Vancouver City Savings Credit Union (VanCity) was founded in 1946 and became the largest credit union in Canada with 41 branches and $9 billion in assets and 300.000 members in financial institution sector comprising commercial banks, trust companies, brokerage houses, insurance companies, credit union and other types of financial intermediaries. Vancity's success was based on member and employee experience, and community involvement.
In 1999, the number of the credit unions was 2.453 and there were approximately 10 million members in Canada. Credit unions were executed under the provincial government regulations.
Their biggest competitors are chartered banks. There were 48 charted banks with 8.000 branches and 12.500 ATM's. There were six big banks accounting 92% of the chartered bank total assets and taking place in world's 100 largest financial institutions ranking.
VanCity was performing well in its traditional approach, customer satisfaction. But the environment has changed. Competition revolved around the convenience of the services like ATM's, internet rather than one-on-one service.
Banks positioned themselves by investing and planning the new technology in order to respond and adapt to the change. However, credit unions had limited resources to invest in technological infrastructure and its maintenance and limited action area since they were not allowed to expand beyond their home provinces. VanCity also needs to conceive of the development the technology and providing convenience for its services. Major Banks exploited technological changes and increased the number of products and developed customer service through Customer Relationship Management programs.
VanCity could also react against the competition by opening new branches, but it would be very costly for the company. Another risk would also cause management problems. Additionally, that type of extension could also take the attention of its rival.
EXTERNAL ANALYSIS
According to Porter (1979), the nature and degree of competition is related to the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products/services and the jockeying among the current constants. A company must understand all these factors in order to be able to set its strategy against competitions and figure out key success factors. (Porter, 1979)
Additionally, according to Porter, the importance of government and regulation on industries, lobby groups, and fashion and fickleness can also be considered as additional forces shaping the competitiveness in the industry (Macmillan & Tampoe, 2000).
The threat of new entrants:
Entrance for the new entrants like supermarket chains into the banking and bill presentment areas was easy due to the increase in usage of internet. The development of internet lowered the entry barriers for the new entrants. Efficiency and suitability of the technology can have a direct impact on the performance. Additionally, the new legislation allowed the new entrants to penetrate into the industry. Availability of the skilled personnel on IT is also very important, so that new entrants could easily adapt the latest technology. Therefore, IT and skilled employees should be considered as key success factor.
Although it may not be the case for intermediary service providers, branches can keep being a key success factor in traditional financial services sector. Increasing the number of branches would affect also economies of scale.
In order to serve in financial services, entrants should be able to serve with minimum cost and high profit, shortly efficiently. This can be done by utilizing assets and averaging investment and operation costs over the customer number. Therefore, economies of scale should be considered as key success factor.
The Bargaining power of Customer:
As stated in the case, according to Salomon Brothers, Intermediary services has weakened the brand loyalty. The customers are away from the information only a few clicks. This enables them to check the convenience of the products in time and decide to choose the proper one. Customers shifted their focus from brand to costs. Additionally, it became easy for the customers to find cheaper products (loans etc.) and change the institution they worked by using intermediary services. In the light of these developments, transaction prices and charged have been reduced. Therefore, price can be considered as key success factor in financial services sector from the customer perspective. Additionally, it should also be remembered that the institutions should blend their prices with their technology. If they are good at pricing but not good at technological terms, their strategy could be crippled.
The Bargaining Power of Suppliers:
According to the case, with the new legislation, the suppliers of financial institutions like brokers, insurance companies and other financial services could get a chance to step into the competition to fight against banks for their own customers. Suppliers of the financial sectors are diversified. While companies in the financial sector purchase some products from third parties, they prefer to buy some critical products from their sister companies. Besides, financial services companies merged with some small financial service providers which could be deemed as threat. The reason for that was to keep them in their organization and impede their penetration into the industry.
The Threat of Substitutes:
With the development of Internet banking and intermediary services, ingredient of the substitutes has changed from service to product. The way of doing business has shifted from one-on-one services to convenience of the products. Product orientation and convenience began to be effective. Financial sector needs to evaluate the technological development as key success factor regarding substitutes. The internet is in the favor of the fast changes. Transformation of the products can be done so fast that the competitions need to respond in time. Banks and credit unions can serve new products and services to the sector by utilizing technological changes. Additionally, while the importance of the service quality is decreasing, price sensitivity is taking an important role. Therefore, this can directly affect the customers' decision.
The Jockeying Among the Current Constants:
According to the case, the number of the credit unions has decreased because of the mergers and acquisitions which caused an increase on the credit unions' assets. Since the business is based on economies of scale, it is difficult to decide to exit from the business. Mergers and acquisitions occurred due to high competitiveness in the sector. Additionally, financial services companies confronted some problems after mergers and acquisitions. The companies struggling to survive in this competitive structure needed to merge with other companies. Companies which are not strong in terms of assets and customer number and wanting to take a position the sector should rigorously consider merger and acquisition actions. Therefore, acquisitions and mergers should be considered as key success factor.
The Importance Of Government And Regulation On Industries
Since government is taking role as regulatory over the financial sector, there are no key success factors stemming from the government. However, if the government acted beyond the regulations and rules, then its existence would be considered as key success factor.
Lobby groups:
Lobby groups may affect the industry's rules and values. However, according to the case, there is no lobby activity yet. If financial companies establish lobby to affect the ground rules and decisions taken by the government regarding the industry, lobbying could be considered as key success factor.
Fashion and Fickleness:
Fashion and fickleness in financial sector is affected by the internet. Internet banking is a one of the ways to attract affluent customers who are expecting faster services. So, internet can change the way of the business. (Macmillan & Tampoe, 2000)
After executing Porter's five forces with additional forces, key success factors in financial services industry can be listed as follows:
IT Technology and skilled people
Economies of scale (necessity of assets)
Branches
Product diversity and convenience
Prices
Acquisitions and mergers
INTERNAL ANALYSIS
Resource Audit:
The resource audit can be a first step to compare the quality and types of the resources with existing and probable competitors. (Macmillan & Tampoe, 2000)
Physical resources: VanCity has 41 branches, $9 billion in assets.
Human resources: Motivation and dedication programs like employee engagement, corporate team provided high employee retention. Hierarchical, but flat organization allowed employees to share their opinions and take part in decision making processes.
Financial resources: VanCity works based on not-profit-organization, it provides loans to their members at reasonable rates. The earnings of the union returns to members in different forms like dividends, lower interest on loan. It has 300.000 members.
Other resources and intangibles: VanCity' brand recognition and prestige is at high level.
Analysis of Cost and Profit
According to VanCity's sources of revenue table, Vancity's total equity has increased from $5.9million to $8.2million within 5 years from 1998 to 2002. VanCity's interest income has reduced from $470.000 to $440.000, approximately %7. However, other incomes like rentals, fees have been stagnant between 2001 and 2002.
According to VanCity's financial statements, its earnings have increased approximately 65% within 4 years from 1998 to 2002. While net interest and other income has increased by 32%, total operating expenses has increased about 20% between 1998 and 2002. Additionally, while ratio of earnings to total assets was %0,48 in 2002, this ratio was %0,40 in 1998.
The biggest share in the operating expenses belongs to salaries and employee benefits. The biggest increase in expenses is seen in salaries and employee benefits. This number again is emphasizing the importance of the employees in the organization.
Competitive Advantages
According to Porter (1998), competitive advantages and disadvantages form the company's performance. Competitive advantages can stem from lower costs, prices, and /or differentiated products. Operational effectiveness is also another competitive advantage. Companies must understand their environment and figure out their resources of competitive advantage. (Porter, 1998)
Customer (member) satisfaction: VanCity's customer satisfaction ranking was number one in 2002. It has higher efficiency rate by 15-20% than the banks.
Employee retention: VanCity exploited its lower employee retention in reducing the costs of hiring. In order to increase the retention, human resources department implemented satisfaction policies for the employees like Employee Engagement Program, Corporate team etc. Although the structure was hierarchical, the flat organization allowed employees to share their opinions and take part in decision making processes. Additionally, some internal communication devices were utilized such as intranet, e-mailing.
Diversity of the products: VanCity has 200 products and offer the same types of products as competitors do in very competitive environment. VanCity also specialized in innovative products regarding environmental issues. Additionally, it initiated Community Investment Deposits (CID) in order to take active role in community involvement to improve local and global communities.
Collaborations and Sister Companies: VanCity is also the owner of Citizens which serves electronic banking. It also established partnership with two companies and launched Credential Securities business, full service brokerage firm. VanCity has also other subsidiaries from insurance to investment management.
Local community involvement and respectable position: VanCity created and involved in community activities like "Success bonus" to provide finance to its projects and Youth Credit Union to impose students the the importance of the savings. In terms of ethics and fairness, VanCity also shaped its supplier selection criteria. VanCity' brand recognition and prestige was at high level.
Customer knowledge: Marketing department focused on the improvement of the customer knowledge to create new bundles of products.
STRATEGIC CHOICE
The way of doing business in financial services sector has changed. While banks were able to adapt themselves to this change, credit unions struggled to find new ways to respond to the change in accordance with their limited action area. Before, credit unions and banks were in direct contact with their customers/members and therefore, the importance of the customer satisfaction was high. With the development of internet and telephone banking, axis of the business has shifted to convenience of the products and service rather than the customer satisfaction. In this context, banks started serving the new products, while credit unions were struggling to the challenges being stemmed from the legislations and limited resources. Additionally, cost of the product development has started taken an important in the business. Since banks had large assets and more customers, cost per customer was lower relatively.
According to the case, since VanCity is a co-operative financial institution, its activities are controlled by the members. The board of directors has assumed the responsibility of the instructions' operation policies. Therefore, the board of directors will decide on the strategic action. However, approval of the board would not be sufficient for the successful implementation of this action. Additionally, VanCity management's attitude would also involve their employees into their decision making procedure. (Macmillan & Tampoe, 2000).
There are two options available for the VanCity:
Merging small companies:
The advantage of the merging with small companies will also be reducing overhead costs which would be much higher in case with large companies. (Klug, 2007)Since an economy of scales is one of the key success factors and establishment of the new branches is very costly, Vancity can take the advantage of the merger. By doing that, it will not only expand its service area but also increase the number of the members which will affect the growth in earnings and assets. However, the target companies for the mergers should be the smaller companies. The reason for that is the cultural problem which may companies confronted after mergers. Since VanCity's management philosophy is innovative and to be open to new ideas of the employees, Vancity can easily overcome possible cultural problems stemming from mergers.
Developing the in-house technology:
The importance of the IT which is a key success factor has increased tremendously due to customer needs and preferences. It also enabled the major banks to serve the customers with lower cost per customer in the sector. In addition to IT technologies, the importance of the technology development and maintenance requiring high skilled employees is a key success factor. Vancity has an internet-only bank, Citizens bank. Vancity can focus to improve Citizens Bank's responsiveness and compatibility to customer needs and rivals' threats. It has already established a shared expertise on technology-based service with Metro Savings Credit Union and opened the call center to common usage of the Citizens bank. Vancity can keep on collaborating with the other credit unions to develop and share technology. By doing that, while VanCity can reap the advantages of the technology and develop its competitiveness in the industry, it can also reduce the costs of innovation and developing. (Klug, 2007)
