Banks are financial institutions which accept deposits from the public and private organizations and creates credit to individuals and organizations who are in need of finance. The banking industry is a vital and sensitive sector of the service industry in the whole world. Over the recent past, competition in this industry has been stiff with some banks opting to shut down while others on the other hand have been thriving. The research aims at exploring how SWOT and the PEST environments have contributed towards the success and also the failure in the banking sector.
Research Methodology
In this research, the case study is The Bank of America (BoA). Qualitative research approach was adopted whereby an analysis and inferences were carried out on data that was already collected. The primary sources of information was observation of the customers’ behavior. Secondary source of data included annual reports of BoA, books about banking sector, the internet and a journal of the BoA.
Limitations of the Study
The limitations of the study is that the due to matters of confidentiality, the bank did not provide a lot of data on its projects and products. Hence real feedback was not possible in some cases. This means that the findings may not be highly accurate. Secondly, the sample size of one bank is very low to make a conclusions about the whole of the banking sector. We cannot assume normality in the findings when the sample size is less than 20.Therefore there will be high discrepancies in the outcome. The third limitation was time constraint as there was limited time to carry out this research. Some traits in this study require up to 5 years for accurate findings
Background
The need for banking rose way back during the industrial revolution where there was need for financing of the industries and constructions. In addition, there was a rise in the wealthy merchants who needed a place where they could store their surplus wealth. These two forces brought about the concept of banking (Mints, 1946). Environment generally refers to the surrounding of an organization. Environment is defined as all the conditions circumstances that influence the surrounding and affects the development of the total organization or internal systems (Harrison, 1996)
The banking sector just like any other market domain is affected by several environmental factors. The internal environmental determinants includes the SWOT analysis which is an abbreviation for the strength, weakness, opportunities and weaknesses. The external factors include Political, Economic, Social and Technological environments (Hill " Westbrook, 1997)
Over the recent past, some major banks have collapsed. This can be attributed to the business environment. A bank that collapses due to unfavorable political atmosphere in this case has been affected by the political environment. The same applies to technology whereby a bank may flourish or fail due to advanced technology or obsolete technology respectively. Advancement in technologies have been on the rise in the banking industry especially with the introduction of mobile banking. Each and every bank has been trying to keep up with the trends through innovations in order to win consumer preference (Friedman " Thomas, 2010). Intrapreneurship and entrepreneurship are the latest trends to be adopted by the major banks whereby banks aim at innovating products which may appeal to the public thus ensuring that they remain relevant in their competition with rival firms (Hudson, 2012)
History of the Banking Industry
In the 1760s when Industrial evolution kicked off, the steam industry was in dire need of entrepreneurs. The entrepreneurs provided capital and financed the operations of major industries. There was a rise in business opportunities and wealth. Hence rose the need for a place where excess money could be deposited and also an institution where loans for construction activities and other financial needs could be borrowed. This eventually led to the rise of banking system (Mints, 1946)
Factors that Have Led to Obsolescence of Major Banks
Major Banks in the world have collapsed in the recent past. A good example is Washington Mutual which to date is the biggest bank failure in the history of United States. As a matter of fact, at its closure, it had assets worth $307 billion and deposits worth $188 billion. Another bank failure was witnessed in the case of the IndyMac bank in USA closed in 2008.Other examples of bank failure include Continental Illinois National Bank, First Republic Bank, American Savings and Loan among others. The big question here is ‘What brought these major banks to their knees?’ Bank run has played a major role in the failure of these major banks. Bank run refers to a situation where customers in large numbers withdraw simultaneously their deposits due to a panic about the solvency of the bank. This forces the bank to urgently sell its assets at low prices in order to increase its cash at hand to meet the customers’ demand. The losses incurred result to insolvency of a bank. The remedy to this condition is coming up with reserve requirements. Reserve requirement refers to a percentage of the total assets of a bank which should be reserved by the bank at the federal bank. Another cause of bank failure is Fraud and Insider abuse where corruption and embezzlement of funds is carried out by the management. This takes place when then officials take part in unauthorized transactions. This has led to the collapse of approximately 35% of the banks. To remedy this situation, banks need to have proper controls and oversight of the key officers involved in conducting transactions.
This can be done by ensuring close supervision of the staff. The other cause of bank failure is over aggressive activities conducted by the management. In other words, this can be described as overambitious growth plans by the management. This is evident when banks adopt inappropriate lending policies and also when banks give out excess loans than it is required. To remedy this condition, banks should adopt the aggressive approach combined with controls and policies that are well established. (Martin, 1977)
Impact of Obsolescence of Major Banks
Bank failure comes with negative effects to the customers, the bank itself and other banks in the industry, the employees and the economy at large. To the customers, they risk losing all their savings in the case of a bank failure. To the bank itself, it ceases to exist since it cannot carry out its daily transactions without assets. To the other banks, through the multiplier and spillover effects, their customers will be gripped with panic and may result to bank runs in the other banks. The employees in these banks which have failed will definitely lose their jobs rendering them jobless. The economy will also suffer since the government for instance won’t be able to collect tax which is required for financing the development activities of a country. Hence the obsolescence of the banking sectors comes about with major setbacks to the country’s economy at large.
Internal Competitive Factors: The Case of Bank of America
SWOT Analysis
Under SWOT analysis, we take a look into the Strength, Weaknesses, Opportunities and Threats in the business environment of The Bank of America (BoA).BoA is the second largest bank by assets in the US. The strengths that make BoA exceptional include Strategic acquisition and large scales of operations. Under strategic acquisition, the bank of America acquired Merrill Lynch making it enter the major banking business of investment globally. Under large scale of operations, Bank of America brags of its operations in more than 150 countries globally
The Bank of America has faced several weaknesses (challenges) in the course of its operations. This includes high levels of interest rates and low levels of income especially in the other countries other than USA. Under high interest rates, critics argue that the Bank of America charges high interest on its loans. Its operations are also affected by regulations of the respective country’s federal banks. In the case of low levels of incomes in other countries, statistics suggest that only 10% is collected from operations in other countries. This means that the operations in the other countries are not profitable.
Under Opportunity in SWOT analysis, The Bank of America has an opportunity of developing its technology to other countries especially the developing countries. There has been a rise in internet banking in these developing countries. Therefore this possess a great opportunity for the Bank of America to expand to this countries. Another opportunity comes from the fact that the Bank of America operates in more than 150 countries. This means that the bank has a high level of acceptability hence it is readily acceptable in other countries in the case of expansion.
In the case of threats under SWOT analysis, high levels of competition has posed a major threat to the Bank of America. Rival banks such as Wells Fargo have posed a major threat to its expansion. Another threat to the Bank of America is tough rules and bottlenecks especially in countries it wishes to expand to. This causes a hindrance to its expansion
Strengths to Exploit and Weaknesses to Mitigate Based on SWOT Analysis
The bank of America can exploit its strengths in the following ways. To begin with, it can establish distribution networks that are reliable which can reach a large percentage of its potential customers. In addition, it can work to ensure that there is high levels of satisfaction among its customers as customer satisfaction has been its major strength. This will ensure that the bank has a good reputation not only among the present customers but also among the potential customers. The Bank of America also brags of having a workforce that is highly skilled. This has ensured that both the present and potential customers have a good image of the bank. This area can be improved by more investment in trainings and workshops for the employees for even better service delivery.
Another strength that can be exploited is the high returns on capital expenditure .The new projects which the bank of America has executed has yielded high returns by ensuring that the total revenue collected is extremely high. Finally, the Bank of America has a good reputation as the best brand. Therefore this strength can be further exploited by ensuring quality service delivery to the customers, favorable interest rates among other incentives. This will ensure that the brand portfolio of the Bank of America is strong. A strong brand will give the Bank of America an easy time in exploring new markets as it would have already won the hearts of potential customers in the new market.
However, the Bank of America also needs to address and mitigate its weaknesses in order to be able to compete with its competitors. The following are areas of weaknesses that needs to be mitigated. The first one is that the Bank of America should aim at mitigating low investments in research and development since it has lagged behind compared to its fastest growing competitors in the banking industry. The Bank of America has remained steps backwards in terms of creati9vity and innovation as compared to the rivals. A lot of resources need to be invested in the field of research to ensure that the Bank of America remains relevant in competition.
Another weakness that needs to be mitigated is high inventory as compared to the rivals. The high capital makes the company to increase its capital investment in the channel. Hence this poses a great challenge especially to the long term growth of Bank of America. In addition, the Bank of America also needs to address its low technological investment especially into the new economies it is planning to venture into. The level of technology at the moment is so low as compared to the vision of the company.
Another weakness that needs to be mitigated is the high cost in training the workforce as compared to the other competitors in the industry. The bank of America has spent a lot of money in training its workforce and training of its labor force. Cost effective methods of training the staff have to be adopted so as to cut on the high costs of training the workforce. There is also need for the Bank of America to mitigate the low success level it has experienced in other businesses outside the core business. The competitors of the Bank of America have increased their product segments. For example offering insurance service in addition to the core business which is banking. Therefore the challenge of expanding into other segments should be addressed urgently. Finally, the Bank of America should work on the weakness of low ratio of profitability and also low percentage of net contribution since it has been below its expectation.
How ready is the BOA to Compete in the Banking Industry?
Based on SWOT analysis, the Bank of America has come up with strategies to ensure that it competes effectively with its rival firms. The first strategy that the Bank of America has implemented is expanding into the foreign markets. The 10% generated from the outside countries need to be worked upon so as to ensure that it is able to raise more revenue. This comes at a time when the reputation of the Bank of America has been tainted in the United States. Therefore expanding into the new markets will be a game changer to the BoA
Another strategy that has been adopted by the Bank of America is mergers. BoA has merged with Merrill Lynch and also Countrywide. This has increased its profitability as the level of customers has tremendously increased. The merger has also resulted to creativity and innovation as diverse ideas are brought to the bank. Merging also comes along with an increase in the brand value as the market is familiar with the bank. Merging also helps reduce competition in the industry
The third strategy that the Bank of America has adopted is ensuring that there is a fast technological innovation and advancement. The BoA is fully aware of the latest trend in the banking industry which is mobile banking. Therefore it has been on the forefront in adopting the relevant technology to keep up with the ever dynamic customer preferences. By exploiting the new breakthroughs in the banking industry, the BoA has remained on top of the game in the banking industry
Finally, BoA has ensured that there is diversity in its Portfolio. The bank serves diverse categories of customers ranging from individual customers, SME’s and large firms. It also offers products such as financial risk management and asset management. This has ensured that it is able to remain ahead of its competitors (Zaik, Walter, Retting " James, 1996)
External Competitive Factors
The Bank of America is also affected by external competitive factors. This include the political environment, the economic environment, the social environment, and also the technological environment
Under the political environment, political and election atmosphere affected BoA. The political rivalry between Trump and Clinton led to fluctuations and inflation especially in the stock market. This caused a major setback in the banking industry. Secondly, tax policies which are made by the government have an impact on the BoA. The regulations vary from country to country.
In the economic environment, unemployment has had a major setback on banking industry. With a lot of layoffs taking place, it has a direct impact on banking industry. Fluctuations in currency rates caused by inflation has also affected the operations of the BoA
Under the Social environment, the quality of education has had an impact on the BoA. The human resource policies and their attitude towards the employees has an impact on banking industry. Demographic factors such as gender equality also falls under this category
In the technological environment, the ever dynamic innovations in technology have a huge impact on the banking industry. In addition, technological digitization has been a game changer on how the customers handle their daily transactions. The payment of recurrent bills by use of smartphones has been the latest technological advancement (Zaik, Walter, Retting " James, 1996)
Strengths to Exploit and Weaknesses to Mitigate in Pest Analysis
The Bank of America should exploit the following areas of strengths. The first one is to ensure that there is a high level of consumer protection. This is by enacting laws and regulations in line with the government which ensures consumers’ rights are not infringed. Another strength that should be exploited is technological innovations. With its large volume of customers, BoA should ensure that it keeps up with the latest trends in the banking sector. Finally, BoA should exploit high level of security for the safety of its consumers. This will ensure customer satisfaction as their security will be guaranteed
On the other hand, BoA should mitigate the following weaknesses. The first one is poor attitude of the HR towards its employees as it is likely to soil its good reputation. This also lowers the motivation of employees hence affecting their productivity. The second area of weakness is to address the area old age population who have been discriminated against. Finally, the area of public image should be addressed as BoA has been involved in several scandals such as the WikiLeaks scandal. This has an impact on its potential customers as such scandals taint the image of the bank. (Zaik, Walter, Retting " James, 1996)
Readiness of BoA to Compete in External Business Environment
To compete favorably with the rival banks, BoA has adopted several strategies. The first one is by the establishment of banking franchise. Boa network of retail services has significantly rose over the years especially after acquisition of Merrill Lynch and countrywide. This has given BoA competitive advantage over rivals such as Wells Fargo. In addition, Bank of America is working too ensure that the latest trend of cryptocurrency is being incorporated in its setup. Cryptocurrency is the latest talk in the financial industry as it has shown the potential to change the ways in which the world of finance works.
Opportunities and Trends
Intrepreneurial Opportunities
The BoA has adopted the following intrepreneurial opportunities: Invention of internal incubators, coming up with mentality of starters especially in corporate organizations, launching of venture teams and lastly is the idea of accelerator panels. All these inventions aim at driving new ideas from within the team. Its purpose is to ensure innovation and to keep the bank relevant
Intrepreneurial assessment
There has been the invention of incubators for internal ideas. The BoA has made a lot of investment in development of prototype and also in research activities. These innovation centers play a vital role in ensuring that there is partnership with the experts in the banking field. This has resulted to invention of new ideas and also innovation of already existing ideas. This is in line with the opportunities under SWOT where BoA aims at exploring technological prowess
Entreprenuarial Opportunities
BoA has come up with several entrepreneurial opportunities in order to address the PEST environment. This includes learning institution for the women i.e. BoA Institute for Women’s Entrepreneurship. Other inventions include the adoption of modern mobile banking where services can be accessed through the click of a button.
Entrepreneurial Assessment
The Bank of America Institute for Women’s Entrepreneurship aims at addressing the social environment factors by bringing gender equality
Trends in the Global Business Environment
They include the building of fintechs Partnership which aims at using technology to improve activities in finance, the expansion of the digital payment system for instance the e-payment system and exploring of advanced technology i.e. artificial intelligence which help improve efficiency
Impact on Opportunities
The adoption of Artificial intelligence aims at decreasing costs, enhancing customer experience and increasing efficiency. Building of fintechs will help in saving time incurred in conducting transactions and cut on the administrative costs. The e-payment system will increase the transaction volume and improve on fraud management.
Impact on Sustainability
For the Bank of America to have a sustainable business operations, then it must explore advanced technology. This includes artificial intelligence, block chain and open banking. These advanced technologies will enable BoA increase its efficiency levels, cut on its costs, ensure better service delivery and enhance a good customer relation.
References
Bank of America Annual Report 2016- http://media.corporate-ir.net/media_files/ IROL/71/71595/BOAML_2016.pdf
Martin, D. (1977) Early warning of bank failure: A logit regression approach. Journal of banking " finance, 1(3), 249-276
Mints, L. W. (1946). A history of banking theory in Great Britain and the United States
Zaik, E., Walter, J., Retting, G., " James, C. (1996).RAROC at Bank of America: from theory to practice. Journal of applied corporate finance, 9(2), 83-93
