INTRODUCTION
Every organization must interact with its internal and external environment in its day to day operations. The nature of these interactions to a great extent determines the survival of any organization. That is why every organization has to understand what is going on within and around it. These bring into focus how economic, political, legal, technological, environmental and social forces affect HSBC.
While battling with these external forces, there are other internal forces which are inherent in the banking sector that affect HSBC. In view of these, the bank has some competitive advantages which have enabled it to compete favourably with other players in the industry.
However, the tool used to scan the environment of HSBC to determine its success within the environment has some limitations. These limitations are equally x- rayed in the work.
QUESTION 1: HSBC AND ITS MACROENVIRONMENT
ECONOMIC FACTORS
It is a known fact that every organization must interact with is external environment during the course of their business. Economic factors are basically those factors that relate the organization of money and resources within HSBC especially in terms of the production, distribution and consumption of their financial services. This will be discussed under sub headings like GNP trends, interest rate, money supply, inflation, unemployment, disposable, income.
GNP Trends
Gross National Product (GNP) is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad, minus income of non resident located in that country). The UK economy grew at its fastest rate for two years in the third quarter of 2006. It grew by 0.7% between July and September. This takes the annual growth rate up to 2.8%. It will further increase following the announcement of 5% interest rate by the Bank of England.
This will make borrowing more expensive, and less attractive to investors who would refrain from borrowing for investment purposes. HSBC may probably advance less credit causing its profit to dwindle and shareholders' earning would equally be reduced.
Money supply
This is simply the total amount of money circulating in the economy (Anderton, A. 2006). In the UK, there are two types of money supply which are namely narrow and broad money with narrow money acting as a medium of exchange while broad is narrow plus near monies. Money supply is important because it has a link with inflation. This is illustrated as Velocity * Money supply = real GNP * GNP deflator.
In other words, if the quantity of money in circulation grows faster than the real GNP described as unproductive expansion, inflation is most likely to follow. It will affect HSBC because lending becomes very expensive. The bank will lose earnings because activities will be reduced.
Interest rate
Interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned. This rate has enormous consequences on the activities of HSBC. In July 2006, the interest rate was 4.5%, 4.75% in august and now 5.0%. This caused inflation to edge up to 2.5% as against 2.4% in the months before august. The rate at which customers acquired banking services improved tremendously.
It is obvious that a fall in the interest rate leads to an increase in investment expenditure whereas a rise in the interest rate leads to a decrease in investment expenditure. This is the direct consequence of the current 5.0% regime.
HSBC earnings will be affected because borrowing for investment expenditure will definitely decline. It will choke off economic growth; increase the cost of debt, causing widespread problems for individual. People will overestimate risky investment and reassess risk. The beneficiaries will be savers. Thus, cause people to save.
Exchange rate
This is the rate at which a country's currency exchanges with other currencies in the world. The GBP has been relatively stable against the dollar. Exchange rate depreciation does affect HSBC directly or indirectly. It can affect the structure of HSBC assets and liabilities denominated in foreign currencies, and its off balance sheet exposure and non asset based services.
It can indirectly affect demand for loans, the extent of the bank's competitive edge and other banking condition. It can affect domestic firms, increase credit risk and liquidity risk.
Inflation and unemployment
Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Inflationary trends and unemployment do affect HSBC negatively.
POLITICAL AND LEGAL FACTORS
Employment laws
This is a body of laws, administrative rulings, and precedents which addresses the legal rights of, and restrictions on workers and their organizations. In employment laws, there are issues that affect the smooth operational running of HSBC. These are namely strikes, pickets, boycotts, unofficial industrial actions, trade unions and other members. Their ...
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Inflation and unemployment
Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Inflationary trends and unemployment do affect HSBC negatively.
POLITICAL AND LEGAL FACTORS
Employment laws
This is a body of laws, administrative rulings, and precedents which addresses the legal rights of, and restrictions on workers and their organizations. In employment laws, there are issues that affect the smooth operational running of HSBC. These are namely strikes, pickets, boycotts, unofficial industrial actions, trade unions and other members. Their overall effect could be enormous on HSBC and the economy in general.
Minimum wage
Wages paid out is part of operational cost of HSBC. Recently, the minimum wage in the UK was increased from £5.05 to £5.35 for adults aged 22 and over. It equally increased for other age categories. The consequences are that the operational cost will be on the increase, efficiency may probably reduce, and the net profit of the bank will decline. This will affect the expectations of the shareholders as dividends will drop
On the other hand, employees will have more money for their consumption. It will further cause the country's productivity level to move up as more goods will be needed.
Work and families bill
This bill will be birthed soon. It concerns balancing work and good parentage. The law will make it lawful for maternity leave to be extended to nine months. In addition, paternity leave will soon be a reality. It means HSBC will be paying out extra three months salaries for mothers on maternity leave. This extra expenditure is unproductive and reduces HSBC efficiency.
Age discrimination
The current issue now is age discrimination at work. The bank can not discriminate on age with regard to employment. It is most true that younger people are more productive, proactive, dynamic and resourceful than older people. This law will cause the bank to employ both young and old people. The effect might be that zeal. Dynamism, and approach to work which have established the bank as a leader in Uk may be eroded.
Taxation
The most contemporary issue is the warming issued by HSBC that it could move its headquarters out of London as a result of huge corporation tax which is at 30% of profit. This is high and outrageous. The percentage compares favourably with other G7 nations e.g. France 34%, Japan 40% but not with other Europeans countries like Ireland at 12.5%.
The tax reduces the profits of HSBC. The investors, shareholders of the bank receive lower dividend as a result of the tax. If HSBC pulls out of the UK, which generated which is committed to social services will decline. Moreover, investment will probably be discouraged because investors want ventures where their investment will be maximized.
Taxation raises the bank's cost of loans which discourage entrepreneurs away from information intensive financing and into unmonitored financing. It reduces the supply of deposits.
TECHNOLOGY FACTORS
In banking and financial markets, the technologies have primarily affected the velocity and volume of transactions. Both domestic and foreign transfers and other banking services have surged and the rate at which they are done has increased. This is as a result of emerging technology advances. In online transactions, where one makes a payment using debit and credits, it takes about 48 hours for the payment to be cleared. But, from January 2007, an emerging technology will complete the clearance in just minutes.
Government involvement in researches to further develop the sector is another issue. One of the distinct differences between technological innovation in the UK financial service industry and that in foreign nations is the level of government subsidy of technical developments that affect the financial service industry. For example, the smart card, the applications and functions was developed by the French Ministry of Post and Telecommunications (PTT). The government of UK should be more participative.
The sector does not encourage obsoleteness due to the nature of the industry combined with the activities of hackers who are out there to ruin the banks.
SOCIAL AND ENVIRONMENTAL FACTORS
The banks' waste disposal and energy consumption contributing to environmental hazards is under control. Their position is threatened by the green law which is in force. Environmental laws affect the bank. Income distribution contributes to the services to be offered by the bank. Higher income redistribution will ensure better businesses and vice versa.
The age, income, sex and population has a way of affecting the activities of HSBC. The level of education or enlightenment informs people about the products and services of banks. The level will affect their willingness to transact or not to transact.
QUESTION 2: HSBC AND ITS MICROENVIRONMENT
Competitive Rivalry
This describes the intensity of competition between existing firms in an industry. It is true that highly competitive industries generally earn low returns because the cost of competition is high. In the banking industry which is the focus of discussion, competition brings about HSBC offering customers the most attractive combination of performance features, introducing new products, or creating a stronger brand image than competitors like Barclays, TSB Lloyds, RBS, and NatWest etc.
The industry is not dominated by two or three banks that are battling to achieve market leader status, and the rules of the game are well established. In this case, the rivalry is not so intense. However, Customers can easily switch between some products. Intense rivalry is likely when customers in the banking industry can easily switch to other banks. In these situations, the banks will be vying for market share.
The market for banks is not growing too fast. The banks are unable to grow their market without taking market away from other competing banks. In this situation, rivalry is more likely.
There is no exit barrier in the industry which will make rivalry intense. The brand identity brings about intense rivalry as other competing banks will be forced to outperform their rivals by adopting active strategies. Their products are basically the homogenous. This will most likely make rivalry intense.
Entry barriers
The retail banking market in the UK is still extremely fragmented and characterized by a range of entry barriers. These barriers which are artificial result from specific regulation or conduct of banks and concern, for instance, access to networks or discriminatory fee structures.
Some banks have products which are associated with switching cost. This cost contribute to clients holding their accounts for about a decade and restricting customer mobility which is essential to help realize the benefits of a competitive banking market. Switching cost is used by banks because profitability tends to be lower in markets where customers are more mobile.
Entry barrier can come in the form of government regulations. The Financial Services Authority (FSA) has the responsibility to authorise or licence suppliers of financial services. In this role there is a case for excluding companies that can not or will not meet certain minimum standards of consumer protection.
Capital requirement is another source of entry barriers for entrepreneurs wishing to enter the banking industry. The capital needed to establish a bank is enormous. The first one is that individual capital requirements are set at firm-specific level. The second one is that the FSA may at any time vary a firm's requirement. Finally, the FSA has declared that it will consider it to be good management practice in the financial services industry for a UK bank to hold an appropriate capital buffer above the individual capital ratio advised by the FSA.
For most banks and building societies, individual capital requirements exceed the Basel minimum of 8%. The FSA considers that the basic 8% regulatory minimum capital requirement is only appropriate for a well-diversified firm whose business, management, systems and controls are strong and where the risks that it is exposed to are captured adequately by the existing capital model.
The threat of substitute products
The threats of substitutes exist in the banking industry. The demand for services of HSBC is affected by price change in the services offered by other banks like Barclays, RBS, NatWest, TSB Lloyds, etc HSBC does not charge international students account £5 monthly but Barclays does just to make it look more superior. These close substitutes constrain HSBC from raising their prices.
Since threats of substitutes come from outside the industry, the prices charged by post office banking related- services and that of building societies come as threats. Clients would decide to keep the monies in their homes or use cards offered by high street retail outlets.
The internet technology offers a means of substitutes. Clients would make their payments over the internet rather than going to the banks for payments or transfers.
Bargaining power of consumers
Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes on HSBC. In the banking industry, customers bargaining power depends on a number of factors which will be discussed below.
The banking industry in the UK does not comprise of small operators. They are all big banks in their own rights. The consumers cannot mount pressure on them. However, their services are mostly undifferentiated. The consumers' bargaining power will be high as a result of it.
The banking services are intangible. It is hard for the consumers to quantify the cost of such services. In this case, the bargaining power of the consumers will be low. Banking services are of strategic importance to the banking public. They can hardly do without it. It reduces their bargaining power because they need the services badly.
The public cannot produce and consume banking services themselves. They need to go to the banks to get these services. This transfers bargaining power to the banks. The customers in rare cases have high volume transactions. Often, they may hold one current account or just another service. Due to the fact that their transaction is not of high volumes, the bargaining power rests with the banks rather than the consumers.
Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. The banking industry is not domianted by few large banks as there are many large banks. The banks power will not be high here. There are substitutes for some banking services. Their power is reduced to an extent.
The switching cost for some banks' products and services can be high. This has reduced mobilty in the banking industry causing people to stay with a bank for over a decade. The high switching cost increases the power of banks. The banking industry has high barriers to entry. This this case their power is reduced.
QUESTION 3:COMPETITIVE ADVANTAGES OF HSBC
It will be of great significance to define the concept 'competitive advantage' as it will help in the understanding of the HSBC's position.
Competitive advantage can be defined as "when two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has potential to earn) a persistently higher rate of profit. In other words, it is the ability of the firm to outperform rivals on the primary performance goal - profitability (Grant R .M, 2002).
HSBC's competitive advantage over other banks in the financial services industry was achieved by offering consumers greater value by providing benefits and services that justifies value, and lower prices. The banks competitive advantages are discussed below;
Brand reputation
Firstly, brand reputation is one of the competitive advantages of HSBC. The bank has over 125 million customers around the world across its 4 Customer Groups in over 76 countries and operating from over 9500 offices. In September 2005, HSBC was voted 'Global Bank of the Year' by The Banker for the fourth consecutive year for its success in the delivery of banking services.
Customers have come to accept the brand HSBC as synonymous with quality and consistency. That is why the banks customers have remained loyal because the brand acts as a disincentive to providing poor quality. The brand performs numerous functions which are namely; a guarantee to customers of the quality of their financial services, it identifies the bank that they are legal and accountable for their services, incentive for customer satisfaction and a guarantee for risk reduction and reliability.
Enormous Resource Base
The resources of HSBC which gives it a competitive edge over other players in the banking would be grouped as tangible, intangible and human resources. The resources are quite enormous when compared with other players like Barclays, TSB Lloyds, Woolwich, RBS, NatWest, Bank of Scotland e.tc. The tangible resources are financial and physical - net income of over £ 2.1billion in the last financial year, presence in 76 countries, ranked 1st as tier one capital company, 9500 offices around the world amounting to real estate holding. The intangible resources are technology and internet based transactions, and worldwide culture acquisition and management expertise. In November 2006, the bank was awarded Best Consumer Internet Bank - Global an evidence to the technological base by Global Finance Magazine.
Its management expertise in employee relations was rewarded by Times Graduate Recruitment 2006 as employer of choice. In addition, its human resources include skills and know how, capacity for communication and collaboration, and motivation.
QUESTION 4: LIMITATIONS OF FIVE FORCES
The model of five forces as postulated by Michael Porter in the early eighties has been criticized on a number of issues. The historical background forms the basis for the critics of the model. In the early eighties, the world's economic growth was cyclic. That's, recurring in nature. Most organizations at that time were positioned for survival and focused on ensuring that profits making was their overall objective.
Since business entities (Companies or Organisations) operate in a larger macro environment. There are forces and trends that shape the opportunities or pose threats to their survival and growth. These forces represent uncontrollable elements that business entities ought to monitor and respond to. In his harsh external environment, the organisations have to use the most advantageous strategy to attain their purpose.
Though the model still remains significant, its relevance is beginning to wane. Here, are the limitations of the five forces.
Assumption of classic perfect market
The model assumes that every organisation operates in a classic perfect market. This is a market that is charaterised by the following; all firms selling an identical product, all firms are price-takers, firms have a relatively small market share, buyers know the nature of the product being sold and the prices charged by each firm, the industry is characterised by freedom of entry and exit. The model finds it exceedingly difficult to have an important effect in a regulated economy.
Idea of competition
The model does not actually take into cognisance the strategies like planned coalition, electronic linking of information systems of all companies along a value chain, virtual enterprise networks etc. This is because the model is based on the initiative of rivalry where firms try to gain competitive advantages over other firms in the industry as well as over suppliers or customers.
Simple market strucutre
The model is best suited for simple market structure analysis. It is not a good tool for analysing complex industries associated with multiple interrelations, product groups, by products and segments. This is because shallow spotlight on particular segments of the company will bear the risk of not identifying important elements.
Static market strucutre
Finally, the model assumes that the market structures are relatively static. But, today's market structures is very dynamic as it is characterised by advancement in science and tecnology, active entry into the market and interatcions along supply chain have changed business models.
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