Essay on "Capital"

Essay 6 pages (1825 words) Sources: 4

[EXCERPT] . . . .

Capital One's external environment and its recent acquisition strategy. Capital One's strategy to this point has been congruent with its need to diversify beyond credit cards and the lack of international opportunities in financial services. As long as the company remains within its consumer lending segment, further expansion is not only possible but recommended.

Our firm has been hired by Capital One to evaluate the company's recent acquisition strategy and identify the key strategic issues that the company is facing going forward. This report will be the summation of those findings. The report will be divided into six sections: an evaluation of the key environmental forces and their strategic implications; the capabilities and weaknesses within Capital One; the business and corporate level strategies employed by Capital One and their potential for continued success; the strategic fit of Capital One's recent acquisitions; the key strategic issues raised by the expansion strategy; and an assessment of the company's international position. The report will conclude with a summary of our evaluations and some insight with respect to the strategies and tactics that Capital One should undertake going forward to ensure the firm's ongoing success.

Key Environmental Forces

There are three key environmental forces that are most critical for Capital One -- the economic, the political/legal and the social. Economic forces drive demand for Capital One's credit card, home and auto loan businesses. Among the macroeconomic variables that are critical to the company's business are the GDP, unemployment, the personal savings rate, consumption and interest rates. The degree to which consumers earn and spend money is reflected in demand for credit. Capital One also benefits when savings rates decline. For example, the company's lost money is 2008 and saw reduced income in 2009 over usual figures as the result of the economic downturn. This downturn saw depressed housing sales, auto sales and increased savings rates, all of which are bad for Capital One's business. Interest rates are reflected Capital One's cost of capital. Since the firm's credit card interest rates do not fluctuate significantly with the prime rate, an increase in rates for Capital One squeezes its margins.

When the economy is distressed, Capital One may be compelled to shrink the size of the company in order to accommodate for the declines in revenues. In addition, the company must take strong measures to contain its credit risk management. Capital One's business involves a substantial amount of subprime lending in credit cards, home loans and auto loans. This increases the company's exposure in the event of economic contraction. Managing this exposure is critical to the survival of the business. The company attributes its success in 2009 to its credit risk management program (Capital One 2009 Annual Report).

The political environment also plays an important role, given the high degree of regulation to which financial services firms are subject. The company's retail banking operations are governed by the Bank Act, and the firm is subject to a number of other acts as well. For example, the Credit Card Accountability, Responsibility and Disclosure Act passed in 2010 outlines a number of specific business practices that credit card issuers must follow (Schultz, 2010). Few industries are subject to this degree of micromanaging on the part of the federal government. This has the potential to impact not only corporate-level strategy but business level strategy and tactics as well. Regulations such as the Credit Card Act go beyond setting a framework for competition and have a direct impact on day-to-day function of a credit card company. Capital One needs to have a certain degree of flexibility built into its day-to-day operations and its business model in order to accommodate these types of changes in the political/legal environment.

The third major external environmental characteristic is the social environment. Recent decades have seen social shifts towards high levels of consumption and credit card usage. While these shifts are reflected in macroeconomic indicators, they are also important to understand on a finer level for a company in the business of marketing credit products. Social trends towards increased savings during the recession could have caused a short-term tactical shift. Now that savings rates are dropping again, a reversal of that tactical shift may occur. In order to maintain its marketing competency, Capital One needs to be in tune with the shifts in social attitudes towards issues of consumption and consumer debt.

Capabilities and Weaknesses

Capital One has a couple of key capabilities that help it to drive its business. The first is that the company has a strong marketing presence. Ever since its inception, Capital One has made aggressive use of mail order to promote its services, since the company did not have a physical retail presence. This has turned into a strong competency for Capital One -- it has a massive database on names and addresses to whom it can send its mailouts and the company has extensive experience in managing large scale mailout programs.

Another key competency for Capital One is its credit risk management. The company seeks a diversified asset mix so that it is insulated against shocks in the economy. The company also builds its underwriting models on the worst case economic situations and designs its programs, organizational structure and risk management program according to those worst-case scenarios. The company also has an aggressive collections and recoveries program to help mitigate the downside risk of an economic downturn. These tactics are especially important given the degree of subprime lending in which the company engages.

Capital One's strong performance suggests there are few weaknesses, but it still lacks diversification. Although the company has made expansions into branch banking, the credit card business still represents 62.3% of total revenue, 99% of net profit and 100% of overseas revenue (2009 Capital One Annual Report). Another weakness is the company's reputation for aggressive marketing to subprime clients, which damages brand equity.

Business- and Corporate-Level Strategy

The corporate levels strategy for Capital One is to compete in the financial services business. Capital One is a bank, a credit card issuer and a consumer and commercial lender. The company operates, roughly a cost leadership strategy. At the business level, Capital One uses extensive use of direct mail marketing and targets lower-end customers with minimal credit. Capital One has expanded beyond this core strategy in recent years to be a more broad-based credit provider. The company's retail banking business supports its lending activities and is not based on a low cost strategy.

Strategic Fit

Capital One's recent acquisitions have included moves into retail banking by acquiring Hibernia Corp, North Fork Bank and Chevy Chase Bank. These purchases served two key purposes for Capital One. The first is that they represented diversification within the financial services industry. By the mid-2000s, the credit card market was becoming saturated and competition in the industry was increasing (O'Hara, 2005). Strategic theory tells us that mature industries are faced with increasing competition and shrinking margins, so firms need to diversify in order to continue to grow. Having already undertaken international expansion into Canada and the UK, the two countries with the closest financial and legal systems to the U.S., Capital One attempted horizontal diversification instead.

The acquisitions are a good strategic fit with Capital One. All three banks operate in different parts of the country, so they help Capital One to increase its retail footprint. Its presence in New York and DC provides a strong beachhead for establishing a presence throughout the Northeast and Mid-Atlantic and the company can utilize its holdings in Louisiana and Texas to expand throughout the South. The acquisitions are also a good strategic fit because the company maintains its status as a monoline firm, focused almost entirely on consumer lending. The retail banks take deposits as well, but with these acquisitions Capital One is not moving into territory with which it is unfamiliar.

Strategic Issues

The acquisition strategy raises a couple of key strategic issues. The first is whether in the long-run Capital One wishes to maintain its monoline status. The company is already the 9th-largest bank in the United States (2009 Capital One Annual Report). There remains however substantial growth opportunities if the company wishes to pursue that path. The company is clearly intent on expanding beyond credit cards -- addressing its relative lack of diversification -- so the acquisitions that it undertakes will set the course for that expansion. In order for this acquisition strategy to be a success, therefore, the company needs these acquisitions to fit within a broader, long-term strategic vision.

The other strategic issues raised by the acquisition strategy are with respect to integrating the new banks into the company in a coherent manner. The banks will each have their own unique culture and ways of operating. In order to build a cohesive national banking brand, however, Capital One will need to integrate these disparate systems and cultures into a singular entity. As the company builds its competencies at acquisition management, this will become easier but with only three banks… READ MORE

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