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Analyse the external factors facing Nationwide
This report willanalyse the external factors facing Nationwide and highlight the resultingopportunities and threats it faces as an organisation as a result of thisanalysis. Before this is addressed in the next section, a brief background onNationwide’s business, mission, goals and objectives is provided below.
The NationwideGroup is the world’s largest building society that is part of a group oforganisations offering retailing banking services.
Nationwide hasits head office in Swindon, 1 major administrative centre in Northampton, abranch network scattered over the UK and 11 subsidiary companies.
The products offered by Nationwideinclude:
Residential mortgage lending (funded through retail savings)
General retail banking services
Personal investment products
Offshore deposit taking
Commercial lending treasury operations
Its mission is:
Honest and straightforward. Treats all people with respect andas individuals and focuses on building long-term and beneficial relationshipswith members and employees with the objective of being the best retailfinancial services business in the UK.
Nationwide’sgoal is to increase overall market shares in the retail savings and residentialmortgage markets.
Its objectives,as outlined in www.nationwide.co.ukare:
To maximise value, which is comprised of the mutuality dividendand retained profits, over the long term for our current and future members;and
To provide our members with a range of top quality, competitivefinancial services that are widely available and delivered with speed, courtesyand reliability, backed by policies of fairness, honesty, employee importanceand corporate responsibility
Nationwide iscommitted to remaining a building society and consequently pass on the successof its business operations to its present and future customers, also known asmembers, through better quality and cheaper financial products. It believes -and the majority of its members support this view – that becoming a bank willremove that emphasis meaning that business strategies will be geared towardsmeeting shareholders needs to the detriment of the members.
The External Environment
The externalenvironment is effectively everything outside the building society that mayaffect its performance or reputation, either directly or indirectly.
An analysis ofthe external environment forms a significant part in the development ofNationwide’s strategy. It involves:
Understanding Nationwide’s position, now and going forward withinthe external environment it operates in
Preparing Nationwide for major changes in this environment
Enabling the building society to identify the externalopportunities and threats it faces, as part of a strengths, weaknesses,opportunities and threats audit (SWOT)
Developing suchan understanding enables Nationwide to put action plans in place to exploit theopportunities and minimise the threats it faces.
The external factors will beanalysed under two sections:
This analysiswill include examples of threats and opportunities that Nationwide faceconsequently, summarised at the end of the micro-environment section.
The macro-environmentin which financial services organisations operate can be analysed using thePESTEL mnemonic framework, with each letter standing representing, political,economic, social, technological, ethical and legal analysis respectively.
The UK political scene is one of democratic stability. This sense of democracy permeatesthrough to the financial services industry as fair competition, innovation andentrepreneurial spirit are encouraged and supported by respective governments.
The UK government’s links with the financial services industry is through HM Treasury whichaims to:
Raise the rate of sustainable growth; and
Achieve rising prosperity
HM Treasury aimsto achieve these goals by creating economic and employment opportunities (www.dti.gov.uk), thus striking a balancebetween economic efficiency with regulation and protection of consumers offinancial products and services.
Anothergovernment department, the Financial Services Authority (FSA), regulates theindustry. Among the FSA’s objectives are protecting consumers which involvesmaking demands of financial services organisations, geared towards, forexample:
Providing relevant and timely information to their customers
Striking a balance between profit-making and exploitingcustomers.
One area wheregovernment intervention is required is in the issue of advertised typicalrates. For example, a Barclays Bank may advertise that its typical loan rateis 6.9% when in reality only a small proportion of their customers receive thatrate with the majority being quoted in excess of that.
Nationwidecharges only one rate for its Personal Loan product, currently 6.7%. When thisissue is addressed, Nationwide could potentially increase its market share ifits 6.7% is less than Barclays advertised rate (i.e. rate quoted to majority ofcustomers).
The economicoutlook in the UK appears strong as at January 2006. Interest rates arestable. Retail sales have continued to be strong – up 2.1% on a year ago and0.7% on December 2005. Consumer confidence is improving while earnings growthhas increased.
House priceshave increased for the fourth consecutive month, since September 2005.
Personal lendingis on the increase mainly due to the increase in secured lending. However,unsecured lending has decreased, contrary to expectations. Credit card debtgrowth is decreasing, indicating more debt consolidation
Investment inthe economy is increasing, up 2.2% on the previous quarter and 3.9% on January2005. Inflation levels are generally down, as measured by the Retail PriceIndex (RPI).
The favourableeconomic outlook presents opportunities for improving secured lending likemortgages. Organisations must also be aware of the threats posed by thediminishing overall unsecured lending portfolio, which could mean putting inplace strategies that focuses on increasing the rates charged for theseproducts to compensate for the potential reduced volumes for example.
The UK demography is changing. The population is getting older and by 2015, there will be more65 year olds than young people aged below 16 years (www.statistics.gov.uk).
Life expectancyis also on the increase and so is the average retirement age.
People are moreknowledgeable when it comes to financial services products. This has resultedin less consumer loyalty and customers patiently shop around for the best dealsor returns and also demanding better customer service. Buying behaviour isalso changing with the use of increased technology.
Household income is increasing.
Opportunitiesfacing organisations is holding on the well trained staff for longer due toincreased retirement age. Lending policies that restrict lending beyond acertain age will need to be reviewed.
Technologicalinnovation and development is becoming increasingly crucial to achieving andsustaining competitive advantage. Organisations have increased the range ofservices they provide through online and telephone banking. Technology isincreasingly used to automate inefficient manual processes in order to controlcosts.
Keeping up withthe pace of change could however, be costly and could make organisationsuncompetitive.
Financialservices organisations are paying a great deal of attention to its socialaccountability and responsibility and are not shy to publicise that fact.
The presence ofpressure and environmental groups, for instance, keep these organisations awareof their responsibilities as the adverse publicity that can be generated, if abusiness is deemed to be acting irresponsibly can do long lasting damage tothat organisation’s reputation. Consequently, organisations includeEnvironmental initiatives as part of their overall group strategy.
The FSA focuseson legislation geared towards organisational behaviour and customer relations (www.fsa.gov.uk). There has been a greatemphasis placed on providing more information to customers from which to makeinformed decisions, recently.
Basel IIrequirements, which comes into effect in 2007 and 2008 puts a requirement onorganisations to hold sufficient reserves of capital to cover unexpectedlosses. For firms that are deemed to adequately identify and measure theirrisks, they would be allowed to hold less capital, thereby providingopportunities to use extra funds to grow their businesses. For example,Nationwide anticipates that their capital reserve requirement will reduce by upto 60% under Basel II. It is anticipated, however, that competition formortgage lending which is low risk will become fiercer as competitors also meetthe requirements.
Finally,financial reporting in the UK must meet the requirements of the InternationalFinancial Reporting Standards (IFRS), which requires more detailed reporting.Businesses not complying could potentially present more volatile results and inNationwide’s case turn away investing members.
Themicro-environment is effectively the industry in which Nationwide operates inand is concerned with the competitive pressures faced within that industry. Porter’s five forces model isuseful in analysing the micro-economic environment.
Bargaining power of buyers
Buyers refer toconsumers in the financial services industry. Consumers are better informed,thanks largely to the efforts of the FSA who promote transparency in organisationsto enable them to make better informed decisions. For mortgages, for example,consumers could switch lenders after an initial term which gives them theopportunity to obtain more favourable rates. Product and servicedifferentiation is minimal thereby enhancing the bargaining power of buyers. Thebargaining power of buyers is increasing, thereby representing a threat toorganisations that cannot provide their services at competitive prices
Bargaining power of suppliers
This isrelatively low. Dot com organisations fall into this category. Getting intotheir ‘best buy’ tables could result in significant extra business. However,going on such tables depend on the price of the product being sold rather thanthrough what is paid to dot com organisations as commission. However, thesesites could be used to advertise individual organisations products.
Threat of New Entrants
Competition isencouraged in the financial services industry which means new entrants areencouraged through government support and legislation. However, the industryis dominated by approximately a dozen organisations in terms of market share(including Nationwide), which operate efficiently, use technology ascompetitive advantage and possess enormous brand reputation, thus making thethreats of new entrants to be fairly low. However, as margins are gettingtighter through increased competition, any new significant entrant could provecostly to existing organisations
Threat of substitute products
Product and service differentiationis minimal, in general, therefore the threat of consumers switching to asubstitute product is minimal.
The extent of competitive rivalry
Competition isintense, due to the high bargaining power of buyers. A small difference ininterest rate can result in significant difference in business volumes.
Products andservices offered are also similar, while there are also many providers.However, branding is very important and the likelihood of a customer opting fora Personal Loan with Nationwide at 6.7% say is higher than opting for XYZ NewEntrant at 6.5%.
Examples of theopportunities and threats facing Nationwide as a result of analyses of themicro and macro-environments are summarised below:
Strength of the economy
Increase in retirement age
Less customer loyalty
Increase in household income
Pace of technological change
Increased bargaining power of buyers
Meeting Basel II requirements
Low bargaining power of suppliers
Low threat of substitute products
Low threat of new competitors
Figure 2 Opportunities andthreats facing Nationwide Group
Nationwide arein a position to exploit the opportunities above by formulating andimplementing strategies that yield increased performance throughprofitability. It is also in a position to minimise the threats throughputting in place appropriate strategies. It will be in a position to do thisby firstly carrying out an analysis of its external environment.
Begg, D et al 1997, ‘Economics’ 5th edition, McGraw-Hill,Maidenhead
Buckle, M & Thompson, J 1999, ‘The UK Financial System’, 2ndedition, Manchester University Press, Manchester
Howells, P & Bain, K 1998, ‘The Economics of Money, Bankingand Finance’ Addison Wesley Longman, Essex
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