Marketing of Financial Products & Services Ch 6

7/27/2019 Marketing of Financial Products & Services Ch 6

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Chapter VI: Banking Strategies: Analysis & Challenges

ByDr. Karim Kobeissi

Lebanese University - 2013


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Introduction

What is a Strategy?A strategy is a long term plan of action that clearly articulates

the direction a business will pursue and the steps it will take

to achieve its objectives.

According to Porter, the purpose of any strategy is to achieve a

sustainable competitive advantage for the business.


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Introduction (con)

For years, banks have realized the need to define a business

strategy, not only for reasons of internal clearer presentation

of the mission and objectives but also for external causes of

communication with their shareholders1 in order to expose

controlled development.


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Section 1: The Field of Banking StrategiesDefining a Strategic Field of a Bank

The bank Strategy must belong to a field whose

boundaries are obviously defined so as to clarify

the limits of the activity and avoid dispersions.

The main variables structuring the strategic field of a

bank are: products, customers, technology and

geographic area.


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1.1 Variables Defining The Strategic Field

In banking, Zollinger (2008) defined the four variables

structuring the strategic (or competitive) field as follows:

1) Clients

The customer dimension contains a variable number of

elements according to the degree of distinction retained in

segmenting the market: individuals and companies as well as

public organizations and financial institutions. It is mostly the

first two categories of customers that form the largest bulk,

which can be segmented.


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1.1 Variables Defining The Strategic Field

2) Products

The product dimension reflects the representation of banking as a multiproduct

activity. Each product line (e.g., Loans1, Investments, deposits) correspond

to a function, to a usage type and to one or more customer segments:

a) Services related to the management of deposits and credit operations.

b) The products of financial engineering: management consulting to the

financial asset (investments).

c) The risk management services: currency risk, country, interest rate, credit.

-d) The provision of value added services such as linking customers through

exchange of information, funds or securities.


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Variables Defining The Strategic Field (con)

3) Technology

The technology concept is taken in its broadest sense, which permits to

integrate the nature of the means of production and the channels of

distribution.

Technology affects all other dimensions structuring the strategic field due to its

influence on the marketing and delivery of products and services. The same

product or service can be distributed via different channels and technologies

(internet, phones,). The technology can also affect other operations such

as information storage, transmission or treatment of operations. Information

technology permits bankers to spend more time in contact with their

customers which is a very important task in the banking sector and facilitate

data analysis and offers customization (CRM).


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Variables Defining The Strategic Field (con)

4) The Geographical Area

This dimension takes into account on international scale, the physical

proximity and cultural similarities. It is particularly characterized by

the concepts of risk, regulation and customers needs1.

In the banking sector, this aspect has long been a key variable in

defining the strategic field, which is probably less true in the current

period. But a reflection of the size and boundaries of the area

of intervention is essential. Decisions in terms of optimal size and

articulation between local and global dimension in terms of service,

contact with customers and the organization, often determine the

success of the largest banks.


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***The Matrix of Competitive Fields***


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The Matrix of Competitive Fields (con)

The various combinations of these choices correspond to different

strategic and competitive profiles. Each of the elements (A; B; C)

of this matrix identify a distinct competitive field which

correspond to a different strategic objective for the firm.

In fact, the elements A & C correspond to the same product type

(e.g., Debit Card) sustained by the same technology (IT

Hardware & Software); however, they target different customer

segments (Business Men & Ordinary Clients). Moreover, the

elements A & B correspond to the same product type (Loan)

targeting the same customer segment (Middle Class Employees);

however, with different technologies (SMS, Internet).


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The Matrix of Competitive Fields (con)

FOR EVERY COMPETITIVE

FIELD, THE BANK CAN

APPLY A DIFFERENT

STRATEGY.


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Section 2: Possible Strategic Options for Banks

In the banking sector, two techniques of strategic analysis

allow us to understand the strategies that could be adopted

in consistency with the selected competitive field.

The first technique is based on the results of an analysis of

the business in terms of its strengths, weaknesses,

opportunities and threats (SWOT Analysis).

The second technique is based on the results of an analysis

of the business in terms of the factors of change in the

banking industry.


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2.1 Strategies Derived From a "SWOT AnalysisThe various strategies outlined in the SWOT matrix have marked the

development of banks during the past thirty years and stimulated

the challenge between traditional strategies of diversification and

specialization. These strategies are based on the variables that

define their fields namely customer, product, technology and

geographic area.

Within a "SWOT" matrix, the banks objectives on a competitive field

must derive from the knowledge of the competitive position

occupied at any given time and the banks market share. This

diagnosis in terms of "strengths & weaknesses" is confronted with

the "Opportunities & Threats" resulting from the changing

environment.


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The SWOT Matrix


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SWOT Matrix & Possible Banking Strategies


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Strategies Derived From a "SWOT Analysis (con)2.1.1 Conquest StrategyA conquest strategy is an offensive strategy which express a will for power and

domination. It assumes the full involvement of the general direction of the

bank.

Conquest ofIndividualsPrivate individuals insure a stable supply of the banks deposits and represent A

marketplace for a range of services and products .

Conquest ofCompaniesFirms are vital for the bank in terms of potential long-term growth. However,

the exploitation of this segment requires the use of industrial management

methods in job organization as well as in long term planning, and the

adoption of new techniques of marketing.


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Strategies Derived From a "SWOT Analysis (con)2.1.2 Re-Orientation Strategy

Like any business, the bank evolves according to cycles and meet at

certain times of its development some sudden changes which

impose modifications that are necessary for its survival. The

objective in this case is clear, it aims to reconstruct a manoeuvremargin and a range of possibilities. The crossing point is financial:

interrupt participation, taking away losing activities...This strategies require having a capital knowledge on the new means

employed in the banking activity and their own advantages.

Decisions consist generally in focusing on activities in which the

bank has strengths which will increase its profits. Another choice is

to take advantage of existing products that are insufficiently

developed.


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Strategies Derived From a "SWOT Analysis (con)2.1.3 Re-Orientation & Divestments Strategy

The implementation of reorientation strategies can be also translated

by divestments (e.g., sales of all the banks branches in Lebanon)

hence, making resources available for development in a new

geographical area or even a different business industry. Generally,

divestments are taken into account when the environment appears

exceedingly risky and the position of the bank in terms of market

share, cost or quality, does not allow it to hope for a development in

this specific banking field (the part located in the lower left of the

SWOT matrix).


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Strategies Derived From a "SWOT Analysis (con)2.1.4 Consolidation Strategy

In business, consolidation refers to the mergers and acquisitions

(M&A) of many smaller companies into much larger ones for

economic benefit.

The dominant rationale used to explain M&A activity is that acquiring

firms seek improved financial performance. The following motives

are considered to improve financial performance: economy of scale,

economy of scope, increased revenue or market share, cross-

selling, cost synergy, taxation, geographical or other diversification,

resource transfer, vertical integration, and hiring.


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Strategies Derived From a "SWOT Analysis (con)

Finally, a consolidation strategy can be adopted following a major

failure which makes renewal a necessity. The priority consists in

reinforcing and solidifying the key strengths of the bank, in slowing

down the decline and in protecting the independence of the bank.


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2.2 Strategies Derived from Changes in the Banking Industry

The factors of change in the banking industry (IT expansion;

deregulation; innovation; modification in the demand,

globalization of financial markets) produced and continue

producing effects leading to two strategies :

Diversification and Specialization.


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Strategies Derived from Changes in the Banking Industry (con)

2.2.1 Diversification Strategy

According to Zollinger (2008), diversification is based on a

modification of the structure of the strategic field. The

banks modify the structures of their strategic fields in

terms of products, customers, technology or geographical

area.

Usually, to diversify is to offer new activities (insurance,

brokerage, ...) corresponding to new products and new

services.


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Three types of diversification:

1)Vertical Diversification

This type of diversification consists in selling existing products for

other customers or in other markets (e.g., open an agency to

Nabatiyeh).

2) Horizontal Diversification

This type of diversification consists in selling new products having

possibly a technological link between them but having especially a

commercial link because the customers are the same.

3) Conglomerate DiversificationThis type of diversification consists in entering an entirely different

market that has little or no synergy with its core business ortechnology (ex: selling cars, jewellery, financial products... ).


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Strategies Derived from Changes in the Banking Industry (con) Advantages of Diversification

The foundation for using the diversification strategy in the banking

sector or even out of the area rely on three paradigms:

1) Cost SavingsThe first advantage of diversification arises from the possibility to

exploit economies of scale. They can occur due to the sharing of

certain resources or certain assets of several products (distribution

network; employees; IT system). Diversification may be considered

because of the complementarities of products offered when it is

possible to sell various products to certain categories of customers.


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Strategies Derived from Changes in the Banking Industry (con)2) Risk Reduction

In financial theory, it is assumed that to reduce the risk we should

diversify the portfolio of our assets (e.g., BBVA Bank). The risk for a

diversified bank will increasingly reduce as the correlations

between the yields on the banking and non banking activities are

weaker (from this point of view, the diversification in the insurance

field is justified).


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Strategies Derived from Changes in the Banking Industry (con)3) Market PowerThe ability to sell a set of diversified products to the same customer

can reduce the information asymmetry between the bank and the

customer. It also can lead to the creation of a market power:

customers detaining several products with the same bank find it

difficult to change even when they receive appealing offers from

competitors.


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2.2.2 Specialization Strategy

This strategy consists on focusing the activities of the bank on a

market segment that corresponds to a type of financial products

(Bank of New York management of financial shares), of customers

(e.g. Barclays clients riches) , of technology (e.g. First Direct

online banking only) or of a geographic area (e.g. Lebanese marketonly).

This strategy allows the bank to be clearly identified by clients, to

better highlight its professionalism, show reasonable development

and control. Experience has shown that the concentration on a

limited number of segments leads to a better monitoring and controlof risks.

Specialization strategy can lead to either a

differentiation or a cost leadership approach.


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Differentiation StrategyThe strategy of differentiation is the search for a competitive

advantage built around a unique character of the offer which

is perceived by the customers. This unique character has to

make the imitation or the substitution of the offer by the

competitors very difficult.

The differentiation strategy allows the bank to escape a direct

competition by the prices. It is thus a question, for the bank

of fighting against its competitors by implementing means

other than the price to make perceive its products as unique

in the eyes of the customers.


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Advantages of Differentiation Strategy

This strategy favors the creation of special relationships with

customers, thus making it difficult to change bank). It also

allows to set a higher price level for products and services.


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Disadvantages of Differentiation Strategy

The bank has to watch out that the differentiation cost does not

entail a higher price to the one that the customers are ready

to pay the bank does not have to try hard to differentiate a

product or a service which has no value for the customer.

Moreover, the competitors may easily imitate the difference

character.


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Cost Leadership StrategyCost leadership, in basic words, means the lowest cost of operation in the

industry. The cost leadership is often driven by company efficiency, size,

scale, scope and cumulative experience. A cost leadership strategy aims totake advantage of the scale of production, a well defined scope and othereconomies (e.g. a good purchasing approach), producing highly standardizedproducts, and using high technology. In the banking sector, the technology isin the center of this strategy, as well for the production costs as for thedistribution costs.

N.B.Cost leadership is different from price leadership. A company could be the

lowest cost producer, yet not offer the lowest-priced products or services.However, cost leader companies do compete on price and are very effectiveat such a form of competition, having a low cost structure and management.


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Cost Leadership Strategy At the production level

Commercial banks took advantage of the continuous decrease

of computing costs (due to IT innovation) to optimize the

processing cost of their current transactions. Ex: the unit

cost of processing of a bank check decreased by half during

these last twenty years.

At the commercial and distribution level

Banks developed more flexible information systems

(consultation of the sales of accounts by videotex, creation

of a Web site)


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Advantages of Cost Leadership Strategy

Increase revenues.

Increase market share.

Develop loyalty and gain new customers.

Weakening competitors.

Channel value back to customers in terms of better

service at lower prices.


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Disadvantages of Cost Leadership Strategy

A price war (if the competitors reduce also their prices).

The cost cutting can reduce the capacity of innovation of the

company and thus its adaptation to the market.

Increase the investment expenses (the domination by the

costs generally require important investments).


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RemarksAccording to Porter, on an aimed market, it is necessary to adopt a single

strategy (differentiation or costs leadership). However, the idea that both

strategies are incompatible and that it is necessary to operate a clear choice

between them is uncertain. If the segment aimed by the market marks its

preference for a single advantage (quality or price) a pure strategy seems

superior. However, when the customers value multiple attributes or have

changeable preferences, mixed strategies seem preferable.

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Marketing of Financial Products & Services Ch 6

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