Introduction

The banking and insurance industry in UK is highly competitive with four major players namely Barclays, HSBC, Lloyds and the Royal bank of Scotland. Lloyds bank is also the second biggest bank in UK according to assets, having over 0.81trillion GBP in 2017 with major competitors HSBC, and RBS having 1.89trillion GBP and 0.75trillion GBP respectively (Statista 2018).

1.0 Porters five-forces analysis

1.1 Bargaining power of the buyer

According to Grant (2016), the ability of buyers to drive down the prices they pay depends upon two factors: their price sensitivity and their bargaining power relative to the firms within the industry. Price sensitivity is normally determined by factors like product differentiation, competition, and significance of the product to the consumer. However, consumer bargaining power is determined by factors like cost and ease of switching to purchase products or services from Lloyds bank competitors like Barclays, HSBC, as well as buyer information regarding costs incurred on banks in the market. Putting these factors into consideration, we can note that Lloyds customers have a relatively low bargaining power due to high switching costs. In the UK, most people are content with their banks and are not willing to switch banks which gives the banks relatively high bargaining power (Barrett 2017). Also, Lloyds bank has high customer loyalty which has enabled it to maintain high revenues and a high market share in UK’s banking industry (Horta- Osorio 2017).   

1.2 Bargaining power of the suppliers

The bargaining power of suppliers has similar determinants like the bargaining power of buyers in an industry, according to Grant (2016). The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The relevant factors are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party. Considering these factors, we can conclude that suppliers in UK’s banking industry such as IT suppliers, Visa who supply credit cards, extra have a low bargaining power because of many available suppliers in UK’s banking industry. This gives Lloyds bank power to obtain products from suppliers at the lowest possible costs to improve its profit margins since existing customers fear to lose their business contracts with Lloyds bank to other suppliers in UK’s banking industry. As a result, Lloyds bank has set up strict guidelines for its suppliers to follow to attain business contracts with the bank (Lloyds Banking Group 2018).

1.3 Threat of substitutes

According to Grant (2016), the price that consumers are willing to pay for a product depends on the availability of substitutes for the products. The absence of substitutes for a product means that consumers are comparatively insensitive to price. However, the existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (demand is elastic with respect to price). The extent to which substitutes depress prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, depends on their price-performance characteristics. Considering these factors, we can note that this is a  high threat for Lloyds bank because substitutes in UK’s banking industry are mainly fintech companies such as Manzo, funding circle, Revolt, bud, that make faster, easier and cheaper business transactions with convenience compared to banks and prepaid debit cards that allow consumers to load funds on the card and spend the money loaded. However, with prepaid debit cards and online banking, customers don’t need to start with certain minimum balance unlike ordinary banks (Pritchard 2018). Hence, Lloyds bank being the largest digital bank in UK intends to partner with fintech startups to provide better services and reduce on the threat (Williams-Grut 2018).  

1.4 Threat of new entry

The threat of entry is low because the slow market growth and decreasing profitability in UK’s banking industry makes the market less attractive which discourages new entrants in the banking industry (Arnold and Binham 2017). Also, Given UK’s banking industry market that is commanded by four major players, there is a lot of competition between other banks trying to attain a bigger market share in UK’s banking industry which would not allow a new entrant to prosper. In addition, Lloyds bank has high customer loyalty hence Lloyds bank customers would not be willing to switch to new banks (Horta- Osorio 2017). 

1.5 Competitive rivalry

Competition intensity is determined by factors such as seller concentration, diversity of competitors, product differentiation together with excess capacity and exit barriers according to Grant (2016). Considering these factors, we can note that Lloyds bank faces intense competition from fellow “big four banks” Barclays, HSBC, Royal bank of Scotland that provide similar products or services at similar prices making product switching costs low hence a customer can easily switch banks which affects the profitability of Lloyds bank. This has led to product innovations and intense advertising. In addition, the low product or service differentiation in UK’s banking industry intensifies the competition which affects Lloyds bank because it does not have unique products or services that differentiates it from other banks. However, high customer loyalty in UK’s banking system has enabled high revenues (Horta Osorio 2017).

2.0 Lloyds Bank BCG analysis

Lloyds bank has four major strategic business units namely; retail banking business, commercial banking business, insurance and wealth business and the run-off and central items business that contribute to Lloyds bank revenue. In 2017, Lloyds bank recorded an annual underlying profit of £8,493million up by 8% compared to 2016 with the retail banking business accounting for 56% of the profit according to Lloyds bank annual report (Annual Review 2017)

2.1 Cash cows

Lloyds Bank retail banking business sector that includes current accounts, savings, mortgages, credit cards, motor finance and unsecured loans to personal banking and business customers has been serving as a cash cow for Lloyds bank for several years because of its high profitability and capability to support other businesses. In 2017, the retail business recorded an underlying profit amounting to £4403million contributing 56% to Lloyds Bank total annual underlying profit. The retail business’s underlying profit increased by 9% year on year (from 2016) due to acquisition of MBNA that is a credit card business which generated £448million according to Lloyds bank annual report (Annual Report 2017) enabling Lloyds bank to record high profits. However, given its mature market with less market opportunities, Lloyds retail business does not need to invest heavily in itself to maintain its high underlying profits but rather invest in other businesses such as the commercial banking business, insurance and wealth business, extra to enable them grow into cash cows that can generate more revenues for Lloyds bank (Global Data Financial Services 2018).

  2.2 Stars

Through its four segments, mid markets, global corporates, SME’s and financial institutions, Lloyds commercial banking unit provides a wide range of products and services to consumers such as lending, transactional banking, risk management, working capital management, among others and is grouped as a star for Lloyds bank due to its high growth in underlying profit. The commercial banking business underlying profit increased by 5% to £2,489million accounting for 32% of Lloyds bank annual underlying profit. And given the growing number of SME’s in UK accompanied by government support for UK’s big banks to increase SME lending, Lloyds has an opportunity to expand its lending market and revenues. Hence, investment in Lloyds commercial banking will enable the business unit to develop into a cash cow and support other businesses (White 2017).

2.3 Question marks

Despite high investment costs in Lloyds insurance and wealth business unit that offers insurance, investment and wealth management products and services has failed to attain significant underlying profits for Lloyds bank and is therefore classified as a question mark. In 2017, Lloyds insurance and wealth business generated £939million in underlying profits down 3% compared to 2016. However, the rising number of the elderly in UK brings more growth opportunities for the business unit that forced Lloyds bank to acquire pensions and savings assets from Zurich to enable further expansion in the retirement market. Therefore, further investment in the insurance and wealth sector will enhance its growth into a cash cow with stable revenues to support other businesses (Dunkley 2017).

2.4 Dogs

Lloyds Run-off and central items business that includes income and expenditure not recharged to divisions and the costs of certain central and head office functions is categorized as a dog in Lloyds Bank because of its low revenues that do not significantly contribute to Lloyds total revenues. In 2017, the run-off and retail business unit recorded an underlying profit of £662million and given its mature market with less market opportunities, the business unit has limited chances of improving its returns. However, since its underlying profit has gradually improved over the years according to its annual report (Annual Review 2017) Lloyds bank can continue investing in its Run-off and central items business to enable it to attain a bigger market share with large profits to support other businesses.

Conclusion

The above porters-five forces analysis concludes that Lloyds bank faces a threat of substitutes such as fintech companies, prepaid debit cards, extra that have greatly affected the profitability of UK’s banking industry and high customer bargaining power which is considered a low threat due to high customer loyalty. However, Lloyds bank faces a major threat of competitors such as Barclays, HSBC, RBS Standard Chartered, extra who offer similar services. Unlike the threat of substitutes where Lloyds bank can partner with fintech companies, Lloyds bank faces intense competition from other banks. In addition, the above BCG analysis suggested that Retail banking business being the cash cow can invest in other developing businesses such as commercial banking business, Insurance and Wealth business and the run-off and central items business to enable their growth into cash cows providing extra revenue for Lloyds bank. 

References

Annual Review (2017) “Lloyds Banking Group” Lloydsbankinggroup.com [online] at http://www.lloydsbankinggroup.com/globalassets/documents/investors/2017/2017 lbg annual review.pdf [Accessed on 18th.6.2018].

Arnold Martin and Binham Caroline (2017) “UK financial stability: What the bank of England is worried about” Financial Times [online] at https://www.ft.com/content/ [Accessed on 18th.6.2018].

Barret Claer (2018) “What would it take for you to switch your bank account?” Financial Times [online] at https://www.ft.com/content/02ca58c6-917f-11e8/ [Accessed on 12th.10.2018].

Dunkley Emma (2017) “Lloyds Banking Group buys Zurich’s UK pensions and savings unit” Financial Times [online] at https://www.ft.com/content/1111ef12-af43/ [Accessed on 17th.6.2018].

Global Data Financial Services (2018) “Is Lloyds bank’s strategy the key to saving the industry” Verdict [online] at https://www.verdict.co.uk/retail-banker-international/opinion/lloyds-banks-strategy-key-saving-industry [Accessed on 18^th.6.2018].

Grant, Robert (2016) “Contemporary Strategy Analysis” 9^th edition, Wiley

Horta- Osorio Antonio (2017) “Lloyds Bank survived thanks to the loyalty of its customers- and now we are ready to help the public prosper” The Sun [online] at https://www.thesun.co.uk/money/3588599/sun-city-llioyds-bank-survived-thanks-to-the-loyalty-of-its-customers [Accessed on 17^th.6.2018].

Lloyds Banking Group (2018) “Third party policies” Lloydsbankinggroup.com [online] at http://www.lloydsbankinggroup.com/our-group/working-with-suppliers/policy-compliance/third-party-policies [Accessed on 18^th.6.2018].

Pritchard Justin (2017) “How to Live With No Bank Account” The Balance [online] at https://www.thebalance.com/how-to-live-with-no-bank-account/ [Accessed on 18^th.6.2018].

Statista (2018) “Leading banks ranked by total assets in the United Kingdom (UK) from 2012 to 2017 (in trillion GBP)” Statista [online] at https://www.statists.com/statistics/300792/uk-banking-sector-leading-banks-by-total-assets/  [Accessed on 18^th.6.2018].

White Lucy (2017) “The number of small businesses in the UK has shot up: Here are the top-growing sectors” Cityam.com [online] at http://www.cityam.com/275406/number-smaller-businesses-uk-has-shot-up-top-growing [Accessed on 18th.6.2018].

Williams-Grut Oscar (2018) “Lloyds is the largest digital bank in UK, CEO says, and it wants to work with fintech startups” Business Insider [online] at http://www.pulse.ng/bi/finance/lloyds-is-the-largest-digital-bank-in-the-uk-ceo-says-and-it-wants-to-work-with-fintech-startups/[Accessed on 18th.6.2018].