HSBC Strategic Analysis: Competitive Position and Growth

Industry Analysis

HSBC is one of the world's largest banks, holding the third-largest market share among UK retail banks. This massive global footprint supports a differentiation strategy encapsulated by the slogan "the world's local bank." HSBC plays to its strengths with a presence in many major markets around the world, but its strength in retail and commercial banking belies a relative weakness in investment banking.

The banking industry is highly competitive. In the UK, at the retail level, it operates under oligopoly conditions. HSBC also competes among global banks worldwide, a business environment closer to monopolistic competition. The company pursues a differentiated strategy loosely based on broad geographic scope and customer service — the latter being a difficult area in which to meaningfully differentiate. There have been problems with geographic scope as well, and HSBC has recently exited both Brazil and Turkey.

Other strategic issues are also at work. The bank's costs increased in the past year, negatively affecting financial returns such as Return on Equity (ROE), and the share price declined as a result.

This paper puts forward four recommendations for HSBC. The first is to expand its investment banking business. Its strong presence in the world's leading financial capitals means it should perform better in this segment, and given that investment banking is highly profitable, there is substantial motivation for a larger presence there. There are also opportunities for international growth, with emerging markets such as Nigeria offering limited competition and significant growth potential. Islamic banking also holds promise. Third, it is recommended that HSBC bring its costs under control, given the impact rising expenses had on profitability last year. Finally, HSBC should place greater strategic emphasis on China. The bank has strong historical ties and is currently the largest foreign bank in the Chinese market, yet still holds a very small share. Expanding more deeply into the Chinese market could be worth tens of billions of dollars, even though it will be difficult given the current structure of that market.

Generic Strategy Analysis

In addition to the UK market, HSBC competes as a local bank in many other countries. In many cases, similar oligopoly conditions apply, but in some instances competition is more fragmented and the characteristics of monopolistic competition prevail. This is certainly the case in the United States, though the US is not a major retail banking market for the company.

More significant is the global banking market. HSBC is one of a handful of banks with a large international presence — a category known as a universal bank (Investopedia, 2015). Others in this category include Citigroup (USA), Santander (Spain), BNP Paribas (France), UBS (Switzerland), and ING (Netherlands). Several major UK competitors, such as Barclays and Standard Chartered, also fit within this category, as do banks with a strong regional presence, such as Scotiabank in the Americas. This category of multinational bank is characterized by monopolistic competition. Member banks are similar in that they all offer a wide range of services spanning retail banking, investment banking, and merchant banking, yet they differ in their focal countries or regions and in their relative areas of product and service specialization. HSBC, for example, has a strong presence in merchant and retail banking. It should be noted that this business model, popularized in part by HSBC, has faced headwinds in recent years, and HSBC itself has been forced to exit the Brazilian and Turkish markets (Hofford, 2015).

In the investment banking sector, where HSBC is relatively weak, it holds approximately a 1.5% share of the global market — substantially behind market leaders such as JP Morgan and Goldman Sachs in the US, or Barclays in the UK (Statista, 2015). HSBC is the 11th-ranked bank on the Fortune Global 500 and the 81st-largest company overall (Fortune, 2015).

Michael Porter outlined four generic strategies by which a company can successfully compete. For a company the size of HSBC, only two are viable: the broad differentiated strategy and the cost leadership strategy (Porter, 1985). The differentiated strategy implies that the company seeks to compete by distinguishing itself in some way from the competition, rather than simply offering the lowest price. HSBC is not a cost leader, and this is evident in its marketing. The company has long billed itself as "the world's local bank," offering a comprehensive range of services to customers around the world. Moreover, HSBC has sought to differentiate its brand along several dimensions that reinforce the differentiated strategy.

Key Strategic Issues

The first of these is the creation of a truly global banking brand. Most banks are primarily national in scope, but HSBC pioneered the concept of a genuinely global bank. In some ways, this was a function of the company's history. Its very name — Hongkong and Shanghai Banking Corporation — incorporates two countries as its home base. After the Communist takeover of China, the bank relocated its headquarters to London as a means of expanding its European footprint and as a hedge against the eventual Chinese takeover of Hong Kong. This gave the bank a three-nation presence, and it had already begun to expand further, having established operations in Canada and the US long before the handover of Hong Kong. Since then, HSBC has built a genuinely global presence, making this one of its key points of differentiation.

The other major point of differentiation that the bank promotes is service quality. HSBC emphasizes the "local" aspect in its marketing and focuses on delivering superior service. While this is not an especially distinctive means of differentiating banking services, it is the approach the company has pursued. HSBC has never positioned itself as a cost leader, which confirms that it has consistently competed with a differentiated generic strategy — an approach common among its major competitors as well.

There are three key issues the company faces. First, as Hofford (2015) notes, HSBC has had to retrench from its global strategy. The company exited the Brazilian and Turkish markets despite the fact that these are the 7th and 17th-largest economies in the world respectively — markets a major world bank would ordinarily seek to operate in. This reveals cracks in the company's longstanding competitive strategy. In both countries, locals were hesitant to adopt HSBC as their bank even after it acquired local institutions, instead remaining with other domestic or foreign banks. HSBC was never able to build the market share needed to sustain operations in those two countries. There may be other countries in similar situations, meaning that HSBC may need to reconsider what has until now been one of its primary competitive strategies.

Another issue is HSBC's limited presence in investment banking, where it holds only a 1.5% global share. The company has not been able to take advantage of its market position, perhaps by spreading itself too thin. It ranks just behind Barclays in the UK — one of the world's larger investment banking markets — and remains active in Hong Kong and mainland China. Yet several Chinese banks have surpassed HSBC due to unfavorable government treatment of what is perceived as a colonial institution (Fortune, 2015). Despite a longstanding US presence, HSBC has also failed to capture a significant share of American investment banking. While HSBC is relatively strong in merchant and retail banking, this weakness in investment banking is a material strategic concern. Investment banking is highly lucrative, and HSBC's global platform — offering companies seamless access to the New York, London, and Hong Kong capital markets — should translate into a much stronger position. Whether the gap reflects talent issues, reputational barriers, or the need for an acquisition, it is an area that demands action.

A third issue is the series of scandals that have damaged HSBC's reputation. Consumers need to trust their banks, and trust in HSBC has been eroded by controversy. Revelations that the company engaged in the "systematic aiding of tax avoidance" have hurt its standing. Consumers may recall little of the detail, but they remember the headline association between HSBC and tax-dodging, which undermines confidence and encourages them to think twice before banking with HSBC. The scandal occurred within the Private Banking division, but because that division carries the HSBC brand, the reputational damage extends to all other divisions operating under the same name (Wintour, 2015).