A business environment involves all the factors affecting a business from within and outside. In most cases, a company has no control over such elements but still depends on them for sustainability and overall performance. The factors that affect the environment from within are known as micro-environment, which include employees, customers, shareholders and suppliers (Cadle, Paul, & Turner, 2014). On the other hand, factors that affect the environment from outside are known as macro-environment and includes control measures, economic uncertainties, technological, political, and competition (Cadle et al., 2014)
Understanding the business environment is essential for various reasons. First, it creates awareness on business dynamics, which an organization can use opportunities for development through appropriate adaptation. Besides, it enables a business to prepare adequately on how to respond to environmental factors, which may present themselves as threats or opportunities to an organization. Moreover, understanding a business environment enables an organization to tap and acquire essential resources required to produce goods and services (Cadle et al., 2014). Change in a business environment can affect an organization positively or negatively depending on the approach the business uses to respond to such changes (Cadle et al., 2014). For instance, increased competition due to new entrants or improvement of product and service qualities by other competitors may negatively affect the sales of an organization in it takes an extended period to respond to such changes.
This report seeks to analyze the business environment in the banking industry in the UK by focusing on the effects of micro and macro settings on the operations of HSBC bank. Business microenvironment factors do not affect all the organizations that operate in the same industry in equal measures, because the companies are structurally different regarding their capability, strategies, capacity, and size (Kew & Stredwick, 2005). On the other hand, the magnitude of influence of macro environment performance on business performance depends on the level of a company’s dependence on the general health of the economy (Kew & Stredwick, 2005).
Description of the Business
The selected business for this case is HSBC banking corporation. HSBC banking corporation is consumer banking or retail banking as it is always known, as it allows its customers to utilize the local branches to access the services. As a retail banking services, HSBC focuses much on the consumers, and therefore it is obliged to offer better consumer products and services to maintain its competitiveness in the industry. HSBC banking corporation aim is to become a one-stop shop where the customers can access multiple financial services at the same time (Upender, 2013). In the UK, most consumers prefer to obtain a range of essential services from the retail banks such as personal loans, debit cards, mortgages, credit cards, and many others to make their operations easier. The utilization of local banking services is a common trend in the UK as they serve all their consumer retail needs. In all its local branches, HSBC has employed financial assistants who give financial advice and other customer services to their clients. Lately, HSBC banking corporation has been making a lot of efforts to introduce new services and products to accommodate a more extended range of services to their customers.
Some of the products and services offered by HSBC banking corporation in the UK’s retail banking industry include accounts management, loans, electronic cards such as debit, and other documents. HSBC Banking Corporation operate in both international and local markets within the UK through its many branches which are distributed in nearly all the major towns in UK offering the same products and services to the customers. Through its 7500 branches which covers about 87 countries, HSBC banking corporation has made it easier for its customers to get in touch with their services in nearly in all the places they go and this has made it more convenient, thus, increasing its ability to command their loyalty.
The financial business in the UK has been dramatically transformed over the years since its emergence, and this has taken shape in the form of the products and services which are offered by the key players in the sector. As one of the main retail bank in the UK, HSBC has also made numerous efforts to transform its services and the way it operates as an attempt to adjust to the new market demands in the UK. For example, the company has changed its focus from being profit oriented to being geared towards assisting its consumers in meeting their needs.
Section 3: Business micro-environment Analysis
The micro-environment for business comprises of all factors that potentially impact on its performance, strategy and decision making. In other words, it refers to all the aspects of the business that can be controlled by the management. Usually, the business microenvironment factors do not affect all the organizations that operate in the same industry in equal measure, and this is because the companies are structurally different in terms of their capability, strategies, capacity, and size. However, there are times when several firm’s microenvironments are nearly in the same level, and during such cases, the organizations respond differently as they try to achieve the highest success level in the market.
HSBC banking corporation micro environment incurs a significant effect on how the consumers in the market use their present resources to make choices at the market place. The products refers to the goods and services that they buy from the various sellers in the market. As a business, each organization has got the role of ensuring that they offer and promote those products whose demands are very high in the market. In doing so, they are bound to influence the choices and budgets of the consumers in the market. Some of the general micro environmental conditions experienced by HSBC comprises of competitors, suppliers, customers, public, and distribution channels (Cadle, Paul, D., & Turner, 2014). HSBC’s micro environment affects its performance in greater measures and therefore through its ability to understand such factors, the company has an increased capability to formulate effective business strategies and plans to make it more productive.
The five forces of Potter’s model analyzes the attractiveness of a market and its competitive intensity. It helps in the identification of the central potentials in a specific business situation within the industry. Knowing a business potential in the market is important because it assists in the understanding an organization’s strengths, its competitive position and what effort is required to elevate it to the most desired status in the industry. In strategic business planning, Porter’s five forces can be used to establish whether introducing new services and products can be profitable to the company. By being able to understand the highest potentials in the industry, Porter’s five forces can be used to determine the organization’s strengths that can be used to improve the weak areas and in minimizing the mistakes.
The application of Porter’s five forces analysis tool is accustomed to certain advantages and disadvantages which influences its application over other existing business analysis tools. Some of the benefits attributed to the use of this framework include its ease of use which makes it easy to understand the current market forces. The porter’s frame gives useful information on the three main issues of planning within an organization which helps in the determination of the industries attractiveness. The model also offers information that determines whether an organization should enter or exit the industry. Other than the suitability of application of the porter’s model, it can be accustomed to certain disadvantages that might limit its use. For example, it lacks empirical evidence; it has a static character and therefore does not account for the industry’s structure that determines its competitiveness. The model does not adequately accommodate the changes in the market as newer differences are attributed to the advancing technology.
Diagram 1: Porter’s Five Forces Framework
|Potential new Competitors threats due to entry of new players|
|Suppliers Bargaining Power|
|Customers/Buyer Bargaining power|
|Competition in the Industry|
|Substitute Services or Products Threat|
Section 3.1: Competitive Rivalry Analysis
Competitive rivalry implies to the level of reaction of companies to the new moves, which are set by other firms in the same industry while attempting to take over dominance in the market. In the UK consumer banking, the rivalry in this industry has been manifested in many ways such as the introduction of new products and services, price, warranties, improved customer services, guarantees, advertising, and technological innovations. HSBC devises various strategies to remain afloat of other industry players. Most of the strategies are customer oriented to retain loyalty and acquire new customers.
HSBC faces an intense competition in the UK retail banking industry. Since its formation in the 17th century, the UK retail banking industry is characterized by the presence of about 350 financial institutions. For this reason, all the banks in the industry attempt to find new strategies for absorbing new customers from their rival companies by offering better services and products. Some of the joint approach applied in improving the firm’s competitiveness include lowering interest rates on loans, improving the after sale services, raising prices on deposits and other investment services. Even though there are numerous players in this industry, it is still dominated and controlled by the larger and older banks in the UK which holds the largest shares in the market. For instance, HSBC holds the largest share in the UK market with rivalries from the Royal Bank of Scotland and Barclays.
Graph 1: market share of the leading UK banks from 2014 to 2017
Brand loyalty is an essential aspect in this industry, and this is the reason why the larger companies are more competitive as compared to the smaller companies. Most financial institutions experience lower returns in this sector because of the prevalence high competition levels. Larger banks are seeking to make acquisitions and mergers with the smaller banks to increase their market share. It is easy for new companies to enter into this market as there is no significant barrier to the new entrants. The competitive rivalry in this industry is very high due to the presence of many firms who are competing for the same customers.
Section 3.2: Analysis Suppliers Bargaining Power
Retail banking suppliers are companies or individuals who bring in new inputs in the form of materials, services, and resources. The ability to dominate depends on several factors such as available suppliers, customer dependence, power of the brand, and customer dependence. Capital is the primary resource in the banking industry. In this industry, there are four leading suppliers of capital which include mortgages, loans, loans from other institutions and customer’s deposits. Through these suppliers, the HSBC fulfills the needs of their customers such as borrowing needs and continue to manage transactions due to availability of sufficient money.
Since the suppliers’ power in the UK retail banking industry is dependent on the market, there is a moderate suppliers bargaining power in the industry.
Section 3.3: Analysis of Threat of Entry:
New entrants are potential competitors who are not currently operating in the industry by they can compete vigorously if they decide. Barriers such as government policy and capital requirement act as determinants of new market players to join the industry (Kew & Stredwick, 2005).Opening a new bank in the UK requires huge capital to facilitate the smooth operation of services. The UK financial industry is also impounded with strict government regulation and issues in acquiring licenses. New banks face a lot of difficulties to start up as they require a lot of money and financial information to their customers. However, most people prefer to give out their personal information to the known commercial companies which they consider to be trustable with such information’s. The level of loyalty of the consumers to the more prominent brands also makes it difficult for new companies to grow in the industry. Moreover, most banks have structured their operations in a way that the customers can access all their financial services at one place. For these reasons, the threat of entering the UK banking industry has been minimized.
Section 3.4: Analysis of the Bargaining Power of Buyers.
The buyer’s power in a market is determined by the number of buyers who are available in the market, chances of backward integrations and alternative sources of products (Hummels, Ishii, and K.-M. Yi 2001). It is important to note that buyers or consumers are the main target of the company’s products because they are the end users in the market (Hill & Jones, 2009).
There is no cost associated with switching from one company to another in the UK banking industry. Most banks are therefore seeking for means that can help in ensuring that they are able to satisfy all the financial needs of their customers and this makes it difficult for the consumers to shift into other banks. The advancement in the communication technology has helped in raising the power of the consumers in the in the UK banking industry as the customers have the ability to compare the services in various banks with much ease. For this reasons, there is a high bargaining power of the buyers in the UK retail banking industry.
Section 3.5 Analysis of Threat of Substitute Products.
Substitute products are alternative goods or services that can act as a replacement or can serve the same purpose as a particular product in the market. As the substitutes of a specific product increases in the market, its demand becomes more elastic. Consequently, when a product develops a flexible demand, it begins to experience an elevated level of sensitivity from the consumer and this translates to reduced benefits (Kew & Stredwick, 2005).
In the UK’s retail banking industry, the market is not substantially affected by the presence of the rival banks but by the many non-financial companies that create a more significant threat of substitution. The methods of payments such as installment, FinTech, and loans also poses a more significant danger of substitution to the banks. The UK Retail Banking industry, therefore, faces a moderate threat of change.
Section 4: Macro Environment Analysis
A micro business environment comprises of all the working and indirect operations affecting organizations. Companies are usually powerless before such factors as they cannot control them in any way (Yüksel, 2012). Some of the macro business environment include political environment, economic environment, social and technological environment. The magnitude of influence that a business macro environment influences its performance depends on the level of a company’s dependence on the general health of the economy. The UK microenvironment can incur more significant influence on HSBC through its consumers by influencing their ability to spend. It is vital for HSBC to understand its macro environment as it enables the company to understand all the changes in the industry and adjust accordingly before any harm is inflicted on the business.
4.1: Analysis of the Political Environment
The political environment affecting HSBC include overall restrictions, boundaries, and limitations imposed by the government through its policies in the banking system. The current political climate in the UK has been a significant challenge to most of the banks in the UK as numerous regulatory policies and rules have been imposed. For example, the UK Banking Reform Act and the European Union Bank Recovery and Resolution Directive. Moreover, tougher rules were introduced in UK after the 2009 financial crisis to help in restoring the strength of the British currency (Common, 2004). The introduction of the 8% surcharge on the bank profits in the UK has also affected the performance of the Company. The decision by the British parliament to exit from the EU has caused both economic and political uncertainty in the UK. There are further push by Scotland to oppose the Brexit, and this could also worsen the situation of the company. In overall, the current political environment in the UK is not good for the performance of the Company. However, HSBC has agreed to follow all the policies and create their own working framework to confirm to government restrictions.
Section 4.2: Analysis of the Economic Environment
HSBC is one of the leading market shareholders in banking industry in the UK. This gives them an economic strength resulting from their customer base and the types of services they provide. However, HSBC faces several challenges due to instances such as the UK decision to leave EU, which imposed uncertainties and financial risks. Some of the expected implications of the exit are the decline in the value of the sterling pound against other major currencies, and this is projected to worsen further if Britain finally exits the EU. The Exit of Britain from the EU is also likely to necessitate a condition of low-interest rate environment to the companies, and this will lead to a decline in their profitability. HSBC tries its best to overcome such challenges create better economic conditions such as employment.
Section 4.3: Analysis of the Social Environment.
HSBC operations are affected by societal trends such as fashion, social mobility, lifestyle, and other trends. The current median age in the UK has risen to 40 years, and it is expected to grow to 55 -64 years old in the future, and this is an implication that the UK’s population is aging. The aging population is more favorable for the growth of retail banking companies as the retired consumers entitled earning pensions and other disposable incomes. This infers that HSBC experience a shift towards investments, wealth management and savings as the bottom-line of services for the old consumers. HSBC aims to ensure that there is equitable benefit to resources provided by the company to the society.
Graph 2: Population Estimate in UK 2017 (in millions)
Section 4.4: Technological Environment Analysis
Business technological environment are the impacts created in the market as a result of the digital capabilities which are driving evolution in the industry. HSBC takes advantage of new technological changes to monitor and improve consumer behavior, expectations, and access to banking services (Jayawardhena & Foley, 2000). Besides, HSBC uses technologies to access different systems through the internet where it gets clients across the globe. Besides, the operations of the company have been improved due to adoption of technology.
This report presents various findings on the prevailing environmental conditions affecting the success of HSBC holdings. The current micro environmental conditions in retail banking industry in the UK is characterized by many factors that HSBC should control to maximize its performance. HSBC faces an intense rivalry in the UK’s retail banking industry as there are many companies competing for the same customers through their service and product offers. The suppliers in the industry have got moderate bargaining power that depends on the existing market situation. HSBC faces low threat of new entrants as strict government regulations, and consumers brand loyalty makes it difficult for the latest companies to perform well. Due to lack of shifting costs and the ability to compare the services offered by different banks, the buyers in the UK financial industry have got a higher bargaining power in the market.
Other than the existing micro environmental conditions for HSBC Holdings, there are specific macro environmental conditions that can impact on the performance of the organization in the industry. The current political environment in the UK does not favor the attainment of good returns by the existing companies. The UK’s decision to exit EU has resulted in the slowdown of the UK economy thus hampering the growth of banks. However, UK social environment favors the growth of banks such as HSNC as it is characterized by an aging population with a high disposable income which is favorable for investment and savings. Lastly, the technological environment in the UK favors the growth of the banking institutions as there are many digital innovations which have increased cost-effectiveness and efficiency in the market. It is therefore advisable to invest in HSBC due to favorable the conditions.
Bennett, R., & Kottasz, R. (2012). Public attitudes towards the UK banking industry following the global financial crisis. International Journal of Bank Marketing, 30(2), 128-147.
Cadle, J., Paul, D., & Turner, P. (2014). Business analysis techniques. Chartered Institute for IT.
Common, R. (2004). Organizational learning in a political environment: Improving policy-making in UK government. Policy studies, 25(1), 35-49.
Davies, R., Richardson, P., Katinaite, V., & Manning, M. J. (2010). Evolution of the UK banking system. Bank of England Quarterly Bulletin, Q4.
Hill C., Jones G. (2009) Strategic Management Theory: An Integrated Approach, Cengage Learning p. 43-45.
Hummels, D., J. Ishii, and K.-M. Yi (2001): The nature and growth of vertical specialization in world trade, Journal of International Economics, 54, 75-96.
Jayawardhena, C., & Foley, P. (2000). Changes in the banking sector–the case of Internet banking in the UK. Internet research, 10(1), 19-31.
Kew J., Stredwick J. (2005), Business Environment: Managing in a Strategic Context, CIPD Publishing, p.21-23
Kew J., Stredwick J. (2005), Business Environment: Managing in a Strategic Context, CIPD Publishing, p.21-23.
Porter, M E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press.
Upender M., Shreedhar V. (2013) Growth Rates and Responsiveness of Credit to the Changes in Deposits in the Indian Banking, Journal of Knowledge Management, Economics and Information Technology
Yüksel, I. (2012). Developing a multi-criteria decision making model for PESTEL analysis. International Journal of Business and Management, 7(24), 52.