SMIB Unit 1a - Strategic management in money and finance PDF

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Strategic management in money and finance...

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1. A Financial Services Organisation’s (FSO) strategy is crucial for long-term performance. An FSO’s business model and mission statement represent fundamental components of a firm’s competitive strategy and engagement in a competitive market. The business model determines the firm’s current orientation (considering the types of products and markets in which the FSO engages). The mission statement is directional and guides the firm’s long term aims (Johnson et al, 2017). This essay will assess the factors and challenges affecting HSBC’s business model and mission statement. A legacy FSO with 150 years heritage, HSBC faces numerous internal and external challenges in attaining a successful future. The business model symbolises a firm’s internal logic and strategic objective at present (Matzler et al., 2013). In turn, this brings value to its operations through value generation and value capture (Teece, 2010). Value generation accrues from the benefits that a company creates for its customer base to determine how much customers will pay for its services. Value capture stems from retaining value from each transaction. Companies that simultaneously balance high value creation and high value capture can establish a profitable business model (Matzler et al., 2015). The business model canvas provides a visual framework for documenting current and prospective value flows, alongside customer segments, firm infrastructure, and finances. HSBC’s value proposition focuses on being a leading international player in financial services, owing to their wealth of expertise. HSBC communicates its value proposition through multiple channels including relationship management, digital banking and its global presence. Moreover, it hopes to expand its channels towards consolidating an Asian customer base to redeploy capital for greater investment returns in the Far-East. Channels are used to communicate with the FSO’s complex range of customers. Segmenting these customers allows for specified targeting that can create optimal value (Johnson et al., 2017). Segmentations are formed around customers’ differing needs and behaviours. HSBC distinguishes between its personal, wealth and corporate clients. These groups deliver differing levels of profitability to which HSBC responds by supporting diversification across these segments to deliver a low earnings volatility. The firm’s key activities are orchestrated under semi-autonomous business lines which are organised within the group’s structure. To maintain a successful business model, HSBC has aimed to reshape its cost structure to simplify its business through an internal restructure. Moreover, it has identified a new key activity by investing in digital technology to improve customer experience. (HSBC, 2020).

In contrast, the mission statement describes the purpose and commitments of an FSO. These missions are often aligned with the scope of the organisation and the values of relevant stakeholders (Johnson et al., 2017). HSBC’s mission is founded on 3 principles: Firstly, to be customer obsessed, enabling those who bank with HSBC to achieve maximum fulfilment from the FSO’s product base. Secondly, to exploit its significant trade presence to be recognised as the connector of choice for international capital flows. Thirdly, to utilise its international heritage to grow its presence in high growth markets. Connected to an FSO’s mission is the long-term vision that defines an aspirational future state (Matzler et al., 2015). HSBC’s forward-looking vision focusses on sustainable financing capabilities to help clients achieve net-zero carbon emissions and class leading digital propositions. Internal and external factors from 2020 and beyond are influential on HSBC’s business model and mission. Internal environment analysis focuses on the assessment of a firm’s own resources, knowledge or competencies that give rise to potential sources of value. This allows for a company to assess its strengths and weaknesses to better inform future strategy. The Resource-Based View considers the importance of analysing internal resources, establishing a roadmap for competitive advantage (Hoopes et al, 2003). The VRIO framework was established to ascertain whether a firm’s resources would enable a sustained competitive advantage. Resources must deliver value by exploiting revenue streams, be unique and almost non-existent amongst competitors, be inimitable and be sufficiently organised to extract value (Barney, 1991). HSBC attains a sustained competitive advantage in several of its resources through its longstanding history and market presence. HSBC boasts a 150-year-old global heritage that has consolidated a strong brand reputation. This creates an asset that is unique and inimitable. As such, this has provided HSBC with a sustained competitive advantage to become a trustworthy institution to instigate international business for its customers. Moreover, this trustworthiness is held by its strong balance sheet position which is unique and unrivalled by any European based competitor (measured in total assets held). This delivers value which ensures it has the financial clout to adhere to its business strategy of investment in high growth markets during recent economic volatility. However, internal weaknesses are present. Several internal resources fail to meet the VRIO criteria which weaken HSBC’s internal position to achieve its strategic objectives and implement change management. The organisation aims to implement customer centricity amongst its large customer base. However, the organisation of this resource is lacklustre, owing to poor

feedback loops that have left customer satisfaction metrics substandard, especially in Asian markets (HSBC, 2020). Moreover, the firm’s technological competencies are inferior to other FSOs. This is evidenced by the firm’s priority to rapidly improve their technology to enhance their digital offering. The turbulence within the current global environment has impeded the prospective operations of FSOs. External analysis provides an objective assessment of the macroenvironment so firms can strategically account for their key opportunities and threats (Gurel and Tat, 2017). This is facilitated through PESTLE analysis to interpret the environment which emanates outside of HSBC’s control (David, 2015). Factors of PESTLE analysis (political, economic, social, technological, legal and environmental) may be conjoined and have an impact on several areas of the framework. In turn, PESTLE can help identify key drivers of change and its strategic implications. HSBC’s business model and mission is influenced by a range of factors emanating outside the financial services market. The political environment has been volatile owing to the ongoing trade war between the US and China, alongside troubles in Hong Kong. This has presented a challenge for HSBC’s longer-term strategy to pivot into high growth Asian markets and maintain a resound reputation as an international FSO. Legally, the uncertainty of Brexit legislation has affected the ease of trade within the European Union. As such, the UK has updated regulation surrounding prudential risk and the minimisation of financial volatility. In turn, increasing costs and complexity. The impact of the global pandemic has been unprecedented in 2020. This has manifested significant pressures on social and economic spheres. Economic performance globally has been mixed. Asian economic performance has rebounded, owing to recovery led by manufacturing and trade (HSBC, 2020). However, other markets suffered siginificant economic shocks, led by dampened customer demand and low central bank interest rates. Lockdowns and social distancing measures significant changed social interactions. This has added to the acceleration in decline of personal interactions and cash transactions (Martin, 2020). Moreover, societal trends have shifted towards a digital and on-the-go approach to finance across retail, wealth, transaction banking and SME customers. The technological environment has seen rapid innovation and disruption. The embedding of AI and Machine Learning into financial services has seen other incumbents utilise new technologies to mitigate risk and reduce costs (Courbe,2020). Moreover, 5G and space-based internet have provided new connectivity technologies. This generates a larger scope for connecting online customer bases, developed and emerging markets.

Other factors may arise from analysis of the financial industry. Porter’s Five Forces provides a more concentrated framework to understand current competitive rivalry (Johnson et al, 2017). This framework considers direct competitors and the industry’s ecosystem. From this analysis, HSBC faces several threats that will influence its business model and mission. Competitive rivalry in the industry is high with the emergence of fintech institutions and challenger banks which threaten HSBC’s legacy business model, forcing it to innovate. Whilst regulations, including PSD2, have increased data sharing to reduce legacy banks’ information monopoly in the European retail market, the absence of such competitive legislation in Asia has prompted the business model focus on personal wealth in this market. The threat of substitutes for HSBC’s proposition is mixed. When considering the individual components of the business model, HSBC faces competition from different sources. For example, in its traditional banking offering, the rise in instant payment providers and accessible FX products have provided substitutes. However, in combination, its ability to operate and connect across many international business lines is hard to substitute. The bargaining power of buyers is also high as low interest rates have put downward pressure on prices, giving borrowers more autonomy. This affects HSBC’s business model by prompting them to focus on specialist products that are more fee orientated such as the bank’s Global Trade and Receivables Finance (HSBC, 2019). External and internal factors affecting HSBC’s business model and vision will challenge its strategic implementation. Porter’s Four Generic Strategies define strategic options based upon market size and the level of product specialisation to sustain competitive advantage (David, 2015). Using Porter’s classification, in 2020, HSBC pursued a hybrid strategy. Elements of cost leadership were implemented by minimising costs through internal restructuring to cut operating expenditure and deliver low price products to the global market. Moreover, the ongoing pursuit for expansion in Asia identified another strategic objective. This was accommodated through increasing the rate of investment in Asia, trade finance and sustainable finance. Such investment flows and pivot to high growth markets marks HSBC’s aims at differentiation to be establish as a specialist international bank. Moreover, HSBC has further implemented differentiation strategies with a key focus on improving customer’s digital experience, technological infrastructure and development of innovative products. In combination, this strategy proposes to make HSBC the world’s leading international bank. A significant challenge has been presented by the social and technological changes brought about by Covid-19 as identified in PESTLE analysis. As such, HSBC’s aim to

improve customer experience has faced increased pressure. This is owing to the rapid change for reliance on digital banking and reduction in face-to-face interactions. Moreover, the threat of substitution and level of competitive rivalry in the industry caused by the level of technological innovation in competitors provides added pressure for the enhancing of customer experience (HSBC, 2020). The push for technological innovation further highlighted HSBC’s internal weaknesses in its substandard technological infrastructure. Changes in economic circumstances and volatility have also been challenging for the establishment of HSBC’s strategy. Uneven recovery rates in the global economy have impeded costs and squeezed profitability margins owing to low central bank rates. As such, HSBC’s cost minimisation strategy has faced pressure to work with tighter margins. This is also challenged by the increased power of buyers. However, uneven growth has provided an opportunity that aligns with HSBC’s aim to expand in Asia, owing to its fast recovery. Yet, external challenges are presented by the impact of political woes in such markets which raises the question for economic stability in such markets. Moreover, HSBC’s direct involvement and international self-interest provides a challenge in this strategy due to the potential damage to HSBC’s reputation. Adopting a hybrid strategy challenges HSBC’s approach to change management. “Penetrating change” is required to implement a more dynamic modus operandi that can respond to external challenges (Huczynski, 2013). Lewin’s planned change theory outlines that HSBC must “unfreeze” and remove stagnating behaviours before a “movement” of change implementation can take place until a point where these new behaviours can be correctly learnt and consolidated. This process started in 2019 with the removal of former CEO John Flint who was not deemed fit by HSBC’s executive board to “accelerate [change] through a point of inflection” (Bradt, 2019). The removal of incumbent leadership marks the first stage of Lewin’s (1947) planned change theory which seeks to “unfreeze” and remove stagnating behaviours before a “movement” of change implementation can take place until a point where these new behaviours can be correctly learnt and consolidated (Mind Tools, 2018). Subsequently, further steps in Lewin’s theory to drive ‘change’ have stalled by the challenges presented in the external environment. Volatile economic and political forces have inhibited the ability for HSBC to adequately plan and implement the changes required. Moreover, reactions to change under increased working pressures in the global pandemic have inhibited employee relations as workers are faced with unattainable objectives and increased workloads which may prove detrimental to

future motivation and impede the ability to “refreeze” change behaviours beyond 2021 (Worral & Cooper, 2006). Successful change management and strategy implementation is contingent on effective leadership. HSBC is currently managed in a ‘transactional’ style where followers are instructed in their actions and incentivised using tangible benefits (Burns, 1978). Owing to the overarching pressures on the financial services industry, fast paced change is required by HSBC to dampen the challenges created by competitive rivalry. HSBC’s strategy to create a sustained competitive advantage as a world class financial organisation requires all employees to engage in this collective purpose. Moreover, the challenges presented by social isolation and technological innovation requires employees to be motivated by higher order satisfactions that transcend monetary benefits. As such, ‘transformational’ leadership would be a better suited style for HSBC to navigate the challenges faced in its external environment. This can be done by unlocking the needs and morals of followers to achieve conviction and commitment to the FSO.

2. The ‘Value Model’ expresses how value is generated by an enterprise and transferred to its customers and shareholders. Choo (2017) illustrates how a more holistic approach to value that expands broader than profit and loss must be considered by FSOs like HSBC in an era of greater customer expectations and increased ease of access to the financial marketplace. Whilst traditional financial value which monitors the profitability of a product remains important to FSOs, this answer will illustrate that social value, customer value require greater emphasis within HSBC’s value model over the next five years. Innovation, the design and implementation of a new product or service, underpins changes required in HSBC’s value model. Innovation can be categorised as ‘disruptive’ or ‘sustaining’. Disruptive innovation typically tackles the base of a market. As incumbents make higher profits servicing top end clients, they neglect lower segments of the market where disruptors can gain a foothold with pioneering, more accessible products (Christensen et al, 2015). This allows them to rapidly expand market share, eroding legacy banks’ low end customer base and giving them a better position from which to pursue more profitable consumers. HSBC’s internal capacities are not best suited to embarking on disruptive innovation owing to previously mentioned internal limitations including outdated legacy IT systems and bureaucratic processes. According to Rogers (1962), the “chasm” between early adopters and the adopting majority must be overcome for disruption to take hold. HSBC must act defensively over the next five years to broaden this chasm with the following twofold response: Firstly, by focussing on sustaining innovation within its strategy, HSBC can deliver incremental changes to its products to keep pace with the industry and maintain its smaller customers who face greater risk of capture by disruptors. The development of HSBC Kinetic, a first in class small business online banking platform delivers a best-in-class proposition to provide small business customers with in-app overdrafts and intuitive cash management insights. Whilst only an overhaul of existing mobile banking technology, this development serves to strengthen and maintain relationships with core customers. Secondly, HSBC must seek to increase market share through cost reduction or product differentiation amongst its profitable high-income customers where it has an absolute advantage over its fintech competitors. Growth opportunities should be concentrated in this market and this should be achieved inorganically by partnering/operating joint ventures with smaller companies specifically targeting disruption (Bamford, 2020). This prevents innovation being constrained by HSBC’s restrictive operating and cost frameworks.

Customer value, the worth of a firm’s products through the perspective of its consumers, can be increased by paying greater attention to customer journeys. The past decade has seen the “debundling” of financial products where the ease of switching between providers has enabled customers to easily purchase financial products such as wealth trusts, mortgages, and reward accounts from separate providers, largely determined by price. According to Deloitte (2019), “rebundling” has become the trend as customers value convenience and improved spending insights that a single provider can offer. Approximately 80% customers claim that the experience a company provides is of equal importance to its products or services (Salesforce, 2016), a paradigm shift from historic assumptions of price driven consumption. According to the Millennial Disruption Index, 70% of young consumers are more excited by offerings from big tech companies including Apple and Amazon than from legacy banks which can be attributed to these companies’ focus on exciting user experience (Rocha, 2015). HSBC is therefore focussing on API development to change its customer value model. By designing alternative delivery mechanisms, the firm can better engage and retain its customers who gain more fulfilment from their financial services provider. Yet whilst innovation within the customer intelligence space could re-position HSBC’s value model to become more customer obsessed, the firm could leverage its mission to “enable people to fulfil their hopes and ambitions” to revamp the customer journey in its entirety. Customer value must extend beyond the surface level utility of a product and instead target customer aspirations at source. Singaporean FSO DBS has successfully deployed this strategy, proclaiming the importance of making “banking invisible” by providing customers with a realised vision, such as owning their own home, whilst masking the financial instruments facilitating this outcome, i.e. a mortgage (DBS, 2018). HSBC could shift its customer value model to reflect this philosophy, building on the desire for seamless end-to-end experience to create integrated back office products capable of delivering maximum customer value and thus upholding the f...