What is Financial Services?
Financial services refer to services provided by the banks and financial institutions in a financial system.
In general, all types of activities which are of financial nature may be regarded as financial services. In a broad sense, the term financial services mean mobilisation and allocation of savings. Thus, it includes all activities involved in the transformation of savings into investment.
Table of Content
- 1 What is Financial Services?
- 2 Characteristics of Financial Services
- 3 Functions of Financial Services
- 4 Classification of Financial Services
- 5 Challenges to Indian Financial Service Sector
- 6 Roles Played by Financial Services
- 7 Regulation of Financial Services
- 8 Significance of Marketing for Business Growth
- 9 Internationalization of Financial Services
- 10 Drivers of Internationalisation
- 11 Globalisation Strategies
- 12 Process of Strategy Implementation
The finance industry covers a broad range of organizations that deal with management of inflow and outflows of funds in an economy. Among these organizations are Asset Management Companies like leasing companies, merchant bankers and Liability Management Companies like discounting houses and acceptance houses, and further general financial institutions like banks, credit card companies, insurance companies, consumer finance companies, stock exchanges, and some government sponsored enterprises.
Following are some of the examples of financial services:
- Mutual Fund management
- Leasing, credit card services, factoring, portfolio management and financial consultancy services
- Underwriting, discounting and rediscounting of bills
- Acceptances, brokerage and stock holding
- Depository services, housing finance and book building
- Hire purchases and installment credit
- Financial and performance guarantees
- Loan syndicating and credit rating
Characteristics of Financial Services
Financial services are usually customer focused. Financial Services are provided, depending on the need of customer for example, leasing finance service may be needed by an industrial customer, while merchant banker’s services may be needed by a company issuing new equity share in the market.
Financial services firms like other service firms continuously remain in touch with their customers, so that they can design products which can cater to the specific needs of their customers.
Financial services are intangible in nature. In a highly competitive global environment, brand image is very important. Unless the financial institutions providing financial products and services have good image, enjoying the confidence of their clients, they may not be successful.
Production of financial services and delivery of these services have to be concomitant. Both these functions i.e. production of new and innovative financial services and supplying of these services are to be performed simultaneously.
Perishable in nature
Like other services, financial services also require a match between demand and supply. Services cannot be stored. They have to be supplied when customers need them.
Dominance of human element
Financial services are dominated by human element. Thus, financial services are labour intensive. It requires competent and skilled personnel to market the quality financial products.
Financial services can be of three types i.e. a fund based or a fee-based or both. In case of fee-based services, the advisory function is dominant. Issue management, registrar of issue, merchant banking, pricing of securities etc. are few examples of advisory financial services.
Financial services are customized services. It cannot be uniform for all clients. Financial services vary from one client to other. Institutional client requirements differ from individual client. After analysing the needs of the clients, financial institutions offer customised financial services to the clients.
Financial service industry is an information based industry. It involves creation, dissemination and use of information. Information is an essential component in the production of financial services.
Functions of Financial Services
Financial services, through the network of financial institutions, financial markets and financial instruments serve the needs of individuals, institutions and corporate.
In essence, orderly functioning of the financial system depends to a great deal, on the range and the quality of financial services extended by the financial intermediaries. Specifically financial services perform following functions for the orderly development of an economy.
Mobilization of funds
A financial service helps in mobilizing fund from investors, individual, institutions and corporate entities. These funds are mobilized through different financial instruments like equity shares, bonds, mutual funds etc.
Effective utilization of funds
These financial services also help in effective utilization of mobilized funds. Financial services helps in this regard through services like factoring, securitization, credit rating etc. Services of Credit Rating Company enables investors to make wise and informed decisions related to investment. Similarly merchant banking services helps companies in mergers and acquisitions.
Financial services like insurance helps in reduction of risk by transferring risk to those who are more willing to bear it.
Enhancement of economic development
A financial service helps in economic development of the country by mobilization and deployment of funds. Ideal savings of individuals are channelized into productive investment through financial services.
Provision of liquidity
The financial service industry promotes liquidity in the financial system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial assets into liquid cash.
Creation of employment opportunities
The financial service industry creates and provides employment opportunities to millions of people all over the world.
Classification of Financial Services
The term “financial services” refers to an assortment of institutions that provide the means for people to save for the future, hedge against risks, acquire capital for consumption and organize capital for investment.
Financial services cover wide range of activities like fund raising, funds deployment, credit rating, underwriting, merchant banking, depository, mutual fund, book building etc.
Financial services can be broadly classified as:
Traditional Financial Services
It includes services rendered for both money and capital market, which can be grouped under two heads:
Fund Based Services
In fund-based services the firm raises funds through debt, equity, deposits and the bank invests the funds in securities or lends to those who are in need of capital.
Fund based Services are the activities which come under the following:
- Primary market activities
- Secondary market activities
- Foreign exchange market activities
- Specialized financial services activities
- Financial engineering activities.
The important fund based services include:
- Equipment Leasing / Finance
- Hire Purchase and Consumer Credit
- Bill Discounting
- Venture Capital
- Housing Finance
- Insurance Services
- Factoring etc.
Fee Based Services
Fee based financial services are those services wherein financial institutions operate in specialized fields to earn a substantial income in the form of fees or dividends or brokerage on operations.
The major fee based financial services are as follow:
- Managing Capital Issues according to SEBI guidelines
- Making arrangements of funds from financial institutions to meet the project cost and working capital
- Making arrangements for the placement of capital and debt instruments with investment institutions
- Assisting in the process of getting all government and legislative clearances.· Managing the portfolio
The fee based/advisory services include:
- Issue Management
- Portfolio Management
- Corporate Counseling
- Loan Syndication
- Merger and Acquisition
- Capital Restructuring
- Credit Rating
- Stock broking etc.
Modern financial services
Modern financial services include innumerable activities like:
- Rendering project advisory services.
- Planning for mergers and acquisitions.
- Guiding corporate customers in capital restructuring.
- Acting as Trustees to Debenture holders.
- Recommending suitable changes in financial structure.
- Structuring the financial collaboration through joint ventures
- Rehabilitating and reconstructing sick companies through reconstruction.
- Hedging of risks through derivative trading.
- Managing portfolio of public sector corporations.
- Asset liability management.
- Undertaking risk management services through insurance.
- Advising clients for selecting the best source of funds.
- Guiding clients for determining the optimum debt-equity mix.
- Undertaking specialized services like credit rating, underwriting, registration and transfers, clearing services, custodian services etc.
Challenges to Indian Financial Service Sector
Financial service in India is industry characterized by increasingly vibrant public and private-sector institutions. A large number of banks and non-banking finance companies (NBFC) are providing a variety of financial services to both individual and institutional clients.
Therefore, the financial service industry will be facing a new, demanding competitive map, which will create challenges for financial service providers in India.
Angel Cano (2010) has identified following challenges to financial service industry in India:
Markets are segmented in unconventional ways
The classical financial services segments are affinities such as chartered accountants, Independent Financial Analysts or insurance agents. These are not the most effective groupings in India because the linkages between communities, localities and religious sects are often stronger than those between occupations.
Changes in society and relationship patterns
Deep changes in consumer preferences will determine how financial institutions reach out to their customers and relate to them. This will mean evolving towards a more efficient, more productive distribution model.
Talent pool is shallow and itinerant
Most financial services businesses require high quality, intelligent people. These are hard to find and already work in high paying multinationals. It is common to have 100% attrition which means that the sales force gets replaced each year. In such circumstances how can one build sustainable institutional capabilities?
Tougher regulatory and oversight standards
Tougher regulatory and oversight standards will materialize as increased capital, liquidity and provisioning requirements and more stringent consumer protection. The main consequence will be greater pressure on banks’ returns, forcing them to being more selective in allocating scarce resources, in particular, capital, which will become increasingly scarce.
Roles Played by Financial Services
The institutions that handle financial transactions, such as investments, loans, credits, deposits, and funds are known as financial institutions. An organization that aims at setting up and providing a smooth, well-organized, and cost-effective association between depositors and investors is known as a financial system.
A financial system comprises all types of investing institutions that include financial services, financial markets, financial institutions, and financial instruments. A financial asset is used for manufacture or expenditure or additional establishment of assets. Financial markets assist in the buying and selling of financial services claims, assets, and securities.
Nearly everyone has an experience with any of the financial institutions in his/her life. Things related to finance with the exchange of currencies, taking a loan, depositing money, or even transferring it from one place to another is done through a mediator known as the financial institution. Here, are the types of financial institutions and the way they are functioning in the whole financial system.
Development of the Economy
As has already been discussed earlier in this chapter that financial services and institutions play a crucial role in the growth and development of a country’s economy. There are several institutions which are associated with the development of the economy. These are:
These are the type of banks that allow a customer to deposit their money with them with the assurance of security of the money that has been deposited in the bank. These banks provide customers with all the basic financial services like loans, investments, deposits, and savings. Having a physical value of money cannot be secured as there can be a mishap where a person may lose their money, hence security is provided by these banks.
In addition, they also provide an interest to the customers over the deposits with the banks. Therefore, a customer holds no responsibility for the security of the money he/she has deposited with a bank instead the bank is now responsible for securing the money.
However, customers can make transactions and withdraw their money at any time until there is any obligation in the terms and conditions. So the flow of money has become smooth and the services are easy to be availed as per the need and convenience.
Commercial banks also make loans available for all eligible customers who can use that money for their personal requirements, studies, home and car purchase, and business expansions. Instead of it, banks charge interest on the loans offered to customers. These banks earn money through the interest imposed on customers for loans availed and thus, are known as commercial banks.
Banks also work as a mediator between two nations of two parties where banks ensure complete, smooth, and secure transactions of money. Not just debt card which is provided by banks, where people can buy any good from anywhere they want but also provide a service for fund transfer from one place to another.
Banks also provide inter-bank facilities where a “cheque” can be considered as a promissory note of paying money by one party to another. In case, the cheque doesn’t have the name and symbol of a bank, it doesn’t mean anything to any organization.
Electronic fund transfer is done through banks where people don’t need any physical cash to be transferred which will have another security issue. Therefore, the banks have made a lot of financial services easier for customers that enable easy, smooth, convenient, fast, and secure transactions and the flow of money in the country, which leads to the economic development of the country.
The failure of the stock market in 1929 and the Great Depression caused the United States government to increase financial market regulation. As a result, The Glass-Steagall Act of 1933 came into existence. While investment banks may be called “banks”, their working is very distinctive from what is of any other commercial bank which takes in deposits.
These types of banks work as a mediator with different types of services that are being provided to businesses and governments. This may have underwriting debt and equity offerings, and performing as a mediator between the issuer of bonds and the investor. These banks also facilitate expanding markets, accelerating mergers and other corporate restructuring, and performing as a broker for corporate consumers.
As a simple agreement, investment banks target initial public offerings (IPOs) and large public and private share offerings. Conventionally, investment banks don’t associate with the common people. Some well-known investment banking firms are JP Morgan, Chase Bank, Bank of America, Citi Group, Morgan Stanley, and Goldman Sachs, investment banks are accountable for less governance than commercial banks.
Although investment banks function under the influence of certain managing bodies, like the Securities and Exchange Commission, FINRA, and the US Treasury. In India, investment banks have to work within SEBI, RBI guidelines.
Insurance firms pool risks by gathering premiums from a bigger group of clients who want to secure themselves and their family members from any unexpected loss, like an accident or sudden death. Insurance companies offer various insurance products designed differently as per the needs of people. Insurance companies earn their profits on the probability of a low mortality rate for their customers.
While on the other hand, people who get insured by buying an insurance product get the benefit of sharing the risk of accident, disease, and death. In case, if a person who has got an insurance policy dies, his/her beneficiary will get money as stated in the terms and conditions. Therefore, insurance companies also play a significant role in the development of the economy by providing insuring the lives of people.
Securities transactions between buyer and seller are facilitated through a broker, who acts as an intermediary. After successful transactions of securities, brokerage companies are compensated, in the form of commission. When a trade order for a stock is carried out, the individual has to pay a transaction fee for the efforts of the brokerage company.
Brokerage includes portfolio management, investment advice, and execution of trade. The customer is liable to pay a significant commission on each transaction. The broker who allows investors to make their research while investing, the trade commission is much smaller.
A mutual fund is a collective investment scheme that professionally manages a pool of money from many investors to purchase securities. Also known as investment companies or registered investment companies, mutual funds are applied only to those collective investment modes that are regulated and sold to the general public. Mutual funds are open-ended and the stockholders can buy or sell shares at any time.
However, this can be done by redeeming shares from the fund itself, rather than on an exchange. By investing in mutual funds, one can easily diversify the portfolio across a large number of securities to minimize risk.
The asset class that consists of equity securities and debt in operating companies that are not publicly traded on a stock exchange is called private equity. The private equity investment is usually made by either a private equity firm, a venture capital firm, or an angel investor. Each type of investor has its own set of goals, preferences, and strategies for investment.
However, all aim to provide working capital to the target company to support expansion, new product development, operations management, or ownership. Private equity is also often clustered into a larger group called private capital, to describe capital supporting any long-term, illiquid investment strategy.
Financial capital provided to early-stage, high-potential, growth startup companies is known as Venture capital (VC). The VC fund produces money by retaining equity in companies in which it invests. VC is an attractive option for new companies that are too small to raise capital in the public markets or secure a bank loan or complete a debt offering.
In exchange for the high risk that venture capitalists bear by investing in smaller companies, venture capitalists usually get substantial control over decisions made in the company. In addition, they may also hold a significant portion of the company’s ownership.
Financial institutions that provide banking services without meeting the legal definition of a bank are known as non-bank financial companies (NBFCs). Depending on the jurisdiction, these institutions are constrained from taking deposits from the public.
However, the operations of these institutions are often covered under nations’ banking regulations. Specific banking products offered by NBFCs may include services such as loans and credit facilities, savings products, investments, and money transfer services.
Savings and loan associations, also known as S&Ls or thrifts, are one example of NBFC that offer lower borrowing rates and higher interest rates as compared to commercial banks.
As we have already discussed that the financial services industry plays an important role in the growth and success of an economy. Since a government is accountable for the economic development of a country, it also ensures the government’s welfare through its constant contribution. Government policies work as a regulator of the services offered in the financial market.
In addition, Government imposes its policies to cater to the needs of the financial market and improve the economic condition of a country through the financial market. It can also be said that financial services are offered keeping in mind the norms and policies of the government and its current policies.
Therefore, financial services play a crucial role in the welfare of the government. In India, the Reserve Bank of India is the apex body that controls and regulates all banks and the banking system and helps the government in monitoring and accelerates the growth of the economy by introducing constant changes through various instruments, such as repo rate, reverse rate, bank rate, cash reserve ratio, and interest rate.
Other government bodies help in the welfare of the government by monitoring and regulating the financial market and services, such as the Security Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA).
The recently imposed policy by the Government of India “Jan Dhan Yojna” through the financial market is an example of the contribution of financial services to the government’s welfare as it was only possible through the cooperation of the financial services industry.
Regulation of Financial Services
With the wide scope of financial services, it becomes obligatory to regulate financial services and the financial industry in the interest of the people and country. For the people working in financial services, this regulatory scenario is complex and progressing and organizations have to devote more resources to governance, risk, and agreement issues. Regulation remains a major problem for the financial services industry and its regulators. Currently, we are facing an era of unparalleled regulatory change, in terms of several new initiatives, their toughness, and the interchange among different regulations.
The main aim of financial regulators is as follows:
- Sustaining assurance in the financial system
- Contributing to the safety and improvement of steadiness of the financial system
- Protecting the suitable degree of security for consumers
- Dropping the degree to which a regulated business can be used for a reason connected with economic crime
- Ensuring fair practices of the financial transactions in the market.
Regulatory Agencies in India
The following are the major regulatory authority and governing bodies in India that regulate the functioning of the financial system and market:
- Securities and Exchange Board of India (SEBI)
- Reserve Bank of India
- Ministry of Finance
- Insurance Regulatory and Development Authority (IRDA)
- FMC (Forward Markets Commission)
Security and Exchange Board of India
The Security and Exchange Board of India (SEBI) plays an important role in the regulation of the securities market in India. It was formed in the year 1988.
It was established aiming at safeguarding the interest of investors in the securities market and promoting trade and development. It regulates the functioning of the entire securities market in India.
Reserve Bank of India
Reserve Bank of India (RBI) was established in the year 1935 aiming at regulating the issue of Bank Notes and monitoring the currency, financial, and credit system of the country. It plays a significant role in the economy and economic growth by introducing changes in its policies from time to time.
It controls the financial market through its monetary policy and various instruments, such as bank rate, cash reserve ratio (CRR), repo rate, and reverse repo rate. Initially, it started its operation in Calcutta, but later on, it permanently shifted to Mumbai in 1937. It was fully owned by the Government of India after its nationalization in 1949.
Ministry of Finance
Ministry of Finance is a part of the Government of India which takes care of the financial stability and system in the country. It is accountable for fiscal policies and controlling the financial system to accelerate financial growth.
It is also responsible for financial stability, economic growth, and financial policies like fiscal policies in India. There are so many other government bodies that work under the regulations and guidelines of the Ministry of Finance.
Insurance Regulatory and Development Authority (IRDA) is a regulatory authority that looks after and regulates insurance practices and policies in India. The objectives of IRDA are to safeguard the interest of policyholders and regulate, promote, and ensure the orderly growth of the insurance industry.
FMC (Forward Markets Commission)
FMC is a regulatory authority, headquartered in Mumbai, controlled by the Ministry of Finance, Government of India. It is a regulator of commodity futures markets in India. Tacks functions of FMC are as follows:
- Keeping forward markets under observation
- Publishing information related to the trading conditions of commodities
- Undertaking the inspection of the accounts and other documents
- Improving the organisation and working of forward markets
FMC comes under the Ministry of Consumer Affairs, Food, and Public Distribution. This is because futures that are traded in India majorly form part of the food commodities. FMC comes under Forward Contracts (Regulation) Act 1952. As per this Act, “the Commission should consist of a minimum of two and maximum of four members appointed by the Central Government. The chairman of the FMC is nominated by the central government.”
Significance of Marketing for Business Growth
The contribution of marketing to the growth and success of any business is significant and undeniable. Therefore, it has become very important to market products and services not only in the national boundaries but also in the international market to sustain the business and for its growth. Rather, international boundaries now mean nothing with time.
This entire world seems like a huge village with people dotted all around the world. This means organizations have expanded their businesses to different parts of the world. But just by transcending some barriers, an organization should not expect overwhelming success unless it is completely sure about various factors that will improve its business earnings and reputation worldwide.
This is an aspect that the chapter widely focuses upon. Social, legal, and other moral factors are also a big hindrance to conducting a business in foreign land. These are the factors that need to be learned and understood to cross national boundaries. The important changes that a business needs to do to increase its learning and earning curve, are appropriately mentioned in the chapter.
Decision-making plays an important role in the functioning and marketing of financial services internationally. Major problems faced by the organization while marketing its financial products and services can be resolved by the appropriate decision-making and global strategies.
This Begins with the internationalization of financial services. It further explains the drivers of internationalization. It also talks about globalization strategies. At the end of the chapter, it explains the selection and implementation of strategies.
Internationalization of Financial Services
With the advent of globalization, there has been increasing pressure sensed by countries along with encouragement to evaluate the internationalization of financial services i.e., the domestic market open to international competition and the increase of cross-border provisions. The focus on financial services has been made by the regional agreements.
Since the early 1990s, the fast international enlargement by financial services firms has taken place in the lack of any consistent evidence. Consequently, such growth and enlargements are associated with performance gains.
Opportunism and replication of the businesses and strategies have been identified as the key drivers of cross-border expansions, suggesting that internationalization strategies need to be focused on a more rigorous analysis of the resources of a foreign country’s value creation. Therefore, to sustain and ensure growth in the international market strategies need to be uniquely formed for the competitive advantages of individual financial services organisations.
There are fears raised by the presence of internationalization namely the threat to a domestic financial firm and financial systems, a loss of monetary autonomy, and underestimating the prudential controls with the increase of volatility of capital flows. Most of these cases, though, are not related to internationalization.
It is not mainly related to internationalization, but to financial liberation and three of them have been defined as follows:
- Deregulation in the domestic financial market lets the market forces eliminate the controls over deposit rates and credit allocation, and generally the reduction of the role of the state in the domestic financial system.
- Capital liberalization account gets rid of the restrictions of currency convertibility.
- Internationalization of financial services removes discrimination in the treatment of foreign and domestic financial service providers, creating a congenial ground for financial services. The internationalization of financial services is a major challenge for strengthening and broadening the financial system in developing countries.
There has been substantial support for the suggestion that internationalization can help countries in constructing financial systems that are stable and efficient by bringing in international standards and practices. On the other hand, it has been researched the risks that internationalization may carry for those countries where adequate regulatory structures are absent.
Drivers of Internationalisation
There have been a lot of stages of development through which the internationalization of higher education has moved in the past few decades. Thirty years ago with the introduction of cost-free education for international students, there was a move to the United Kingdom and within Europe for cooperation and exchange under the impetus of European programs like ERASMUS (European Community Action Scheme for the Mobility of University Students).
Then fifteen years back, it was a competition that raised cooperation involving the active recruitment of international students as a bigger issue of internationalization. At and around the same time Anglo Saxon countries deepened their operations of cross-border operations making the institutions and programs move abroad which was about developing franchise operations and branch campuses.
The focus of internationalization has shifted back in the past few years with an increase in the demands for global knowledge of economy, culture, and technology. The competition has gone global with international students being continuously targeted by the BRICS countries, such as Brazil, China, Russia, India, and South Africa along with other South Asian competitors like South Korea, Malaysia, Taiwan, and Singapore. The countries that invested big are now receiving big too.
In addition, there has been an increase in mass recruitment with a hugely selective based approach to absorbing highly skilled and talented brains. The approach invented by Australia and the United Kingdom some thirty years back is now being impetuously followed by other countries, such as Sweden, Denmark, and the Netherlands. Talking about Australia, the United Kingdom, and Canada, have undergone a huge shift in qualitative as compared to quantitative standards for recruitment of international studies.
There is an increased concern for the United States in terms of receiving students and sending them abroad about the falling standards of effectiveness and its attractiveness as a destination for scholars and students. The newly spotted trend of graduates from India and China returning to their homes also increases this concern.
Over the last two decades, the concept of the internationalization of higher education has moved from the fringes of institutional interest to the very core. In the late 1970s up to the mid-1980s, activities that can be described as internationalization were usually neither called that nor carried high prestige and were rather isolated and unrelated.
In the late 1980s changes occurred. Internationalization was invented and promoted with its importance ever increasing. New components were added to its multidimensional body over the past two decades so that it moved from being about the simple exchange of students to the big business of recruitment, and from activities impacting an incredibly small elite group to a mass phenomenon.
The main form of internationalization has been driven by related targets and activities as in the case of Bologna target aiming for the mobility of the twenty percent of the students with a higher number of international students.
There used to be a drive in the late 1990s which was named “Internationalisation at Home” focusing on the internationalization of the curriculum with the teaching and learning process as compared to completely interpreting internationalizing altogether. The movement spread out to resonate places beyond Europe, even in places like Australia and the United States, the impact; however, being very limited.
The economy worldwide still focuses on the internationalization of the curriculum with the knowledge plus skills of the graduates to show that they live and can operate in a more connected world.
Defining the intercultural and international competencies for the students helps them to be included in the curriculum and be assessed. These are the questions that have to be focused upon as compared to the other related goals which completely dominate the internationalization strategies now.
Two types of drivers can be studied to have a deep understanding of factors that affect internationalization. They are as follows:
- Internal Drivers: Internal drivers internally affect the business of an organization while expanding in the global market. These drivers can affect an organization and its business in the international market positively and negatively. Therefore, an organization needs to be very careful while marketing and launching its products in the international market.
Unlike external drivers, these drivers are controllable to some extent. These drivers include HR characteristics and policies, the firm’s set of resources, product features, prices of products and services, and international marketing strategies of an organization.
- External Drivers: External drivers refer to factors that are uncontrollable and completely dependent on the external environment. These drivers affect an organization and its business in the international market as per the prevailing market conditions.
Various external drivers can affect a business, such as characteristics of the competitive environment, availability of resources, degree of competition, demand for the products and services, consumer’s bargaining power, national and international trade policies, cultural and climatic changes, government policies, and trade barriers.
In the present era, globalization has forced financial institutions to cultivate strategic partnerships to gain a competitive edge over others in the market. For this, organizations need to focus on developing globalization strategies that focus on achieving growth across borders. To enter into new markets in different countries, organizations can adopt the following strategies:
Mergers and Acquisitions
These have become popular strategies in the last two decades to expand the scope of business for an organization. A merger can be defined as the combination of two or more organizations, in which both organizations are dissolved and their assets and liabilities are combined to form a new business entity.
An acquisition, on the other hand, is the process of gaining partial or full control of one organization by another. In most cases, acquisitions are unfriendly as one organization tries to take over another organization by adopting hostile measures, which may not be in the interest of the acquired organization.
A joint venture can be defined as a creation of an entity by combining two or more organizations that want to attain similar objectives for a specific period. In other words, it is a cooperative business agreement between two organizations to fulfill their mutual needs. The joint venture strategy allows organizations to share their technological skills and specific knowledge; and represents a potential source for the growth of the organizations.
A strategic alliance is a mutual agreement between two or more organizations. According to Yoshino and Rangan, “A strategic alliance is a partnership between two or more organizations that unite to pursue a set of agreed-upon goals but remain independent after the formation of the alliance to contribute and to share benefits continuingly in one or more key strategic areas.” Strategic alliances help organizations to gain a competitive advantage by enabling them to enter new markets, obstruct competitors, and generate higher revenues.
An important cause for financial institutions to operate successfully in international markets is their capability to serve highly sophisticated, better-educated, and powerful consumers who have become dependent on the technology and ease of using it.
Financial institutions failing to understand the need to focus on hat fail-to-consumer-driven markets are either struggling to survive or have ceased to exist in a new global financial services sector that has been completely transformed due to changes in deregulations.
Process of Strategy Implementation
A financial organization needs to select a strategy as per the products and services produced by it. After selecting the appropriate strategy, it is essential to implement it effectively to get the desired results. The implementation of strategies involves the application of strategies designed by the top management of the organization. Several activities put a strategy in motion to achieve organizational goals.
According to Steiner, “the implementation process covers the entire managerial activities including such matters as motivation, compensation, management appraisal, and control processes.”
The process of strategy implementation is discussed as follows:
After selecting a strategy, its activation is done by dividing strategies into plans, programs, projects, policies, procedures, and rules and regulations. For instance, a bank has adopted an expansion strategy; the plans can be setting up new branches and venturing into international markets.
Change is an essential element as every organization has to deal with the dynamic forces present inside and outside the organization. An organization operates in two types of environment namely internal and external and follows various techniques to scan changes in the environment. Changes in the environment can occur anytime.
For example, it can occur at the time of implementing the strategy. The procedure of change management requires the identification of a change to prepare the organization to manage the change resistance. Organizations should see change as a positive process rather than a negative thing because it results in learning. The change also offers various opportunities, such as the deregulation of strict laws that were hindering the organization’s work process.
It refers to achieving organizational effectiveness that implies a degree to which an organization can fulfill its objectives. It is a result of the implementation process.
For instance, a bank has planned to achieve a sales growth of 15% in a year and as the year passed, the bank measured that it has achieved 18% sales growth. In this case, it can be said that the bank has achieved effectiveness. The bank will be called ineffective if the sales growth is less than 15%.
Organizational effectiveness cannot be reached without the implementation process. The implementation of the strategies helps in achieving the goals of the organization.