How Recent Credit Crunch Affects Banks - Term Paper Example

The Current financial crisis has put on squeeze on business. As Budget are being cut across organizations and head count being reduced, question are also being asked about the contribution of various function to organizational survival, growth and competitiveness. As the head of marketing division for a major financial services company, write a report to the company,s management board that critically evaluates the role of marketing in the creation of sustainable competitive advantage, along with any other issues of financial relevance you care to identify, for instance stock market valuation. It is expected your report demonstrates strong evaluative style you should draw on the relevant theories covered within the course (course book attached) you must relate your answer to your chosen organization ( eg : Barclay's, HSBC U.K etc) Harvard referencing Stlye May, 2009 Table of Contents 1.0Introduction 1.1 Overview of the institution under case study -Barclays Bank 1.2 Summary of the Global Financial Crisis 2.0 The Role of marketing in the creation of sustainable competitive advantage, along with any other issues of financial relevance you care to identify, for instance stock market valuation 3.0 Conclusion and Recommendation References 1.0Introduction This paper is aimed at looking at how the recent credit crunch is affecting banks and how this in turn affects international business. The paper argues from a marketing point of view. Here the paper looks into how marketing can help restore confidence and competitive advantage into some of these troubled banks. The recent credit crunch in the U.S is a cause for concern for governments, regulatory bodies, businesses, individuals, stock markets, etc. This issue is affecting world trade in that it is currently making it difficult for banks to provide loans to businesses given the significant losses encountered so far as following prior sub-prime mortgage lending. The first part of the paper looks into the institution in question. Here our institution under case study is the Barclays bank. The first part of the paper discusses the various ways through which Barclays bank could be affected by the crisis. The second part of the paper discusses the role of marketing towards restoring a competitive advantage and creating value for Barclays bank. The last part of the paper presents the conclusion and recommendation. 1.1 Overview of the institution under case study -Barclays Bank Barclays PLC (Barclays) is an international and major player in the world financial system. It is headquartered in the United Kingdom, a global financial services provider and is engaged in retail, commercial banking, credit cards, investment banking, wealth management and investment management services. (Report 2008). The bank is present in Europe, United States, Africa and Asia using different strategies with respect to different markets. According to an independent analyst review, the Company operates in business segments: For example, UK Retail Banking, Barclays Commercial Bank, Barclaycard, Global Retail and Commercial Banking (GRCB)-Western Europe, GRCB-Emerging Markets, GRCB-Absa, Barclays Capital, Barclays Global Investors and Barclays Wealth (Company's Report 2008). Today, Barclays Plc is listed in major stock exchanges in the world such as the London, the Tokyo and the New York etc. Barclays Plc has consolidated its position through a series of mergers and acquisitions. For example, according to the company's web page, in November 2008, Barclays PLC announced that it has completed the purchase of the Italian residential mortgage business of Macquarie Group Limited. According to the company's (2008) report, Barclays PLC was ranked as the 25th largest company in the world according to Forbes Global 2000 (2008 list) and the fourth largest financial services provider in the world according to Tier 1 capital ($32.5 billion). It is the second largest bank in the United Kingdom based on asset size, although its share price, having fallen by 60% in the past year as of 14 April 2009(2009 -04-14)[update] (Company's Report 2008) 1.2 Summary of the Global Financial Crisis Major Banks in the United States and Europe have recently suffered significant losses as a result of the recent credit crisis. This calls into question the adequacy of baking regulation both at the national and international scene. (Avgouleas, 2008). For example, Northern Rock, a medium-sized Mortgage provider in the UK almost collapsed as a result of the credit crunch. In like manner, Bear Stearns an upper tier US investment bank was only rescued from the crises by the Federal Reserve Bank. (Avgouleas, 2008). In addition other major investment banks such as Merrill Lynch, Citigroup, UBS, and JPMorgan have all announced negative earnings in their last financial reports as well as plans to lay off a significant number of workers. Sub-prime loans are loans offered to borrowers with no prior track record of good credit history. (Shaffer and Hoover, 2007). Due to the risk inherent in the loans, they are often issued at very high interest rates so as to compensate for the extra risk that they carry. (Shaffer and Hoover, 2007). A sub-prime crises or credit crunch is said to exist when a significant number of sub-prime loans have been issued to unscrupulous borrowers. (Shaffer and Hoover, 2007). These crises pose difficulties to both financial institutions and the borrowers. The outbreak of the recent sub-prime crises came after warning signals of write-downs in the value of mortgages late last year. (Schumer and Maloney, 2007). House prices in the U.S witnessed an unusual growth between 1997 and 2005. For example, prices increased by approximately 85% during this period. The period 2001 and 2005 witnessed the highest rates of appreciation. (Schumer and Maloney, 2007). Sub-prime delinquencies and foreclosures were therefore mitigated by house price appreciations during these years. This is so because borrowers facing difficulties to make regular mortgage payments could depend on the appreciation of the value of their property to solve their financial problems by refinancing the mortgage and withdrawing cash from the increased equity in the house thereby sustaining the new mortgage for a while. Borrowers could repay the principal by selling off the property. (Schumer and Maloney, 2007). Appreciation in property prices therefore significantly improved the performance of sub-prime loans. (Schumer and Maloney, 2007). According to Mauldin (2008) the United States has an idea of market fundamentalism, which has become a dominant ideology. This ideology holds that markets are self-correcting. A series of crisis including the international banking crisis of 1982, the bankruptcy of Continental Illinois; and the failure of Long-term Capital Management in 1988 have occurred during the 1980s in the US. These crises have all warranted the intervention of the government through the Federal Reserve late in the crisis. The main issue is the weakening of property prices in the US. Banks have issued a lot of mortgaged-backed loans and it is unlikely that they will recover these loans given falling property prices. Owing to this, a lot of banks are witnessing serious crises including profit declines, share price declines, and layoff of staff. For example, CitiGroup on Tuesday January 22nd announced a $10billion dollar loss and a $1.8billion dollar write-down and attributed it to the credit crunch. Merrill Lynch also announced an approximate loss of over $10billion in the latest quarter. (Investor Guide, 2008). According to reports from CNN Money.com by Ellis (2008) Merrill Lynch alongside recording a $10billion dollar loss has written down approximately $14.6billion as a result of the credit crunch. Its shares witnessed an 8% drop on Thursday 17th January. JPMorgan and Wells Fargo all members of the fortune 500 index also witnessed losses but were not hard hit like Merrill Lynch and CitiGroup. (Ellis, 2008). As concerns stock prices, January 18th witnessed a major decline in stock price indices in the U.S. The Dow Jones index and the NASDAQ index witnessed a decline of 4% each while the S&P 500 index witnessed a decline of 5%. (Investor Guide, 2008). This decline could not be stopped by a $150billion package announced by President George W. Bush to help stem the decline. Although some investors hoped that a larger package would turn things around, others contended that a self discipline in the market was necessary and that any government action might be unable to make an immediate turn around. The stimulus plan was therefore considered by many investors as being in the short-run. (Investor Guide, 2008). Other major problems include the laying off of employees by major investment banks. For example, Goldman Sachs major investment banker and Credit Suisse announced plans to lay off approximately 200 employees. While Goldman Sachs is planning to lay off 5% of employees that is about 1500, Credit Suisse is planning to lay off 500. Stock prices of financial companies immediately witnessed a decline in value while bond prices immediately witnessed an increase in price. This was as a result of the fact that investors began shifting away from equities into bonds, which resulted in the fall in stock prices. (Investor Guide, 2008). Governments and central banks have been engaged in a number of measures to tackle the credit crunch. For example, Governments in Asia are in the process of turning state controlled pension and other investment funds in an effort to help stem falls in domestic equity markets. (Jung-a et al., 2008). Asian central banks announced earlier on December 13th 2007 that they would refrain from joining their North American and European Counterparts in taking emergency action to boost market liquidity. (Minder and Nakamoto, 2007). According to Minder and Nakamoto (2007) booming Asian economies also reduced their need for corporations to tab debt markets. For example, it was estimated by Socit Gnrale that Chinese companies now use retained earnings to finance 60% of their working capital requirements. The US government and the Federal Reserve have engaged in a series of measures to stem the crises. The Federal Reserve recently reduced interest rates by 0.75 percentage points. This move received both positive and negative reactions. Approximately 60% of delegates voted in favor of the move saying that central banks have lost both their focus and control with respect to their economic governance. (Giles, 2008). President George Bush on Friday January 18th 2008 announced a $150billion package to help stem the crises. (Investor Guide, 2007). Following announcements by the Federal Reserve to eliminate the crises, stock markets in the US witnessed slight increases in value 2.0 The Role of marketing in the creation of sustainable competitive advantage, along with any other issues of financial relevance you care to identify, for instance stock market valuation According to Kortler (2003), is an organizational function and set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. To serve both the buyers and sellers, marketing seek s to discover the needs and the wants of prospective customers and at the same time satisfying these needs and wants. This part of the paper presents the role of marketing and the marketing department of Barclays towards creating a competitive advantage and shareholders value. The marketing mix is the center of an organization activities, it defines the prices, the sales techniques and strategies, set the pace for entering new markets, developing new products and extending product lines (Fill 2007). For the greatest communication impact, Kotler (2003) argued that the entire marketing mix (promotion, product, price, and place) must be carefully coordinated for greatest success. This is so because, the product designs, the price, the shape and colour of its package and others within the chain communicate something to buyers. Thus, for consistency and uniformity all these aspects of marketing should be integrated. These are the entire functions of marketing communication plays in Barclays Plc. The marketing communication mix for example helps in developing Barclays Plc as a brand, developing those unique brand elements. According to Fournier (1998), brands are simply a collection of perceptions held in the minds of the consumers. Branding in consumer's market has been widely argued to improve on a company's financial performance and long term competitive position (Aaker 1992). According to Keller (1993), powerful brands create meaningful images both in the minds of consumers and society as a whole. Elaborating on this, Aaker (1992) contends that, brand equity is a combination of assets such as loyalty, awareness, and perceived quality with brand associations. Marketing communication for the bases for developing a company's brand equity and quality. The marketing functions thus, remain vital for Barclay's activities in the phase of the global crisis. The marketing mix help customers interpret and process information about a product and are primary for customers purchase decision (Fill 2007). At the level of the firm, the marketing communication mix develops a company's brand that improves the firm's efficiency by reducing marketing costs and improving prices and margin. An important task of marketing communication can be seen as it serves as an important point of differentiation for firms, assisting customers in their evaluation and choice processes (Fill2007). Marketing communication is currently required to assist the Barclays Plc brand in entering new markets, developing new products and developing ascending features of the brand over the other related brand. For example, it is thanks to one of the primary task of marketing communication that the Barclay's customer's brand equity model is created. This model is built on the premise that, the power of a brand in the market is in "what customers have learned, felt, seen and heard about the brand due to their experiences over time" (Keller 2003). Keller (2003:60) defines CBBE as the "differentiated effect that brand knowledge has on consumer response to the marketing of that brand: brand awareness and brand image (Keller 2003). The CBBE model suggests that four sequential steps are necessary in building a strong brand. As outlined in the model, these steps start from given an identity to the brand (who are you), to marking a difference between the brand and other related brands. Keller (2003) cautions that, each step is contingent of the other. This is what the management of most companies fails to do. However, using Barclays as a case study, this is a history. The marketing department using the CBBE model is built by "sequentially establishing six brand building blocks with customers and assembled within the brand pyramid"1. Keller (2003) argues that, for a brand to be significant, it must get to the top of CBBE. No wonder, Barclays is rated as a top brand. The Management of Barclays has through the brand equity model enhanced the brand aesthetic features perceived as the brand quality. This has been through Barclays brand positioning-media visibility, effectiveness of Barclays' marketing in terms of sales, premium price to some of its products. Thanks to marketing communication tasks, customers identify a brand "who are you", give meaning to a brand "what are you", response to a brand "what about you", relationship "what about you and me". (Fill 2007, Kitchen, 1993) Another important task marketing communication needs to fulfill for the Barclays brand is promotion. Promotion means to create awareness although awareness is just the beginning. Good promotion compels the buyer to buy" (Fill 2007, Kitchen, 1993). The "need" for the product must be addressed. How does it solve the customer's needs (even needs he doesn't know he has) (Fill 2007, Kitchen, 1993). In all, Consistent success is not possible without at least one, if not all, of the classic elements of a quality sales offer: Kortler (2002) postulated that, it is thanks to the marketing communication task that potential buyers quickly learn of a new product, the more quickly they become aware of its fault. Thus, integrated marketing will call for good deeds followed by good words (Kortler. 2002). In all, an important task marketing communication still needs to fulfill for Sony management is to discover new customers needs and meet up with the ever increasing challenges inherent in consumer's behaviour. Here, marketing does not create the need for a product but shapes a person's wants (Kortler 2002). Organisational capabilities are the skills embedded in a company's people, processes, and institutional knowledge (Mintzberg 2003). These resources and competencies unique to organisations give them a fit both to make more money from existing businesses and take advantage of existing opportunities (White, Stephen & Baghai., 1999). Here, marketing through the identification of these capabilities, Barclay's managements should take advantage and push its activities further. Privilege Assets Growth enabling skills Barclays existing knowledge and information of customers can be critical in managing sales. Thus, in an event that the management of Barclays discovers that a competitor is laying emphasis on the BCG growth matrix, their strong brand name and corporate reputation can be extended to launch new products and quickly gain market share without threatening the credibility of the current business. That is cutting down on the number of dogs while using stars and cows to feed on question marks. Their existing network of suppliers and other stakeholders (Distribution network) can be used to increase sales of its existing products or reduced cost of a new product launch. Maximizing this bundle of distinctive capabilities, Barclays has the best chance to be a winner to counter competitor's move. 2.2 Barclays and Porters Competitive Advantage While the BCG growth matrix is a one size fit all model, in the event that the management of Barclays discovers a competitor is using the matrix as a competitive break through, we recommend Barclays to lay emphasis on Porters competitive advantage. Competitive advantage can be referred to as a situation whereby a firm is able to provide a particular service in an industry better than its competitors and thereby increases its market share and profit potentials (Porter 1985). Competitive advantage is determined by the core competencies of the firm, which are particular skills and techniques as well as staff and suppliers achieved by the firm which are otherwise not available to other firms in the industry (Blocher et al 2005). These, unique resources and capabilities should be capitalised upon as a retaliation for competitors using the BCG growth matrix. These capabilities and resources are analysed with respect to Porters competitive advantage framework. This is based upon Porter's argument that, a firm positions itself by leveraging it strength. Lower Cost Differentiation Cost leadership Low product system Low life cycle cost for Barclays product High reliability of Barclay's product and non intrusive serviceability for Barclay's electronics. Barclays unique resources, trademarks, proprietary know-how, uninstalled and installed customer base Differentiation Adequate advanced functionality Aesthetic product features Integration capabilities and upgrade ability, convenient product availability in terms of quantity, location acquisition and installation. Confidence in the product Equity of Barclays brand Cost focus Differentiation focus Looking at the overall strategy of Barclays, one will not hesitate to conclude that Barclays has a broad target. Here Barclays is able to bring its product faster to the market than some of the competitors. Thus the company is focused on cost leadership and differentiation. Management should reposition most of the Barclays brand items within this direction. 3.0 Conclusion and Recommendation Strategic advantages are not always achieved by competition alone. Collaboration between potential buyers and sellers and some other dealers turn to be very beneficial and advantageous when negotiation and contracting costs reduces (Johnson et al. 2005:261). I believe by developing and capitalizing on its service minded employees and reliable service, the company stands a better chance to sail through the five forces framework (Johnson & Scholes 2007). Here, if Barclays realizes that a competitor is operating following the BCG growth matrix, the company should capitalize on it core values. These values are defined with regard to quality, time and cost tied down to innovation. This is the primary function of the four Ps of marketing. The higher the accessibility to technology and cost leadership the higher will be the customer base and thus the competitive advantage of the firm. Marketing communication plays an important role in that it explains the product as well as it positions the company and the product (Storey and Easing wood 1998: p. 344). Staff/customer interaction is a measure of service quality as opposed to product quality. This will mean assessing the quality of the service products as customers also tend to evaluate how the service was delivered by the staff. Customers look in particular at the welcoming nature of the staff, their physical appearance or outlook, consciousness, promptness and efficiency. Attention could be shifted to these taken for granted assumptions. Barclays should cut down on the number of question marks. These could be easily turned in to stars and cash cows with excesses from cash cows. For any business, customers are the main strengths and means of success. Barclay has gained advantage from this fact. References Avgouleas, Emilios, (2008) Financial Regulation, Behavioural Finance, and the Global Credit Crisis: In Search of a New Regulatory Model" . Available at SSRN: http://ssrn.com/abstract=1132665 Ellis D. (2007). More pain than profits ahead for banks. 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