pavlova, valeriya 0050098500

MGT8002-Strategic Management Assignment -1

Strategic Management MGT 8002

Assignment 1

By: Pavlova Valeriya ID: 0050098500

1By: Pavlova, Valeriya Id:0050098500 [email protected]


The purpose of the essay is to investigate strategic management practices and how the strategy

applies to the different sections of business operations. The essay will focus on one of New

Zealand’s leading banks, Kiwibank. The first section of the essay will focus on the analysis of

the industry in which Kiwibank competes in, followed by an analysis of the bank’s strategic

capabilities. Then it will engage in a critical discussion of the bank’s strategic choices. Finally,

the essay will focus on the alternative strategies, if any, that the bank should pursue.

The environment can become a source of organizational survival as well as become a threat to

that survival (Johnson et. al. 2008). Strategy development is highly influenced by environmental

changes, therefore it is vital for the organization to take into the account relevant environmental

factors and changes. This section of the essay will analyse the industry and the environment

Kiwibank competes in, using analytical tools such as the PESTEL framework and Porter’s five

forces framework.

During times of global financial crisis and low economic activities it is vital for any organization

to monitor and understand relevant environmental changes. Especially this is relevant to the

banking industry as the financial sector was the one which has been majorly affected by the

current crisis. The PESTEL framework analysis helps to classify the various environmental

factors into relevant categories (Oxford University Press 2007). PESTEL is the abbreviation for

Political, Economic, Social, Technological, Environmental and Legal. The PESTEL framework

analysis is the one most frequently applied. It provides a list of influences and trends which are

likely to determine the success or failure of a given strategic choice or developed strategies

(Barth & Wolff 2009; Johnson et. al. 2008). Therefore PESTEL is considered an appropriate

tool for conducting the external analysis.

Economic factors:

The current global financial crisis has strongly affected New Zealand’s economy. A sharp

downfall in domestic economic activities has led to a significant increase in food and fuel prices,

accompanied by high interest rates and a dramatic downfall in house prices, all negatively

reflected in the banking sector. In addition the country’s GDP growth rate was equal to 0% p.a.

and inflation increased by 2% from 3.1% to 5.1%. Furthermore there has been strong uncertainty

around financial markets and international commodity prices (The Treasury 2009). However the

New Zealand government introduced the retail banking deposit guarantee which reinstated

retailers’ confidence in banking (The Treasury 2009).



Political & Legal factors:

In October 2009 the Reserve Bank of New Zealand released new liquidity policies for the all

registered banks in the country (The Reserve Bank of New Zealand 2009). Furthermore the

Reserve bank set new compulsory requirements on registration for most local banks. In addition,

the RB is likely to propose new conditions for the registration of registered banks, new entrants,

and overseas owned banks. In addition, all of these banks will be influenced by a new liquidity

policy (The Reserve Bank of New Zealand 2009). Tougher registration requirements and the

new liquidity policy may be strong barriers to new industry entrants, as well as the new liquidity

policy can present significant problems to already registered banks.

The New Zealand government policy in regards to the financial sector is aimed at the support of

economic growth in with the sector, development of confidence in the financial sector for

institutions (banks, financial organizations etc) and investors, as well as focused on establishing

the balance between innovation in the sector and associated with the innovation managerial risks

(Ministry of Economic Development 2009). In addition, New Zealand government is focused on

the development of a world class financial sector which would encourage healthy growth for all

the companies involved (Ministry of Economic Development 2009).

The PESTEL factors discussed above are considered to be the key drivers for change and are

likely ‘to affect the success or failure of strategy’ (Johnson et. al. 2008, p.56). Other PESTEL

factors such as Technological, Environmental, and Social aspects are considered to be low

impact factors and therefore are not looked at in detail.

Porter’s five forces framework, unlike PESTEL, analyses the extent of the competition within

the industry (Campbell et.al 2002). These five forces which make up the industry structure

include: the power of buyers & suppliers, threat of substitutes, the competitive rivalry and the

threats of potential entrants. It is important to understand the strength and the nature of each

force in order to develop a competitive strategy for the organization. Furthermore in-depth

knowledge of these forces assists in identifying the key organizational strengths and weaknesses,

identifying the organization’s positioning, and also indicates the strategic changes and future

trends which may result in greater payoffs: finally, it can become a key in the development of

diversification (Campbell et.al 2002; Minzberg & Quinn 1996). Therefore Porter’s five forces

model can be considered an important tool in analysing Kiwibank’s competitiveness in the

industry.



The intensity of the competition can be categorised as high. There are 18 other registered banks

besides Kiwibank and a number of other financial institutions that provide similar services in

nature (The Reserve Bank of New Zealand 2009). Kiwibank’s top competitors are the Bank of

New Zealand, ASB, ANZ, Westpack and The National Bank. The industry growth rate was

1.4% for the year (New Zealand Bankers’ Association 2009).

The barriers for the new entrants are mostly set by the new requirements for bank liquidity, and

new rules for the bank registration process set by the Reserve Bank. Furthermore the intense

level of competition in the market and high entry costs are also considered to be strong barriers

for new entrants. The supplier power is moderate. The Reserve Bank of New Zealand is the

primary supplier to all the registered banks. There offshore owned banks are likely to be

supplied by their quartets head from the bank’s country of origin. The power of buyers is high

due to the low switching costs (i.e. in every day banking). Buyers can easily switch to

competitors out with experiencing harsh penalties from banks. There are few substitutes

available to the buyer when it comes to banking. Everyday banking and some of the loans

offered by the banks (i.e. mortgages) only can be financed by the bank itself. There are number

of finance companies/institutions available in the market that provide term loans (provide small

to medium loans up to $30,000) that are similar to banks. Yet their rate is higher to a degree

than the rate offered by the bank. Therefore it can be concluded that the threat of substitutes is

low.

The primary cause of strategic failure for organizations is any incapability of the firm to adapt to

the rapidly changing external environment (Collis & Montgomery 2004). Thus it becomes vital

for any organization to monitor the industry and environmental changes, and to be able to

respond to them promptly. The PESTEL analysis and Porter’s Five forces analysis are the

primarily tools used to monitor those changes.

The following section of the essay focuses on the analysis of the organization’s strategic

capabilities. The two tools of analysis discussed are resources and benchmarking analysis.

Strategic capability is defined as the resources and competences required for an organization’s

survival and development/growth (Johnson et. al. 2008). The first tool which can be utilized to

analyse the organization’s strategic capabilities is the analysis of the organizational resources

and competencies. This analysis helps to identify an organization’s sources of competitive

advantage as well as providing the information on the organization’s resources required for its

operations (Johnson et. al. 2008).

The majority of multinational corporations have come to the conclusion that the key element to

survival is to develop an organization’s core competency (Blevins 2003). It is believed that 4

By: Pavlova, Valeriya Id:0050098500 [email protected]


Kiwibank’s core competency is its unique distribution chain or more specifically its branches.

Kiwibank uses New Zealand Post distribution channels to reach its customers (Kiwibank 2009).

It is present in more than 300 post offices which have become bank branches (Kiwibank 2009).

Some of the branches are open outside usual banking hours (compared to the hours the bank’s

competitors offer) and on the weekend, which provides more convenience to the bank’s

customers. The unique distribution system which no other competitor is able to imitate or obtain

is considered the primary source of competitive advantage for the bank. Distribution channels

are critical for any organization as they determine the product/service market presence and the

buyer’s accessibility to this product/service (Pride et.al. 2007). For example in remote areas of

the country where there are no competitor bank branches Kiwibank can become the monopolist

in this area and therefore have total control over an area’s financial activities.

Other sources of competitive advantage are found in the bank’s unique resources such as

strategic partnership with the Citi bank and the advanced IT solutions offered by Microsoft (Citi

Bank 2009; Microsoft 2009). Partnership with Citi bank has not only minimized the impacts of

the competition but also provided Kiwibank with the sources/channels to extend its operations

(Kiwibank uses Citi’s processing and infrastructure network). Strategic partnerships of a similar

nature provide the opportunities for business growth, reduce the costs and complexity of

business operations which in term improves productivity and therefore the level of customer

satisfaction (Electronic News 2006).

An additional element of the bank’s strategic capabilities that should be analyzed is threshold

resources. The threshold resources analysis should supply information about the financial health

of the organization and its assets. That information would allow us to give a generic judgment of

organizational success. The Kiwibank group has over $35 million in assets in addition to the

$697 million available for sale assets (Kiwibank Annual Report 2009). The group has over $30

million equity injection on an annual basis and demonstrates healthy annual growth of 14.2%

(Kiwibank Annual Report 2009). Furthermore the Group’s executive comity is made of well

educated professionals, some with the strong political backgrounds (i.e. the chairman is an ex NZ

prime minister), and which has an in-depth knowledge of the industry and are able to bring their

knowledge to significantly contribute to strategy development. The employee’s capabilities are

vital when developing strategies. Therefore leadership should become the starting point in

developing strategy (Ross 2005). Companies should put leadership in front when it come to

strategy development, and recruit the brightest minds in the industry to lead this complex process

to success (Ross 2005; O. Crockett & Kharif 2008).



The second tool that can be used to analyze an organization’s strategic capabilities is

benchmarking. Benchmarking can be defined as a continuous systematic process aimed at

evaluation of industry leaders in order to identify methods or business practices that are

considered ‘the best practices’ and to ‘establish rational performance goals’ (Zairi 1996, p.19).

There are number of variations of benchmarking techniques available for analysis. The

following section will focus on performance benchmarking. Performance benchmarking focuses

on a performance comparison between competing organizations or on an internal parameters

assessment in the organization (Global Benchmarking Network 2009). Benchmarking results

allow the organization to identify strengths and opportunities for improvement (APQC 2009).

The following table benchmark Kiwibank against its primary rivals fro the year ended Sep 2009:

Comparison

Criteria

Kiwibank BNZ ANZ ASB Westpack

Customers 600,000 Unavailable Unavailable Unavailable 1.2 Mil

Branches 330 184 156 144 200+

Revenue NZ$312.9 Mil NZ$1,983 Mil NZ 30,008

Mil

NZ$1,365

Mil

NZ $11,420

Mil

Assets $10,371Mil $453 Mil 37,404 Mil $65,230, Mil 219.6 Bil

Equity $355, Mil $449 Mil 34,429 Mil $3,158, Mil 36,571 Mil

Source: Data Monitor 2009;

The analysis demonstrates that Kiwibank has the most branches in the country yet it is last by

revenue, assets and equity. Therefore it can be concluded that Kiwibank has a considerably

weaker financial position than its rivals. Performance benchmarking provides data which

indicates performance gaps between organizations; however, it does not offer solutions or

generate ideas on how to close this gap(s) (Global Benchmarking Network 2009).

A combination of Kiwibank’s unique core competencies, unique resources accompanied by a

strong financial position and experienced leadership team indicate the organization’s strong

strategic capabilities and present a significant threat to its rivals.



The next section of the essay will critically discuss the bank’s strategic choices that are pertinent

to strategic positioning of the company. The key generic strategy that Kiwibank focuses on is

categorized as price-based strategy, specifically low price strategy. Kiwibank beats its rivals by

offering at least 30% lower fees and rates (Sunday Star times 2008; Kiwibank 2009). Low price

strategy is based on the concept of entering the market with prices lower than competitions,

while offering the same quality or perceived value product as the competition (Cohen 2001).

The strategy proved to be very effective for Kiwibank. From the firs opening in 2002 the bank

managed to maintain steady growth over the years, attracted new and competition’s customers,

achieved almost 30% return on investment and to win the Supreme award as the best value bank

for three consecutive years (Kiwibank 2009). Nevertheless, low price strategy has several

significant disadvantages. A low price strategy usually associated with the low earnings/profits

margins therefore the bank has to work twice as hard to make the same profit as the competition

for the same period of time. A low price strategy is considered to be risky and not easy to

sustain. Furthermore it may interfere with the brand’s value positioning and lead to the low

operating profit and create undesirable brand image (i.e. perceived as cheap) (Murane 2002;

Cohen 2001). The Kiwibank competes with the industry leaders with much greater financial

resources which can be used for the marketing campaign to minimize the Kiwibank’s price

advantage. In addition the industry leaders can easily drop prices to a lower level than

Kiwibank. These actions are likely to provoke Kiwibank to a price war where the bank is likely

to suffer a significant loses or even declare bankruptcy (Teinowitz 1993). A critical aspect for

the organization that relies on low price strategy as the key to strategic advantage is to avoid

price wars (Patki 2007). Also a low price strategy may hold up future organization’s growth.

After the organization has chosen a low price strategy it may become impossible to raise prices

to stimulate growth (Cohen 2001).

A price based strategy is more suitable for the new business that yet has to attract customers and

strengthen its position on the market. The Kiwibank should focus on development of alternative

strategies to a low price positioning. The bank should focus on less risky options that will

guarantee long term sustainability. On the other hand, new strategy development may require

significant financial injections, additional human resources contributions etc., which due to the

currently implemented strategy the bank may not afford. Therefore the gradual contributions

may be required.

The Kiwibank takes strategic direction towards new product development. Product development

can be defined as a type of strategic direction where organization improves an existing product

or develops new kinds of products to be introduced to the existent markets (Johnson et.al. 2008).



Kiwibank was the first one to introduce innovative solutions such as debit cards, mobile banking,

term deposit fund, TXT alerts and online international money transfers (Kiwibank 2009). The

product development is usually associated with the high risks of new strategic capabilities and

project management risks (Johnson et. al. 2008). Additional risks may be associated with large

investments and the possibility of a new product being unwanted by a market (Wang 2002).

However there is a positive side to a new product development. Product development can

become an effective tool in initiating the organizational changes which can become vital if the

company needs to adapt to the changing environment. Product development may be used by the

top management to bring organizational change with the aim to improve organization’s internal

performance or process (Junginger 2008). Furthermore new product may add value to the brand

or the service. Emphasizing on how the new product adds to the overall value of the service can

become source of competitive advantage (Browning et.al. 2002). For example the mobile

banking could become free support service with the savings account over $10,000. That would

increase perceived value of the initial service (savings account). The Kiwibank implements this

technique by introducing the ‘hero’ services (Sunday star times 2008).

Final aspect of strategic choices on which the essay focuses on is the strategic methods of how

organization peruses its strategic choices.

One of the instruments Kiwibank uses to pursue its strategic choices is strategic alliances

precisely subcontracting. The Kiwibank uses Citi’s processing and infrastructure network to

operate its international money transfers (Citi Bank 2009). The strategic alliances usually

associated with certain risks and difficulties. Problems usually associated with the strategic

alliances include lack of control over the final outcome due to the other party involvement,

failure of one party to contribute the required resources (including time) which leads to

mismatch in final and desirable results, uncertainty of the outcome due to the partner’s change in

objectives or environment and finally the management of relationship between the partners

(Luffman et.al. 1996). In addition there is a risk of becoming dependant on the partner’s

strategic resources which may lead to difficulties in strategic development outside formed

partnership (Thompson and Strickland 2001).

Critical analysis indicates that Kiwibank uses variety of different approach in its strategic

choices. Some of the approaches are associated with the high risks however the exceptionally

high results indicate on the effectiveness of chosen techniques or methods.

The final section of the essay will focus on developing of the alternative strategies that Kiwibank

should pursue. It is believed that the bank should develop hybrid strategy, through utilizing

methods of organic development and through strategic directions such as product and market



development. The hybrid strategy uses methods to simultaneously achieve lower price compared

to the competitors and diversification (Johnson et.al. 2008). There are indications that

combination of the low-cost and diversification strategy can be positively related to the

organizational performance as well as increase of returns on investments (equity), sale and assets

(Acquaah et. al. 2008). The Kiwibank already successfully integrated the low cost strategy into

its business model thus it will be easier to develop diversification strategy only as the low-cost

strategy already in place. A combination of these two strategies would allow the bank to keep

existent customer base (i.e. price sensitive segment) as well as to acquire new customers who are

looking for the new diverse kind of service.

Secondary, Kiwibank should add an additional strategic direction through which the bank will

seek to achieve its strategic goals. The bank should focus on market development as well as on

already existent product development. The market development strategy should be developed as

an alternative strategy to the highly-risky new product development strategy. The market

development strategy is concerned with offering existent products to the new markets (Kurtz

2008). The market development strategy should take the ‘new geographies form’. The bank

should consider opening branches in the Asia-Pacific region (outside its home market) for

example in Pacific islands or selected areas of Australia. Developing the new markets would

allow the banks to gain new experience which can be later used in the domestic market, increase

the existent earning and ROI, increase its regional presence hence market share, improve the

brand name perception and build stronger relationship with the customers (as there will be some

certainty that the international bank will not disappear with the customer’s life savings).

Finally, in addition to the strategic alliances the bank should adopt methods of organic

development. Internal development focuses on the development of the organization’s own

capabilities (Johnson et.al. 2008). The Kiwibank should focus on the knowledge and capability

development. For example, developing its own capabilities for the international money transfer

would make the bank fully independent from Citi bank resources hence to save on costs in the

long term run.

In conclusion, the various analysis and critical discussion in the essay determined that there is no

perfect strategy to follow. The effective strategic mix should be made of compromises and most

of the time involves high risk on the road to success. The PESTEL and five forces analysis

demonstrated that the bank competes in challenging industry with the high degree of competition

and bargaining power of buyers. The environment analysis concluded that it’s vital for

organization to monitor the environment’s changes in order to survive and grow. Strategic

capability analysis determined that the bank possess some unique resources and has developed



unique core competency (unique distribution chain). It was identified that the bank developed

priced based strategy, took product development strategic direction and used the strategic

alliances method to pursue its strategic goals. In addition to the strategies and strategic methods

in place it was recommended to Kiwibank to develop hybrid strategy as well as to add strategic

direction and methods such as market development and internal development.



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pavlova, valeriya 0050098500

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