Commonwealth Bank Business Report Essay
Commonwealth Bank Business Report
Section 1: Executive summary
CBA has put record profit of $8.68 billion dollar although the company is facing Royal Commission inquiry with regard to Financial Planning scandal (Yeates 2014). At present, CBA is a dominant leader in the retail-banking sector across the Australian financial services industry with premium price trade due to its largest customer base in Australia with its disruptive technology (Rose 2014). However, it is important for CBA to invest in service improvements and innovation to maintain its current market leadership position. Therefore to identify the success factor behind CBA, it is important to assess Australian Financial industry as a whole to examine the attractive features of Australian Banking sector and the internal strength of CBA to clarify its competitive advantages and capabilities.
Industrial life cycle
Australian Financial industry has exhibited the characteristics of shakeout stage lifecycle stages (Shapiro 2014). In shake out stage cycle, competition and price-war between financial institutions have intensified since big four banks are imposing discounts on variable interest rates available to a broader range of borrowers and lowering their fixed rates on mortgage offers (AAP 2014). Since then, services offered by big four banks become difficult to differentiate each other and this has helped the customers to broaden their option to have selective acquisition with the major banks. Further analysis will explain CBA’s clients and competitors power change due to industry evolution and its regional expansion strategy. Then, the further report will analyze the reason behind CBA to attain premium stock price over competitors and its ethical implication in financial industry.
Section 2: Environmental Analysis
To analyze the external industrial environment that lead CBA to stay ahead of competitors, overall Australian Financial industry will need to be analyzed in term of Porter’s five forces followed by PESTLE model to observe how the competitiveness of the Australian Financial environment and macroeconomics factors have changed within the industrial structure (Thomas 2007).
Conservative supervisory of APRA, which approached more intensive than the Basel II minimum requirement, has assisted Australian Financial Institutions to have minimum impact during the 2008 GFC period (RBA 2014). Moreover, Four Pillar Policy which prevents mergers between Australian’s big four banks to main competitive financial environment at low risk had also shielded the Australian Banking System from the worst of 2008 GFC (Durie and Gluyas 2009). Consequently, Australia’s strong and dynamic financial policies have favoured sustainable growth even in the hard time to former government owned incumbent CBA to withstand attack from aggressive competitors under a well-regulated financial environment (Brisden 2012).
During the pre GFC time, RBA’s interest rate has increased from 5.50% in 2000 to 7% in 2008 (RBA 2014). These inclining rates have favored big four banks during the crisis period since the high interest rates increased the bank’s deposit and helped Australian Banks to fund their debt in the hard time (Kerr 2011). Beltratti and Stulz (2009) also stated that the larger banks within strict regulations with more deposit financing at the end of 2006 had significant high return during the GFC. Therefore, during the crisis, the effect of GFC on Australian Financial Institutions were considerably low compare to other developed economies and CBA had also came through the economic turmoil with strong gain in deposit share by delivering $4.72 billion full-year net profit in 2008 (Leyden 2009). This has clearly showed that favorable Australian economical scape has favored CBA to retain premium share over competitors in post and pre GFC periods.
Eyers (2014) stated that Fintech (Financial Technology) scene is expanding rapidly in world financial centers. Financial Technologies are also challenging existing business models of financial institution since non-traditional players in Australian financial sectors are leveraging new innovation to deliver flexible services to consumers in a more convenient way (Wade 2014). However, CBA is operating efficiently in the dynamic technological environment. This is because, CBA has set its strategy to capitalize on the difference between its three big rivals by injecting $1.1 billion upgrade to its core banking system and invest $300 million a year in the high-tech modernization program (Smith 2012). So, this has clearly clarified that technology is one of the factors that lead CBA in a dynamic business environment to stay two to three years ahead of competitors (Faherty 2013).
Porter’s five forces
Next, Porter’s 5 forces will be used to determine the financial industry’s profitability, which influence over the success of CBA in Australian financial market.
The threat of new entrants
Nowadays, the digitalized financial system appears to be reaching maturity and every major big four banks are utilizing different channels of entrants to capture the market share (Eyers 2014). Consequently, there is a high threat from competitors in financial market beyond APRA’s highly regulated financial systems since potential competitors from overseas and domestic (e.g woolworths/Coles) could have used technologies to offer virtual and physical financial services in Australian Financial Market (Eyers 2014). Since then, this could eventually challenge the growth of CBA’s physical banking in the long run. However, CBA is still a major incumbent in a financial industry, which captures majority of market share with strong domestic presence in Australia (CBA 2014).
Bargaining power of customers
In Australian Financial industry, there is a high bargaining power of customers since Australian major big banks have brought similar financial packages with competitive rates to expand their market share in a concentrated market. As Australian market is favoring customers to bargain on the best rate, CBA has dynamically influenced the bargaining power of the market by offering an aggressive rate at low risk to itself for such customers by dropping its five years fixed home loan rate to record-low 4.99% in 2014(Yeates 2014).
Rivalry among existing competitors
Todays, the financial market in Australia appeared to be reaching maturity. Mason (2014) stated that financial industry in Australia has developed at compound annual growth rate of 13% over the past decade and ranked among the most profitable banks in the developed world (Australian Trade Commission 2011). Nevertheless, Australian Financial industry is considered as Red Ocean since big four banks could potentially face more mortgage competition each other for the concentrated market share (Janda 2014). Thus, if market leader CBA failed to maintain its current competitiveness in an aggressive market, the market share could be missed out and it will be given away to competitors.
Section 2.2: Internal Analysis
Harrison (2014) stated that combination of tangibles and intangible assets of which control by the CBA could be identified as key resources to execute its strategic capabilities. Resources include teamwork among managers and Past/Present Chief executive officers, firm’s reputation among customers and its strong balance sheet has helped CBA to attain premium share price over competitors. The possession of CBA’s strategic resources ahead of competitors has favored its long-term survival and alleviated its competitive advantage. The strategic resources of the CBA will be demonstrated by using the value Chain framework.
Value Chain Analysis
Smith (2012) stated that CBA appears to be ahead of competitors in its IT development strategy and this has induced CBA to attain not only cost and operational efficiency but also improve customer satisfaction. As a result, due to its new modernization in core banking system with best in class online banking platforms, CBA has attained the biggest improvement in its customer satisfaction score out of big fours and achieved Money magazine’s best innovative awards in 2014(News 2014). Moreover, CBA’s strong shareholder with a resilient balance sheet has also empowered full funded acquisition from internal and external stakeholders (Letts 2014). CBA’s significant balance sheet growth with high earning assets and deposit has empowered organic capital growth and investor’s confidence in investment. Therefore, it is assumed that strong financial strength with high profit return has amplified CBA to stay ahead rivals and trades its shares at premium over their domestic competitors.
CBA’s strong acquisitions with Aussie Home loan and concrete financial brokers network have improved its home loan supply to the new customers in the financial market (Elsworth 2014). Moreover, CBA’s 1000 plus extensive branch network in Australia with highly efficient technology platform has also aided CBA to gain solid netbank customer loyalty bases in Australia (CBA 2014).