These are good performance criteria because they are done my an independent survey, however, without knowing where the figures come from to make up these charts and taking branding into consideration they become fairly invalid, as RBS has a bigger brand than Lloyds TSB and so generates a higher share price and bigger profit through utilising it’s brand names and big status.
Appendix 2, Figure 1, shows how the banking sector has performed compared to the FTSE 100, where these banks sit. It is a good performance measurement because it shows whether they are over or under performing in comparison to the industry average. Looking on FT.com all of the banks are performing above the Banking sector average.
Appendix 1, Table 7 shows the profit before tax for RBS and Lloyds TSB, you can see that from 2000 to 2005 Lloyds TSB has doubled their retail bank income whilst during the same period RBS has increased it by 1/5th this is a vast difference and perhaps you would of thought the leader should be the one with the biggest increase, we will see in sections B and C how their strategy will have effected these figures.
After assessing the different performance criteria in appendices 1 to 3 I have come to the conclusion that the leader for my sector is RBS and the laggard is Lloyds TSB. The laggard was torn between Alliance & Leicester and Lloyds TSB because they are both performing at the bottom of the market, however, I concluded that if I add branding and reputation into the equation Lloyds TSB is the ultimate laggard because of the negative reputation it has received in comparison to Alliance & Leicester.
Analysis of the strategies that have been followed by the leader and laggard in the last five years
Lloyds TSB Strategy for 2005:
In 2003 they developed customer relationship programmes to deliver higher revenues per customer in the retail market and according to their press releases this strategy seems to be working “Our customer satisfaction scores hit record highs in 2005, again reflecting the improvement programmes established over the last couple of years, and we will continue to drive further improvements as we seek to differentiate our service performance against that of our Competitors.”
Lloyds TSB say they are “committed to achieving top performance in both effectiveness and efficiency. Effectiveness is the ability to recruit, develop and retain loyal customers who think of us first for their next financial services need. Efficiency is the ability to provide service and sales at a lower cost so that we can give our customers better value. We believe that in order to achieve our goal we must be customer rather than product centric.”
Lloyds TSB have a strategy to deliver short term financial goals that will enable them to invest in the long term health of the business which then makes future earnings growth sustainable.
One of the main strategies for Lloyds TSB is to increase their market share with a slow growth process to become market leader. They intend to do this by focusing their core operations on UK retail banking and increasing brand awareness, reputation, customer loyalty and a general increase in new customers, this is one strategy that is working “Target customer current account recruitment increased by 28 per cent, compared with 2004.”
Lloyds TSB Strategy for 2000:
Lloyds TSB main objective in 2000 is to maximise shareholder this is to be achieved by three strategic aims of being a leader in their chosen markets, being first choice for customers by better understanding and meeting their needs, and by driving down day-to-day operating costs.
At this point Lloyds TSB were still on a rapid growth expansion as in the year 2000 alone they tried to meet too many objectives and went into acquisitions and alliances when they were the wrong move.
Lloyds TSB tried to become market leader by using acquisitions; they bought outright Scottish Widows to give them market leader in long term savings products. They also bought Chartered Trust to give them market leader in motor finance.
To achieve their second strategic aim they introduced an enhanced model of Customer Relationship Management (CRM). This improved customer loyalty, and increased revenue growth in the retail business.
They believe their future strategy is about the continuing investment in our growth businesses to deliver organic revenue growth through customer relationship management, leveraging the strength of their brands, reducing day-to-day unit costs and driving forward the e-commerce strategy with Centrica and Goldfish.
Lloyds are at the forefront of technology advances, they created a new processing system (iPSL) in conjunction with rival Barclays to improve economies of scale needed as costs of processing cheques rise.
Analysis of Lloyds TSB strategy:
Lloyds TSB used to be the leading commercial bank pre 1990’s because investors valued the amount of history and strong background they had achieved since 1765 when they were originally formed.
However, in the 1990’s Lloyds TSB developed a ‘high growth’ strategy and decided to expand into the USA, New Zealand and Europe. This had a disastrous effect on Lloyds TSB and as a result they went quite quickly from being a market leader to being a laggard.
They re-developed their strategy and sold off all foreign assets, enabling them to focus on their core service of UK retail banking so that they could try and increase their market share to become market leader again.
One of their main strategies now is to attract, retain and develop customer relationships in all areas of their business, which now mainly focuses on UK retail.
They have made these changes in their strategy from rapid growth to slow steady growth because the market was no longer on a rapid growth spurt.
As most of the industry diversifies into emerging markets and takes their focus off the UK retail market Lloyds TSB do the opposite and remain solely focused on the UK retail market. Perhaps this is along the lines of ‘once bitten, twice shy’, meaning that they have tried to enter these emerging/foreign markets before but failed miserably and ended up selling off the companies they bought. In hind sight they might have been more successful had they entered into alliances with these companies rather than buying them outright like they did with Scottish Widows and a Mexican bank purely to become market leaders by market share.
They also had to make changes to their strategy because they were quickly loosing their brand image and market share in what is their core market and were once ‘their’ market.
Their current strategy seems to be working for them as many of the tables and figures show that over the past few years since they have sold off their ‘bad eggs’ and changed their strategy they have started to regain market share and increase profitability again.
RBS Strategy for 2005:
RBS established Retail Markets in order to strengthen the co-ordination and delivery of their multi-brand retail strategy.
RBS believe in using acquisitions and alliances to meet their strategic aims.
The integration of Churchill, acquired in September 2003 was completed in September 2005 with benefits in excess of those forecast at acquisition.
RBS have a strategy of increasing shareholder wealth through increased income and diversification. They have taken steps to redefine their credit policy and improved their recoveries process to reduce costs and bad debt so that profits will increase.
Their strategy for 2005 onwards is to diversify into global emerging markets, like China, Brazil, Russia, India and China. They intend to do most of this through strategic alliances, like with Bank of China, although in some countries like Germany they are setting up their own RBS brand from scratch.
RBS Strategy for 2000:
One strategy is to grow their income while making substantial cost reductions and maintaining credit quality.
During 2000 RBS put in place multi-brand, multi-channel strategy. They want to grow on all fronts not just the UK retail banking industry and so have a multi-brand strategy utilising the various brand they have under the RBS group across the world.
In terms of the UK retail banking market their strategic aim is to increase their market share at the same time as increasing shareholder wealth, and to do this through growth of income.
RBS implemented a major business re-engineering programme which reshaped their UK banking operation and enabled them to become the fastest growing bank in the UK during the five years to 1998. This achievement created the basis for the successful takeover of Natwest.
RBS main focus over 2000 has been on integration. Their strategy is to only pursue those which we believe can add significant sustainable shareholder value.
The acquisition with Natwest allowed RBS to release significant further value for shareholders. They intend to create further shareholder wealth through integration and acquisitions in the future. So their strategy for 2000 forwards would be for growth and shareholder wealth through acquisitions.
Analysis of RBS strategy:
The change in strategy for RBS is not because of trends in the industry but more because they are now market leader and must change their strategy from rapid growth to become market leader to sustained growth to keep them at this position.
They seem to have gone from not being customer focused but more profit/income focused to being more customer focused as they have realised that good customer relations is what is needed to retain their customers.
Many of the top companies are now trying to get into emerging markets and so to fit in with the times and not miss out on potential growth, increased profit and increased market share they need to be in there at the heart of these emerging markets.
This is what they have changed to do, in 2000 it was more acquisitions and integration that enabled them to obtain growth of income, market share and shareholder wealth, but now it is more alliances that will enable this as it offers entry to the market with significantly reduced costs and risks.
Evaluation of the strategies that have been followed by the leader and laggard in the last five years
Evaluation of modifications in Lloyds TSB strategy from 2000 to 2005:
The fact that Lloyds TSB is laggard is largely down to the strategy it followed over the past five years.
They are market leader when it comes to innovation in products and technology so why did they follow strategies that lead them to become a laggard? The answer is because it was what they thought everyone else was going to do and they thought they would get in there first to retain their market leader status.
Some of their strategies that caused them to become a laggard include rapid growth, diversification into emerging and foreign countries, purchasing outright companies rather than undertaking strategic alliances.
Lloyds TSB believe that they are beginning to meet some of their strategies “In terms of delivering the Group strategy, we have established better sales momentum and stronger levels of Customer acquisition in our banking businesses and delivered good sales growth in our life assurance Business over the course of the year. Our markets shares are either stable, or growing, in most of our key Product lines.”
Some theorists believe that performance should not just be measured on a financial basis.
The Balanced Scorecard was developed by Prof. Robert S. Kaplan and Dr David P. Norton, at the Harvard Business School. “It was designed to improve current performance measurement systems by providing alternatives to managing organisational performance exclusively through financial measures.”
“The balanced scorecard suggests that we view the organisation from four perspectives, and to develop metrics, collect data and analyse it relative to each of these perspectives:
- Customer satisfaction;
- Enhancement of internal processes;
-
The creation of capabilities in employees and systems; and financial.”
Lloyds TSB already seem to be implementing the balanced scorecard approach because they measure their performance in terms of the customers satisfaction and are constantly trying to enhance their internal processes, e.g. iPSL.
Evaluation of modifications in RBS strategy from 2000 to 2005:
You could say that the extent to which RBS is leader is down to the strategy it followed over the past five years. They followed a variety of strategies that enabled them to grow through strategic alliances, mergers and takeovers and organic growth.
According to RBS they believe that they have developed their strategies as the economy developed and thus profited from opportunities these developments brought, “The major economies in which we operate coped well with the challenges that arose in 2005. We expect a similar picture to emerge in 2006 and that such a scenario would provide many business opportunities. The growing strength and diversity of the Group should ensure that we are well placed to take advantage of these, for the benefit of our shareholders, customers and staff.”
Applying the balanced scorecard theory to RBS I would say that they rely more on financial performance measures than customer satisfaction or the enhancement of internal processes. If they use this they could measure their performance more accurately.
Their ultimate strategy has been to increase shareholder wealth and this has not changed from 2000 to 2005 but the method of getting there has changed on many occasions, e.g. from mergers to outright buying to alliances, inevitably they have all had the required result of increase income and shareholder wealth.
On example of their successful strategies is RBS and Bank of China strategic alliance. They are working with Bank of China to develop business co-operation initiatives in areas such as credit cards, wealth management and corporate banking. They are also supporting Bank of China in key infrastructure areas, including risk and financial management, human resources and information technology.
If they have simply gone and set up a RBS bank in China, after fighting off fierce regulations they would then incur great set up costs and also have the problem of branding as no one would of heard of them so they will have to offer greater incentive to bank with them.
On a whole RBS has moved from integration to alliances, this is a very good move as it reduces the costs and risks faces by RBS yet allows them to enter new markets and still grow and increase shareholder wealth.
Appendix 1
Table 1 – ROE and P/E of UK retail Banks:
Recent Return on Equity (ROE) and Price Earnings Ratio (P/E) figures comparing Lloyds against RBS and two of the other top 4 UK retail banks shows:
“U.K. Bank TTM Ratios
*Data provided by Capital IQ, a division of Standard & Poor's. P/E numbers reported on a normalized basis to adjust for the impact of extraordinary items”
Table 2 – CAPM of top 5 UK Retail Banks:
Rf = 4.43% currently for Treasury Bills, Rm = 7.5% currently for FTSE 100 return.
I have chosen to use the FTSE 100 rate of return because all 6 companies are listed as being in the top ten largest listed UK companies by equity market value and should therefore give a more accurate CAPM figure.
Table 3 – Earnings Per Share (EPS) in pence:
Table 4 – Share Price Performance:
Table 5 – Return on shareholders funds (ROSF):
Table 6 – Return on Capital Employed (ROCE):
Table 7 – Leader & Laggards’ profit before tax:
Appendix 2
Figure 1 – FTSE 100 V Financial Services over past 5 Years:
Figure 2 – New companies by business sector:
Figure 3 – Kaplan and Norton’s Balanced Scorecard:
Appendix 3
Figure 4 – UK Premium and Packaged Accounts Market Share:
Figure 5 – UK Debit Card Market Share 2005:
Figure 6 – UK Credit Card Market Share 2005:
Figure 7 – UK top 5 Secured Personal Loan Providers 2005:
Figure 8 – UK Top 9 Unsecured Personal Loan Providers 2005:
Bibliography & References
Business Source Premier
FAME Database
http://business.guardian.co.uk/
http://uk.finance.yahoo.com/
www.balancedscorecard.org/basics/bsc1.html
www.barclays.co.uk
www.dmo.gov.uk/index.htm
www.fool.com/index.htm
www.fsa.gov.uk
www.ft.com
www.hbosplc.com
www.hsbc.co.uk
www.investorrelations.lloydstsb.com/media/PDF_IR/2005_LTSB_Full_Results.pdf
www.lloydstsb.com
www.londonstockexchange.com
www.mintel.com
www.rbs.co.uk
www.reuters.co.uk
www.statistics.gov.uk/glance/
www.timesonline.co.uk/
Kaplan and Norton, The Balanced Scorecard: Measures That Drive Performance, Harvard Business Review, January-February 1992
http://www.investorrelations.lloydstsb.com/reports_and_accounts/2005_results_highlights_page.asp
http://www.investorrelations.lloydstsb.com/reports_and_accounts/2005_results_highlights_page.asp
Lloyds TSB 2005 Annual Accounts and Reports – Retail Bank section
Lloyds TSB 2005 Annual Accounts and Reports
Kaplan and Norton, The Balanced Scorecard: Measures That Drive Performance, Harvard Business Review, January-February 1992
Sourced: http://www.balancedscorecard.org/basics/bsc1.html
Section headed “Outlook” in RBS 2005 Annual Accounts and Reports
Figures Sourced: Relevant Companies Accounts at FAME Database (https://fame.bvdep.com/)
Figures Sourced: Relevant Companies Accounts at FAME Database (https://fame.bvdep.com/)
Sourced: http://investaquest.londonstockexchange.com/NR/rdonlyres/D40CB1C9-F46F-4378-8FBF-7571118FBFDD/0/CorpMag0412.pdf
Sourced: http://www.balancedscorecard.org/basics/bsc1.html
Sourced: Mintel Estimates - Premium and packaged accounts market share, 2005
Sourced: Mintel – UK Credit and Debit Cards Market Share 2005
Sourced: Mintel – UK Credit and Debit Cards Market Share 2005
Sourced: NOP / Mintel – UK Personal Loans 2005
Sourced: NOP / Mintel – UK Personal Loans 2005
