Wales Would Be a Favourable Market for Westpac Bank - Case Study Example

Country-Product Brief – Wales Name Name of Institution Table of Contents Table of Contents 3 3 1.0 Executive Summary 4 2.0 Introduction 5 3.0 Situation Analysis 5 4.0 SWOT Analysis 11 Country-Product Brief – Wales 1.0 Executive Summary Australian banks retained a high level of stability during a global financial crisis that led to the collapse of numerous banks in the UK and US. Data from 2015 continues to show that Australian banks are the most profitable in the developed world. The stiff competition among the leading Australian banks means that international markets offer remarkable growth opportunities. This paper examines the business environment in Wales with a view determining whether Westpac should expand to the market. The findings show that Wales and Australia share comparable political, legal, and social environments. The economic, technological, amd environment analysis has show that an Australian bank should be successful in Wales. When it comes to the market segment, Westpac will be competing in the retail and business banking segment, with the focus being on small and medium sized enterprises. The target market will be comprised of 1.3 million workers and approximately 210,000 businesses. Westpac’s main competitors will be HSBC, Barclays, and the Royal Bank of Scotland as they have existing operations in Wales. However, each of these competitors lack a sustainable competitive advantage. As such, the paper concludes that Wales would be a favourable market for Westpac Bank. 2.0 Introduction It is an acceptable fact that the global financial crisis had a devastating impact on the global banking sector. While Australian banks suffered from the crisis, they retained a high level of stability when compared to UK and US banks. This stability can be attributed to factors such as a culture of prudent lending, high levels of capitalisation, sound corporate governance, and effective regulation of the financial system (Hawtrey, 2009). These policies allowed Australian banks to get through the financial crisis without having to receive support from the government. According to Palmer (2015), the top four Australian banks – Westpac, ANZ, Commonwealth Bank, and NAB – were ranked as the most profitable banks in the developed world in 2015. The profitability and soundness of these banks give them a strategic competitive advantage that can allow for expansion into other global markets. Indeed, Westpac serves more than 1.3 million consumers and small businesses in New Zealand through an extensive network of ATMs, branches, and online banking. The purpose of this report will be to analyse the business environment in Wales to determine whether Westpac Bank can operate in the country. The report will also analyse the banking market in Wales, existing competitors, and Westpac’s organisational assets and skills. The report will conclude with a SWOT analysis of Westpac. 3.0 Situation Analysis 3.1 Business environment 3.1.1 Political and Legal Analysis Multinational corporations typically enjoy strong bargaining positions when negotiating to enter new markets. However, they lose this bargaining power and get exposed to political risks once they make their investment (Jiménez, Luis-Rico, & Benito-Osorio, 2014). An expansion into Wales will be associated with minimal political and legal risks given that the two countries use the same political system. Australia as a whole and the UK have a long-standing relationship with the two countries sharing a sovereign leader. Additionally, the Australia and Wales share the English common law system. Therefore, Westpac should expect to work under a similar political-legal environment, with the only differences being the degree of devolution. The desire for Welsh Independence is a political factor that might affect businesses seeking to do business in the region. However, the support for independence has fallen to very low levels after the failure of the Scottish referendum (BBC 2014). The other relevant factor is the tense relationship between the UK as a whole and the European Union, which is evidenced by the upcoming referendum on the UK’s membership of the EU. At present, Wales can be considered as part of the European Political Union that allows the free movement of capital, goods, and services. This is an attractive factor since a multinational firm that sets up operations in Wales will gain access to the broader European market. 3.1.2 Economic Analysis According to the Welsh Government (2015), its economy has generally kept up with the pace of recovery in the UK with Wales performing better than the UK in areas such as income. Work is a critical driver of economic growth for the Welsh region. The region has an employment rate of 69.3%, meaning that 1.3 million people between the ages of 16-64 are employed. In terms of trends, there have been insignificant changes in the employment rate over the short and long terms (Welsh Government 2015). When it comes to poverty levels, 23% of individuals have an income that falls below 60% of the median income in the UK. It is worth mentioning that Wales does not have the freedom to create its policies when it comes to fiscal and monetary policies. The Welsh GDP is generally lower than that of Scotland and England, and it would have a deficit if not for finances from the UK government (Daily Post 2014). A complete devolution of fiscal and monetary policies would give the Welsh government the flexibility to tailor policies to the local environment (Daily Post 2014). Finally, a move to the UK would expose a multinational firm to foreign exchange risks, a risk that would be considerable for a bank seeking to transact on a large scale. One of the key features of the Welsh economy is its reliance on small and medium-sized enterprises (SMEs). According to The Welsh Conservatives (2013), SMEs account for over 99% of active businesses in the country. However, they faced considerable challenges when it comes to accessing finance. There were 209,200 SMEs in Wales, with 199,300 being micro businesses that employ 615,000 people or 60.5% of the entire private sector workforce (Welsh Conservatives 2013). This shows that growth in the Welsh economy is reliant on the success or failure of SMEs. 3.1.3 Social Analysis Differences in national cultures have implications on firms conducting business across state borders. As in the case of the political environment, Wales and Australia share similar cultures in terms of language and communication systems, values and belief systems, and material culture and artefacts. When it comes to the population, the 2011 census revealed that the country had a population of 3.06 million people, indicating a 5.3% increase over a decade. The country has an aging population, with projections showing that the number of people over 65 years will rise from 19.1% of the population in 2012 to 26.4% of the population in 2037. The number of those under the age of 16 will remain constant while the working population will reduce from 62.8% to 56.4% of the population (Welsh Government, 2013). This will create enormous challenges as there will be a high dependency ratio in Wales. 3.1.4 Technological Analysis Technology is a factor that is transforming the international business environment at a dramatic pace. In the case of the banking industry, technology allows banks to serve millions of customers without having to invest in physical branches. Wale’s membership in the United Kingdom gives it access to some of the most advanced technologies in the world. For instance, Wales has the top availability of superfast broadband of any of the devolved nations with 80% of businesses having access to the broadband (Welsh Government 2015b). The innovative entrepreneurial culture in Wales has meant that businesses have embraced technology to save on costs and to improve their efficiency. World class education facilities are also ensuring that the Welsh workforce will continue to leverage emerging technologies in business settings. 3.1.5 Environmental Analysis The EU and UK Governments have set greenhouse gas emission targets that mandate the Welsh government and businesses to move towards clean energy. Wales is located in a natural environment that gives it easy access to renewable sources of energy like wind and tide. In 2011, gas was still the primary source of energy for electricity generation. Importantly, the contribution of renewable energy to the energy mix has risen steadily to 7.9% in the period between 2004 and 2011 (National Assembly for Wales Commission, 2013). The location coupled with support from the government will cement Wales’ position as one the leaders in sustainability. Should Westpac enter the Welsh market, it will need to make drastic changes to its marketing and financial practices in order to attain the same level of sustainability. 3.2 Market Analysis Westpac will target the retail and small and medium-sized business segments of the banking industry. As stated, Wales has 1.3 million individuals who are between the ages of 16-64 and employed. This will form Westpac’s target retail market. The evaluation of the business environment showed that the nation’s success is driven by around 210,000 SMEs that employ over 600,000 people. The financial crisis impacted banks in the UK more than Australian banks, meaning that these SMEs have difficulty accessing finance. These businesses will be the primary target for Westpac Bank. When it comes to the future outlook, the reduction in the size of the working population will have minimal impacts on the retail operations of Westpac. This is because the retirees will still need financial services. When it comes to the SME target market, the Welsh entrepreneurial spirit will guarantee high numbers of businesses that require loans for growth. When it comes to distribution channels, 80% of Welsh businesses have access to superfast broadband, with individuals having similar access levels. This will allow Westpac to utilise online banking as the primary means of serving its retail and business customers. The profitability of Westpac and the cost savings from reliance on online banking will allow for competitive pricing strategies. This will permit the bank to gain a foothold in the market while the local banks continue to recover. 3.3 Competitor Analysis As stated, there are four Australian Banks that are in a strong financial position. Westpac Bank faces tough competition from ANZ, Commonwealth Bank, and NAB when it comes to finding ways to expand their business. The size of the Welsh Market might be small for some of these competitors, but it offers Westpac the opportunity to grow its retail and small business portfolio by targeting 1.3 million individuals and over 200,000 small and medium-sized businesses. Apart from the Australian competitors, Westpac will also have to compete with existing banks in Wales and the UK as a whole. HSBC, UK’s largest bank, has extensive operations in Wales. Its competitive advantage is its knowledge of the Welsh banking sector, but the bank has had to restructure and concentrate on Asian markets (Barry, 2015). The Royal Bank of Scotland also has operations in Wales, but its position was weakened by the global financial crisis and the subsequent bailout by the UK Government limited its scope of operations (Barry 2015). Barclays Bank is the other major competitor that has acquired much experience in diverse markets. As in the case of HSBC and the Royal Bank of Scotland, Barclays is closing many of its branches in the UK (Silk 2015). Additionally, the firm’s reputation has suffered considerably from its participation in fraudulent activities. It is evident that the competitors lack a sustainable competitive advantage, meaning that a foreign bank in a stronger financial position would be able to gain market share with relative ease. 3.4 Organisation Assets and Skills Westpac is Australia’s oldest bank and is part of the four biggest banks in the country. The firm operates using a divisional structure whereby five key divisions function independently. The division that is of concern in this report is the Westpac Retail & Business Banking group that serves businesses and individuals in Australia. The firm has successfully expanded into the New Zealand market, indicating that it has experience in international marketing. The firm has also managed a representative office in England since 1853, demonstrating that it has sufficient knowledge of the UK business environment (Westpac, 2015). This should allow for the offering of banking services to UK nationals who do not have interests in Australia or New Zealand. The availability of superfast broadband connections in Wales will allow Westpac to leverage its technological skills and knowledge to serve Welsh businesses and individuals. The company’s illustrious history is also a key attribute in a world where financial organisations are losing their reputations. Finally, the most vital skill is Westpac’s ability to generate returns in economic conditions that are unfavourable to UK and US firms (Hawtrey, 2009). This skill gives Westpac a sustainable competitive advantage that can lead to growth in the Welsh market that is being ignored by local banks. 4.0 SWOT Analysis Strengths Westpac continues to generate profits in an economy that is still recovering Westpac subscribes to sound lending practices that reduce risk and losses. The bank has considerable experience in business banking The firm’s long history and the shared culture will facilitate rapid growth Weaknesses Westpac faces competition from local and international banks Opportunities Thousands of individuals and businesses in Wales lack access to finance EU membership gives Westpac access to a wider market Threats The political environment poses significant risks that are associated with Welsh independence and EU membership Regulatory changes by the EU can have far-reaching impacts on the bank Exposure to foreign exchange risks An evaluation of the SWOT analysis shows that the strengths and opportunities outnumber the potential threats and weaknesses. This confirms that Wales has a favourable business environment and that there is a ready market for retail and business banking. The SWOT analysis also indicates that the main competitors do not hold a sustainable competitive advantage that would hinder the growth of a new entrant. It is recommended that Westpac undertake an evaluation of entry strategies since this situation analysis has concluded that Wales is a favourable destination for Australian businesses. References ‘Record low’ back Welsh independence – BBC/ICM poll. (2014). The BBC. Retrieved 10 September 2015 http://www.bbc.com/news/uk-wales-29331475 2012 – based National Population Projections for Wales. (2013). Welsh Government. Retrieved 10 September http://gov.wales/docs/statistics/2013/131106-national-population-projections-2012-based-en.pdf Barry, S. (2015). HSBC is still in top 10 of world’s biggest banks, but only just. Wales Online. Retrieved 11 September 2015 http://www.walesonline.co.uk/business/business-news/hsbc-still-top-10-worlds-9544879 Company Overview.(2015). Westpac Group. Retrieved 12 September 2015 http://www.westpac.com.au/about-westpac/westpac-group/company-overview/about-us/ Hawtrey, K. (2009). The global credit crisis: why have Australian banks been so remarkably resilient?. 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