Seminar Paper, 2009
30 Pages, Grade: 55%
1.2. DB Profile
2. Environmental analysis
2.1. PEST Analysis
2.1.1. Political factors
2.1.2. Economic factors
2.1.3. Social factors
2.1.4. Technological factors
2.1.5. Legal factors Error! Bookmark not defined.
2.2. Porter’s 5 Forces
2.2.2. Substitutes Error! Bookmark not defined.
2.2.3. Industry rivalry
2.2.4. Suppliers’ and Buyers’ Power
3. Strategy analysis
3.1. Strategic Positioning & Orientation
3.2. Entry strategy
4. Measuring Performance
4.1. Balance Scorecard Concept
The financial industry has experienced enormous development in the last 100 years accompanied by globalisation, technological and legal advances, serious financial turmoil, like the one we are currently facing. Despite these changes, some financial institutions have managed to survive throughout by developing themselves into the most efficient and profitable multinational companies (MNC) in the business world.
One of these financial MNCs is Deutsche Bank (DB), with almost 140 years of international banking experience. Right from its conception, it was to become an international bank with its stated purpose “to transact banking business of all kinds, in particular to promote and facilitate trade relations between Germany, other European countries, and overseas markets” (DB, 2009). In order to fulfil this purpose DB had to have an adequate strategy which is defined by Johnson and Scholes (2002:10) as “the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment and to fulfil stakeholder expectations”.
This report critically evaluates DB’s international strategy and business environment. In order to identify the firm’s fundamental strategic position, the report starts with the bank’s business profile by showing where and how DB competes. The main part of the paper will deal with analysis of DB’s business environment and later with the evaluation of DB’s international strategy. The study applies various business theories and concepts, which are also critically examined in the course of their adoption. Finally, based on the evaluation of DB’s qualitative and quantitative strategic performance and comparison to their principal competitors, the report presents recommendations for the improvement and development of DB.
DB offers a broad range of financial services and operates all over the world and therefore needs to implement various strategies for different markets in different regions. In order to deliver an appropriate depth and breadth of content, whilst not exceeding the paper’s given word limit, this report will concentrate on DB’s universal bank strategy inside the European region which represents the origin of DB’s global expansion, and is therefore especially suitable for analysis of DB’s international strategy.
Answering the questions of where and how DB is competing gives the first clues about DB’s profile and strategy. This primarily descriptive step is essential for the later critical evaluation of the company’s strategy.
Where DB competes:
DB competes in the banking industry, particularly as a “global investment bank with a strong private clients franchise” (DB, 2009). As a modern universal bank, DB “provides private clients with an all-round service extending from account-keeping and cash and securities investment advisory to asset management. It offers corporate and institutional clients the full product assortment of an international corporate and investment bank - from payments processing and corporate finance to support with IPOs and M&A advisory. In addition, the bank has a leading position in international foreign exchange, fixed-income and equities trading” (DB, 2009).
Geographically, DB competes in 76 countries with roughly 81,000 employees from 145 nations and it generates 75% of its earnings outside of the home market. It offers financial services throughout the world. The core businesses are: Private & Business Clients, Private Wealth Management, Asset Management and Global Markets headed by distinct operating committees. The company’s basis markets are Germany with around 700 finance centres and Europe with additional 600 centres. Together these form a core part of the Private & Business Clients division (DB, 2009).
How DB competes:
DB pursues a differentiation strategy in which it relies on brand image that was developed through good reputation and advertising. The bank’s mission is to “compete to be the leading global provider of financial solutions for demanding clients, creating exceptional value for our shareholders and people” (DB, 2009).
DB expanded its international operations organically through new branches and subsidiaries as well as through acquisitions. The first step towards international competition was made by DB in 1873 with the foundation of a foreign branch in London. DB further developed its international business by founding of Deutsche Bank Luxembourg S. A. (1870), acquisitions of Morgan Grenfell Group (UK, 1989), Crédit Lyonnais Belgium (1998), Bankers Trust (USA, 1999), and United Financial Group (Russia, 2006). In addition, the company has built up its own branch networks in Italy, Spain, Belgium, and Poland as well as in key emerging markets like Asia and Latin America. These engagements enabled DB to gain recognition and a strong foothold in international commercial banking, as well as investment banking and asset management.
To round off DB’s profile it is important to say that with market capitalisation of € 15.89 billion and approximately 361,000 shareholders (31.12.2008), DB is one of Germany’s largest public companies (DB, 2009; Kubis-Labiak, 2005)
“The business environment of the firm consists of all the external influences that affect its decision and performance” (Grant, 2008:66). The starting point to monitor and analyse environmental conditions is to create a system to organise information. Environmental influences can be classified by source, e.g. PEST Analysis, or by proximity, differentiating micro- and macro-environment (Eilert, 2004 in Grant, 2008). However the extent of environmental analysis should consider cost effectiveness and avoid information overload which means “distinguishing the vital from the merely important” (Grant, 2008:66).
The following section critically evaluates ‘PEST Analysis’ and “Porter’s 5 Forces’ frameworks and applies them to DB’s business environment. Analysis of DB’s macro and micro environment is an essential step before the concrete analysis of DB’s strategy.
PEST Analysis is a way to evaluate the general business environment in order to manage the future opportunities and threats from probable changes in the political (P), economical (E), social (S) and technological (T) environment. In the case of DB it makes sense to add the aspect of exposure to legal (L) factors as it is strongly influenced by permanent new regulations in the financial industry. The PEST framework is based on historical data, which could be used to anticipate the consequences of environmental trends, thus crucial for any strategic decisions, which this report aims to evaluate (Fahey and Narayanan, 1986; Johnson and Scholes, 2002). The critical point in the use of PEST Analysis is to understand the combined impact of these factors for instance by identifying key structural drivers of an industry or market (Davis, 2005).
Political and Legal factors are closely related and together have contributed to the creation of large, liquid financial markets and opportunities to exploit synergies.
Creation of the Single European Market (SME) in financial services is according to Nellis et al (2000) one of the driving forces of competitive pressures, development of new financial instruments, business models and distribution channels and finally the strong growth of the financial sector. However the implementation of SME has been also criticised as the main explanation for inefficiency, low competition and the slow transformation of banking in Europe (Balling et al, 2006).
The banking system depends heavily on the state of the economy. Balling et al predicted in 2006 that the gloomy economic situation in Europe will mean no future increase in banks’ growth rate.
In 2009 Dr. Josef Ackerman, the chairman of the DB’s management board, stated in the DB’s annual report, that 2008 was the most difficult year financial industry has experienced in recent times (DB AR08’, 2009).
In the long term, the depth of integration and globalisation of financial markets remains the most important changing force. It has contributed to the formation of an environment where institutional investors successfully challenge the positions of commercial banks (Nellis et al, 2000).
Public trust in banks has recently been seriously damaged by the collapse of several banks around the world. The Banking industry is also seen by the general public as the originator of the crisis (WEF, 2008).
Progress in electronic data processing and communications technology is one of the key drivers behind the rising number of financial activities and their efficiency, as well as increasing capital market orientation and internationalisation.
Development of complex financial instruments can be used to customise financial products to individual needs and risks, but can also become intransparent and deceptive about the real risk of the products (BDB, 2009).
Combined PEST factors have contributed to the continuous flourishing of financial industry in the last several decades until the recent financial crisis which has put a serious threat to the prior achievements. The new political, regulatory and organizational changes of financial system which are planned by governments all over the world in order to prevent future failures will have a crucial impact on the future of the banking industry (WEF, 2008).
“Porter’s five forces of competition framework views the profitability of an industry as determined by five forces of competitive pressure” (Grant, 2008:71). These five sources of competition include three sources of horizontal competition: competition from substitutes, new entrants, established rivals; and two sources of vertical competition: the power of buyers and of suppliers. However in the financial industry and especially in universal banking, the extremely complex interaction between players makes it hard to draw a clear line between the sources of competition. For example on the horizontal level it is hard to define if some services offered by institutional investors should be considered as rivals or substitutes. On the vertical level it should be considered that often banks’ money suppliers are at the same time their customers. Moreover, banks’ rivals can also be their suppliers and customers, since banks have multiple interrelations. Given that, the critique points of the framework’s generic structure and limitations of applicability in modern highly dynamic industries become apparent (Johnson and Scholes, 2002).
“Devising strategies for changing industry structure” requires an understanding of “how industry structure drives competition” (Grant, 2008:80). Identifying the main groups of players in service industries is more difficult than in manufacturing industries. Sorting out the different players and their relationships requires a definition of the industry with its boundaries (Grant, 2008).
Deregulation and the consequent removal of traditional barriers between the various players fortified the changing structure of the European financial services industry and increased the banking concentration (Nellis et al, 2000).
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