Its important to note that very few industries will meet the precise criteria for a perfect competition market type, however there are some industries that come close, examples would be foreign currency exchanges. They come close because there are many buyers and sellers. Usually each trader is relatively small in comparison to the total market and has to take the price as given. The product is homogeneous. However individual traders could move currency markets.
- Explain how organisations respond to market forces – e.g. supply and demand, with reference to the UK banking industry.
There are two market forces, supply and demand, I will explain each one with reference to the UK banking industry and I will explain how they work against each other. Once the quantity that customers are willing to buy at a particular price equals the quantity that the producers are willing to sell at that same price then a successful balance will have been achieved.
It is important to know that these market forces, demand and supply, work against each other. Obviously consumers want to pay low prices for goods, whilst organisations want to make profit. Therefore a balance must be met so that both consumers and organisations are happy.
2.1 Demand
Demand can be defined as, “the quantity of a product that consumers will be prepared to buy at a given price over a period of time.”
There are three important parts in this definition:
- Any given consumer must have the ability and will to purchase a product. E.g. everyone wants a huge expensive house but not everyone can afford one.
- Demand and price are directly linked.
- A period of time is involved. If prices change over a long period of time then so will demand.
The main factors that effect demand in reference to the UK banking industry are:
- Population
- Income
- Changing tastes (including advertising)
- People’s expectations of future price and output changes
2.1.1 Population
As the graph above shows when the population increases demand for banking services increases too. The demand curve moves to the right as more customers open bank accounts or take out loans etc. As the demand curve moves to the right the price remains the same. Banks respond to this by providing more facilities and better facilities whilst ensuring that prices are competitive.
2.1.2 Income
Banks respond to this by reducing interest rates so that people may be more inclined to use their credit cards or take out loans etc.
2.1.3 Changing tastes (including advertising)
Banks respond to this by advertising low rate credit cards and loans at certain times of the year (Christmas), they also advertise debt consolidation loans just after Christmas.
2.1.4 People’s expectations of future price and output changes
2.2 Elasticity of demand
Elasticity of demand can be defined as, “the relationship between the proportionate change in price and the proportionate change in quantity demanded.”
A numerical value can be provided using the formula below.
With regards to the UK banking industry demand may increase or decrease due to interest rates and times of the year. Inelastic demand applies to the UK banking industry because if interest rates rise then consumers will be far less inclined to borrow any more money, however consumers will always borrow money because it may be the only way to purchase an expensive item such as a car. The same can be said about mortgages, if interest rates increase consumers will be less inclined to borrow as much, however people need a place to live so they will still be forced to buy a mortgage only it probably won’t be such a large mortgage.
2.3 Supply
Supply can be defined as, “the quantity of a product suppliers are willing to make available and provide for a market at given prices over a period of time.”
There are two important parts to this definition:
- It underlines the role of price in deciding the quantity which suppliers are prepared to provide for the market.
- A period of time is involved just as it was with demand.
There are various factors that affect supply, they are:
- Price
- Physical and natural conditions
- Indirect taxation / subsidies
- Technology
- Cost of the factors of production
2.3.1 Price
Price is the most important factor affecting supply because it is essential that there is enough money made to cover costs otherwise the company will be running at a loss and eventually collapse.
Banks respond to this by ensuring that their products are priced so that they cover all costs and make a healthy profit.
2.3.2 Physical and natural conditions
This includes weather, which could affect crops and disrupt transport networks, natural disasters (severe flooding) and disease that can affect crops and animals.
This affects banks because if they offer insurance services they could be faced with large payouts. They respond to this risk by ensuring premiums are set accordingly to the however high the risk may be, for example home insurance, homes that are located near high risk flood areas, river banks etc will be charged a higher insurance premium than a house that is in a low risk flood area.
2.3.3 Political / civil actions
This includes new laws and legislation that governments may pass; examples could be changes to the Consumer Credit Act 1974 would affect supply. Civilian riots may affect supply too.
Obviously changes to legislation may affect banks, especially if it was to the Consumer Credit Act 1974. Banks respond to this by keeping up to date with legislation and ensuring they are not breaking the law.
2.3.4 Indirect taxation
This is a tax placed on the production of a good or service; it is therefore an additional cost for the producer. Examples include hydrocarbon taxes on petrol and diesel, alcohol taxes on alcoholic drinks, tobacco taxes on cigarettes, import duties which are taxes on non EU products, and of course VAT which is an indirect tax (17.5%) on more or less all products sold in the UK.
Banks respond to these costs by increasing their own prices accordingly to make a profit.
2.3.5 Subsidies
The government may give out subsidies to companies to reduce their costs; obviously this has the opposite effect to taxes. This will actually increase supply. Examples of this are payments made under the CAP to EU farmers and payments made to businesses under the Regional Policy.
Banks will respond to subsidies if they receive any, they will respond by reducing their prices, as they will not have as much cost to cover.
2.3.6 Technology
Introducing new technology may improve the quality of the product and the speed at which things are done. New computer systems may enable staff to become more efficient. Examples include faster communications such as networking computers or broadband Internet access, new computer technology such as Internet shopping. New technology will increase supply.
Banks have responded to this by implementing Internet banking systems, which allows customers to access their accounts whenever they like, and from where ever they may be. Banks have introduced better computer systems that allow their staff to work at a more efficient level and provide a better service to the customers.
2.3.7 Costs of the factors of production
All organisations require factors of production so that they can produce products; each factor receives a payment or reward. These factors are:
- Land (rent)
- Labour (wages)
- Capital (interest)
- Enterprise (profit)
2.4 Explain how three organisations in the UK banking industry have responded to market forces in different ways.
The three organisations within the UK banking industry that I have chosen to analyse are HSBC, Lloyds TSB, and NatWest.
HSBC responded to market forces by introducing online banking so that its customers could access their bank accounts anywhere in the world and at any time. This service has been highly successful and there has been a drop in the amount of calls received at the call center, so labour costs will steadily decrease as more customers gain confidence in using internet banking. Soon customers will be able to apply and be accepted for loans and credit cards, again this will take away work from staff and therefore cut overheads in the long run.
Lloyds TSB have responded to market forces by providing more products, in particular Lloyds TSB have introduced various insurance services these include car, home, travel, pet, and health insurance. By doing providing these products it helps customers because they won’t necessarily need to go to independent insurance brokers. These insurance services have become extremely popular with customers and Lloyds TSB have now firmly diversified into the insurance industry.
NatWest have responded to market forces by offering both variable and fixed rate mortgages. Customers can apply for a mortgage any time of the day and receive a decision within two days. This helps customers because they can have their current account, savings accounts etc linked with their mortgage, plus it’s all within their bank. They don’t have to go to a building society. NatWest now offer a ‘100% mortgage’ which allows buyers who haven’t got the required amount of money for the initial deposit to take out a mortgage without a deposit. This responds to demand from customers because house prices are very high at the moment.
- What is meant by competitive advantage? How do organisations gain / lose competitive advantage?
Competitive advantage is defined as, “factor which enables a firm to compete successfully with competitors on a sustained basis.”
Organisations will always seek to gain competitive advantage over their rivals. According to Michael Porter in his book, Competitive Advantage, he suggests that there are two main ways to be competitive.
The first is that a business gains competitive advantage through becoming the producer that produces at the lowest cost. This can be achieved through producing and providing products in the most efficient way possible; this can be done through the use of modern technology. With reference to the UK banking industry banks can achieve this by providing Internet banking facilities to their customers. Another way of achieving this is by providing large quantities of the product. Due to heavy advertising banks have been able to set up more bank accounts.
If a company wants to gain the advantage of becoming a low cost producer then its essential that the company has a large market share. Michael Porter explains that by becoming the market leader profits will follow. In other words the bigger share of the market you have the more chance you have of lowering costs down to that of the competitors.
The other way Michael Porter suggests is differentiation; this is to make your product better than that of the rivals. However it is important that the product is still bought by the customers. Within the banking industry there are certain credit cards, which may be highly desirable, however they are not within every customers reach. However these cards are still successful because there are people that have the wealth to posses such a card. There are other ways to differentiate products this can be done through customer service, promotion, advertising, branding etc. Banks have been looking to gain a competitive advantage over each other through the customer service improvements, for example NatWest have linked better customer service, promotion and advertising on their latest advertisement, this advert gives the message that NatWest are a friendly and sensible bank, that their customer service is better because they provide local bank telephone numbers. Halifax has been successful in their recent advertisement campaign as many regard it as humorous. The best way to differentiate a product is to add value; this way customer’s perceive it as being better value than rival offerings.
Competitive advantage can be lost through competitors providing a product at the same price. When the first online banking system was established that bank gained a competitive advantage. However rivals soon realise that they are losing out and so they release similar systems, perhaps at a lower price or higher quality / extra features so rivals will gain the competitive advantage.
- How do companies grow? Is size important? Explain economies of scale, acquisitions, takeovers, mergers, etc in the context of the UK banking industry. Describe briefly the importance of customer perceptions and the impact of technology on organisations.
4.1 How do companies grow?
Organic growth (‘scale expansion’) of a bank is when a move from a smaller to a larger bank is financed using internal profits, capital raised from shareholders or by borrowing money (loans etc). The generation of profit is essential in order to finance growth. Usually banks will want to quickly change the scale of their operations therefore they will be seeking capital for the bank, they can do this by seeking extra capital through stakeholders or they can borrow money from various financial institutions. As the growth below shows (under 4.3) as the bank grows in size the costs increase, however output increases. The graph gives an example of how a bank may grow in size.
4.2 Is size important?
Size is important because if you want to gain a competitive advantage over a rival bank then you must have a large client base. This is important because the larger the bank is the better advantages you receive from economies of scale. A larger bank will be able to provide more services and products at a cheaper price, as its production costs will be lower than that of a smaller rival bank.
4.3 Economies of scale
Economies of scale can be defined as, “ the reductions in the average cost of producing a commodity in the long run, as the amount of output of the commodity increases. The larger a business is, the more efficiently it can produce.”
In simple terms economies of scale are the advantages of being big. Larger companies have many advantages over smaller companies, which enable them to gain competitive advantage.
As a company gets bigger its able to obtain a number of economies, or advantages of size. Because of economies of scale a larger bank is able to provide more products at lower costs of production.
The graph below shows how economies of scale can be shown. It shows how a company is able to provide higher outputs at lower average costs due to expansion over five year periods.
- 1980 – medium sized business
- 1985 – organic growth
- 1990 – merger with competitor
- 1995 – take over of competitor
- 2000 – organic growth
Economies of scale come from various sources, they are:
- Technical economies of scale
- Managerial economies of scale
- Financial economies of scale
- Commercial economies of scale
- Marketing economies of scale
- Risk-spreading economies of scale
4.4 Acquisitions
Acquisitions are important within the UK banking industry. An acquisition is when a bank buys another company and acquires new products, which enables them to provide a stimulus in the marketplace. However generally making acquisitions fails to make the bank innovative, and as research shows, four out of six acquisitions do not generate any shareholder value.
4.5 Takeovers
Takeover can be defined as, “where on company buys a majority shareholding in another company.”
This is a quick and dynamic method of growth, which enables the integration of a number of business units under a single bank. A company that has shares for sale is available to be taken over, all that is required is another company to buy the majority shareholding in another company and they have taken it over. An example of a takeover in the UK banking industry is The Hongkong and Shanghai Banking Corporation Limited (HSBC) who took over Midland Bank; today we now have HSBC in the UK.
4.6 Mergers
Mergers can be defined as, “a situation in which two or more enterprises ‘cease to be distinct’.”
In other words a merger is when two companies become one larger company. There are different types of merger; firstly, a full legal merger is when the assets of two or more banks are transferred to a single new or existing bank. An example of this is Lloyds and TSB who are now known as Lloyds TSB. This idea will be attractive to banks as it will allow far more significant market share, with this extra market share the new bank can take advantage of economies of scale. The other type of merger is when there is a change in ownership of the banks concerned. By merging banks will be more competitive as far as exporting is concerned. There are horizontal and vertical mergers, a horizontal merger is when two companies who produce similar goods at the same stage of development join together, and vertical mergers are when two companies who produce similar goods at different stages of production join together.
4.7 The importance of customer perceptions
Good customer perception levels are essential within the UK banking industry. It is important for customers to perceive the services on offer from the banks in this industry are of high quality and value. If a customer perceives a bank to be of high value then this will appeal to a certain market segment. If a customer perceives a bank to offer quality services then this again will appeal to a certain market segment. It is important to get a balance between the two. Offering good customer support (call centers and internet banking) will appeal to customers as they will perceive the bank to be helpful and may be more inclined to use the services of that bank instead of another bank. An example of this is the current advertisement campaign from NatWest, the advertisement gives the perception of the bank to be friendly and helpful by providing local bank numbers, customers will perceive NatWest to be friendly and helpful and will be more inclined to open a bank account and use their services instead of rival banks. This can be seen as gaining a competitive advantage.
4.8 The impact of technology on organisations
The impact of technology in the UK banking industry has been significant. The use of information technology has had a huge impact on the way people bank. Internet banking has been revolutionary because it allows customers to access their bank accounts anywhere in the world and at any time. According to Huczynski and Buchanan who wrote Organisation Behaviour there are three ways in which technology can be used in terms of its impact on business, they are:
- Apparatus – This is machines and associated tools
- Technique – This is skills and procedures
- Organisation – This is the way in which social organisation is manipulated to foster production
All of the above have had an impact on the UK banking industry, because it’s such a competitive industry its important for banks to gain competitive advantage over their rivals and so they look at technology to gain that advantage. Banks have implemented new computer systems so that they can be more efficient, this helps cut overheads and so prices can be reduced, again to gain competitive advantage.
Bibliography
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
HND Business Course Book – Organisations, Competition and Environment – BPP Publishing. 2002.
HND Business Course Book – Marketing – BPP Publishing. 2002.
Tutor2u - www.tutor2u.net
HSBC – www.hsbc.co.uk
Lloyds TSB – www.lloydstsb.co.uk
NatWest – www.natwest.co.uk
Guardian Unlimited - www.guardian.co.uk/
Various search engines
www.ask.co.uk
www.google.com
www.altavista.co.uk
Various handouts from lessons.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
HND Business Course Book – Marketing – BPP Publishing. 2002.
HND Business Course Book – Organisations, Competition and Environment – BPP Publishing. 2002.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
Business for Higher Awards Second Edition. Authors Dave Needham, Rob Dransfield, Martin Coles, Rod Harris, Maureen Rawlinson.
