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Financial Services Transformational Management Stages


The enormous changes in the financial environment demand new strategies from the financial institutions that intend to survive into the next decade. Given the speed with which change occurs in the global business environment, standard planning techniques and asset allocation methods have become woefully outdated. Indeed, achieving new levels of business sophistication is a never-ending process, requiring companies to rapidly reallocate assets to meet changing conditions. Tremendous pressure exists for banks to grow larger, so that they can use their internal resources to fund major lending opportunities. This pressure underlies much of the consolidation of the investment banking sector, as those firms choose to be acquired by large banks and thus to expand their balance sheets. At the same time, opposing pressure exists for banks to focus on narrow ranges of products in which they are excellent, rather than to become financial supermarkets, since this strategy consistently failed during the 1980s and 1990s. And these two pressures are only a couple of the ones currently bombarding financial institutions in the newly deregulated environment of global competition.

Transformational Management is the process of corporate strategy determination that calls for a firm to project its domain of business activity into the future, to identify mechanisms for competing successfully in that context, and to educate the market about that future and about the company’s ability to provide the services/products that will be needed in that future. It requires an active effort to define the technological and regulatory environments that will prevail in the future, as well as to anticipate the competitors who will populate the market. And finally, it requires a clear and timely implementation plan to take advantage of rapidly moving opportunities and to focus the firm’s efforts on completing the cycle from identification of the strategy to its realization.

Using Transformational Management, financial institutions can better position themselves and move to create sustainable competitive bases. In addition, they can explore the process of incorporating the Internet into internal operations and into client services through this perspective.

The firm must first assess its core strengths, which enable it to exist profitably. Without some competitive strengths, or the possibility of developing them, there would be no basis for projecting a future competitive position. This requires not only identification of competitive strengths, but also evaluation of who the key competitors are. This exercise in establishing the firm’s Initial Position is really backwardlooking, since it only evaluates the firm’s situation up to the present time.

The first step in transforming the organization and the strategy is to Envision the Future. Depending on the competitive context (e.g., a country, a particular market segment, a global broad market, etc.) selected as the firm’s target, the relevant competitors may well be different from those encountered to date. This requires a process of futurism. The firm’s leaders must envision the technological and regulatory environments that will characterize the market(s) in which the firm wants to operate in the near-term future (say, the next 3–5 years). This does not have to be “high- tech,” necessarily, but just forward-looking.

In the financial services sector, this is particularly important, with the global deregulation trend and Internet-based changes that are ongoing. Even though the details of the future cannot be known, it is actually easy to see many of the relevant elements.
Once the target context is defined, the firm must decide on the kinds of business activity that it wants to pursue in this environment, positioning itself to take maximum advantage of the new reality. This is to Design a Strategy to Meet that Future.
The strategy does not need to follow just on the existing competitive strengths of the firm but, rather, it requires building/acquiring additional strengths that may be required to succeed in the new context.
Third, the customers and potential customers have to be informed of this vision and of the firm’s capabilities to provide the market-leading products and services.
This step requires not only an external effort to Sell That Future, but also an internal effort to convey the direction and requirements to the firm’s own managers and staff members.
The final step is to Implement the Plan. This final step is easy to downplay in the efforts to pursue the first three parts of the sequence, but obviously all is lost if the implementation is not carefully considered and carried out. As in any strategic planning process, the goals need to be identified clearly and measurably, and implementation has to be evaluated according to the degree of success in achieving those goals.

In the mid-1990s, Citibank was the second the largest US commercial bank after Bank of America. The Citibank leaders saw that commercial banking was going to continue to lose ground to investment banks in terms of extending credit to corporate clients (through securities issuance, rather than deposit/loan intermediation), and even in terms of capturing savings – in mutual funds rather than bank deposits. They also saw the possibility of expanding activities in other financial sectors such as insurance and, even more attractively, asset management.

But prior to moving to the stage of defining a way forward, the bank needed to identify its competitive strengths relative to the relevant competitors. Citibank defined its geographic target as global rather than national. Any goals would be pursued in competition with financial services firms at the worldwide level, rather than just within the United States. This perspective did not mean that Citibank would follow an identical strategy in each country, but that the target market was consumers, corporate clients, and governments around the world – and that competitors were definitely not just other US banks.

The strengths (the Initial Position) that the bank was able to define were numerous. The fact that Citibank possessed the largest US retail branch network at the time gave it an advantage over both (domestic and foreign) commercial banks and other financial services providers in terms of access to retail customers in the United States. This situation was almost exactly the opposite in most other countries, where Citibank had a marginal retail presence, focusing mostly on corporate business and private banking. A second major competitive advantage was Citibank’s role as the preeminent source of financial innovation in the world. Citibank had been first or among the leaders in introducing all kinds of financial and technological innovations, from automatic tellers to currency forward contracts and options, from telephone banking to global cash management. This advantage was truly global in scope, relative to competitors almost everywhere. A third key advantage was Citibank’s possession of the largest global network of affiliates of any bank. Since most of the non-US affiliates were involved principally in wholesale business activities, Citibank was able to offer the most extensive distribution of corporate banking services to multinational companies and other wholesale clients worldwide. These are only a few of the strengths that Citibank brought to the table as it undertook the process of Transformational Management in the mid-1990s .

As another example, consider the German insurance company, Allianz. In the mid- 1990s, Allianz was Germany’s largest insurance company and the third largest in the world, with major businesses in both property/casualty and life insurance. Under the German legal system, Allianz was permitted to have major shareholdings in other financial and industrial companies. At that time it had key holdings of shares in Deutsche Bank (5% of the bank’s equity) and in Dresdner Bank (22% of that bank’s equity), in addition to investments in numerous other financial and industrial firms. Allianz viewed the strengths of its Initial Position as residing in four areas in the mid-1990s. First, the firm was one of the acknowledged world leaders in insurance products, in both life and property/casualty segments. Second, it had better distribution than almost all competitors. Only AXA had a larger network of offices around the world. Third, Allianz had complementary businesses in its portfolio of holdings, due to Germany’s allowance of cross-shareholdings. The major stakes in Deutsche Bank and Dresdner were only part of the total portfolio. And finally, Allianz was one of the world’s top ten asset management companies, with about $US 400 billion under management in 1998. This capability in asset management derived directly from the need to invest insurance premiums in long-term investments, to provide for future policy payouts.

As with Citibank, Allianz defined its market to be global, though with a European foundation. While Allianz wanted to provide a wide scope of financial services, it limited itself largely to the insurance policies, annuities, and asset management activities of that sector, and left retail and wholesale commercial and investment banking to its alliance partners.
As a final example, Hongkong and Shanghai Banking Corporation ( HSBC) was the long-time leader in commercial banking in Asia, and particularly in Hong Kong. In the late 1980s it was obvious that major changes in the Hong Kong business environment would likely take place upon reversion of the colony to Chinese control on July 1, 1997. In 1990 the bank moved its headquarters from Hong Kong to London, largely as a defensive strategy against the political risk. As part of this process, HSBC undertook a Transformational Management process beyond the geographic diversification.
Maintaining the same time frame as for Citibank and Allianz, we can see that for the Initial Position in 1995 the key strengths of HSBC were its possession of the largest network of retail affiliates of any bank in Asia, its leadership as well in the wholesale banking business in Asia, and its large global network of affiliates (including Midland Bank in the UK and Union Bank and Marine Midland Bank in the USA). In the Asian region, HSBC was the clear leader in provision of international services, particularly trade finance and foreign exchange.

With global market integration, Citibank saw a future competitive environment that would require broad-scope financial services providers to be able to offer their services to retail clients throughout the country with physical facilities, as well as electronically. On the wholesale level, it was clear that these services would have to include traditionally investment banking products, such as securities underwriting and trading, as well as asset management. And at the global level opportunities were arising to establish full-service operations in many countries, where previously only limited, and typically international, services had been permitted to foreign banks.

Citibank looked for US options that would give the bank a major presence in investment banking and asset management, as well as in the retail insurance sector, and that would fit nicely into the retail branch network. The initial growth of the Internet also provided a challenge to see how this channel of distribution could be fitted into the bank’s portfolio of services.
Allianz was pursuing a strategy of globalization, with affiliates throughout Europe and in Asia and the Americas at that time. Looking at the global financial services industry, it was clear to Allianz that its insurance market was being invaded by other financial services providers, and that its core asset management business was likewise subject to incursion from noninsurance competitors. Allianz saw that to survive and prosper it had to be a truly global provider of not only insurance services, but at least asset management as well. And with the evident consolidation in financial services in general, it was obvious that Allianz would also have to consider becoming directly involved in banking.
Allianz defined the future of its intended business as requiring a global presence in a coordinated set of financial services activities including insurance and asset management, but also potentially extending to other, particularly retail, financial services. It did not see an existing or future core strength in securities underwriting or trading; that is, in investment banking.
HSBC’s leaders saw the future competitive terrain that they wanted to serve as global corporate banking, multinational retail banking, and the provision of integrated financial services. With the geographic coverage that the bank had already achieved by the mid-1990s, the challenge was to integrate these affiliates and to provide clients with truly global services. The traditional trade financing and international services would continue to be focal areas but, additionally, HSBC wanted to build domestic retail business in its key markets (the UK, the USA, and China). And the bank wanted to continue to build its regional dominance in commercial banking services throughout Asia.

Once the key challenges in competitive domain have been sketched, the firm must design a set of steps to position itself as a leader. These steps include both restructuring of the organization and investing in R&D to enable the firm to produce the new products or services that will be demanded in the unfolding environment.
Citibank took a huge step in the process of Transformational Management in the late 1990s, when it agreed to merge with Travelers Group and to become a universal bank, or really an allfinanz institution – even before the US legislators had approved rules permitting such activity. (In 1998 Citigroup, as the merged entity was called, was given a period of about two years to begin the integration of the two firms, after which key businesses such as insurance would have to be divested if US law and/or Federal Reserve rules had not changed to permit banking and insurance businesses under the same holding company.) Citibank’s leaders took the risk of entering into a complex set of financial businesses, because they foresaw the convergence of commercial and investment banking and insurance in the USA, just as it was already a reality in most of the other industrial countries. By betting in such a huge way on the US regulatory reform, the newly named Citigroup3 positioned itself to enter rapidly into the full-service financial market and also to take maximum advantage of the electronic services that are possible.
The stated intent of the merger was to position Citigroup as the country’s leader in integrated financial services, operating at the retail level largely through Citibank branches countrywide and at the wholesale level through New York based underwriting, asset management, and other service provision for corporate and institutional clients. The important steps to (1) sell all three kinds of products (e.g., bank deposits and loans, stocks and bonds, and insurance policies and asset management) through the branch network and (2) use technology to reach more clients and improve service were both begun at the time, but even three years later were not complete. Happily for the group, the US Congress did approve legislation to permit allfinanz institutions, so the insurance business was not lost to the previous regulatory prohibition.

The strategy pursued by Allianz took several years to unfold, in terms of its interest to build a major branch network for retail sales of financial services in Germany. The firm looked to build on its alliances with both Dresdner Bank and Deutsche Bank, which attempted to merge in the year 2000. Allianz had intended to utilize the Deutsche Bank 24 network of branches and automatic tellers to sell its retail insurance products along with the two banks’ products. However, this attempted merger broke down, and both banks ended up with dissatisfied shareholders and a continuing commitment to link up with another institution to expand their scope. In early 2001, Allianz agreed to take full ownership of Dresdner Bank, and to divest its holding in Deutsche Bank. This gave Allianz a nationwide network of branches in Germany through which to sell not only bank deposits, loans, and other services, but also its own insurance products and asset management services. Given Allianz’s major focus on retail financial services (e.g., personal and homeowners’ insurance policies), this major bet on Dresdner’s retail banking arm may prove successful.

For Allianz, more than the other two firms discussed here, the need to expand into additional financial services (i.e., beyond insurance) was a pressing priority. With the elimination of barriers to entry in insurance in the United States, and with global financial services integration, the raison d’être of insurers is more and more in doubt. The strategy of Allianz confronted this challenge head on.

HSBC has undertaken a pair of Transformational Management processes in recent years. First, HSBC defined its market as truly global financial services, and created an entire new structure and set of affiliates through moving the headquarters to London from Hong Kong in 1990, and buying Midland Bank in the UK, along with Marine Midland and Republic National Bank in the United States, to bring its global business into three roughly equal parts in Asia, Europe, and North America.
Second, HSBC has moved aggressively into Internet-based banking through the Midland Bank division called First Direct. This Internet bank has been one of the two or three most active leaders worldwide in developing this means of banking during the past several years. First Direct was established in 1989 as a subsidiary of Midland Bank, aimed at clients who wanted to use their accounts via telephone. By the mid- 1990s, it was possible to offer account access through the Internet, and FirstDirect.com was launched. By early 2000, First Direct had more than one million clients.
For HSBC, the organizational repositioning may be less of a shock than for the other two examples here, because the bank had already gone through a wrenching transformation in the 1980s, to prepare for Hong Kong’s return to Chinese control in 1997. Given that HSBC already had reconfigured its business into three segments of the world, and had moved headquarters from Hong Kong to London, the addition of the Internet-based banking division has probably been felt as less of a threat than at the other institutions.

With the firm’s own direction clearly defined, the task remains to educate the public about the conditions that are coming and the way in which the firm’s products or services offer superior qualities in that future. Citibank is probably the most advanced in this regard, having regularly innovated with new products and services over many years. Thus, for Citibank to present to clients and potential clients the idea that its banking services are available on line and will be supplemented with stock-market products and insurance products should likely produce a positive response, since Citibank is regularly the leading innovator in the financial markets. Likewise, moving stockbroker clients of Smith Barney into the use of a wider range of Citigroup services should be relatively easy, given the Citi name and innovative record.

Even in Citigroup, getting customers to understand the vision requires instilling this vision into its own diverse internal marketplace. This implies a lengthy process of integrating two enormous institutions and corporate cultures – perhaps three, if we consider Smith Barney as separate from Travelers Insurance Group. It also requires investing in research and development into new financial products and structures that take greatest advantage of the full range of combined financial services that the group can provide. In particular, it requires a continuing effort to develop services to be offered through the Internet, to build on existing customer relationships and to develop new ones. One key technology that is being developed is that needed to operate an electronic financial center, so that clients can deal with Citigroup for deposits and loans, stock and bond, and other investment management transactions, and insurance products, in a single location (virtual or real).

In the case of Allianz, this requires the development of additional financial services beyond its traditional insurance policies and asset management business. Even though Allianz was a major shareholder in both Deutsche Bank and Dresdner Bank, the firm still did not have its own direct access to the clients of those banks. By buying Dresdner Bank, Allianz has gained the owned banking arm that may allow it to sell a much broader portfolio of financial services, and do so through electronic means as well as through branches and insurance agents. It remains to be seen how successfully this new model can be presented to the public.
The other side of the story is that Allianz has established a leadership position worldwide in insurance products, and has educated the public about the benefits of its portfolio of those products. However, it has not demonstrated any presence in the banking market, other than through its ownership of shares in banking institutions.
In the asset management business, Allianz has accomplished the goal of educating clients about its capabilities, but this still leaves both investment banking (possibly to be divested) and commercial banking as new areas for the firm. Allianz needs to complete the steps of internalizing commercial banking activity, and then conveying the message to the market.

Some major steps still remain to be taken in this process, even before seeing how technology and market conditions develop in the years ahead. Allianz is still seen as an insurance company, in a world in which integrated financial services will be the only viable model for large competitors4. Whether the provision of an integrated portfolio of products comes from the acquisition of new affiliates or the development of the previously announced Deutsche Bank 24 (presumably now “Allianz Dresdner Bank 24”), Allianz must implement this stage of the process before going further.
HSBC has the most advanced strategy of the three institutions as far as virtualization is concerned. HSBC does not have a fully integrated set of financial services available either through First Direct or any of its traditional banking branch networks, so that implementation remains to be accomplished. Given that such integration has only been permitted in the USA for a couple of years, it is not surprising that the process is incomplete.

Still, in a competitive environment that really does move in Internet time, HSBC will have to move rapidly to implement the service integration now.
Probably the key difficulty for HSBC is to sell the company name to clients in a way that will convey the image of an institution with global reach, with world- leading distribution capabilities through its affiliate network, and with a full allfinanz portfolio of products. In 1998, the bank launched a campaign to convert its various commercial bank acquisitions to the HSBC name, dropping Midland, Republic, and so on. This informing of the public has been done successfully in Asia, but is still in progress in the United States; and is only partially completed in Europe, with the conversion of Midland Bank to HSBC. It is easy to see why many analysts argue that

Note that the transformation of the bank began about two decades ago, with the process of relocating its headquarters and building business in North America and Europe. On the basis of its fundamental competitive advantages, which may center on the bank’s knowledge of Asian markets and possession of Asian clients, HSBC is attempting to put together the structure for selling universal banking products globally. The crucial next step is for the firm to commit to pursuing the R&D and other expenses needed to achieve the competitive position envisioned in the new business environment.

The implementation of the chosen strategy may be the hardest step to take. In the case of Citibank, this has meant giving up a lot of the firm’s autonomy to (the former) Travelers in the new organization, and really “betting the company” on the universal banking model. This was ultimately accomplished by the fact that Travelers’ leader Sandy Weill wrested sole leadership of the combined firm from his co-equal colleague from Citibank, John Reed. Once Weill had gained control, the universal banking model was cemented into the core of Citigroup’s strategy, and the implementation then shifted to expanding the group’s presence in more markets and to finding ways to cross-sell products between divisions and to streamline the provision of services.

For Allianz, the implementation problem is perhaps even more complex than at Citigroup, since the base of the organization in insurance products is narrower than in commercial banking. Perhaps a kind of “reverse takeover” of management may occur, with the universal banking model put into place at the combined Allianz Dresdner Bank, and the repositioning of insurance as one (key) financial product in the portfolio. This would better position the firm to sell the broad range of financial services. Another part of implementation is the global expansion of the firm to lead in financial services, and Allianz has taken numerous steps to build its global insurance business, through acquisitions of large insurers in several countries.

In the case of HSBC, the implementation of its transformational process has proceeded quite far, with very extensive expansion in all three Triad regions of the world. The attempt to build a leading role in wealth management does not seem to have produced results thus far, but perhaps the acquisition of a leading asset management firm may catapult HSBC into a much stronger position in this area. The group’s virtualization strategy appears to be unfolding relatively peacefully, and First Direct is becoming a globally known and respected brand name. The competitive environment for Internet-based banking services is, of course, still far from settled.

All three institutions Citibank, Allianz and HSBC have largely defined their goal as being the same: the provision of truly global financial services to a worldwide client base. All three have histories of extensive retail sales networks, and yet all three have built industry-leading businesses in corporate financial services as well.
Their goal is, however, far from identical. Allianz is far more focused on insurance and related products than the other two; Citibank has much greater activity in investment banking than the other two; and HSBC has by far the largest franchise in Asia. Despite these differences, and the likelihood that each institution will lead the others in these sectors, a visible convergence is occurring. Each competitor will have to redefine its relevant markets and positioning as technological and competitive conditions evolve. The Transformational Management framework provides a comprehensive basis for elaborating strategy in this complex and dynamic environment.


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