School of Management-Essay Solution


School of Management- Essay Solution

(6143 Words)


School of Management (PG)

Assessment Cover Sheet


PIN or Student ID




Date Due


16thDecember 2005


Student Name

Ting Kong Kwan  

No of Words




Programme and Centre

Guildford FT MSc IBM

Word Limit


Table of contents & list of references will

not be included in the word count.


The use of appendices is not permitted in

assignments  and students should be

aware that work submitted as an

appendix in an exam project will not

count towards the final mark of the exam project.



Module MSc Corporate Strategy Examination project
Title In this examination project, students are required to choose and analyse an organisation which grown through the use of mergers and/or acquisitions. In particular, students are required to:

·        Consider the internal and external drivers of such merger and acquisition activity;

·        Evaluate the main strengths and weaknesses of this form of growth strategy;

·        Reach robust conclusions as to whether the organisation under consideration is likely to achieve a sustainable competitive advantage through the adoption of such growth strategies.


Learning Outcomes:  On successful completion of this assessment, the student should be able to demonstrate:


Number Outcome type Outcome
1 Intellectual & cognitive skills Think both theoretically and strategically about business.


2 Intellectual & cognitive skills Critical evaluation of business facts and business research data.
3 Intellectual & cognitive skills Ability to distinguish between assumptions and evidence in research publications and business reports.
4 Professional & practical skills Ability to analyse a company’s business environment and identify opportunities and threats at industry level.
5 Professional & practical skills Ability to analyse a company’s internal capabilities and resources.
8 Knowledge & understanding Knowledge and understanding of the impact of contextual forces on organisations and business operations, including legal systems; ethical, economic, environmental, social & technological change issues; corporate governance and international developments.
9 Knowledge & understanding Appreciation of the development of appropriate business policies and strategies within a changing context to meet stakeholder interests.


Basis of Assessment

Markers are required to put comments in all the sections


Presentation and Style (B1)

Marker’s comment/s

Poor presentation, poor referencing. Weak structure.




Evidence of Reading/Application of Theory (B2)

Marker’s comment/s

Some discussion of mergers and acquisitions but it was weak and underdeveloped and never applied. Nothing of any note on competitive advantage.




Discussion of the topic (B3)

Marker’s comment/s

Never really answered much of the question. Too descriptive and lacking in depth and detail.






Use of Applied Examples in Context (B4)

Marker’s comment/s


Relevant example, but only ever anecdotal and descriptive.



Summary or Conclusion (B5)

Marker’s comment/s

Weak and underdeveloped.





Markers:  Please note marks must be put on spreadsheet and not on this cover sheet.


 Students:  The mark for this assessment will be available on the SOME website



General Comments: (Markers are required to complete this section)

Basis of Assessment: Examination Project


The marking scheme is designed as a ‘guide’ for markers and should NOTbe used exclusively as a prescriptive template. The markers should also use their knowledge of the subject area and experience to judge whether the question has been answered correctly, as well as assessing the quality of the answer presented.


Presentation and Style  (10)

Should be clearly written and easy to read. Any tables and figures should be explained. There should be an appropriate structure. Marks should be deducted if there is too much decoration or colour. The Harvard referencing system should be adopted.


Inappropriate or unclear structure, referencing minimal or inaccurate      4 or less

Appropriate structure, clear articulation, referencing acceptable                         5 to 7

Appropriate structure, clear articulation, correctly/fully referenced                      8+


Evidence of Reading/Application of Theory  (20)
Students must use referencing to demonstrate that they have read beyond the set textbooks for the module. There should be references to journal articles and specialist corporate strategy and business texts.

Reference to set texts and internet sources only                               8 or less

Reference to set text and other books                                       9 to 14

Reference to texts beyond those set and to academic &

business articles                                                                                    15+


Discussion of the topic (30)

There should be a critically evaluative discussion of the project’s topic, not simply description. Good piece of work would have compared and contrasted different literature sources and developed a logical argument.


Wholly descriptive                                                                                8 or less

Mainly descriptive but containing some discussion                                  9 to 15

Roughly equal amounts of description and critical evaluation       16 to 21

Critically evaluative discussion with necessary description                      22+


Use of Applied Examples in Context   (20)

In-depth discussion of examples and explaining how they support different theoretical statements and how they relate to the original questions.


Inappropriate choice of example                                                           8 or less

Limited discussion of example                                                   9 to 14

Appropriate example, discussed in relation to the rest

of the project                                                                                        15+


Summary or Conclusion   (20)

Summarizes the key points from the discussion and draws them together to demonstrate an understanding of the literature and the formulation of an informed opinion. Good synthesis of findings

Little reference to the body of the project                                           8 or less

Reference to main themes in text                                                           9 to 14

Clear drawing together of theory and applied examples                    15+




Corporate Strategy




Final Assignment



URN: 3550842
























Introduction                                               7


Motivation for mergers                               7

-Theoretical motivations                            7-8

-Diversification of activities                        8

-Complementary nature                             9


Business Model                                           9


Company profiles and                                 9

the reasons for the

Citicorp-Travellers Merger


Merger-Announcement Effects                    9



Strategies involved                                      10


Core Competencies                                     10



Post-merger events-(Spin-off)                      11


Reinventing strategy                                    11


Leadership                                                   12


Size of Citigroup                                           13


SWOT Analysis                                             13


Innovative Strategy                                        14


Bank size and strategy                                  14


Risk involved                                                 15


Future Prospect & Conclusion                    16-18




Bibliography                                                                                                             19 – 21







Citicorp and Travellers Group completed their $70 billion merger in 1998 , the year which has been often described in the press as the year of the mega-mergers, joining these two financial institutions to form the second largest corporate merger in history. Citigroup, the second largest commercial bank in the United States and the world’s prominent credit card issuer tied with Travellers Group, a financial conglomerate that offered insurance and investment banking services. Their merger created ContiGroup which serves one hundred million customers in the world with their global network. What are the driving forces behind this move? What effects can be created by this step? What kind of events occurred afterwards? How about the future prospective of this combination? In the following paper, it is my honour to do this as my final project, to explore and evaluate this event.


Theoretical Motivations


Bergers(1999)  reviews the literature on both the cause and consequence of consolidation of financial services through mergers and acquisitions. The advantage includes informational advantages, economies of scale or scope, diversification, cross-selling and cross marketing.

First of all, the oversupply of financial capital not readily used in almost all industries has been quite clear during that period of time. There has been too many banks, airlines etc. Bank mergers can increase value by reducing costs and /or increasing revenues. Cost reductions can be achieved by eliminating redundant managerial position, closing overlapping bank branches, vacating redundant head offices facilities, and consolidating back office functions like check clearing. Cost-cutting potential may be greater when merging bank have geographic overlap. Bank senior executives frequently say that mergers with considerable operations can be long. Restructuring and consolidation costs can lead to deterioration in short-term performance even though long-term performance is expected to improve.


In the nearly two decades since the banking industry was deregulated, thousands of institutions large and small have been absorbed or shuttered. The waves of consolidation that nearly halved the number of U.S. banks since the mid-1980s were driven by resources and the push for improvements in efficiency and greater economies of scale. But the transformation remains far from complete. For bankers and their customers standing at the dawn of the millennium, the breakdown of barriers through technological advances and the overhaul of the US financial services laws have again altered the industry’s fundamental dynamics. The bigger is better strategy is no longer, in itself, sufficient. In an ever-more tightly wired world, data mining, cross selling, and product line extension are the new bywords. One-stop shopping, industry experts say, will increasingly be the financial services norm. Bankers seeking growth already have begun to look beyond the traditional boundaries of their business toward insurance sales, asset management, and innovative marketing techniques.


Secondly, the merger boom of 1998 was, according to J.P. Morgan, stock-driven, i.e. acquired firms were accepting stock offers more often than cash. In fact, according to Colvin (1999), stocks accounted for 67% of the value of the deals as opposed to 7% in 1988, by far the highest level ever in a decade.


Thirdly, globalisation represented by the elimination of trade barriers, reduction in taxes and fees, higher mobility of funds, and the wealth of information available to investors worldwide and the resulting increased international competition in financial service has been a consideration of the merger.




The combination of Citicorp’s banking business with Travellers Group’s insurance and investment banking business creates tremendous opportunities to cross-market their products. On the corporate side, the global presence of Salomon

Smith Barney in equity underwriting would help Citibank’s corporate banking business. Citigroup can also offer individuals a one-stop shopping approach to financial services by allowing consumers to take out life insurance, buy stocks, pay bills, and obtain credit cards with a single visit to a branch office.


On the other hand, literature on M&A activity in general distinguishes between value enhancing and non-value enhancing motives for mergers. Generally , there are five value-enhancing motives for M&As, which includes market power, economies of scale, economies of scope, financial synergies, and savings in transaction costs. The non-value enhancing motives are related to managerial or agency motives.

The fundamental issue of a merger is to create value. From a strategic standpoint, developing a sustainable competitive advantage, which is a result of core competencies of the company, creates value.


The empirical literature on strategy illustrates that the performance of post-merger firms is highly correlated with the degree to which business units within the combination are related to one another (Singh and Montgomery 1987;Seth 1990;Shelton 1988). Furthermore, the degree to which business units are related is in turn a function of how they are related product-wise as well as geographically.


Saunders and Walter(1994) show that the risk reduction can be achieved by combining banks with insurance firms. Hughes et al. (1999) in addition added that diversification reduces the resources required to manage risk, resulting in lower cost. Melbourne et al.(1999) also argue that an expanded scope may benefit firms facing significant uncertainty in the skills required for future success. Greater diversity increases the probability of having the right skills to compete in new activities that may arise in the future.


Complementary Nature ?


In addition to the benefits from risk reduction, the complementary nature of banking and insurance may produce cost and revenue efficiencies. Bank use private information when accepting and pricing loans for businesses (1995) and consumers(1999). Todd and Murray (1998) argue that a bank’s established customer base and customer knowledge provides bank insurance  firms with a competitive advantage. Citibank is a well-established bank with decades of history handling customer’s information, the data they are holding is making them better off than other insurers. In addition to informational advantages,  (1985) argues that the extensive branch system allows a bank to deliver insurance products at lower costs than a traditional insurer. Citibank although mainly based in the States, has a worldwide bank networks, from Toronto to Tel Aviv, from Dublin to Dresden, from Singapore to Santiago, they have got the largest number of branches in the world among American banks. The company has over 275000 employees over 200 millions customers’ accounts in 100 countries.


Business model


In order to understand the strengths and weaknesses of the merger, we have to first understand the model of Citigroup. It uses the “diversified financial services business model” first invented by Prudential in the late seventies. Simply put, this model attempts to conglomerate many types of finance companies, such as stock brokers, banks, insurance companies, and others. This is done because each of those businesses do better or worse at different times of the business cycle, and so owning all of them balances things out and creates in theory less earnings volatility. This is also done because customers usually use many different kinds of financial products and attempting to convince them to use more products from the same company sells more.


Company Profile

Citigroup is the first financial services company to bring together banking, insurance and investments under one umbrella. It has many products and many different brands that puts together the company including Citibank, Discards, CitiFinancial etc.



Merger Announcement’s Effect Market power effects how the market values them?

Recently, (2001) did a research analysing mergers between European financial institutions during 1988-2000, show that domestic mergers have – on average -significantly positive combined (bidder plus target) announcement effects, which were weaker, however, in the last few years (i.e. 1998-2000). They also found that diversifying domestic mergers (particularly between banks and insurers) had on average a positive value impact. In line with this evidence, the Citigroup-Travellers merger resulted in an increase in the stock prices of both merger partners (1998). Also,(2000) find a positive effect on combined value. Overall, studies investigating the announcement effect on financial institutions that strive for scope economies point at positive effects of expanding scope – seemingly in contrast to studies focussing on cost or profit efficiency – but this may well reflect market power effects.


The results of the studies that focus on the announcement effects of mergers and

acquisitions reveal the market’s expectation of future cash flow. Two caveats should be emphasised. First, actual performance may differ from market expectations. As This is particularly true for some of the mega-mergers that are

observed today. A lack of data and potentially radical and unprecedented shifts in the

structure of banking give little guidance in interpreting the value consequences of these mergers. As an example, the reported significant positive announcement effects associated with bank-insurance mergers may be difficult to reconcile with the current market sentiment. Second, mergers and acquisitions may change the structure and dynamics of the industry, and the possible increase in the market value of bidders and/or targets could measure a variety of effects other than those related to the expansion of scale and scope, including those linked to a perceived increase in market power of the enlarged institution.


Strategies involved

The companies that are most successful at creating long-term shareholder value tend to be those that systematically make acquisitions through good times and bad ,said by in Harvard Business Review in 2003.  Weill, the COE of Citicorp, became interested in Travellers when he inserted management into that company to oversee operations and cost cutting. He did this due to losses Travellers suffered during Hurricane Andrew, one’s losses made another opportunity and this strategy was considered efficient way to expand.


Creation of a financial supermarket like what Citicorp has done is a diversification of financial products but it is important to understand that diversification initiative must create value for shareholders. Although the share prices of both companies rose after the announcements of the merger, it did not mean that it has created a long-term value for shareholders.

Diversification should create synergy which is Business 1 + Business 2 > Citicorp’s merger with Traveller, an insurance company which is a new business for Citigroup, is aimed to created value. They synergy was to leverage the support activities via this merger including the technology development, procurement and information system and Citicorp did not do this so swiftly. Even seven months after the merger was announced, Citigroup did not combine corporate banking franchises. As mentioned by the Regional Director of British American Tobacco Asia Pacific, merging to capture benefits of scale, one must act fast. Although Citigroup’s response to the combinations in some part swiftly, it was considered slow not to combine the franchises after seven months of merger.


Core Competencies

On the other hand , there are three criteria of core competencies which includes superior customer value, business similar in way related to core competency and difficult to imitate or find substitutes for. It seems that the creation of Citigroup has achieved to a certain extend the above criteria in a way that it did provide something different and it was the first bank in the States providing insurance service to clients. Also, different businesses in the firm like credit cards, mortgage ,insurance, private banking are similar in way related to core competency. Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units.

According to KHZ. Hammonds (2002) , the merger between Citicorp and Travellers has already created 109 billions by corporate restructuring , portfolio management.

In particular, reported in Business Magazine that as a result of the merger, Citigroup was able to centralize computer systems, finance, human resource, project management, and procurement. The company estimates that this effort saved as much as 1 billion.






Spin-off of Travellers…A failure?


Citigroup planned to spin off parts of its Travellers insurance business, which merged with Citicorp in 1998 to form the financial-services giant. In announcing the merger, Citigroup’s chief executive, Sanford Weill, said the deal was about cross-marketing and providing better services to clients. In announcing the spin-off,  Weill said that the parts of the insurance business it’s unloading weren’t as profitable as other units and that the cross-selling synergies really did not work well.

Repeated studies show that well over half of all mergers and acquisitions fail to enhance shareholder value or live up to their promises. A 1999 report by KPMG International analyzing 700 of the most expensive deals from 1996 to 1998 found that 53% actually reduced shareholder value.


Steven Kaplan at University of Chicago believes that there was so much activity in the 1990’s and it was  not surprising to see companies disposing  some of the bad elements. Some experts believe the splits are simply part of the daily business. Divestitures surged along with acquisitions throughout the 1990s, as companies shuffled assets and sold off certain businesses even as they bought others. The only reason spin-offs are more visible now is that the merger market has become not that popular. It is expected that there will be a surge of spin-off transactions.


Other specialists say the spin-offs are not necessarily a sign that the deals did not work efficiently. Companies often spin-off strong businesses to give the units more independence and access to capital. By selling off less profitable units, companies can also devote more resources to their more profitable core operations. It is believed that not all de-mergers are a sign of failure.




Reinventing the industry


The success depends on influencing the customer and competitive value undefined at the deal’s close. Vice Chairman of AOL describes the blended companies’ goal: to “combine our unique mix of creative, editorial and distribution assets to connect, inform and entertain people everywhere, transforming the ways in which they communicate and receive information.” It seems that achieving this is not easy. The companies’ leadership must make the case for the merged entity that maintains its market value and retains sceptical employees. Leaders must likewise continue to steward and promote the value of their individual businesses-it’s hard to recoup a drop in standalone performance, particularly if the value of putting the two companies together takes time to emerge.
Beyond presenting the deal to external and internal stakeholders, the management teams need to pursue two initiatives together. The first pursues short-term objectives-for example, cost reduction, overhead consolidation, or divestment of non-core business units-all typical steps in integrating mergers. Speed matters here-indeed, success in this initiative can help win market confidence and buy time to move more slowly on other fronts. Also, cost reductions can provide funding for longer-term strategic objectives.

The second initiative fleshes out the more strategic objectives of the merger and defines the long-term direction for the new business. Novak, of AOL Time Warner, summarizes the new company’s direction: “Our acquisitions are driven by .how our members communicate, what they want, and how we can best provide that.” AOL Time Warner has already sketched out some of its plans-most of which involve using AOL as a gateway to sell Time Warner entertainment. Novak comments that this clarity of direction helps the merger integration process

Citigroup adopted this dual approach. Created by the merger of Citibank and insurance company Travellers Group, Citigroup’s stated merger objective was to rewrite the rules of the financial services industry by selling just about any customer nearly any type of financial service almost anywhere in the world. Commentators raised concerns over whether customers would see value in broadening the range of products they buy from Citigroup.
Citigroup tackled several short-term objectives immediately. It consolidated credit card operations, cut cost out of Citibank’s marketing and information technology departments, and slashed overhead costs. With these actions, the group bought itself some room for the difficult challenge: to capture more of its customers’ spending on financial products. Two years later, Citigroup-still short of its original revenue objective-has satisfied shareholders with its cost-cutting success.


COE Sandy Wells makes the strategy of Citigroup very know in his opening statements to shareholders in the 2001 Annual Report. He states, “We are now completely focused on our strategic aspiration – to establish trusted relationships with customers, corporations , institutions and governments as we continue to deliver the full spectrum of financial services across our multiple distribution channels.” He went on to talk about how Citigroup has set the standard for the financial services business model, due to the fact that his model is fully exportable and applicable to every major market of the globe.

Employees as owners of the company is the company’s strategy. Two-thirds of Citigroup employees are shareholders in a sense that it helps to align interest between management, employees and other shareholders. That being so, Citigroup is in a good position to expand greatly. They are in a strong growth stage even though they are a well-establish firm. Citigroup annual report, “The opportunity for growth in these emerging market in dramatic and eight six percent of the world’s population lives in emerging market countries.”

It seems that Sanford Wells has a charismatic leadership that is the core of the Citigroup and his successor did well in managing workers. Charismatic leadership is the essence of the success of a firm as it directs and inspire vision of the group. Ironically, when insisting on trust in Citigroup, it was reported that there was  insufficient communication among the co-leaders and it led to an irreparable divergence of views and opinions. It was reported in the press that Reed and Weill actually avoided each other. Subordinates accentuated the rift by “shopping ideas” with the two leaders, which led to further conflict and a resulting decay in the level of trust.


Size of Citigroup

Its size, however, also may prove to be its greatest weakness. In finance, as in seafaring, bigger is not always better. Assets can be a heavy weight to bear when they underperforms. Citicorp itself was at death’s door as recently as 1991 when bad loans torpedoed earnings, its stock sank to single digits, and Reed was sounding out potential rescuers.

Why are these two big companies becoming one really, really big company? Weill and Reed are betting that they can gain what is quaintly known as ”share of wallet” by creating a worldwide brand and a full gamut of homemade products and services. Their big idea is to use Citicorp’s branch network to sell products from Travellers such as insurance and Smith Barney Inc.’s brokerage service, while using Travellers sales agents to push Citicorp products, such as credit cards. For that strategy, scale and breadth are essential.

Companies like Charles Schwab & Co. position themselves as trusted intermediaries, providing a menu of the best financial products available from all sources. The companies whose products the distributor sells focus on doing one thing well, whether it’s mortgages or credit cards.

The emergence of internet technology also undercuts the advantage. consumers are finding gobs of up-to-date market information and access to all manner of financial services on the World Wide Web. There are a number of successful insurance companies currently doing similar things, selling similar product. It poses as a threat to Citigroup.

”In this new virtual community, size matters not,” says E*Trade president Christos M. Cossacks. Neither, he says, do many names and symbols that evoked fuzzy feelings in past generations: ”Some of the older brands just don’t resonate with the Gen-Hers and baby boomers. A mega merger’s not going to change that.”


SWOT Analysis

The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates . As such, it is instrumental in strategy formulation and selection. SWOT analysis is essential to create a strategy.

Strengths are the inherent strengths of a specific company. Weaknesses are the areas that need to improve. Opportunities are the things that allow for future growth. Threats are the changes in the external environments that might affect business operation.

Citigroup has first of all a large market capitalization which was about 242 billions as in 2004. The assets it holds are about 1.48 trillion which enables it to easy access to capital market and debt financing .

Citigroup’s name is recognised almost all over the word and the strong technology research base was an great advantage of it. It has been a technology leader in banking since 1960’s.


Weaknesses include the scandals that have been reported in the press during the late 90’s. Corporate size can be a drawback of growth as the locations worldwide seems to be widespread and tight control over it seems impossible.


Citigroup’s involvement in E-business will be an opportunity for it to develop further and deeper. Citibank is well poised to take advantage of the growing demand for global financial services as it has got numerous branches in 100 countries.


Online scandals and scam websites seem to be threatening the growth of E-business for banking and the risky unstable global market in some countries like Middle East and Russian CIS countries has posed a threat to its growth.




Innovative Strategies /Financial supermarket?

Financial supermarkets was first created by Citigroup .For customers who prefer not to search for other competitors’ products .Citigroup may be able to charge a premium for a branded, customized bundle of products.

But it will take a long time for Travellers and Citicorp to work together cohesively as a single marketing machine. Complicated computer systems must be merged. And managers who are accustomed to maximising the profit of particular lines of business will need to be retrained to support cross-product promotions..

The first movers such as Schwab and Amazon are extremely difficult to emulate because their competitive advantage is multidimensional, consisting of several components: technology, product breadth, scale, customer relationships, knowledge, and implementation capabilities. Not all of these dimensions are visible to the market and are therefore not obvious to competitors. If a competitor was able to see the whole situation, it is feasible that individual dimensions could be copied, but it is extremely difficult and costly to replicate them all. Leaders also tend to engage in continuous innovation and growth, making them fast-moving targets. This analysis is particularly relevant when a broad range of services and expertise is required to manage and deliver the final product. Even Merrill Lynch with all of its internal resources needed to enter into an alliance with Banc One of Ohio to help it manage the banking side of the CMA account.


Citigroup’s Bank Size and Strategy

The main focus strategies are market focus (a particular segment), geographical focus, supply chain focus, and product focus. Citigroup private banking focuses on global high net-worth individuals and offers a sophisticated personalized banking service. Citigroup’s operational strategy is based on customer relationship management through multiple distribution channels, combined with effective outsourcing of most other functions, including bank processing and IT systems. Another focus strategy is to concentrate exclusively on a particular stage in the bank supply chain, such as transactions processing.

The juggernaut strategy is based on size to control the market. The PINS studies demonstrated companies controlling large market shares typically outperform the average return in that industry . Mergers and acquisitions within the same country have been justified on the basis of economies of scale and cross-selling of products, which should lead to greater efficiencies and increased revenues. Although this has seldom been demonstrated in practice.

The banks in death valley will struggle because they will be caught between banks focusing on particular segments and market niches, and by the market power of juggernauts. They are too big to be small, and too small to be big. Banks in death valley must recognize their position, and then formulate a strategy to get out, either by becoming more focused (and perhaps more vulnerable to takeover), or by merging/forming alliances to become a juggernaut. The remaining option, and the ultimate challenge, is to try and become both. Although Citibank has a wide variety of products located differently in the world, it still has a low global presence (3% in 2004).

Analysis of Risk involved

According to the Federal Reserve Board, there are six types of risk which are essential when evaluating a financial services firm .This includes credit risk, liquidity risk, market risk , operational risk, reputation and legal risk. Credit risk is the like hood that an obligation will not be paid and a loss will result. As Citigroup is well diversified with various subordinate firms and due amount has been failing which lowered Citigroup’s risk to a great extend.

Liquidity risk results from bank’s inability to meet payment etc. Citigroup has been offering low interest rate deposit accounts and their high assets holdings would increase their ability to sell something to meet liquidity needs.

Vulnerability of a bank to change in interest rate is called market risk and it is considered into three aspects including security price, interest and foreign exchange risk. According to the annual report in 2004, Citigroup has a high percentage of transaction occurring outside the US. This would lead to the increase in foreign exchange risk

The risk associated with actual operating expenses varying with anticipated figures is operational risk and Citigroup has a high-quality and efficient payment processes which means they do not have such concern.

Legal risk of Citigroup seems obvious in the past four years including the Enron incident and the scandal in Japan which resulted in negative comments in media.

Future and Conclusion

The main sources of change in the current banking market are globalization and customization, information technology, and increased customer sophistication, all of which have wrought massive changes in the competitive environment of banks.


Carlow (2000) said that for banks considering entry into the insurance market, they

need to carefully do research on investment opportunities in the insurance market. Investors anticipate that banks will earn the average rate of return, not large profit margins. For insurance companies, the free entry of bank is likely to increase existing and potential competition. The threat of entry, if not the actual entry of banks, will lead to more competitive pricing and/or lower sales volumes. However, insurance companies will underwrite the sales of the new bank distribution channel are expected to benefit.


In addition, Technological innovations and other business forces have destabilized bank markets. Technology widens the gap between winners and losers, reflecting the concept of diverging returns first noted in the Profit Impact of Market Strategy (PINS) study,  and it reduces the average profitability of the banking sector as a whole.

The overall profitability of banks has declined over the past 20 years, accompanied by diverging returns. New entrants have had a significant effect on competitive strategies of the incumbents, and also changed the expectations of customers placing incumbent banks in a vulnerable position. The immediate threats are the online brokerage firms such as First Fidelity and Charles Schwab, and the launch of simple bank products by non-financial services organizations such as retailers, telecommunications companies, and large insurance organizations. The new entrants exploit the fact that bank value chains are being broken up into their constituent parts and the separate activities of relationship management, processing and IT infrastructure, and distribution and risk are likely to be managed across a network of organizations with distinctive skills and competencies. The next wave of competition is likely to come from retail e-commerce companies such as AOL and Amazon.

The non-financial companies have strong advantages over banks because the marketing databases and associated management information systems give them more prospective into customer behaviour and requirements than banks’ information systems allow. Although Citigroup has been well-establish and able to exploit their customer databases to segment markets and they have information on assets, payments, and sometimes investments, they sometimes do not know much about their customers in terms of their buying habits and aspirations.

The size-strategy model is a powerful framework for analyzing bank markets. However, as Citigroup become more virtual, it may need to be amended. For example, a small bank can achieve scale economies by outsourcing agreements with a large transaction bank such as Banc One of Ohio or BAN Ammo. It can then combine this scale economy with superior customer relationship software and sophisticated links to the money markets. A small bank can therefore focus on the gateway with the customer and can deliver products or fee-based services from a portfolio of product offerings actually managed by other financial service organizations. It is then possible for focus banks to achieve the benefits of size without asset ownership. The compound growth rate of new entrants in Internet banking also suggests it may be easier to grow Internet market share rather than acquire it, which makes established brands and high levels of assets of less value than on the high street. The strength of Internet brands such as Egg, Smile, AOL, and Amazon also raises the possibility of Internet brands transferring to the high street. This may be easier to achieve than high-street brands moving to the Internet. Banks have a very short time periods to establish their presence, probably less than two years. If they do not react they are at risk of being overtaken by new entrants, which in terms of market capitalization, if not asset size, will be juggernauts in their own right.

Also, companies have to understand that growth does not occur naturally because you add up the sales of two companies that were separate before the merger. Growth is triggered when the right merger partner is found after a careful search and when the new company does much more than exploit efficiency synergy. Also ,it is important to notice that the economies of scale that Citigroup is enjoying may soon reach a point of diminishing returns because of foreign cultures’ clash, complex product and service line etc.

Creating a successful merger between two companies used to be concentrating on logistical planning and operational integration. Today, dynamic and future-oriented process by corporate leaders seems more essential and Citigroup has been doing a lot of work on future planning by setting new growth strategy including investing easily in the consumer business, capitalising on fast-growing international markets, building up the corporate investment banking and restoring Citigroup’s reputation.

The Five Point Plan which was implemented on 1st March, 2005 which aims to make changes within Citigroup for clients. The plan includes expanded training, enhancing focus on talent and development, balancing performance appraisals and compensation ,improved communications and lastly strengthened control.

Citigroup will be big and powerful if they successfully implement the above plans which will result in better financial performance and changes in their organisational culture by human resources development and penetrated the global markets by expansion of distribution channels (Direct and remote sales channels) and by enhanced online service. The merger with Travellers was generally quite successful in creating an innovative way of delivering insurance products and it is also important to be a leader in financial innovation continuously to be successful. But it also will be extraordinarily difficult to steer. The current growth of Citigroup in China, Mexico and Russia is quite significant and it is expected that these are the areas Citigroup will focus on in the next ten years. Their corporate advantage of economies of scale, experienced and worldwide employees, comprehensive set of products and services, capital strength and giant customer base will help them to develop in global market presence.  However, it is important to note that over-diversification of product might lead to misallocation of financial resources according to the discount diversification theory. Lastly, with their data hold, they are able to increase the domestic US market within five to ten years but, to a certain extend, icebergs or uncertainties lie ahead.