Chinese Banks Potential to Set Up a New Market in the UK - Essay Example

?Chinese bank’s potential to set up a new market in UK Financial services sector has undergone tremendous changes over the past few decades.In order to be competitive in the age of globalization, many financial institutions tend to cultivate strategic partnership, mergers, acquisitions, and diversification. Understanding individual client’s needs and expectations has become the key to survival in the financial service industry. Although liberalization of cross border trade barriers opened new arena for business expansion, it has raised new challenges to international firms depending on legal, political, cultural, and environmental factors of the proposed destinations. This paper will perform a feasibility study to evaluate a Chinese bank’s potential to set up a new market outside the country. Introduction Bank is one of the most common forms of financial services in an economy. The major function of a bank is to receive deposits from people and to lend money to potential customers. In every country, there is a central bank to manage the state’s currency rate, money supply, and interest rates. Economists unanimously propose that strength of the banking sector is a direct determinant of a country’s economic feasibility and sustainability. In order to attain greater level of operational efficiency and to sustain their operations, banks need to attract huge amounts of deposits. Although lending is a potential way to improve the profitability of banking operations, careless and excess lending would challenge the long term sustainability of banks. Thoughtless mortgage lending led to a series of bank failures in the United States over the last decade. Since then, banks all over the world have been giving increased focus to the repayability of loans granted. Many well established banks consider international operation as an effective strategy to spread risk elements and to achieve greater future certainty. New market in United Kingdom The feasibility study will be about setting a new market for the Chinese bank in United Kingdom. Evidently, UK is one of the most economically rich countries in the world and hence there is a greater scope for banking business in the UK market. In addition, UK stands well ahead of other developed countries in terms of industrial operations. Furthermore, the country is one of the strongest members in the EU. Hence, at the initial look it seems that UK is a potential market for the Chinese bank to promote its overseas operation. PESTLE analysis Political factors In the United Kingdom, the government exerts increased control over the banking industry blaming that thoughtless interferences of politicians caused a downturn in banking sector in the country recently. The government is likely to introduce stricter regulations in the near future so as to reduce the power of the banking institutions. Despite such regulations, increased political interferences still affect the flow of UK banking sector. According to PwC’s UK banking leader John Hitchins, growing political interferences coupled with stricter regulations have taken the banking sector’s future out of its control (Moore 2010). Economic factors While analyzing the economic landscape, it is clear that UK’s economic growth rate is lagging behind many other developed countries since the global financial crisis 2008-09. It must be particularly noted that the UK banks have significantly reduced the volume of lending over the last few years in response to a number of bank failures in the last decade. In 2011, four leading banks in UK including Royal Bank of Scotland, Lloyds Banking Group, HSBC, and Barclays restricted their property lending by a combined total of ?17.2 billion. Even though the Bank of England had announced an attractive plan to foster bank loans to medium sized businesses and home buyers, UK banks still hesitate to sanction property loans. Undoubtedly, this situation can be very helpful for the Chinese bank to set up its new market in UK. In addition, reports indicate that UK economy is successfully recovering from the impacts of the recent global recession. Social factors Homelessness is a huge problem in the United Kingdom. Hence, there is an increased demand for housing mortgages in the country. However, some market analysts reflect that UK people have a negative attitude toward banks because they believe that banks are money-hungry institutions that push the society into troubles. However, low class people still depend on banks to meet their unexpected financial needs. Technological factors UK is a technologically developed country and this technological advancement can be greatly seen in the banking sector. Most of the UK’s banking operations are performed online and customers are given advanced facilities like debit/credit card payments and instant money transfer. Information technology has gained wide popularity in UK and most of the UK people have frequent access to internet. In addition, the government is continuously investing in R&D to promote financial innovations and hence to better serve the needs of the financial sector. Therefore, the country’s technological landscape would back up the expansion goals of the Chinese bank. Legal factors It seems that legal factors are not much helpful for the proposed business because the UK government is imposing stricter regulations on the banking sector. However, it also appears that the government strives to foster banks’ operations. As discussed already, the government has framed a number of policies to boost banks lending practices and to improve the economic growth of the country. Environmental factors Obviously, banks do not have much effect on the environment. It is identified that many of the leading UK banks have their unique social responsibility programmes. They allot a fixed percentage of funds to improve the overall living standards of the communities. Hence, environmental factors are favourable for the planned business venture. Choice of market entry strategy It is advisable for the Chinese bank to choose the Greenfield investment strategy to enter the UK market. Under the Greenfield investment strategy, a firm enters new market through establishing a wholly owned subsidiary there. Although this type of market entry is a more complex and expensive process, it enables the bank to enjoy full control over its operations and reduce worksite conflicts to a great extent. “Wholly owned subsidiaries and expatriate staff are preferred in service industries where close contact with end customers and high levels of professional skills, specialised know how, and customisation are required” (Hitt 2009). Evidently, bank is a service sector and hence this type of market entry would be suitable. When entering a new foreign market through Greenfield investment, the bank obtains greater level of operational efficiency management control. Under this strategy, the newly established subsidiary is wholly owned by the bank and hence there will be no external influences on the bank’s business operations. Here, the management can follow its own business tactics and operational policies to get established in the UK market. Since the firm obtain direct and full control over the newly established subsidiary, it can be easier to minimise operational costs and other managerial expenses. In addition, the management can directly employ qualified and skilled staff to run the activities of the new subsidiary. As scholars point out, one of the most noticeable benefits of this market entry strategy is that it assists the management to get rid of issues associated with cultural integration. Under other forms of market entries including mergers, acquisition, or joint ventures, the firm needs to integrate its organisational culture – more specifically work culture – with the partnering organisation. Often, it is a difficult task and the situation probably leads to worksite conflicts. Hence, Greenfield investment eliminates such strategic issues because there is no business alliance under this market entry concept. The proposed policy may provide the Chinese bank with increased level of design flexibility. Since the bank has full control over the business under the Greenfield investment strategy, the management can flexibly alter the project’s strategic framework at any phase of the project development in order to effectively meet the planned project requirements. Another advantage of this policy is that it would trim down maintenance costs since new and improved facilities are installed. Undoubtedly, the Greenfield investment provides the bank with a potential opportunity to strengthen its corporate image and market stature. When the bank establishes a wholly owned subsidiary through Greenfield investment, people may hold the view that the bank is financially sound. Such an image is vital for multinational corporations, particularly those working in the financial services sector. The UK government is most likely to welcome such a Greenfield investment project because it would increase the total outputs of the country’s banking sector. In addition to offering full management control, the Greenfield investment strategy benefits the firm to ensure 100% marketing and production control (the Great Britain Parliament 2004, p.35). Finally, through this type of market entry, the bank can achieve customer loyalty because this entry reflects a promise of long-term commitment to the UK market. Implications of the marketing mix strategy Marketing mix strategy can have significant implications on the firm’s market operations. It is identified that marketing mix elements such as product, price, place, and promotion greatly affect the way financial services are delivered to the end customers. First, the type of products/services offered determines the market competitiveness of the bank. Today, modern banking services like internet banking, mobile banking, and credit card purchase facilities are offered by almost all leading banks. Hence, the Chinese bank has to provide more attractive financial services to take better advantages of the new UK market. In order to identify the potential services that would better meet the interests of UK clients, the management has to conduct a comprehensive market survey. Evidently, same services cannot satisfy the needs of different market segments. Hence, the management must offer unique financial services to each market segment. Second, the management has to consider the UK customers’ willingness to pay while dealing with product/service pricing. Since UK consumer spending has been severely affected by the global financial crisis 2008-09, it is better for the management to cheaply price its financial services. At the same time, the management may offer highly charged services to its upper class consumer segments. Third, the ‘place factor’ also can significantly influence the bank’s operations in UK. The management has to identify potential market locations in terms of total volume of banking transactions. In other words, the bank should establish branches in places where the scope of deposits and lending is particularly high. Finally, promotion is important for the banking industry, particularly for the Chinese bank which is planning to enter the new overseas market. For this, the management can use different modern online promotion tools, which will be discussed in this paper later. In addition, the management may also employ some traditional advertising techniques like TV ads and flux boards. In short, a right mix of product/services, price, place, and promotion would assist the Chinese bank to be competitive in the UK market. Customer economics and segmentation considerations While analysing UK consumer economics, particular attention has to be paid to two areas including consumer spending and consumer confidence. Consumer spending can be simply defined as the amount of money that households spend on goods/services so as to meet their needs. The UK’s consumer spending increased from 227451 GBP million in the 3rd quarter of 2012 to 277735 GBP million in the 4th quarter of 2012 (United Kingdom: Consumer spending, n. d.). While evaluating the historical figures from 1955 to 2012, it is identified that the country’s average consumer spending is 124143.99 GBP million and the consumer spending reached an all time high of 238145 GBP million in the year 2007 (ibid). Although the consumer spending in UK has declined since the recent global recession, recent financial releases show that it is getting improved significantly (ibid). Similarly, consumer economics is a macroeconomic indicator used to measure the consumers’ level of optimism about the overall economy and their individual financial status. In UK, this measure indicates the degree of optimism that consumers have about the state’s economic performance over the next 12 months (United Kingdom: Consumer confidence, n. d.). While analysing the UK’s consumer confidence measures over the last few decades, it seems that consumer confidence in the UK was severely affected by the global financial crisis 2008-09 (ibid). As of February 2013, the consumer confidence in UK is -26. Despite these figures, a new Chesterton Humberts Residential Observer report gives some attractive features of UK’s recovering banking sector. According to this report, the country’s residential transaction volumes reached highest levels in Q1 2012 since Q1 2008; and in Q1 2012, a total 198,000 transactions were completed and it represented a 14.5% increase relative to the first quarter a year ago (as cited in Gerrity 2012). Similarly, the bank has to make clear plans for segmenting its new market prior to its establishment. It is observed that demographic segmentation will be a sensible segmentation strategy for the bank in the UK context. Demographic segmentation is a common market segmentation strategy where the market is segmented on the basis of customers’ characteristics such as age, gender, and income. Age is a key factor in the financial services sector. It is precise that people between the ages 15 -50 are more likely to use bank services. Therefore, it is particularly important for the bank to emphasise more on that segment. Similarly gender differences have great impact on banking business even though today both the genders represent all areas of the society. Bank transaction reports clearly indicate that men depend more on bank services as compared to women. Hence, it is better to frame some segmentation strategies that would specifically meet the needs of men clients in the banking sector. At the same time, the management must notice that the needs of women clients do not go unnoticed. Finally, income is another major customer characteristic that can be very crucial to the success of the demographic segmentation process, particularly in case of the banking industry. It is recommendable for the Chinese bank to focus more on economically upper class clients because this customer segment can assist the bank to meet its fund needs through investments. Middle class as well as poor class people are badly in need of funds. Hence, the bank must try to pay particular attention to these customer segments so as to increase its profitability through granting loans and mortgages. Product provision, pricing, and distribution strategy Evidently, product provision is a major element that can have a great influence on the proposed new market development in UK. As discussed already, UK bank lending rates remain declined since the recent global recession and this adverse economic environment stunts the overall economic growth of the nation. Therefore, the supply of bank credit lags behind its demand in the United Kingdom. In this context, it is better for the Chinese bank to give more emphasis on lending operations while planning product provision in this overseas market. One of the potential features of this strategy is that it may benefit the management to take advantages of financial packages announced the by the Bank of England in order to foster credit lending in the country. However, before sanctioning loans and mortgages, the management must ensure that adequate collateral securities have been received to secure the credit granted. In other words, credit worthiness of clients has to be crucially evaluated in order to safeguard the bank’s financial soundness. In addition, the management should formulate some service packages that are effective to attract deposits. In order to effectively confront with other domestic British banks, the management must provide advanced bank facilities including products and services including online and mobile banking, debit/credit cards, and magnetic strip cards. A Deloitte project study contends that today pricing strategies practiced by most of the financial institutions give little importance on how much a client is actually willing to pay (Deloitte, n. d.). It is clear that a financial institution cannot prepare a potential budget or run its operations profitably if it is unable to forecast possible revenues for a targeted future period. Therefore, the Chinese banker has to specifically address customers’ willingness to pay while planning pricing strategies. In addition, pricing strategies must be specifically designed for different market segments. For instance, cheap borrowing rates should be offered to economically low class people whereas better interest rates must be offered to wealthy people in order to attract more deposits. While designing distribution strategy, it is advisable for the bank to consider joint operation. More precisely, the bank must co-operatively work with other financial institutions to deliver its products and services to customers efficiently and uninterruptedly. For instance, the management may depend on other financial firms’ ATM and similar service facilities in regions where the bank has no branches. This strategy would assist the management to reduce its initial investments to a great extent. In addition, the bank has to specifically emphasise the development of mobile banking and internet banking networks because today’s people give little importance to manual transactions. The widespread popularity of internet and smartphones increase the scope of online banking, which is more convenient and cost-effective for bank clients. Initially, it is better for the bank to focus on major cities in UK. The management can eventually understand hot business points as well as weaker areas in the country. Finally, the distribution strategy must specifically try to meet the needs of the key markets segments. Brand and corporate reputation strategies In order to get well positioned in new overseas market, the Chinese bank has to build and maintain corporate reputation and brand loyalty. Today, corporate reputation has become one of the essential elements that determines the sustainability of an organisation. However, building corporate reputation is not an easy task, particularly for the Chinese bank, which is planning to spread its operations internationally. To effectively build corporate reputation in the new UK market, the management has to allot a significant percent of funds specifically for this purpose. Today, serving the needs of local communities is the better way to promote corporate reputation. Hence, nowadays multinational corporations fund a wide variety of social responsibility programmes to improve their corporate status. Financial data indicate that the UK government spends a huge amount of funds on education. Therefore, it is particularly recommendable for the management to assist the UK government in its efforts to improve the educational status of the country. For this, the management may establish new education institutions in the country or finance existing institutions. In addition, the management can contribute to health care operations in the country. For instance, it can conduct community based programmes concerning the spread of various epidemic diseases and the necessity of improving modern lifestyle culture. In addition, the bank management can support modern trends in health care, such as home care and palliative care, because they are of significant importance in the context of growing old population in the UK. Another way to build corporate reputation is to invest in environmental safety. With the growing threat of global warming and climate change, today people are increasingly aware of the essentiality of enhancing environmental sustainability. Evidently, dumping municipal solid wastes creates far reaching issues in UK. Hence, the bank management may take initiatives to recycle and reuse municipal solid wastes in the regions in which it operate. Likewise, the Chinese bank can support the UK government’s efforts to curb greenhouse gas emissions in the country. For this, the bank can minimise its use of vehicles because internal combustion engine in vehicles is a major cause contributing to greenhouse gas emissions. Today, major organisations publish corporate sustainability reports along with their financial statements at the end of the year. Since this is a practice intended to inform stakeholders about the firm’s sustainability operations, it can greatly benefit the Chinese bank to develop its financial services market in the UK. Corporate sustainability report may also aid the bank management to analyze the targets achieved and to address the areas of improvement. Furthermore, this document is a better tool for the bank to convince the public that the firm strives to enhance environmental sustainability and community welfare. Finally, providing uninterrupted quality services at affordable rates is a better way to improve the bank’s brand loyalty. As discussed already, the bank must offer all modern banking facilities in its new overseas market. Conclusion From the above discussion, it is clear that UK is a potential market segment for the Chinese bank which is planning to expand its operations outside the domestic market. The major attractable feature of the UK market is that its leading banks hesitate to lend credits to home buyers and medium businesses because of a series of bank failures over the last decade resulting from excess credit lending. Since this situation adversely affects the overall economic growth of the country, the UK government is likely to support the planned business entry. A well developed technological landscape also contributes to the potentiality of the UK market. It is better for the Chinese bank to establish its wholly owned subsidiary in the new overseas market through Greenfield investment because this strategy allows the management to exert greater level of control over the firm. The marketing mix of the financial services offered greatly influences the bank’s operations in the UK market. Data indicate that consumer spending has been declining in the UK since the recent global recession. Hence, it is better for the management to practice demographic segmentation while operating in the UK market. The bank has to make alliances with other UK banks to gain the advantages of a strong distribution network. Finally, the management has to perform social responsibility programmes and to publish sustainability reports to build corporate reputation and brand loyalty. Recommendations It is recommendable for the bank to give particular attention to infrastructural facilities. In order to be a reputed financial service provider in the UK market, the management has to furnish the building and other facilities to the industry standards. The management must evaluate the UK banking guidelines in detail so as to completely adhere to the country’s rules and regulations. This practice would assist the management to avoid future lawsuits and other legal complications to a large extent. It is important for the management to focus more on advertising since the firm is a new player to the UK market. The firm can better publicise its products and services through online promotion techniques rather than traditional advertising. Today, social networking websites like Facebook, Twitter, YouTube, and MySpace are considered to be the most effective channels of promotion. Therefore, the management may rely on these websites to promote its market development in the country. In addition, it is better for the Chinese bank to organise some interesting contests or finance some TV reality shows as part of launching it products and services in the new overseas market. In order to enter the new market effectively and to get positioned in the market quickly, it is advisable for the management to introduce some cheap and attractive financial service packages that would actually meet the short term as well as long term needs of the UK customers. Finally, the management must try to include more native workers in its workforce because the UK culture is very contrasting to Chinese culture. This practice may also benefit the management to obtain strong support from the UK government because the country is currently struggling with high unemployment rate. References Deloitte. ‘Pricing for the banking industry’. [online] available at http://www.deloitte.com/assets/Dcom-Switzerland/Local%20Assets/Documents/EN/Consulting/Strategy/Pricing/ch_en_Pricing_for_the_Banking_Industry.pdf [accessed 30 March 2013]. Great Britain Parliament. (2004) Responses to the Committees tenth report, session 2003-04, Scientific publications, free for all? The Stationery Office. Gerrity, M. (2012) ‘UK Enjoys Highest Property Transaction Volumes Since 2008 in Q1’. World Property Channel, May 8. [online] available at http://www.worldpropertychannel.com/europe-residential-news/uk-home-sales-london-property-sales-british-bankers-association-chesterton-humberts-robert-bartlett-eurozone-debt-crisis-home-transaction-volumes-chesterton-humberts-residential-observer-report-hsbc-arla-5612.php [accessed 30 March 2013]. Hitt, A. (2009) Strategic Management Competitiveness and Globalization, Nelson Education Ltd. Moore, J. (2010) ‘Political interference is banks' biggest risk’. The Independent. Feb 01 [online] available at http://www.independent.co.uk/news/business/news/political-interference-is-banks-biggest-risk-1885360.html [accessed 30 March 2013]. United Kingdom: Consumer spending. Trading Economics. [online] available at http://www.tradingeconomics.com/united-kingdom/consumer-spending [accessed 30 March 2013]. United Kingdom: Consumer confidence. Trading economics. [online] available at http://www.tradingeconomics.com/united-kingdom/consumer-confidence [accessed 30 March 2013]. 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