The Strategic Development Study of RBS
Royal Bank of Scotland is public finance and insurance Industry founded in 1727.Originally opened its first premises in the old town of Edinburg, with a staff of 8 people only. For more than half century, RBS solely traded from the Scottish Capital but in 1783 they opened their first branch in fast- growing trading city of Glasgow. Soon RBS opened many more branches across Scotland. And then 1874 RBS opened its first office in London.
Now, in 2010 Royal Bank of Scotland is one of the largest banking groups in Scotland and also has its main head quarters in Scotland. RBS has 700 branches across the globe. RBS operates in a wide variety of banking brands offering personal and business banking services. Provide private banking, insurance and corporate finance throughout its operating countries like Europe, North America and Asia. In the UK & Republic of Ireland the main subsidiary companies are: National Westminster bank, Ulster Bank, Drummonds & Coutts & co. In the United States, RBS owns Citizen Financial Group, the 8th largest bank in the country. In 2004-2009 Royal Bank of Scotland is the 2nd biggest shareholder in the Bank of China. To be more successful in future RBS group has set its Vision, Mission and Core Values:
Vision: RBS retail vision is to “Become the best bank in the world”.
Mission: RBS mission is to be the “The best bank to work for, to be with and to invest in”.
Core Values: values are
Customer Focused - To focus on customer relationship and customer’s success.
Team Oriented - respect and depend on each other for success by working as collaborative teams.
Performance Deliver - result matters so have a burning desire to succeed and to make it happen.
Entrepreneur - thrive on being innovative in our approach to business.
2. Strategic Corporate Developmental History of RBS:
Royal Bank of Scotland is amongst the world’s leading financial service group. RBS group acquired NatWest in March 2000 for 21 billion pounds and Charter One in August 2004 for 10.5 billion US dollars.
Group has shown consistent income growth from 5 billion pounds in H1 1999 to 12 billion pounds in H1 2005, which is a 120% growth in 5 years second to only HSBC group which grew by 140% in these years. (This income is as reported by banks in US Dollars, except RBS which reports in Pound Sterling and UBS in Swiss Francs). A 120% growth in five years shows the commitment of the group and the planning with which they grow in the existing and emerging markets.
It is the most efficient bank in terms of cost to income ratio during 1999-2004 with a consistent improvement in the ratio and a 15% decrease in cost to income ratio in these five years. As the group was focused on reducing cost to income ratio this would automatically lead to better efficiency and higher return for the stakeholders.
It had got the record of best credit among the global banks with P&L A/C provisions / customer loans + Advances being lesser than 0.5% which was the best across the world and proves the credit worthiness of the group (1999-2004). All the other banks were above 1% across the world. This credit rating itself proves the credit worthiness of the group.
In the year 2000, the group was positioned for new opportunities and challenges with the acquisition of the NatWest in March 2000. Group’s immediate priorities were to deliver NatWest transaction benefits and achieve organic income growth with improvement in efficiency. This transaction would not only put the group in strong position but would also increase the earning per share and investor confidence. New opportunities and challenges would bring along with them new growth avenues and ventures for the group to develop. As the growth of the group was organic and steady in the last two decades, it was confident of gradual growth by creating platforms in new markets.
The group was also exploring new segments in the existing markets to penetrate in different verticals for future development. Strategy was to establish platforms across US market and also increase the business from the European market in this phase.
RBS was increasingly striving for more value growth. Process re-engineering, acquisition, cost savings and marketing efficiencies were yielding fewer opportunities to create new value growth, leaving just one route open which potentially could be the most valuable of them all – innovation into new markets and products.
Innovation is different for RBS. It is by nature complex, ambiguous and risky, but the group always attempted to enter new market in order to spread the products geographically.
In the 21st century, acquisition involves dealing with an extended and rapidly advancing scientific frontier, fragmenting markets and business models, political uncertainties, regulatory instabilities, partners, new working practices and competitors who are increasingly coming from unexpected directions.
Along with the income growth and efficiency improvement, the group also focused on geographical-income diversity. This acquisition was important for them in order to address the strategic gaps. This acquisition spreaded there market in the first five year itself, till 2000 the major share of profit was from UK which contributed 85% of their total profit, while after the acquisition and the strategic changes incomes improved and they became stronger in US market with 27% of their operating profit coming from US market also the contribution from European markets improved from 5% in 2000 to 9% in 2005 and their dependency on UK market reduced with 63% contribution from UK markets.
As they expanded in US market, higher were the chances that they would start operations in other major markets as well. With the reduction of their dependency on UK market they spreaded the risk involved in this business. As the economies are booming on a faster pass, they have to be present in all major markets, to get a pie from the cake. As there excellence was already proved in the UK market, they repeated the success story in US as well.
Group improved drastically by increasing the non interest income from 52% to 62% from 1999 to 2005. With the improvement in geography and market spread company also improved in EPS by recording 18% in 2004 (UK GAAP Earnings) which was best in the industry at that time. Increase in noninterest income and EPS is considered to be the best industry standard.
As the EPS improved investor confidence also built up, where in group would always get responses from the investors.
It was often assumed that innovation requires abundant resources and great capabilities. But companies like RBS have shown that creativity and a commitment to solving customer problems can be just as powerful a force.
2.1 RBS attempts create successful platforms in major markets.
Starting with a well thought-out strategy was crucial to success. This set out the choices which help them to position its efforts, and defines where the company is headed and how it intends to get there. The strategy was aligned with the overall business strategy and communicated with commitment by top-level innovation leadership - right at Board level.
To deliver the strategy effectively, the emphasis was on selecting and building growth platforms to provide the critical mass and focus to develop a sustainable stream of new business opportunities. Platforms were built around capabilities, well-researched future foresights and external markets.
Maintained leadership in their selected segments required the company to orchestrate and build the requisite capabilities, and create and support a culture conducive to rapid decision making. Finally, it created the organizational structure and processes to nurture the growth platforms as they develop. Strategies required ownership across the whole company, with accountability sufficiently focused to drive forward the necessary activities.
3. Current Strategic Situation.
Currently it ranks seventh in the world by market capitalization with second position in UK and third in Europe. The group has a strong position in UK and has established platform in US and Europe. They are seeking more growth opportunities in Asia through strategic acquisitions. There is no change in strategic direction and strategic priorities are evolving. Platform has been built in Asian and US Markets, main priority is to leverage it. They have platforms for financial institutions and big corporate in all four major markets UK, US, Europe and Asia-Pacific, but have aggressive plans for capturing mid corporate’s and commercials in European and Asian markets. They are also absent in the American Insurance and Wealth management segment and are also eyeing consumer finance and insurance in Asian market as it is the most growing market.
They have strengthened corporate banking in all major markets. Strategically they are growing by sequential development, product by product – market by market and have focus on organic growth –building on each stage on existing platform and capabilities. They have maintained the cost-income ratio and risk appetite. Gradually they are transiting to distribution led international business. Let us strategically analysis current RBS situation which will help us get more strategic choices for the future. To start with let us first analyze the Macro Environment affecting the RBS (banking sector Industry).
3.1 RBS Macro Environment:
The effects of external environment on the strategies of an organization are difficult to predict when it is changing rapidly. As Royal Bank of Scotland is expanding its horizons and trying to become world’s number ‘one bank’ it has to be very aware of many macro environmental
factors affecting their business. Here we are using PEST analysis to determine the factors which can affect the industries strategies. These all factors are the external factors which influence the bank on broader level.
Now we will see how these factors can affect the whole industry of Royal Bank of Scotland.
Political: Government instability causes a huge impact on the banking industries and hence also affects RBS operations. When any government changes it gets changes in rules, regulations and policies which indirectly affect the operations. Like for example in 2010 UK government changed from Labour party to Conservative party. Conservative government changed many rules and regulation in March 2010 budget. The new government also got many changes to taxation policies like the Value added tax to increase from 17.5% to 20% from January 2011. All council tax across London to be freeze for a year. These changes will affect the spending pattern and saving pattern of the local public which in turn affect the banks.
Economical: - Economy of any country directly affects any financial organizations. The amount of economic activity in the economic environment is extremely important. The economic environment for banking industry in Europe can be described as difficult. The global economy experienced a sharp downturn during the last decade, and this affected the demand of banking services. In 2008 the economy of the developed countries as well as from the emerging markets experienced a dramatically decrease in growth. As the inflation rates increased in the past 12 months which also forced the Royal bank to increase interest rates. For eg: Poor economy of Pakistan and instable government is also badly affecting RBS and its department in Pakistan.
Social: - RBS has been influenced by many social-cultural factors. Every country has different cultural environment which affect the socio-cultural factors affect the
banking environment and its operations. For eg in Pakistan- after the 9/11 attacks, Every European country is seeing Pakistan as terrorist country, so the people of Pakistan are emotionally affected by this, and are more turning from RBS products to Islamic banking products as a result arising a feeling of love for their religion and Islamic products.
Technological: - technology has great influence on banks. Way of banking is changing day to day because of the technological changes. RBS technology has great effect on the working environment. No banks nowadays keep their records manually instead store them in computers, so banks has to be constantly aware of the modern ways of task performance. Internet facility is playing an important role in banking sectors in keeping their customers online via internet banking and ATM services.
3.2 RBS Industry Structure and Competitive Environment.
The structure of an industry and ability of firms to act strategically depend on strength of five forces given by Michael Porter, their analysis allow organization to develop the competitive advantage.
Porter’s Five Forces Analysis
Porter Five Forces includes:
Porter Five Forces
tell us about the attractiveness of the industry. Now I will discuss them individually in the following paragraphs.
Threat of New Entrants
There are many factors which are affecting the entry of new player in the industry. Analysis shows that there are strong commercial and competence barriers in the way of new entrants. The commercial barriers include
And competence barriers are:
The entry into the financial industry is low also due to the huge capital investment and cutting edge technology. The development of new brand from scratch is not easy.
Threat of Substitutes
There are plenty of substitutes in the banking industry. Banks offer a variety of services like taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities, chances are there is a non-banking financial services company that can offer similar services. On the lending side of the business, banks are seeing competition from unconventional companies. Sony, General Motor and Microsoft all offer preferred financing to customers who buy big times. If car companies are offering 0% financing, why would any customer want to get a car loan from the RBS and pay 5-10% interest?
Bargaining Power of Suppliers
The suppliers of financial Industry might not pose a big threat, but the threat of suppliers can take away human capital from the company. We can Imagine if a talented individual is working in RBS, there is the chance that person will be taken away by other banks, investment firms, etc.
Bargaining Power of Buyers
The power of buyers is moderate but one major factor affecting the power of buyers is high switching cost. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions - by offering better exchange rates, more services, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients.
The banking industry is highly competitive in nature. The financial services industry has been there for hundreds of years and just about everyone who needs banking services already has them. Because of this, banks must attempt to attract their clients away from competitor banks. To do this they can offer lower finance, preferred rates and investment services. The banking sector is in a race to see who can offer both the best and fastest services, but this also causes banks to experience a lower ROA. They then have an incentive to take on high-risk projects.
Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people.
Resources and Capabilities of rbs
In this global environment every single organization need and possess certain resources and competencies. These resources and competencies help the organizations in its survival and also to remain competitive in their particular industries and markets.
Resources are of two types:
Includes physical assets like plant, people and finance of the organization
Includes non-physical assets like technology, brand name, reputation, consumer information and corporate culture, are invaluable to the firm’s competitive power
Resources Based Analysis of RBS
The physical resource of BMW includes technology advanced services, successful segmentation according to the market, valuable supply chain network.
These consist of the monetary resources a firm possesses and in 2010 RBS upward operating profit by 49% shows the strong strength in financial resources.
Highly trained and qualified labour force, professionals who are young and affluent.
Renowned engineering excellence, brand identity of being powerful, reliability and luxuriousness are the key intellectual capital for RBS.
3.3.2 Strategic Capabilities of RBS
The strategic capabilities can be analyzed in four different ways which are as follows:
Integrated supply chain, trained employees, wide spread services are threshold resources.
The unique resources which are the source of competitive advantage for RBS are its reputed Services excellence and high quality of labour force.
The threshold competencies held by RBS are Quality, reliability, dealings, transparency and its customer relationship.
Core competencies in RBS can be Technology, speed of quality services, management structure, certification such as FTSE4 good and Dow zones, external certificate such as SA8000 and ISO14001.
These were the resources and capabilities, which will give a strategic synopsis for the future.
4. Strategic DIRECTIONS for the Future:
After analyzing past and present strategic position of Royal bank of Scotland, there is a need structure and management to take the leadership position, and measure and reward staff for their performance against the communicated strategy and implemented growth platforms.
Creating structures and frameworks was an important factor in helping to focus resources and increase return on investment for the group.
Unfortunately, there was no 'one size fits all' process that could be applied, since company required different levels of intervention depending on its circumstances in different markets. External benchmarks and 'best practice' could help to a point, but often the reported practice focuses on the 'what' that was done, making little reference to the guiding principles and operational policies that were in play. This made tailoring to specific needs based solely on best practice benchmarking a tough job.
A first crucial step to demystify innovation was to remove undue complexity and make any changes real and actionable. Creating a structured framework based in a rapid current state analysis will really help. This assessment was not complex, and went through a structured framework aimed at highlighting:-
The real scope for growth - the realistic size of the value gap, funds required to deliver it, the pain versus the ultimate prize, the pressures that are forcing innovation, and the potential dangers.
Practical opportunities for short-terms gains.
Barriers to overcome and assets on which to build.
Organizational and cultural issues.
A 'Top 10' set of activities to deliver real change in capability.
Creating and designing new businesses out of the company's present position and status.
Once the assessment had been completed, management teams had a roadmap of basic changes that can be made to deliver improvements. By taking leader role in future, RBS can target and measure market position and customer satisfaction in all its core business.
RBS has following strategic choices available in future to accelerate its performance:
Income Growth: In the years ahead RBS can focus on business, that is capable in delivering sustainable growth and achieve market level. As 2009 was not a good year and all its core business remained silent through economic condition.
Cost Control: RBS can achieve success if it can control its cost, if RBS saves around £25 Billion by 2011 by new programs and while making initial investments, RBS will come along the most efficient of its global peers.
Reduce Balance-sheet scale: RBS should de-risk and try to shrink the group’s balance-sheet and should also have a full control on the future asset growth.
Funding Program: As funding is very important in building up the liquidity reserve, RBS should plan to limit over-dependence on wholesale markets to meet the groups.
Stable & robust capital support: RBS should very specific on implementing risk controls. They should run excess risk concentrations and maintenance of strong equity capital.
Focus on retail and commercial banking: As two third of the RBS groups profits comes from only retail and commercial banking, RSB should concentrate more on
retail and commercial activities. They should focus on UK, US and Ireland activities and support by important business investment plans.
Refocus on the core strength of GBM: GBM accounts for one third of the group’s profits and revenues. RBS should strategically plan them as they were decreased to 17% as compared to 31% in 2008.
Publish targets for risk/return balance: RBS needs to set clear performance targets for risk and returns. They should then effectively and regularly give updates on the progress against risk and returns.
Improve levels of Disclosure: Due to current economic instability investors confidence is all time low. RBS should rebuild confidence and trust with investors by combining clear targets and improved disclosures.
Set customer franchise targets for every business: RBS should maintain excellent customer service as it is a core objective of the company.
Management change: RBS can completely restructure its boards and its senior management team as they are the standalone strength of the company.
Strong risk management: RBS can introduce a new set of management discipline to make sure that the RBS of tomorrow will be different from the RBS of yesterday especially in the risk management.
These are some the strategic choices available to RBS in future which can protect RBS from future uncertainty and risks like:-
Credit risk: - arising from both in country and political risk.
Funding and liquidity risk: - risk arises when they are unable to meet obligations as they fall.
Market risk :- risk that the value of the assets and liabilities may change
Insurance risk: - risk of financial losses during the time of underwriting.
Operational risk: - risk of financial customers or reputation loss resulting from fraud, human error, and improper behaviour or by any external errors.
Regulatory risk: - risk from regulatory changes and enforcement.
Other risk: - like pension risk in UK. Or reputation risk.
Here now I would like to discuss the strategic choices available to company using the following well known models:
Ansoff Strategic Direction Matrix
Expansion Method Matrix or Method of development
Porter’s Generic strategies &
So let’s see what options available to RBS according to current situation with the help of Ansoff Matrix. Then the possible methods of development followed by analysis of Porter’s Generic Strategies and explanation will be given.
5.1Ansoff Strategic Direction Matrix
Ansoff matrix offers us four different kind of strategic options keeping product on one side and markets on other. These include Market Penetration, Product Development, Market Development and Diversification.
Choice for RBS
After the careful analysis of Ansoff Matrix I would suggest two strategic choices for the RBS which are:
These two strategies are the best fit for the RBS because aims of the company can only be achieved if they follow both together. If we consider the discussion of previous section we will notice the suggested strategies match with situation and position of RBS. Now let’s see how they will work for RBS.
Product development involves giving:
Financial solutions to all types of business small, medium and large.
Good saving schemes for old age, education, health etc.
Low interest rate loans to individual, small-medium size business and also great offers for big corporate clients.
Market development is also a very important aspect for the RBS future success. There are new untapped markets which has very high potential for growth. These include:
These are the regions in which the economies are growing rapidly and these countries are full of educated young professionals who can become a great human asset for RBS.
5.2Method of Development
RBS growth can be said organic growth. Organic growth can be beneficial if it wants to grow in its home market but on the other hand also wanting to expand globally. Keeping in mind the historical moves by RBS I would like to suggest the hierarchy of options according, to their suitability for the growth on the international or global level. So RBS can pursue growth by:
Joint Ventures &
The joint ventures and acquisition strategy is recommended for the RBS if they want to expand internationally. As seen in history of RBS, it has significantly indulged itself in Mergers and Acquisition eg: when they acquired NatWest in UK or Joined hands with Aviva insurance. Since they have a good experience in mergers then can indulge themselves more to achieve success.
5.3Porters Generic Strategies
According to Porter’s generic strategy RBS in the financial market lies on product differentiation quadrant.
Through sustainable competitive advantage the differentiated services of RBS are able to satisfy the needs of their customers. This allows RBS to desensitize the prices of their services instead focus on the values that generate not only a comparatively higher price but also a better margin. RBS’s advantage of differentiation is created through additional value which is achieved through variety of means, such as quality, service, and brand image.
With this strategy they can serve variety of customers all over the world which also differentiate their services in the mind of customers. Thus, successful differentiation by RBS allows customer loyalty, making customers less sensitive and shielding the business from other competitors.
After recession now it’s the need for searching some new sources of profits. These new sources of profit can be achieved by the recommended strategies which include:
Product Development &
Joint Ventures &
This is the right time to go for such strategies because the companies want to come out from the financial crisis and they can easily go for joint ventures. RBS has the good financial resources in hand which can be used for these types of expansions.
This recession will be followed by the boom i.e. growth in the economies again and this will increase the buying power of customers where the demand for services will increase especially in the emerging markets like:
South Asian Economies
So, they should focus on these emerging markets with their existing and new services. In the same time they should not stop focusing on their existing markets that in UK, because they will give them revenue to invest more in these kinds of projects.
These types of innovations are obviously the finest way of sustaining and increasing the market share of company and attaining competitive advantage upon their rivals and help them achieve and fulfill their 3 main Objectives:-
To serve customers well.
To restore the bank to it’s undoubtedly standalone strength.
To rebuild sustainable value for their shareholders.
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