Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.
American Express: Strategic Analysis
The recent economic crunch has affected the profitability of American Express greatly and the company is engaged in product and market development and cost leadership strategies to cope with the challenges in the industry. The paper provides an extensive PESTLE, Porter’s Five Forces, SWOT and financial analysis of American Express to identify its success in doing so.
PESTLE; SWOT; Porter’s Five Forces, Financial Ratios; Share Performance
Introduction and Company Overview
American Express is a global financial service provider whose products and services include charge and credit card products, expense management products and services, consumer and business travel services, Traveller’s Cheques and other prepaid products, network services for B2B partners, fee services which comprises of market and trend analysis, consultation and customer loyalty programs (Harbus, 2010 [online]). These services are sold to consumers and commercial clients. American Express has been present in the financial sector since 1850 and has long enjoyed a competitive edge in the market in the form of strong brand equity which it has established with its unique and quality customer service. It operates in more 130 countries with over 66,000 employees. American Express uses third-party institutions such as banks to cover a wide network of customers across the world (American Express, 2010 [online]). These institutions are mostly banks. Although, the recent economic crunch has affected the profitability of the company greatly, the company is engaged in product and market development and cost leadership strategies to cope with the challenges in the industry. The paper provides an extensive PESTLE, Porter’s Five Forces, SWOT and financial analysis of American Express to identify its success in doing so.
American Express in May 2010 expanded to North Carolina, due to the lower tax rates offered by the state government. The state is looking for employment growth as well as productive economic activity (Show Me Daily, 2010 [online]).
- Due to the weak economic conditions in the U.S. in 2008, the credit market froze causing high credit losses for financial service providers (Market Watch, 2010 [online]).
- The economy is still in its recovery stage at a slow pace producing a massive amount of uncertainty for the future. Consumers are leaned towards saving more money than borrowing [The Wall Street Journal, 2010 [online]).
- In 2009, due to the economic slump in the credit card industry, American Express announced cutting down of seven thousand managerial level jobs to slash costs of $1.8 billion (The Daily News, 2010 [online]).
- Consumers that have been previously struggling to pay off big debts in 2009 are now paying off their old debts (Daily News, 2010 [online]).
- By the third quarter of 2010 consumer spending has increased pushing sales through large transaction volumes for American Express cards though lending volumes are still down as consumers are reluctant to borrow more money (Market Watch, 2010 [online]).
- Seasonal fluctuations greatly affect sales which are evident through higher travel sales are in the second and fourth quarter and Gift Card sales during November and December (American Express, 2010 [online]).
Urban consumers, like rural ones, are looking for more personalized, localized and community-tailored relationships with sellers as they yearn for more sustainable rather than cheap products. This implies that the future is of small and self-sufficient vendors and community shops that are tailored to the requirements of the local consumers (American Express, 2010 [online]).
According to a consumer research conducted in the U.S. in 2009, 26% of the Americans are looking for creative elements in brands they purchase, 16% expect creativity in the retail environment and 23% seek customization in which their own contributions and ideas are given importance in product design (American Express, 2010 [online]).
The birth of online social networking websites has created a new trend of shopping in groups and communities where selling through online social channels has become an effective medium. According to a survey of U.S consumers, 41% of consumers have adopted online shopping through influence of their online social groups (American Express, 2010 [online]).
Interaction with consumers through mobile devices and websites has allowed companies to identify a new means of offering services and developing loyalty schemes with ‘on the go’ consumers based on locations facilitated through the GPS applications available in smart phones (American Express, 2010 [online]).
With the rise in concerns towards social responsibility by companies, organisations and individuals, consumers are seeking products and survives that allow them to fulfill their requirements at the same time portray a responsible behavior towards the society, thus, they are seeking companies that are also associated with philanthropic activities (Market Watch, 2010 [online]).
U.S Justice Department has accused credit card companies of charging anti-competitive prices with higher fees charged on services. Investors are now eager to find out how the credit card companies will adapt to the new restrictions [Market Watch, 2010 [online]).
Porter’s 5 Forces Analysis
The financial services industry is highly competitive even in times of the economic slump. There are two major players in the U.S financial services sector, specifically in the credit card sector: American Express and Discover Financial Services. Discover Financial Services acquired a net income of $261 million by September 2010 whereas American Express recorded net income of $2.1 billion which suffered a decline from $2.7 billion from 2009 (Market Watch, 2010 [online]). The competitive edge that American Express has that is primary revenue is generated from card spending and secondary revenue is generated from the fee charges on services. For other financial service providers, like Visa and Mastercard fees charged on services is the main profits driver. Considering the existing restriction on the fees charges, American Express has therefore, less to lose compared with its competitors (American Express, 2010 [online]). Share price for Visa have dropped to 14 percent in November 2010 whereas for Master Card the decline is 9 percent. American Express saw an increase in the share value by 3.5 percent in the last quarter of 2010 (Bloomberg, 2010 [online]).
Threat of Substitutes
Threat of substitutes is there but not so high as the element of customization and innovation allows financial service providers to meet local needs of consumers who are increasingly becoming aware of the various options of finance open to them. New and emerging channels for reaching out to customers are becoming available as well as new forms of customers, such as the recent identification of ‘on the go’ customers, referring to mobile customers who use mobile phones to transact and interact with service providers (Bloomberg, 2010 [online]).
Threat of New Entrants
In the prevailing conditions in the market, threat of new entrants is low as the industry is still recovering from a massive economic blow. As the industry is growing at a slow pace right now it is not a highly attractive industry to tap into for new firms.
Bargaining Power of Suppliers
Suppliers exist in the form of providers of human capital which on a forefront do not pose a big threat but can influence the expertise in management and innovation in services provided by the companies (Investopedia, 2010 [online]).
Bargaining Power of Customers
Bargaining power of customers is high as the level of consumer spending is directly linked with the company’s profitability. With the recent economic downturn which forced consumers to save more and borrow less, the financial services sector suffered tremendously. Thus, the company had to reduce fees and surcharges under the pressure of the government.
SWOT Analysis of American Express
- American Express has a ‘spend centric business model’ which focuses on generating revenue from encouraging card spending rather than reliance on fees (American Express, 2010 [online].
- American Express in 2010 has launched new pay-in-full charge cards which are highly offer customers with discounts and other membership benefits that are tailored to their interests and lifestyle (Market Watch, 2010 [online]).
- Cooperative activities with China Union Pay allow American Express to avail a stronger network in China and benefit from the growing economy (Market Watch, 2010 [online]).
- The recent downsizing of employees has caused negativity among the employees and reduction of human capital encompassing management expertise and sources of innovation in the company.
- American Express has been rather slow to identify major opportunities and tap into new markets such as in the mobile service offering segment (Bloomberg, 2010 [online]).
- Engaging in mobile transactions facility provision for customers is a viable option for future.
- Higher customer involvement in product designing to increase customer loyalty is another option.
- American Express can link its services to social networking websites and provide news feeds and updates regarding its services to its customers via the social groups and communities present online.
- Discover Financial Services has entered in a contract with Verizon to provide a service called “Isis” which is a mobile commerce network that would allow consumers to transact ‘contactlessly’ to pay off their bills by just waving their smartphones (Bloomberg, 2010 [online]).
- The future is uncertain in the U.S and across Europe due to the slow pace of economic growth.
Analysis of Financial Ratios
Gross Profit Margin in 2009 was 77.7% which is quite higher than the industry average of 35% and last year’s figure of 50%. This was so because of the increasingly large focus and restructuring of the company towards ‘spend centric business model.’ This has caused consumers’ transaction volume to rise even in the economic crunch pushing sales to a high level for the company (American Express, 2010 [online]).
On other thank the net profit margin was 17.3%, which actually fell from 2008 but was still higher than the industry average of 12%. There was a fall of 16.3%. Lower operational costs, though, have attempted to pave way for a moderate profit figure but it is still lower than the previous years’ figures and it is expected that there will be an increasing trend from here onwards (American Express, 2010 [online]).
Annual Revenue Growth in the period of five years ending in 2009 has been 3.8% compared with the industry average and ideal over a period of 5 years, 15%, is quite below impressive. This can be explained through the slow adaptation to changing consumer trends in the industry in the challenging economic times when consumers have been quickly switching brands and lessening their spending. Although, in 2009, the growth was 30% which is far higher than the average of 12% in the industry (New York Times, 2010 [online]).
Return on Equity Ratio was 37.3% in 2007, 22.3% in 2008 and 14.6% in 2009. It rose again to 24.50% in the first quarter of 2010 and reached to 25.9% in the last quarter of 2010. Over the period of five years, the average return on equity has been 27.9%. The reasons for the rise can be the strategy of the company to downsize employees, cut down on advertising and promotion costs and administrative costs in order to reduce overall operational costs in 2009 and 2010. This is expected to produce further positive impacts upon the profitability of the company in future (American Express, 2010 [online]).
The rise in revenues and sales volume have been due to the rise in spending of consumers and higher level of travel commission charged to card members which are holding small loans with low interest rates.
The ability of American Express to efficiently utilize its capital and assets can be identified through the following efficiency ratios (Arnold, 2005).
Return on Capital Employed was 4.4% in the last quarter of 2010. The average ROCE over the last five years has been 5.4% which is a good sign along with the strong profitability indications of the company. This is the outcome of higher focus of America Express towards investing in business expansion and revenue generating innovative directions during the period of 2009 and 2010 (New York Times, 2010 [online]).
Return on Total Assets 2.5% in 2010, which rose from 1.7%. On average over the period of five years the ROA has been 2.3% which is a good record. The total assets in 2010 were $146 billion out of which 48% are fixed assets, thus, reflecting a highly efficient use of the assets in generating profits (ADVFN, 2010 [online]).
Based on the current ratio of 2.5%, American Express is in a strong liquidity position having more than two current assets that can be quickly converted to cash to overcome short term debts.
Debt to Equity ratio was 4.78% in 2010, which rose from 4.21%. this reflects that the company has kept a firm control over its long term debt financing and equity financing makeup in the last two years. The company is not heavily geared, in fact is in a strong position as having being majorly financed through equity (ADVFN, 2010 [online]).
Analysis of Share Performance
Earnings per share fell by 33.9% in the first quarter of 2009 from 2008 and rose to $3 in the last quarter of 2010. The decrease in the first quarter of 2009 was much sharper and in only rose then onwards during the period of 2009 to 2010 there was first a declining trend which brought the EPS down to $1.4 and from then onwards there was only a rising trend in the EPS, as evident from Figure 1. Though in the last quarter of 2010, the earnings per share figure has risen to $3 until the very recent notifications (ADVFN, 2010 [online]). The rise during 2009 to 2010 and during 2010 can be explained through the sudden rise in the consumer spending and larger transaction volumes of credit purchases using loyalty charge cards and travelling services. In the last quarter of 2010, the sales and profits can be expected to rise further because of the holiday season and rise in sales of the travel and holiday cards services offered by the company (American Express, 2010 [online]). Though with the new tax increase and fee charge restriction, profitability will be restricted but not low.
Cash flow per share was $3.93 in the first quarter of 2010 but it fell to $3.08 in the last quarter of 2010. The higher cash flow in the first quarter resulted from the cost reduction actions taken in 2009 in order to reduce operational costs and generate more revenue. This was met with a rising trend in the first quarter. Though, during 2010 due to the fees charging restriction on services, the cash flow remained limited and coupled with the recent investments of the company in launching new card schemes and offers, there were an increased amount of cash outflows which resulted in a comparatively lower cash flow per share ratio.
Dividends per share were $0.72 in 2009 and now in the last quarter of 2010 it is 0.6 (New York Times, 2010 [online]). A small decline is evident and that too due to the recent challenge towards the profitability of the company with heavy tax infusions and limited revenue generating options. The restriction of fees for services has limited profitability options and also coupled with tax rises, the profits left to be distributed as dividends have reduced slightly, compared with the figures of 2009 (Figure 1). It could rise if the company finds a new effective means of offsetting the rise in operating costs despite of its earlier initiatives to reduce them.
American Express has four key strengths: managerial expertise, quality services, strong customer relationship management and innovation using which it has surpassed the tough challenges that the economic crunch brought. Though profitability was hurt badly but it maintained its customer loyalty through innovative and customized products that it timely launched in the market. 2009-2010 was a crucial period for the company where many new decisions and strategies came to the forefront which groomed the company towards a more profitable trend. The strategy of product development, market development and cost leadership was met with an effective execution through the launch of four packs charge card service in 2010, operational cost reduction via downsizing and networking and channeling in China, Japan and in Australia to cover a broader network of customers. Based on the financial analysis, the positive trend showed by the figures, it could be concluded that the strategies taken on by the company were met with success and were the need of the challenging times the company was facing.
If you need assistance with writing your essay, our professional essay writing service is here to help!Find out more
Cite This Work
To export a reference to this article please select a referencing style below:
Related ServicesView all
DMCA / Removal Request
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please: