Introduction
Barclays Bank is a leading multinational financial services provider. The bank’s core business activities include retail banking, wealth management, corporate, as well as, investment banking. The bank’s headquarters is located in London in the United Kingdom. Barclays Bank was founded over 300 years ago in UK, and has since expanded its operations to other parts of the world. Currently, the bank operates in over fifty countries across the globe. Barclays is the third largest bank in the UK by market share and the fourth largest bank in the world by asset base. The vision of the bank is “to be one of the premier globally integrated universal banks, providing superior benefits to each of its stakeholders” (Barclays Bank 2012). The firm’s commitment to realize this vision is reflected in its mission. The firm’s mission is “to help individuals, institutions and economies to progress and grow” (Barclays Bank 2012). By the end of 2011, Barclays Bank had assets worth $ 2.33 trillion. The bank serves over 48 million customers in UK and other parts of the world. Currently, Barclays Bank has more than 140,000 employees. In 2011, the firm’s income increased by 3% to 32.2 billion pounds. However, the firm’s profit before tax decreased by 3% to 5.9 billion pounds over the same period (Barclays Bank 2012). In this paper, three macro-environmental factors that influence the performance of Barclays Bank in UK will be analyzed.
PESTEL Analysis
PESTEL analysis is a framework for analyzing the macro-environment or the external environment of a business. The macro-environmental factors (PESTEL) include “political, economic, social, technological, environmental and legal factors” (Richards & Gilligan 2005, p. 43). Thus, PESTEL analysis examines how each of these factors influences the performance of businesses in a particular market. The analysis aims to enable businesses to take advantage of available opportunities, as well as, to mitigate the effects of threats in the industry. The macro-environmental factors can be explained as follows.
Political factors refer to the government policies that affect businesses and the extent to which the government intervenes in the economy. The government policies that affect businesses include the tax policy, labor policy and trade restrictions (Loudon, Stevens & Wrenn 2004, p. 68). Government intervention may include price controls, provision of merit goods and bailing out financially distressed firms. Finally, political factors also include the political stability of the country.
Economic factors refer to the economic variables such as interest rates, inflation rate, as well as, exchange rate. They also include factors such as GDP growth, income per capita, unemployment and availability of credit. These factors affect the performance of businesses, as well as, the decisions made by firms (Nisbet, Thomas & Barreti 2003, pp. 245-259). For instance, interest rates affect the cost of capital. Thus, a business intending to raise capital through external sources must take into account the prevailing inertest rate.
Social factors refer to the cultural and demographic aspects of the community in which the business operates. Some of the social factors include health consciousness, attitude towards work, population growth, and level of education (Richards & Gilligan 2005, p. 44). The social factors determine the type of products and business activities that are acceptable in a particular community. They also determine the availability and productivity of employees.
Technological factors describe the influence of technology on businesses. The main technological factors include the level of research and development (R&D), internet usage, technological transfer, patents and copyrights. These factors determine the level of efficiency, barriers to market entry, innovation and productivity of individual firms (Brousseau 2002, pp. 353-374).
Environmental factors refer to the ecological, as well as, climatic and weather changes (Richards & Gilligan 2005, p. 45). They also include natural phenomena such as volcanic activities, earthquakes and floods. The increasing awareness on the impacts of climate change has forced companies to produce environmentally friendly goods. This has resulted into the emergence of new markets, as well as, elimination of some products.
Legal factors refer to the laws and regulations that guide business activities in a given country or industry (Friesner & Rosenman 2001, pp. 437-450). Such laws include consumer laws, antitrust laws, labor laws, as well as, health or safety laws. Legal factors determine the business activities that companies can engage in, and how they perform such activities.
The benefits of using PESTEL analysis include the following. First, it helps businesses to understand the growth or decline of the market, their position in the market, as well as, the threats and opportunities in the industry. Second, the results of PESTEL analysis provide useful information for strategic planning (Loudon, Stevens & Wrenn 2004, p. 73). Third, it ensures that the performance of the firm is strategically aligned to the main forces that drive change in the industry. Finally, PESTEL analysis provides important insights that inform expansion decisions. In particular, it enables businesses to avoid assumptions that can lead to failure in new markets.
Some scholars criticize the application of the PESTEL model due to the following reasons. First, the usefulness of PESTEL analysis is limited due to the fact that it covers only the external environment. It ignores the internal and the competitive environment which must be considered during strategy formulation. Second, the macro-environmental factors often change rapidly, thereby making it difficult to anticipate their future impacts on businesses (Loudon, Stevens & Wrenn 2004, p. 75). Additionally, lack of information on the relevant macro-environmental factors can limit the application of the model. Finally, the assumptions associated with PESTEL analysis may limit its usefulness.
Macro-environmental Factors that Affect Barclays Bank
Economic Factors
According to nominal GDP measures, UK’s economy is the seventh largest in the world and the third largest in Europe. UK has been experiencing dismal economic growth since 2007. In 2009, the country entered a recession due to its huge public debt and the effects of the 2008/2009 global financial crisis. The government and the Bank of England took remedial measures that enabled the economy to leave the recession in January 2010. In 2011, the Bank of England reduced its lending rate to 0.5% to encourage economic growth (HM Treasury 2011, pp. 5-104). The government also implemented austerity measures and plans to reduce public borrowing to stabilize the macroeconomic environment. Consequently, GDP grew by 0.8% in 2011, while unemployment rate reduced to 8.1%. The country’s GDP per capita in 2011 was $39,604 (Sawyer 2011, pp. 13-29). UK’s inflation rate decreased from 4.2% in December 2011 to 3.6% in January 2012. These statistics indicate that UK’s economy was on a recovery path in 2011. However, the country reentered a recession in the first quarter of 2012. GDP reduced by 0.2% in the first quarter of 2012. Median income earners constitute 60% of UK’s population, while 14% of the population still lives in poverty.
The economic factors have affected Barclays Bank and the banking industry in the following ways. Currently, banks can borrow more money from the Bank of England due to the low interest rate. However, the poor economic growth has reduced the demand for loans from commercial banks such as Barclays. Additionally, the default rate has increased, thereby increasing the losses made by commercial banks (Sawyer 2011, pp. 13-29). Thus, Barclays has been forced to limit the amount of loans it can offer to avoid losses. The reduction in inflation rate is likely to stimulate demand for loans offered by Barclays. This is because interest rates tend to reduce as inflation rate reduce. Finally, the recession has reduced investor and consumer confidence in UK. Consequently, Barclays is losing its customers and investors to overseas banks. The bank is likely to make huge losses if the economic crisis in UK persists.
Political Factors
The government of UK has been able to maintain political stability for a long time. The government of UK is based on a constitutional monarchy system. Previous governments have been able to promote political stability by upholding the rule of law and enhancing democracy. The government of UK intervenes in the economy by providing merit goods such as health care, education and infrastructure (HM Treasury 2011, pp. 5-104). For instance, in the 2011 budget, the government allocated more than 300 pounds for the construction of railway systems and enterprise zones to promote exports. The government began to implement tax reforms in 2011 to make tax compliance easier and cheaper. The government reduced the corporate tax to 26% in 2011, and intends to reduce it further to 23% by 2014 (HM Treasury 2011, pp. 5-104). The government is, currently, implementing a progressive tax system to enhance equality in income distribution. Local businesses are also supported by the government. For instance, Barclays Bank received financial assistance from the government during the 2008/ 2009 financial crisis. The current economic crisis has forced the government to implement austerity measures. This involves reducing expenditure on welfare and reducing employment in the public sector. Additionally, the government has been forced to reduce borrowing from the public to reduce its debts.
These political factors affect Barclays in the following ways. The tax reforms are an opportunity for Barclays to reduce its tax compliance costs. Additionally, the reduction in corporate tax will enable the bank to increase its after tax profit margin. The initiatives to promote economic growth by investing in infrastructure will increase demand for credit in the private sector. Thus, Barclays will have a high demand for its credit and savings products. As the government reduces its borrowing from the public sector, commercial banks such as Barclays will be left with more deposits. Thus, Barclays will be able to increase its revenue by advancing more loans. The austerity measures such as job cuts in the public sector are likely to affect Barclays Bank in a negative way (Baker 2010, pp. 3-14). This is because the demand for personal loans and deposit products such as personal savings accounts tend to decline as the level of unemployment increases.
Legal Factors
Business activities in UK are guided by an effective legal framework. An effective legal framework is needed to facilitate legitimate trade and competition. For instance, a person who fraudulently obtains money from another person can not be prosecuted if the legal system is not effective (Stone 2010). The antitrust laws ensure that businesses engage in fair and legal business practices. For instance, the antitrust laws prohibit activities such as insider trading (Stone 2010). This is because insider trading benefits investors with classified information about a company at the expense of other investors. Additionally, the antitrust laws prohibit using personal influence to prevent others from accessing services such as financial bailout from banks (Stone 2010). The consumer laws ensure that clients are supplied with safe and high quality goods. The labor laws ensure that workers in UK are not exploited by their employers. UK’s banking industry is one of the highly regulated in Europe. The high regulation began after the 2008/ 2009 financial crisis. The industry is highly regulated to prevent the collapse of banks in the event of a financial crisis (HM Treasury 2011, pp. 5-104). The regulatory capital requirement was significantly increased to enhance the stability of banks. The liquidity of banks is also regulated to stimulate investor confidence in the industry. Additionally, the governance of bank boards is subject to regulation. Risky investment products have since been prohibited. Restrictive terms and conditions for accessing loans have been introduced to reduce private debts.
The legal factors affect Barclays Bank in the following ways. The high regulatory capital requirement means that commercial banks such as Barclays can not hold investments that increase the chances of default (Eichengreen, Feldman &Liebman 2011, pp. 25-164). However, it also limits the banks’ ability to advance loans using deposits. Thus, it is a threat to Barclays’ plans to increase revenue through advancing loans. Restrictive terms and conditions for accessing personal loans also reduce the demand for Barclays’ credit products. Finally, regulating the investment products offered by commercial banks limits Barclays’ ability to develop new products.
Conclusion
Barclays Bank is one of the leading commercial banks in UK and the rest of the world. The bank’s success is, partly, attributed to its ability to align its operations to the macro-environmental factors that drive change in the banking industry. The macro-environmental factors include “political, economic, technological, environmental, social and legal factors” (Richards & Gilligan 2005, p. 43). The impact of these factors on the performance of businesses is often assessed using the PESTEL framework. The framework enables businesses to identify the threats, as well as, the opportunities in their industries (Richards & Gilligan 2005, p. 43). The main macro-environmental factors that affect Barclays in UK include economic, legal and political factors. These factors are associated with both positive and negative effects on businesses in the banking industry. For instance, the austerity measures reduce demand for credit products, whereas the tax reforms reduce the banks’ expenses. Thus, Barclays Bank should continue to align its operations to the macro-environmental factors to take advantage of the opportunities brought by these factors and to avoid the threats associated with them.
References
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