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Hong Kong and Shanghai Bank Corporation Strategy Analysis Essay

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Introduction

Hong Kong and Shanghai Bank Corporation [HSBC] was established in 1865 in the UK. The firm has experienced numerous changes over the years. The firm’s name was changed to HSBC Holding PLC in 1991. The firm is committed towards achieving a high level of competitiveness within the global banking industry. In an effort to achieve a high competitive advantage, HSBC has integrated growth as one of its corporate level strategies. Aswathappa (2008) asserts that growth strategy enables an organisation to improve the scope and scale of its operations.

The firm has entered a number of markets by adopting inorganic and organic growth strategies. One of the organic growth strategies that the firm adopts in the international market entails foreign direct investment. On the other hand, the firm has integrated the concept of merger and acquisition as its inorganic growth strategy. HSBC targets firms with high market potential in its acquisition process.

The market growth strategy adopted by the firm has played a remarkable role in enhancing the firm’s market expansion. By 2013, the firm had established 9,500 outlets in different parts of the world. The firm targets emerging markets as one of its investment destination. Examples of such markets include China, India, Brazil and Mexico.

This paper evaluates HSBC’s strategic rationale in entering and operating in emerging markets. Secondly, the paper evaluates HSBC’s organic growth strategy and its decision to expand its financial services in China’s rural areas. Additionally, the major challenges faced by the firm in its operation within the Chinese banking industry are identified and analysed. Finally, solutions on how to deal with the identified challenges are identified. Different models which include the PESTLE model, the Porter’s five forces, the Hofstede model and the SWOT analysis model are used in evaluating the prevailing market conditions in the Chinese banking industry.

Analysis

HSBC’s rationale in entering emerging markets

HSBC’s decision to expand into the emerging markets was informed by a number of reasons. First, emerging markets are characterised by high market demand for financial services compared to mature markets. Subsequently, the likelihood of achieving the set organisational goals by establishing an outlet in emerging markets is relatively high.

The high market potential in the emerging markets arises from the fact that such markets are characterised by a low rate of penetration with regard to financial services. Furthermore, emerging markets are characterised by a high population growth rate. Subsequently, the demand for financial products and services in these markets is relatively high compared to supply. Financial institutions can exploit the prevailing market opportunity by providing diverse financial products and services. Additionally, the bank’s rationale to enter the emerging markets was informed by the need to provide banking services to diverse corporate customers. These markets are characterised by a high rate of growth with regard small and medium sized enterprises. This presents an opportunity for HSBC to maximise its profitability.

Macro environmental analysis

HSBC’s success in the Chinese banking industry will be influenced by changes in the external environment. Aswathappa (2008) opines that the attractiveness of a particular industry is influenced by the prevailing macro-environmental forces such as the political, economic, social, environmental, legal and technological forces. Therefore, HSBC should understand the external business environment and the industry structure in its target market before entering. This can be attained by integrating the PESTLE analysis, the Porters’ five forces model, and the Hofstede model. These models will aid in gauging the likelihood of success.

The PESTLE model

The political-legal environment

China has been characterised by a high level of political stability over the past decades. However, the degree of political stability has reduced over the past few years. Morrison (2014) asserts that “the number of public order disturbances increased by 50% between 2003 and 2006” (p.5). This shows the likelihood of China experiencing a high degree of political risk is high. Subsequently, HSBC might incur losses arising from such social unrests.

In an effort to prevent social unrests, the Chinese government has implemented strict measures to control accessibility of information by the general public. One of the measures that have been adopted entails blocking internet access. This might adversely affect HSBC’s ability to undertake online marketing and other e-commerce activities such as online payment.

Despite this, China has implemented a number of legal reforms over the past three decades. For example, the Chinese government has eliminated trade barriers hence providing foreign companies an opportunity to enter the Chinese market. Furthermore, the government has streamlined licensing procedures hence making it easy for multinational companies to obtain operating licenses (Lam 2011). These legal reforms have led to improvement in the level of predictability and transparency in the country’s legal environment. Another major legal reform relates to liberalisation of the Chinese banking industry hence eliminating government control.

Economic environment

China has undergone remarkable economic growth over the past three decades. This has arisen from implementation of effective monetary and fiscal policies. The country’s economic growth has been enhanced by the recent economic reforms. The country had adopted a closed economy system for decades, which limited trade with other countries.

Upon its accession to the World Trade Organisation, China changed its economic system to an open economy in order to conform to WTO’s requirements. This led to elimination of trade barriers, which increased trade between China and WTO member states. These changes have led to remarkable economic growth in China. Today, China is ranked amongst the fastest growing economies in the world (Morrison 2014).

China has made significant progress despite the 2008-2009 global financial crises. The government intervened by implementing a comprehensive stimulus program in an effort to promote economic growth. Subsequently, China has recovered from the economic recession (Morrison 2014). It is estimated that China’s Gross Domestic Product (GDP) will grow at an average rate of 7% between 2014 and 2018. HSBC should consider implementing effective operational strategies in order to leverage on the projected economic growth (Morrison 2014).

Technological environment

The banking industry in China has undergone remarkable change arising from the high rate of technological innovation (Pereiro 2002). Banks are increasingly integrating electronic payment systems in an effort to attain a high level of operational efficiency and to provide customers with more convenient banking services. This trend might affect HSBC’s future success in China if it does not adjust its operations to market changes. Furthermore, technological innovation poses a security threat in HSBC’s operation through cyber crimes. Therefore, the firm will be required to implement effective security measures to counter such threats.

Social-cultural environment

China has experienced a rapid population growth over the past decades. Furthermore, Chinese are appreciating different financial products and services in an effort to improve their wellbeing. Subsequently, multinational banking companies are increasingly targeting China in an effort to exploit the high market potential. The high population in China has also played a significant role in attracting investors in the financial sector in an effort to market their financial products and services.

The Porters’ five forces model

Degree of rivalry; High

The Chinese banking industry is characterised by a high concentration ratio. A report released by China Banking Regulatory Commission shows that 50% of the industry is dominated by 5 major banks. Furthermore, the industry is characterised by a high rate of product homogeneity, which makes product differentiation to be difficult. This has led to remarkable increment in the intensity of competition. The intensity of competition is further increased by the high rate of growth amongst commercial banks as a result of relaxation of rules governing the banking industry by the Chinese government (Morrison 2014).

Threat of new entrants; moderate

HSBC is likely to face intense competition in the Chinese banking industry arising from the high threat of market entry. The high market potential in the Chinese banking industry is attracting both domestic and foreign financial service providers. Furthermore, the legal reforms in China have provided multinational companies an opportunity to enter the market. Despite this, firms entering into the Chinese banking industry must be approved by the Banking Regulation Commission (Morrison 2014). This is one of the main barriers to entry. Therefore, one can argue that the threat of entry in the Chinese banking industry is moderate.

Threat of substitute; low

The high rate of technological innovation has increased the intensity of competition within the global banking industry. The emergence of alternative payment systems and platforms has significantly reduced the need for traditional banking services. Currently, customers can access banking services online.

To safeguard itself from the high rate of technological innovation, HSBC will be required to improve its financial products and services in order to align itself with the market changes. In addition to this, China is experiencing an increment in the number of financial services companies such as trust fund and securities firms. However, these companies have not penetrated the entire Chinese market because of the strict and uncertain regulatory environment. Therefore, the threat of substitute is relatively low.

Buyer bargaining power; low

Accessing credit finance from Chinese banks is relatively difficult because of the high rate of interest required to service the loan. This makes the cost of credit from financial institutions to be high. Despite the high demand for credit finance, borrowers do not have the capacity to influence the rate of interest, which lowers the customers’ bargaining power.

Supplier bargaining power; high

Aswathappa (2008) asserts that the banking industry is characterised by different suppliers such as investment and securities companies. The suppliers develop different financial products, which are distributed to customers.

Suppliers within the Chinese banking industry have a relatively high bargaining power emanating from the tight regulations implemented by the government.

The Hofstede Model

China is ranked amongst the most culturally diverse countries in the world. It is important for HSBC to understand the prevailing cultural diversity in order to successfully expand into China’s rural areas. This will enable the firm to effectively integrate cultural diversity in its human resource management practices hence increasing the likelihood of developing a strong organisational culture.

Hofstede (2001) emphasises that understanding the host country’s cultural dimensions is critical in firms’ internationalisation processes. HSBC will be required to adjust its management practices in order to align itself with the prevailing cultural dimensions. There are five main cultural dimensions according to Hofstede. They include; individualism/collectivism, uncertainty avoidance, power distance, masculinity/feminity and long-term orientation. Below is an analysis of how HSBC will be affected by the cultural dimensions.

Uncertainty avoidance

Hofstede (2001) defines uncertainty avoidance as the extent to which individuals are sceptical of the future. A high uncertainty avoidance index shows that individuals in such a society avoid uncertain situation. China’s uncertainty avoidance index is estimated to be 46, which is relatively low. This means that the Chinese are generally comfortable with situations characterised by uncertainty. Therefore, HSBC will not experience major difficulties in its quest to implement change in its outlets located in China.

Individualism dimension

This dimension evaluates the extent to which individuals in a particular society are interdependent of each other. Subsequently, HSBC will be required to integrate the concept of teamwork in order to be successful in achieving its goals. Failure to integrate teamwork in its HR management practices will adversely affect the firm’s long-term survival.

Power distance dimension

According to Abu-Jarad, Yusof and Nikbin (2010), power distance explains the extent to which the members of the society are comfortable with inequality. Additionally, power distance is used to explain the extent to which a particular society accepts decentralisation or centralisation of power. China’s PDI is estimated to be 80, which is relatively high. This means that Chinese accept considerable power distance between leaders and their subordinates.

Masculinity/feminity dimension

This dimension explains the extent to which division of labour is practiced between the male and female genders. China’s masculinity index is estimated to be 66, which is relatively high. Hofstede (2001) asserts that a high masculinity index shows that the male gender is preferred in performing some duties. The high masculinity index in China shows that HSBC has take into account the society’s perception in allocating roles between male and female employees. Furthermore, Wilbur (2013) opines that “the likelihood of conflict in a society characterised by a high degree of masculinity is relatively high compared to a society characterised by a high degree of feminity” (p.46). A high masculinity index shows that individuals in such a society are committed to their work. Subsequently, the likelihood of employees experiencing work-related stress is high. To deal with this challenge, HSBC will be required to implement effective work-life balance strategies.

Long-term orientation

Wilbur (2013) defines long-term orientation as the degree to which individuals in a particular society are focused towards attaining long-term goals rather than short-term goals. Therefore, a society characterised by a high long-term orientation index is very flexible, which means that employees can adjust to change. China’s long-term orientation index is estimated to be 118, which means that Chinese are persistent in achieving long term goals.

Microenvironment

HSBC’s success in the Chinese banking industry will be influenced by the effectiveness with which it leverages on its strengths, weaknesses, opportunities and threats.

HSBC SWOT analysis

The chart below illustrates HSBC’s strengths, weaknesses, opportunities and threats.

Strengths
Financial resources;HSBC has a strong financial capital base as a result of its global operation. Subsequently, the firm will be able to establish additional outlets in China’s rural areas..
Effective management:the firm has integrated effective management practices. The strong leadership has played a critical role in the firm’s market expansion efforts.
Strong reputation;HSBC is listed in reputable stock markets such as the Hong Kong and London stock markets. This shows that the firm is compliant with the legal requirements.
Strong market reputation;HSBC has established market presence in a number of emerging markets such as India, Brazil, Mexico and India.
Weaknesses
Global brand;HSBC has not been effective in positioning itself as a global brand. This might limit its ability to expand into the emerging markets.
Redundancy program: HSBC has integrated a redundancy program. The firm is increasingly restructuring its operations by undertaking massive job cuts. This might adversely affect the firm’s reputation in the international market.
Opportunities
Growth potential;HSBC can improve its profitability by establishing branches in emerging markets such as China, Brazil, Mexico and India by adopting organic and inorganic growth strategies.
Threats
Economic recession; the firm’s future success may be affected by occurrence of financial crisis in the emerging markets.
White collar crimes;HSBC faces a threat arising from the high rate of white collar crimes such as money laundering, hacking and insider trading. This may lead to a decline in the level of investor confidence.
Competition;the firm may be adversely affected by increase in the intensity of competition from multinational banks, which are increasingly entering emerging markets.

HSBC’s organic growth and rationale for targeting China’s rural areas

HSBC has adopted organic growth as its market entry strategy. The decision to adopt this strategy was informed by the need to increases its profitability by introducing its financial products and services to new customer groups. Additionally, the firm’s decision to adopt this strategy was informed by the need to develop a comprehensive understanding of the customers’ needs. Aswathappa (2008) argues that organic growth provides businesses with an opportunity to gain sufficient understanding of the prevailing market condition. Subsequently, business managers are able to identify areas of improvement hence increasing the likelihood of future success. By adopting organic growth, HSBC will be able to develop new products in order to satisfy the market needs.

HSBC has targeted China’s rural areas in its market expansion effort. It is estimated that over 75% of China’s population reside in the rural areas and do not have access to credit finance from financial institutions. Additionally, a significant proportion of China’s rural population is unbanked. This presents a high market opportunity for HSBC to exploit by providing its financial products and services. Consequently, HSBC will be able to enhance the level of its profitability.

Conclusion

Aswathappa (2008) asserts that emerging markets are characterised by high market potential. Subsequently, firms are increasingly considering expanding into these markets in an effort to maximise their profitability. HSBC has established its operation in a number of emerging markets. This has played a remarkable role in improving the firm’s competitiveness within the global banking industry. The firm has integrated both organic and inorganic growth strategies in its market expansion efforts.

China is ranked as one of the most attractive emerging markets. Some o the factors that have increased the country’s attractiveness is the high rate of economic growth and the high population (Aswathappa 2008). Subsequently, Chinese have experienced a remarkable increment in their purchasing power. Furthermore, the country’s commitment in undertaking legal reforms has enhanced its attractiveness. HSBC has targeted China as one of its investment destinations.

Decision to enter the Chinese market was informed by the high market potential especially in the rural areas. A significant proportion of the country’s population resides in the rural areas and does not have access to bank products and services. HSBC might achieve its profitability objective by establishing branches in these areas. However, it is imperative for the firm to understand the prevailing market conditions and the customers’ needs and expectations before implementing its expansion strategy. Subsequently, the firm’s management team should take into account the following aspects.

  1. HSBC should undertake a comprehensive market research in order to understand the countries, political, economic, social, legal, and technological trends affecting the banking industry. This will aid in development of the right financial product. This will give the management team insight on how to adjust the firm’s operational strategies.
  2. HSBC should assess its internal environment in order to understand its strengths, weaknesses, opportunities and threats. This will enable the firm to implement effective operational and management practices to promote its growth.
  3. HSBC should take into account China’s cultural dimensions in the process of formulating its management practices. This will increase the likelihood of the firm developing a strong and efficient human capital base.

Reference List

Aswathappa, K 2008, International business, Tata McGraw Hill, New Delhi. Abu-Jarad, I, Yusof, N & Nikbin, D 2010, A review paper on organizational culture and organizational performance, University of Malaysia, Malaysia. Web.

Hofstede, G 2001, Culture’s consequences: Comparing values, behaviours, institutions, and organizations across nations, Sage Thousand Oaks, CA. Web.

Lam, W 2011, ‘Beijing’s Wei-Wen imperative steals the thunder at NPC’, China Brief vol. 11, no. 4, pp: 2-4. Web.

Morrison, W 2014, China’s economic rise; history, trends, challenges and implications for the United States. Web.

Pereiro, L 2002, Valuation of companies in emerging markets; a practical approach, John & Wiley, New York. Web.

Wilbur, D 2013, . Web.

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