization and implementation of an efficient CRM system in order to extend its benefit to both the management as well as the customers and thereby ensure smooth functioning of the organization as whole. Well satisfied customers further translated into increased consumer loyalty and hence improvement in revenue inflows. Improved employee morale on account of successful achievement and implementation of their policies and increased customer satisfaction Initiate measures to enhance customer satisfaction and help reduce customer switching costs. Better strategies revolving around attainment of customer satisfaction Improved customer loyalty and enhanced brand value Regaining its lost customer base and re-establishing itself as a pioneer in providing world class services in the industry. Reshuffling of the organizational strategies and implementing new policies and measures which are in sync with the current trends and competitive scenario A smooth functioning organization with well equipped and experienced management team, optimum organizational policies and large database of satisfied customers. BALANCED SCORECARD  Conclusion The credit card industry is growing by leaps and bounds and as the plastic money is increasingly finding large takers it has become an indispensable and prominent form of payments. But the tremendous amount of popularity of the plastic money has also brought along with it an increased scrutiny of the credit card industry. The amount of online frauds, money laundering, phishing, and identity theft too has acquired pace. The attractiveness of the industry has led several new players entering into the market which is being made easier due to the meager entry barriers. Owing to the above mentioned facts, retaining a strong customer base and competitive positioning is going to be a tedious task. The management thus has to take concrete steps to keep with the industry norms, and to retain its strong competitive position: that of an industry leader through continuous and timely revival of its business policies that would enable it to maintain a stronghold in the industry. The industry has immense potentials to further grow and expand and Barclaycards, given its long standing experience of being in the industry since a long time now, has an edge over its competitors and hence has the power to exploit the immense market potentials to the fullest. The various models presented in the paper, explore the oligopolistic structure of the credit card industry, and is an attempt to derive industry equilibrium dynamics that are consistent with the empirical facts stated in the case study. REFERENCES Gadiesh, O., and J. L. Gilbert. 1998. “How to map your industry’s profit pool.” Harvard Business Review 57:137 – 145 Slater, Stanley F., and Eric M. Olson. 2002. “A Fresh Look at Industry and Market Analysis (BH068).” Business Horizons: 15 – 22 www.barclaycard.co.uk July 18,2008. Available from: K Munir, Security Strategy, July 6, 2004. Available from: < http://software.silicon.com/security/0,39024655,39121921,00.htm> Credit card league table announced, June 11, 2008. Available from: < http://www.find.co.uk/mortgages/buy_to_let/news/186706801> Internet Business News, July 18, 2008. Available from: < http://www.allbusiness.com/technology/internet-technology/436823-1.html> Read More