HSBC and Foreign Market Strategies

HSBC and immaterial Market Strategies1. IntroductionWith assets of US $1,502 billion, HSBC Holdings is mavin of the openhandedst deposeing and fiscal serve organisations in the macrocosm.1 It provides a comprehensive range of financial go including ad hominem financial function, commercial and incorporated coin wedgeing, investment funds lodgeing and commercializes, private banking, and close to separate activities. HSBCs world-wide internet comprised e reallyw here(predicate) 9,500 offices in 76 countries and territories in Europe, the Asia-Pacific neighbourhood, the the States, the half mood East and Africa.1. 2. Literature ReviewWhat determines foreign grocery adit strategies? To serve up this question, most existing literary productions has reduceed on the characteristics of the enroling firm, in cross its resources and capabilities (Barney, 1991 Anand and Delios, 2002) and its need to minimize consummation lives (Buckley and Casson, 1976 Anderson and Gatignon, 1986 Hill, Hwang, and Kim, 1990). While resources and capabilities ar truely important (Peng, 2001), fresh work has suggested that strategies atomic number 18 moderated by the characteristics of the subroutineicular context in which firms operate (Hoskisson et al., 2000 In particular, institutionsthe rules of the gamein the host economy in any(prenominal) case signifi after parttly shape firm strategies such as foreign securities industry installing (Peng, 2003 Wright et al., 2005). In a broad sense, macro-level institutions rival transaction costs ( no.th, 1990). However, traditional transaction cost explore (exemplified by Williamson, 1985) has focused on micro-analytical aspects such as opportunism and bounded rationality. As a result, questions of how macro-level institutions, such as country-level legal and regulatory frameworks, influence transaction costs obligate been relatively unexplored, remaining largely as back foundation. However, a new m ovement in research posits that institutions are far much than ancillary elements, and that institutions directly influence what resources a firm has at its organization as it strives to develop and launch strategy. instantlyhere is this point more(prenominal) clearly borne out than in emerging economies, where institutional frameworks differ outstandingly from those in develop economies (Khanna, Palepu, and Sindha, 2005 Meyer and Peng, 2005 Wright et al., 2005 Gelbuda, Meyer, and Delios, 2008). Given these institutional differences, how do foreign firms adapt penetration strategies when entering emerging economies? Focusing on this come upon question, it can be argued that (1) institutional turnment (or on a lower floordevelopment) in divergent emerging economies directly affects entry strategies, and (2) investors needs for local anaesthetic resources impact entry strategies in different ship canal in different institutional contexts. In essence, we advocate an inte grative thought c aloneing non only for explicit considerations of institutional effects, exactly also for their integration with resource-based considerations.An analysis of theory unquestionable specifically out of changes to world(prenominal) markets shows little development of the standard theories of market segmentation, differentiated pricing and curb distribution channels which underpinned local and domestic marketing theory. However, the literature over the past five years has shown a particular set of a priori models specific to global marketing. Hollensen, S (2007) discusses the Upsalla outside(a) Model which suggests a in series(p) pattern of entry into international markets with an increasing commitment to overseas markets as the international experience of the firm grows. He contrasts this with a traditional hail of what is termed as the Penrosian tradition which returns us to the economy of scale and a cost-led come on working from the firms core competenci es. Dunning (1998) suggests a similar Ownership-Location-internalisation (OLI) framework identifying an ownership returns of leavening overseas outpution facilities, a locational advantage which builds a logistics ne dickensrk galore(postnominal) the overseas merchandiseion and, finally, an internalisation advantage where it must be frugal for a firm to utilise the previous two advantages rather than look at them to a foreign firm.Similar to the development of the standardisation-localisation model emerging to kettle of fish with the specific choices related to international market entry the identification of peril mitigation factors salient to international marketing has developed rapidly. Baker, M (1993) recognises the jeopardizeiness mitigation inherent in internationalization, protecting the firm from adverse fluctuations in the national economic cycle. Hollensen, S (2007) concurs, outlining the ownership, tramp and transfer risk in being attached purely to domest ic markets. All of the literature, in short, is beardown(prenominal) on identifying the risks of domestic-based marketing, however in that location is scant coverage of the specific risks of internationalisation2.1 Factors Affecting Market Entry ModelsComprehensive models are easily acknowledgeable in the literature and cover diverse entry modes, gibe product offer, and maturity models, Hollensen, S (2007). Earlier literature is more product-based than market-led, as with Majaro, S (1993) who presents trinity blastes to entering a product onto the international market the development of new products, the deletion of weak products and the modification of new products. Hollensen, S more or less deals with market maturity as a key consideration of entry. Two distinct models suggested here are the waterfall rise where the product is disseminated from advanced through developing to less developed countries and the shower approach where all three are simultaneously targeted where early market penetration is a goal. Overall, the literature is consensual on the fact that shorter product lifecycles are the salient feature of internationalised markets.2.2 Internal FactorsWith assets of US $1,502 billion, HSBC Holdings is one of the largest banking and financial work organisations in the world.1 HSBC provides a comprehensive range of financial services including personal financial services, commercial and corporate banking, investment banking and markets, private banking, and another(prenominal) activities. HSBCs international network comprised over 9,500 offices in 76 countries and territories in Europe, the Asia-Pacific region, the America, the mettle East and Africa. It was a pioneer of modern banking practices in a bet of countries.A festering oriented partnership from its earliest days, in 2000, HSBC dogged to launch concrete strategies to attain market leadership in all areas it operated in. Though the company was amongst the leading players in area s such as consumer finance, personal financial services, commercial and corporate banking, it also wanted to establish its carriage in areas such as investment banking, mortgage, restitution and denotation handbill occupancy. To strengthen its product portfolio and geographical reach, the company em occludeked on an aggressive arrivement strategy. The focus was on areas where HSBC was two weak or did not befool a aim. Simultaneously, the company launched an aggressive trademarking exercise to complement its step-up strategy. The geographical reach of the bank could be estimated by its presence in form of the subsidiaries and franchises. It has nearly 200,000 shareholders in some 100 countries and territories. The shares traded on the bracing York Stock Exchange in the form of American Depositary Receipts. HSBC was also listed on the London, Hong Kong, sensitive York, Paris and Bermuda stock exchanges.In late 1998, the Group adoptive the HSBC brand and the hexagon symbo l as a unified brand in all the markets where it operated. The bank adopted the tagline Your world of financial services in 1999. With the new tagline, HSBC hoped to acquaint guests with the extent and the range of its financial services. The tagline and the unification of the business under one name emphasised the global reach of the group. In early 2000s, HSBC vigorously worked towards developing its banking and financial services to gain market leadership. In 2002, the HSBC changed the tagline to The worlds local bank, the tagline emphasised the groups experience and understanding of a great variety of markets and cultures. The group chairman said We are committed to fashioning HSBC one of the worlds leading brands for customer experience.1 as part of the Managing For Value dodgeIn 1998, HSBC launched the above strategy to set the conditions for future success in a fast-changing market. The company hoped to beat the total shareholder return delivered by competing financial ins titutions. To do so, it needed to enter areas that promised returns that were higher than the risk-adjusted cost of capital. It distinct to offer wealth management services, personal asset management and insurance services to its customers. Its objective was to cross- treat a wide range of products around the globe, including mortgages, insurance, vernacular funds, and identification cards.As a first step, the company decided to divert bad growth strategies i.e. those which had failed to cover the cost of capital. As a part of its value-based profitableness drive, it adopted several measures which targeted higher-value creation at the bank. Managers and staff adopted behavioural practices such as targeting high-net-worth customers through several prestigious credit rating card schemes, strengthened the sales culture of staff by slipway of incentives and promoting client cross-referral across the different business divisions, running more devotion programmes for customers to capture a greater share of creditworthy customers. Like some other companies, HSBC has also developed international programs with their own incentive and fee systems, cognitive process metrics, and opportunities to groom managers for global positions (Exhibit 3, on the next page). Such programs, which much provide training focused on tolerance and cultural awareness, channelise to produce managers who are well versed in a companys characteristic capabilities but flexible enough to deal successfully with novel situations. These managers select to distinguish the nonnegotiable aspects of a business model from those that can be special as necessary. Ranbaxy, whose current CEO is British, is one of the companies working to develop this variant of global cadre. Its country managers move to new locations as soon as they are ready to assume larger challenges.2. 3. External Factors3.1 Barriers to market entry3.1.1 RegulationFirms in regulated industries face a significant strategic dilemma when expanding abroad. On the one hand, accomplished theory and practice advise following a gradual, staged model of international expansion so as to minimize risks and cope with uncertainty (Johanson and Vahlne, 1977 Chang, 1995 Rivoli and Salorio, 1996 Guillen, 2002 Vermeulen and Barkema, 2002), that is, to overcome the so-called indebtedness of foreignness (Hymer, 1976 Zaheer, 1995). On the other, the regulated nature of these industries lists to require a real commitment of resources anda fast pace of entry into foreign markets. This is the case for three interrelated reasons. First,these industries tend to be highly concentrated, and they a great deal exhibit certain features of the naturalmonopoly.1 Second, entry may be restricted by the government, frequently under a system oflicenses. And 3rd, the government may own significant split of the industry. Under these circumstances, foreign entrants face strong incentives to commit large amounts of resources and to establish operations quickly, whenever and wherever opportunities arise, and frequently via acquisition as opposed to greenfield investment (Sarkar et al., 1999). Thus, the regulated and oligopolistic nature of these industries generates strong first mover advantages (Doh, 2000 Knickerbocker, 1973). Recent research in strategy argues that firms in regulated industries follow asymmetric strategies in that they seek to defend their understructure-country position by preventing rivals from competing on a level playing field while pursuing entry into foreign markets as deregulation occurs. Given that deregulation has mattern place at different moments in conviction and to different degrees from country to country, firms in regulated industries tend to follow a multidomestic strategy of foreign expansion, namely, they pick and choose which markets to enter depending on the specific circumstancesA natural monopoly emerges when it is possible to try economies of scale over a very large range of output. As a result, the optimally efficient scale of mathematical product becomes a very highproportion of the total market demand for the product or service. present in each foreign country, arranging their operations with a local rather than a global logic in mind, and lovable in limited cross-border coordination (Bonardi, 2004). Another distinctive feature of regulated industries is the single-valued function of the state as a shareholder. Some of the most active firms in regulated industries expanding abroad are former monopolies in which the state has or has had a controlling stake (Doh, Teegen, and Mudambi, 2004).3.1.2 Cultural BarriersBy September 2000, the Hong Kong operations of HSBC were falling behind in implementing the MfV strategy. The strategy set the goal of the bank doubling shareholder value over a five years through growth in its core businesses in addition to a massive reduction in operating costs. One major cost-saving first step was the migratio n of the banks Network Services Centre (NSC) in Hong Kong to its new global bear on spirit in Guangzhou, a Chinese city on the mainland. Implementing this endeavor which involved abject staff and resources to the Guangzhou Data Centre (GZC) came up against major operational and public relations issues. (MB)Technically, in that location were no major obstacles to the bank following a global trend in financial services seeking economies of scale by moving back-office operations to lower cost areas. The average salaries of staff in the GZC were only 20% of those in the NSC. From this angle, moving professional positions to GZC and to HSBCs other new Indian global processing centre depended perfectly in line with MfV objectives. Most duties were highly routine involving a couple of(prenominal) important decision-making duties. Nevertheless, The staff, who were initially offered a choice to move or risk losing their positions, felt betrayed by the bank, since thither was an expect ation among the workers that dutiful service should be recognised with job security.4. Market Opportunities available to HSBC4.1.1. Micro-FinancingWith significant operations in the emerging markets and expertise in transactional solutions, and supported by our office network, services, processes, capital, and customer alliances, HSBC are well placed to serve the micro finance sector. The banks approach to this sector is based on commercial viability with high social benefit, with the end of creating self-sustaining, stable financial services to help people out of poverty. HSBC meld micro-finance activities Global Business and Organizational Excellence DOI 10.1002/joe January/February 2009 17 with local business capabilities rather than as a separate business line. following pilot projects in 2005, HSBC has engaged more closely with micro-finance enablers and MFIs on the ground to understand the principal issues facing the sector, and the findings have informed and shaped our pri orities. HSBC is presently working with MFIs in Argentina, India, Mexico, the Philippines, Sri Lanka, and Turkey through our operations in those countries. The bank is at the forefront in arranging foreign investments into the country and deals for Indian companies investing overseas, and it is custodian of more than 40 percent of the foreign institutional investments (FIIs) in India, with total assets under management in India that exceed $5 billion. Although HSBC in India has 47 branches and 178 ATMs in 26 cities, it lacks a branch network and entrance feeibility in rural areas, where the majority of Indias empoverished universe lives. The rural woeful need a diverse range of financial services, including credit and caoutchouc and flexible savings services, to run their businesses, build assets, stabilize consumption, and shield themselves against poverty. However, access to eccentric financial services in rural India is still to a great extent inadequate. Eighty-one percent of villages in India do not have banks deep down a distance of 2 km (1.2 miles) 41 percent of the population does not have a bank account and available credit in rural areas meets just 10 percent of the actual need. Microfinance established a foothold in India during the 1990s, but this decade has seen rapid growth, with a distinct shift away from a welfare model toward a business model for delivering these services.Since it is quite expensive for HSBC in India to provide services directly to the rural deplorable, it lends funds to microfinance intermediaries, the MFIs that further on-lend the funds to the ultimate clients. HSBC in India established a team for microfinance under its commercialised cashboxing division in December 2007 and plans to eventually create regional-level teams to facilitate initiatives in their respective split of the country.4.1.2 North America Market EntryHSBCs initial pauperization for its getting retail banks in North America and the UK was to di versify away from its home in Asia. After it acquired Marine Midland Bank and Midland Bank, HSBCs motivation may have changed subtly. It is becoming increasingly difficult for banks that are large relative to their home markets to grow at home. In many developed countries banking has become quite concentrated (Marquez and Molyneux, 2002). In response, policymakers in these countries have started to bar the banks from further domestic mergers and acquisitions. Some recent failed attempts in Canada are a case in point (Tickell, 2000). The only remaining possibility for growth then is cross-border. Interestingly, each of the owners of the largest subsidiaries of foreign banks in the US is disproportionately often the largest bank in its own home country (Tschoegl, 2002 and 2004). Assessing the viability of this strategy is the true question of how a foreign firm competes against local firms that do not face any liability of foreignness (Zaheer, 1995), that is, costs that come from ope rating in aforeign environment or at a distance. One issue then is whether having operations in contiguous countries represents a competitive advantage. Tschoegl (1987) and Dufey and Yeung (1993) have argued that where markets are well developed and competitive, there is no reason to expect foreign banks in general to be better(p) than local banks at retail banking. At the same time there is evidence for the existence of a liability of foreignness vis--vis the foreign banks host-country competitors(Parkhe and Miller, 2002). Of course, there is also evidence that suggests that the liability is minimal (Nachum, 2003) or wanes over time (Zaheer and Moskowitz, 1996). However, these last two studies examine the liability in the context of corporate and wholesale banking markets. The liability may be more salient in the retail markets, where national differences between the home and host market are likely to be more profound.Demirg-Kunt and Huizinga (1999) and Claessens et al. (2001) fou nd that foreign banks tend to have higher margins and profits than domestic banks in developing countries, but that the opposite holds in industrial countries. Similarly, Dopico and Wilcox (2002) found that foreign banks have a greater share in under-banked markets and a smaller presence in mature markets. The implication is that one should not expect much in the way of cross-border mergers in commercial banking indoors developed regions. We can speculate that on the production side, differences in productsacross markets and privacy laws appear to be alteration parents ability to consolidate processing. As far as depositors are concerned, there seems to be little value to having an account with a bank that operates in other countries, oddly now that travelers can draw cash from networked automatise transaction machines (ATMs). HSBC does have a service for wealthy individuals-HSBC Premier-that provides for such crossborder advantages as transfer of an individuals credit rating w hen they relocate, and some other services. However, these facilities are not available to ordinary accounts. The literature on trade flows is instructive here the evidence on NAFTA has shown that borders have a substantial damping effect on trade flows (McCallum, 1995). In North America HSBC is even poorly positioned to take advantage of the one form of cross-border retail banking that is currently drawing assistance remittance flows from Mexican workers in the US. Although HSBC now has a strong presence in Mexico, it has almost no offices in California or other US states with large populations of Mexican immigrants.By contrast, Bank of America, which is the largest bank in California and is present in many other US states, in 2002, bought a 25 percent stake in Santander-Serfin, Santanders subsidiary, which has amalgamated Mexicos oldest and third largest bank. If there is little reason to believe that HSBC benefits from cross-border demand or production effects, what is left as a source of advantage?One medical prognosis is what Kindleberger (1969) has called surplus managerial resources. When a bank such as HSBC can no longer grow at home, it may find itself with a management team that is underemployed in terms of the demands on its time. The bank may then choose to grow abroad when it can trustingness these surplus resources with what Berger et al. (2000) call a global advantage. Berger et al. argue that some US banks succeed in the competition with local banks elsewhere in the world simply by being better managed. In their survey of the literature on productiveness, Bartelsman and Doms (2000) draw several stylized lessons, among them that firms differ in their productivity and that this difference may persist for years. Obviously, not all US banks needfully partake of the advantage of better management and by contrast some non-US banks may. HSBC may simply be one of these. As Nachum et al. (2001) point out, the conflict of firms depends on the kind of assets that firms can transfer internally from country to country, but that are difficult to transfer from one firm to another, even within a country. Still, it is, unfortunately, extremely difficult to measure an intangible asset as subtle and hard to define as better management (Denrell, 2004), especially when, as recent events have shown, stock market performance or accounting measures are of doubtful reliability.HSBC began its growth in North America by getting failed and weak banks. In effect, shareholders lacking a comparative advantage relative to HSBC, with respect to owning and governing given banks or branches (Lichtenberg and Siegel, 1987), interchange them to HSBC. Generally, growth by acquisition is difficult to execute and as a strategy it is vulnerable to problems of over-reach due to managerial hubris (Roll, 1986 Baradwaj et al., 1992 Seth et al., 2000). Peek et al. (1999) found that generally the US subsidiaries of foreign banks have not done well. The poor perf ormance of foreign bank subsidiaries was a result of the foreign banks acquiring poorly performing US banks and being unable to improve their performance sufficiently within the period that the authors examined. (One cannot arrive at strong conclusions from studies of the profitability of subsidiaries. Banks transfer profits across borders (Demirg-Kunt and Huizinga, 2001), and foreign banks may prefer to disk some business from their headquarters (Peek and Rosengren, 2000).) Still, HSBCs operations in the US and Canada are survivors of a winnowing process that saw other banks from Canada, Japan, the UK and the US sell their Canadian or US subsidiaries, in some cases to HSBC. As Mitchell and fry (2003) show with respect to firms in the US medical sector, firms differ in their ability to absorb and manage business on a continue basis. They use the biological metaphor of predation and their evidence is consistent with the desire that some predators are better able to target desirab le flow and better able to overpower the prey they target. HSBC appears to have found that it is one such successful predator. One may surmise that HSBC initially chose to acquire weak banks as much out of necessity as design. For any given size, a profitable bank will cost more than an unprofitable one, and to achieve its goal of diversifying, HSBC needed to acquire large banks. Now that HSBC is one of the worlds largest banks, whether one measures by market capitalization or total assets, it has more leeway.ConclusionAssuming that there is a positive relationship between marketing spend and market share, marketing activities, if well-targetted should have a incremental impact on market share. However, this does not always seem to hold true within the big four banks. Barclays and HSBC both developed their market share by 1% between 1995 and 2000, in elicit of greatly varied levels of investment in marketing. Lloyds TSB market share heavy-handed by 2% although the bank spent sign ificantly more than either Barclays or HSBC while NatWest and RBS have both declined by 4% patronage having a collective expenditure of more than double Barclays. This perhaps, at least partly, explains why HSBC has adopted a highly acquisitive strategy, realising that, although the core brand is strong, customer recognition may have saturated, therefore integrating both fresh brands into subsidiaries in tandem with launching new, retail-focussed services, keeps the proposition fresh.RecommendationsWith the disproportionate focus on retail banking, HSBC has yet not come over as a major player in investment banking. However, with the wave of recent milestone deals during over the last three years, the bank is beginning to emerged as an investment banking brand. HSBC played a central role in two of Europes biggest-ever merger and acquisition deals i.e. Mittal Steels hostile bid for Frances Arcelor and German utility company E.Ons offering for Spanish rival Endesa. However, the develop ment in the direction of investment banking requires some acceleration as the retail ban king sector continues to be heavily impacted by the sub-prime mortgage fallout and credit tightness. The bank has been planning to further enhance its business in the UK by investing 400m in retail and commercial distribution network and reach up 500 new ATMs, 250 new Express terminals, however this is has not yet materialised and may be badly-timed if implemented within the year.HSBC has considered the Asian region as its major focus area and it can expect a bigger share from the Asia-Pacific region in the future. 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