The Development Of Micro Financial Services Commerce Essay

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According to the International Labour office (2002), Micro finance means providing the poor with small loans to help them engage in productive activities or grow their micro businesses. Over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.). Microfinance came to prominence in the 1980s, although early experiments date back 30 years in Bangladesh. The Grameen bank and in turn the man who invented it Muhammad Yunus, is credited as the original model of microfinance, through the transformation of thousands of impoverished peoples lives by ignoring the traditional banking norms and lending money to the poorest of the poor.

Introduction

Grant (2003) states that strategy is an overall plan for deploying resources to establish a favourable position. Strategic decisions in the business world share three common characteristics:

They are Important

They involve significant commitment and resources

They are not easily reversed

Street UK

Street UK was launched in September 2000 after securing funding from a Charitable Trust, for the purpose of offering specialised financing and advisory support to Britain's population of micro-entrepreneurs. These are defined as owners of businesses employing 1 to 5 people.

Street UK Foundation

Street UK

The Street UK organisation consists of two entities, a guarantee company and charity.

Mission

In the 2004 business plan the street UK mission statement was as follows;

The Street UK mission is to provide Britain's population of micro-entrepreneurs and the communities in which they live and work, with a range of high quality, specialised financial services on a sustainable basis. These will be designed to protect our clients from failure and to support their development until they graduate to mainstream banks.

Johnson & Scholes (2003) described that a mission is a general expression of the overall purpose of the organisation, which ideally is in line with the values and expectations of major stakeholders and concerned with the scope and boundaries of the organisation.

Objectives

Johnson & Scholes (2002) describe an objective as a statement that should be qualified or be a more precise aim in line with a goal. Wheelen & Hunger (2002) state that objectives should be the end results of a planned activity and should state by when and qualified where possible.

To bring recognition, legitimacy, respect and opportunity to the hundreds of thousands of micro-entrepreneurs throughout Britain.

Create a fair and level playing field for every micro-entrepreneur so that they do not need to be relegated to permanent dependency just because they do not qualify for mainstream finance.

Help clients to help themselves and offer a framework within which they can mutually support each other, thus awakening them to their capacity to give and strengthening their bonds within the local community

Demonstrate that charitable or social objectives, pursued in an efficient, business-like way to the highest possible standards, will result in the greatest empowerment for the people supported and the best chance of large scale impact for the supporter

Revive the roots of banking, so that credit is once again based on trust and relationships and a person's wealth or poverty has no bearing on his or her creditworthiness to provide a forum to engage and unite different parts of society in a common purpose and draw together widespread institutional participation from the public, private and voluntary sectors.

(Source Street UK Business Plan 2004)

Social and Economic Impact

Again according to the Street UK business plan (2004), Street UK intends to make an important contribution to the psychological, social and financial well being of its clients. It aims to strengthen the bonds of support between them and to reach out to the neediest communities.

Porters Five Forces & Other Stakeholders

Source: Wheelen & Hunger (2003)

Threat of new entrants

The new entrant in an industry represents a competitive threat with the potential to erode market share of existing competitors, however in most industries new entrants cannot enter on equal terms with those of established firms. The existing companies rely on barriers to entry and the reaction that can be expected from existing competition an entry barrier is an obstruction that makes it difficult to enter an industry. (Wheelen & Hunger 2002)

According to the Mintel report sub prime lending: entering the mainstream UK September (2002), there is a threat from companies in the USA who have established a sub prime lending market in their country and are now expanding their operations into the UK. They are specifically targeting individuals with less than perfect credit scores (sub Prime) this market has developed due to the intense competition in mainstream (prime) lending which has meant low profitability and high costs.

Economies of Scale

In industries that are, capital intensive efficiency requires a large scale operation

Grant (2003).

This may be true in commercial for profit organisations but in the case of Street UK who operate on a not for profit basis with the ideology of helping clients develop their businesses Street UK may have to stay smaller in order to be able to work closely with their customers.

Street UK is still in its infancy having traded for just over three years; with three regional offices, the number of loans produced by the company to date does not cover its operating costs at this time. The prospect for new entrants covering their operating costs in the early stages is very low without substantial investment in infrastructure and marketing.

Product Differentiation

Is the provision of a product or service regarded by the user as different from and perceived as higher value than the competition, Johnson & Scholes (2002).

The Street UK brand of microfinance is unique in the market place providing, Investment readiness, business loans and advice all in one package. Street UK is the only micro finance company operating in the Grey Market of the UK. Lloans in this market are based mainly on character assessment and experience. Customer loyalty is very high and many come back for repeat loans and advice.

Substitute products

There are a number of substitute products that can be used which include; Credit cards, personal loans, borrowing from friends and family, house equity, debt consolidation loans, grants, and pawnbrokers.

Bargaining power of Buyers

The bargaining power of our buyers is low; they are individuals who are regarded as 'Not Business Bankable' for reasons of being poor, with no discernable assets, unemployed or have an adverse credit history. They are however targeted by predatory lenders such as loan sharks and companies such as provident.

Bargaining power of Suppliers

In the case of Street UK, the main suppliers are the providers of capital. The money we use to support our operational costs comes from charitable trusts and local government who are interested in urban regeneration. These suppliers have tremendous power over our organisation and dictate in the majority of cases as to how we spend that money in our operations. These dictates will include geographical boundaries, start ups, and ethnic communities.

Competitive rivalry

In most industries, corporations are mutually dependant. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation or counter efforts, Wheelen & Hunger (2002). Competitive rivals are organisations with similar products and services aimed at the same consumer group, Johnson & Scholes (2002). There are a number of factors that affect competitive rivalry.

Number of Competitors

Street UK not only competes with other microfinance organisations but also with, Community or enterprise loan funds, community development venture capital funds, social banks, credit unions and mutual guarantee societies (see index for descriptions of these organisations). As identified by the New Economics Foundation (2003). All of these institutions come under the title of Community Development finance Institutions. There are also two major commercial organisations that specifically target this market place (complex sub prime); they are Provident & Cattles.

Industry Evolution

Over time, most industries evolve through a series of stages from growth through to maturity to eventual decline. The strength of the competition mentioned earlier varies according to the stage of industry evolution. The industry life cycle is useful for explaining and predicting the trends among the competitive forces driving industry competition.

Risk Capital financing is now the preferred method of the European Commission according to the New Economics Foundation (2003) , This means basically that loan funds work harder as apposed to grants and are to some extent when paid back are recycled. This has meant that there is now more funding provided for Microcredit than ever before and less for grants. This has led to a growth in new micro enterprises with several new such organisations opening in the West Midlands alone. The microfinance industry in the UK is in the growth area of the industry life cycle as depicted in the diagram above.

Diversity of rivals

Rivals that have very different ideas of how to compete are likely to cross paths often and unknowingly challenge each other's position (Wheelen & Hunger 2002).

In the west midlands there is a relatively high activity of Community Development finance institutions providing funding for individuals who have problems obtaining funding from mainstream banks. As of august 2003, there were 12 operational CDFI's and five in start up which makes a total of 17 in the West Midlands Region, New economics foundation (2003).

Summary

Having completed the Five Forces & Stakeholder analysis, it is Important for Street UK to use this information in order to understand the different levels of competition the organisation is faced with. Street UK is not just exploiting a market gap but competing with other CDFI's and commercial organisations. Some of these will have greater resources and thus create barriers to entry. The financial market in the UK is very well established and is very sophisticated and there are many substitutes for the Street product.

Selection of Strategic factors (SWOT)

Introduction

In analysing the external and internal environments in which Street UK operates these can be summarised in the form of a SWOT analysis. A SWOT analysis summarises the key issues from the business environment and the strategic capability of the organisation that are most likely to impact on strategy development Johnson & Scholes (2002). Now that the external or business analysis has been completed I will state the opportunities and threats that face Street UK. Strengths and weaknesses will be examined later in this document once the internal analysis is completed.

Opportunities

To develop a national micro finance organisation specialising in the development of legitimate micro businesses and the graduation of grey market enterprises into legitimate businesses. Reduce the number of small business closures in the UK through early intervention, access to finance and sound business advice. Become recognised as the UK market leader in micro finance.

Review and align the Street UK strategy to compliment that of the government (National Strategy for Neighbourhood Renewal 2001) and in so doing, qualifying for more opportunities to bid for valuable funding of Street UK operations.

The development of stronger relationships with other stakeholders, these would include business links and government redevelopment agencies in order to influence their output requirements and boundaries so they are in line with the Street UK strategy. They also can provide a valuable source of client referrals.

With the rise in self employment, the growth in service industries, more women in work and the growth in single and couple households. Street UK has the opportunity to develop loan and business development products specific to these growth areas.

To offer the Streetserve back office loan management product to all new and existing CDFI's in order to provide a revenue stream to Street UK other than grant funding.

Threats

Competition from new commercial organisations entering the market place providing a loan product in the Sub Prime market.

Competition from new CDFI's will mean that there will be more bids for funding, this may result in smaller awards or being completely overlooked by funders. This is not withstanding the political factor and the influence held by long standing CDFI's.

The current consumer credit act does not specify a ceiling for interest rates on loans; this is currently under review by the government. If they do not decide to cap interest rates this will leave the way open for more sub prime lenders and loan sharks to enter the market.

A rise in bank interest rates would mean higher costs of borrowing of loan capital for Street UK as all of the loans made by the organisation are from bank loan funds. The rise coupled with the increase of indebtedness in the UK could also result in a rise in delinquency through bad debt for Street UK clients and in turn the Street UK organisation. With banks dictating that delinquency should not rise above 10% of the current loan book this could be a very serious situation for Street UK.

Summary

Scanning and analysing the external environment for opportunities and threats is not enough to provide an organisation a competitive advantage. Analysts must also look within the corporation itself to identify internal strategic factors, those critical strengths and weaknesses that are likely to determine whether Street UK can take advantage of the opportunities that exist and avoid threats, Wheelen & Hunger (2002)

Structure

The Street UK structure is best described as a functional structure as identified by Wheelen & Hunger (2002). Each individual in the organisation has a defined role and are specialists in their functions.

Top Management

Head Office

Accounts

Administration

Business Manager

London Branch

Business Manager

Newcastle Branch

Business Manager

Birmingham Branch

The Functional Structure, Source: Wheelen & Hunger (2002)

Strategic factors (Strengths & Weaknesses)

Strong dynamic leadership with a clear mission

Ability to raise operational grant funding

Entrepreneurial

Passion & experience

Experience in grey market development

Tacit Knowledge, Innovation

Reputation

Weaknesses

Strategy

No full time fundraiser

Size of organisation (cannot be self supporting)

Product range

Customer awareness

Funding of lending capital

Deal flow

Summary of strategic position of Street UK

The financial market is of concern as a rise in interest rates will mean higher costs to secure loan capital from banks, with indebtedness being at its highest ever in the UK a rise in delinquency could be a disastrous.

The organisation can achieve its mission but to do this it has to strategically align its own interests with that of Stakeholders, working closely with government organisations will increase the companies ability to raise funding and influence the political system to the benefit of many Street UK clients, whilst at the same time continue building the reputation of the Street UK organisation.

The market needs more products which will include loan products, training, insurance and savings. There is a rise in the number of self employed in this country and Street UK needs a strategy that can deliver for both customers and stakeholders

Conclusion

Street UK has a strong management team in Martin Hockly and Rosalind Copisarow, They have accomplished a great deal to date in building an organisation and raising finances to achieve their shared mission. They are idealists with a passion for what they do and what Street UK is capable of doing, they have created an organisation with many core competences notably in Grey Market activities, Back office automation and major fundraising. Their reputations are well respected in the marketplace as with the rest of the board of directors.

It is my hope that this document can help with the development of a successful strategy that will ensure the future of a very worthwhile organisation that is working hard to regenerate depressed areas of the UK through increasing employment and raising living standards.

"The competitive position of a company is determined by the industry structure in which it competes."

The advantages of knowing exactly what business you're in would seem obvious. Nevertheless, too many businesses do not define these boundaries, define them incorrectly, or conflate the industry with the domain. This penalizes a businesses' ability to identify and study competitors as well as take advantage of opportunities. It can hurt profitability. In addition to providing guidelines for defining a domain, this article shows the impact of domain choice and definition on the bottom line through a study of electrical wholesalers.

Introduction

The Business domain would agree that a sound business definition is important. By explicitly considering their business domain, firms may improve their competitor analysis and streamline their competitor intelligence. Furthermore, significant threats and opportunities will be detected on a more timely basis, and the formulation of appropriate short-term tactics and long-term strategy will have a better foundation Sidhu, (2004). Delineating market boundaries is also a prerequisite for determining a firm's market share Curran and Goodfellow, (1989). Business definition can affect the perception of strategic choices or options, and ultimately the bottom line.

.

The Conceptual Framework

Though many companies define their competitive arena rather by accident than design (Weinstein, 1994), we may from an outsider viewpoint measure the competitive positioning of a firm objectively with hard data. A firm's competitive arena is determined at first by the boundaries of the industry itself. Drawing industry boundaries is always a matter of degree. In fact, in the case of the electrical wholesale sector. The degree to which firms are direct competitors or not depends on the types of products they sell (e.g., cables or lighting material, etc.), and also on the customer types they target, the geographic reach or location, and their degree of integration.

Just as the average performance differs among industries, it is likely that average performance differs among business domains within an industry. The intensity of the rivalry within a domain can be further explained by the structural characteristics of that domain or with a five forces analysis applied to that domain (Porter, 1980). By considering the business domain instead of the industry as the primary unit of observation, researchers may perhaps gain a more in-depth knowledge of rivalry patterns between firms. Structural characteristics at domain level are the concentration ratio, the height of mobility barriers and the degree of product differentiation, growth of demand within that domain, the number of buyers, technology, and the degree of integration. These are very much the same structural characteristics operating at industry level and have implications for the average profitability of firms operating within that industry Scherer, (1980). Differences in structural characteristics between domains should explain with more precision the rivalry of firms and the performance differences, if any, between firms active in different domains.

I look at (1) if differences between firms do exist to such a degree that we can speak of business domains as subsets of industries, (2) if performance differs between business domains within an industry, and, if so, (3) if the supplier-wholesaler-buyer relationships (a subset of the five forces) may help to explain these performance differences. But first, we start with a discussion on the partitioning of an industry in business domains.

Heene,( 1997), a business domain is conceptualized to be a four-dimensional "strategic space".

(1) the buyer types targeted,

(2) its product variety sold,

(3) its geographical reach, and

(4) the degree of vertical integration Porter,( 1986). Business domains are delineated on the same dimensions a firm can use to define its business. Even when a firm has not explicitly defined its business, the firm's business definition could be assessed with information on who is being satisfied, what needs are satisfied, how the needs are satisfied, and where (geographically) these needs are satisfied. Variation on any of the above dimensions will significantly affect a firm's structural position in the industry.

The first element of the definition of the business of a firm is concerned with its value propositions (product types sold within a certain product family, here "electronic material"), and, therefore, the product variety offered to the target market. Second, defining the business includes some form of targeting some buyer types, or, on the contrary, aiming at selling to everyone. Incumbent firms, however, also talk about each other in terms of locals or regionals, nationals or internationals. This geographical reach, which is essentially a size dimension as well, constitutes the third dimension of the business definition. The fourth dimension is the level of vertical integration, which indicates which value activities are performed within the company.

Frazier and Howell (1983) delineated clusters of firms in the hospital supply industry based on two criteria for business definition: the degree of scope and differentiation of (I) customer needs served with a given technology, and (2) customer groups. Profitability (i.e., net profit before taxes, return on assets, return on net worth) did not differ significantly between these clusters, illustrating that numerous paths in this industry can reach roughly the same profitability levels. However, performance criteria associated with sales volume (e.g., average order size) did vary significantly across the clusters of firms.

An article published on Goliath investigated 56 firms in different industries on how the companies conceptualized their business domains (and competitive arena) and how this affected performance. They found that delineating competitive arenas relatively narrowly, with an organization's technological competencies as the reference point, is positively associated with performance in turbulent industries. Performance was operationalized as sales growth. In stable industries, on the contrary, a broad definition encompassing producers of substitute products was positively correlated with sales growth. Furthermore, the study showed that explicitly articulating the company's business domain lead to superior performance, both in stable and in turbulent environments.

Further, in his study of the multimedia sector in the Netherlands, Sidhu, (2004) discriminated between firms with explicit business domain statements and those with none. He also measured the comprehensiveness of strategic planning, and discriminated between short-range, long-range, and strategic planners. He found that firms with a written business-domain statement had significantly higher sales growth than others, after controlling for the effect of strategy planning comprehensiveness and strategy content. Furthermore, strategy planning comprehensiveness and a strategy of greater innovation contributed positively to sales growth.

Methodology

It makes sense to speak about separate business domains within an industry. If several 'separate' domains within the electrical wholesale industry can indeed be delineated, then the performance and competitive implications of these business domains will also be investigated.

Business definition variables. A firm's competitive arena is defined by its business definition or strategic scope, either explicitly or implicitly. This scope can be characterized by four dimensions: buyer scope, product scope, geographical scope, and vertical scope. Within the electrical wholesale sector, vertical integration is absent: none of the wholesalers is engaged either in production.

Product scope is measured through eight measures: the percentage of sales derived from each product type. The categorization in eight product types in the electrical wholesale sector is familiar to firms because it is the categorization used within the EU for statistical purposes. Firm size is supposed to be a proxy of the geographical reach and taken as a measure of geographical scope.

Performance measurement. Performance is measured with gross return on business assets, net return on assets, gross profit margin, and net profit margin. A commonly used profitability measure is return on assets. Here, the focus is on intrinsic profitability of operating activities (in a broad sense, but to exclude pure financial or exceptional activities).

Business assets are nonfinancial, used here as an accounting term, and are composed of formation expenses, intangible assets, tangible assets, stocks and contracts in progress, amounts receivable within one year, and deferred charges and accrued income. The larger this measure, the healthier the firm is supposed to be. Return on Business assets is a performance measure calculated before taxes and debt charges, so tax policy considerations and differences in tax rates are excluded.

Measurement of supplier and buyer power.

According to Porter (1980), five competitive forces within an industry determine the average profitability of firms within that industry. Accordingly, five competitive forces within a business domain determine the average profitability of all firms within that business domain. This survey did not focus on forces external to the supply system, i.e., the threat of substitutes or potential entry. Focus was on the measurement of supplier power and buyer power, because we expected that differences in the competitive situation were to be found here. Supplier power and buyer power were measured with objective data. Buyer power was measured with the number of buyers and with the numbers of buyers accountable for 50% of all sales of the wholesaler. Supplier power was measured by asking for the share of purchases bought from their two largest suppliers, which may, therefore, differ from wholesaler to wholesaler; we did not specify particular suppliers).

Final Thoughts

When decomposing the industry into business domains. The first question is whether or not separate domains de facto exist given the business positioning of the different firms within the industry. Cluster analysis (first used by Tryon, 1939) is the appropriate technique to investigate this, anchored in the business definitions of the firms competing within the same industry. As cluster analysis can be distorted by multicollinearity, a factor analysis ,ay ne performed beforehand on the business definition variables. This factor analysis not only reduces the number of variables to a more manageable and intelligible number, but also removes multicollinearity. As market scope and product scope are measured as a percentage of sales, the variables themselves are not independent.

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