Discuss why a bank might change its corporate objectives over time.
CAMBRIDGE
A level and AS level
Year Examined
October/November 2017
Topic
Strategic Management
👑Complete Model Essay
Why a Bank Might Change its Corporate Objectives Over Time
Corporate objectives are the specific, measurable, achievable, relevant, and time-bound (SMART) goals that a company sets for itself to achieve its overall business goals. The corporate objectives of a bank, especially if it is a public limited company (PLC), are often focused on financial performance. Some common corporate objectives for banks include maximizing profits, achieving growth, reducing competition, developing new products and services, paying employees competitive salaries and bonuses, expanding into new markets, and increasing market share.
However, these objectives are not set in stone and may need to change over time due to a variety of internal and external factors. Banks operate in a dynamic environment, and factors such as government regulations, competition, and the economy can all impact a bank's corporate objectives. Banks that can adapt their objectives in response to these changes are more likely to be successful in the long term.
Government Regulations
Government regulations play a significant role in shaping the corporate objectives of banks. New regulations can be introduced to address a variety of concerns, such as systemic risk, consumer protection, or money laundering. For example, the Basel Accords, a set of international banking regulations, have been implemented in phases since the late 1980s to strengthen the stability of the international banking system. These regulations have forced banks to hold more capital, which has made them less profitable but also less risky.
Furthermore, governments may implement regulations to curb unethical or undesirable activities within the banking sector. This could involve stricter lending practices, limitations on high-frequency trading, or increased scrutiny of executive compensation. While these regulations aim to foster a more stable and ethical financial system, they can also increase costs for banks and limit their potential profits.
Competition
Competition is another major factor that can force banks to change their corporate objectives. In recent years, traditional banks have faced increasing competition from non-traditional financial institutions, such as fintech companies, credit unions, and social enterprises.
Fintech companies, leveraging technology to offer financial services, are disrupting traditional banking models. They often operate with lower overhead costs, enabling them to offer more competitive rates and fees. Credit unions, being member-owned, often prioritize their members' financial well-being over maximizing profits, leading them to offer better interest rates on savings accounts and lower interest rates on loans compared to traditional banks. Social enterprises, driven by a social mission, may focus on providing financial services to underserved communities or promoting financial inclusion, putting pressure on traditional banks to demonstrate greater social responsibility.
This increased competition may force banks to adjust their strategies. They might need to focus on improving customer service, offering more innovative products, or lowering prices to remain competitive. In some cases, banks might even choose to merge with or acquire other banks to expand their reach and reduce costs.
Economic Conditions
Changes in the economy can also have a significant impact on a bank's corporate objectives. During a recession, for example, banks may need to focus on preserving capital and reducing risk. This could involve tightening lending standards, reducing exposure to volatile markets, or even scaling back on expansion plans.
Conversely, during periods of economic growth, banks may be more willing to lend money and take on more risk. Governments may also encourage banks to adopt a more liberal lending policy to stimulate economic activity. This interplay between a bank's objectives and the overall economic climate highlights the adaptability required to navigate changing financial landscapes.
Internal Factors
In addition to external factors, internal factors can also lead to changes in a bank's corporate objectives. One of the most significant internal factors is a change in leadership. A new CEO or board of directors may have different ideas about the strategic direction of the bank.
For example, they may decide to prioritize growth over profitability, or they may focus on expanding into new markets. Additionally, internal factors like a bank's risk appetite, organizational culture, and technological capabilities can also influence its objectives and strategic choices.
Conclusion
In conclusion, a bank's corporate objectives are not static but rather evolve over time in response to a complex interplay of internal and external forces. Regulatory changes, competitive pressures, economic fluctuations, and shifts in leadership or internal priorities can all necessitate a reevaluation and adjustment of a bank's objectives. Banks that demonstrate agility and adaptability in response to these dynamic forces are more likely to thrive, while those clinging to outdated objectives risk being left behind. The ability to anticipate change, understand its implications, and adjust strategic goals accordingly is crucial for the long-term success and sustainability of any bank in today's rapidly evolving financial landscape.
Discuss why a bank might change its corporate objectives over time.
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A-Level Business Studies Essay Guide: Why Banks Change Corporate Objectives
This essay guide will help you write a compelling A-Level Business Studies essay on why banks change their corporate objectives. The guide includes key information, relevant tips, and a suggested essay structure to guide your writing process.
Understanding Corporate Objectives
Corporate objectives are the long-term goals that a company aims to achieve. For banks, these objectives can vary depending on their structure, ownership, and market position. Common corporate objectives for banks include:
- Maximizing Profits: This is a primary goal for many banks, especially publicly listed companies (PLCs). Profit maximization drives shareholder value and growth.
- Growth: Expanding market share, acquiring new customers, and increasing assets are crucial for long-term success.
- Reducing Competition: Banks may seek to dominate specific markets by acquiring competitors or developing unique products and services.
- Developing New Products and Services: Innovation is key to staying ahead of competition and attracting new customer segments.
- Employee Compensation: Attracting and retaining top talent often involves offering competitive salaries and bonuses.
- Expanding into New Markets: Reaching new geographical areas can diversify risk and open up new revenue streams.
- Market Manipulation: While unethical, some banks may engage in activities to manipulate markets for profit.
- Ignoring Regulations: Some banks may choose to operate outside of regulations to gain an advantage, but this carries significant risks.
Factors Driving Change in Corporate Objectives
Banks are dynamic entities, and their corporate objectives are not static. Internal and external forces can significantly influence these objectives, leading to adjustments and shifts in focus. Key factors include:
External Forces:
- Government Regulations: New regulations, like those related to responsible lending, environmental sustainability, or financial stability, can significantly impact a bank's operations and necessitate changes in its objectives.
- Competition: The emergence of new competitors, such as ethical banks, credit unions, or social enterprises, can force banks to re-evaluate their strategies and adapt their objectives to remain competitive.
- Economic Conditions: Recessions, economic downturns, or shifts in monetary policy can significantly impact a bank's lending practices and require adjustments to its objectives, such as promoting economic growth through more liberal lending.
- Social Responsibility: Increasing societal pressure for banks to prioritize social good, responsible lending practices, or environmental sustainability can influence their corporate objectives.
- Government Shareholdings: If a government has a significant shareholding in a bank, it may influence the bank's objectives to prioritize public interest over pure profit maximization.
Internal Forces:
- New Senior Management: Changes in senior management can lead to different priorities, vision, and strategies, affecting corporate objectives.
- Performance Analysis: Regular performance reviews and analysis may reveal the need to modify objectives to improve efficiency, profitability, or market competitiveness.
- Technological Advancements: New technologies can create opportunities for banks to expand their products and services, leading to changes in their objectives.
Tips for Writing a Strong Essay
To write a compelling A-Level Business Studies essay on this topic, consider the following:
- Use Specific Examples: Provide real-world examples of banks that have changed their corporate objectives in response to external or internal forces. For example, discuss how the financial crisis of 2008 led to stricter regulations and changes in lending practices for many banks.
- Analyze the Impact: Explore the consequences of changing corporate objectives, both positive and negative. How have these changes impacted the bank's profitability, reputation, and customer relationships?
- Evaluate the Effectiveness: Discuss whether the changes in corporate objectives have been successful in achieving their intended goals. Has the bank adapted effectively to the new environment?
- Use Academic Language: Utilize relevant business terminology and cite credible sources to support your arguments.
- Structure Your Essay: Clearly articulate your thesis statement, develop supporting arguments, and provide a strong conclusion summarizing your key points.
Suggested Essay Structure
Here is a suggested structure for your essay:
Introduction:
- Define corporate objectives and their importance for banks.
- State the thesis statement, explaining that banks change their corporate objectives due to internal and external forces.
Body Paragraphs:
- Paragraph 1: Discuss external forces like government regulations, competition, and economic changes that can influence corporate objectives.
- Paragraph 2: Analyze internal forces such as new senior management, performance analysis, and technological advancements.
- Paragraph 3: Evaluate the impact of changing corporate objectives on a bank's performance, profitability, and reputation.
Conclusion:
- Summarize the key arguments regarding the changing nature of corporate objectives for banks.
- Reiterate the thesis statement and highlight the importance of adaptability and flexibility for banks in a dynamic environment.
Remember:
The key to writing a successful essay is to demonstrate a thorough understanding of the topic, present a clear argument, and use relevant evidence to support your claims. By following these tips and suggestions, you can write a well-structured and informative essay that will impress your A-Level Business Studies examiner.
Extracts from Mark Schemes
Discuss why a bank might change its corporate objectives over time.
Answers could include:
- Corporate objectives of a bank (if a PLC) might well be to maximise profits; grow; reduce the competition; develop new products/services; pay employees significant salaries/bonuses; expand into new markets; manipulate markets and ignore regulations.
- These objectives may change for a number of reasons: new government regulations may require significant change; to curtail marginal potentially unethical activities so costs may increase.
- Competition might increase from more ethical banks, credit unions; social enterprise.
- May be urged to pay more attention to small and medium enterprises.
- If a government has a shareholding, a bank may be required to withdraw from some highly profitable activities and pay more taxes or be subject to extra taxes.
- New senior managers may have different views on what the corporate objectives should be.
- The economy may change requiring a bank to play a much more social role in pumping money into an economy through a more liberal lending policy.
Strong and evaluative answers will recognise that the corporate objectives of a bank may change as a result of internal and external forces and that banks that fail to be adaptive and flexible may well fail.