This paper aims to apply the concept of Mintzberg School of Strategies, which refers to the organisational routines that shape the way the firm's strategic path is developed over time. While the idea that the firm's development is based on routines is not new, there has been little theoretical and empirical investigation of the nature of these routines. For the purpose of this research I took three school of strategies from Mintzberg Ten School of Strategies for apply on an certain organization (HSBC) and analyzed how strategic path is developed over the time. This research met to HSBC's strategic needs in expansion of customer base and market share. Thus, this has resulted to how to build leading strategies into HSBC for rapid growth. The first School of Strategy (Designing) contributed to support strong and visionary leadership. The second School of strategy (positioning), this represented HSBC's competitive advantage, Porter's five forces analysis and, market positioning. The last School of Strategy is entrepreneur. Its approach is rely heavily on intuition, judgment, wisdom, experience and insight.
Thus, I analyzed HSBC's strategic direction with those three (Mintzberg School of Strategies) and built my strategy on the HSBC.
Mintzberg 10 school of strategy
-Planning - Culture
-Designing - Political
-Positioning - Learning
The Design School
A process of conception
Clear and unique strategies are formulated. The internal situation of the organization is used to match the external environment.
Useful in relatively stable environment
Support strong and visionary leadership
Mission Model (Statement)
SWOT Analysis of HSBC
-HSBC is well capitalized - Lent to high-risk borrower
-Brand is well recognized -HSBC has increased mortgage
in the world rate while UK mortgage rate falls
-Less depended on Government -An announcement of redundancy
-The bank has a strong -HSBC's share price dropped due
presence in emerging markets global recession
-Merger with other financial -Less credit being available
Institutions - Loosing customers, because of
-To increase market share by higher mortgage rate
acquisition - Loosing value of company
-To reduce cost with centralization by suffered investors
Mission Statement of HSBC
The HSBC group has adopted the Global Sullivan Principles. These are a set of objectives that aim:
to support economic, social and political justice by companies where they do business;
to support human rights;
to encourage equal opportunity at all levels of employment, including racial and gender diversity on decision making committees and boards;
to train and advance disadvantaged workers for technical, supervisory and management opportunities; and
to assist with greater tolerance and understanding among peoples; thereby helping to improve the quality of life for communities, workers and children with dignity and equality.
The Positioning School
An analytical process
It places the business within the context of its industry and looks at how the organization can improve its strategic positioning within that industry
Strategic Management is a science.
Provides content in a systematic way to the existing way of looking at strategy
Focus on hard facts. Particularly useful in early stage of strategy development, when date is analyzed.
Competitive Advantage on the Banking Sector
(The impact of technology on the intensity of Competition)
Banks were some of the first companies in the world to adopt computer technology; it first began with advances in telecommunications. These initial steps allowed banks to link their branch networks on both a national and an international scale. The more recent onset of internet technology has lead to even greater movement in operational efficiencies. With quicker access to more information, banks are in a much better position to monitor risks and provide improved service.
Improvements in technological capabilities have allowed banks to centralize much of their data processing. Many of the banks, including HSBC, have centralized the security preparation process for residential mortgages. More specifically, all of the mortgage security documentation is sent to one location where a specialized team is responsible for ensuring that everything is in order and filed correctly. HSBC trials the major banks slightly in this area; however, it will likely centralize its security administration in the near future.
It is important to note that many of the centralization initiatives require substantial capital investments. Consequently, economies of scale must be factored into the decision; the combined cost savings must warrant the investment. This makes sense for many larger institutions but tougher to justify for smaller ones.
Another strong technology-related benefit for the banks is the increased ability to outsource certain functions. For instance, many of the banks now use independent companies to conduct flooring audits on their automotive customers. As another example, several UK banks are also looking to outsource the margining process for lines of credit. Technology allows both the banks and outsourcing company to effectively communicate in a timely manner. As a result, many time-consuming and expensive duties are being completed by outside companies with expertise in these particular fields. Outsourcing of duties provides the banks with significant cost reductions.
Internet banking, ATM, debit cards and telephone banking have all resulted in a reduced need to physically be in a branch to conduct business. Customers can now perform many banking activities form almost anywhere in the world, twenty four hours a day, seven days a week. From a commercial banking perspective, these alternative methods of banking are extremely useful for transfers, bill payments and payroll services. However, it is important to remember that most businesspeople still prefer to conduct negotiations and develop rapports with their commercial relationship managers on a face-to-face basis.
From the banks' perspective, the various methods of electronic banking represent cheaper alternatives to many in-person services. Herein lays a strategic opportunity for HSBC over its competitors. HSBC has a much smaller branch network; therefore, it can place a greater reliance on technology to reach its expanding customer base. Although HSBC continues to expand its branch network, it can do so on a smaller scale without sacrificing its growth objectives. The bank can offset partially the need to open branches by encouraging customers to use various methods of electronic baking. Therefore, HSBC should be able to open fewer and smaller branches while still meeting objectives for customer growth. Branches that are being opened should be smaller because of greater centralization of many back -office processes. With fewer and smaller branches, HSBC's cost-to-income ratio should continue to be lower than the competition's. Ultimately, it will grow its customer base and improve its customer service with less up-front capital costs and lower operating expenses (i.e. lower salaries).
Many think the next biggest technological advancement in banking will be smart card technology.
Porter's Five Forces Analysis in Banking Sector
This sector attracts lots of attention in most countries because it touches on people's financial needs, one of the most basic needs, and many customers are not entirely satisfied with the service and products (high interest rate, hiding cost, queue etc.).
Porter's five forces analysis as described in Exploring Corporate Strategy.
Porter's five forces
Threat of new
Power of suppliers Power of buyers
Threat of Substitutes
Products or services
Rivalry among existing firms
New Competitors to the Industry (threat of entry)
The threat of entry into the UK banking industry is moderate. A new entrant would have to endure a substantial amount of regulatory process and reporting. The nature of an oligopoly makes it even more difficult; one would expect the incumbent banks to react very aggressively towards a new entrant, offering lower pricing or superior service.
The global economy continues to develop, national distribution network is increasingly important to develop an international distribution network. Therefore, one of the greatest challenges a new entrant would have is to establish these networks. HSBC holdings plc entered the Canadian banking industry bay acquiring an existing bank, the Bank if British Columbia, thereby obtaining an existing distribution network (albeit one limited to Alberta and British Columbia). It is fair to assume another large global player could also enter the Canadian banking industry with an acquisition entry approach. However, one must recognize that the new entity is not really new; rather, it is an existing competitor with a new ownership structure, a new identity and perhaps a new strategy.
Regardless, distribution represents a considerable barrier for new entrants.
HSBC continues to target large national and multinational firms as customers. These firms often require access to multiple branches across Canada and around the world. Therefore, it is essential that the bank also have offices across the country and around the world. Customer demand for greater distribution networks continue to grow as the world moves towards a global economy.
The strength of the UK economy is highly dependent upon international trade. An increasing number of UK businesses are involved in importing and exporting.
HSBC also has a presence in most European, Asian and Latin American countries. Therefore, it has a distinct advantage over both new entrants and the existing UK banks. Clearly, this is an advantage the HSBC should continue to exploit.
Advances in technology have the potential to help level the playing field for new entrants. It is becoming easier for banks to reach customers via internet banking, phone baking and roaming salespeople.
Creating brand identity is another major hurdle for a new entrant. Since many of the services offered by UK banks are similar in nature, the ability to develop brand identity is an extremely important. The UK banking sector is a mature industry with well established players; creating a new brand identity to compete with these players would likely be very expensive. For instance, top ten global banks are in the world, in average value of brand is worth an estimated $ 12.5 billion. Not only are the advertising costs expensive, but most people are reluctant to simply move their financial affairs to and unproven bank. As such, trust is also an important. Customers are not simply taking their cars into a service station for an ail change; they must be able to trust the financial institution with very personal and important financial matters. Generally speaking, the large, existing UK's banks have established strong reputations for being trustworthy. In comparison, a new entrant would have to prove its trustworthiness, an expensive and timely exercise.
HSBC Holdings plc's hexagon symbol is well recognized throughout the world. The brand identity of HSBC will continue to get stronger in worldwide.
A new competitor must also consider the cost to a business when it switches form one financial institution to another. Although it is not uncommon for UK business to change banks, there are certainly expenses associated with doing so, such as legal fees, penalties and convenience. Having to deal with someone new and to explain one's business all over again is an important, non-tangible cost. Since commercial banking arrangements are often complex in nature, this can materially affect one's decision. New entrants would have to provide some sort of compelling reason for customers to leave their existing institution. Providing such an incentive would likely prove quite difficult and expensive.
Another difficulty for a new entrant to the UK banking industry pertains to the substantial, capital costs associated with setting up a new bank. A few of the start-up costs would include the following. Not only must the distribution network be addressed, but the entrant must hire and compensate a brand new workforce, it must spend considerable advertising dollars, and it must source start-up money to lend to its customers. The new entrant must also acquire at least some real estate for its head office. Furthermore, the new entrant has to spend considerable money setting up its reporting requirements. Competing against existing players, which have huge economy of size and scale advantages, is the greatest challenge for a new entrant. The existing banks are able to operate with considerably lower cost structures.
Strong Bargaining power of buyers
The power of buyers is high. Buyers have no trouble absorbing potentially high switching costs if the cost of borrowing is lower or the deposit rates are higher with the new institution. Customers can easily calculate how long it would take to recoup the costs through improved savings. As such, price is clear; however, it is not the only one. Many customers continue to stay loyal to their bank knowing that they could possibly get a slightly better rate at another institution. Two key determinants that help reduce the importance of price are: a) the type of services offered and b) the quality of the services offered. A standardized service, such as a basic term loan to purchase a commercial building, requires little or no advice. In that scenario, pricing plays a much greater role. However, when a business requires a specialized service, such as trade finance, pricing is no longer the final determinant.
HSBC's parent company has a strong global presence with its international distribution network. HSBC Holding plc was originally founded on trade finance. HSBC has more than 5,000 offices in 82 countries and a proven ability to meet the needs of its importing and exporting customers. It also has a clear advantage over its larger UK competitors in the trade finance market. However, it is important to note that HSBC must continue to offer the more basic term loan and operating credits as these services complement the more specialized services. HSBC does not have to be the low-cost provider of basic services if it can attract and maintain customers with its ability to offer unique services and/or appeal to niche markets.
Many banks are now investing considerably greater resources into expanding their electronic and internet capabilities. As more businesses use electronic alternatives to meet their daily banking needs, the urgency for an extensive branch network is reduced. Although it remains vital to have a branch network in place as customers still need to conduct some of their banking business in person, perhaps the number of branches and size of its branches are less critical.
Most banks offer at least some similar services. If buyers can easily obtain the same service at another institution, their negotiation position is that much stronger. However, if the services offered are specialized or customized in any way then the buyers' power is reduced; they cannot play one bank off another in an attempt to strike the best deal. The level of expertise displayed by HSBC employees has a material impact on the bank's negotiation strength. Superior expertise translates into excellent customer service.
HSBC seems to targeting more affluent market of UK with these new advertising initiatives; people who have above-average disposable income, travel for business or pleasure and enjoy an active lifestyle. The goal is to have the target market identify with the HSBC brand. Once the customers develop a sense of belonging, they become increasingly loyal to the brand image and less concerned about price.
The Strength of the Industry's Suppliers
The bargaining power of suppliers is significant. Since baking is a service-related industry, one of the most important suppliers for a bank is its employees. Employees are the primary contact between the company and its customer base. Therefore, educated and experienced employees play a vital role in HSBC's overall success; high quality employees are considered.
HSBC commercial relationship managers, having greater exposure to multiple industries, are able to play more of an advisory role to the customer. This knowledge enables them to provide a greater level of service to the customer. The distinction here is that an advisory role offers greater benefits to the customer than relationship manager who is simply geared toward being a salesperson. The real benefit to the commercial customer lies within the advice provided by knowledgeable bank employee. But, having this skill set also provides these employees with greater negotiation power.
One significant characteristic that works in the suppliers' favour is the expense associated with training employees. Fore example, HSBC pays a new commercial relationship manager trainee and trains the person for one to one-and a half years before posting them. Although they are working at a branch while training, the trainees' productivity is quite low as they are not given a customer portfolio to manage. Once all of the courses provided, wages paid, and mentors' time have been factored, HSBC has made a substantial investment in each new trainee. As such, the bargaining power of these employees strengthens considerably.
Availability of Substitute Services
Credit unions seem to operate in a much more cyclical manner than banks, primarily because of their size. More specifically, they must watch their loan and deposit growth much closer than the banks. If they become offside (e.g. have given out too many commercial loans), they cut off their commercial lending until their deposits reach a certain level. This can render them a dangerous threat or it can represent a real opportunity for the banks. Following the example above, when a credit union needs deposit growth it often offers higher-than-industry average investment rates. Banks are usually reluctant to match credit union rates. As such, the credit unions are able to attract deposit money. Still using the same example, the credit union can also stop lending money to its commercial customers. This makes the commercial customers more vulnerable to solicitation efforts from the banking industry. As long as local HSBC branches are able to closely monitor the credit unions operating in the same geographical markets, the bank can take advantage of the cyclical nature of credit unions.
Switching costs remain a consideration, based on the individual customer's current financial situation. In other words, is the customer locked into a collateral mortgage or is he or she simply a deposit customer whose term deposits have just matured? The cost of switching financial institutions for most borrowing commercial customers can be significant.
Strengthening relationships is a particularly important for banks when faced with the threat of substitutes. Locking in a customer with several services makes it more inconvenient for them to move. HSBC is capable of offering a wide array of commercial financial services. If it is successful in selling these services to its customer base, the customers are then more reluctant to move as the sheer hassle and expense associated with moving from one financial institution to another deters many. Also, many of the substitutes (credit unions, brokers, etc.) are unable to offer all of the services HSBC can. Cross-selling services locks in customers, thereby reducing the threat of substitute service providers. Selling more services also facilitates greater profits for HSBC.
Again brand identity, which is an industry key success factor, plays an important role. HSBC should continue to lock in its customers with brand loyalty, thereby making it more difficult for customers to try a substitute service provider.
Market positioning of HSBC bank
The graph illustrated comparison between revenues growth and operating margin which is resulting market positioning of world's top ten retailer companies.
The graph shows HSBC grew to higher percentage of revenue growth with low operating margin which is higher revenue growth than some of the other top ten global retailer banks.
In the market positioning, HSBC grew its total revenues at a rate of approximately 23 percent which is higher than Citigroup, RBS, Wells Fargo, Wachovia, Societe Generale, between 2003 and 2007. HSBC is increasing its business and government footings (loans and deposits) almost twice as fast as each of the other banks. The balance-sheet growth substantiates the bank's aggressive growth targets and growth culture.
HSBC's total asset growth form 2005 to 2006 outperformed the competition, but not as dramatically as it did over the previous five-year period. The growth in the past year alone was 15.4 percent versus 14.3 percent for Citigroup's total assets growth was considerably lower at 7.59 percent. The comparison between HSBC and Citigroup suggests that the other big eight UK banks are also placing a greater focus on growth.
The Entrepreneurial School
A visionary process
The visionary process takes place within the mind of the charismatic founder or leader of an organization.
Rely heavily on intuition, judgment, wisdom, experience and insight
A sound vision and a visionary CEO can help organization to sail cohesively through muddy waters especially in early or very difficult years for the organization.
Seven surprises for new CEO's
The Bank for International Settlements (BIS) Committee, an international organization which fosters international monetary and financial cooperation, is in the process of setting up worldwide capital adequacy standards with its Basel II Framework initiative which is forcing banks around the world to improve their risk management abilities.
The BIS Committee requires that banks have capital equal to eight percent of their assets; Tier 1 capital must not fall below four percent of assets. Essentially, the required capital must be sufficient to protect depositors and counterparties from the risks of the institution's on and off-balance-sheet risks. There are different categories of bank assets; each category has its own level of risk. Commercial loans, for example, are considered riskier than government loans. Such as, banks must keep more capital on hand when it advances a commercial loan versus a government loan. There is also a lesser known ratio, Tier 2 capital, which cannot exceed Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital.
Tier 1 capital consists of common equity, non-cumulative preferred shares and non-controlling interests in subsidiaries, less unamortized goodwill. It is considered long-term capital and a core measure of a bank's financial strength, from a regulator's point of view.
Tier 2 capital includes undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.
Strategy: Focus On Resources (HSBC)
This strategy involves a substantial investment into three of HSBC's primary resources: people, brand and technology which should lead to considerable improvements to these goals. The purpose of this strategy is to focus on a few key areas that have traditionally served as key differentiators for the bank and/ or will continue to do so in the future.
HSBC has long had a strong reputation for its commercial banking operation. However, in more recent times there has been considerable strain on this resource and the continuous changes have resulted in a deterioration of customer service. To what extent the deterioration has fallen or where it compares to the competition is difficult to measure with any certainty. However, it is an area that must be addressed if HSBC wants to continue using customer service as a key differentiator.
Present technology and processes are also a detriment to the bank. The competition seems to have developed systems and processes that are much more user friendly and automated. The refocus on resources strategy calls for considerable improvements to both HSBC's internal and external systems and processes. Much of these improvements will come with advances in technology.
Lastly, this strategy calls for an increased focus on the HSBC brand. The bank wants to promote the global nature of HSBC as a key differentiator. Although the bank intends to invest two percent of its net profit towards branding and marketing in the next few years, it must be in a position to deliver on the promises it makes.
The Focus on Resources strategy would indirectly improve HSBC's global distribution network. Improvements in technology should facilitate the bank's ability to improve the integration of systems used by HSBC subsidiaries around the world, indirectly improving the bank's global network. Furthermore, investment in people would also incorporate training initiatives. These initiatives would educate HSBC's commercial relationship managers to effectively use the bank's global distribution network to solicit new business.
The Focus-on-Resources strategy suggests positive results for all of HSBC's desired goals. Some of these positive outcomes are a direct result of the strategy while others appear to be more indirect.