2010MASTERS ENTRY PROGRAMME

MODULE-THE BUSINESS ENVIRONMENT-MEP2

CHANGING BUSINESS ENVIRONMENT OF MULTI NATIONAL COMPANIES

TABLE OF CONTENTS

1. Introduction………………………………………….3

2. Executive Summary…………………………………3

3. Business environment……………………………….4

4. Macro Economic Scenario………………………….5

5. A Brief History………………………………………6

6. The Company Environment………………………..6

7. PEST Analysis……………………………………….6

7.1.Political Factors………………………………….7

7.2.Economic factors………………………………...7

7.3.Social factors……………………………………..8

7.4.Technological Factors…………………………..11

8. Challenges ahead…………………………………...12

9. Suggestions………………………………………….13

10. Conclusion…………………………………….14

11. References…………………………………….15

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Introduction:

This study is an attempt to make a bird’s view of the global strategies of HSBC over last five

years and analyze them in the view of the current global financial scenario. This study lays a

special emphasis on the emerging trends and opportunities in the emerging economies and

tries to analyze the region specific strategies to serve these markets effectively and thus

expanding the overall market base of the company.

I. Executive summary

HSBC holdings, one of the world’s oldest financial service conglomerates has been in

the lime light in the recent past, especially among the researchers of economics,

owing to its consistency of performance in times of global financial meltdown. Its

consistency in performance owes a lot to the strong fundamentals it has maintained

over more than one and a half century and the quickness in adapting to the changing

global financial environment. The group had of course been part of the subprime band

wagon of the Western markets, and suffered owing to this in terms of accumulated

loss of asset and loans; but its investment in technology and sustainable practice

across the globe paid off the time of turbulence. Now the group is all poised to

expand itself into the deeps of larger markets and its recent acquisition of the Indian

operations of RBC (Economic Times, Mumbai Edition, May 12, 2010) stands

testimonial to this. This study tries to make a quick introspection into the strategic

responses of the company to the Political, Economic, Social and Technological

factors which affected the group in the recent past.

II. Literature Review

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The literature which was referred as part of this study has revealed the basis details of the

company. Along with this, concepts of business environment and analysis of strategy were

also referred.

1. Business environment:

Business environment is a set of political, economic, social and technological (PEST)

forces that are largely outside the control and influence of a business, and that can

potentially have both a positive and a negative impact on the business.

Types of business Environments:

The types of business environments can be Internal or External. The external

environment can further be classified into Task and Micro/general environment.

Internal Environment contains Owner of Business/Share holders, Managing Director,

Non Managers/Employees, Customers, Infrastructure of Business Organization &

culture of the organization. The External environment consists of Competitors,

Consumers, Producers of substitute products/services and prospective entrants in the

Business.

Macro/General Environment is further divided as Political &Legal, Economical,

Social & Cultural, Technological, Natural/Ecological, Demographic, Global

environmental factors.

2. PEST Analysis:

PEST analysis is a scan of the external macro-environment in which a firm operates.

This is expressed in terms of the following factors:

Political

Economic

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Social

Technological

The acronym PEST is used to describe a framework for the analysis of these

macro environmental factors.

3. SWOT Analysis.

A scan of the internal and external environment is an important part of the strategic

planning process. Environmental factors internal to the firm usually can be classified as

Strengths (S) or Weaknesses (W), and those external to the firm can be classified as

Opportunities (O) or Threats (T). Such an analysis of the strategic environment is referred

to as a SWOT analysis.

SWOT analysis provides information that is helpful in matching the firm’s resources and

capabilities to the competitive environment in which it operates. As such, it is

instrumental in strategy formulation and selection

III. Macro Economic Scenario

The global financial sector is yet to recover from the subprime mortgage crisis and the

overall financial turmoil which hit economies across the globe.

The financial sector has been the worse hit among all the sectors, which got terrible blows on

its credibility in different economies in different magnitudes. The crisis brought into to the

forefront the unsustainability of many practices that these institutions were following across

the continents. The turbulence caused many celebrated names in the global financial arena

taste the dust and many big players were even forced to declare themselves insolvent. It was

seen that the worse hit has been those economies, whose much talked about free trade regime

were been showcased as the best model which can fuel economic growth in those countries

which are more 'regulated' and whose economies were considered 'underdeveloped'. The

leizes fair in financial sector had indeed nurtured many such practices which were bound to

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fail. HSBC, the bank having a long tradition of over two and a half centuries was able to

withstand the storm of this crisis mainly because of its business base in the so called 'less

developed' eastern markets whose mammoth deposit bases worked as a buffer for the bank

which enabled the bank to withstand the seismic waves of the crisis.

IV. A Brief History

The Hongkong Shanghai Banking Corporation has been established in 1865 to finance the e

growing trade between China and Europe

It is incorporated in Hong Kong by special dispensation from the British Treasury under the

Hongkong and Shanghai Bank Ordinance 1866. But it was after 1991, when the HSBC

Holdings is established, shares started being traded on the London and Hong Kong stock

exchanges that the bank started its spree of rapid expansions into different economies. HSBC

entered the UK retail banking sector by acquiring the Midland Bank, which at that stage was

barely solvent. Since then, the Midland Bank2 has changed dramatically and has returned to

profitability

(Strategizing Routine in HSBC, Jonathan Menuhin and John McGee, 2002)

V. The Company Environment:

With an operation network in over 83 countries with over 10000 offices HSBC has presence

in Europe, the Asia Pacific region, the Americas, the Middle East and Africa. The Bank has

a diverse product basket ranging from highly personalized private banking offered mainly in

developed economies to the micro finance instruments custom made for the ‘low volume’

customers in the emerging and third world economies. The bank has been functioning in the

highly competitive environment of the Developed West as well as the oligopolistic East over

these years.

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VI. PEST Analysis:

A PEST analysis is attempted here to assess the strategic positioning and operation of the

bank over different continents. The analysis tool attempts the effect various internal as well

as external environments on the organization and the way the group responded to them.

a. Political Factors:

The WTO regime opened the door for companies in the west to expand their

operations to the un touched territories of many emerging economies. With the

Basel norms acting as a super regulator for international financial retailers, the

banks across the continents have started following the same set of norms and

compliances. (The Top Executive, 24 July, ICFAI Press, Hyderabad, 2009)

Stability returned to Brazil after a prolonged time of political upheavals, and the

East Asia has been more over calm, except certain unpleasant turmoil in

Indonesia and Malaysia. China, the big Dragon drew everybody’s attention by

posting double digit GDP growth figures year after year and India too has been

impressive. The growing brigade of new generation entrepreneurs and emerging

middle class offered a lucrative market for the bank.

The Bank was quick to respond to the opportunity this situation unveiled and

expanded its branch network in to greater numbers and now the bank has

operation in 83 countries across continents.

b. Economic factors:

The period from 2007 saw periods of financial turbulence and HSBC also got the

bitter hit. In 2008, where some of the best know banks started recording losses,

HSBC managed to register 10% growth in revenue. (Katherine Griffiths and

Philip Aldrick, The Telegraph, 09 October 2008). It incurred credit loss of US$

17 Billion in US market alone. Its shared shed 14% in the market, which still was

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quite better comparing it with the performance with its competitors. Mr. Stephen

Green, Chairman, HSBC stated it is he strong growth the bank managed to

achieve in Asia, Middle East and Latin America which helped the it withstand the

intensity of the blow it occurred in the West. But in 2009, HSBC also got burns

in the furthering financial turmoil. HSBC Finance Corporation, a subprime

lending subsidiary of the company in US contributed around US$ 50bn to its NPA

basket. (Richard Watchman, The Guardian, 12 April 2009). The bank resorted to

large scale downsizing and reduction in the number of offices in US and Europe

and continued to consolidate its position in the East and Latin America.

In 2010, the bank is back with its consolidation spree. In the end of the first

quarter, HSBC took over the Indian operation of RBS, making its intention clear

that in the years to come the bank will further strengthen its presence in emerging

markets with diversified strategies.

c. Social factors:

The bank is functioning in a dynamic environment where the habit of banking and

its nature is different in each of the region in functions. The Bank is considered as

a provider of sophisticated financial solutions in the West, where the financial

literacy is quite high; while a bank is considered as a tool for financial inclusion

and social change in the developing countries, which still seek welfare economic

solutions for their social and economic miseries.

The bank has been quite adaptive in its operations considering the social factors in

different markets. In spite of its global reach, HSBC maintains a ‘local bank’

philosophy – local learnings, local customers and local products.  The company

wants to be the ‘best place to bank and the best place to work’ and its seven

‘global pillars’ around ‘our customers’, ‘our culture’ etc communicate the actions

it is taking.

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The bank, which mainly sought to serve the elite customer group world over has

been spending corporate social responsibility in developing countries, where the

spending is mainly channelized towards education and social inclusion.

Given below is the strategy intervention diagram for its social sector interventions

in India.

http://www.hsbc.co.in/1/2/miscellaneous/about-hsbc/corporate-sustainability/our-approach

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c.a. Brand Positioning:

In the developed markets, the bank is functioning through a number of subsidiaries, each

one of which dealing in specialized set of products or functions. The Group has shown

skilled adaptation as far as the branding of its subsidiaries is concerned. It has adapted

well in deciding the appropriate positioning in different social conditions across

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Investment in Micro finance- a case of strategic adaptation:

Over these years, HSBC had been considering ‘class’ banking as its preferred mode of

operation, where in the business volumes are expected to come from the set of high

profile customers, which included corporate as well as individual customers. But the

company was quick to adapt to the changing mode of operation while it decided to

have its own share in the micro finance market. This is an innovative idea of banking

where a group of five to twenty women are given loan above the bank rate, but below

the informal rate prevailing in the informal village money lending system. In India,

Bandhan Micro Finance based on Eastern part of India and Spandana Micro finance,

based at Hyderabad, south India are among 11 MFIs which received financial

advances In India and far East from HSBC.

geographies. This is evident from the multiplicity of brand images, the company chose to

wear in different continents.

Over different countries, the positioning of the group considering the mentality of

prospective customers to connect themselves to the world through a player which serve

the globe as a whole has been fairly successful. The pride factor of being served by a

bank having presence world over gives customer feel elevated.

d. Technological Factors:

The innovative practices in the technology end have redefined the way banking is

being done across the globe. Every bank is considering technology innovation as a

means of differentiation over competitor.

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The HSBC group has been quick to accept the technological innovation in the area

of its operation. HSBC Global Technologies (GLT) is one of the world’s largest

financial service organizations, which has a dedicated mission of development and

implementation of core mission critical Banking, Financial services and Insurance

applications for the HSBC group. This is one of HSBC’s latest additions to the

investment in Technology in the last 5 years. This organization, a wholly owned

subsidiary of HSBC is dedicated to the development of cutting edge technologies in

the area of financial services. GLT has a sprawling campus in Pune, India, from

where it spear heads the development and research in technology innovation.

HSBC and Capegemini have collaborated on developing innovative solutions that

include a platform for cards and collections servicing, which has been deployed

across multiple countries enabling HSBC to introduce new offerings at a faster rate

and significantly increase business volume processing.

The platform's architecture enabled deployment across locations with minimal

customization, lower cost and reduced time than HSBC's previous process

(http://www.domain-b.com/finance/banks/hsbc/20100210_capgemini.htm)

The investment made in technology enabled HSBC take a leading edge over its

competitors. HSBC manages around 368,000 kilometers of fibre optic cable. This

network runs at about one-seventh of the cost of using a public carrier. It is totally

owned and managed by HSBC, carrying only data on behalf of our customers. And it

allows us to take data across the world and return it in a second and a half. 

The group had also developed capacity to consolidate back office functions and

process transactions across borders to optimize cost savings. Likewise, because IT

development could be done in any location, anywhere the appropriate skills exist, we

can develop our systems and software wherever the productivity advantages are

greatest. 

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The innovation and investment made in the technology end enables the group

win the Cape Gemini- NASSCOM Corporate innovation award in Feb.2010,

and Banker Magazine's Innovation in Banking Technology Award in June 2010.

These are some of the latest laurels the group had won in the recent past.

Challenges ahead:

The group is currently functioning in one of the most volatile financial environment the

world had ever witnessed. HSBC had rightly decided to tune its strategies in tune to the

changing demand of the current global market. As the bank decides to venture into the

territories it never ventured before and re position itself, it has to face new challenges

also.

Positioning: HSBC, which has a strong global positioning as a Higher End Bank has to

decide which way it has to reposition itself when it goes for mass banking in the larger

territories. Any deviation from its current positioning strategies is bound to make its

repercussions on its existing growth path.

External competition: The Local and National banks of the respective countries are

bound to pose a serious competition for the Bank when it goes for large scale expansion.

In many countries, the Banking sector is partly nationalized and these players are also in

the path of consolidation and expansion-as in the case of State Bank Group, India- and

the rich experience and long standing credibility of these banks make them tough

competitors for HSBC to counter.

Huge non performing back log: The millions the bank has lost as Non performing asset

in the financial meltdown in the latest years and the possibility of further losses from its

lending to some of the economies which are still reeling under crisis- especially Greece,

Italy, Iceland and Spain in Europe- is sure to prove a throne for the bank in the days to

come.

Risks associated with mass banking and branch expansion: The traditional risks

associated with mass banking are another important factor it has to consider while going

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for wide area banking. The increase in the over head expenses in the initial period will be

high and it is to be noted that many a banks who tried this model had to leave the scene

suffering burns of low volume business and sprawling over head and administerial costs.

Suggestions:

As understood from the aerial view of the company, as an inquisitive researcher, I feel

the group is moving in the direction which is actually demanded by the present global

financial market sector. As suggestions, I would like to put the following points for the

group:

i. Acquisitions and consolidations:

The hey-days of the financial sector players seems to be over by the current financial

melt-down in the recent times. Many new players that emerged at the times of hype were

blew off by the turbulent storm of recession. It is high time for the financial institutions to

concentrate on their basics and move ahead in the path of consolidation, where the

weaker players in the local markets are to be acquired and the position of the group in

different geographies is to be consolidated.

ii. Branch expansion in local penetration:

Expansion of branches to the grass roots is the key to win the heart of the customers in

the developing economies. The ‘World’s Local Bank’ should look like their real Local

bank

iv. Technology education to larger customer base:

Since the group has made its intent clear as to go for large scale expansion in to the

emerging economies, the bank should put more pain to educate the customers, especially

in the small towns and villages on the technology side of banking. This in turn is an

investment for near future, which will help the bank serve their customers better and

increase their efficiency of operation, which many of the local players lag in.

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v. Innovative products for BOP customers

‘Dealing with the deprived millions’ is the mantra of modern day business, and many

players across categories had identified the fortune kept in on dealing with the Bottom of

the Pyramid customers. Simple and useful products need to be introduced while working

with this section of customers. Wholly owned subsidiaries of the group may be formed

assigned with the task of serving them.

vi. Concentrating on SME sector: The Small and Medium Enterprises have been

instrumental in setting the economic engine of the emerging economies in motion. Many

of these enterprises have capacity to catapult into big business also. The bank should

carefully select these enterprises for long term business of decent volumes.

(Financing MSME, EXIM Bank publications, India)

Conclusion:

The HSBC group has a strong history of successful business of over 150 years. The Bank had

overcome two worst financial crisis of the world and two world wars, along with countless

political and Economic turbulences. The group had expanded over these years and adapted itself

to the changing global scenario.

As stated by the Chief Executive of the group Mr. the HSBC group is shifting its strategic

concentration towards the emerging economies, especially towards the East. While the group

moves towards these markets, the group should take utmost care in building its fundamentals by

reaching the largest possible number of customers. Unlike the west, where a limited number of

customers can provide the company with the required volumes, the success of eastern markets

mainly depends on the volumes in the number of customers.

Reference:

1. Back to Basic: The current Competitive Strategy of HSBC Bank, Canada- Christopher

Patric Sheppard, Simon Fraser University, 2007

2. Strategizing Routine in HSBC, Jonathan Menuhin and John McGee, 2002

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3. The Top Executive,24 July, ICFAI Press, Hyderabad, 2009

4. Kotler, P. (1998) Marketing Management – Analysis, Planning, Implementation, and Control, 9th

Edition, Englewood Cliffs: Prentice-Hall

5. Economic Times, Mumbai Edition, May 12, 2010

6. Micro Finance Focus, 17 Dec. 2009

7. Financing MSME, EXIM Bank publications, India

8. http://www.guardian.co.uk/money/2009/apr/12/hsbc-credit-cards-us-business

9. http://news.bbc.co.uk/2/hi/business/7274385.stm

10. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3168502/Financial-

Crisis-HSBC-details-750m-plan-to-strengthen-capital-base-in-UK.html

11. http://www.hsbc.co.in/1/2/miscellaneous/about-hsbc/corporate-sustainability/our-

approach

12. http://www.quickmba.com/strategy

13. http://www.domain-b.com/finance/banks/hsbc/20100210_capgemini.htm

 

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