Strategic Management - Hello Bank - Case Study Example

Strategic Management inserts his/her s Department’s Contents References Appendices 1. PART A 1.1 Introduction The concept of strategy in business has matured in the last few decades. The concept has evolved from the perspective of mere warfare which required combating others to win the war to relying upon development and planning of corporate resources to achieve operational excellence. However, this view suffers from its various limitations such as the fact it can be ‘easily’ imitated, thereby endangering the winner’s position. Strategy has, therefore, been defined as a unifying theme bringing coherence and direction to the organization towards its goals (Grant, 2010). These goals have expanded beyond the traditional realm of profit maximization towards economic value creation, disruptive innovation or techniques as well as considering the social and environmental impact of firms’ activities. Strategy, therefore, aligns stakeholders (shareholders, investors, personnel, suppliers, etc) with respect to organizational goals and facilitates their attainment. 1.2 Porter’s five forces model- History The figure (see Appendix 1) shows that, in the 1950’s and 1960’s, strategic management was focused on corporate planning and growth along with tighter financial controls and budgeting (Grant, 2010). Medium-term horizons, including 5-year plans, were set and used to develop macro-economic forecasts (Grant, 2010). The market players were relatively independent and were governed primarily by the macro-economic forces, with little regard to the strategy of other players. The 70’s, with the internationalization of economy and events such as surge in oil prices further emphasized macro-economic volatility (Grant, 2010). Strategists approached a more granular level of analysis to find the best direction for the firm. Porter’s model of the Five Forces highlighted the economic implications on industry structure which put knowledge-based innovation and strategy at the forefront (Ryall, 2013). The model goes beyond the traditional “narrowly” defined view of competition as competing merely for profits to encompass other competitive forces such as suppliers, buyers, substitutes and threat of new entrants in the market (Porter, 2008). The model provides insight into the competitiveness of an industry, demonstrating that not all industries are equally profitable (see Appendix 2). It is rooted in the notion of creating and maintaining a competitive advantage (Nilsson & Rapp, 2005). Though (corporate) planning remains part of strategic design, the Five Forces model places this exercise in a more realistic industry-specific context. 1.2.2 Porter’s Five Forces Model - Definition 1.2.2.1 New Entrants It is important to consider that the threat of new entrants will depend on barriers to entry, and even barriers to exit as well as the reaction from incumbents. The theory identifies typical barriers to entry as: i. Economies of scale which result in lower production costs for already established players owing to their large volumes. ii. Significant investment is required for differentiation to override customer loyalty towards already established brands. iii. Capital requirement to build the business (plants, facilities, R&D efforts etc.) or equivalent acquisition of an existing business. iv. Experience in the business as well as patent protection provides a cost advantage to incumbents v. Regulations and laws prescribing business policies that impact costs or result in delay to enter the market (Henry, 2008). Furthermore, the reaction of incumbents creates additional threat to the shares of newcomers. i. Retaliation ii. Slow growth of industry or over-capacity: The lack of capacity may make it difficult to absorb new entrants. This can occur in several phases of an industry’s cycle. iii. The price conditions must enable the newcomer to be profitable. In this case, the total costs of entry should be lower than the market price (Henry, 2008). Similarly, an exit barrier can invalidate the business case of entering a sector. These barriers can include: Financial barriers such as large obsolete/devalued fixed assets Environmental barriers such as ground sanitization obligations Social barriers such as expensive exit plans for redundant personnel and a damaged reputation (Grant, 2010) 1.2.2.2 Substitutes Here the main concern for the new entrant is to find another product or solution which makes the customer equally satisfied. This eliminates some of the entry barriers. Sharing internal capabilities or resources may ease introduction of the substitute. But the cost or effort of brand switching by the customer may be a new threat. For instance, the US consumer study of McKinsey (2011) showed a change in habits of consumers after the financial crisis in the industry of hair dying, nail styling and facial treatment. Consumers opted for performing these tasks themselves. However, such a shift in behavior will cost consumers time and effort to gain experience. Nevertheless, two-thirds of the respondents were satisfied by the results. Hence, the business has moved from getting these activities performed by professionals towards do-it-yourself products. 1.2.2.3 Rivalry Each incumbent can and will attempt to enhance its position. Reactions from others will naturally be triggered, creating interdependence between the players. These reactions include: i. Tactical moves (such as price changes) from one competitor triggering reaction of other incumbents. This is best explained through the cola wars whereby Coca-Cola has emerged as the leader in the “cola” segment. On the other hand, PepsiCo has a leadership position in salty snacks, whereby it controls almost 40% of the worlds salty snack market (Grant, 2010). ii. More strategic moves such as engaging in diversification and growth strategies to increase market share. For instance, Minnetonka acquired the pump manufacturer to get a 6 month advantage on its pump design and control the replenishment that competitors needed (Putsis, 2013). iii. Finally, buyer advantage may be limited by some sort of ‘gentlemen agreement’ occurring between the incumbents. 1.2.2.4 Bargaining Power of Suppliers Supplier performance can have significant impact on how the business runs in terms of prices, delivery terms, payments conditions, quality consistency, services, collaborative interactions to improve client’s output and innovations. For example, when there is an over-reliance on a supplier, one can look for alternative suppliers or consider the option of a take-over to strengthen one’s competitive position. Threatening suppliers positions include the following: i. They are concentrated and/or few, and by extension rely upon convenience for the client ii. The product is critical for the client iii. The client product/industry is not important for the supplier iv. They could acquire the client (Grant, 2010) 1.2.2.5 Bargaining Power of Buyers Buyers’ readiness to purchase will affect sales volumes and revenues as well as firm’s net profit. Buyers can bargain on prices, quantities, quality, payment or delivery terms, thereby affecting the firm’s financial and brand strength. Buyers’ threats typically include: i. Concentration or buying in large volumes- this explains the cooperative association of several buyers in order to act on price or other terms. ii. The product being supplied is important or cost-critical for the buyers. For example, a drug store retail network imposed just-in-time delivery to the pharmaceutical producers, to decrease its inventory cost. iii. The product is standardardised. As consequence, the client may easily switch between brands, depending on any ongoing promotions. iv. The costs of switching are low. This is often seen in the telecom industry whereby customers may lose little when switching between brands (Grant, 2010). 1.3 Porter’s Five Forces Model- An Evaluation In his earlier works, Porter had broken down competitive analysis into various components whereby the current strategy, future strategy, capabilities and assumptions shaped the response of competitors (Porter, 1980) (Mintzberg, 1994). The greatest merit of Porters theory is to have convincingly focused management attention on key variables that can affect the strategic position of the company- variables that management must always consider in the formulation of strategy. The Five Forces model has, in fact, made strategic management at the crux of management agenda (Grundy, 2006). Furthermore, this model has gone beyond the inertia prevailing at the time when SWOT analysis did not devote adequate attention to the external environment (Grundy, 2006). However, Porter assumes perfect competition, thereby failing to acknowledge other types of market structures such as monopolistic industries as well as industries which are heavily regulated or supported by subsidies from government which undercuts prices. The model also fails to acknowledge the benefits of competition on a dynamic level. This is contrary to the contemporary age of globalization whereby consumers demand higher quality products and services at a lower cost. As a result, remaining competitive is becoming perhaps more challenging. Porter overlooks the business benefits of supplier consolidation when he mentions suppliers as a threat. Look no further than Silicon Valley – a technology hub which is bustling with the wealth of free flowing information, increased access to educated labor, network infrastructure and links to universities who provide opportunities for benefitting from the talent of engineering graduates. Therefore, industry consolidation has become the norm with most firms engaging in forward and backward integration. Maintaining an arms-length relationship with suppliers is no longer valid; in fact, firms must join hands or partner with their suppliers to develop lasting advantage (Dyer, 2000). Many of the five forces are no more a threat than a force backing the business into a corner and demanding that it remains innovative and subsequently competitive. This, however, has been acknowledged to some extent by Porter in his analysis of the “value chain” later on whereby integration with suppliers and customers was stressed (Nilsson & Rapp, 2005) (Ryall, 2013). As markets become competitive, organizations must possess agility and absorption capabilities to win the corporate battle. Agility pertains to the ability to anticipate market changes while absorption refers to the ability to withstand the same (Sull, 2009). While Porter’s five forces model effectively demonstrates the external fit that companies must achieve to secure competitive advantage, it fails to point towards the development of internal capabilities of organizations to spot changes in market and to withstand such changing circumstances. The model also does not offer any practical insight into the possible managerial “actions” that need to be taken when firms faced competitive pressures (Grundy, 2006). Nevertheless, it has paved the way for authors to explore the significance of knowledge-based managerial systems and cross-functional collaboration by T-shaped managers (Hansen & Oetinger, 2001). Furthermore, a limitation of this model is that it only considers the medium to long-term drivers of industry profitability that are manifested in industry structure while discounting short-term factors such as weather or business cycle that can affect industry competitiveness (Porter, 2008). Furthermore, the Five Forces model can be thought of as overemphasizing the role of the “industry”. New theories, such as the theory of “transient competitive advantage”, highlight how firms, rather than sustaining and sticking to one competitive advantage, must launch, abandon and re-launch new strategic initiatives to keep pace with fast changes in the market. As per this theory, the traditional view of strategic theorists such as Porter’s Five Forces Mode whereby the firm is compared with rivals in the same industry is no longer valid (McGrath, 2013). This is because industries are not strictly defined in today’s world. This is best explained by Google’s threat to firms in the phone business by its entry into telecom operating systems and online video. Similarly, Wal-Mart is competing with firms in the “health-care” sector- a rather unconventional and different line of business than Wal-Mart’s initial retail business (McGrath, 2013). Businesses today operate in “arenas” not industries; therefore, the focus is no longer on securing more profits than competition but to respond to customers’ needs (McGrath, 2013). Nevertheless, even though Porter’s Five Forces Model may not directly predict the appropriate strategy which firms must adopt in the context of their external environment, it has paved the way for greater analysis by other authors. For instance, an understanding of the threats to new entrants can result in a new firm devising strategy on how and when to enter the market. Therefore, in some cases it may be prudent to follow the pioneer as Microsoft did when it introduced Internet Explorer in response to Netscape (Grant, 2010). This allowed Microsoft to develop its resource capabilities to secure large market share later on. However, not all profitable markets may invite threat of entrants. Businesses are better off concentrating on their core markets even if they find a lucrative segment (Putsis, 2013). PART B- HELLO BANK This presents an interesting case of mobile distribution sector and also highlights the blurring lines of industry as discussed in the limitations of Porter’s Five Forces Model. 2.1.1 Product Hello Bank has been developed as the first digital mobile bank in Europe which operates in three major regions including Germany, Belgium and France. Typically, the banking industry is not dominated by many suppliers meaning that the suppliers primarily comprise of depositors and the market for loans or credits. Keeping in view the fact that Hello Bank primarily targets individuals who prefer mobile banking, the bargaining power of suppliers is relatively low. The threat of substitutes remains somewhat moderate for Hello Bank. This is because most of the mobile banking platforms have been payments-based or merely reflect a technological shift from internet to mobiles (Daneshkhu, 2013). The product, which is mobile banking, enjoys mixed customer perceptions. Research shows how the “current” perceptions of customers favor retail banking over mobile banking (Marc Lien; Sebastian Sjöberg; Radboud Vlaar, 2011). However, this perception is expected to change greatly over the next 5 years with customers aged 25-34 years primarily voting in favor of mobile banking (Marc Lien; Sebastian Sjöberg; Radboud Vlaar, 2011)(see Appendix 3). As Porter suggests, companies that use technology and internet as complementary to their traditional ways of competing are the ones that shall be successful as opposed to ones that draw the line between their internet and traditional operations (Porter, 2001). Even though banks have acknowledged the profitable potential in mobile banking, these banks have made only minor and temporary adjustments to their current operations such as adaptation of their commercial functions and hiring additional employees. However, none of them has approached or intend to approach mobile banking as comprehensively as Hello Bank has, therefore, giving Hello Bank a competitive edge. 2.1.2 Price To begin with, although the power of buyers in the banking sector is not strong on average across the globe, high switching costs greatly affect the same. If customers enjoy loyalty to a particular bank in terms of having accounts, loans and mortgages from the same bank, they may not easily switch to other banks. In this case, however, the situation appears different especially due to the financial crisis in Europe which resulted in a contraction in demand for loans as well as overall decline in retail activity in Europe (Daneshkhu, 2013). Therefore, banks are now looking for new customers to generate activity. Interestingly, the mobile banking platform used by Hello Bank offers lower cost base to the bank which could possibly allow the bank to lower costs of switching. The threat of new entrants appears to be high owing to the fact that the mobile banking industry is growing at a tremendous rate. On the other hand, the cost of acquiring new customers is high- approximately €80m in Europe (Daneshkhu, 2013). This means that banks, such as Hello Bank, would require several years to break-even and even more in order to generate a profit. This is because, mobile banks, in an attempt to lure customers are offering services free of cost which are otherwise paid for. For instance, Hello Bank is offering accounts and payments free of charge although there is a charge for debit cards in France (Daneshkhu, 2013). This may appear costly to potential entrants in the industry, thereby deterring them. In fact, insufficient investment by banks remains a hurdle to the exploitation of opportunities represented by mobile banking in Europe. On the whole, the threat of new entrants remains somewhat moderate. This is because some banks may find this industry as an opportunity to offer convenience, digital commerce and services to the in emerging markets such as India whereby digital financing services are expected to grow eight times by 2020 (McKinsey & Company, 2012). Furthermore, research shows that full digitization of banking can reduce costs by 20-40% (Matarranz et al., 2011) (see Appendix 4). This is likely to lower prices of digital banking services. 2.1.3 Promotion Companies such as Dell have focused on online marketing owing to their competitive advantage in online sales (Dudovskiy, 2012). Furthermore, companies which promote mobile banking services tend to have twice the rate of adoption as that of institutions that do not do so. Mobile banking institutions such as Hello Bank can use account statements to offer promotion to customers of its parent bank- BNP Paribas Group. Similarly, banks such as SunTrust have used “inserts” in statements to promote their mobile banking services. Perhaps another effective way of promoting the same would be to target online customers by sending out emails. This would enable Hello Bank specifically reach its target market of young customers as they are the ones who tend to be more technologically savvy compared to their older counterparts. Furthermore, the “MINE” Facebook feature shall be very useful as it allows companies to customize their Facebook notifications, feed as well as allow seamless sharing across multiple platforms (see Appendix 5). This is also particularly useful for incumbents of the mobile banking industry as they are likely to miss out on new developments by being deeply engaged in their experience and scale of operations. Furthermore, the social media pages would be optimized for web viewing, thereby directing customers towards the mobile banking “app” on their “app” store (see Appendix 6). 2.1.4 Place Mobile banking offers a virtual electronic platform, rather than traditional physical banking outlets. Therefore, place in this case would involve providing the service closer to customers to allow for convenient access. Mobile banking offered by Hello Bank, however, shall transcend this phenomenon as it can be accessed at any place and time and with any device. However, restrictions or additional costs may apply on using this service in other countries in which case Hello Bank must partner with other local banks or other branches of BNP Paribas Group in European nations to make this service cost-effective. The changing landscape means that retail distribution strategy must be complemented by digital channels and that the two must be seamlessly integrated as suggested by Porter. References Daneshkhu, S., 2013. BNP launches full-service mobile bank. [Web] Available at: HYPERLINK "http://www.ft.com/intl/cms/s/0/95ce4f9c-be3a-11e2-bb35-00144feab7de.html" \l "axzz2m7b2zFNi" http://www.ft.com/intl/cms/s/0/95ce4f9c-be3a-11e2-bb35-00144feab7de.html#axzz2m7b2zFNi [Accessed 28 November 2013]. Dudovskiy, J., 2012. Dell Value-Chain Analysis. [Web] Available at:"http://research-methodology.net/dell-value-chain-analysis/" http://research-methodology.net/dell-value-chain-analysis/ [Accessed 29 November 2013]. Dyer, J.H., 2000. Collaborative Advantage: Winning through Extended Enterprise Supplier Network. New York: Oxford University Press. Google, 2013. Hello Bank! [online image] Available at: [Accessed 30 November]. Grant, R.M., 2010. Contemporary Strategy Analysis. 7th ed. Chichester: John Wiley & Sons. Grant, R.M. 2010. Evolution of strategic management: dominant themes, John Wiley & Sons, Chichester. Grundy, T., 2006. Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15, pp.213-29. Hansen, M.T. & Oetinger, B.v., 2001. Introducing T-Shaped Managers. Harvard Business Review, pp.106-16. Henry, A., 2008. Understanding Strategic Management. New York: Oxford University Press. Marc Lien; Sebastian Sjöberg; Radboud Vlaar, 2011. What’s the future of mobile banking in Europe? McKinsey Quarterly. McKinsey & Company. Marc Lien; Sebastian Sjöberg; Radboud Vlaar, 2011. % of banks’ customers using mobile devices for banking activities,McKinsey & Company. Matarranz, V., Scopa, E. & Vlaar, R., 2011. Retail Distribution 2015 – Full Digitalisation with a human touch. EMEA Banking Practice. McKinsey & Company. Matarranz, V., Scopa, E. & Vlaar, R., 2011. Financial Implications for Retail banks,McKinsey & Company. McGrath, R.G., 2013. Spotlight on Strategy for turbulent times: Transient Advantage. Harvard Business Review, June. pp.1-10. McKinsey & Company, 2012. The digital edge: new opportunities in financial services. Financial Services. McKinsey & Company. Microsoft, 2013. MINE for Facebook [online image]. Available at: Accessed November 30, 2013. Mintzberg, H., 1994. Rise and Fall of Strategic Planning. New York: Free Press. Nilsson, F. & Rapp, B., 2005. Understanding Competitive Advantage: The Importance of Strategic Congruence and Integrated Control. Heidelberg: Springer. Porter, M., 1980. Competitive Strategy. New Jersey: John WIley & Sons. Porter, M.E., 2001. Strategy and the Internet. Harvard Business Review, 79(3). Porter, M.E., 2008. The Five Competitive Forces That Shape Strategy. Harvard Business Review, 86(1), pp.1-19. Porter, M.E., 2008. Differences in Industry Profitability, Boston, Harvard Business Review. Putsis, W., 2013. Compete Smarter, Not Harder: A Process for Developing the Right Priorities Through Strategic Thinking. New Jersey: John Wiley & Sons. Ryall, M.D., 2013. The New Dynamics of Competition. Harvard Business Review, pp.80-87. Sull, D., 2009. How to Thrive in Turbulent Markets. Harvard Business Review, February. Appendix 1 History of strategic management Appendix 2 Differences in Industry Profitability Appendix 3 Mobile-banking Survey Appendix 4 Financial Implications of Full Digitization for Banks Appendix 5 Mine Facebook Appendix 6 Social Media App- Hello Bank Read More