Core Resources and Competency of HSBC Hong Kong
1. Introduction
Hong Kong and Shanghai Banking Corporation (HSBC) is one of the leading global banking and finance institutions in the world. It has achieved this status by carefully strategizing on its positioning in the local and international markets. HSBC commenced operation in 1865 to take advantage of the growing trade between Europe and China and the financing that trade activities required. As its operations expanded to more clients trading in more locations worldwide, the company also expanded through carefully planned mergers and acquisitions. What started as one bank operating in Hong Kong grew to become an international bank with branches or subsidiaries in Europe and North America conquering the financial capitals of the world such as London, New York and Singapore. Modern HSBC Group now boasts of having 10,000 offices located in 82 countries. Its success has been largely attributed to its ability to capture the value demanded by local markets around the world. (2007)
2. Industry Analysis
HSBC Group faces a very vibrant banking industry in Hong Kong, which means that competition is fierce. According to (2007), the Hong Kong banking industry hosts one of the biggest groups of international banks in one market. Out of the 100 largest banks in the world, 71 of these companies have established branches or subsidiaries in the Hong Kong market. This places Hong Kong on the 9th rank among international banking centres when considering transaction volumes as well as 2nd rank in considering the Asian region following Japan. Hong Kong also ranks 7th among the foreign exchange centres in the world. As of the mid-2006, the number of operating banking institutions reached 199. Out of this number, 133 were considered as licensed banks, 33 qualified as restricted license banks, and the remaining 33 were classified as deposit-taking firms. These banks shared the market through the establishment of 1,600 branches in Hong Kong. Moreover, 89 representative offices of international banks have been established in Hong Kong. With all these banking industry players in Hong Kong, the industry accounts for 80,000 jobs and aggregate assets modestly valued at US trillion.
The condition of the banking industry in Hong Kong is highly open and susceptible to shifts based on economic fluctuations in Hong Kong and the world market so that the 2001 Asian monetary crisis definitely affected the Hong Kong banking industry and this was also felt by HSBC. Since the Hong Kong banking industry handles large volumes of financial transactions, it greatly feels the effects of economic downturns. On the part of the industry, the low tax regime in Hong Kong has expanded the business activities and investment opportunities for banks ( 2007), which should support viability of banking firms despite economic problems. In 2006, taxes for profits were computed at the minimum rate of 16 percent. There is also no sales tax, withholding tax, interest tax or capital gains tax. Earnings obtained by Hong Kong banks outside of the territory are also not subject to taxation. The HKSAR government also offer generous deductions on dues to banking institutions. ( 2007) This operating environment allowed HSBC to utilize its resources and competencies for growth. The open and business friendly environment in Hong Kong has caused local banks to thrive and international banks to consider Hong Kong as a potent market.
In utilizing Porter’s five forces (1980) to analyse the Hong Kong banking industry, particularly the competitive position of HSBC in the industry, results showed that HSBC holds a leadership position in the Hong Kong market. Financial (2007) provided a listing of the top performing banks in Hong Kong. At the top is HSBC earning an assets valued as 9.986 million and average annual profit pegged at .295 million giving placing it at the 14th rank among the top 500 banks in the region and the leader in Hong Kong. The other banks such as Bank of East Asia and Dao Heng Bank report less than half of the assets and profits of HSBC. Moreover, a number of banks are also subsidiaries of HSBC Group.
This means that the degree of rivalry in Hong Kong is strong because of the number of banks operating within the same market and vying for the same clients. However, HSBC was able to gain top position through brand identity. Since its modernization, HSBC held the value of never underestimating the power of gaining local knowledge. The bank prides itself in being a company that knows what the local market needs so that in Hong Kong, it stands as the bank that understands what the Hong Kong businesses need in local and international expansion because of its experience in financing trades and internationalization expansions of Hong Kong businesses. Apart from this, HSBC also has a wide market reach as expressed in its reported 1.99 million customer accounts in 2006 up from the 1.73 million customer accounts in 2005 (HSBC 2006). This is a significant number especially since the population of Hong Kong in 2006 is 6.9 million. This further means that brand recognition of HSBC is high in Hong Kong.
In terms of substitution, HSBC also holds a stable position in the market because it provides international financial services applied to the circumstances of Hong Kong individuals and businesses. With individual customers, HSBC has many branches overseas that caters to the needs of international travellers such as students, teachers and businessmen. In dealing with corporate clients, the bank offers opportunities for international expansion based on terms usually applied in the international banking sector but tailored to the needs, objectives and capabilities of the Hong Kong companies. Although, there are a number of other Hong Kong and international banks in Hong Kong, HSBC is preferred because it understands the business culture in Hong Kong unlike foreign banks and it has strong experience in international operations unlike other local banks.
In terms of buyer and supplier power, individual and corporate customers of the banking industry have the freedom to select which bank to engage in business. The relative strength of buyer power for the banking industry in Hong Kong means that there is a high degree of product standardization in the industry. As a financial capital, Hong Kong holds a large buyer market able to demand a particular level of quality in products and services of banks. However, buyer power is also balanced by the number of banks operating in the industry so that no single bank dominates the market. The delicate balance means that customers are free to select a bank that caters to their needs while banks need to work within particular standards but offer a value that would draw customers to the bank relative to its competitors. HSBC gained a leadership position in the banking industry in Hong Kong by offering a value that accommodates the demands of the market, which is up to the standard products and services, while enhancing the value offered by the company through local knowledge and international experience.
With regard to barriers to entry, the Hong Kong banking industry is open to newcomers especially with the government support for industry viability through a low taxation regime. However, the greatest barrier to entry that makes it difficult for companies to engage gain a foothold in the Hong Kong market is brand identity. For HSBC, brand identity constitutes the factor that propelled the company to its leadership status and it is also this competency that maintains the company in its leadership position. No other bank in Hong Kong has been able to establish a brand identity able to provide the company with a similar range of growth as HSBC. It is also brand identity that determines the continuity of both local and international banks in Hong Kong.
3. Firm Boundaries
Through the principles of economies of scope (1997) and Porter’s value chain (1998), results show that horizontal boundary of the firm is determined by its learning curve while vertical boundary is defined by its joint ventures, mergers and acquisitions. HSBC has accumulated knowledge and experience on international operations because of more than a century of engagement in personal financing services and international trade financing. This means that the company has the competency to engage in international operations as expressed by its presence in the major financial centres in the world. The company has achieved tremendous growth as an organization through engagement in joint ventures with other banking and finance companies in investing on international projects as well as acquisition of smaller local banks. Hang Seng Bank, the Hong Kong bank that follows HSBC in ranking based on the Financial’s (2007) ranking of Asian banks is actually a subsidiary of HSBC Group. Through its assets and profit level, HSBC holds the capability to acquire smaller banks and other financial firms such as insurance companies. Since HSBC holds the resources and capacity to further expand its horizontal and vertical boundaries in Hong Kong, the limit is determined by industry and government regulatory limits more than the resource and capability limitations of HSBC.
4. Business Strategy
In strategic positioning, there are two generic ways with which a company can achieve competitive advantage, which are 1) offer similar benefits for a lower cost to consumers or 2) retain cost but offer greater benefits. In the case of HSBC, the strategy that works for the company is the second option of maintaining the cost of its banking products and services but offering a greater benefit or value in its products and services. Greater benefit emanates from the competence of HSBC in international financing in the context of Hong Kong business firms. As mentioned earlier, even if HSBC offer similar types of products and services at the same cost to consumers in Hong Kong its experience in international financing benefits individual Hong Kong customers wanting to engage in international transactions and corporate Hong Kong customers seeking expansion into the international market or engage in international transactions. It is a trusted bank because of its roots in Hong Kong and it is a bank relied upon in international financing because of its century of experience in supporting Hong Kong business activities overseas.
5. Sustaining Competitive Advantage
Sustaining competitive advantage may arise in two circumstances, which are 1) banking on resource base and firm capabilities and 2) leveraging through isolation mechanisms. In the case of HSBC, sustaining its competitive advantage in Hong Kong involves a combination of these circumstances. Compared to other Hong Kong banks, HSBC holds the greatest value in terms of assets and profitability because of its organizational size and scale of operation. The next Hong Kong bank has assets and a profit level that is three quarters less than HSBC. It is only the international banks that hold a similar resource capability as HSBC. However, the international banks are limited by HSBC’s isolating factor of being rooted in Hong Kong business values, an advantage it holds over the foreign banks entering the Hong Kong market. If HSBC maintains the combination of sustainable competitive strategy, then it should be able to maintain its status towards the succeeding decade.
6. Implementation
Achieving sustainable advantage depends upon the ability of the firm’s organizational structure to support corresponding strategic activities. The organizational structure of HSBC Hong Kong is functional with a headquarters and branches falling under one department. This works for the achievement of the company’s competitive advantage because the centralization of corporate value determination in headquarters supports the adoption of uniform corporate culture by the different bank branches. However, since headquarters does not relate directly with customers, it should coordinate with its branches on decisions requiring market research.
7. Conclusion
Hong Kong offers a very good business environment for many industries. The open market system and relaxed government regulation on the banking industry caused banks and financial institutions to thrive in the Hong Kong market. With a highly competitive environment, individual firms need to adopt strategies that would set them apart from their competitors and create a greater value offering to consumers. HSBC was able to achieve a leadership status through differentiating factors—mastery of local value and experience in international operations—difficult to achieve by competitors so that with the maintenance of this strategy, HSBC should retain or enhance its position in the Hong Kong market.
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