QUESTION

Assignment:

Describe the particular external environmental issues that impact upon financial services organisations’ strategic planning. Illustrate your description with examples from a financial services organisation with which you are familiar.

Select 3 major challenges from the external issues that you have identified and analyse their potential implications for the organisation in your example.

Describe the process for strategic management decision making and explore the tools or frameworks that can be used to analyse the organisation’s internal environment. Illustrate your answer with examples.

SOLUTION

Executive Summary

The assignment mainly focuses on the analysis of the internal and external environment of the financial services organisations and their impact on the strategic decision making process too. Then the major three issues related to external environment which have great impact on the financial services organisation are analysed. Then the process for strategic decision making and the tools which can be used for strategic decision making are being studied in this report.

Introduction

External environmental issues which impact the financial services organisations, strategic Planning have been vital to make any financial service organisation survive for long term. External environment comprises of all the elements which are present outside the boundary of the organisation and have the capacity to affect either part or the whole organisation. IN order to understand any financial organisation we need to analyse its domain which exists in the external sectors of the organisation (RamaRao, 2010). The niche of the organisation forms the organisational domain and also defines all the externals sectors which with the organisation will interact in order to accomplish its goals.

The external environment of every financial organisation presents threats as well as opportunities. Like the growth or decrease in the amount of international trade, regional trading blocs and matters like national protectionism are few examples which are the economic and political environmental issues affecting the financial services organisations.

The external environment which has been identified by Kotler et. Al. (Kotler, 2004) classifies it as listed below and calls it macro environment:

• Economic environment
• Technological environment
• Cultural environment
• Demographic environment
• Natural environment
• Political environment

Amongst all the factors demographic environment has the maximum effect on the financial services organisations because of constantly expanding population in Australia, thus they require more and better opportunities to invest and save and earn good profit margins by investing their money in these financial organisations (Bowles, n.d.).

Therefore Macro-environmental analysis acts as an early warning system which allows organisations to have some time to anticipate the threats and opportunities which they might face and thus they can develop right measures to tackle them (Ginter and Duncan, 1990). Thus Scanning, Monitoring and Forecasting Changes in the External environment are very vital for every organisation to sustain for long term.

The most common external environmental factors which are found to be having impact on the financial services organisations are discussed below.

 COMPETITION

It consists of the related financial services organisations which have same kind of services and products, their target markets and the geographical locations too.

• Related Industries:  It is vital to know about all the competitors, the skill pools and size of the organisation, their offshore development, marketing strategies and their competitive advantages also.
• Global Perspective: With the widely expanding world economy the financial organisations should also watch out their competition across the oceans too along with the competitive products launched by them from abroad, home-grown entrepreneurs and changing socio-political situations (Gupta, 2009).

CUSTOMERS

The most critical aspect of external environment is customers as they are the end users of the financial products and services.

• Demographic Changes:  these changes have an impact on the mass market trends and the changing customer preference and they include factors like the age of population, education level, population class and ethnicity.
• Preference Changes:  Customers like and hate the changes happening very quickly because people live in very strict social system so it is vital to anticipate the changing trends of user products requirements and the emerging technologies which influence the trends of usage of the services (Gupta, 2009).

TECHNOLOGY

It covers the technology and the science which is used to make the financial products or the technical tools which are used in manufacturing or the technology itself. It includes social network, internet and communication technologies which will revolutionise the operations of the financial organisations in the current era (Gupta, 2009).

RESOURCES

For the operations and their productivity the organisations depend upon the availability of external resources. Like:

• Raw Materials: To manufacture their services the organisation uses certain kind of raw materials and any disruption in their supply or changes in the cost of material will cause undesirable effect on the organisation.
• Skilled Workers: The availability of the skilled labour or employees at various levels in the organisation can cause a change in the results of any financial organisation. As the competition grows the organisations compete for the same kind of skill sets which creates temporary high level of demand in the market.
• Finance: It provide operational assistance to the organisation which includes the available cash and savings, credit lines to fund new ventures, investors, stock markets and venture capital. The financial environment plays noteworthy role in case of start-up ventures or the organisations which are operating on very thin margins as they have very small support to raise capital from other markets.

LAWS AND REGULATIONS

Due to political and social changes in the environment new laws and regulations are added by government constantly and all the financial organisations have to abide by the new laws and regulations and follow the legal system. Compliance to these laws and regulations will cause extra cost, additional taxes, legal fees or development of new technology for the financial service organisations. Like in case of Green environment where the organisations are striving to lower the carbon emissions (Gupta, 2009).

The major issues which have been found as the biggest challenges in the financial service organisations are:

• The appetite for risk is again on the rise for the financial institutions
•  Managing the complexity is one of the biggest challenges which the financial services organisations will face, because during 2011 the turbulent global economy had great impact on the financial sector.
• The technology of social media has not been accepted as it should have been by the financial services organisation.
• There is great amount of room for improving and getting skilled labour in the financial services sector.
• Management boards in the financial services organisations are paying and concentrating just on the risk factor and not on the environment issues related to going green etc. (Too Good to Fail? New Challenges for risk management in Financial Services, 2011)

Three major challenges due to External Environment and analysis of their potential implications for the organization

The major three challenges which are faced by financial service organisations are:

Technology

The fast rate of changing technology which is an external factor of the environment has severely altered the dynamics of financial services sector which covers banking, insurance and other financial services. This has allowed increased the number of new entrants in the financial services sector at higher rate and that too at much lower cost than the organisations which are already in the market of financial sector.

This has lead to a competitive pricing and severe competition amongst the financial services organisations like the new financial services organisations have been able to offer more competitively priced products as well as the services and have gained much more market share than the older players. For example the Direct Line Insurance in the U.K. has simply cut off the insurance broker, the intermediaries by offering the insurance quotations directly to the consumer using telephonic services. This has, made Direct Line Insurance to achieve greater chunk of market share and has eventually gained the position of market leader also.

But the changing rules of insurance industry has resulted or rather forced the incumbents to bear losses in market share or to follow a suit. But Direct Line’s first-mover advantage also got eroded because of pricing competition in the market which has been utilised by Norwich Union which is competing on the basis of price for their financial services.

Discontinuities:  It is the major threat which is faced by financial organisations which have the potential to destabilise the way of doing business. Like in case of financial services they haven’t utilised the platform of technologically advanced ‘Social Media’ to grow their business. After the financial crisis the social media will act as the best opportunity to rebuild financial services sectors relationship with the public, but they lack the expertise to understand the usage of social media to capitalise it (Jackson, 2012).

The biggest concern amongst the financial services organisation about the social media is the brand image damage, because of rapid volume and speed at which conversations happen on social media platform.

Figure 1: The Five Financial Sectors Fear of Social Media

The fast speed of technological changes will also impact the financial sectors and the organisation in very huge manner and for near future the critical skills which they will need to develop would be:

• Advances computer and IT skills
• More interactive Social Media Platform
• Business Continuity Planning

Resources

With the changing market dynamics and changes in the circumstances the development of training needs and analysis in the financial services sector. The total effect of the downfall of HIH the biggest financial services organisation was seen when it was found that purchasing liability insurance became very difficult in Australia (McDonald, 2005).

With the introduction of the Financial Services Reforms Act (FSRA) in Australia, minimum education requirements were made compulsory and the main goal of the regulator was to establish some standards in the financial services industry. In order to enhance the quality of financial services provided to the society which could be monitored and adjusted over the period of time (ENVIONMENT SCAN 2010- Financial Services Industry, 2010).

The financial industry needs to be highly skilled and should have a highly responsive workforce in order to tackle the future challenges during the economic recovery. Moreover expansion of the financial service industry in the global markets needs expanded pool of talent and skilled labour and developing the new knowledge base and skills at the same time.

Laws and Regulations

The major significant event which had great impact on the financial services organisation was the implementation of FSRA form march, 11, 2002 and the main purpose of the act was to reform the practices and the control of the financial services organisations in Australia. The major issue over here was the knowledge skills of the staff which was already employed in the financial services sectors.

Thus an extensive analysis of the employee’s qualifications was indispensible, so that all the employees which went to meet the customers should have minimum training as desired. If the employee did not have the required skills then the organisation needed to establish proper training courses, so that the employee standards could be met. Thus the General Insurers a financial services organisation had to reorganise the duties of employees after merger and legislative changes were brought in the company in relation to FSRA (McDonald and Jackling, n.d.).

The changing regulations and the market operations will impact highly the financial planning, Investment, taxation and superannuation. The future skills which would be critically required by the financial services organisations would be:

• Supervision and Leadership
• Business Planning
• Risk management
• Governance
•  Knowledge  Management
• Compliance

The laws of environmental sustainability will impact the fund managers, insurance brokers and thus the critical future skills which will be needed by financial services organisations would be:

• New products and systems
• Risk management
• Impact of Carbon Trading

The process in strategic management decision making

The process adopted by top management to take the most fundamental and vital decisions for the financial organisations are called the Strategic Decision Making. The effective strategic decision making process involves brining in together the correct markets and the right amount of resources at the right time for success of the organisation which is depicted below in figure 2. Like Virgin sold off it’s all the music stores because downloading music has become a very popular trend.

All the business decisions should reflect the organisations aim like maximising the returns for the shareholders and they should also cover the objectives or the goals of the organisation for example becoming the market leader and in order to achieve these aims and objectives every organisation needs to develop some strategies (Improving Strategic Decision Making, n.d.).

The figure 2 shows that the strategic Decision making process involves steps like finding the problem, information and intelligence and then finding alternatives and finding choices which can be implemented and then obtaining feedback.

Figure 2: Strategic Decision Making Process

Scanning the external environment

The only three certainties which exist in life are death, taxes and change. The external environment also keeps on changing and due to these change sit is easy to forecast on the basis of historical trends. That is why the financial organisations can show relatively higher degree of stability by making predictions which are based on extrapolations based on the past data. Scanning helps in finding the weak signals which are the barely perceptible changes happening in the external environment (Gladwell, 2000).

Monitoring the external environment

The activity which simply follows these unequal signals and keeps tracking them as they grow into much perceivable signals. The organisation can set thresholds so that whenever any activity which crosses the line of threshold it will get monitored (Guillen, 2000).

Forecasting changes in External environment

The main purpose of scanning and monitoring the changes in external environment of organisation is to help the organisation to forecast the future trends before they turn into absolute threats

A rational decision making process can help in reducing the uncertainty level in any organisation, but at the same time the external environment of the business keeps on adding the variable factors which will enhance the risk for the organisation. Therefore there are different levels of decision making which have been identified:

• Strategic Decisions: they have long term impact on the organisation like the forecasting of turnover of any financial organisation. Like RBS bought share in second largest Bank of China in China itself as a major strategic decision.
• Tactical Decisions:  help in the implementation of the strategy and they are mainly taken by the middle management.
• Operational Decisions: for example the stocks and the fluctuating market economy govern the decision making process for the financial organisation very day.

Analysis of Business Accounts

The basic business documents like the income statement and the balance sheet are very helpful in taking the strategic business decision making process. Like for a financial services organisation when its balance sheet  and the income statements were studied it was found that although there was reduction in cost of services produced but it was not able to generate the increased profits and the increasing overheads cost of the organisation were eating the potential profit which the company would have generated.

Tools used for analyzing the internal and external environment of organization

The External Factor Evaluation (EFE) Matrix

The external Factor Evaluation Matrix is the best tool which is used for external environmental elevation of organisation. The table depicted below:

The table clearly indicates that since the weighted score for information technology is highest so if the financial sector organisations utilise the IT in their infrastructure or product development, they can get better opportunities to earn bigger profits like MFS Investment management company introduced internal blog for sales people as well as an external blog for client’s comments to improve their services (Hosford, 2012).

At the same time the biggest threat which is being seen from the table below of EFE is Political Interference and withdrawal of sponsors in case of financial services, because both will hamper the functioning of the organisation. Thus it has been noticed that London-based Barclays and Wells Fargo& Co. Have strong back up support of their sponsors so they are flourishing very much in the market.

Competitive Profile Matrix (CPM)

Competitive Profile Matrix is another strategic management tool or framework which is used to do a comparative analysis of the competitors in the financial service organisation. It is helpful in evaluating both the internal as well as external environment factors and thus does the overall evaluation of the firm with respect to their competitors (Peng, D.Y.L. and Jiang, 2008). Below is one example of CPM which is helpful in internal and external factor analysis.

From the above table it is clear that the product 1 is most competitive in its sector as its weighted average score is very high because it is getting better sponsors, coping with economical shifts in better manner and getting better government incentives and labour is also easily accessible for the product 1.As is seen in case of APPLE and HTC and NOKIA Cell phone comparison Apple is the leader because of strong brand image and technology which gives it greater weighted score on CPM. This why Direct Line service in UK which has strong sponsors like Royal Bank of Scotland ( RBS) to manage the economic shifts is able to handle the external factors very effectively.

KEY PERFORMANCE INDICATORS

Key performance Indicators (KPI’s) are another vital management tool which are used in strategic design making as they monitor the progress and the achievement of business towards the target. A perfectly made track of KPI’s will help the organisation to keep track whether they are moving towards progress or not (Improving strategic decision making, n.d.).

Bibliography

Bowles, M. 2.2.1 External environment: The Institute for Working Futures, [Online], Available: http://www.marcbowles.com/courses/adv_dip/module12/chapter2/amc12_ch2_two1.htm [15 April 2012].

‘ENVIONMENT SCAN 2010- Financial Services Industry’, Innovation & Business Skills Australia (2010).

Ginter, P. and Duncan, J. (1990) ‘Macroenvironmental analysis for strategic’, Long Range Planning, vol. 23, no. 6, pp. 91-100.

Gladwell, M. (2000) The Tipping Point: How Little Things Can Make a Big, Boston, MA.: Little, Brown and Co.

Guillen, M.F. (2000) ‘Business groups in emerging economies: A resource-based view.’, Academy of Management Journal, vol. 43, no. 3, pp. 362-380.

Gupta, A. (2009) Organisation’s External Environment, 20 December, [Online], Available: http://www.practical-management.com/Organization-Development/Organization-s-External-Environment.html [15 April 2012].

Hosford, C. (2012) Study: Financial services companies use of social media ‘amateurish’, 9 April, [Online], Available: http://www.btobonline.com/article/20120409/SOCIAL/304099956/study-financial-services-companies-use-of-social-media-amateurish [20 April 2012].

‘Improving Strategic Decision Making’, Chartered Institute of Management Accountants.

Improving strategic decision making, [Online], Available: www.thetimes100.co.uk [15 April 2012].

Jackson, C. (2012) Made in Heaven or Marriage from hell? Social media and Financial sector: CICERO, January, [Online], Available: http://www.cicero-group.com/wp-content/uploads/2012/01/Cicero_SoMe_Report_200112_Web.pdf [15 April 2012].

Kotler, e.a. (2004) ‘The marketing organisation’s macroenvironment.

McDonald, T. and Jackling, B. An analysis of the environment as a means of assessing training needs in the Insurance industry in Australia, [Online], Available: http://www.avetra.org.au/downloads/Vol3_2%20-%203%20Training%20Analysis.pdf [15 April 2012].

Peng, M.W., D.Y.L., W. and Jiang, Y. (2008) ‘‘An institution-based view of international business strategy: A focus on emerging economies’,’, Journal of International Business Studies, vol. 39, no. 5, July/AUgust, pp. 920-936.

RamaRao, V.S. (2010) The External Environment, 28 November, [Online], Available: http://www.citeman.com/12267-the-external-environment.html [15 April 2012].

‘Too Good to Fail? New Challenges for risk management in Financial Services’, Economic Intelluigence Unit (June 2011).

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