Recession and Banking Analysis - Essay Example

Recession and Banking: An Analysis "While the financial crisis was felt primarily in the United s and the banks in Central and Eastern Europe have been able to avoid serious issues, the conclusions outlined above generally also apply to our region. Failure to adapt quickly cannot result in success in the current global environment. Hence, even banks in our region should act promptly," added Mike Jennings, leader of the financial services industry group of Deloitte Central Europe. According to the above statements, the years 2007 and 2008 turned out to be challenging and sometimes, discouraging for the biggest financial institutions of the world. This was indicated by the McKinsey research which demonstrated that the competitive analysis proved how the banking industry was not adhering to set market dynamics anywhere in the world. With differences in performance between regions, structures and sub sectors, the use of the five forces of competition easily came across in the changing global dynamics of the banking sector. The McKinsey research further concluded that the next decade will herald a worldwide GDP growth reaching 16% by 2012. According to Deloitte, "The global banking industry weathered turbulent times in 2007 and early 2008. After rising interest rates and a decline in U.S. housing prices drove increased defaults among subprime borrowers, investors rapidly lost their appetite for securities based on subprime mortgages and soon for other securitized assets as well. Given the integration of capital markets, the impacts quickly ricocheted around the world, affecting banks, securities firms, and hedge funds in the United States, Europe, and Asia." (Global Banking Industry Outlook, 2008; Pp 1 to 12) This can be seen in the fact outlines by Deloitte according to which the AAA downward trends have affected the hedge funds the most. While commercial and investment banking institutions had announced write offs of almost $100 billion by January 2008, increased legal activity (double of what was seen in the previous year) became the trend for August 2008 onwards. (Global Banking Industry Outlook, 2008) In the face of these trends, this essay will seek to study the changing dynamics of the global banking industry according to the Pestel analysis and Porter's five forces of competition. PESTEL ANALYSIS Following are the features according to which the analysis has been carried out by taking the questions into consideration when studying the various pieces of literature to find a conclusion: Political What is the culture of the organization, How is the HR function viewed by other functions Who are the political champions of HR (or its adversaries) Shareholder views Economic What is the budgetary position of the department, Is more money available Are our customers likely to spend more or less money on the services we offer What is happening to the financial status of the organization Interest rates Inflation Salary trends in the sector Sociological Other departmental attitudes to HR Population shifts (age profile) Education Fads Diversity Immigration/emigration Health Living standards Housing trends Fashion & role models Age profile Attitudes to career Technological What changes may be coming our way What new technology/ systems, How do we record attendance, performance how might this change Use of and encourage home working Communications technologies changes of technology that will increase/ reduce the need for recruitment changes to HR software Legal What is happening in our sector that will impact what we do Minimum wage, Working time, Food stuffs, Under 18 working, Occupational/ industrial Training etc. What changes will impact the services of the organization Environmental Staff morale Staff engagement Need to reduce storage needs Management attitudes (inside dept/ function) Organizational culture Source: RapidBi - Pestel Template Findings The basic finding based on the PESTEL analysis points to the following trends as outlined in the various reports used within this essay: Credit Crisis in the banking industry Legal Issues in the sociological environment of the industry Customer satisfaction Issues In this context, the Deloitte report lays down the following challenges for the global banking dynamics: Back from the brink: Emerging lessons from the subprime crisis. The credit crisis spurred by problems in the U.S. subprime mortgage market has placed enormous strains on the banking industry. Building the next-generation branch. The role of the branch is changing-from aplace to conduct transactions to acenter for advice and sales. Developing your talent pipeline. Ensuring there is consistent, quality leadership in executive ranks is clearly essential to banks' success. Lightening the compliance burden: Integrated compliance and risk management. Spurred in part by September 11th, the dot-com bust, and financial reporting scandals, over the last several years compliance requirements have increased substantially in number and scope, imposing agreater burden on financial institutions. The sustainable bank: Where eco-friendly meets business-friendly. Many banks have announced environmental initiatives, but few have adopted astrategic approach. Payments consolidation: Time to act. Although vital for most banks, payments is increasingly acommodity business subject to price and margin pressures. SOA: Moving beyond IT. At atime when banks often struggle to keep aging, disparate systems in step with business needs, service-oriented architectures (SOA) are away to integrate and streamline the IT landscape. Source: Global Banking Industry Outlook, 2008 This brings us to the increase in competition in the global banking sector. This brings us to a discussion on the technicalities of the model proposed by Porter. Porter's Five Forces model provides suggested points under each main heading. When taken into consideration individually, each of these gives rise to the development of a broad and sophisticated analysis of competitive position in the global banking industry. This may further be used during the creation of a strategy, plans, or even where making investment decisions about global banking dynamics. These five competitive forces determine industry profitability and attractiveness apart from being responsible for shaping the prices that firms can charge, the costs they have to bear, and the required investments to engage in industry level competition. We are concerned with the fact that Porter's essentially ahistorical approach cannot provide a full account of either a nation's competitive advantage and corporate strategies or the growth and development of industrial clusters. For this, let us first understand competitive advantage. Competitive advantage is the response of afirm to the pressing need to organize and perform discrete activities. While these needs may not be perpetually spelt out, it is the responsibility of the planners and executers of policies to foresee such situations when catering for growth and development of the firm n various levels. So does this mean that we are dealing with changes and issues only on an individual level and not a national level The basic explanation for this comes from the fact that any change on an individual level is effected by changes on a national level within the banking sector. Yet, Porter's theory cannot accommodate strategies and competitiveness at such levels due to various constraints. The first of these emerges from the fact that people run businesses and economies - and everyone has his or her own unique style. These cannot be covered at length when talking which factors and resources will be utilized in which combination. Thus Porter's theory does not provide an accurate account of the diversity and dynamism in the corporate and commercial environment that banks thrive in. Secondly, there are various activities to take into consideration. The activities performed when competing in the banking industry can be grouped into categories, as these activities can be divided broadly into primary activities and support activities. It has been noted that primary activities are those involved in the ongoing production, marketing, delivery, and servicing of the product. Whereas support activities are those that provide purchased inputs, technology, human resources or the overall infrastructure functions supporting the other activities. Every activity employs purchased inputs, human resources, some combination of technologies, and draws on firm infrastructure such as general management and finance. Activities vary in their importance in regard of competitive advantages from industry to industry. (Porter M E, 1998). While this is a good theory to reckon with, cynics are of the opinion that in today's world there are 'n' number of influences on a firm's activities and not just a set number of the same. In this regard, firms believe that all activities contribute to the creation and development of consumer value, which may be defined as the consumer base of the banking and its product in qualitative as well as quantitative terms. Therefore, according to the theory, the buyer value of a firm is directly proportionate to the effort put in by the firm when providing various customer and other services especially in terms of time and quality maintained. In this way, firms create value for their buyers where the ultimate value a firm creates is measured by the amount buyers are willing to pay for the product or service offered in terms of the various activities it indulges in, as specified above. In a nutshell, a firm breaks even and garners profits if the buyer value manages to exceed the collective cost of performing the required activities. Thus, in order to gain competitive advantage over its rivals, a firm must either provide comparable buyer value, and perform activities more efficiently than its competitors at a lower cost, or perform activities in a unique way that creates greater buyer value and commands a premium price through differentiation. If we are to take recent facts into consideration regarding the state of the economy, we will find that this is not necessarily an accurate measure at the national level. Thus, for a more competitive strategy, the theory that a firm adopts has to be more forward looking. In this regard, one may make use of clusters which are groups of firms and other broad industries linked to each other on the basis of various skill and their subsets. These function in the sphere of providing the necessary technical and research based support for various customer services, by making use of various institutions and universities apart from interns and other individuals. A cluster that has been well formed and makes the required effort to be called well functioning is one that contributes to the advancement of an economy in terms f growth and development. This is a crucial aspect that most firms tend to ignore. In this way, one can measure the implications of the theory and growth thereof, in a more accurate and reasonable manner. This also helps avoid monopolistic tendencies within markets in order to make sure development is not impeded. Implications: Emerging Trends According to the article titled Barking up the Wrong Tree - Factors influencing customer satisfaction in Retail Banking in UK, author Anita Chakrabarty has pointed out how the last two decades have been seeing an increase in competitiveness in the retail banking sector globally. This has a strong connection with the various activities that have been triggered in the banking industry all over the world owing to recession. Thus, one will find that the banks are now in a race towards consolidation of their positions and mergers. In this regard, they have realized that the primary focus of their activities must be on the optimum satisfaction of the customers who are the one's who will actually consolidate the bank's standing and reputation. (Chakrabarty, 2001) Cruikshank Report For starters, it is imperative to study the loyalty business model in terms of global projections. In context of relelvant findings for the banking sector, Don Cruickshank's report which was published on 20th March, 2000 is an important one. This is due to the fact that it has important discussions on competition and the factors that will facilitate the process of gaining a foothold as far as competitive advantage in the banking industry is concerned. This report makes use of various elements like innovation, competition as well as efficiency, all of which have a strong context towards customer satisfaction and support, for the purpose of examination of facts. The findings of this report have a strong connection with the setting of international standards. (Morris, 2000) References Global Banking Industry Outlook, 2008. Deloitte Mid Year Update. Czech Republic. Chakrabarty, A; 2001. 'Barking up the Wrong Tree - Factors influencing customer satisfaction in Retail Banking in UK.' International Journal of Applied Marketing. Vol 1. Morris, J; 2000. 'The Criuckshank Report: Competition in the Banking Industry Under Scrutiny.' Practical Law Company. Cruickshank, D (March, 2000). 'Competition in UK Banking - A Report to the Chancellor of the Exchequer.' Review in Banking Services in UK - HM Treasury. Porter, Michael E (1998). The Competitive Advantage of Nations. Free Press. Reibestein, Robert; Walter, C (Jan, 2008). 'What's in Store for Global Banking' McKinsey Quarterly. Available at: http://www.mckinseyquarterly.com/Whats_in_store_for_global_banking_2095 (Accessed during: March, 2009) Read More