Management Essays – Barclays Bank PLC and Deutsche Bank PLC

Barclays Bank PLC & Deutsche Bank PLC.

Introduction

The historical models of market opportunities have favored coordinated market economies (CME’s) over liberal market economies (LME’s), however this traditional position has shifted in the case of Europe where the Central Eastern European countries have demonstrated a growth rate in loans of twelve percent (12%) as compared to just four percent (4%) over the mature markets of Western Europe during the past three (3) years (Hoover’s, 2005). Germany’s Deutsche Bank operates in a coordinated market economy and experienced an increase of forty six percent (46%) in revenues before income tax expense over 2003. This is in marked contrast with the results recorded in 2003 when the bank experienced a decline of almost twenty percent (20%) in revenues. The United Kingdom’s Barclays PLC, which operates in a liberal market economy, has recorded an increase in profit of twenty percent (20%) in 2004 over 2003 and a rise in income of twelve percent (12%) (Barclays PLC, 2004).

This essay will seek to examine the differences in performance of these two banks based upon the comparative institutional advantages inherent in operating in a coordinated market economy versus a liberal market economy, focusing on changes or other developments at these institutions regarding performance and changes or strategies implemented to effect improvements to reflect the results recorded in 2004. The preceding will take into account recent changes in CME and LME systems and their effects as contributors to the foregoing. The radically differing context that represent these two market systems are each self-sustaining and in their individual frameworks as well as being self-reinforcing (Esping-Anderrsen, 1990). The inherent structure of these two market economic systems form the environment in which the subject banks operate and as a result influence their performance thus causing them to implement and introduce strategies to override or negate, to some degree, the inherent inhibiting factors and or forces at work.

Casper et al (1999) explained the production system in Germany as ‘Diversified Quality Production’ (DQP), which relies upon the consistent improvement in products through either better production processes or specialized employees, as well as distribution. The preceding sets up a system of high production quality as a definitive aspect of the CME system. The basis of the LME system relies upon the consistency of innovation to drive product generation rather than the improvement based foundation of the coordinated market economy system. The inherent capability of the LME system that allows for capital to be raised quickly, as well as to hire as well as fire workers when new projects fail. The foregoing process represents a strength in the LME system as it has proved extremely successful in the software and biotechnology sectors, however, it has its drawbacks in machine tools and other longer standing skilled industries.

The proceeding peek into LME and CME systems offers a generalized overview that represents the underlying basis for the examination of Barclays PLC and Deutsche Bank PLC with respect to changes or other developments at these institutions regarding performance and changes or strategies implemented to effect improvements to reflect recent results.

LME – CME                                                                                              

In order to understand the context that helps to formulate the strategic performance changes at Barclays PLC and Deutsche Bank PLC as well as the rationales involved, one must have an understanding of the market economy context they are in. The coordinated market economy of Germany has been undergoing a slow transformation that has focused upon further specialization in those fields that it has a comparative advantage (Casper et al, 1999). The governmental and business policy, as a result of globalization, has resulted in German companies divesting themselves of less competitive industry sectors to focus upon those representing an advantage (Iversen, 2001). The foregoing represents an important change in the dynamics of the coordinated market economy system where a considerable investment is made in increasing the skills of workers who produce products requiring high technological skills and know-how. To accomplish the preceding, the training in labor requires considerable assurances that this investment will be retained rather than re-entered into the work-force as is the case in the liberal market model (Hall et al, 2001). Employers unions help to stabilize the preceding by ensuring that competitive companies do not wrest trained employees through having unions with a seat in the running of the company as this represents their best interests. The foregoing results in a long-term stabilization factor that provides the foundation for capital to be obtained with the long term view in mind.

The foregoing has particular importance in the case of Deutsche Bank as in the CME model banks have access to distinct information on companies as a result of their providing the availability of long term capital which means that the bank obtains a seat on the company’s board. The foregoing enables the institution to have first hand knowledge on the actions of the company.

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In liberal market economies the co-ordination with respect to the varied components of the capitalist model is by and large market based. In this instance, employers do not have any guarantee with respect to workers remaining loyal as the main incentive of wages enables other firms to successfully bid for the services of skilled employees. In the instance of worker unions there are no provisions against rival firms hiring away employees. This condition limits the amount of training that employers can and do invest in worker skills as there is no guarantee that they, employees, will remain loyal (Dore, 1973). The preceding means that workers do not benefit from advanced training, thus creating the condition whereby most positions require relatively simple skills, which in most instances are learned on the job. Under the circumstance of the foregoing fast changing employee environment, long term as well as short term capital is difficult to secure. This therefore brings equity financing to the forefront as the principle means.

The equity finance rate in the United Kingdom as well as the United States exceeds one hundred percent (100%) of their respective Gross Domestic Product. This is in sharp contrast to Germany where that figure is less than forty percent (40%). With the shareholder incentive based upon profits, rather than long term market positioning through superior products, management is prone to reduce the labor force to produce bottom line results, thus increasing unemployment. This condition fosters invention rather than product improvement, sacrificing long term quality for short term bottom line results.

The effects of globalization as well as the introduction of a single market currency in the European Union are impacting upon both the LME model in the United Kingdom, as well as the CME model in Germany as a result of financial disintermediation (Alvarez et al, 1991). The foregoing sets up the condition whereby equity might be available at rates that are less expensive than that which is offered by banking institutions. This condition has particular relevance in Germany whereby it could provide a wedge between firms and banks thus eroding the existing long-term arrangement and seats of banks on corporate boards. The preceding will undo the underlying labor relations arrangement and thus a convergence with regard to the CME market model (Calmfors et al, 1988). The introduction of the Euro could very well indicate a change for Germany as a result of real wages are impacted by the agreement of unions with the German Central bank.

The aforementioned condition has already been manifested in varied degrees in Sweden, Italy and France, CME countries that have been converging on the LME model creating hybrid systems with characteristics of both as well as specific aspects of their own individual country applications (Maurice et al, 1986). This has increased competition in with varied British companies in low skilled industries thus bringing increased competitiveness. As the dynamics acting upon these two models increases as a result of globalization, cross border currency and competitive circumstances, various CME based models will increasingly acquire characteristics of the LME model. The foregoing also is influenced by the posturing of political parties seeking election by either reintroducing CME model framework supports, or elements of the LME model. The preceding has implications for both Barclays PLC and Deutsche Bank PLC in their approach to performance strategies.

Barclays PLC

Barclays’ origins can be found back in 1690 to John Freame and Thomas Gould. The named changed to its present form when James Barclay became a partner in 1736.  Presently, Barclays is the third largest bank in the United Kingdom. The institution’s primary focus is in retail banking, investment banking as well as investment management. Barclays operates in 60 countries and operates over 2,000 offices in the United Kingdom and is one of the ten largest banks global when measured by market capitalization (Barclays PLC, 2004). The institution’s core business revolves around retail and investment banking, and it is the later that is being impacted by forces acting upon liberal market economies in varied European Union member states as a result of the aforementioned introduction of the Euro as well as globalization. As a result of the preceding, Barclays services the United Kingdom market as well as providing services to multinational companies located in differing market models.

A SWOT analysis of Barclays reveals the following (Barclays PLC, 2004):

STRENGTHS

WEAKNESSES

Barclays is one of the UK’s largest Financial companies

Reduction in the banks branches

Global diversity in 60 countries

Weak Private Clients performance

Excellent acquisition strategy that has expanded Barclays distribution base

OPPORTUNITIES

THREATS

Expansion in wealth management and Private banking

Lack of cross-selling initiatives in wealth management

Offering life, pension and varied investment products to customer base 

Increased UK competition from clearing and mortgage banks

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The proliferation of banking consolidation within the industry is and has created a new era of international banking conglomerates, particularly in the United States. The preceding is causing European based banks to appear small in terms of relative comparison. Barclays’ operation in a liberal market economy means it competes with equity financing for corporations and as such, this does not represent a strength concerning its overall performance base. The SWOT analysis identifies that Barclays’ performance underpinnings are represented by its strategy of acquiring other banking concerns to expand its retail as well as other banking services through representation in international markets as represented by the bank’s presence in 60 countries. This provides Barclays with the means to sell its highly profitable investment banking services as well as be positioned to service the cadre of multinational companies that utilize its diverse banking financial service packages.

Barclays is known a consistent performer delivering steady profitability results, 20% increase in profit before taxes in 2003, and again in 2004, and one of the lowest cost to income ratios with regard to banks in the UK. The preceding indicates that Barclays is well managed. Barclays’ focus on internal administrative consolidation as well as the acquisition of banking concerns represents its recognition of forces within the LMS model that it must respond to in order to maintain growth in revenues, return on equity, dividends and profits in response to maintaining a high market capitalization that tends to make it a relatively unattractive takeover target as a result of the high premium required to acquire it. Barclays’ retail banking arm is clearly supported by the huge success of its Barclaycard division that has set industry standards in terms of innovations in customer utility. Barclays’ presence in 60 countries further strengthens the utility of this card providing business and retail customers with access to their financial accounts globally (Barclays PLC, 2004). The aforementioned diversity in operations is a result of the economic strength of liberal market based economies that have fully recovered from the global recession events of 2002. Barclays’ banking acquisition strategy is a direct outgrowth of the foregoing in keeping with the consolidation mania initiated by U.S. based banks that also operate under the LME model.

Deutsche Bank PLC

Deutsche Bank was granted a license to operate as a financial institution by the Prussian government in 1870 with a view to challenging the supremacy of British banks that were dominating German foreign trade. As one of the four largest banks in Germany, Deutsche Bank is strongly positioned within Europe and offers corporate as well as investment banking as its principle core business as well as the management of private client accounts, asset management services and products. Located in over 75 countries (Deutsche Bank, 2004), Deutsche has a strong global presence, yet it has a high reliance on its domestic market that represents a CME model. The cost to income ratio for Deutsche is above the German average of 77 and this indicates that the institution is not being managed efficiently. Its return on equity is in line with the German average, but is one of the worst performing areas in its financial analysis. The SWOT analysis of Deutsche points out specifics that indicate operating problems (Deutsche Bank, 2004):

STRENGTHS

WEAKNESSES

Financial strength in the face of multiple problems as its resources are higher than competitors

Exposure to fluctuations in the market

Implementation of cost cutting measures

Problems in the Private Wealth Management unit as a result of low profits

Global market presence in 75 countries

Poor 2003 / 2004 revenues in its core  Corporate and Investment banking units

OPPORTUNITIES

THREATS

Increase domestic retail banking business to lower exposure in Investment Banking

Strong inter Germany banking competition

Expand in Asia, the banks only positive growth region

Weak economy in Germany

The aforementioned consolidation practices have increased competition and has affected  German banks along with the introduction of the Euro, which has increased the cross market capabilities of banks as a result of the elimination of currency transfer rates which had insulated the German CME model banks from LME markets. The global market diversification of Deutsche has protected it somewhat against the poor economic performance in its home market. Deutsche has recognized that its internal operations have further exacerbated its poor performance and set about an internal restructuring and reorganization in 2003 to address performance (Hopner et al, 2001). Termed a “transformation” program management implemented this process in response to sub-par performance in 2002 and this has resulted in an increase in income before taxes in 2004 of forty-six percent (46%) over year end results in 2003 (Deutsche Bank, 2004). Additional results were also achieved in the bank’s risk management profile that reduced problem loans by twenty-seven percent (27%) over 2003 (Deutsche Bank, 2004).  The aforementioned internal program also produced results in Deutsche’s Corporate and Investment Banking units as well as Asset Management arm along with Corporate Division Private & Business client units. The aforementioned ‘transformation’ program focused on identification of the internal bank operational and administrative factors contributing to poor performance, as well as reorganizing operations to centralize functions and reporting procedures. Deutsche also implemented extensive cost cutting measures with all efforts focusing on a reduction in operating expenditures and revenues growth through aggressive new business generation.

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The Bank’s Investment Banking business, which has long been one of its core strengths, was emphasized and experienced healthy growth as a result of refocusing. However, a strong Euro impacted negatively on bottom line performance. The preceding developments represent effects of a CME based model that was impacted negatively by the performance in LME based economies.

Conclusion

The economic events that preceded as well as followed 2002 caused LME based companies and governments to examine means via which to re-energize their economies. This resulted in reducing expenditures on social areas, as well as lowering interest rates to refuel borrowing for expansion and growth. Companies within these markets (LME) conducted a string of ‘down sizing’ measures which increased unemployment, but made companies financially stronger and helped to fuel a massive number of mega mergers that were based upon models of economy of scale as well as generating bottom line performance as dictated by shareholder concerns for growth. Governmental intervention in terms of interest rate cuts and other market stimulation measures aided in creating competitive advantages that came at the expense of CME based models and had the effect of severely impacting growth in that sector.

Globalization had less of a negative affect on LME based models as the primary market country, the United States, generated growth through utilization of the ‘golden straitjacket’ principle. Friedman (1999) explains the foregoing as the adoption of deregulation and reforms aimed at increasing the competitiveness of a country’s home based businesses and industries. One such area resulted in the mega merger mania in the United States that impacted various industries as well as the round of banking consolidations. The ability of LME models to make quick short term adjustments as opposed to the slow turn around time required for CME models generated growth in that sector while slowing it in another. This proved to affect Germany’s economy while aiding that of the United Kingdom. Deutsche Bank PLC has managed through a refocusing of its efforts to reverse the negative performances generated in 2002 and 2003, with further progress being made as a result of understanding the corrective measures that were and are needed to be taken. Barclays’ performance throughout this period has remained consistent and steady as the bank has not lost sight of the competencies that helped it achieve acceptable historical performance.

Bibliography

Alvarez, R., Garrett, Geoffrey, Lange, Peter. 1991. Government Partisanship, Labor Organization, and Macroeconomic Performance. June, 1991, Vol. 85American Politicial Science Review.

Barclays PLC. 2004. Annual Report. Barclays PLC, London, The United Kingdom

Calmfors, Lars, Driffil, John. 1988. Centralisation of Wage Bargaining. Vol. 6. Economic Policy

Casper, S., Lehrer, M.,  Soskice, D. 1999. Can High-Technology Industries Prosper in Germany? Institutional Frameworks and the Evolution of the German Software and Biotechnology Industries. Vol. 6, pp 5-24. Industry and Innovation

Deutsche Bank. 2004. Annual Report. Deutsche Bank, Hamburg, Germany

Dore, Ronald. 1973. British factory, Japanese factory, the origins of national diversity in industrial relations. University of California Press. ISBN: 0520024567

Esping-Anderrsen, Gosta. 1990. Three Worlds of Welfare Capitalism. Princeton University Press, Princeton, New Jersey, United States.

Friedman, Thomas. 1999. The Lexus and the Olive Tree. P 105. Anchor Books, New York, New York, United States

Hall, Peter, Soskice, David. 2001. Varieties of Capitalism: The Insitutional Foundations of Comparative Advantage. Oxford University Press, Oxford, The United Kingdom

Hoover’s. 2005. Foreign Regional Banks. Hoover’s Banking Industry Report

Hopner, Martin, Jackson. 2001. An Emerging Market for Corporate Control? The Mannesmann Takeover and German Corporate Governance. Paper No. ¼. Max Planck Institute for the Study of Sociaties.

Iversen, Torben. 2001. The Dynamics of Welfare State Expansion: Trade Openness, Deindustrialization, and Partisan Politics. Oxford University Press, New York, New York, United States

Maurice, Marc, Sellier, Francois. 1986. The Social Foundations of Industrial Power: A comparison of France and Germany. MIT Press. ISBN: 0262132133


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