Strategy Analysis
PART 1 Industry Analysis
This paper is an analysis of the Banking Industry in Hong Kong. It discusses the competitiveness of this industry and the critical issues affecting its operation both in the national and the international arena.
The Case of Hong Kong Banking Industry
Introduction
The Banking Industry in Hong Kong is among the leading international financial centers in the Asia Pacific region and the world. It is a market friendly industry with a sound tax system and regulatory framework. The openness to foreign competition and international practices also contributes to the qualities of the industry. In fact, Hong Kong is ninth among the largest international banking centers in the world when it comes to external transactions. More than 100 international insurance companies prefer Hong Kong and seventy six of the world’s top 100 banks also selected the country as the best place to do business in Asia (2002). Generally, the Banking Sector has remained to be attractive for the following factors:
- Full Convertibility of the Hong Kong dollar
- Relative Simplicity and Less complexity of business acquisition in Hong Kong
- Minimum Regulatory Interference from the Government
- Soundness of the Tax System and Regulatory Framework
- The absence of competition legislation and the openness to international practices
Macro Analysis
Hong Kong’s Business Environment has been economically successful since the Second World War. The Gross Domestic Product has consistently grown and envied by most of the developed and developing systems. The rate of unemployment is at low level while the demand for employment is stable (2002). The population has experienced a huge improvement in their standard of living which is often cited as a significant factor for the high level of social stability.
The civil service is considered to be the most efficient and non corrupt throughout Asia with the citizens being mostly law abiding. Various political parties support the wide capitalist ethic which dominates the country’s thinking. Trade unions are not very powerful forces and those that existed are mostly moderate and accommodating. The business elite are predominantly Hong Kong Chinese. They favor the tax system, minimal interference of the government and the system focused on making profit.
Furthermore, government policies implement a non interventionism policy which is favored by many businesses. The Basic Law in Hong Kong also supports a largely capitalist system. Much of the constitution for Hong Kong is based on guaranteeing its autonomy from the interference of China. It also states that profit, low taxes, low levels of government intervention and the freedom to trade with are guaranteed (2002).
Hong Kong was named by the Heritage Foundation as the “world’s freest economy” attributing its success from its willingness to transform and embrace the forces of globalization. However, its position as a one time center for diverse economic activities has been left only on the finance and service industries. In the wake of the Asian financial crisis, the country realized the difficulty of being a financial center. Like Malaysia, money-men in Hong Kong discovered the vulnerability of their currency reserves and capital investments ( 2002). Its claims to be a world class financial center were in serious threat.
Also, mainland China is fast becoming adept in many services which Hong Kong offers. Some analyst claims that Hong Kong will only have a lead time of 10 years before China can offer more attractive option. Primarily, the reduction in business prospects following the Asian financial crisis is due to the high operating costs. The living costs in Hong Kong are higher than anywhere in the United States. It is ranked as the fourth most expensive city in the world (2002).
In March 2001, a London-based Hong Kong bank shifted about 1,000 of its jobs to Guangzhou in China until the next three years. This brought shocks to the entire financial service sector (2002). The financial services though asserted that the two cities, Shanghai and Hong Kong are likely to complement each other rather than compete. While retaining its confidence in the financial sector, the city also continues to strive for high quality and potential for growth. In fact, there were efforts to improve the infrastructure of the financial sector through reform and increase in the depth and breadth of the market. There were also reviews undertaken on the debt issuing mechanisms and the simplification of the procedures. The industry undergone liberalization and reform with the final phases of the rate deregulation expected to be completed by 2014 (2002).
Another critical problem of Hong Kong banking industry is the shortage of qualified and high skilled human resources. Despite its high tech image, Hong Kong lacks quality professionals to back it up. Sydney which has shown a promise in the financial sector has a clear advantage to Hong Kong in terms of its high skilled workforce (2002). The key strength that moves Australia is the strong supply of skilled workers. By the end of the day the up front cost is still embedded in the workforce despite the favorable tax system. Businesses are less likely to make a profit to be taxed on as long as this problem remains.
The industry must also consider the changing demands of the customers and the need to produce new products, better channels and more responsive services. The change in technology helps various financial institutions to introduce and manage new products and services. There is the growing trend towards information technology in the critical factors of the competition such as costs, service quality and price.
Information Technology is an aspect of the industry which is considered to be critical. It helps improve the quality and the value added to the products and services. However, the cause of IT systems is too huge to be afforded. Banks can share the costs associated with this through merging with other companies. The past decade has shown an increase in this kind of investment in Hong Kong and is expected that more overseas companies will invest in the country.
PESTEL Analysis
Political Factors
- Policy of Non Interventionism
- Autonomy from People’s Republic of China
Economic Factors
- Increased in the GDP
- Sound tax system
- Low unemployment rate and buoyant demand in employment
- High Operating Costs
Social Factors
- Entrepreneurial Drive of the people
- High Level of Social Stability
- Increase in the Standard of Living
- Shortage in Qualified Human Resources
Technological Factors
- High Technology Projects
- The use of Information Technology in various aspects of the industry
Legal Factors
- Minimum government intervention
- Sound legal and regulatory framework
- Liberalization and reform in the financial infrastructure
Five Forces Analysis
In any industry, the rules of competition are governed by five competitive forces. These forces determine the ability of the industry to become more attractive than others.
Potential Entrants
Potential entrants enjoy the simple and less complex way of acquiring business in Hong Kong. The financial industry being a premier center has been a market friendly and open market for competitors. This is proven by the number of international financial services operating in the country
Competitive Rivalry
Towards the end of 1999, there are around 156 licensed banks and 288 financial institutions in the country making it the highest in the world. Seventy six of the 100 largest banks in the world operate in Hong Kong. More than 100 international insurance companies prefer Hong Kong and seventy six of the world’s top 100 banks also selected the country as the best place to do business in Asia.
Substitutes
The customers’ transfer from small and medium sized banks to more reputable institutions such as the Hong Kong Shanghai Banking Corporation (HSBC), Citibank and Standard Chartered Bank.
Bargaining power of Buyers
Customers’ demands are changing and requiring the industry tom produce new products, better channels and more responsive services. The financial sector is compelled to follow the lead of other industries in improving their service standards.
Bargaining power of Suppliers
Hong Kong is suffering from the shortage of qualified human resources. The gap is filled through imports from Mainland China.
Of the abovementioned forces, the degree of rivalry is the most obvious in the banking industry. The number of licensed banks and financial institutions operating in the country indicates the stiff competition in the financial sector. Also, the openness has resulted to fewer barriers for foreign investors and new entrants. In this case, the market becomes more accessible to new entrants which in turn increase the degree of rivalry. As a matter of fact more than 50% of the largest banks in the world already have their operations in the country. Banks compete rigorously in terms of prices, customer convenience and their reputation.
Evaluation of Findings
The Banking Industry retains its position as the premier financial centers in the world. The characteristics of the market and the business environment are the primary reasons why this sector is attractive to foreign investors. However, it is susceptible to competition from countries such as China, Singapore and Sydney. China for one is catching up by providing the services which Hong Kong offers.
The relatively lower operating costs in China provide more alternatives for businesses. In addition to this, the shortage in the human resources is filled through imports from mainland China. The industry and the whole country in general lacks with qualified professionals. This weak area of Hong Kong is considered to be the key strength of Sydney, a promising financial center. These concerns affect the ability of the banking industry to maintain and strengthen its position in the international financial sector.
As time progresses, the environment in the financial services will get tougher particularly in the international arena. Hong Kong being the leading center has the most to lose. In order to maintain its position, the infrastructures of the financial sector must be reformed and increased in scope. The government must take the necessary measure to simplify the procedures relating to debt issuing mechanisms.
Lastly, the Asian economic crisis has changed the competitive landscape of the banking sector. Since 1997, the licensed banks are reduced by about 17 %. As the customers worry about the stability of financial institutions during the crisis, they have transferred to more reputable institutions such as the HSBC, Citibank and Standard Chartered Bank (2000). With this, small and medium sized banks find it hard to survive the competition. Even with the recovery of the economy, there remains to be a weak demand for domestic credits. As a result, banks need to write off bad loans, improve services and invest in the development of products, technology and skills to compete with more established banks. Generally, the banking industry has undergone rapid changes. Among the factors influencing competition are technology advancements, regulatory requirements, high skilled work force and quality products and services. This intense competition can be survived by the banks by improving the quality of their services.
Conclusion
Hong Kong’s openness to foreign competition and international practices has paved the way for greater opportunities particularly in the banking sector. Foreign investors favor the clarity of policies, financial reforms and liberalization in the industry. Even so banking industry must focus on its weak areas to maintain its position and remain competitive in the international scene.
Among the global competitors of Hong Kong are Singapore, China and Sydney. Though the Hong Kong banking industry has marked its position in the international scene, it must strengthen its weak point to remain attractive for investors. High skilled workers are clearly the disadvantage of Hong Kong from its foreign rivals.
Aside from this, there is also the high operating costs which reduces the business prospects. Ultimately, the ability to satisfy the needs of the customers will determine the competitiveness of the industry and every bank participating in it. The industry can move into a more competitive landscape by improving the quality of its services and adopting technological advancements. The reform and liberalization of the financial structures is also a viable option.
Recommendations
- The reduction of operating costs will help the industry to regain business prospects it has lost. In 2001, a London based bank shifted its jobs to China. This illustrates the tendency of financial investors to transfer their operation in countries with fewer costs
- The lack and shortage of highly skilled professional has been a critical problem. Other financial centers have taken advantage of this weak area such as Sydney. The government must implement measures to improve the quality of education and produce qualified professionals
- The increase in competition also requires improvement in the service standards. Banks and financial institutions must continue to produce products, services and better channels to meet the changing demands of the customers. They must focus on the particular area of ‘service quality’ and ‘customer care’
- Existing employees must be trained continuously to provide the services which the customers want. The industry must be attentive in providing the needs of the customers in order to attract and retain them. They can implement initiatives to improve the quality of performance among their employees.
- Technology advancements must be used to facilitate new products and services. Information technology must be utilized to change the significant aspects of competition which includes costs, price and quality of services.
- Banks can resort to Mergers for significant savings in adopting information technology. Financial institutions must compete in the changing environment through their IT systems. The integration of IT can be done though mergers
PART 2 – FIRM ANALYSIS
This paper is an analysis of the Hong Kong and Shanghai Banking Corporation. It discusses the competitiveness of the bank and the factors that contributes to its success as a banking and financial service company
The Case of Hong Kong and Shanghai Banking Corporation (HSBC)
Introduction
HSBC is one of the largest banking and financial services worldwide. The HSBC Group started in Hong Kong around 140 years ago and the Special Administrative Region remains one of its key markets and operating centers at present.
The Hong Kong and Shanghai Banking Corporation Limited is established in Hong Kong in March 1865 and in Shanghai a month later. It is the founding member of the HSBC Group and serves as the Group’s flagship in the Asia Pacific region. Known as Wayfoong which means the ‘focus of wealth’ or ‘abundance of remittances’, the bank is one of the three note issuing banks of Hong Kong which accounts for at least 65.2 %of its bank notes.
HSBC holds a distinctive position in the banking sphere of Hong Kong. Aside from the bulk of note issues, it has some attributes which are associated with a ‘central bank’. It serves as a banker to the government and other banks though not in exclusive terms. At some occasions, it also acts as lender of the last option. There are no statutory obligations for the HSBC to perform these functions and its quasi-central bank qualities are not sought after but came naturally towards becoming the largest operating bank in the country (Pui-Tak & Faure, 2004, p.200).
Its main subsidiaries:
Hang Seng Bank Limited (62.14 % owned) HSBC Investments (Hong Kong)
HSBC Bank Australia Limited Limited
HSBC Broking Services (Asia) Limited HSBC Private Equity (Asia) HSBC Insurance (Asia Pacific) Limited
Holdings Limited HSBC Trustee (Hong Kong) Limited
Source: The HSBC Group in the Hong Kong Special Administrative Region (SAR) 2006
The bank including its subsidiaries has more than 600 branches and offices in 20 countries and territories in the Asia Pacific and 20 in five other countries all over the world. They employ at least 50, 800 staff. HSBC Limited is wholly owned by the HSBC Holdings plc of the HSBC Group. As one of the largest banking organization, it has around 9,500 offices in 76 countries serving 125 million customers with a total of e customer base of 2 million.
The HSBC Group is one of the major users of Information technology with a yearly spending of US$4.4 billion. The e-business includes the internet, PC banking and telephone banking through fixed phones and mobile phones. HSBC has its own telecommunication network which is one of the largest in the world. This network is used in delivering IT services to the customers and employees worldwide. During the first half of 2006, at least 900 million visits are recorded on its website.
Its services:
Personal Financial Services
HSBC offers a wide range of personal financial management services to at least 4 million personal customers in Hong Kong. The services include multicurrency savings and current accounts, mortgages, hire purchase and leasing for motor vehicles, credit cards and loans. Customers are also given access to insurance products wh9ich includes life, health, home, hospital and travel insurances. The financial team helps the customers in planning their financial needs such as education, retirement and estate.
Commercial Banking
HSBC provides financial services to small and medium sized enterprises. The services offered include multi currency business accounts, payment and cash management, insurance, trade services and borrowing solutions. It has business banking branches that covers key commercial centers and a multi channel service to make the service convenient for the clients. Automated banking terminals are available in key areas to allow 24 hour access to cheque deposits and cash transactions.
Corporate, Investment Banking and Markets
HSBC provides a wide range of services to corporate and institutional customers within Asia. It promotes long term relationships with the clients based on the global knowledge and expertise of the Group. This division is composed of three business line: Global Banking, Global Markets and Global Transaction Banking.
Private Banking
HSBC provides private banking for its clients to protect their wealth. Aside from the investment and management solutions, it also offer wealth planning including inheritance and succession planning
Organizational Culture
HSBC is highly committed to standards of corporate behavior which is central to its strategy. Its core values focus on the long term ethical relationships with the clients, high productivity through cooperation, a sense of excellence, international in outlook and customer focused. The strategic plan also involves the corporate social responsibility. HSBC continue to commit itself to high standards of conduct and its obligations in the society. The groups’ CSR policies are focused on education and environment which is the primary recipients of their charitable activities.
The growth ambitions centers on the four groups of customers. These comprises of the personal financial services, commercial banking, corporate and investment banking. Specific strategies are developed for each of the area. The customer focus is reinforced by organizing the internal and external reporting around the customer groups.
The competitive positioning of HSBC is accomplished by introducing skills and practices from the leading retailing businesses world wide. The integration is increased with more skills sharing and technology transfer to enhance its existing activities. The key elements in achieving its objectives is to accelerate the growth rate of revenue, develop brand strategies, increase productivity and maintain the risk management and the strong position in the financial services. The development of staff skills is a critical factor and is necessary to ensure that they contribute to the success of the Group. Employees who contribute to the achievement of corporate goals are rewarded.
Strategic Plan
The vision of the Group remains constant: HSBC aims to be premier financial service company worldwide. To be ‘leading’ means being preferred, admired and recognized for providing the customers with a fair deal. The main goal of the strategy is to guarantee that the shareholders get better returns from the banks than they would have in any financial service company. The sustainable success includes the addressing the needs of the customers, colleagues and those representing the interests of different communities.
By the end of 2003, HSBC launched a strategic plan which serves as a blueprint for growth and development until the year 2008. The strategy is evolutionary and builds on the key strengths of HSBC. More so, it addresses the areas which need further improvement.
Strategic Imperatives:
- To become one of the leading brands for customer experience and corporate social responsibility
- To be the strongest global player in personal financial services by driving growth in key markets, expanding businesses with existing clients and penetrating new ones
- To make the most of the international customer base by promoting efficient customer relationship and management
- To speed up growth with the enhancement of the capital market
- To serve the individual and family clients all over the world
- To develop and motivate employees by rewarding success
- To concentrate in increasing the earnings at a favorable rate. It will also focus on investing technology, its people and brands to support the future value of the company
Value Chain Analysis
Primary Activities
Inbound Logistics
- HSBC promotes the manufacture and use of environment friendly products. It directly influences the environmental impacts of its suppliers.
Operations
- Operating as the number of local banks all over the world. It operates on 10,000 offices in 82 countries in Europe, Asia Pacific region, America, Middle East and Africa.
Outbound Logistics
- Processing work is offshore to lower costs economies in order to decrease the costs associated with the services provided in developed countries.
Marketing and Sales
- The HSBC brand and the hexagon symbol are adopted in all markets where it operates to enhance the recognition of the group by the customers, stakeholders and employees all over the world.
Service
- HSBC provides a wide range of financial services which includes business and commercial banking, investment banking and personal banking.
Support Activities
Procurement
- The procurement network consists of 430 people in 56 countries and territories. The suppliers range from multinationals to small local businesses. E procurement systems are also utilized to accommodate both the local and global business needs
Technology Development
- The largest expenditure is on the Information and Technology equipments and services. Its e commerce capabilities are rapidly increasing. It has invested in Sparkice Inc. which will develop the online trade finance, payments and insurance services in the business-to-business website of the company. Human Resource Management
- The company acknowledges the need to attract and motivate talented and skilled people. The HSBC’s values thrive on the importance of respecting and embracing the ideas, abilities and diverse culture of its employees. This principle is manifested on its present campaign “Your point of view”. Its global sourcing strategy plays an important role maintaining competitiveness in the international financial services.
Firm Infrastructure
- The HSBC is headquartered in London and operates in five other regions including Europe, Hong Kong, Asia Pacific, Middle East, Africa, north and South America. The financial services it provide range from personal, commercial and corporate banking. In 1999, the HSBC Group was established with a uniform international brand name.
Financial Information
Paid up Capital: HK$22,494 million (US$2,896 million) at 30 June 2006
Reserves: HK$87,793 million (US$11,303 million) at 30 June 2006
Pre-tax profit: HK$25,516 million (US$3,289 million) for the first six months of 2006
Attributable profit: HK$18,471 million (US$2,381 million) for the first six months of 2006
Capital Strength: Tier 1 capital ratio: 12.1 % at 30 June 2006
Total capital ratio: 13.1% at 30 June 2006
Source: The HSBC Group in the Hong Kong Special Administrative Region (SAR) 2006
Financial Highlights
2006 2005
For the year HK$m HK$m Net operating income before loan impairment charges 92,325 77,222
Profit before tax 52,016 45,249
Profit attributable to shareholders 37,709 32,873
At year-end
Shareholders’ equity 145,450 97,334
Total equity 165,445 114,425
Total regulatory capital 183,981 154,065
Customer accounts 1,989,467 1,735,110
Total assets 3,150,840 2,672,532
Risk-weighted assets 1,367,607 1,238,164
Ratios % %
Return on average shareholders’ equity 31.1 37.4
Post-tax return on average total assets 1.46 1.44
Cost efficiency ratio 41.4 41.2
Net interest margin 2.31 2.14
Capital adequacy ratios
– total capital 13.5 12.4
– tier 1 capital 12.3 11.7
Profit before tax (HK$ millions)
70,000
60,000
52.016
50,000
45.249
40,000
30,000
20,000
10,000
0
2006 2005
Source: HSBC Annual Report and Account
The profit attributed to the shareholders for 2006 increased by HK$4,836 million or 14.7% to HK$37,709 million. The profit before taxation increased by HK$6,767 million or 15.0 % to HK$52,016 million
Core Competence
HSBC has establish itself as a leading commercial bank not only in Hong Kong but worldwide. Its long term existence has earned it the reputation which is unequaled by any other banks. Today, HSBC remains to be one of the most trusted financial institutions with operations in Europe, Asia Pacific region, America, Middle East and Africa. It maintains a sound financial status which is growing by the year.
Evaluation of Results
The Corporation serves an international customer base in about 82 countries all over the world. Its financial services range from personal banking to commercial and corporate banking service. It operates on high technology that delivers a wide range of products and services designed to meet the needs of the customers. HSBC attributes its competitive positioning in the integration and sharing of skills, technology transfer and the adoption of best practices. It also recognizes the need to develop its human resource as they are crucial elements in achieving the goals of the corporation.
Moreover, it adheres to its corporate social responsibility through its philanthropic activities for education and the environment. The HSBC maintains a sound and increasing financial status as shown in its financial information and financial highlights for the year 2006. It also has this unique position in the Hong Kong Banking sphere as a ‘central bank’. It acts as the banker to the government and other banks though not exclusively.
Conclusion
Over the years, HSBC has been able to maintain its competitive position in the financial services. The growth focuses on four main areas including personal financial services, commercial banking, corporate investment banking and markets and private banking. Each of these areas is addressed through a set of specific strategies.
The financial success of the company is attributed mainly in meeting the expectations of its customers, its people and various communities. The key to its strategy is to maintain corporate behavior that foster long term client relationships and increase productivity of its people. This is accomplished through skills sharing and the transfer of technology. HSBC recognizes the potential of Information Technology and invested significantly in the improvement of its IT infrastructures. In return, the e business enabled easier access to the international customers and employees.
Recommendations
- Expand the business and penetrate other market though the effective channels. The use of IT systems is an advantage and the company must continue to lead advanced information technology
- Promote good customer relations by being responsive to customer needs. The company must also improve its flexibility by meeting the changing demands of the customers suitable for their lifestyles. In addition to this, regular monitoring on customer satisfaction must be implemented
- Empower the employees by understanding their needs and measuring their engagement to the company. Feedbacks must also be encouraged from the employees and use them to contribute to the company’s success
- Manage the business in the interests not only of the clients but the wider society
- Fulfill corporate responsibility through environment friendly purchasing and supplier engagement. Aside from the environment, philanthropic activities can also be focused on education and poverty alleviation