The External Environment of the Commonwealth Bank - Case Study Example

Running Head: REPORT Report Student Name: Student Number: Course Code: Instructor: 1st December, 2016 Executive Summary The banking industry is a very challenging one seeing as most players have to mitigate the effects of serious tragedies like financial downturns. Time and again, the world financial market gets affected by factors in microfinance, or even microfinance, just enough to warrant a move aimed at normalising business in order to mitigate effects of such occurrences. For instance, the economic downturn of 2007 – 2009 affected most financial institutions globally so much many had to write off loans and debts as bad since they could not recoup them from lenders. This meant foreclosures and such moves aimed at reducing the effect of such events that were deemed to be of catastrophic proportions. The Commonwealth Bank in Australia is a major player in the financial and banking sector. Over the years, it has remained a dominant player, thanks to its various strategies that have seen it grow to a very well managed entity. The political, environmental and technological advancements, put together with social-economic and legal frameworks around the business environment have been used, together with various strengths drawn from within the organisation, to ensure that it realises its goals in line with the vision and mission statement of the company. This paper aims at looking into the internal environment of the firm as this helps foster strategies from within that are critical in helping to beat the competition. The external environment, drawn through a Porter’s 5 Forces analysis and a PESTEL analysis, will be crucial in analysing the forces from without that create challenges for the Commonwealth Bank. A conclusion and recommendations will be made at the end of the exercise. Background The banking industry is very essential for a thriving economy. Banks serve as the point from which many other businesses, apart from the regular individual customers, draw their financial assistance in form of loans, which are financial facilities besides their traditional incomes. As a means to earn a profit out of the business, banks charge interest on their loan facilities alongside the regular charges that may be levied on other facilities that are offered to the customers. The Commonwealth Bank is a provider of banking, insurance, retail, broking and investment services among many others. These services are offered in all of its branches across the countries where it has banks in the UK, US, Fiji, New Zealand and Australia where it is headquartered. Originally started by the government of Australia, the bank has been through all sorts of challenges that finally saw it being privatised in 1996. Despite all these challenges, it is the biggest banking institution in the Southern hemisphere (Commonwealth Bank, 2016). As a dominant player in the industry, and considering that it is also made as one among the four biggest banks in the Australian banking industry, the Commonwealth Bank, sometimes referred as the CBA, draws a diverse market from different market segments to the different sectors it operates in. For instance, Commonwealth Bank is also among the biggest insurer through whom a great number of Australians have taken life insurance covers. In New Zealand, and through a subsidiary, the bank offer insurance too. There are varied markets for the Commonwealth Bank, much of it coming from Australia, while the remaining countries where it has branches and subsidiaries also contribute what may be considered as a sizeable chunk of markets for the various products it offers its customers. The biggest advantage that the Commonwealth Bank has over its competitors is the capacity it offers its customers through various services which have been integrated in such a manner as to ensure that the bank enjoys an unrivalled stranglehold on certain markets (Otchere & Chang, 2003). Macro Environment in Australia – PESTEL The macro environment of an area creates a favourable condition in which business can flourish or go down within a period of time. There are various factors that indicate how a business will fair in any kind of jurisdiction. For instance, political upheaval may create situations where businesses cannot survive for long because it interferes with the day-to-day operations that work towards making a business profitable. As such, it is prudent to note that a business can profit and work out easily in areas where peace and tranquillity prevail. The finance sector is particularly very sensitive since, besides the regular peace and harmony required by any business, it also requires a favourable political will that can ensure policy stipulations do not inflict upon the industry harm. The PESTEL analysis is a great way of assessing the macro environment in any country. The following PESTEL analysis is for the banking or finance industry in Australia, and with regard to the Commonwealth Bank. Political Initially, the Commonwealth Bank was seen as a “people’s bank”. This changed when policy regulation stipulated that the bank is privatised. It effectively made the bank a private affair that would mean a movement of profits from the government that was the initial owner, to shareholders and other investors. As a matter of fact, this means that political goodwill is effective at changing a business’s operation. However, and more importantly, the political atmosphere is peaceful, meaning that businesses enjoy a certain calm that is quite conducive for all business, especially the finance sector (Melville, 2003). Economic Currently, the standard ratio shows that Commonwealth Bank’s capital position cannot be affected much because it looks to be neutral. Consequently, the Commonwealth Bank should strengthen, through Basel III capital regulatory frame since this may have a big impact on its capital settling. On the other hand, the economic empowerment among Australians is such as to allow for them to continue consuming products from banks since they have a considerable disposable income that may allow them to go for bank services, or even borrow more to finance various projects in a family and in business alike (Hensiz, 2000). Social There are diverse ways through which the social lives of consumers may be affected by banks like CBA. More often than not, such banks are at the forefront of creating situations where customers understand the products they are using, and how these products may improve their lives. As such, the CBA is greatly involved in creating awareness among its market, say the segment with students, on how and why it is important to finance your education through banks if you are not financially well off so that you pay back such loans after advancing in your career. Technological Technological advancements have, in a great way, ensured that more people can now access their money through different channels, or even engage in business investments through other means that do not involve visiting a physical bank outlet or branch. Comm Sec, Net bank, ATMs, telephone banking and other broker services offered through the internet are just but examples of how technological advances have made it possible to access funds and use them in different ways in real time without necessarily having to visit any branch. The EFTOS system is a great way of transacting between businesses or businesses and customers (Bajad & Trayler, 2015). Environmental The use of various systems through IT and other core systems means that the Commonwealth Bank expends more environmentally unfriendly gases. This means that the bank needs to incorporate practices that ensure very little of this affects the environment. In lieu of this, CBA has integrated systems that reduce the power used within, so minimal damage to the environment is achieved, if any. Equally, use of energy friendly branches in all of its facilities reduces harm as it encourages energy conservation, which in turn is a great way of reducing wastage. Other goals that may help the bank achieve the Carbon Reduction Target include the use of controlled heating, air conditioning and ventilation in upgraded buildings where the commercial enterprises are located, in order to ensure a minimal wastage of energy. This strategy earned the bank awards back in 2012 (Schlagwein et. al., 2014). Legal While the services at the bank are seen as superior when compared to its contemporaries, the bank has instituted measures to ensure that those who feel that they have received poor services, or the advice given was not up to par, can access measures that compensate them for this. The Open Advice Review Program takes care of this in cases where customers feel that the financial advice given may not have been sound. This is a very good way of staving off any legal issues that may cause harm than good to both bank and customers (Gillian et. al., 2015). Porter’s Five Forces Analysis Bargain Power of Suppliers The Commonwealth Bank has a lot of suppliers, which means there is an intentional strategy to reduce prices to earn money from the bank. This means that the bank stands at an advantage since it receives supplies at a cheaper price. Bargaining Power of Customers The mere fact that the bank has so many customers means it gains a lot just going by the manner in which it enjoys economies of scale. For instance, as a result of having many customers, it can offer loans at cheaper interests, but still, garner higher profits since it highly relies on the economies of scale to recoup on any areas where it may lose out. Intensity of Existing Rivals As a big player in the finance industry, Commonwealth Bank enjoys a lot of advantages that arise from the sheer numbers it has. Beyond this, and as a big bank making the top three banks in Australia, the government also acts as a point from which the bank benefits. For instance, the bank limits ways through which competition may be carried out, meaning that Commonwealth Bank is somehow insulated against some practices (Brandao et. al., 2013). Bargaining Power of Customer As intimated earlier, the Commonwealth Bank enjoys the advantage in having huge numbers of customers, both in Australia and in its foreign banks in the UK and New Zealand. This means that through the lower prices of banking when compared to most of its competitors, the bank gets to enjoy various advantages that place it ahead of its competitors. Threat of New Competitors The aforementioned factors lend credence to the fact that the Commonwealth Bank is indeed a big bank with tentacles spread all over Australia, and extra countries to boot. From here, its operations cannot be ignored as not having the capacity to survive new entrants. Even more surprising is the fact that entry into the banking sector in Australia is further complicated by the many barriers entrants are faced with since even government policy is stipulated against some forms of competition that may interfere with the industry. As such, the Commonwealth Bank stands little risk against new players. Internal Environment Analysis The internal environment of a business is a great component in strategy and which is very integral in surviving competition. More often than not, businesses with capacities to run efficiently from within post better results and stand a better chance of surviving in very difficult markets. For instance, sufficient capital associated with well-oiled campaigns signify the capacity to face competing firms. The Commonwealth Bank is an example of a company whose internal environment is great, seeing as it can craft strategies from within and use them to gain a serious advantage against erstwhile competitors who have an equally good grip or stranglehold on the market. The SWOT analysis presents a near-perfect assessment of what the internal environment of a company is like. SWOT Analysis for Commonwealth Bank of Australia Strengths The sheer magnitude by which the company spreads across countries – US, UK, New Zealand and Australia itself guarantees it numbers. This means that just by the fact that it has more than 40000 workers, then it is well represented in all of the four countries. Additionally, being one among the big four banks means that it is a big entity that can spur competition, hence growth in the industry. The bank is listed as among the largest in the stock exchange in Australia. This means that it has a good standing by capitalization (Weill, 2015). The highly-differentiated services and products at the CBA mean that it can capture market segments from brand extension due to market dynamics. Further, the bank is a constantly growing entity, meaning that its revenues and profits increase annually as a sign of great strategies. Weaknesses The bank is a concern, at least according to Moody’s, since it scores a miserly B- on the important area of financial strength. Moreover, there are concerns about controversies that the bank seems not to be able to escape from. These controversies started from activities as reported by an action group that calls itself “Unhappy Banking” (Featherstone, 2016). Opportunities The scrutiny by action groups and Moody’s are a chance to do away with those perceptions that the bank is slacking in some areas. As such, strategies that focus on particular issues such as financial strength may be instituted to help reduce the growing bad perceptions associated with the bank. In addition, the bank may create strategies to increase better understanding of services by customers. Technology is one great way through which such strategies may be exploited {Groom and Taylor (Eds.), 2018}. Threats The bank has a number of counter partners in various ventures. The fact that these partners may fail to meet certain obligations means that the bank is exposed to threats in many forms. Secondly, the bank operates in different geographical locations, hence different jurisdictions, meaning they get to use different rules and policies. The predisposes them to great risks, even those associated with operating using different currencies. Currency volatility may pose great risks to the business. The aforementioned factors in the weaknesses section appear to pose situations where investors may feel less confident when investing in the bank. This means chances of garnering more investors may become dimmer, even with the great prospects its capital size presents in terms of capacity to expand (Ferguson & Vedelago, 2013). Summary and Conclusion The Commonwealth Bank appears to be among the biggest players in the banking sector going by its positioning and market capitalization. Such factors as international or global operations mean that the bank has an appeal the extends beyond the borders of the bank. This does not imply that there are no worthy competitors that may pose a great risk. This does not mean that the bank is not capable of fighting competition and emerging as a winner. The fact that it employs over 40000 employees is one of the indicators that the bank is a serious entity. The environment in Australia allows the Commonwealth Bank to expand beyond its traditional areas of operation. This is evident in the manner in which it has managed to comfortably operate in areas which are not its traditional sectors. There is evidence of political goodwill in Australia and the other countries where the bank operates. This is further demonstrated by the constantly glaring preference for indigenous companies by the Australian government that stipulates policies to deal with any unfair practices. This may be difficult for new entrants to operate, but once these entrants can start operating, then the benefits will be immense. Even more concerning to other new entrants is the fact that the Commonwealth Bank, together with the three others considered as the “big four” operate within a certain realm where the stranglehold on certain markets makes it more difficult for them so that the big four prosper with little difficulty. Be that as it may, the bank has a few challenges to deal with. For instance, the rating by Moody’s as concerns the bank’s financial strength means that investors may be wary of the reputation the bank has built itself, seeing as action groups had already declared that the banks’ services are wanting. To deal with such issues, the bank has to institute changes that will see it improve on its rating and other areas which allow activists to associate it with poor services. While it is important that the bank focuses on strengthening its stranglehold on certain markets, it is imperative that it uses its advantages to improve the general positioning that predisposes it to competition from the other members of the big four banks in Australia. In conclusion, the banking industry is fraught with players who are angling to score a higher percentage of customers in terms of market share. While this is the convention with most companies, some indulge in activities under social responsibility to enable them to gel well with communities that live around the locations where the bank branches are located. With such activities, the bank stands a great chance of scoring more customers, especially if such activities in the social responsibility strategy is tailored to ensure that customers resonate well with the initiative. Initiatives to keep the environment green are just but types of examples that may furnish here. Green initiatives like those that include reducing the carbon footprint left behind by companies would be greatly appreciated by consumers who identify with green initiatives. Effectively, the bank may well use such strategies to improve the perceptions among customers. There are strategies that work for banks, especially when crafted in consideration of the internal environment. For instance, the Commonwealth Bank is known to have immense resources that it can use to develop extensive marketing campaigns that could improve its standing in whichever market segment. However, this may not work if it is not complemented with activities that match the organization’s capital might. A great use of capital to improve the wellbeing of a company should be met with an equally well thought out plan that stands within reasonable cost to ensure the efficacy of such campaigns in delivery. There is no need to spend money where a great deal of it is not needed. Conversely, areas that need proper finances should be bequeathed the same to ensure balance. References Bajada, C., & Trayler, R. (2015). Technology-driven service innovation in the banking industry. In the Handbook of Service Innovation (pp. 319-343). Springer London. Brandao Marques, L., Correa, R., & Sapriza, H. (2013). International evidence on government support and risk taking in the banking sector. 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Intra-industry effects of bank privatization: A clinical analysis of the privatization of the Commonwealth Bank of Australia. Journal of Banking & Finance, 27(5), 949-975. Schlagwein, D., Thorogood, A., & Willcocks, L. P. (2014). How Commonwealth Bank of Australia Gained Benefits Using a Standards-Based, Multi-Provider Cloud Model. MIS Quarterly Executive, 13(4), 209-222. Weill, P. (2013). QUARTERLY EXECUTIVE. Read More