Analysis on HSBCs Reorienting Strategy from the West to East - Essay Example

? HSBC Bank’s Corporate and Global strategy Analysis on HSBC's Reorienting Strategy from the West to East Table of Contents Analysis on HSBC's reorienting strategy from the West to East  1. Introduction 2. Corporate Strategy of HSBC Bank 3. Scope for HSBC in the Emerging Eastern Markets 4. The Reliability of the Eastern Markets 5. The Major Resources of HSBC Bank 6. VRIN model 7. External Analysis through Porters Five Forces Analysis 8. The Other Side of Profitable Investments 9. Why Choose East over West? 10. How HSBC Can Make A Difference? 11. Recommendations for HSBC to Help Further 12. Conclusion HSBC Bank’s Corporate and Global strategy Analysis on HSBC's Reorienting strategy from the West to East Executive Summary HSBC is shifting its focus towards the Eastern countries in a much faster pace than expected. Most of the key activities of the bank are now controlled by their office in Hong Kong. Though their London office serves as a main branch, still it is reduced to the position of a ‘branch’ instead of being ‘head quarters’. The promising economy of the eastern countries lures several institutions like HSBC to invest in them. This paper explores the HSBC’s overall corporate strategy, its scope in the third world and the various challenges it faces in the eastern world. The paper puts forward a question whether it is worth taking all these risks as the eastern markets are as volatile as inviting. The study refers to a survey taken in Middle East, analyzes the internal and external environment of the eastern markets and concludes it would be mutually beneficial for HSBC to reconsider its decision. It recommends investing the same money and effort in the US and European markets than the eastern markets. Introduction HSBC has branches in over 86 countries, with more than 9500 branches all over the world. The Hong Kong Shanghai Banking corporation has the reputation of being known as the “The World’s Local Bank”. In 2010 HSBC chief moved his office from London to Hong Kong. With more than 220000 shareholders, they indulge in a comprehensive range of financial solutions including corporate investment banking, private banking, insurance, lending loans for house, automobile and business development. After the economic crisis of the 2008- 2009 and the European credit crunch, several financial institutions including HSBC are shifting their focus towards the emerging eastern markets. These institutions which were the backbone of the industrial development in the western countries are no longer ready to lend massive amount to the westerners. HSBC’s move targeting the eastern market creates an image that west is winding up quickly making way for eastern countries to gain momentum in the financial field. Economists all over the world pose two questions to HSBC Is the eastern economic growth a mere bubble or a really sustainable option worth enough to be investing billions of money on it? Do the BRIC and the CIVETS countries have enough disposable income, steady political structure and rich people to make HSBC’s move profitable? Shouldn’t companies like HSBC which have earned massive profits from the western market help the western economy by slashing interests in its time of crisis? Is it just on their part to invest all they have gained in the west, elsewhere? The paper explores HSBC’s corporate and global strategy in a detailed way to find the real answers for these questions. The first question is explored by means of various web references predicting the massive growth of the eastern economy. The second question analyzes the vital role institutions like HSBC can play in improving the European credit crunch and in improving the western economy. Corporate Strategy of HSBC Bank The corporate and global strategy of HSBC has always been profit oriented. "In today's world, you can't afford to wait for business. You have to go where the business is” said Michael Geoghegan, the CEO of HSBC bank. The banks corporate strategy is based completely upon this principle. HSBC has always spotted the winners ahead of others and invested in them multiplying their profits by many folds. They were one of the very few experts to predict the 2008-2009 economic crisis years before it spread its wings enormously. There is a global belief that they cannot be wrong. HSBC’s strategies of concentrating on the east create an overall negative image to the western financial market. The corporate and global strategy of the bank is criticized by many economists because HSBC is the world’s second largest bank and its moves are watched closely by millions of people. This move instils fear in the mind of a common man, who has already lost his hope on the western way of finance management and wealth accumulation. Scope for HSBC in the Emerging Eastern Markets The emerging markets in the BRICS (Brazil, Russia, India, China, South Africa) and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) nations are the new winning horses any financial institution bets on. There is strong reason for that. China is having nearly 33 million millionaires. The average age of this group is 43. Global sources estimates nearly 155 million new millionaires will emerge in China by 2014. The industrial revolution paved way for a prosperous and strong economic condition in the western countries. The eastern countries which missed this global surge made use of the IT revolution beyond imagination. These changes and the western influence in the culture have increased the disposable income of the middle class eastern people and their spending mentality to a great level. They are looking for fine products. A survey says Chinese tourists are the most spending ones in world famous destinations like Paris beating the US people and the Russians (Geoghegan, 2010). The emerging eastern markets are estimated to grow three times faster than the current well developed western market. The Middle East, South Africa and the Asian markets combined together are the future for any new business. There no wonder a company with immense foresight like HSBC sees lending loans for business ventures in these countries as a very profitable option. They encourage both the eastern entrepreneurs as well as the western companies starting their branches in these countries. They fund the major corporate companies in these nations becoming an inevitable part of their profit. HSBC had indeed taken the right move and it can reap major profits from the developing markets than the developed western nations easily. The Reliability of the Eastern Markets Though there are various doubts regarding the sudden surge of economy in the eastern side, the future seems to be promising for them due to good employment opportunities and steadily increasing disposable income. Most of the countries in the BRICS and the CIVETS enjoy stable government unlike the war torn African and Islamic countries. Countries like Brazil and China are emerging as major tourist destinations. The smaller countries around them like Venezuela, Colombia, Singapore and Vietnam make great use of this tourist population, selling goods and services to them. The money earned through international trade and tourism is mostly invested in improving the infrastructure of the country to western standards. This increases the employment opportunities for the locals, empowering them to spend more. We cannot guarantee they will grow three folds in the next two years, but economists are sure the financial development is not a mere bubble. Hence, doyens of financing like HSBC are ready to invest billions in these markets in spite of many initial challenges. The Major Resources of HSBC Bank HSBC does not take any move hastily. They pre-plan their actions for years before venturing into any market. A recent survey conducted in the Middle East lists, HSBC is the most famous international bank in the area. The survey included 25 customers who had deposited a massive amount in this bank. When asked why they chose HSBC instead of their local banks which had actually helped them in their formation years by lending loans, 19% said they chose it because of high returns. 17% stated they trust the bank more reliable than other international banks. 18 % said they chose it because of its stable growth over the years. 72% of all the customers using it rated their service and complaint resolving ability as very satisfied and the rest 28% rated it as excellent (Salagh, 2006). Customers rated their excellent customer service as their main strength. Reliability and brand name combined with cutting edge technology and prophet like vision follow the good customer service. It is said no company can manage without extending its care towards the well being of society and its stakeholders in general in this century (Yeung, 2011). HSBC cares for its customers making their trust its most treasured resource. Let us analyze how these resources help HSBC stay ahead of their competitors all over the world through Barney’s VRIN model (Barney, 1991). Internal Analysis through Barney’s VRIN model According to Barney's VRIN model, we can analyze if the resources in a particular company are sustainable and useful for gaining competitive advantage over others. The greatest resources of the HSBC bank are its good customer service, amazing technology and ample cash flow, reliability and brand name. Valuable –The reliability and customer service they have earned among the customers are their most valuable assets. Though there are several other international banks available in the market, HSBC is the only one which is friendly to approach even for the most common man. Their staffs are trained to treat even the pettiest query with utmost politeness. They appoint really knowledgeable staff and give them immense freedom to solve the problem and achieve target with their common sense (Tait, 2012). This enables the staff to serve the customers much better than other process sticky banks. Their peers like Deutsche, JPMorgan Chase and Bank of America failed to gain major fame in countries like India and the Middle East mainly because of their highly sophisticated nature. Similarly, HSBC never fails to show profit no matter however grim the situation might be. They spend over 6 million dollars in advertising their success every year, showcasing them as an ever profitable venture no matter how grim the world economy is. Their ads do not boast about their infrastructure and schemes, but only success. This plays a huge role in earning the reliability of the customers. Rare – They have very good vision. Their focus always lies on strategy rather than operation, but strict process orientation is also absorbed in core procedures. Giving equal importance to strategy content as well as strategic process is important to gain a competitive edge over others (Wit & Meyer, 2010). Their globalization process started way back in 1967, while the whole world adapted it in only in 1990’s. HSBC is the only bank which can be credited to have customer focused business knowledge. They invested in e-commerce ventures way before the world realized its importance. Whenever a financial institution spots and enters a new market or a field, HSBC will already welcome them as a dominant force there. Inimitable – HSBC have branches in almost all the countries of the world. HSBC gives ample importance to cultural impact and completely act like a Roman in Rome. This is known as consonance or adapting to the external environment (Rumelt, 1980). Most of the major banks like BNP Paribas and Barclays still follow very traditional and streamlined process oriented methods to solve an issue. Further they expect the customers of the eastern countries to think like a westerner. They are not able to compete with HSBC because of this social complexity and pride in their history. They never hesitated to explore new markets, establish new links and take more risks even when they were in the peak. Not every company in the world would afford to take such huge risks without very clear vision. Non – substitutable – Their advanced technologies like SWIFT, eBam, Mobile technology and ERP Integration are future proof and cost effective. Establishing an integrated network over 86 countries with fool-proof security system is a herculean task. Their technology is very much responsible for their centralised process and automation of various procedures in the banks. All over the world the financial supply chain remained more or less without any changes for centuries. HSBC changed this by establishing contacts with third party banks and through various mergers and acquisitions. They made full use of the South-South trade for currency exchange which many banks feared to use. They always used the most influential money dealer in the neighbourhood to manage their money transaction needs. External Analysis through Porters Five Forces Analysis The external market of any potential ground can be studied using four main elements the buyer and the supplier bargaining power, the threat from the substitutes and the new entrants (Porter, 1979). Buyers Power (Very High): The bargaining power of buyers is quite high in the external market for HSBC bank as the eastern customers are targeted by various international banks at a time. Supplier (High): Though there are several competitors, HSBC’s brand image as “The World’s Local Bank” and its simplicity in approaching customers had earned a worldwide fame. While most of the people in India and China haven’t even heard about JPMorgan Chase and Bank of America, nearly every Tom, Dick and Harry in these countries know HSBC. It is the only international bank name known to most of them. Threat from Substitutes (High): The eastern markets do not depend upon the registered banks and financial institutions completely for their finance. There are so many traditional money lenders and financiers with political influence who play the role of mobile bank in these cultures. Any IT employee saving one fourth of his income will rather choose to mortgage his money through these lenders and earn more interest, rather than opening up a savings account. Similarly they approach the same network when they are in need of immediate cash, rather than coming to the bank. Eliminating their influence by offering better interest rates and winning their customers is always a challenge for HSBC. But, by far, HSBC is the only bank trying to draw a deal with such financiers and make them their priority customers. While all other banks view them as their enemies, HSBC treats them as potential clients. Potential Entrants (Low): Though HSBC shows massive profits, not many international banks are ready to invest heavily in the eastern markets as the competition from the local banks is very high. HSBC manages this threat easily as they started open branches around the world before many decades. Many Chinese, Indian and Brazilian cities have nearly 20 year old HSBC banks. So the threats from the potential entrants are very low. The Other Side of Profitable Investments – Evaluation of Current HSBC Situation The local banks have much greater understanding about the local markets than the international banks. They know exactly whom to trust and are able to prevent bad debt easily. The nationalized and local banks have several loyal customers who had been doing business with them for generations. They nearly have all the major rich people as their customers. The greatest challenge for HSBC and similar financial institutions is to lure in this loyal group of customers. Further, it will take some time for any new venture or expansion to study the local markets and understand whom to trust (Porter, 1985). HSBC recently reported it had to pay a fine of $1.15 Billion to the U.S government for money-laundering in its Mexican branch (Slater & Scuffham, 2012). They simply failed to realize 39 suspicious transactions costing them about $7 billion which helped in illegal drug trading on the US soil. The US senate fined the bank on the claim of funding for illegal activities in their country. The Bad debts problem in Australia cost HSBC to lose nearly $45million on the whole (AAP, 2012). The same problem occurred in Vietnam and the Middle East before a few months. HSBC Vietnam's Head of Global Markets Pham Hong Hai agreed publicly most of the local branches simply failed to publicise the details of their bad debts and an investment on the matter is necessary (Khoan, 2012). It is estimated nearly 12 to 13 percent of the total outstanding loans might go uncollected due to bad debt issues. The bad debt issue is rising in Hong Kong and Brazil, HSBC's two non-western markets too. It is said till November 2011, HSBC lost nearly 36% of its net profits due to bad loans issue in these areas and Middle East. HSBC nearly lost $2.6 billion pre tax profit. It compensated the loss by initiating nearly 30000 job cuts in the western branches. North America especially the US continues to be HSBCs top revenue generator in spite of all the eastern market fame. Why Choose East over West? HSBC already contributes a lot in educating the people about better financial management and helps them through various grants. But, it would make a great difference if they come forward to route their investments into the western field completely. The bank faces more problems in the Eastern soil than the west, exploring new markets and cultures. But, they bear it for future profits. If the same mentality is shown in investing money in the western markets, they can easily help the western market revive without having to strain much. They should shed the “abandon the sinking ship” mentality and act like captain to try and save the hands that fed it so long – the western economy. How HSBC Can Make A Difference? They are already doing a massive job by educating the people regarding good financial management in the US and other European nations. Here is a list of some of their public awareness creating activities. HSBC educates several people on better money management. Their YourMoneycounts.com website got more than 5 million views in the past few years (Rajmanthri, 2005). The website acts as a virtual guide in helping you plan your finances better. They give ample advice from how to save within your income to how to avail loans with the lowest interest rates. HSBC joined hands with the Centre for Neighbourhood Enterprise (CNE) to conduct Adult Financial Literacy Workshops. They teamed up with The Society for Financial Education and Professional Development (SFEPD) and educated over 64500 students about managing their finance properly without getting into debts and clearing their student loans quickly under the YourFutrueCounts campaign. HSBC have given grants worth billions of dollars to students, individuals and families who approached them following their ideas. HSBC powers with Junior Achievement (JA) in promoting youth economic awareness to the U.S. students (Corporate Sustainability, 2010). Recommendations for HSBC to Help Further If HSBC and the other financial institutions of its might start considering the SME's in the western market seriously, they can rise small business potential by many folds in a short time (Kalin, 2012). The problems and challenges they face in the emerging markets is a lesson for them. All over the world there is a general view that the financial institutions are making the Western market look like a sinking ship. They can easily change this image by establishing collaboration among themselves and taking the following steps. 1. Funding the banks that are about to sink 2. By preventing job cuts in their branches to avoid the increase in unemployment rate further. 3. Bringing down the targets set for their company during the crisis 4. By slashing the interest rates for their loans and bringing in various debt consolidation measures. 5. They can boost up their measures to collect the volatile amount pending with the huge corporate and the extremely rich. Since financial institutions like HSBC, are the pioneers in the industry, they can draw pact with all other profitable banks to impose these measure. There won't be any issues regarding one institution incurring more loses than others in that case. Conclusion Instead of exploring the various new markets overcoming all the challenges and earning a meagre profit, financial institutions like HSBC can take various measures to improve the western economy and make it sustainable. The growth about the eastern market still remains a prophecy and there is no proof about their assured growth. A little patience and the mindset to improve the economy through various innovative means will fetch them great support from the public as well as the government. They can simply use this to boost their company’s image. After all, they are going to lend money to people. They can easily do it to the well known westerners ready to swarm them instead of luring the easterners by trying so hard. References 1. 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