Business Strategy Report of Royal Bank of Scotland Group Plc - Essay Example

Business Strategy Report of Royal Bank of Scotland Group Plc Contents Introduction 3 Strategic Analysis 3 Profile of the industry & company 3 Organizational purpose 5 External and internal environment 6 PEST Analysis 6 SWOT Analysis 7 Competitive Environment: Porters Five Forces 7 Basis of competition & Key Success Factors 8 Strategic Development 9 Existing strategy(s) 9 Generation of strategic options 10 Evaluation and ranking of options 12 SBU level 12 Corporate Level 13 Choice of strategies 13 Implementation 15 Reference 18 Introduction The report deals with the strategic report of the Royal Bank of Scotland Group Plc (RBSG) and includes a detail profiling of the industry and the company, the purpose for which the Bank works, the various ranges of products and services offered by the company and others. In addition the current strategies have also been highlighted along with the suitable strategic options available to the bank based on the framework such as porters, Ansoff’s matrix and others. Finally set of strategic options and strategies have been suggested to Royal Bank of Scotland along with a Gantt chart which shows the timings and planning of RBS in implementing the suggested strategies and through which the Bank can implement to further expand its market share and generate profits. Strategic Analysis Profile of the industry & company The Royal Bank of Scotland Group Plc also known as RBSG is an international company deals in banking and financial services. The company offers a wide range of products as well as services and serves the commercial, personal along with the large institutional and corporate customers. The Royal Bank of Scotland Group Plc tends to operates through its subsidiary named the royal bank and the national Westminster Bank Plc also referred to as NetWest. Some of the financial services offered by the Bank includes, commercial banking, investment banking and services of wealth management. The bank offers the product through its various brands like RBS, Direct Line, NatWest, Churchill, Ulster Bank, Coutts and the Citizens. The Royal Bank of Scotland (RBS) forms it’s headquartered in Edinburgh and serves about 30million customers in Europe, UK, and America, Middle East and also Asia and employees about 130,000 staffs globally (Global Data, 2012). Some of the major product and services of RBS includes, credit cards, insurance products, retail issue charge card and service offered by the Bank are foreign exchange finance, money market, deposit and investment, treasury services, electronic services, insurance, loans, development along with other services and information technology operations (Global Data, 2012). The banking and financial sector has encountered unprecedented change and turmoil globally. Failure of some of the renowned financial leader like the Lehman Brothers had focused attention towards interconnected debt. Credit along with interbank liquidity had froze across the globe and it was since then the government across the globe has been pumping money in order to bail out the failing banks in order to normalize the activities of financial institution and prevent meltdown down of global financial system (QFinance, 2012). Some of the key players include, Bank of England, HSBC, Standard Chartered, Barclay and others. As per December 2011, RBSG operates the business based on 11 divisions such as US Retail and Commercial which in the fiscal year 2011, the retail and commercial division of US contributed about £479million against its total revenue; UK Corporate contributed £1414million in 2011 and offers the product and services through telephones, internet channels and relationship manager; UK Retail generated £1991million; Global Transaction Services (GTS); The wealth sector generated 321million in the total revenue of RBS; Global Banking & Markets (GBM) contributed £1,561m towards the total revenue of RBS; Ulster Bank offered retail services through its 236 branches but had incurred a loss of £1024m, Central Functions, Non-Core division and Business Services and RBS Insurance. Organizational purpose The Royal Bank of Scotland aims to be at the top tier position in the desired target market which it’s wide geographical locations and liquidity to support the needs of the client globally. Therefore the mission of RBS is to provide a world class financing, transaction services, and risk management, along with liquidity towards corporate, financial institutions, clients of public sectors and sovereigns. RBS helps the client to access the market across the globe and grab the potential opportunity to build a better tomorrow. Vision of RBS is to get recognized as a market leader in wholesale banking in each of its market and product areas. The bank builds sustainable partnership with its client by combing the local knowledge along with global expertise in order to meet the needs of the respective clients (RBS, 2012). Every employee that works for RBS undergoes a responsibility to conduct things in the right way and the following statement of RBS helps it to understand its clients and customers in a better way. RBS tries to understand its customers and treat them in a fairly manner and the banks makes sure that the product offers “value for money” to its target customers; RBS values its people and conducts business in a sustainable manner in order to protect the reputation of the Bank, operates in a secure environment, manages the risk and finances (RBS Group, 2012). External and internal environment PEST Analysis Political factors: The political factors of UK are stable and support the international banking and financial service industry to a very large extend. Given the global nature of the financial firms the UK government has implemented new financial regulations which should not duplicate the existing guideline of the foreign organizations (Accenture, 2012, p. 5). Economical factors: At a global context, economic environment tends to make the banking industry challenging as business and confidence among the customers has not been restored as uncertainty and market volatility continues to form as a brake on some of the major investment decisions (Ernst & Young, 2012). Social factors: Since social factors plays an important role in the development of banks it is necessary that financial institutions try to win the heart of customers and maintain a positive reputation. Technological factors: Technology has emerged as a key differentiator and enabler in the recent years and is expected to increase its presence in the near future. Technology has helped to understand the customer profitability, enable to deliver the products in an innovative manner and effectively manage the data due to technology (Ernst & Young, 2012, p.2). SWOT Analysis Strength of the Bank includes its source of funding and with efficient management of resources has helped RBS to improve profitability. Also the initiative taken by RBS group of capital management also adds on to its list of strength. RBS operates globally in about 40 countries and serves 30 million customers with its products and services. Weakness for the Bank is the declining operating profits which decreased to about 17.85% affecting the profitability of the Bank. Opportunity for RBS Group includes diversifications or business restructuring, increase in age old population also serves as an opportunity which is expected to rise by 22%in the next four years and its positive outlook for the global wealth market through which the group will be able to benefit themselves. A high level of threat comes from its competitors like Barclays PLC, Provident Financial, Citigroup Inc, Standard Chartered, along with HSBC Holdings. In addition to it, interrelated banking crisis and sovereign debt crisis are also regarded as threat for the company. Competitive Environment: Porters Five Forces In the banking and financial service industry the suppliers do not exists and thus the bargaining power of the suppliers is nil. The power of buyer is high as with the existence of other banks the customers has the option to choose from wide range of products. The threat of substitute for banking services are low as there are no substitutes like banks but the customers has the option either to invest or save in their money. The banking sector has a high growth rate and with increased competition to enter new market with the purpose to expand its branches thus threat of new entrant is high. Rivalry among the existing firms can also be categorized as high and gives rise to challenges which banks tends to faces against its competitors. Basis of competition & Key Success Factors The Royal Bank of Scotland Group tends to provide its customers with a wide range of quality services. The business services model is recognized as a competitive advantage for Royal Bank of Scotland Group as it aims to provide a common platform and processes for the various brands it has under its brand name and is one of the major reasons as to why the customers tends to prefer RBS against other competitors such as Citigroup, HSBC and others. Royal Bank of Scotland believes that a diversified workforce is a key towards the success of the business and continues to adopt the strategy of diversification in its workplace (Woods, 2010). In addition to it, the leadership skills of Philip Hampton, the chairman of RBS Group also adds on to the KSF for RBS Group. RBS Group has been able to build a huge brand name and the bank is known globally for its services and product offered along with its quality customer service. Strategic Development Existing strategy(s) Royal Bank of Scotland Group focuses and its strategy outlines the following things, To serve the customers well To rebuild a sustainable value for its shareholders and To restore banks towards an undoubted standalone strength (RBS Group, 2012) To identify the strategies adopted by RBS Group in relation to strategic direction matrix, the Ansoff’s matrix and the Porter’s genetic strategies are taken into consideration. Analyzing the Ansoff’s matrix, RBS has adopted the three strategies, market penetration, development and product development and currently plans to diversify its business into other segments. The new RBS is building on new businesses also referred to as core businesses which are customer centered as well as highly competitive in nature. According to the Porters generic strategy, firm should adopt either of the strategies in order to achieve a competitive advantage. The generic strategies includes cost leadership where the firm enjoys cost leadership by maintaining the lowest price as compared to its competitors, differentiation strategy where the firms tends to differs from the other brands and focus strategy which focuses on niche market segment. The bank provides high quality service which also acts as a differentiator factor for the RBS. Corporate strategy of RBS is to be become the most admired, stable and valuable bank globally. RBS as a part of it corporate strategy targets a 15% of sustainability return in customer driven markets. The bank concentrates on the competitive strengths in each of its core business and some of the key strategies are to focus on the core activities; reduce the risk funding exposures by restructuring; reduce the scale as well as scope of operation and re-engineer the cost structure on business investment (Global Data, 2012, p.20). RBS operates in 40 countries which indicate that the bank has adopted the expansion strategy in order to increase its market share through adoption of new capabilities, technology which has enabled it to gain positive market share globally. Generation of strategic options Based on the strategy of RBS the strategic options available to the bank can be further divided based on the ROCE of the bank and through other frameworks such as Porters generic strategies, Ansoff’s matrix, the expansion strategies, value chain of the firm, and other strategies. The bank can continue to increase profit by expanding the business into other countries along with maintaining a positive reputation among the customers. Applying the Porter’s generic strategy, RBS has incorporated the differentiation strategy and has created a competitive advantage to compete in the existing and potential market segment. RBS with its wide range of products and services headed under different brand name has been able to differentiate its product range from its competitors and as a result has been able to meet the needs and requirements of the customers. Differentiation strategy usually involves high involvement of cost as huge investment is required in R&D in order to differentiate the products and services and create a stable market share in the operating countries. The Bank has already build its brand name in the existing market and off lately has been expanding into emerging countries and also into other developed countries to increase market share. Applying the Ansoff’s matrix strategy, RBS has implemented market penetration, market development, product development and also diversification strategy out of which market and product development involves moderate amount of risk and can be said that they will be financially feasible. However diversification strategy is also regarded as one of the key option but involves high risk as the product as well as the market tends to be new so the chances of failure are comparatively high. Other feasible strategic option is the expansion strategy through M&A, joint ventures and accordingly changes made in the value chain of the bank in order to deliver satisfactorily customer services. But reviewing the balance sheet of RBS Group in the financial year 2011, Profit after tax had shown negative rate amounting to (2016) which emphasis that the company does not have much capital to invest in expansion strategy. The total net asset in 2011 amounted to £1506.0 and liabilities amounted to £1430 higher than what was in 2010 (Redmayne-Bentley, 2012). Evaluation and ranking of options SBU level The strategic options made available to RBS are expansion of business, product development, and market development and diversification strategy. Each of the strategic option has its own set of benefits and also requires investment to succeed in implementing the strategies. The expansion and diversification strategies are likely to be the most risky affair and also require heavy investment. For expansion strategy to take place careful selection of the target market is essential and approximately will require 2-3 years before investing into the desired country. Risks involved with it are non acceptance of the brand and its product and services, cultural difference, nature of doing work, ethical issues along with other factors. In case of diversification, if the company aims to adopt the related diversification the risk involved will be comparatively less as compared to unrelated diversification strategy. The capital investment is high along with investment made in R&D. Analyzing the SBU of RBS Group, the US Retail & Commercial division which encompasses of UK Corporate, UK wealth, UK Retail, Ulster Bank and GTS, as per the BCG matrix, it can be said that the UK corporate division acts as a ‘Cash Cow’ for the company along with UK retail, wealth can be categorized as a ‘Star’ as it still growing also GTS division. The Ulster bank of RBSG can be regarded as a ‘Question mark’ as it had generated loss for the company which can further become a ‘Dog’. Corporate Level After evaluating all the strategic options, the strategic business units of RBSG can be ranked according to the performance. The UK corporate division ranks number 1 followed by UK retail, wealth, GTS division and lastly the Ulster bank. Ulster Bank which offers retail services through its 236branches and also tends to offers business services to SME business customers, corporate markets and institutional had incurred a loss of £1024 towards the total revenue of RBSG. Although the Ulster bank had incurred loss but it would be feasible not to divest the SBU as with the rise in SME it has the potential it perform well in the next financial years. The balance sheet of the RBS do not depict a positive flow of asses as the liabilities are comparatively higher and so RBS should focus primarily towards its existing SBU and concentrate on the existing market for the time being as the cash flow do not depict a positive result and the value of the assets of the bank are comparatively less as compared to previous years. But at the same time expansion is the key to growth and every organization needs to adopt the expansion strategy. Thus RBS can also adopt the market development strategy by market expansion and creating greater market value and market share. Choice of strategies Based on the evaluation of the strategic options and the SBU’s of Royal Bank of Scotland Group the strategies that the Bank should implemented based on the current financial situation are as follows, Market development entail finding new and potential market for the existing product and can be adopted by RBS Group which will help it to earn increase in market growth rate, market share and also brand awareness and competitive advantage. With careful market research and segmentation RBS can segment the target market according to the needs and requirements of the new set of customers. The level of risk involved is moderate as the product remains the same. RBS has the opportunity to target various markets both at the domestic level and on foreign countries. With moderate level of risk it will be feasible for Royal Bank of Scotland group to chose the option of market development and explore the emerging and economically stable countries through which the RBS Group will be able to benefit itself. Next strategy suggested for RBS Group is that of product development where a new product is marketed to the existing customers. The new product developed is to meet the demands and needs of the target customers and RBS has always invested in its customers in order to develop innovative and new product. The product so introduced is further marketed to the existing customers enabling customer loyalty. In Banks customer loyalty plays a major role and introducing products or services which suit the changing demands along with investing options RBS will be able to achieve a high level of customer loyalty which can also acts as a competitive advantage for the bank. Finally diversification strategy can be implemented by RBS; however the risk involved is much higher as compared to other strategies. This is because diversification strategy can be related or unrelated and involves risk of not being accepted by the customers. Unrelated diversification tends to involve much risk than related diversification. It is suggested that RBS Group should opt for the related diversification strategy. Implementation The recommended strategies suggested to Royal Bank of Scotland Group needs to be implemented effectively. However the strategic choices face some of the implementation issues which are discussed below, The first strategy suggested to RBS is that of market development strategy which forms an integral part of Ansoff’s matrix. While implementing the market development strategy RBS needs to find new and potential market to sell off its existing product. In the current economic scenario, every country is facing threat from the economic downturn and from other uncertainties existing in the financial world. Therefore investing in such a scenario involves high risk as with any uncertainties the banks are going to get affected to a very large extend. After the huge recession and euro crises in UK, the global economy has not yet been stable and investing into merging countries might result to be a costly affair along with threats from economic uncertainties. In addition, finding of the potential target market also involves heavy research on the market, the product which is to be introduced, the services and others. Thus in order to effectively implement the strategy of market development RBS should maintain its assets, reduce its liability and invest in the potential market which has the potential to grow in the future and survive in the toughest situation. The next implementation issue encountered is with the diversification strategy. Diversification strategy involves moving new products into new market and is recognized as the most risky strategy. If RBS group opts for the unrelated diversification it tends to move away from its past and as a result more uncertainties are created. RBS is known globally as a company which provided financial and banking services to its customers. If the Bank moves away from its past activities it creates a risk of not being accepted in the market and also the customers will not be able to relate it with the brand name. When the bank moves into related diversification it thus involves risk but since the bank plans to invest in related product there are positive chances of the product being accepted in the market. Thus it is suggested that RBS Group should invest in the related diversification strategy. Another set of recommended strategy is the expansion strategy in emerging and developed market. Expanding in emerging countries will help the bank to increase its market share and at the same time increase the brand awareness by introducing new product in the target market. RBS has already created a brand value which acts as a strength for the bank and therefore investing into other markets will be beneficially for the company. The mode of entry can be through mergers and acquisitions or joint venture depending on the nature of the target market. The following is a chart which shows the key actions and timings of the strategies to be implemented by Royal Bank of Scotland. December 12 January 13 February 13 March 13 April 13 May 13 Therefore based on the above analysis it can be concluded that RBS in the recent past has not shown an impressive growth rate but it has the potential to increase in the near future. Applying the recommended strategies and strategic option RBS will aim to capture the market share and turn its total net profit into positive as it has been experiencing a negative net profit in the financial year 2011. Reference Accenture, 2012. State of the Banking Industry 2012. [Pdf]. Available at: < http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-State-of-the-Banking-Industry-2012.pdf > [Accessed 5 November 2012]. Ernst & Young, 2012, Making the right moves. [Pdf]. Available at: < http://www.ey.com/Publication/vwLUAssets/Making_the_right_moves_-_Global_banking_outlook_2012-2013/$FILE/Making-the-right-moves_Global-banking-outlook-2012-13.pdf> [Accessed 5 November 2012]. Global Data, 2012. The Royal Bank of Scotland Group PLC (RBS) - Financial and Strategic QFinance, 2012. Banking and Financial Services Industry. [Online]. Available at: < http://www.qfinance.com/sector-profiles/banking-and-financial-services> [Accessed 5 November 2012]. RBS Group, 2012. Our business and strategy. [Online]. Available at: [Accessed 5 November 2012]. RBS, 2012. About US. [Online]. Available at: http://mib.rbs.com/about-us/mission [Accessed 5 November 2012]. Redmayne-Bentley, 2012. Royal Bank of Scotland Group. [Online]. Available at: http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=RBS [Accessed 6 November 2012]. SWOT Analysis Review. [Online]. Available at: < www.globalcompanyintelligence.com> [Accessed 5 November 2012]. Woods, D., 2010. Top Employers for Working Families: Royal Bank of Scotland. [Online]. Available at: < http://www.hrmagazine.co.uk/hro/news/1018689/top-employers-working-families-royal-bank-scotland > [Accessed 5 November 2012]. Read More