Lade Inhalt...

Critical analysis and evaluation of strategies adopted by world class financial institutions (2006)

Citigroup, Hongkong Bank (HSBC), Deutsche Bank and Goldman Sachs

Hausarbeit 2007 40 Seiten

BWL - Unternehmensforschung, Operations Research

Leseprobe

Table of Contents

1. Introduction

2. Question 1
2.1. Core competencies and dynamic capabilities of Citigroup, Hongkong Bank (HSBC), Deutsche Bank and Goldman Sachs
2.2. Corporate governance: a source of competitive advantage?

3. Question 2
3.1. Competitiveness of Deutsche Bank and Citibank

4. Question
4.1. The future of financial services

5. Conclusion and Recommendation

6. List of References

7. Appendices

List of Appendices

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

Appendix G

List of Figures

Figure 1: Online banking users in Europe

List of Graphs

Graph 1: The top leading companies in the world,

Graph 2: Underperformance of Citigroup

List of Tables

Table 1: Core competencies of Citigroup, HSBC, Deutsche Bank and Goldman Sachs

Table 2: Citigroup’s growth in revenue, net income and in employees

Table 3: Number of banks per million of capita

1. Introduction

The world today is changing faster than ever before. Technological developments, financial constraints, expanding markets, mergers and acquisitions, new government legislation are all putting pressure on organisations to change and stay dynamic (Davenport and Short, 1990; Aijo et al., 1996). It is argued that organisations have to pay attention to environmental changes in order to survive in the market (Fahey and Narayanan, 1986). Especially the financial sector is driven by two key environmental features; global deregulation of the sector and global decline in cost and technological changes such as the use of electronic media for service provisions and greater use of the Internet for banking transactions (Grosse, 2004). Corporate Strategy is the cornerstone of the success or failure of a company. It gives direction to corporate values, goals, mission and culture.

This paper defines the core competencies and dynamic capabilities of four of the leading financial institutions (for a company brief refer to Appendix A, SWOT analysis Appendix B) as well as the importance of corporate governance. Furthermore based on the information gathered it will be discussed what key challenges Citibank and Deutsche Bank are facing, the significance of these challenges and how they might be overcome. Finally, strategic implementations are suggested.

2. Question 1

2.1. Core competencies and dynamic capabilities of Citigroup, Hongkong Bank (HSBC), Deutsche Bank and Goldman Sachs

In response to the dual process of deregulation and technological advance financial institutions must now develop strategies that enable them to establish a dominant position in the key service they choose to emphasize and build broader-based capabilities (Grosse, 2004). Successful strategies depend on the internal strategic capabilities and the external environment in which a company operates (Johnson, Scholes, Whittington, 2005) (for a detailed explanation refer to Appendix C). Moreover a company needs to have distinctive or unique capabilities that cannot be imitated or obtained by others to create and sustain competitive advantage. Prahalad and Hamel (1990) call this the concept of core competencies. They define it as the “… collective learning in an organisation, especially how to coordinate diverse production skills and integrate multiple streams of technology …” (Prahalad and Hamel, 1990 p. 82). However there are three different schools of thought on the definition of this concept (Aung and Heeler, 2001) (refer to Appendix C). A core competence of Citigroup and HSBC is their network of retail affiliates, which is much more extensive than of any other financial institution worldwide and therefore allows them to provide superior point-of-sale dealings with clients worldwide (Grosse, 2004). Besides this Citigroup and Goldman Sachs have build competitive advantage in the USA and Europe by their core competencies of offering a superior service to corporate clients. They are the leading provider of corporate financial services (Grosse, 2004). A core competence of HSBC which distinguishes it from its competitors might be its unique culture in managerial practices with thrift being an important aspect of it (Grosse, 2004). Deutsche Bank’s core competence is its knowledge in investment banking and risk management where it has a competitive edge (Deutsche Bank, 2006)

But core competencies on its own are not sufficient enough to gain sustainable competitive advantage; a firm needs to have dynamic capabilities (Johnson, Scholes, Whittington, 2005). Teece, Pisano and Shuen (1997) define it as “an organisation’s abilities to develop and change competencies to meet the needs of rapidly changing environments”. Generally these capabilities refer to more formal organisational processes such as product development, major strategic moves such as acquisitions and particular ways of decision-making in companies or so-called embedded organisational knowledge (Eisenhardt and Martin, 2000; Zollo and Winter, 2002). The concept of dynamic capabilities complements the assumption of the resource-based view of the organisation. Both focus on the internal capabilities of firms, the so called “inside-out” view, which is in contrast to Porter’s “outside-in” view (Mintzberg, Ahlstrand, Lampel, 1998). Citigroup for example created a new virtually service that hasn’t been offered before in response to the growing Internet-banking market (Grosse, 2004). Furthermore, Deutsche Bank, Citigroup and HSBC were developing complementary Internet services in order to increase the portfolio of services and thereby avoiding being pulled into an aggressive competition for standardized services with eventually unprofitable margins (Grosse, 2004). Another approach of these banks is the convergence among major financial service providers towards the “allfinanz” model, i.e. providing all kind of financial services: commercial banking, investment banking and insurance. These banks possess now a broader scope of financial services to clients, which is a competitive advantage over rivals. However there are some risks as all three business segments need to be combined, although they are quite different (Grosse, 2004). As a consequence of the difficulties that may arise Citigroup has sold off the Travelers property/casualty business and Goldman Sachs stayed completely away from commercial banking. Goldman Sachs sees its competencies in investment banking, it is the largest investment banking organisation that is not affiliated with a commercial bank or other non-bank entity (Grosse, 2004). Furthermore, to stay competitive Citigroup follows an aggressive expansion policy through mergers and acquisitions both in emerging and industrialized countries (www.corporateinformation.com). HSBC on the other side is concentrating its presence in emerging and less-developed countries, which makes it vulnerable to market crisis arising in these countries. However, HSBC is a leader and trend setter in mergers which gives them competitive advantage. Deutsche Bank on the other side, in response to the growing competition, has decided to move into a more focused profile, emphasizing investment banking and corporate commercial banking. However, they also engage in mergers and acquisitions to gain competitive advantage (e.g. Bankers Trust in 1999). Their level of internationalisation increased from 60% in 2003 to 72% in 2006 (Deutsche Bank, 2006). The next table summarises the core competencies of the four banks.

Table 1: Core competencies of Citigroup, HSBC, Deutsche Bank and Goldman Sachs

illustration not visible in this excerpt

Source: adapted from Grosse, 2004

Interestingly none of the banks follow a cost-leadership, they are all looking for other ways to differentiate their services from each other, i.e. by offering a broader-scope service, geographically broad distribution, use of the Internet to offer “a any time, any place service” and a differentiated quality of service. These seem to be core competencies of all four banks (Grosse, 2004).

2.2. Corporate governance: a source of competitive advantage?

By definition corporate governance refers to the “... influence and power of the stakeholders to control the strategic direction of the organisation in general and, more specifically, the chief executive and other senior officers of the organisation” (Lynch, 2006 p. 362). However several definitions exist. De Witt and Meyer (2004, p. 595) use the following: “it deals with issues governing the strategic choices and actions of top management”. The board of directors is typically central to corporate governance. Its relationship to other primary participants, typically shareholders and management, is critical. Additional participants include employees, customers, suppliers, and creditors (www.corpgov.net). Corporate governance should stress the corporate responsibilities of a board of directors, and differentiate the director’s role from those of shareholders and managers (Osseo-Asare, 2007)

Former financial scandals and legal actions forced Citigroup to restructure its corporate governance. Under its former CEO Sanford Weill, the concentration was primary on mergers and acquisitions to increase profits. He was setting though profit targets in order to make the deals lucrative, whereas ethical issues were not of importance (Lynch, 2006). After the acquisition, the management team would usually engage in aggressive cost-cuttings to build up cash for the next deal (www.wikipedia.org). One of the cost-cuttings involved reduction of employees, which led to serious problems as there were not enough people available for undertaking governance activities and central monitoring of the bigger group became more complex. However, net revenues doubled, and net income increased even to a higher degree in the period 1998-2004 (Lynch, 2006). After Charles Prince took over as CEO in 2003 the strategy changed and with it the number of employees increased at a higher proportion than before.

Table 2: Citigroup’s growth in revenue, net income and in employees

illustration not visible in this excerpt

Source: adapted from Lynch, 2006, Citigroup Annual report 2005 and 2006

Prince shifted the focus more towards organic revenue growth, i.e. selling more products instead of focusing on acquisitions and cost-cutting alone to increase profits (www.wikipedia.org). However, since 2002 some top acquisitions have taken place (e.g. Federated Department Stores, Sear Roebuck & Co) (Wighton, 2007).

According to Fortune Global 500, Citigroup ranked 2005 among the top-leading companies in the world and Forbes 2000 ranked it first of the world’s biggest companies, measured by a composite of sales, profits, assets and market value (www.forbes.com) (Appendix D).

Graph 1: The top-leading companies in the world, 2005

illustration not visible in this excerpt

(based on net income in US$ millions)

Source: www.wikipedia.org

However, Prince realized that in order to reach the goal of becoming the most respected global financial services company it has to restore its reputation which suffered from various scandals by regaining the trust of their clients, employees and shareholders (Lynch, 2006). Now the concept of corporate social responsibility comes in, which means by definition …” the ways in which an organisation exceeds the minimum obligations to stakeholders specified through regulation and corporate governance” (Johnson, Scholes, Whittington, 2005, p. 191). Prince’s approach was the introduction of an ethically “five-point plan” to enhance corporate governance as well a 13-pages guideline on corporate governance for its Board of Directors. The guidelines are thought to support the mission of Citigroup and therewith regaining the trust of its stakeholders: aspire to the highest standards of ethical conduct: doing what we say; reporting results with accuracy and transparency; and maintaining full compliance with the laws, rules and regulations that govern the Company’s businesses (Citigroup, 2007).

Additionally, Citigroup developed a Code of Conduct and a Code of Ethics for its financial professionals (Citigroup, 2007a). According to its documents Citigroup acts social responsible and can be considered as an ethical company (Appendix E). Moreover, by observing the statements of Citigroup it becomes obvious that not only shareholders but a broader range of stakeholders are influencing Citigroup’s behaviour, which goes along with the theory of Freeman & Reed (1983).

However, the last decision Citigroup announces was to relocate or discharge 15,000 jobs as part of a restructuring programme in order to improve its responsiveness to clients and to cut costs (Wighton, 2007a) as Citigroup has underperformed concerning its long-promised operational improvements and stock prices are below World Banks Index (Financial Times, 2007).

illustration not visible in this excerpt

Graph 2: Underperformance of Citigroup

Source: Financial Times, 2007

Moreover, its expenses were enormous against its earnings (Wighton, 2007a) Compared to the year 2005 the costs in 2006 increased by 15% whereas the earnings only increased by 7% (www.reuters.com). Reasons may be the failure of integrating its acquisitions properly, Prince’s leadership style and weak performances in some of its business sectors. However, this example shows the paradox of responsibility and profitability/accountability. The decision is certainly not in the interest of its employees, but definitely in the interest of its shareholders to whom Citigroup is highly accountable.

Nevertheless by following its own Code of Conduct, Ethics and Corporate Citizenship, Citigroup will surely become the most respected global financial services company. To ensure therefore that Citigroup is implementing business practices that meet the highest standard of professionalism, integrity and ethical behaviour, the “Business Practices Committee” was established (Citigroup, 2007c) which guides and oversees the practices. The listing in the Dow Jones Sustainability World Index and the FTSE4Good Index in 2006, which identifies the leading sustainability-driven companies, based on economic, environmental and social criteria (www.sustainability-index.com) shows that Citigroup is on the right path.

Therefore it can be said that if Corporate Governance, Business Ethics and Corporate Social responsibility is effectively linked together and operates towards the same goals and objectives, a win-win situation will arise, and therewith a competitive advantage can be achieved.

3. Question 2

3.1. Competitiveness of Deutsche Bank and Citibank

Deutsche Bank AG, founded in 1870, is now one of the world’s leading financial institutions and an “allfinanz” bank (www.deutsche-bank.de). Citibank, the largest US bank on the other side is the consumer and corporate banking arm of Citigroup. It delivers a wide array of banking, lending and investment services to individual consumers, as well as to small businesses with up to $10 million in annual sales in over 100 countries worldwide (www.citigroup.com).

According to Farnham (1999) the PEST analysis and Porter’s (1980) five forces model provide a useful start for analysing the external environment and gives a crucial set of inputs for strategic development and implementation. Whereas the PEST analysis examines the general business environment in order to manage future opportunities and threats from probable changes in the environment (Mullins, 2002; Farnham, 1999) represents Porter’s (1980) model the microeconomic environment and helps to identify the level of competition within the industry (Stonehouse, 2001). It is essential to consider the characteristics of the industry in regard to technological and economical aspects and the influence of the government in regulating competition (Porter, 1980). (For a PEST and Porter’s 5 forces analysis refer to Appendix F). However it is essential by using this model to consider the characteristic of the industry in regard to technological and economical environmental aspects and the influence of the government in regulating competition (Porter, 1980). However, some criticism has been made that the five forces model are an analytical tool and rather static. Rumelt (1991) claims that companies have company-specific preferences of strategic development regarding profitability, which have larger influence than the competitive forces of the environment. Furthermore, the five forces largely ignore the human resources aspect of strategy (e.g. resource-based view of Barney, 1991) which will be of increasing importance in the future (Farnham, 1999).

As can be seen from both analyses the development of technology has lowered entry barriers as has the process of deregulation. Furthermore new suppliers can offer competition to banks because they are no longer required to provide the full range of banking services, or to undertake all of the processes involved in supplying banking services. In addition, consumers now have more information about a wider range of alternatives to bank deposits for holding liquid funds (Llewellyn, 1996). This makes strategic thinking and exploration of new sorts of business designs more important than ever. Moreover it seems quite likely that the main trends in Europe as well as in the USA will be a rapid migration to the online world, new technologies in banking and harmonization in Europe, which will make it hard for the traditional retail banking where most branches operate as bureaucratic elements of a large network to survive. However, it also became clear that banking customers still want face-to-face contact and consultation that only branches can provide (Nicholson, Kurstjens, and Orlander, 2003). But the operations of bank branches have to become more efficient in order to become a competitive advantage. As Llewellyn (1996) argues customers have more choice nowadays as there are more distribution channels available. Today customers advisory services are mainly branch based, so branches are still the most important access point to the bank, despite phone and internet-banking. In this sense both Deutsche Bank and Citibank can profit of its enormous worldwide retail affiliates. However, wireless-based Internet delivery technologies, PDAs etc. will have a radical effect on the mix of distribution channels used by customers. More and more customers will recognise and appreciate the convenience of the new technologies, so that the interaction between bank and customer will take place via a wide variety of distribution channels. Again both financial institutions have done steps in the right direction. With the transparency offered through the Internet more and more customers will receive comparative information on products and their performance and will find it easier to compare and purchase products elsewhere as discussed by Llewellyn. Therefore both institutions need to offer a wide range of the best financial products on the internet as well as on any other channel. Performance and cost pressure will support the consolidation of the market for product provision. If Deutsche Bank’s own products become less competitive they will need to cooperate with other providers to gain the necessary expertise and economies of scale, like Citigroup who is going to merge with Nikko Cordial. Technological progress has the potential to increase economies of scale in a variety of bank products and services, such as payment-processing, cash management and back-office operations. It may lead to the development of new products and services that have more scale economies than traditional bank products (Bank of Canada, 2004)

[...]

Details

Seiten
40
Jahr
2007
ISBN (eBook)
9783640676590
ISBN (Buch)
9783640676811
Dateigröße
1.2 MB
Sprache
Englisch
Katalognummer
v154700
Institution / Hochschule
University of Sunderland
Note
A (73%)
Schlagworte
Critical Citigroup Hongkong Bank Deutsche Goldman Sachs

Autor

Teilen

Zurück

Titel: Critical analysis and evaluation of strategies adopted by world class financial institutions (2006)