Module Title: Contemporary Issues in

Strategic Management
Module Number: SOE11105
Module Leader: Sarah Sholl
Student Number: 40172476

International Strategy of HSBC

SYNONYMS

MNC: multinational company

FDI: Involves both International Trade and Foreign Direct Investment
HUB: HSBC Universal Banking System
HSBC: Hong Kong Shanghai Corporation
IM: International Managers
IT: Information Technology
UK: United Kingdom
US: United States

INTRODUCTION

Part 1 of this paper aims to offer a rational, critical analysis of the internationalisation
strategy used by HSBC and compares it to the other 2 largest global financial services
banks, CitiGroup and Standard Chartered. By comparing and contrasting their relative
strategies, a fair representation of the factors underpinning their global competitive
positioning shall be evaluated. The case study titled Case 2-3: HSBC Holdings
written by Lane and Khanna (2008) shall be referenced throughout as a basis of the
analysis. The context of the different international strategies shall be examined using
the academic writings of Lasserres (2012) called The Global Integration/Local
Responsiveness Grid. The second part to this paper explores the rationale behind
HSBCs acquisition of the American bank Household. In addition to considering the
ensuing post-acquisition process, within the context of thoeries found in another of
Lasserres papers (2007), titled Global Mergers And Acquisitions.

(PART 1) INTERNATIONAL STRATEGY

HSBC Holdings PLC was originally founded in 1865 by a Scotsman, and
headquartered in Hong Kong. By 1900 the bank had expanded into managing British
government accounts in the major economies in the Asian continent. Branches were
opened in America and Europe only to facilitate their clients trade. A substantial
international expansion was bolstered after the 2 nd world war which saw numerous
banking acquisitions with a pre-existing market presence in the Middle East, Europe,
North America, and Latin America between 1965 and 1997. (Khanna, T., Lane, D.,
2008)
Subsequently, HSBC has made further overseas acquisitions across the continents to
maximise their capacity and exploit currency factor differences. Advancements in
technology initiated in the 1980s intensified the global competition. The internet
permitted ease of communication of information across the world. Thus it became
increasingly imperative for HSBC to develop an effective international strategy to
position themselves more competitively on the global banking market. (Khanna, T.,
Lane, D., 2008),
After 1991, HSBCs headquarters moved to London, and by then they had a presence
in 79 countries, although lacking a meaningful one in the US North America. At this
point a policy which stipulated that each subsidiary within the group, was to have their
own balance sheet. Head office was only responsible for providing essential functions
and providing a platform known as HUB which is a system mainly used for ubiquitous
IT applications and credit control systems. This decentralised management approach
gave more accountability to local managers encouraging faster autonomous decision
making. IMs were assigned to a particular global region then moved around to share
their past market experience and knowledge. (Khanna, T., Lane, D., 2008),
Such autonomous management is an excellent way to stay on top of trends in market
demand across the globe. It can even identify potential opportunities that would have
otherwise been overlooked. This international structure enabled flexibility and quick
responsiveness to focus on specific competitive forces which are unique to a country.
Moreover, it can give the firm a more considerate brand image, adding value to the
customer experience. The dominance of local forces up until 1998, as opposed to
global forces, exemplifies a multi-domestic international strategy. (Lasserre, P., 2012),

This strategy, has however, been criticised of being detrimental to the companys
global competitive positioning by diluting the groups brand image. It became apparent
to the new chairman from 1998, John Bond, that the company hadnt carried out
effective measures to reinforce the HSBC parent brand. Many people were unaware
that HSBC was even the parent company, confusing customers as to the brand
offerings. It was only professionals in the finance community who acknowledged the
presence of HSBC as a global financial services bank. (Khanna, T., Lane, D., 2008).
This structure is also criticised for potentially overlooking inefficient value-chain
activities and wasted resources used on unnecessarily duplicated operations.
(Lasserre P. 2012),
By contrast, the competitive positioning of Citigroup, HSBCs biggest competitor, is
more impacted by global forces than local. Thus, it has a global strategic position with
the dominant force being the line of business of their clients. Citigroup headquartered
in North America, which is where 60% of its total income comes from. They have
offices in 100 countries which are centrally managed interdependently in the
headquarters. The groups positioning focusses on overseas support for local MNC
clients, rather than those with locally based operations. All offices outside the US are
not operated as subsidiaries but instead as geographical branch extensions of
Citigroup. (Khanna, T., Lane, D., 2008).
Furthermore, Citigroup operates as a single entity with only one balance sheet, which
brings advantages of tax reduction. (Lasserre P. 2012), Unlike HSBCs, centralised
management hierarchy has more scope to benefit from economies of scale and lower
costs. The bank is better positioned to provide the MNC client segment with their
requested homogenous and streamlined, cross-border services. The banks
communication and activities can be carried out more efficiently. What is more, the
brand image is strong and instantly recognisable. (Khanna, T., Lane, D., 2008).
Yet it is important to note, Citigroups strategy limits their local market responsiveness
and risks overlooking potential opportunities. The standardised service stifles
innovation and flexibility to accommodate to local needs. As long as their target
market is MNCs however, the global forces will continue to dominate the strategy with
minimal need for local responsiveness. Therefore the global strategy model is the
most cost effective for their chosen business model. (Lasserre P. 2012)
Bond recognised that the dominance of HSBCs localised operations was difficult to
match with a market leading competitive position. The bank needed to accommodate
to the global forces as well as the localised ones. Bond saw the merit in defining their
customer groups into four main segments. These were: 1. Retail Banking and Wealth
Management; 2. Commercial Banking; 3. Global Banking and Market and 4. Global
Private Banking. Each service segment was to be consistently provided in all of
HSBCs outlets. This exploited their global reach and offered the chance to cross sell
a multi-facet of financial and banking services, broadening the client base. While it is
necessary to include local responsiveness for 1 and 2, a global strategy is most
beneficial to 2 and 3. (Khanna, T., Lane, D., 2008), Therefore it is imperative to
incorporate a mix of both global and local forces to offer a competitive service to each
segment. (Lasserre P. 2012)
HSBC came up with an innovative new marketing campaign, as a catalyst for an
instantly recognizable and global brand image. They creatively capitalized on their

local responsiveness skill set while simultaneously promoting themselves as being a

transnational bank. The slogan The worlds local bank, launched in 2002 is
emblematic of this hybrid company branding strategy. (Khanna, T., Lane, D., 2008). It
falls between multi-domestic and global and can supplement the relative shortcomings
and absorb the respective benefits of each. (Lasserre P. 2012).
An example of an established international bank is Standard Chartered. Following an
episode of bad debt exposure in the 1970s they chose to limit their target market to
developing nations in Asia, Africa and the Middle East. (Khanna, T., Lane, D., 2008),
By providing basic financial services locally while also serving companies who wish to
operate in these countries they represent an intra-national global strategy. It sought
wholesale centralized control while also appealling to local consumers whom have
unique needs for a sustainable financial services brand which to provide support to
business development in their economy. For this reason, however, the global growth
prospects of Standard Chartered are slightly limited and thus are unlikely to overtake
CitiGroup or HSBCs global market share. (Lasserre P. 2012),
Pragmatically, the progressive nature of globalization only propels the necessity for
banks to adopt a competitive international posture. It is true to say that HSBCs multidomestic strategy, which was in place for such an extended period of time, has put the
bank at a competitive disadvantage on the global market. Its operations were too
fragmented and uneconomical. The diluted weak branding implies that its acquisitions
were managed as passive portfolio investments with little control over realizing their
full potential. (Lasserre P. 2012)
Having said that, the new integrated strategy that Bond has implemented places the
bank in a unique global competitive position. They are able to leverage their extensive
local knowledge with scale of their global reach. If a customer uses HSBCS services
for personal banking then happens to develop their own international business in the
future, they are more inclined to stay with the HSBC brand they trust. As long as
HSBCs strategy is influenced by the right mix of global and local forces to operate
efficiently they have a greater chance of gaining traction with market share growth
with superior competitiveness positioning. (Lasserre P. 2012)

(PART 2.1) PRE-ACQUISITION RATIONALE

In 2003 HSBC made the decision to purchase the 2 nd largest consumer finance
company in the US, after Citigroup, for $14b. It had revenues of $11b, in 2003 alone.
(Khanna, T., Lane, D., 2008). The larger combined size of the company will put HSBC
in a stronger position to secure investment and raise capital in the future. Barriers to
entry will be less severe and will save them having to invest, and potentially waste
resources, on the learning curve when trying to enter the American consumer market.
(Lasserre, P., 2007),
Moreover, it is important to note the synergy anticipation of this acquisition. They
deemed the purchase price of Household to be less than the value it would add to
HSBCs entire value, including the premium that was paid on top of Households NPV.
Thus it was thought to be a worthwhile long-term investment that would bring synergy
value. (Lasserre, P., 2007),

Another key value-creating objectives of this acquisition was to extend the global
reach of their international operations to include the largest developed economy
America. As yet, HSBC have failed to gain a significant presence in America. They
hoped to grab instant market share to compete with Citigroup. HSBC can cross-sell
their services through these new subsidiaries expanding their global reach and
international network of clients. (Khanna, T., Lane, D., 2008).
The Household acquisition also brought options to HSBC, in the form of new
technology, (Lasserre, 2007). Household had an analytical database containing
extensive data on the behaviour of American consumers covering a 13 year period.
This sophisticated database was used to generate risk profiles for the customers
which were generated by computer programmes with the ability to assimilate, learn
from and adapt to behaviour patterns. The neural network uses over 300 different
variables and employs around 250 qualified analytical staff who are responsible its
maintenance. (Khanna, T., Lane, D., 2008). The knowledge base of these staff has
potential to be extremely beneficial to HSBC, who can utilise their experience and
credit profile expertise. Demonstrating the rationale of wanting the transfer of
competencies from Households analytical staff and software programme. So HSBC
can find common algorithms, utilise their expertise and knowledge, and apply to their
international operations. (Lasserre, 2007).
Furthermore, to develop its intra-national strategy HSBC planned to focus on
provided banking services in emerging markets with growing middle-classes. HSBC
expected to launch Households database model promptly in emerging economies,
such as China, India and Brazil. Where they would have the opportunity to utilise their
substantial lending capacity. (Khanna, T., Lane, D., 2008).
The expanded global reach of HSBC permits them to benefit from pooling the
resources and assets of each new subsidiary. It promulgates economies of scale and
bring cost saving benefits to the conglomerate where the increased operations
enhances bargaining power with supplier. This in turn adds value to the acquisition
and supports the synergy pre-acquisition rationale. (Lasserre (2007). Having lower
costs will improve the combined companies profit margins and will have a wider scope
to offer competitive prices to customers.

POST-ACQUISITION (PART 2.2)

The process following the acquisition is extremely important in determining how
successful it is and whether synergy value is achieved. There are several important
considerations HSBC should examine. According to Lasserre (2007) there are 3 main
types of contingent integration modes which are determined by the degree of required
autonomy versus operational interdependencies between the two companies. Please
see figure 1. HSBC must decide which resources to use in common, capture, replace
or retain. In addition to the extent of the integration of activities. HSBC must consider
the methods of implementing the integration process considering the initial rationale of
the acquisition.

(Lasserre, 2007).
HSBC are hoping to learn about Households neural software and sophisticated
database from the 250 analytical staff to fully comprehend its intricacies. (Khanna, T.,
Lane, D., 2008), Therefore a degree of teamwork must be actioned in order to
extrapolate the expertise in order to be able to apply it to their emerging markets
operations. This implies an interdependency between the two companies to transfer
these competencies. It is this transfer that creates value and acquisition synergy.
(Lasserre, P., 2007),
The aim was to use this competency for lending in emerging markets. However, critics
of the acquisition noted that there are very few economies who actually have the
capacity to collect such a vast range and high quality of data on its citizens, as the
USA does. Therefore it is challenging to be able to apply the 300 plus consumer
variables the Household software assesses, when there is not enough consistent
data. (Khanna, T., Lane, D., 2008), HSBC will need the expertise of Households
model combined with partnering with local subsidiaries in emerging markets to
develop an applicable lending model.
Moreover, the local knowledge that Household has for American customer is valuable
for knowing the best way to advertise and interact with them. HSBC must also assess
bad debt cases of Household in order to find commonalities of loan mistakes to avoid
happening in the future as well as signals for lucrative customers. Therefore some of
the analytical expertise will have to be preserved initially in order to accumulate
learning from the risk assessment system. This aspect of the integration is
emblematic of features described in the symbiotic approach. (Lasserre, 2007)
Contrastingly, total assimilation of HSBCs business culture is needed. HSBC must
promulgate a unified culture translated into staff attitudes, interactions with customers
and logic when lending. HSBC has a culture of being cost effective and risk-averse.

The risks generated by the incompatibilities of Households business model in order

must be assessed to support the assimilation. The dichotomy of corporate cultures
between the two organisations was exemplified by Households notorious hard selling
and high financial penalties with several substantial law suit pay outs as a result.
HSBCs investors became understandably concerned that Households practices
would have a harmful effect on the previously trust worthy brand image. Hence, HSBC
sought to limit association with Household by keeping the subsidiary brand names
separate. (Khanna, T., Lane, D., 2008). This element is found in the Preservation and
Symbiotic approaches. (Lasserre, P., 2007),
Although the brand names were being preserved, the culture of Household was to be
replaced by HSBC. They spent $150m on additional compliance, training and
monitoring of the acquired Household subsidiaries in order to align the lending culture
with HSBCs, to avoid future legal action, (Khanna, T., Lane, D., 2008). This instilment
of HSBCs dominant culture is emblematic of the absorption approach, (Lasserre
2007). But managers need to be aware of any incompatibilities and areas of friction
throughout the integration process.
There is a risk of management being so absorbed with the post-acquisition process
that they overlook the external market environment. Markets and customers can be
more fragile to financial services in the wake of a banking crisis. If HSBC failed to
observe the effects this would have on the companys operations, they may lose
competitive positioning and market share to other banks who adapted their operations
accordingly. (Lasserre, P., 2007),
Hidden costs which were not anticipated before the purchase also post a threat to
synergy. There has to be a reconfiguration of both the tangible and intangible
resources of each bank to ensure that sources of potential savings are identified. It is
necessary to decide whether staff redundancies or movements will be required.
HSBCs managers should carry out regular financial audits and monitor progress to
see if the new sum value is more than the independent parts. Essentially, the
integration process is extremely intricate and managers must be interactive with
gradual process for each stage. (Lasserre, P., 2007)

CONCLUSION
As long as the Household subsidiaries preserve their brand, HBSC is unable to align
their brand identity with the acquired outlets. Which offers sustenance to the multidomestic international strategy they were attempting to progress from. Their intranational strategy is limited until they manage to assert a meaningful presence in
America. The interdependencies of the analytical data system and market knowledge
as well as the preservation of the Household brand name represents some similarity
to the symbiotic approach. But the dominance of the business model and culture of
HSBC being integrated is more symbolic absorption approach.
If this assimilation is effectively achieved, the lawsuits and brand image of unethical
lending will hopefully be quelled up to a point where it is appropriate HSBC to fully
integrate their brand name. HSBC can then begin the process of conducting the total
absorption of the branding, replacing Households existing names. If this happens

HSBC is better placed to realise the advantages of an intra-national strategy. Where

Citigroup mainly serves American customers overseas, HSBC would mainly serve all
overseas customers throughout a multitude of markets including America. In addition
to the chunk of American customers attained in the Household deal. Hence, in this
hypothetical instance, HSBC would have a substantially vaster consumer base with
access to more growth markets and would stand a chance of attaining a superior
global competitive position.

Word Count: (2933)

REFERENCES
Khanna, T., Lane, D., (2008), Case 2-3: HSBC Holdings, from Bartlett, C. et al,
Transnational Management: text, cases and readings in cross-border management,
pp138-155, London: McGraw-Hill
Lasserre P. (2012), The Global Integration/Local Responsiveness Grid, Global
Strategic Management, 3rd edition, Basingstoke: Palgrave Macmillan
Lasserre, Philippe, (2007), Chapter 5: Global mergers and acquisitions, Global
Strategic Management, 3rd edition, Basingstoke: Palgrave Macmillan