Hsbc Strategy Analysis Paper

HSBC is one of the world's largest banks, and it has the third-largest market share among UK retail banks. This massive global footprint supports a differentiation strategy that is encapsulated by the "the world's local bank" slogan. HSBC plays to its strengths with a presence in many major markets around the world, but its strength in retail and commercial banking belies a relative weakness in investment banking.

The banking industry is highly competitive. In the UK at the retail level it is in an oligopoly state. The company also competes among the global banks of the world, which is a business more in a state of monopolistic competition. It has a differentiated strategy, which is loosely based on a broad geographic scope and customer service. The latter is a difficult area in which to differentiate. There have been some problems with the geographic scope, too, and HSBC has recently left both Brazil and Turkey.

There are other strategic issues at work as well. The bank's cost have increased in the past year, and that has negatively affected some of the financial returns like the Return on Equity. The share price has declined as a result.

There are four recommendations for HSBC. The first is to expand its investment banking business. Its strong presence in the world's leading financial capitals means that it should perform better in this industry, and since investment banking is highly profitable there is substantial motivation for a bigger presence here. There are opportunities for international growth as well, with emerging markets such as Nigeria offering limited competition and an opportunity for significant growth going forward. Islamic banking also has promise. It is recommended that HSCB get its costs under control as well, given how these impacted the profits last year. Lastly, it is recommended that HSBC should place greater emphasis on China. It has strong ties and it presently the largest foreign bank in the Chinese market, but it still holds a very small share. It would be worth tens of billions to expand more into the Chinese market, even though this will be difficult given the current structure of that market. Nevertheless, this is something that the company should look at.

Industry Analysis

In addition to the UK market, HSBC competes as a local bank in many other countries. In many cases, the same oligopoly conditions apply, but in some instances there is more competition and the characteristic of monopolistic competition applies. This is certainly the case in the United States, though that is not a big retail banking market for the company.

More important is the global banking market. HSBC is one of a handful of banks that has a large international presence, a category known as a universal bank (Investopedia, 2015). Some of the others are Citigroup (USA), Santander (Spain) and BNP Paribas (France), UBS (Switzerland), and ING (Netherlands). Many of its major UK competitors such as Barclays and Standard Chartered fit with this category as well. There are several others that would fit this category as well, and still more than have a strong regional presence, such as Scotiabank in the Americas. This category of multinational bank is characterized by monopolistic competition. The banks in this category are similar in that they all offer a wide range of banking services ranging from retail banking to investment banking and merchant banking. The banks in this category are different because they each have focal countries or regions and they have different relative areas of strength in terms of the products/services in which they specialize. HSBC has a strong presence in merchant and retail banking, for example. It should be noted that this business model, popularized by HSBC, has fallen on hard times in recent years, and HSBC itself has been forced to exit two important markets in Brazil and Turkey (Hofford, 2015).

In the investment banking sector, in which HSBC is relatively weak, it holds a 1.5% share of the global market, which is substantially behind market leaders like JP Morgan and Goldman Sachs in the U.S., or Barclay's in the UK (Statista, 2015). HSBC is the 11th-ranked bank on the Fortune Global 500, and the 81st largest company overall (Fortune, 2015).

Strategy Analysis -- Generic Strategy

Michael Porter outlined the four generic strategies by which a company can successfully compete. For a company the size of HSBC, there are only two -- the broad differentiated strategy and the cost leadership strategy (Porter, 1985). The differentiated strategy implies that the company is seeking to compete by differentiating itself in some way from the competition, rather than simply trying to sell at the lowest price. HSBC is not a cost leader, and this can be seen in its marketing. The company has long billed itself as the world's local bank, offering a comprehensive range of services to customers around the world. Moreover, HSBC has sought to differentiate its brand on a couple of different dimensions that support the idea of the differentiated strategy.

The first of these is that the company has sought to create a truly global banking brand. Most banks are national in scope, first and foremost, but HSBC pioneered the idea of having a global bank. In some ways, this was a function of the company's history. The name -- Hongkong Shanghai Banking Corporation already incorporates two countries as its home. Since it ended up with a Hong Kong base after the Communist takeover of China, the bank eventually shifted its headquarters to London as a means of expanding its footprint to Europe but also as a hedge against the eventual Chinese takeover of Hong Kong. This gave the bank a three-nation presence, but it had already begun to expand beyond that, having set up in Canada and the U.S. long before the handover of Hong Kong. Since then, HSBC has built a global presence. This is one of the key points of differentiation for the bank.

The other major point of differentiation that the bank touts is its service. They play up in their marketing the "local" aspect and focus on how they deliver superior service. This is not an especially distinctive means of differentiating banking services, but it is what the company sought to do. At no point has HSBC ever positioned itself as a cost leader, so the implication is that it has always competed with a differentiated generic strategy. This is common of its major competitors as well.

Strategy Analysis -- Key Issues

There are three key issues that the company faces. First, as Hofford (2015) notes, HSBC has had to retrench a little bit from its global strategy. The company left the Brazilian and Turkish markets, despite the fact these are the 7th and 17th-largest economies in the world respectively, in other words markets a major world bank would want to operate in. Thus, there are cracks in the company's longstanding competitive strategy. Many locals have been hesitant to adopt HSBC as their bank, even when the company takes over a local bank. In these countries, apparently, locals stuck with other banks, either local or foreign, and HSBC was never able to build the market share that it needed to sustain business in these two countries. There may be other countries in similar situations, too, meaning that HSBC needs to perhaps reconsider what until this point has been one of its major competitive strategies.

Another issue for HSBC is its lack of presence in investment banking. It has a 1.5% share in investment banking. The problem is that the company has not been able to take advantage of its market position, perhaps stretching itself too thin. It is only behind Barclay's in the UK, and the UK is one of the bigger investment banking markets in the world. But Hong Kong is also a major market, and HSBC is still active in China. Several Chinese banks are larger than HSBC, however, due to unfavorable government treatment of what is viewed as a colonial bank (Fortune, 2015). Further, despite a longstanding presence in the U.S. market, HSBC has not been able to capture much share of the investment banking there, either. While HSBC is relatively strong in merchant banking and retail banking, its relative weakness in investment banking is an issue for it. Not only is investment banking highly lucrative, but HSBC should be bigger in this field -- there must be talent issues, reputational issues or maybe it just needs to acquire somebody. But something has to change and HSBC needs to be able to leverage its global position to be bigger in investment banking. It makes no sense that bank that can effortlessly offer companies access to the New York, London and Hong Kong capital markets can have such a small share in investment banking.

A third issue for HSBC is that the company the scandals that have hurt its reputation. Consumers need to be able to trust their banks, and quite frankly trust in HSBC has been eroded by scandal. The revelations that the company engaged in "systematic aiding of tax avoidance" has hurt the company's reputation. Consumers know little about the issue, and even less about what the company has done to address the problems. What they remember is that HSBC was involved in some sort of tax-dodging scandal. This reduces consumer trust in the bank, and encourages them to think twice about doing business with HSBC in the future. It casts aspersions as to the ethical compass of the bank, and banks already have difficulty convincing people that they are ethical. This scandal occurred in the Private Banking division, but because this division uses the HSBC brand, any other division that also uses that brand will also face reputational damage (Wintour, 2015).

Management Competencies

In general, HSBC is a well-run company. It has faced challenges recently, however, with the tax evasion scandal and with the exit of the Turkish and Brazilian markets. These issues highlight how difficult it is to run a global banking empire. A tremendous amount of leadership talent needs to be present within the organization, and ultimately this talent also needs to have an appropriate ethical compass. These incidents are evidence that HSBC might be stretching its managerial talent a little too thin, biting off more than it can chew, and the result has been some disappointing performances.

Marketing

In terms of marketing, HSBC remains fairly effective. The bank has a strong consumer brand. In the Interbrand ranking of the world's top 100 global brands, HSBC ranks 37th, higher than several larger banks. All told, HSBC ranks second only to JP Morgan among banks. This is important because it shows that the company has a strong brand and globally its reputation and brand recognition are much greater than its actual size within its industry. That speaks to two things. First, it is a reflection of its strong presence among consumers. Having as many physical locations in as many countries as HSBC has is an important means of building a great brand. The other thing is that the marketing of the brand has clearly been effective. HSBC is a household name in a lot of countries. It is the #3 bank in the UK, and is a household name. This brand strength is a testament to effective marketing, despite the obvious struggles marketing the bank in some other countries.

Financial Analysis

The normal financial ratios that are used to evaluate companies in any other industry do not apply to the banking industry (Simpson, 2015). As such, banks should be evaluated using metrics that apply specifically to the banking industry. One such measure is capital strength, which reflects the quality of the capital that the bank holds. This improved from 10.8% to 10.9% in FY 2014 (HSBC 2014 Annual Report).

Another key financial measure for banking is the cost efficiency ratio. This is a reflection of how well the bank manages its costs. Remember that a bank brings in deposits and then lends out the capital. The spread between what it pays on the deposits and what it earns on its capital is its profit. Fixed expenses, relating to things like real estate and staff, have to be controlled by the bank. The better its cost efficiency ratio, the more profitable it is likely to be. The cost efficiency ratio was 67.3% in 2014, which is up from 59.6% in 2013. As a result, the ROE declined to 7.3% from 9.2% and the stock price dropped from ?6.62 to ?6.09. HSBC was less profitable in the 2014 fiscal year, and the spike in the costs was a factor in that. The company thus has faced some internal control weaknesses. At present, there is not a trend of this, but it is worth monitoring the cost situation to see if 2014 was just a one-off year or the start of a trend towards a higher cost structure for the company that will inhibit profitability going forward.

Recommendations

The first recommendation, based on this analysis, is that HSBC should make a more concerted effort to expand its investment banking business. This is a large and highly-profitable segment of the global banking business. Traditionally, HSBC has focused on building its retail banking business, for example when it has the marketing tagline of "the world's local bank," but it really did not apply this same thinking to the investment banking industry. The company has exceptional access to global capital markets, as a major bank in both London and Hong Kong, and with secondary operations in many other centres (New York, Shanghai, Toronto, Sydney). With this kind of access to capital markets, HSBC really should be a more significant player in global investment banking. It has not managed to position itself as the world's global investment bank.

There are two ways that the bank can approach the implementation of this recommendation. The first is that it can try to build this business organically. It has some base upon which to build out an investment banking business, but ultimately this process will be time-consuming and will require it to consistently outcompete more established players in investment banking. It is unclear what advantages it legitimately has over other investment banks that would allow it to do that. The other approach is to purchase an investment bank. HSBC surely has the capital to make that happen. It probably would have trouble acquiring anything on the JP Morgan/Goldman Sachs level but there are smaller investment banks that it can target, merge with its existing business, and apply its resources to in order to build out a bigger share of this profitable segment of the global banking industry.