An Examination of the External Environment in Which International Commercial Banks Operate

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PART ONE

AN EXAMINATION OF THE EXTERNAL ENVIRONMENT IN WHICH INTERNATIONAL COMMERCIAL BANKS OPERATE

CONTENTS

Item Page

Title

1

Contents

2

Summary

3

Part One: An examination of the external environment in which international commercial banks operate

Introduction

3

The macro-environment

3

The Industry environment

5

Conclusion

7

AN EXAMINATION OF THE EXTERNAL ENVIRONMENT IN WHICH INTERNATIONAL COMMERCIAL BANKS OPERATE

SUMMARY

Part one of this report will examine the external environment in which international commercial banks (ICBs) operate using a variety of analytical models.

INTRODUCTION

The External Environment is that in which any organisation operates and can broadly be defined as having several layers: macro, industry, strategic group and competitor. Not all layers of the external environment may be relevant to the analysis process (B820, Unit 2, P 6) and therefore it will be necessary for me to select those which are.

THE MACRO-ENVIRONMENT

The macro-environment relates to "the totality of conditions in which an organisation operates". (B820, Unit 2, P 9) and as such comprises a vast array of possible factors. These factors vary from organisation to organisation and can apply on national, regional or global levels. (B820, Unit 2, P 10)

The most commonly applied tool for macro-environment analysis is the STEP model, sometimes expanded to STEEPLE (V), which allows for the examination of the following factors, some of which are applicable to this study of international commercial banking:

SOCIOLOGICAL

TECHNOLOGICAL

ECONOMIC

ENVIRONMENTAL

POLITICAL

LEGISLATION

ETHICAL

(VALUES)

For the purposes of this report I shall concentrate on Sociological, Technological, Economic and Political factors only as they are the ones which I believe have the most relevance to ICBs.

SOCIOLOGICAL

For ICBs the relevant Sociological factors in the Macro-environment relate to population growth worldwide combined with the opening up of new, emerging markets in Central and Eastern Europe, China and India.

Success in tapping into these new markets and catering for the growth in population will be the target for ICBs in the near future.

Customers will require access to ICBs and not just through the internet or by telephone because these are still relatively new technologies there. ICBs will need to build and maintain a core of high street branches, even in the developed world as it is in these local branches that many customers still continue to open accounts and buy new products.

Supermarkets are now moving into areas traditionally the preserve of ICBs as are mobile telephone companies. Both are able to offer banking services through their stores and both benefit from technological advances. In the UK the ubiquitous face of Tesco provides reassurance to customers that their finances are in safe hands.

TECHNOLOGICAL

One frequently cited view about size is that the bigger a bank (or any organisation) gets, the greater its ability to benefit from economies of scale becomes. However, according to the Economist survey, there is a large amount of literature supporting the argument that, "economies of scale can be exhausted by the time a bank reaches a relatively modest size." (TMA1 CS, p59). Indeed as banks expand further and further, it is likely that they will start to be affected by diseconomies of scale where the ICBs will duplicate expense and management will lose track of activities. This will apply to the banks' ability to benefit from technology as much as from anything else as, although they will have greater spending power to introduce cutting edge technological innovations, their smaller competitors will be in just as good a position to do the same.

ECONOMIC

Banks have to look for new lines of business in order to increase their market share in the face of extreme competition and regulation. They can do this through several different means, mergers, International take-overs, entry into emerging markets or diversification into other financial services. The trend towards expansion allows these enormous banks to make strategic investments in new areas with relative impunity.

In addition to the possible benefits of scale, large organisations can also benefit from economies of scope (TMA 1 CS, p59) whereby "related lines of business under the same ownership or management can share resources and create opportunities for one another." (TMA1 CS, p59).

Finally, being big allows banks the freedom to invest in future markets, such as China, without risking the survival of the whole bank.

POLITICAL

One