Lloyds Banking Group - Assignment Example

Case Study of Lloyds Banking Group Student’s Name: Instructor’s Name: Course: Date: Executive Summary Lloyds is the largest bank in the United Kingdom. The global financial sector is considered a fast changing industry, which has affected the operations of many companies. Financial organizations need to adapt to these changes in order to remain competitive. Lloyds Banking Group has implemented several strategies to boost competitiveness and remain relevant in the industry. It has established business model based on strategic alliances and mergers and acquisition as strategies for growth and expansion. These strategies are used in increasing growth, market share as well as boosting competitive advantage. In addition, Lloyds Banking Group has a strong corporate governance and leadership structure that are able to enhance its reputation and performance through corporate social responsibility. Even with CSR initiative in place there are gaps in the area that needs to be filled by the company in order to be considered a responsible business. Contents Executive Summary 2 Contents 3 Introduction 4 Question 1 4 Porter’s Five Forces Analysis 4 Bargaining Power of Customers 4 Threat of New Entrants 5 Bargaining Power of Suppliers 5 Threat of Substitute 5 Threat of Competition 6 Question 2 7 Strategic Alliance 7 Mergers and Accusations 8 Business Model fit in the Fast Environment 8 Question 3 9 Corporate governance, CSR, leadership and competitiveness 9 Personal Reflection 12 Conclusion 13 References 14 Introduction Lloyds Banking Group is considered one of the largest UK’s retail banks with more than thirty million customers and total asset of £ 1.1 trillion (Lloyds Banking Group 2008). It was established in 1995 and has numerous branches across the United Kingdom. In today’s complex business environment, the bank is experiencing financial difficulty but it believes it can harbour economic recession with its position in the market. Lloyds has a business model in place to propel into becoming the best bank in the industry (Lloyds Banking Group 2008). This report will critically analyse the competitiveness of Lloyds Group Banking to determine its position in the market. It will also evaluate he concept of strategic alliance and mergers and acquisition in the context of the company to determine whether it business model fits in the fast changing business environment. In addition, the report will evaluate the ability of Lloyds’ to satisfy all its stakeholders in regards to corporate governance, corporate social responsibility and leadership. Finally, it will reflect on the impact of the report on the understanding of the global financial service industry. Question 1 Porter’s Five Forces Analysis Bargaining Power of Customers Customers often bank with different banking institutions, and possess different financial products. Customers are not tied into agreements for a long time and can therefore change accounts depending on banks changing their interest rates (Berz 1997, p. 190). Customers are also considered money minded due to their effort to bank with institutions with interest free credit cards, minimal interest rates on loans as well as competitive savings rats. In addition, customers today can easily access account details and bank statements online and can compare different products offered by banks to determine their preferences (Klein 2005, p. 91). Therefore, their bargaining power is high. Threat of New Entrants In the Global Financial Service Industry, there is a low threat of new entrants. New entrants are faced with strict entry barriers from Financial Service Authority as well as the British Bankers association (Berz 1997, p. 190). These barriers reduce the likelihood of new players entering the market. Also, starting a financial institution requires high capital investment that may be difficult for many entrants. However, the major concern may come from the rival brands merging or acquiring other brands to form a stronger and larger bank which can dominate the market (Berz 1997, p. 191). In this situation, the rivalry will intensify and depletes the profits of Lloyds Banking Group. Bargaining Power of Suppliers Suppliers can have power over the companies where there number is low. In this situation, they can change prices according to their preferences and because there are no alternatives, an organization is forced to buy products from them (Berz 1997, p. 190). In the case of Lloyds Bank, the suppliers have no power over the company because its main operation is to offer services and not physical entities to the clients. Nevertheless, there is some level of supply such as office supplies and services related to Information technology which have minimal effects on the company. Also, the interest rate of banks is controlled by the Bank of England Monetary Policy Committee and stands at 4% (Lloyds TSB 2007, p. 5). This influences financial services and products, keeping the bargaining power of suppliers at minimal. Threat of Substitute Lloyds’ products are affected by the availability of different substitutes in the market. Substitutes are everywhere in the financial service industry and poses the largest threat to the company (Berz 1997, p. 191). Companies outside the banking industry have started offering financial services that were only available in the banks. The number of Credit Unions has increased considerably in the form of credit cards. For instance, Marks and Spencer offer credit cards to its clients as well as reduced personal loan rate which affects the competitiveness of Lloyds Banking Group. Substitute products may include transfer services life prepaid debit cards and online lenders like LendingClud.com (Berz 1997, p. 190). Lloyds Bank has responded to this threat by establishing a digital wallet service and a division focussing on small business lending. Threat of Competition The competitive rivalry in the banking sector is intense with many players offering similar products to the customers. The intense competition in the market has led to Lloyds losing its bargaining power and competitiveness (Berz 1997, p. 190). Some major players in the UK’s banking industry include Barclays Bank, Citigroup, ICBC Company etc. Today, Lloyds Banking Group offers five different current accounts with its competitors such as ICBC Bank and Citigroup offering similar products to the customers. In order to remain relevant, the bank has spent a lot of money and time in marketing and promoting its products. One element that has intensified competition in the market is low switching costs. It is easy for customers to change accounts and transfer from Lloyds to rival companies which may affect its market position. Lloyds Banking Group has therefore been working on developing new products that can assist them move clients from rivals in order to gain larger market share (Lloyds Banking Group 2010, p. 18). Citigroup offers low interest rates compared to Lloyds Banking group which has led to customers switching from the company to Citigroup. The company has merged with Solomon Inc. creating a leading pan-European Investment bank with access to international market. On the other hand, ICBC also has a larger global presence and offers unique financial product and services to its customers (Lloyds Banking Group 2010, p. 18). With global presence, these two banks create intense competition in the market and threaten the competitiveness of Lloyds Banking Group. Question 2 Strategic Alliance In this age of globalization and technological advancement, business environment has undergone changes that require companies to come up with effective strategies to survive. Strategic alliances are considered divers of growth and success today (Wheelen and Hunger 2012, p. 191). Lloyds is lagging behind in developing strong alliances with selected groups to complement their services. However, the bank has established several alliances to boost its competitive advantage. Strategic alliance can be termed as the agreement between two or more businesses to chase the same objectives and goals while being independent entities (Ben et al. 2002, p. 55). It can take two forms; non-equity and equity. Lloyds formed strategic alliance with Banco Sabadell to strengthen their position in the retail and commercial segment in the United Kingdom. This alliance included a transfer of about 28 branches of Lloyds in Spain to Sabadell which involved businesses in deposits and mortgages. The agreement guaranteed that the United Kingdom’s clients in Spain will be served at Sabadell branches while the Sabadell clients in the UK will be served by Lloyds Banking group (Lloyds Banking Group 2008). With such as an agreement, Lloyds has the potential to have access to larger market segment and obtain certain capabilities from the partner. Mergers and Accusations Lloyds Bank operates in the United Kingdom’s financial industry which is among the strongest in the world. To survive in this environment, the bank needed to grow to dominate the market and this has been possible through Mergers and Acquisitions. According to Ben et al. (2002, p. 119), mergers and acquisition are the central method that determines the success of financial companies. It involves purchasing and/or joining two companies together. In an acquisition, one company purchases another smaller company which is absorbed into the parent business. In a merger, two companies join together to form a new company with a new identity (Ben et al. 2002, p. 119). Due to the recent economic recession, many companies in the financial sectors have come up with strategies to increase their growth while some have adopted other means of survival and growth such as Mergers and Acquisition (Johnson, Scholes and Whittington 2005, p. 28). Lloyds Banking Group has grown its operation by making a proposed acquisition deal with HBOS. The main aim of the merger between the two companies was to build the United Kingdom’s leading financial service that could withstand the intense competition. According to research, more than 70% of mergers and accusations often end up unsuccessful (London and Hart 2004, p. 88). Therefore, it is important for companies to do due diligence thoroughly to ensure nothing is left unknown. Each part should learn about the other to eradicate misunderstandings that may result into failure (Ragothaman and Gollakota, 2009, p. 310). Business Model fit in the Fast Environment It is evident that Lloyds’ business model is based on strategic alliances and mergers and acquisition as strategies for growth and expansion (Lloyds Banking Group 2010, p. 10). The financial sector is faced with financial crisis and the UK’s financial industry is dominated by major players who threaten Lloyds Bank’s profitability. Mergers and acquisitions and strategic alliances are used as techniques of increasing growth, market share as well as boosting competitive advantage. The use of these techniques by the bank can be seen as an effective strategy that fits for purpose in the fast and dynamic global business environment. For instance, the decision to form a partnership with Sabadell opened opportunities for the company to access customers in Spain (Lynch 2006, p. 151). The company has been able to reduce costs and risks associated in foreign expansion. Access of Spain market has been made cost-effective by its alliance with Sabadell. In addition, although the acquisition deal with HBOS has brought a number of challenges such as problems related to cultural alignment, IT systems integration and human resource management, the partnership has increased its market share and its access to valuable assets for development (Ben et al. 2002, p. 108). It has led to diversification of its products and services that has enhanced customer loyalty. Becoming the leading UK’ banking provider has been made possible by this partnership. Question 3 Corporate governance, CSR, leadership and competitiveness Being the largest bank in the United Kingdom, issues such as corporate governance, corporate social responsibility and leadership influence their policies and stakeholders. Their ability to satisfy all their stakeholders depends on these elements (Lloyds Banking Group 2010, p. 18). The main objective of the bank is to become the most recognized financial service company in the United Kingdom by all the stakeholders and shareholders. Lloyds Banking Group has divided its Corporate Social Responsibility into subtopics; our people, our stakeholders, etc. Lloyds Banking Group defines a stakeholder as anyone who is influenced by the business or who impact it in return. From the Lloyds Banking Group CSR report, all of its operations are founded upon deep and long-lasting relationships with its clients to offer them high quality and sustainable products and services (Lloyds Banking Group 2010, p. 102). Lloyds’s Corporate Social Responsibility also involves building employee motivation and customer satisfaction. Lloyds was rated the sixth most corporate social responsible bank in the world and eighth most trusted company in the United Kingdom (Lloyds TSB 2007, p. 16). Corporate social responsibility and satisfaction of all the stakeholders have become an integral part of the mainstream corporate governance. Companies, irrespective of their nature, cannot operate in isolation (Mujahid and Arooj 2014, p. 186). Corporate governance involves balancing the interest of all the stakeholders. It offers a way for companies to achieve their objectives through a system of rules and practices that control and direct businesses. In Lloyds Banking Group, the directors are responsible for satisfying the needs of the shareholders and consider the views of the stakeholders. Leadership of the company plays an important role in the implementation of CSR initiatives (Johnson, Scholes and Whittington 2005, p. 66). The main stakeholders of Lloyds include the shareholders, customers, employees, the environment and the community. The employees are considered the most important resource in the company. Therefore, managing them is the fundamental tool to the success of Lloyds. They have created a conducive working environment for their employees which have attracted and retained pool of talented expertise (Ragothaman and Gollakota 2009, p. 310). Lloyds Banking Group has built strong relationships with diverse groups including suppliers, business partners, customers and colleagues. The company has adopted diversity in the workplace. For instance, the management positions of Lloyds Banking Group have one of the highest female representations among the United Kingdom’s companies. This has enhanced their reputation and has boosted their long-term profitability (Lloyds Banking Group 2010, p. 20). Although the company has developed a fair and responsible business, it lags behind when it comes to its responsibility towards the community. Lloyds has focussed its attention more on the customers, employees and shareholders and has forgotten about the needs of the society. Although it has been engaged in charity events in the past, Lloyds is not consistent (Lloyds Banking Group 2010, p. 20). In addition to environmental and ethical responsibilities, companies need to take part in philanthropic responsibilities. Philanthropic responsibility may entail donating capital, goods and services to the people in needs or companies in ruins. For instance, Lloyds Banking Group (2008) can donate funds to assist the local community such as schools, healthcare clinics and hospitals or people living in poverty. According to De Wit and Meyer (2010, p.119), many companies have not incorporated philanthropy directly in their business plan. It is not treated as an important part of social accounting which makes it difficult for companies to be held accounted for not adopting this responsibility. Organizations that practice CSR are responsible for their actions towards the society, consumers, employees and communities (Johnson, Scholes and Whittington 2005, p. 120). In its CRS report, Lloyds Banking Group (2008), highlighted the responsibilities they have towards the community but have yet to show substantial results. Therefore, while the company has done its business fairly and responsibly, it has yet to prove its responsibility towards the community. Changes therefore need to be made in the company to incorporate philanthropic corporate social responsibility. Personal Reflection This assignment has assisted me in understanding the factors that result to high competitiveness in the banking sector. The global financial service industry has changed over the years and is faced with competition from large players who have been in the market for a long time (Klein 2005, p. 25). Therefore, in order to survive, companies need to come up with strategies that can propel them towards achieving competitive advantage. I have learnt that banks cannot exist alone and require strategic partnership in order to survive. Leaning towards strategic alliance can be helpful to companies. Strategic alliance is a common initiative used by many banks to grow and expand in new markets (De Wit and Meyer 2010, p. 88). Banks choose to create a partnership and work together towards common objectives. With such strategy in place, enterprises are able to gain capabilities and access to target markets. Strategic alliance also plays a major role in relieving company of financial burden. Banks are able to reduce their financial risks when they decide to enter into strategic partnership. Synergy and competitive advantage are the products of an effective strategic alliance that result in greater organizational success (Ben et al. 2002, p. 113). In the fast changing global environment, banks may not be able to attain this on their own and may require to join efforts with another business. In addition, throughout this assignment, I have learnt that factors such as corporate governance and leadership play an important role in ensuring an organisation has a culture that promotes development and employee engagement. Global financial service industry is affected by internal factors such as threat of new entrants, competition, threat of substitute and bargaining power of customers that can affect the productivity of potential banks (Berz 1997, p. 191). Leadership plays a major role in minimizing the effects of these factors by instilling the culture of excellence to the employees. With great leaders, banks can deliver ever-improving value to its clients and improve the overall effectiveness and capabilities of businesses. Conclusion Global financial service industry is faced with numerous challenges that affected bank performances. The industry has intense competition, high threat of substitute, and high bargaining power of consumers. With such challenges in place, banks need to come up with strategies that can ensure they survive and boost their competitive advantage. Some strategies that can be adapted by banks include strategic alliance and mergers and acquisition. Lloyds formed strategic alliance with Banco Sabadell to strengthen their position in the retail and commercial segment in the United Kingdom. The company has also grown its operation by making a proposed acquisition deal with HBOS. These strategies have enabled the bank to grow its operation and prevent burden caused by internal and external factors. Although Lloyds Banking group is responsible towards its employees, customers and the environment, its responsibility towards the community is lagging behind. The company is not committed to offering philanthropic assistance to the community which may have adverse effects on its operations. Therefore, the company should invest more on such initiatives. The assignment has sharpened my understanding on the issues affecting global financial service industry and the importance of strategic alliance and leadership structure in driving competitive advantage. The ability of any bank to gain sustainable competitive advantage depends on its strategic initiatives. References Ben, D., David J & Arthur, H 2002, International M&A, Joint Ventures, and Beyond: Doing the Deal, Wiley; 2 editions. Berz, G 1997, Climate Change And The Financial Sector: The Emerging Threat—The Solar Solution. Global Environmental Change, vol. 7, no. 2, pp. 190-191. De Wit, B and Meyer, R 2010, Strategy Process, Content, and Context International Perspective, 4th Edition, Cengage Learning. Johnson, G., Scholes, K and Whittington, R 2005, Exploring Corporate Strategy: Text and Cases, 7th Ed., Financial Times Prentice Hall. Klein, E 2005, Global banking issues, New York, Nova Science Publishers. Lloyds Banking Group 2008, Annual Report and Accounts 2008 / Corporate Responsibility. 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