HSBC Strategic Analysis – Market Position and Future Recommendations

3878 words (16 pages) Essay in Marketing

06/06/17 Marketing Reference this

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The purpose of this essay is to identify and analyse the strategic capabilities and by extension strategic choices available to a multinational corporation. The multinational corporation being analysed is The Hong Kong and Shanghai Banking Corporation (HSBC), which is one of the worlds leading financial organizations. For the purpose of this essay, the domestic country the organization operates from is considered as Sri Lanka and the first section of the essay is devoted to analysing the industry and the operating environment both in terms of domestic and global. The essay also discusses the Banks strategic capabilities through analysis of its core competencies as a prelude to the apex of the essay, which is the discussion of possible strategies the bank could pursue.

Background of the selected organization

HSBC commenced operations in March 1865 from Hong Kong to finance the growing trade between Europe, China, and India. To day, it is considered as the world’s largest financial organization and operates in 88 countries and territories with around 8000 offices. HSBC is listed in London, New York, Hong Kong, Paris, and Bermuda stock exchanges and has over 220,000 shareholders with a market capitalization of USD 161 Billion as at 30 June 2010 (HSBC, 2010). Appendix 1 carries detailed information about the HSBC Bank.

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HSBC commenced operations in Sri Lanka in July 1892 and as at date operates in the country through 16 Branches and 17 express banking centres. Originally focusing only on corporate banking services, the Bank has now expanded its operations to provide a comprehensive range of commercial banking products and services and is considered the leading foreign Bank in Sri Lanka and is the market leader in Credit cards and corporate finance. Information about HSBC Sri Lanka is enclosed in appendix 2. Clear company background. Appendix acknowledged.

Analysis of the external environment

The below analysis comprises of both the domestic environment as well as the global environment. The analysis is structured around the layers of business environment model (Johnson et, al, 2008, p.54), and discusses competitors, industry and the macro environment. Refer appendix 3 for a detailed overview.

In terms of the domestic competitors, HSBC Sri Lanka competes with a plethora of banking and other financial organizations operating in the country which consists of licensed commercial banks, licensed specialized banks, registered finance companies, specialised leasing companies, primary dealers, pension and provident funds, insurance companies, rural banks, merchant banks, unit trusts and thrift and credit co-operative societies (Central Bank of Sri Lanka, 2010). Details of HSBC’s main competitors are included in appendix 4. HSBC’s main competitors are the commercial banks, but specific products or services may face competition by other financial institutions as well.

In terms of the global environment, HSBC competes with both leading international banks as well as domestic banks operating in the countries it operates in. Given the diversity of its operation, analysis of each regional environment is not covered in this essay. Details of HSBC’s main competitors on a global scale are listed in appendix 5. With deregulation and advances in technology, the competition in the banking industry has intensified. Today’s banking industry is characterized by intensifying global competition and rapid advancements in the liberalization of the banking market. (Chen, 1999). Appendix 6 analyses HSBC’s domestic and global competitors using the strategic groups framework ((Johnson et, al, 2008, pp.73). This framework has been employed as it provides a comprehensive overview of the competition in terms of similarity in strategic capability, competing in the same markets and the intensity of competition.

Banking is a fragmented industry (Smith, 2009). A fragmented industry is defined as a business environment with a majority of small geographically dispersed firms. There are no market leaders, nor is there a firm that has the power to shape industry events (Porter, 1980). The financial services industry in Sri Lanka is regulated by the Central Bank of Sri Lanka and statistics pertaining to the Sri Lankan Banking industry is analyzed in appendix 7. Although fragmented in nature, the major asset share is controlled by six domestic banks, thereby creating an oligopolistic market structure. The global banking industry operates in a similar market structure with global banking giants holding the majority of the market share in terms of financial assets. Information on the global banking industry is presented and analyzed in appendix 8. Appendix 9 analyses the banking industry using the porter’s five forces model. This model is used as the five forces determine industry profitability because they influence the prices, cost, investment of firms in an industry, return on investment, and the attractiveness of the chosen industry. (Porter 1998).

The macro environment has a direct impact on the financial services industry as it provides the organizations their means of survival (Johnson, et al, 2008 p.54). The macro environment is analyzed in appendix 10 using the PESTEL framework as it provides a comprehensive analysis of the environment influences (Johnson, et al, 2008 p.55).

Key drivers of the Banking industry

The key drivers of an industry are environment factors which are likely to have a high impact on the success of an organizations strategy (Johnson, et al, 2008 p.56). As identified through the PSTEL analysis, the key drivers of the industry are identified as savings and investment habits and preferences of consumers, the growing demand for more convenient and personalized banking solutions, and the perceived strength and security the institution, and the industry as a whole can offer the consumers. The identification of the three key drivers of change was a good way to conclude this section.

Core resources and competencies of HSBC

Resources and competencies

Resources and competencies of an organization provide it with the strategic capability it needs to survive in the industry (Johnson, et al, 2008 p.95). An accurate definition. Resources are assets owned or controlled by an organization while competencies are skills and ability the organization possesses to deploy these resources effectively through organizations processes. Core resources are those that critically underpin the competitive advantage and that others cannot imitate or obtain, while core competencies are skills and ability the organization has to deploy resources to achieve competitive advantage that cannot be imitated or obtained (Johnson, et al, 2008 p.97). One of the clearest definitions yet seen.

HSBC’s resources can broadly be categorized in to four main categories; these are physical resources, financial resources, Human resources and intellectual resources. These are further discussed in Appendix 11.

Irrespective of the resources the organization possesses, if the organization does not have the required competencies, such resources may not be used effectively to operate at an optimum level. HSBC’s key competencies are elaborated in their operating values and key business principles (refer appendix 1). These are categorized under three sections for ease of analysis. These sections are customer relationship management, internal process management and human resource management. These are further discussed in appendix 12.

Unique resources and Core competencies

Having analyzed HSBC’s resources and competencies, they can further be segregated as core resources and competencies, which as defined above are beyond competitor’s ability to imitate and thus provide HSBC with a competitive advantage. These can be divided further as intangible and tangible.

“the liberalization of product and labor markets in many parts of the world, and the deregulation of international financial flows is stripping away many traditional sources of competitive differentiation and exposing a new fundamental core as the basis for wealth creation. That fundamental core is the development and astute deployment and utilization of intangible assets, of which knowledge, competence, and intellectual property are the most significant. Also included are other intangibles such as brands, reputations, and customer relationships (Vargas-Hernandez & Noruzi, 2010). HSBC’s expertise which spans over and intellectual properties such as its vast customer database allows the bank to optimize its delivery network by providing the right product to the customer using the most cost effective process. For a competitor to imitate this would require access to resources such as diversified customer databases and superior expertise. While one can argue that both can be obtained, the cost of such acquisition would require significant investment in an organizations branch network and business processes. This level of investment is beyond many competitors.

HSBC’s brand name is another one of its core resources. For many businesses, the brand name and what it represents are it’s most important asset-the basis of competitive advantage and of future earning streams (Aaker, 1991). Having the world’s no 1 banking brand allows HSBC to clearly differentiate from its competition not only in terms of it’s existing markets, but also for emerging markets which is discussed later in this essay as a strategic choice for the Bank. It is estimated that building a brand costs at least US$100Mn (Doyle, 2000). To sustain and develop the brand name to a level which can challenge HSBC would be beyond most competition.

While HSBC’s most significant core competencies and resources lie in the form of intangible assets, one of its key tangible core resources is its branch network. As explained above it spans over 88 countries worldwide and covers both mature and emerging financial markets, which places HSBC in a unique position, especially against domestic banks to provide international banking solutions to its customers. Creation of such a branch network not only requires a significant capital investment and expertise but would also mean a paradigm shift in the organizations existing business process to suit different operating environments. With the developments in the technology paving the way towards comprehensive online banking, the value of maintaining a retail branch network is subject to some criticism, especially considering the costs involved in maintaining and upgrading same. If the basic bank products, especially those associated with encashment and money transmission, are increasingly provided by alternative technology distribution channels, comprehensive branch networks on a scale comparable with the present will almost certainly cease to exist (Howcroft & Beckett, 1996). However, given that most banking products are generic and can easily be imitated by the customers, the banks competitive advantage would rely on its service, trust, and friendliness as perceived by the customers. Branches play a key role in portraying this image. Financial service products are comparatively intangible, and innovatory ideas are copied swiftly and easily by competitors. The efficiency and image portrayed by the high-street networks are, therefore, essential core components of differentiation strategies seeking competitive advantage (Greenland, 1994).

HSBC strong capital base is another one of its core resources. In terms of market capitalization, it is the 5th biggest Bank in the world. It is also one of the few global banks, who did not require any funding by the authorities during the financial turmoil. HSBC successfully completed a rights issue in 2009 adding US$17.8Bn to shareholder equity. This was the biggest successful rights issue conducted by a financial organization in UK and 96.6% of the banks shareholders participated in it demonstrating HSBC’s perceived value among its shareholders (The Guardian, 2009). The strong capital base and the ability to raise further capital enable HSBC with opportunities for growth.

Appendix 13 summarizes the above discussion and categorises the identified resources and competencies. Another top mark for this in-depth response.

Strategic choices available to HSBC

Strategic options

Based on HSBC’s core resources and competencies as explained above, several strategic options are available to HSBC. These options are discussed in appendix 14 using the TOWS matrix. TOWS matrix is used as it helps identify the relationships between strengths, weaknesses, opportunities, and threats and assists formulating strategies on these relationships (Ruocco & Proctor, 1994).

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Strategic choices

Strategic choices are the choices that are pertinent to an organization’s future positioning in the market in relation to the market dynamics. Ansoff matrix enables to identify the strategic directions available to the company based on its current position (Johnson et, al, 2008, p 257). It is used to identify the optimum direction for HSBC in appendix 15. Relevant theory input was noted.

Based on the available strategic options discussed above and the optimum direction as identified through the Ansoff Matrix the following are deemed to be the most suitable strategic choices for HSBC. They are summarized in appendix 16.

Entering in to emerging markets with a full range of products and services is a choice available to HSBC. As mentioned above, emerging markets are expected to grow faster than the more mature markets and as a result the financial centre of the world is shifting towards these markets. This presents an ideal opportunity to HSBC to move in and establish first mover advantage and develop a sizable market share, while most banks are still consolidating their positions after losses experienced during the financial recession. Having a full array of products and services would enable HSBC to service all customer segments in these markets. HSBC could look at a premium pricing strategy for its up market products, while establishing lower margins for the generic banking products intended for mass customers to ensure optimum results.

Another choice available to HSBC would be to consolidate its already strong position in the existing markets. With recession coming to an end, the demand for financial services is likely to improve and given that HSBC is already well established, the bank could use a pricing based competitive strategy to gain market share by lowering the margins. With most banks trying to recuperate from their losses in the last couple of years, it is unlikely that they are in a position to match lower margins in the immediate future.

HSBC could also focus more on selected niche markets in both emerging and existing markets. Given that the banks flagship products are more directed at the affluent and emerging affluent segments, the bank can position itself away from competitors by using differentiation. There is a high demand for personalised banking services in these segments and a premium pricing strategy can ensure high returns compared to servicing other customer segments.

Emerging solutions like Islamic Banking and Insurance industry are also viable options for HSBC. As discussed in the previous section both has possibilities of growth and given that HSBC has expertise in these areas, would present the bank with opportunities to capture market share and gain profits.

Appendix 17 analyses the choices discussed above using the strategy clock. The strategy clock assists the understanding of changing requirements in the market, therefore enabling organizations to optimize its position to gain competitive advantage. (Johnson, et, al, 2008, p. 224)

Implications for choices identified above are summarised in appendix 18. The positive implications are already discussed in previous sections and therefore the key focus of this section would be on the negative implications. In terms of moving in to emerging markets, the key negatives would be the adaptation to the operating environment, local regulations aimed at protecting domestic industry, the level of technological advancement, and the risk of uncertainty. Adaptation to the local market may require changes to the banks culture, business processes, and policies and procedures. This may be a challenge with HSBC planning to standardize its operations under One HSBC framework. Regulators often adopt policies which protect local service providers from being outplayed by the multinational corporations. These policies adversely affect the laws of competition tipping the scale in favor of the local industry (Borch & Brastad, 2003). The level of technical advancement in emerging markets may pose another threat to HSBC, whose operations are heavily supplemented by advanced technology. The level of IT infrastructure development and the speed and dependability of network connections would have a major impact on running HSBC’s international network effectively and support services such as internet and phone banking. The digital divide is the gap between awareness and unawareness of the use of new forms of information systems, which is very significant in the underdeveloped and the emerging countries (Balaban et, al, 2009). This would pose an issue to HSBC in both recruitment and providing online customer solutions. The risk of uncertainty is the risk the bank will have to face when investing in a new market. Considering that the investment is a sizable one, and the risk is significant, the stakeholders of the bank would expect a high return on investment.

In terms of looking to grow in the existing markets, the biggest implication would be sustainability. Most of HSBC’s key competitors are also dominant in the existing market and would be able to match HSBC’s products and services. Although HSBC can leverage heavily on it’s existing core resources such as their retail network and business processes to provide more efficient services at low margins, the scope for future growth is limited compared to other options such as moving in to emerging markets.

In terms of focusing on selected customer segments with HSBC’s flagship products such as Premier and Advance, the biggest issue would again be sustainability. While this choice would enable the bank to focus solely on servicing profitable customer segments, and to deploy its resources only for this purpose, issues such as the opportunity cost of not servicing the other customer segments and imitation of products and services by the competitors needs to be considered. The Bank may also be perceived by the consumers as a bank for the select few, which will have a negative impact on the bank’s ultimate desire of being the leading financial service provider in the world. The Bank may not be able to fully realize the opportunities which can be achieved by its core resources, especially in terms of its branch network and customer databases. Most competitors are also targeting these particular customer segments; therefore sustainability of market share is also on issue.

Insurance and Islamic banking, are not HSBC’s traditional areas of strength even though the bank has had success in its limited Islamic banking operation. Over the last two decades, the insurance market has become highly competitive due to deregulation, globalization of insurance institutions and advances of IT technology (Cummins & Venard, 2008). To obtain a sizable market share in such an industry would require a long period of time, delaying the pay back on investment. On the other hand, international institutions have made in roads to areas like life insurance, but local firms continue to dominate in areas such as motor insurance and many insurance markets have local specificities (Cummings & Venard, 2008), which could be a challenge to HSBC with it’s standardized solutions in penetrating the market. Islamic banking on the other hand is limited to specific markets and only to Muslim customers, therefore growth is limited. Islamic Banking at core adopts a profit sharing system rather than the conventional interest paying system. This notion may also lead to negative perceptions of HSBC as the bank also deals with traditional banking products where interest income is the key source of profit, especially if deposits accepted through the Islamic banking is mobilsed on interest bearing instruments. An extremely high quality analysis.

A strategy suitable for HSBC to pursue

In analyzing the strategy which is most suitable for HSBC to pursue, it is important to evaluate each of the choices explained above based on suitability, acceptability, and feasibility.

Suitability refers to the conformity of the strategy in relation to the organizations strategic position derived through its core competencies and resources. Acceptability evaluates whether the strategy is capable of delivering the expected outcome and the extent to which it satisfies stakeholder expectations. Feasibility is concerned with whether the strategy is practically possible to implement (Johnson et, al, 2008, pp 385-6).

Appendix 19 ranks each strategy based on above criteria and appendix 20 provides the justification for the ranking. Based on this ranking, the optimal strategic choice for HSBC is considered as entering in to emerging markets with a full array of products and services.

Given HSBC’s current position of being highly capitalised, profitable and the bank’s ability to raise finances even in the most trying times, puts HSBC in a strategically strong position at a time when most of its competitors are trying to consolidate their operations after sustaining heavy losses during the recession. The growth in emerging markets, coupled with deregulation and globalization presents the ideal opportunity to the bank to capitalise on its position of strength. By moving in on the emerging markets, HSBC would also be able to capitalise on first mover advantage. Going in with a full range of products would ensure that the bank can cater to a wide range of customers. By doing this, HSBC would not only acquire affluent customers for it’s up market products, but would also capture the market share in generic banking products by adopting a cost based differentiation strategy. The biggest advantage of this choice is that it affords the bank the opportunity to diversify its resources effectively, rather than concentrating all resources on a few products or segments or on options with limited growth potential. Expanding its operations in emerging markets would also be the most suitable option considering HSBC’s mission to be the most preferred financial service solutions provider. Embarking on this choice does not by any means stipulate putting a stop to HSBC’s existing business. According to HSBC 2010 interim report, all of the existing regions have declared profits in the first half of 2010 (HSBC, 2010), which enables the bank to retain part of profits made by the respective regions to look at opportunities in their own regions. This choice also enables HSBC to embark on other options discussed in future, such as expanding in to insurance and Islamic banking, which can certainly be considered as the second phase of expansion.

Conclusion

This essay has explored HSBC’s operating environment and its core resources and competencies in order to identify and discuss viable strategic choices for the banks future. The international financial landscape is changing after the 2008 financial recession and top global players such as HSBC find themselves in a unique position to harvest the opportunities which comes along with this changing landscape. HSBC with a conservative operation shaped by its key business principles has weathered the financial storm better than most banks and are one of the very few leading banks to refuse any government aid. The bank has sufficient resources to expand its business to emerging markets, which is identified as the most suitable strategic choice for HSBC. The emerging markets have proven to be more resilient to the financial crisis as compared to the developed markets and are also expected to grow faster then the developed markets in the coming years. The emerging markets would seek to dominate world economics in the coming years and this creates great opportunities for a Bank such as HSBC with a wide branch network and extensive expertise in international and commercial banking to offer its services to these growing economies. It also paves the way for implementation of other viable strategic choices such as expanding HSBC insurance and Islamic Banking business. Expanding in to emerging markets would also strengthen HSBC’s competitive advantage and would further strengthen the Banks already strong position as one of the dominant Multinational corporations in the world.

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