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Mgmt 619: Capstone Project        Fall 2011      Prof. Madsen      Neeraj Dhulekar      Chris Henshaw        Julia Levites...
Table Of ContentsI. WSJ ARTICLE and EXECUTIVE SUMMARY .............................................................. 6  I....
III.B. Organization Structure, Controls and Values ..........................................................................
Exhibit 10a: Citigroup Revenue by Segment ...................................................................................
Exhibit 25b: Bank of America BCG Matrix for Investment Banking ..............................................................
I. WSJ ARTICLE and EXECUTIVE SUMMARYI. A. WSJ Article - BofA Readies the KnifeBofA Readies the Knife1Bank Plans to Cut $5 ...
"Everyones extremely worried," one BofA employee said Monday.BofA shares rose seven cents, or 1%, to $7.05 in 4 p.m. New Y...
Project New BAC is one of several moves by Mr. Moynihan during the past month to solidifythe banks finances and refocus it...
I. B. Executive SummaryBank of America Corporation (BofA) is a bank holding and financial service corporationheadquartered...
Though many firms offer financial services, the primary competitors considered to BofA in thisanalysis hold the largest ma...
Administration Insurance program. In the long term, BofA needs to continue to invest ininfrastructure, restructure its mor...
II. EXTERNAL ANALYSISII. A. Industry DefinitionBofA operates in two broadly defined industries: Commercial Banking (CB) an...
of customers and significantly reduce it as the same time as the financial services industry isheavily reliant on brand re...
costs. Large players do not control the majority of the market and none hold significant sharecompared to others in the se...
margins pressure has contributed in part to this weak growth. The European financial crisis isalso causing concerns for US...
Major spending will occur in the following key technology areas: 17 algorithm changes toaccommodate new rules, mobile bank...
Table 1: Demographic TrendsCustomers                    IB        Customers Served   CB        Locations Served   CB     I...
consumer and industrial loans (business lending) as proxy for commercial products and services.Exhibit 5 highlights the to...
JPMorgan Chase: Corporate Level StrategyJPMC is divided into seven major segments or business units and targets its distin...
between businesses, as well as the fact that no business provides >70% of revenue, translates to arelated constrained corp...
servicing as well as easy integration of accounts on platforms such as online or mobile banking.WF‟s Community Banking seg...
quality services to large corporations and institutions as well as high net worth clients 28. MorganStanley‟s 5.3% market ...
The VRIO analysis for JPMC (Exhibit 15c) shows that it has SCAs in its broad product line andability to cross-sell, its re...
selling capability, and as WF‟s value chain shows, is a pervasive organizational value that isleveraged across the entire ...
In the context of the VRIO framework (Exhibit 19c), Morgan Stanley provides a SCA in thedepth and quality of its brokerage...
While certain non-bank services may be used more than others as substitutes for bankingservices based on convenience and f...
by the 33.5% willingness to pay, we can see that JPMC buyer surplus is approximately 28.1% -as shown in Exhibit 20c. As su...
While exact customer value capture measures may be difficult to derive and precise willingnessto pay measurements elusive ...
ranked a „tier 2‟ for IB buyer surplus creation. In line with Exhibit 21b, Goldman‟s cost for IBservices was approximately...
The debt to capital ratio is consistent across all banks and the industry as a whole. This makessense given the fact that ...
II. D.7 Implications of Competitor AnalysisOur competitive analysis demonstrates that the industry continues to operate in...
ThreatsToday, customers remain sensitive to big bank changes. IBs are seen as the root cause of thefinancial crisis and CB...
presence in the industry. As it stands, at the business level in CB, BofA services the massmarket and is broadly different...
to customers and share of firm revenue generation. Firms compete in these segments dependingon the given product, service,...
III.B.2 Employee Controls, Values, and EthicsWhile appraisal methods differ across lines of business, the firm monitors em...
1. The Global Banking and Markets group caters to the financial needs of institutional clients.2. The Global Wealth and In...
users). In addition, the medium-to-low degree of market uncertainty – consumers werecontinuing to use their credit cards m...
Recent Alliances / Partnership / Joint Venture ActivityIts membership in the Global ATM Alliance beginning in 200277, as w...
The cost-leadership element of the CB business-level strategy is evident in the product pricingstructure for the CB produc...
strategy can be classified as a „star‟ within the BCG matrix. It commands the #2 position formarket share for investment b...
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
Bank of America's "Project New BAC" - For Good or for Bad?
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Bank of America's "Project New BAC" - For Good or for Bad?

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In 2011, BofA was the subject of criticism and scrutiny. With reports of quarterly negative net income and a 48% decline in stock price, BofA faced a strategic challenge that threatened its survival. To deal with its high exposure to mortgage-related losses and lawsuits, and the slow recovery of the U.S economy, BofA was forced to make multiple changes to its organization in order to cover soaring costs and disproportional revenues, while also attempting to maintain customer and shareholder confidence.

In an effort to stabilize profitability, BofA's recovery plan, called “Project New BAC”, proposes aggressive cost cutting, divesture of non-core assets, and generation of new capital through private investment, and sales of its correspondent mortgage lending platform.

In order for BofA to regain its health and defend its strategic position, we propose three long and short-term recommendations that can help to stabilize BofA's profits and salvage its mortgage lending investment by absorbing its losses.

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Bank of America's "Project New BAC" - For Good or for Bad?

  1. 1. Mgmt 619: Capstone Project Fall 2011 Prof. Madsen Neeraj Dhulekar Chris Henshaw Julia Levites Ethan Levy Lissa Streegan
  2. 2. Table Of ContentsI. WSJ ARTICLE and EXECUTIVE SUMMARY .............................................................. 6 I. A. WSJ Article - BofA Readies the Knife .......................................................................................................6 I. B. Executive Summary ....................................................................................................................................9II. EXTERNAL ANALYSIS .................................................................................................. 12 II. A. Industry Definition ................................................................................................................................... 12 II. B. Five Forces Analysis ................................................................................................................................ 12 II. B.1 Five Forces Analysis-Commercial and Investment Banking ............................................................ 12 II. B.2 Five Forces Analysis- Mortgage Banking ........................................................................................... 13 II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns .................................... 14 II. C.1 Global/Economic ................................................................................................................................. 14 II. C.2 Social ................................................................................................................................................... 15 II. C.3 Technological ...................................................................................................................................... 15 II. C.4 Governmental/Political ........................................................................................................................ 16 II. C.5 Ethical ................................................................................................................................................. 16 II. C.7 Demographic Trends ........................................................................................................................... 16 II. D. Competitor Analysis .................................................................................................................................. 17 II. D.1 Competitors ......................................................................................................................................... 17 II. D.2 Primary Competitors ........................................................................................................................... 17 II. D.3 Primary Competitor‟s Corporate/Business- Level Strategies .............................................................. 18 II.D.4 Strategic Positioning - Value and Cost Drivers and VRIO Analysis ................................................... 22 II.D.5 Value - Cost ......................................................................................................................................... 25 II.D.6 Comparative Financial Analysis .......................................................................................................... 29 II. D.7 Implications of Competitor Analysis .................................................................................................. 31 II. E. Intra-Industry Analysis ............................................................................................................................. 31 II. E.1 Stage of Industry Evolution ................................................................................................................. 31 II. E.2 Strategic Groups Analysis ................................................................................................................... 31 II. E.3 Other Competitive Dynamics .............................................................................................................. 33 II. F. Threats and Opportunities ......................................................................................................................... 33 II. F.1 Emerging Threats and Opportunities ................................................................................................... 33 II. F.2 Threats and Opportunities Implications for Strategy ........................................................................... 33 II. G. Summary of External Analysis ................................................................................................................. 33III. INTERNAL ANALYSIS .................................................................................................. 34 III.A. Business Definition and Mission............................................................................................................... 34 2
  3. 3. III.B. Organization Structure, Controls and Values ............................................................................................ 34 III.B.1 Organization Structure ........................................................................................................................ 34 III.B.2 Employee Controls, Values, and Ethics .............................................................................................. 35 III.C. BofA – Strategic Position Definition ........................................................................................................ 35 III.C.1 BofA - Corporate Level Strategy ........................................................................................................ 35 III.C.2 Business Level Strategy ...................................................................................................................... 38 III.C.3 Resources and Capability Level .......................................................................................................... 41 III.D. Financial Analysis ..................................................................................................................................... 44 III.D.1 Performance and Operating Ratios ..................................................................................................... 44 III.D.2 Discounted Cash Flow Analysis ......................................................................................................... 44 III.D.3 Scenario Analysis ............................................................................................................................... 46IV. Analysis of the Effectiveness of the Strategy .................................................................. 48V. Recommendations .............................................................................................................. 49 V. A. Three Short and Long Term Strategies .................................................................................................... 49 V. A.1 Short Term #1 - Sell Risky Assets ..................................................................................................... 49 V. A.2 Short Term #2 - Layoffs .................................................................................................................... 49 V. A.3 Short Term #3 - Loan Modification to 40 Years................................................................................ 50 V. A.4 Long Term #1 - Feed the Mortgage Business Segment ..................................................................... 51 V. A.5 Long Term #2 – FHA Loan Program................................................................................................. 52 V. A.6 Long Term #3 - Invest in Innovation Infrastructure .......................................................................... 53 V. B. Strategy Implementation .......................................................................................................................... 54VI. Conclusion ......................................................................................................................... 56VII. Appendix .......................................................................................................................... 58 Exhibit 1: Commercial Banking & Investment Banking Industry and Ecosystem ............................................. 58 Exhibit 2a: Commercial/Investment Banking Level 1 & 2 Analysis ................................................................. 59 Exhibit 2b: Commercial/Investment Banking Level 3 Analysis ......................................................................... 64 Exhibit 3a: Mortgage Banking Level 1/2 Analysis ............................................................................................. 64 Exhibit 3b: Mortgage Banking Level 3 Analysis ................................................................................................ 69 Exhibit 4: BofA Segments and % Revenue ........................................................................................................ 70 Exhibit 5: Bank Holding Companies market share by Deposits, Credit Card, Consumer Loan Revenue ......... 70 Exhibit 6: Bank Holding Companies by Fees Generated from M&A, Equity, Bonds, and Loans ..................... 71 Exhibit 7: Rumelt‟s Corporate and Business-Level Strategy Classification ....................................................... 71 Exhibit 8: Porter‟s Generic Strategies Matrix (Business Level Strategy) ........................................................... 71 Exhibit 9a: JPMorgan Chase Revenue by Segment ........................................................................................... 72 Exhibit 9c: JPMorgan Chase BCG Matrix for Investment Banking .................................................................. 72 3
  4. 4. Exhibit 10a: Citigroup Revenue by Segment ..................................................................................................... 73Exhibit 10b: Citigroup BCG Matrix for Investment Banking ............................................................................ 73Exhibit 11a: Wells Fargo Revenue by Segment................................................................................................. 73Exhibit 11b: Wells Fargo BCG Matrix for Commercial Banking ..................................................................... 74Exhibit 12a: Goldman Sachs Revenue by Segment ........................................................................................... 74Exhibit 12b: Goldman Sachs BCG Matrix for Commercial Banking ................................................................ 74Exhibit 13a: Morgan Stanley Revenue by Segment ........................................................................................... 75Exhibit 13b: Morgan Stanley BCG Matrix for Commercial Banking ............................................................... 75Exhibit 14a: BofA VRIO Analysis ..................................................................................................................... 75Exhibit 14b: Bank of America Value Drivers ..................................................................................................... 76Exhibit 14c: Bank of America Cost Drivers ....................................................................................................... 77Exhibit 15a: JPMorgan Value Drivers ................................................................................................................ 78Exhibit 15b: JPMorgan Cost Drivers .................................................................................................................. 78Exhibit 15c: JPMorgan VRIO Analysis .............................................................................................................. 79Exhibit 16a: Citigroup Value Drivers ................................................................................................................. 79Exhibit 16b: Citigroup Cost Drivers ................................................................................................................... 80Exhibit 16c: Citigroup VRIO .............................................................................................................................. 81Exhibit 17a: Wells Fargo Value Drivers ............................................................................................................. 81Exhibit 17b: Wells Fargo Cost Drivers ............................................................................................................... 82Exhibit 17c: Wells Fargo VRIO.......................................................................................................................... 82Exhibit 18a: Goldman Sachs Value Drivers ....................................................................................................... 83Exhibit 18b: Goldman Sachs Cost Drivers ......................................................................................................... 83Exhibit 18c: Goldman Sachs VRIO .................................................................................................................... 83Exhibit 19a: Morgan Stanley Value Drivers ....................................................................................................... 84Exhibit 19b: Morgan Stanley Cost Drivers ......................................................................................................... 84Exhibit 19c: Morgan Stanley VRIO Framework ................................................................................................ 84Exhibit 20a: Commercial Banking V – C Analysis ............................................................................................ 85Exhibit 20b: Commercial Banking Profit Analysis ............................................................................................. 85Exhibit 20c: Commercial Banking V-C analysis ................................................................................................ 86Exhibit 21a: Investment Banking Customer Value Capture ............................................................................... 86Exhibit 21b: Investment Banking V-C analysis .................................................................................................. 86Exhibit 22a: Ratio comparable analysis for top 10 US banks and the industry for last 12 months ..................... 87Exhibit 22b: (cont.) ............................................................................................................................................. 88Exhibit22c: Bank of America performance (ratios) for 2008-2011 .................................................................... 89Exhibit 23: Bank of America Organizational Structure and Business Segments ................................................ 90Exhibit 24: Bank of America Business Segments and Aggregations.................................................................. 91Exhibit 25a: Bank of America BCG Matrix for Commercial Banking ............................................................... 91 4
  5. 5. Exhibit 25b: Bank of America BCG Matrix for Investment Banking ................................................................. 91 Exhibit 26: BofA Value Chain ............................................................................................................................ 92 Exhibit 27a: Layoffs scenario methodology ....................................................................................................... 93 Exhibit 27b: Layoffs scenario implementation ................................................................................................... 94VIII: Financial Background Appendix ................................................................................. 95IX: Bibliography.................................................................................................................... 108 5
  6. 6. I. WSJ ARTICLE and EXECUTIVE SUMMARYI. A. WSJ Article - BofA Readies the KnifeBofA Readies the Knife1Bank Plans to Cut $5 Billion in Costs by End of 2013; 30,000 Jobs to DisappearBank of America Corp. Chief Executive Brian Moynihan announced a $5 billion cost-pruningplan that includes 30,000 job cuts. Pulling it off will require the Charlotte, N.C., companysembattled boss to convince skeptical analysts and investors that he is serious about shrinking thenations largest bank in assets without seriously damaging employee morale."Brian is trying to do a balancing act, one BofA executive said.”Satisfying investors and notscaring the hell out of employees-its tough to do.The 51-year-old Mr. Moynihan, fighting to steady the bank and jump-start profits as concernsdeepen about its exposure to the slowing US economy and a slew of mortgage-related losses andlawsuits, said the expense cuts would be made in consumer-related businesses by the end of2013.Mr. Moynihan also vowed to "get more aggressive" about lowering costs. The first phase of anoverhaul called "Project New BAC," after the companys ticker symbol, will lop off 18%, or $5billion of the $27 billion in annual costs in consumer banking, global technology and other areas.At a widely anticipated speech at the Barclays Capital financial conference in New York, Mr.Moynihan said nothing about corresponding job cuts.Later on Monday, though, Mr. Moynihan told BofA employees in an internal memo that "overallemployment levels would come down by 30,000 over the next few years. A separate QandA onthe companys internal website referred to the cuts as "the most difficult outcome of this work.The actual number of positions cut likely will be higher than 30,000. The estimate includes therehiring of some employees, as well as new positions that are expected to be added over time,according to a BofA spokesman. The number also reflects positions cut through attrition orelimination of unfilled jobs."This is an impact the management team does not take lightly, and we know well how difficult itwill be," Mr. Moynihan said in the memo to employees.The BofA spokesman declined to provide the gross number of jobs being eliminated. "From anexpense standpoint, Im not sure thats relevant," he said. "What investors care about is how areyou going to get that fixed cost down." 6
  7. 7. "Everyones extremely worried," one BofA employee said Monday.BofA shares rose seven cents, or 1%, to $7.05 in 4 p.m. New York Stock Exchange compositetrading. The stock is down 47% so far this year.Paul Miller, an analyst at FBR Capital Markets, said the looming expense cuts arent deepenough to offset BofAs potential exposure to multiple billion-dollar lawsuits related to mortgagewoes. Many investors are worried BofA will have trouble raising enough capital to meet newglobal requirements starting in 2013, though the bank has insisted it can meet them."This is what investing in this stock is about," Mr. Miller said. "It is not about cutting costs."BofA began scrutinizing its sprawling operations for cuts in May and concluded the process lastweek. Company officials discussed higher job-reduction targets than the number unveiledMonday, including roughly 40,000 as recently as late August, according to people familiar withthe situation. As of June 30, BofA had 288,000 employees.In comparison, Wells Fargo and Co. said in July it plans to cut 12% of its quarterly noninterestcosts by the end of 2012. On Monday, PNC Financial Services Group Inc. said the regional bankwill trim its expense base by 6%, or $550 million, in 2012.PNC didnt disclose any job cuts, though its cost-savings plans include 700 ideas submitted byemployees. "We did not have a nickname for our expense program," said James E. Rohr, PNCschairman and chief executive. "We called it continuous improvement." PNC shares rose 3.9%, or$1.79, to $48.17 at 4 p.m. in New York Stock Exchange composite trading.BofA said its goal is to reduce costs as a percentage of revenue, or its efficiency ratio, to 55%. Atthe end of 2010, the companys efficiency ratio was 63%, higher than at rivals J.P. MorganChase and Co., Citigroup Inc. and Wells Fargo, according to SNL Financial. The industryaverage is 74%. Hudson City Bancorp Inc., in Paramus, N.J., has an efficiency ratio of 30%, thesmallest among all US banks, according to SNL.In a second phase of the belt-tightening effort at BofA, officials will try to reduce some of the$28 billion in expenses in commercial banking, wealth management, corporate banking andinvestment banking. BofA didnt specify cost-cutting or job-reduction targets, except to say theywould be lower than in consumer businesses.Mr. Moynihan also said BofA is looking to put behind it other costs that arent related to normalbusiness activities, including mortgage and litigation expenses. Such costs amounted to about$18 billon of the companys total expenses of $73 billion for the year that ended in March. 7
  8. 8. Project New BAC is one of several moves by Mr. Moynihan during the past month to solidifythe banks finances and refocus its operations. Last week, he ousted two high-ranking lieutenantsand installed two others as co-chief operating officers.BofA also sold $5 billion of preferred stock to Warren Buffetts Berkshire Hathaway Inc. andagreed to sell half its remaining stake in a major Chinese lender. The bank is trying to sell a largepiece of its mortgage business. 8
  9. 9. I. B. Executive SummaryBank of America Corporation (BofA) is a bank holding and financial service corporationheadquartered in Charlotte, North Carolina. The firm offers a suite of products and services andoperates in deposits, global card services, home loans and insurance, global commercial banking,global banking and markets, and global wealth and investment management. It employees288,000 people who service the United States and 40 countries, is currently the second largestbank holding company in the United States with $2.2 billion in assets, and is the fourth largestbank in the US with $58.59 billion by market capitalization.In 2011, BofA has been the subject of criticism and scrutiny. With reports of quarterly negativenet income and a 48% decline in stock price, BofA is currently facing a strategic challenge that isthreatening firm survival. To deal with its high exposure to mortgage-related losses andlawsuits, and the slow recovery of the U.S economy, BofA has been forced to make multiplechanges to its organization in order to cover soaring costs and disproportional revenues, whilealso attempting to maintain customer and shareholder confidence.Given the complexity and depths of its problems, the scope of this analysis concentrates on twobusiness segments where BofA can consider change while defending its strategic position in theindustry during it recovery efforts. Specifically, it focuses on commercial banking (includingretail) and investment banking, and calls attention to its mortgage-lending business because ofthis segment‟s strategic importance.Industry attractiveness is low in commercial banking, investment banking, and mortgage lendingbecause of moderate-high barriers to entry, high supplier power, moderate buyer power (high inmortgage), high rivalry and low threat of substitutes. Government regulations and politicsheavily influence this industry, which is extremely interwoven in macroeconomics given theinfluence, size and international reach of its major players. As threats and opportunities to theindustry exist at the macro level, key players in this mature industry compete at the corporatelevel on measures of parity while existing and emerging threats fight for customer share at theproduct level. 9
  10. 10. Though many firms offer financial services, the primary competitors considered to BofA in thisanalysis hold the largest market capitalization in the industry and compete across similar productlines, services, and geographies for nearly the same customer segments. Little differentiationamongst them exists thus competitors compete for customers based primarily on customerservice and reputation. For this analysis, in commercial banking, BofA‟s primary competitorsare JPMorgan Chase, Wells Fargo and Citigroup while in investment banking they are GoldmanSachs, Morgan Stanley and JPMorgan Chase.BofA‟s corporate strategy over the last 5-10 years has been to broaden its product offeringswhich included acquisitions of Countrywide for its consumer mortgage portfolio, and MerrillLynch to broaden its investment banking customer base and product portfolio. Its promise ofproviding a personalized set of products across any customer segment has been a key driver ofBofA‟s positioning strategy. Yet as the financial crisis unfolded, this plan seems to havebackfired and has led it into the complex and costly mess where it stands today.In an effort to stabilize profitability, BofA‟s recovery plan, called “Project New BAC”, proposesaggressive cost cutting, divesture of non-core assets, and generation of new capital throughprivate investment, and sales of its correspondent mortgage lending platform. Its goal is to cut$5 billion in spending, improve its revenue/cost ratio to 55%, and return the firm to pre-2009health in the long term. In order to do so, it has announced plans to commit 30,000 in layoffs,cut costs across the board, and sell a portion of its shares in China Construction Bank. As it iscurrently its biggest issue, BofA is also contemplating the fate of its mortgage business. Rumorsof selling, bankruptcy, and a split off from the assets that it acquired from Countrywide havebuilt a fury of speculation as to how BofA can best clean up its mortgage predicament.In order for BofA to regain its health and defend its strategic position, we propose three long andshort-term recommendations that can help to stabilize BofA‟s profits and salvage its mortgagelending investment by absorbing its losses. In the short term, BofA needs to save and generatecash, and can do so by laying-off employees and selling some of its risky and non-core assets.To lessen the blow from its existing sub-prime mortgage troubles and purge them from itsbalance sheet, BofA must also take advantage of the government‟s Federal Housing 10
  11. 11. Administration Insurance program. In the long term, BofA needs to continue to invest ininfrastructure, restructure its mortgage rates to aid its customers, and continue to feed itsmortgage division with capital from its higher performing business segments. 11
  12. 12. II. EXTERNAL ANALYSISII. A. Industry DefinitionBofA operates in two broadly defined industries: Commercial Banking (CB) and InvestmentBanking (IB). The CB industry targets mass-market consumers and small-to-mid size businesseswith traditional banking products and services, which include checking and savings accounts,debit/credit cards, personal loans, mortgages, and certificates of deposit (CDs), among otherproducts. The IB industry involves creation and management of capital and assets for largecorporations, institutions, and high-net worth clients; product and services include loanunderwriting, intermediary between securities issuer and investors, facilitating of mergers andacquisitions, and provision of brokerage services for institutional clients.2 See Exhibit 1 for adiagram of the CB / IB industry and ecosystem in which BofA operates.II. B. Five Forces AnalysisII. B.1 Five Forces Analysis-Commercial and Investment Banking 3 4 5The level three industry analysis score for CB and IB is 3.84 out of 5, which represents medium-low attractiveness (Exhibit 2a, 2b).Threat of Rivalry: Threat of rivalry is significant in financial services and was graded as 4 outof 5. The concentration ratio for CB is CR4 at 36%, which leaves room for competition sincenone of the major players hold significant market share. For IB, distribution is different andsuggests lower competition with CR4 over 70%. The demand/supply ratio for CB and IBsuggests that the current economic crisis is still a strong influencer, which makes the entireindustry volatile.Barriers to Entry: Barriers to entry are moderate for the industry. Capital requirements arerelatively high and create barriers for new companies to penetrate. Additionally, CB is a highlyregulated industry to protect safety of deposits and reduce bank failure rates. Among regulationsare FDIC requirements, Federal Reserve membership, and State and Federal Charter guidelines.IB is not as heavily regulated, but more laws have recently been introduced due to the financialcrisis. From the customer side, switching costs are moderate and do not present a major expensefor the customer other than in time and inconvenience. Network effect can increase the number 12
  13. 13. of customers and significantly reduce it as the same time as the financial services industry isheavily reliant on brand reputation. Today, consumers are also highly sensitive to fee charges.As we saw with the threat of the $5 debit card fee6, this change could have had damaging effectson all brands.Supplier Power: Human resources, information technology, and customers were considered assupplier power and were divided into consumers and institutions. Financial institutions facesignificant switching costs for suppliers, which are difficult to replace with substitutes.Customers and institutions in turn rely on banks and will not be able to survive without bankingservices in the current economic ecosystem. As some corporations establish banks themselves,they also transform into threats.Buyer Power: Buyer Power was estimated as moderate and scored 3.64 of 5. In a moderneconomy, financial institutions play a key role in everyday activities therefore making buyerpower weak. Though switching costs might not be that significant for buyers, price paid forfinancial services comprises a significant part of the buyer‟s costs.Threat of Substitutes: Community banks, credit unions and cash are considered substitutes forCB while brokers and customers themselves are substitutes for IB. Based on this analysis, threatof substitutes is not significant due to the extensive network of banks that offer establishedservices at competitive prices.II. B.2 Five Forces Analysis- Mortgage Banking 7 8As BofA‟s mortgage business is the cause of financial problems for the firm at the time of thisanalysis, the mortgage industry was analyzed as a separate segment in order to evaluate industryattractiveness, as it will relate to our recommendations for the firm. It scored 3.88 out of 5(Exhibit 3a, 3b). Key factors that influenced the analysis include the current mortgage crisis,strong competition and high influence from suppliers and buyers.Threat of Rivalry: Threat of rivalry is high with low diversity among competitors. High exitbarriers and low demand in current economic situations force incumbents to compete and cut 13
  14. 14. costs. Large players do not control the majority of the market and none hold significant sharecompared to others in the segment.Barriers to Entry: Barriers to entry are moderate-high. Increasing government regulations anddemand for low cost operations make the industry less attractive for new entrants. At the sametime, brand loyalty and switching costs are low and have allowed for newcomers to enter.Supplier Power: Supplier power is significant in this segment. IT, human resources andconsumers were considered as suppliers. Cost saving is very important for incumbents anddrives the importance of having technology and innovation. As for human resources, employeeswith a financial BofA background can easily switch to a different employer within the financialmarket space.Buyer Power: Though buyers do not pose threat of backward integration, they hold significantinfluence over product costs. Since switching costs in highly competitive environments are notsignificant, this allows buyers to shop for the best deal.Threat of Substitutes: Threat of substitutes is low since small banks can‟t compete for loanservicing with larger players. Small players compete with CBs only for loan initiations, but sellthose loans to large banks immediately after closing the deal because they can‟t afford to servicethem.II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical ConcernsII. C.1 Global/EconomicIn 2008, the financial markets experienced a severe global downturn, which was immediatelytriggered by the collapse of the US housing market. Several major banks went into bankruptcy,the stocks of financial institutions were greatly devalued, and world governments had to step into stabilize the collapse through bank obligation assurance, fiscal and monetary policyenhancements, and actual bank bailouts in some cases, succeeding in stemming the financialcrisis in 2009. One result of this has been extensive consolidation within CB and IB.Analysts at the IMF predict that this decade will be the worst decade in terms of revenue growthfor the overall banking sector since the decade of great depression.9 Lack of loan growth and 14
  15. 15. margins pressure has contributed in part to this weak growth. The European financial crisis isalso causing concerns for US banks.10US banks are still recovering from the sub-prime mortgage meltdown. The newly implementedbank capital adequacy and liquidity reform in the form of the BASEL III 11 global regulatorystandard will ensure that there will be tighter governance on the banks over their tendency ofbeing “risky”.More recently, the US national agency that oversees Freddie Mac and Fannie Mae has filed alawsuit against all major banks including BofA. The lawsuit accuses them of misrepresentingthe quality of mortgage securities they assembled and later sold at the further aggravating thehousing bubble.12 While it may cost millions of dollars for all of the major banks, BofA inparticular faces damage uncertainties as large as $50 billion.13II. C.2 SocialBanks realize the importance of economic vitality in their future growth strategies. As a result,most of the banks and financial institutions have made corporate social responsibility (CSR) afundamental way to do business. These institutions are increasingly helping to generateeconomic and social opportunities through responsible business practices, community-development, lending and investing, philanthropy, diversity and inclusion, volunteerism, supportof arts and culture and environmental initiatives.14The Socially Responsible Investing (SRI) based approach incentivizes institutional investors andlarger corporations to provide social development and growth in their communities as aconsequence of their normal business activities.15 As SRI grows to be a global phenomenon,there is an increased pressure on financial institutions to keep up their brand value of socialresponsibility. More and more financial institutions are investing heavily in their CSR strategiestoday to be more profitable tomorrow.II. C.3 TechnologicalThe financial service sector is the biggest spender on IT technology. As it spent a whopping$500 billion thus far, the industry accounts for nearly 20% of IT spending worldwide and isestimated to total $132 billion by 2015, representing a 24% average annual increase.16The key to success for financial services is superior customer service. Technology makes itpossible to create an easy and convenient customer service experience. Keeping this in mind, allof the major banks can expect significant IT spending in the near future to remain competitive. 15
  16. 16. Major spending will occur in the following key technology areas: 17 algorithm changes toaccommodate new rules, mobile banking applications for smart phones and tablets, social mediapresence, green sector initiatives, and data analytics for personal and business sectors.II. C.4 Governmental/PoliticalThe industry is heavily regulated at the federal and state government level. These regulations areintended to protect the public, prevent crime, and ensure the integrity of the industry. Theseregulations can be argued to limit the profitability of banks in general as banks have to spend asignificant portion of their revenues adhering to these regulations.Bigger banks are successful in exploiting the fact that government and political institutions aretheir clients. This is evident from the fact that many bigger banks, including BofA, were bailedout by government regulators after suffering humongous losses during the financial crisis.II. C.5 EthicalLarge financial institutions have a history of involvement in ethical legal battles. Although allmajor financial institutions have a formal code of ethics, gray areas exists when it comes tocertain financial judgments and decision-making. These ethical issues tend to adversely affectinvestor confidence in both the short and long run. As a result, it reflects in poor financialperformances, financial crisis, and huge economic implications.The post subprime era has seen many litigations and legal claims being made on most of thefinancial institutions, including BofA. As a result, BofA shares have dropped almost 45% sincethis time and continue to dive deeper today. As BofA faces a significant risk in legal costs todate in FY011 on ethical grounds alone,18 it and others‟ unethical behavior must be addressedimmediately.II. C.7 Demographic TrendsAs seen in Table 1, the major markets of the financial services industry are made up of a varietyof products and services that serve different clients. Geographically, financial services firms arelocated across the US.19 20Other demographic information like age, income, ethnicity, gender, level of education etc., helpfirms to decide on many important aspects of their business including new product development,marketing and communications strategy and front-end technology usage. 16
  17. 17. Table 1: Demographic TrendsCustomers IB Customers Served CB Locations Served CB IBServedPrivate 14% Retail 45% Southeast 30% 13%Corporations 35% Small Business Great Lakes 18% 20%Institutions 23% Corporations 35% Mid-Atlantic 14% 33%Government 16% Institutions West 12% 13%Municipal 12% Government 15% Others 5%II. D. Competitor AnalysisII. D.1 CompetitorsThe US banking industry has undergone significant change with two events changing thetraditional definition. The first was the passage of the Financial Services Modernization Act of1999, which allowed commercial banks, investment banks, and insurance companies to mergetogether into a single firm. The other was the 2008 credit crisis, in which large investment banksand corporations were allowed to change their legal standing to become bank holding companiesin order to become eligible for liquidity and funding from the Federal Reserve.21 Given these twodevelopments, firms that were not traditionally defined as bank holding companies, suchinvestment-focused Goldman Sachs may now be considered competitors to BofA.In addition to the increase in these large, diversified financial services companies, tens ofthousands of smaller banking institutions, which provide more focused banking services tocustomers, such as smaller regional banks, credit unions, and savings institutions, among others,also compete for customers.II. D.2 Primary CompetitorsIn order to identify the primary competitors that BofA faces in the domestic US banking realm,its key markets were defined. BofA is broken down into six business units. Each business unitprovides products and services that are primarily focused on serving either the CB or IB industry(Exhibit 4). As the breakdown of revenue by target segment suggests, BofA dedicates the nearentirety of its resources to serving the CB and IB industries (~46% and ~41%, respectively).Commercial Banking: While BofA has a diverse product line geared to CB customers, we willfocus on the core products of 1) deposits under management, 2) credit card loans, and 3) 17
  18. 18. consumer and industrial loans (business lending) as proxy for commercial products and services.Exhibit 5 highlights the top 10 bank holding companies in Q2 2011. Based on a weightedrelative ranking in each product category, the top 16 competitors to BofA in the CB market arelisted in order of primacy of competition.Investment Banking: The Financial Times classifies the fees generated from four primaryactivities as representative of IB market performance: mergers and acquisitions, equity issuance,bonds issuance, and loan underwriting. Based on an aggregation of fees from US-based activityfor the first three quarters of 2011, the top 10 IB firms are listed in Exhibit 6.Firms considered competitors to BofA may vary depending on the given product, service, orgeographic region. However, there are certain financial services rivals that consistently competeagainst BofA across product lines, services, and geographies for roughly the same customersegments. In order to delineate these primary competitors from the thousands of othercompetitors, we listed the top firms in both CB and IB industries to determine the market leaders.In CB, the top competitors to BofA are Citigroup (CG), JPMorgan Chase (JPMC), and WellsFargo (WF). These rival firms are among the top 10 competitors to BofA in deposits, creditcard, and consumer loan products. In IB, the top competitors to BofA are JPMC, MorganStanley, and Goldman Sachs. Each of these three competitors has > 5% market share of the feesgenerated from IB activities through Q3 2011, and/or double-digit growth rate year year-over-year.II. D.3 Primary Competitor’s Corporate/Business- Level StrategiesExhibit 7 outlines the corporate and business level strategies for BofA‟s four primarycompetitors in CB and IB. Exhibit 8 orients competitors on the Porter‟s generic strategiesmatrix that highlights business-level strategies that drive competitive advantage.BofA – Corporate Level Strategy: See section III.C.1.bBofA – Commercial Banking: Business Level Strategy: See section III.C.2.a.1BofA – Investment Banking: Business Level Strategy: See section III.C.2.a.2 18
  19. 19. JPMorgan Chase: Corporate Level StrategyJPMC is divided into seven major segments or business units and targets its distinct financialproducts and services to a particular customer segment. There is much cross selling and linkagebetween products from both the selling and operational sides, which falls in line with JPMC‟sstrategy for organic growth. The linkage of activities and capabilities between CB and IBbusinesses under the enterprise umbrella, and the fact that no business provides >70% ofrevenue, means that the JPMC has a related constrained strategy (Exhibit 9a).JPMorgan Chase - Commercial Banking: Business Level StrategyJPMC‟s utilizes cost leadership to target mass market retail and business customers in CB. Thefirm‟s cash back debit card, its low-fee checking account, free online banking, and ATM/Mobilerepresent a low-cost business level strategy. While JPMC does try to pursue some degree ofbroad differentiation through its large branch, ATM network, and customer service, itspromotional campaigns and public perceptions seem to weigh heavier on the cost leadershipquadrant. These CB business units comprise a large market share (~13%) of the US CBindustry, but in terms of aggregate growth rates, have a negative return (-6.4%). Based on thesefacts, JPMorgan commercial banking is a „cash cow‟ in the BCG matrix (Exhibit 9b).JPMorgan Chase - Investment Banking: Business Level StrategyJPMC‟s IB adheres to a focused differentiation business level strategy by targeting corporations,financial institutions, and institutional investors through “deep client relationships and broadproduct capabilities”.22 JPMC‟s IB business unit captured the largest share of IB fees of anyinstitution in the US (and world), while still retaining a high growth rate of 14%. Based on thesetwo measurements, its IB unit can be classified as a „star‟ in the BCG matrix (Exhibit 9c).Citigroup: Corporate Level StrategyThe CG organization is divided into three major segments and seven business groups. CG‟sbusiness segments offer some unique financial products to targeted customers with a significantamount of cross selling. In addition, there is a large degree of operational and technologicalplatform sharing to provide different financial products. The sharing of linkages and attributes 19
  20. 20. between businesses, as well as the fact that no business provides >70% of revenue, translates to arelated constrained corporate strategy for CG (Exhibit 10a).Citigroup - Commercial Banking: Business Level StrategyThe stated goal of the Regional Consumer Banking unit is to target “affluent” customers in “thetop 150 international cities” and urban centers with tailored financial product and service lineofferings.23 Within this smaller segment, CG appears to utilize both a cost leadership strategy(low-fee checking/no fee debit card) while broadly differentiating itself through factors thatinclude product innovation and pricing, access to distribution channels, and technologyadvances. Hence, CG pursues a focused low-cost and focused differentiation business levelstrategy with its CB unit. Unlike its CB competitors, Citibank‟s commercial unit logged animpressive 13.4%24 growth, higher than the 8% growth the IB unit saw in 2010. The CG CBsegments can therefore be placed in the „star‟ quadrant on the BCG matrix (Exhibit 10b).Wells Fargo: Corporate Level StrategyWF is comprised of three primary operating segments. Much like CG and JPMC, WF leveragesshared knowledge, processes, capabilities, and activities across its business lines to provideoperational efficiency as well as build competitive advantages that come with organizationalintegration. The fact that nearly all CB and IB products can be sold from each branch, andfrequently by the same banker across shared platforms, shows how the bank‟s business unitsshare links and attributes, which combined with no unit accounting for >70% of revenue, resultsin a related constrained corporate strategy (Exhibit 11a).Wells Fargo – Commercial Banking: Business Level StrategyThe acquisition of Wachovia Bank in 2008 helped to propel WF into the #2 position for CB inthe US. Much like CG and JPMC CB groups, the CB business segment of WF adheres to acombined cost leadership and broad differentiation business level strategy. Similarly, WF alsooffers a low-cost checking account with bonus interest and cash back based on spendingbehavior and additional accounts opened (e.g. credit card), though it does not match the discountlevels of JPMC. Instead, WF‟s broad differentiation focuses on “wallet share” – or promotingthe convenience of having all financial accounts with the Bank, including single point of 20
  21. 21. servicing as well as easy integration of accounts on platforms such as online or mobile banking.WF‟s Community Banking segments command more than 10% of the CB market, making it thefourth largest. It falls in line with most rivals, however, its negative YOY growth rate from 2009to 2010 (-5.2%)25 qualifies it as a „cash cow‟ in the BCG matrix (Exhibit 11b).Goldman Sachs - Corporate Level StrategyGoldman Sachs reports its operating activities in four business segments that fall under the aegisof IB. As nearly the entirety of Goldman Sachs revenue can be attributable to IB activities,Goldman‟s corporate level strategy can be classified as dominant business (Exhibit 12a).Goldman Sachs - Business Level StrategyIn the IB industry, Goldman Sachs targets very capital-heavy customers that include, accordingto its 2010 annual report, “corporations, financial institutions, governments and high-new-worthindividuals.”26 Goldman‟s ascension from the #3 to #1 in merger and acquisition advisory and#8 to #2 in the capital markets, attest to Goldman‟s ability to differentiate its services from otherIBs through a reputation for diligence and a successful track record. 27 Goldman pursues afocused differentiation business level strategy exemplified from its commanding 5.0% marketshare of fees generated from IB in the US. However, its relatively low 4% growth rate in feesgenerated from 2009 to 2010 is much lower than many of its top rivals, classifying the entireGoldman firm as a „cash cow‟ according to the BCG matrix (Exhibit 12b).Morgan Stanley: Corporate Level StrategyMorgan Stanley reports its operating activities in three business segments of which all can beconsidered as part of IB. As all three business segments are focused on IB products and services(albeit to different customer segments), Morgan Stanley can be classified as having a dominantbusiness corporate strategy as IB accounts for >70% of the firm‟s revenue (Exhibit 13a).Morgan Stanley - Investment Banking: Business Level StrategyAcross its three business units, Morgan Stanley‟s business-level strategy can be classified asfocused differentiation. While the Global Wealth Management Group targets more mass-marketindividual investors and small-to-medium sized businesses (primarily through the Smith BarneyHoldings subsidiary), the Institutional Securities and Asset Management units provide high- 21
  22. 22. quality services to large corporations and institutions as well as high net worth clients 28. MorganStanley‟s 5.3% market share of IB fees, as well as its industry-leading growth rate of 19%,places the IB in the „star‟ quadrant of the BCG matrix (Exhibit 13b).II.D.4 Strategic Positioning - Value and Cost Drivers and VRIO AnalysisIn order to assess the strategic positioning of BofA and its primary competitors in CB and IB, ananalysis of their value drivers and cost drivers must be conducted, in addition to the review oforganizational resources and capabilities within the VRIO framework.Analysis of BofA‟s value chain, value drivers, and cost drivers (Exhibit 14b-c) reveal that thefocal firm has a host of sustained competitive advantages (SCAs) in internal resources andcapabilities, which in turn feed the value (and cost) drivers that highlight the firm‟s strategicposition. BofA only reaches parity with the industry in terms of its IT offerings and accessconvenience factor, while finding itself at a disadvantage in terms of risk management,government relations (political savvy), and customer service. While a number of its value (andcost) drivers may not be rare or hard to imitate, that does not prevent BofA from leveraging theseassets into its positioning strategy. A more detailed analysis for BofA is covered in Section III.D.3, p.17.JPMorgan Chase - Strategic PositioningIn reviewing JPMC‟s value and cost drivers (Exhibit 15a-b) we can see that it has adopted a mixof cost leadership and broad differentiation strategy within its CB units, while targeting afocused differentiation strategy in IB. The CB focus helps build the „easy one-stop shop‟competitive advantage, which is further emphasized by integrating access to products in an easy,usable manner. In addition to this broad differentiation advantage, JPMC provides costleadership positioning through credit cards that offer high levels of cash back, low interest andhigh points for consumers and businesses. This array of credit cards to match benefits tocustomer behavior shows how JPMC uses customization to build its competitive position.Similar to its CB arm, its IB segment uses its diverse product offering to differentiate itself as aninstitution that caters to all needs. In addition, its large internal capital base allows it to providelarger loans to customers while bringing down its cost of capital. 22
  23. 23. The VRIO analysis for JPMC (Exhibit 15c) shows that it has SCAs in its broad product line andability to cross-sell, its relatively lower cost of capital (due to large internal asset base), its abilityto create innovative products that match to customer benefit preferences and/or behavior, and itsextensive leveraging of technology (multiple access and management platforms) in a usablefashion.Citigroup – Strategic PositioningMuch like its CB competitors, CG‟s value chain, value and cost drivers point to a positioningstrategy of broad differentiation with some „me-too‟ cost leadership (Exhibit 16a-b). Valuedrivers include a broad line of CB products to meet customer needs as well as a unifiedtechnology platform across products and digital channels to facilitate access and usability. Astronger focus on providing products in emerging markets (e.g. China, S.E. Asia) has provenlucrative, as growth in the Western CB markets has atrophied.CG‟s VRIO analysis (Exhibit 16c) shows that its widespread international presence is asustained competitive advantage for the firm. With a footprint that includes banking productsand services in 160 countries through 16,000 offices worldwide29 and investments in large bankssuch as KorAm Bank (S. Korea), Bank of Overseas Chinese, and Banamex (Mexico) 30, CG canleverage its organization know-how of financial product delivery across worldwide economies ofscale. However, the diversified product line and integrated systems platform themselves onlyprovide CG with parity as compared to equally capable competitors.Wells Fargo – Strategic PositioningWF‟s value and cost drivers (Exhibit 17a-b) indicate that its Wholesale and Community bankingbusiness units employ a broad differentiation strategy, though some elements of cost leadershipare present. WF‟s competitive position derives partially from its strong corporate reputation,with the WF brand placing #13 globally31 and ranking the highest in Forrester‟s 2010 CustomerAdvocacy rankings among large CB competitors.32 This strong reputation dovetails with othercapabilities that provide WF a SCA according to the VRIO framework (Exhibit 17c). SCAsinclude a very loyal customer base as well as a high cross-sell ratio (6.02 products perhousehold).33 The broad and diversified product line is the value driver that enables this cross- 23
  24. 24. selling capability, and as WF‟s value chain shows, is a pervasive organizational value that isleveraged across the entire firm. WF‟s conservative approach to real estate lending was anoutcome of its strong risk management processes, a capability that provides a temporarycompetitive advantage. The firm also leverages technology to deliver its products and services,though this only provides parity with other large CB competitors.Goldman Sachs – Strategic PositioningThe analysis of Goldman Sachs‟ value and cost drivers shows that the firm positions itself with afocused differentiation strategy (Exhibit 18a-b). Like its rival investment houses, Goldmanfocuses on large corporations, institutions, and sovereign government customers with itsfinancial services products. However, it positions itself as a more experienced and investment-client-focused firm that has consistently focused on IB products. Goldman leverages these valuedrivers to differentiate itself from newly-formed CB/IB financial supermarkets that don‟t haveestablished histories as combined companies with split allegiances.Goldman‟s VRIO (Exhibit 18c) shows that its SCAs emerge from superior M&A capabilities, astrong reputation, an enviable company culture, extensive political connections, and a history offinancial product innovation. In addition, Goldman‟s innovation with financial products such asblock trades and financial derivatives34 has provided differentiation and sustained competitiveadvantage.Morgan Stanley – Strategic PositioningMorgan Stanley‟s analysis reveals a focused differentiation strategy within the IB industry, as ithas shed nearly all of its retail businesses to focus on its wealthiest clients and institutions.35Morgan Stanley value drivers (Exhibit 19a) include having the largest brokerage force in theindustry with 18,50036, as well as a lion‟s share of the top-performing financial advisors (byassets) as ranked by Barron‟s magazine. 37 A significant input cost driver (Exhibit 19b) forMorgan Stanley is its reliance on short-term borrowing for capital, as compared with competitorswho have a larger internal asset bases due to deposits from their CB operations.38 In addition,expenses in its Asset Management business are cost drivers, with CEO James Gorman focusingon increasing margins from the current 9% to 20% through cost cutting and job cuts.39 24
  25. 25. In the context of the VRIO framework (Exhibit 19c), Morgan Stanley provides a SCA in thedepth and quality of its brokerage analyst capabilities, though its IB focus and technologicalresources only provide it with parity against rivals.II.D.5 Value - CostThere are two primary considerations that make an analysis of customer willingness to pay/valuecreation in the CB and IB industries very difficult to assess. The first is that each industrycontains hundreds of financial products that provide varying degrees of value. The second is thatthe differences in customer willingness to pay across primary BofA competitors, particularly inCB, are difficult to assess quantitatively.Commercial Banking Value – Cost MethodologyDeposits (checking accounts), credit cards, and business loans were used as a proxy for all CBproducts. Based on an average monthly checking account fee of $20 (Exhibit 20a) and anaverage US salary of $41,673 in 201040, the total percentage of salary paid by consumers tomaintain a checking account (not including other fees such as overdraft) is approximately 0.58%.This compares with an average of 2.5% fee paid to cash a check through a check-cashing onlyservice.41 In addition to interest rate benefits, there is value created in the convenience of more-widespread ATMs, as well as the decreased risk of not needing to carry an entire paycheck incash in one‟s pocket.In regards to credit cards, customers pay an average of approximately 16% interest annually onstandard bank-issued credit cards (Exhibit 20a). This stands in stark contrast to usurious ratesof interest on one of the next „best‟ non-bank options – payday loans – which can range from212% for a one-month loan to 911% for a one-week loan.42For small or mid-size businesses, loans can range from a 3-4% spread over prime for an SBAloan (Exhibit 20a) to the mid-teens spread over prime for standard business loans, which equatesto a range of 6.25% to approximately 20%. However, this compares to the 30% or more thatnon-bank “Merchant Cash Advance” providers charge business for varying sizes of cashadvances (from $5,000 to over $1M).43 25
  26. 26. While certain non-bank services may be used more than others as substitutes for bankingservices based on convenience and fees, we will determine the general willingness to pay for CBservices as an average of these three non-bank offering fee rates (2.5%, ~212%, 30%) – anequivalent of 81.5%.Based on an analysis of CB profit margins for the four primary competitors, we find that theaverage profit margin is approximately 48% for 2010 (Exhibit 20b). According to thesecalculations, the value captured by CB customers is approximately 33.5% above the pricecharged by banks.Given the relatively similar price and fee structure for the three CB proxy products across thefour competitors and the difficulty in quantifying the value of different value drivers (e.g. goodonline customer experience vs. a bad experience), we will need to use a measurement of marketshare as a proxy for the overall attractiveness and value of one CB‟s offerings over others.According to Exhibit 5, BofA has a combined market share of 43% across the three proxy CBproducts.As BofA is the CB market leader in aggregate across these products, we will assume itscustomers capture the full 33.5% willingness to pay over price. For other competitors with lesseraggregate market shares, their percentage share will be divided over 43% and multiplied by the33.5% willingness to pay. See Exhibit 20c for CB competitor V-C. The methodology outlinedin Exhibit 20a-b was applied to all.JPMorgan Chase: Commercial Banking Value – CostJPMC value drivers such as broad product offering („one stop shop‟), widespread physical andvirtual product access channels, and customized product offerings – e.g. credit card rewardprograms to match customer behavior – all align with its customers‟ willingness to pay andcustomer surplus/value capture.JPMC has an aggregate market share of 36.1% across CB products, as outlined in (Exhibit 5).Dividing this market share by 43% (the aggregate market share for leader BofA) and multiplying 26
  27. 27. by the 33.5% willingness to pay, we can see that JPMC buyer surplus is approximately 28.1% -as shown in Exhibit 20c. As such, the JPMC CB aggregate operating cost is $25.86 billion, theaggregate firm surplus is $29 billion, and the aggregate buyer surplus is $7.3 billion.Citigroup: Commercial Banking Value – CostCG value drivers such as broad product offering, „me-too‟ product integration and (particularly)its international presence and delivery know-how all inform its customers‟ willingness to pay.It was determined that CG has an aggregate market share of 39.5% across CB products, asoutlined in Exhibit 5. Dividing this market share by 43% (the aggregate market share for leaderBofA) and multiplying by the 33.5% willingness to pay, we can see that CG buyer surplus isapproximately 30.8% as shown in Exhibit 20c. As such, the CG CB aggregate operating cost is$24.5 billion, the aggregate firm surplus is $23.8 billion, and the aggregate buyer surplus is $7.5billion.Wells Fargo: Commercial Banking ValueWF value drivers such as its high brand reputation, loyal customer base due to high degree ofcross-sell (~6 products per household), and its innovative technological offerings all inform itscustomers‟ willingness to pay.It was determined that WF has an aggregate market share of 24.4% in CB products, as outlinedin Exhibit 5. Dividing this market share by 43% (the aggregate market share for leader BofA)and multiplying by the 33.5% willingness to pay, we can see that WF buyer surplus isapproximately 19.0% as shown in Exhibit 20c. As such, the WF CB aggregate operating cost is$41.3 billion, the aggregate firm surplus is $35.6 billion, and the aggregate buyer surplus is $7.9billion.Investment Banking Value – Cost MethodologyThe customer value derived from IB services is more difficult to quantify, as perceived customervalue rests more on intangible factors such as experience, specialization, innovation, andreputation than on quantitative factors. In addition, the lack of good substitutes or alternatives toIB services makes willingness to pay more difficult to measures. 27
  28. 28. While exact customer value capture measures may be difficult to derive and precise willingnessto pay measurements elusive due to no clear „second-best‟ option, a relative scale of valuecapture can be formed by measuring three key factors 44: industry experience, experience withlarge transaction size, and strong relationship management skills.In regards to industry experience and large transaction (deal) size analysis, we will use acombination of Q3 2009 and Q3 2010 M&A deal data as measure of relative performance. Interms of strong relationship management, the number of financial advisors each bank has on theBarron‟s „Top 100‟ Financial Advisors list for 2011 was used as a proxy. This attests to anorganization‟s ability to hire and/or train good relationship managers.45 See Exhibit 21a formethodology.While BofA placed 2nd in customer relationships, its smaller number and value of M&A dealsbetween 2009 and 2010 placed it in „tier 2‟while Morgan Stanley lies in „tier 1‟. Per Exhibit21b, BofA‟s cost for IB services was approximately $31.6 billion while the firm surplus was$13.5 billion.JPMorgan Chase: Investment Banking Value – CostJPMC‟s broad investment product offering as well as its large internal asset base fromCommercial Banking deposits are key value drivers to the IB‟s total economic contribution.Based on JPMC‟s middle-of-the-road M&A deal size and deal volume, and theunderrepresentation in the list of top 100 financial advisors (Exhibit 21a), JPMC was ranked a„tier 2‟ for IB buyer surplus creation. In line with Exhibit 21b, JPMC‟s cost for IB services wasapproximately $35.3 billion and firm surplus was more than $14.5 billion.Goldman Sachs: Value – Cost FrameworkGoldman Sachs‟ long-term industry experience, history of (derivative) product innovation, andstellar reputation are key value drivers that contribute to the firm‟s total economic contribution.Based on Goldman‟s relatively high M&A deal size, somewhat variable deal volume, andabsence from Barron‟s 2011 list of top 100 financial advisors (Exhibit 21a), Goldman was 28
  29. 29. ranked a „tier 2‟ for IB buyer surplus creation. In line with Exhibit 21b, Goldman‟s cost for IBservices was approximately $25.2 billion and firm surplus was nearly $14 billion.Morgan Stanley: Value – Cost FrameworkMorgan Stanley‟s largest-in-industry brokerage force (18,500), impressive representation onBarron‟s 2011 list of top 100 financial advisors (37 of top 100) (Exhibit 21a), and its industryaccolades that include best Equity Bank and best M&A Bank46 are important value drivers thatcontribute to its value creation and firm/buyer surplus.Morgan Stanley was ranked the only „tier 1‟ IB for buyer surplus imparting it incrementallyhigher buyer value creation than its competitors. In line with Exhibit 21b, Morgan Stanley‟s costfor IB services was approximately $24 billion and firm surplus was $7.8 billion.II.D.6 Comparative Financial AnalysisIn 2011, BofA has consistently been reporting quarterly net losses resulting in poor profitabilityratios. The legacy mortgage costs incurred due to its acquisition of Countrywide FinancialCompany in 2009 has been a major contributor to this performance. In fact, the net losses 47resulting from the mortgage-lending segment were close to $10 billion alone by the thirdquarter in 2011. Despite this, a closer look at the capital ratios for BofA indicates that thecompany is still fundamentally strong with the four of the six business segments includinginvestment banking posting healthy profits. In the short term, the BofA management team willface a tough challenge of successfully resolving its mortgage crisis while maintaining thefundamental health of the company and making it profitable for shareholders.A detailed ratio performance analysis was done in Exhibit 22a-c. The interest coverage ratio interms of EBIT and EBITDA of 2.6 ~2.7 is nearly 45% lower than the industry average. This is aclear indication that BofA is struggling to generate enough operating cash to meet its interestexpense liabilities as compared to the industry. Over the last 4 years, the financial crisis andcertain bad investments by BofA, e.g. the acquisition of Countrywide, have resulted in this ratiobeing even lower. 29
  30. 30. The debt to capital ratio is consistent across all banks and the industry as a whole. This makessense given the fact that the interest income for BofA is also nearly 50%. This is an indication ofvery high similarity in the capital structure of the banks.Traditionally, as a rule of thumb, firms strive to achieve a ratio of 1.5 on their return on assets.However, BofA happens to be the only bank to have a negative ROA. The industry average is1.3%. The nearly $8 billion net losses resulting from the mortgage segment of BofA in 2010 isresponsible for pulling this ratio lower. The profitability of BofA in its entirety depends on asuccessful resolution of the risky mortgages it acquired with the acquisition of Countrywide. Anegative ROA over a period of time often indicates that the business segment or the company asa whole needs to file for bankruptcy as it is no longer able to generate income on its assets for itsshareholders.Using similar reasoning, the return on equity of -0.78% is also lower than the industry average ofnearly 13%. This will prove highly detrimental for BofA in attracting potential investors in thenear future. The notable exception is Berkshire Hathaway, which is investing $5 billion in BofA.BofA has a superior management at the top of its hierarchy which has the capability to steerBofA clear of the recent mortgage crisis since the acquisition of Countrywide FinancialCorporation. As a result, BofA continues to remain one of the premier banks in the US eventhough the ROA and the ROE ratios suggest otherwise.An investor may be misguided by the Price to Book ratio of 0.25 for BofA. However, in the caseof BofA, it is more indicative of poor firm performance resulting in a low number whencompared to 0.71 for the industry. Like the other profitability ratios, a low number for Price toBook can be attributed to BofA consistently posting losses in every quarter in 2011.A lower Price/Earnings ratio of 5.27 for BofA as compared to that of 8.21 for the industryindicates investor‟s hesitance in investing in BofA. They are willing to pay much less per dollarin earnings as compared to its top ten competitors. This ratio could be argued to have been lowerthan the current level. However, the current level indicates that the investors still believe that thestrength upper management has the capabilities to turn the company around to pre-2009 levels ofprofitability. 30
  31. 31. II. D.7 Implications of Competitor AnalysisOur competitive analysis demonstrates that the industry continues to operate in a maturity phaseand confirms this trend on account of its propensity for mass consolidation and little product andservices differentiation. Industry players are in parity with each other and offer similar productsand services, IT platforms, extensive global presence and over 100 years of experience. Due tothe financial crisis, banks are cutting costs and layoffs are happening at the majority of key firms.Primary competitors have smaller amount of debt comparing to BofA and lower cost to revenueratios. In order to stay competitive, BofA has to reduce outstanding debts and significantly cut itscosts.II. E. Intra-Industry AnalysisII. E.1 Stage of Industry EvolutionThough the recent financial crisis put the industry into a stage of temporary shakeout, financialservices remains mature in its life cycle. Because the industry has undergone dramaticconsolidation and product offerings and services are commoditized, superior customer serviceand convenience in this industry can leverage significant economic benefits. While attempts toregain reputation are ongoing, financial institutions have been forced to innovate on attributesthat are important to their customers. Quality, ease of use, convenient delivery channels andflawless execution are among the strongest drivers.48II. E.2 Strategic Groups AnalysisOn account of their high percentage of firm revenue, emphasis on customer service, quality, andwide breath of product offerings, CB and IB are considered to be strategic areas where a firm candifferentiate from its competitors.Threats and Opportunities OverviewBoth strategic groups face a number of threats and opportunities from competition within theindustry and through external forces. Today, threats to CB and IB come from lack of customerdemand, slow recovery of economic conditions, and tightened government regulations. Futureopportunities lie in development of delivery channels thus firms will have to maintain ageographic and virtual balance between branch and ATM locations, online presence, and mobileapplications in order to maintain customer expectations.49 31
  32. 32. ThreatsToday, customers remain sensitive to big bank changes. IBs are seen as the root cause of thefinancial crisis and CBs are undergoing turbulent times because of government policies like theOpt-In Regulation50 and the Dodd-Frank Act51, which have shaken firm revenue streams andconsequently garnered reaction in the form of fee hikes. But threats to these strategic groupshave not stopped with government regulations and consumers. For CBs, regional banks, creditunions, and thrifts, which are not affected by the revenue threats that Dodd-Frank poses for bigbanks, have made rapid shifts in their marketing strategies to target potential “switchers” in orderto gain big bank patronage. Service offerings like “switch kits” and pay back incentives aretactical moves, which have made some recent traction.52 For IBs, online investment and assetmanagement options are also gaining strength.OpportunitiesAs consumers are looking for convenience, ease of use, and access to a wide breathe of productsand services, future opportunities lie in development of delivery channels. As basic bankingtransactions in branch locations are projected to increase by 3% from 2010 to 201553, advisoryand investment services, relationship management, applying for complex products likemortgages and loans, and general problem solving use is expected to rise.54 Online and mobileapplication development across commercial and investment banking will also be key.Improvements in online customer service, ease of bill pay and transactional use will not onlyappease customer demand, but will provide a focused, cross-marketing opportunity to target sellother products to consumers in an optimized platform.Mobility BarriersMobility barriers are not an issue in this industry. Since financial institutions offer the sameproducts and services and have an existing customer base, the opportunity to cross-sell makesswitching the balance of their business from one strategic group to another easy.Evaluation of BofA’s Competitive PositionSpeculation can be made that changes to BofA‟s competitive position prior and afterimplementing cost cutting changes will be slight because of its massive size and dominating 32
  33. 33. presence in the industry. As it stands, at the business level in CB, BofA services the massmarket and is broadly differentiated with a uniqueness perceived by its customer. In IB, BofAservices the narrow market and is focus differentiated with a uniqueness perceived by customer.As Phase I of the Project New BAC rolls out, it can be assumed that this will have a negativeimpact on its customer service and perhaps narrow its offerings. At most, BofA will shiftslightly down and left from its position in Exhibit 8.II. E.3 Other Competitive DynamicsOther competitive dynamics that must be considered as threatening is the emergence of CB is thepopularity of online-only banks such as PayPal, ING Direct and Smarty Pig. These firms areparticularly dangerous to retail channels where customers make up 45% of revenue. 55 Theseplatforms, which provide basic retail services, have little overhead, and relatively low barriers toentry, are gaining steam amongst frustrated consumers who are looking for an alternative.II. F. Threats and OpportunitiesII. F.1 Emerging Threats and OpportunitiesEmerging threats and opportunities are discussed in Sections II. B-D, p.12 and F2, p.33.II. F.2 Threats and Opportunities Implications for StrategyGiven that CB and IB are heavily regulated by government regulations, economic conditions,and are at the mercy of customer demand, CB and IB must continue to work on developing theirdelivery channels to cater to the customer. Since quality, ease of use, convenient deliverychannels, and flawless execution are among the strongest drivers, strategy must continue to bebuilt around these assets in order to remain competitive.II. G. Summary of External AnalysisThe financial services industry has experienced turbulent times since the financial crisis. Asgovernment regulations and policies continue to have a major impact on industry operations andguidelines, firms continue to struggle in order to meet regulatory, consumer and shareholderexpectations while also remaining profitable.On account of the size and complexity of key players, the scope of this analysis considers CBand IB business segments, as they are considered strategic groups on account of their importance 33
  34. 34. to customers and share of firm revenue generation. Firms compete in these segments dependingon the given product, service, or geographic region for roughly the same customer segments andshare parity on most levels, though they have a few unique value drivers. As a result, most firmsshare similar results across financial performance ratios, customer service polls, and in operatingpractices.III. INTERNAL ANALYSISIII.A. Business Definition and MissionBofA is a multinational banking and financial service corporation that provides investmentbanking, wealth management and other services.56 It is currently the second largest bank holdingcompany in the United States by assets ($2.2B), 57 and is the fourth largest bank in the USby market capitalization ($58.59B).58Its purpose is “to make opportunity possible for our customers and clients at every stage of theirfinancial lives”. 59 BofA‟s objectives are to serve its three customer groups, offer all of itscapabilities in the US and its investment capabilities worldwide, provide products and serviceson an integrated basis to meet customer and client needs, and create long-term relationships thatgrow over time while providing value to customers.60 According to its 2010 Annual Report,BofA aims to maintain its strategy by “staying customer focused, maintaining a fortress balancesheet, pursuing operational excellence, delivering on its shareholder return model, cleaning uplegacy issues, and being the best place for people to work”.61III.B. Organization Structure, Controls and ValuesIII.B.1 Organization StructureHeadquartered in Charlotte, North Carolina, BofA currently operates regionally throughout theUS and in 40 countries.62 BofA‟s organizational structure is broken into two main subsidiaries;Merrill Lynch & Co. Inc. and NB Holdings Corporation (Exhibit 23). Major operatingsubsidiaries of Merrill Lynch include commodities, capital services, government securities, andinternational. NB Holdings includes global card services, commercial and retail banking.63 34
  35. 35. III.B.2 Employee Controls, Values, and EthicsWhile appraisal methods differ across lines of business, the firm monitors employee performancethrough annual 360 Performance Reviews. BofA also trains personnel annually on its Code ofEthics. Included in the document are its core values to: “deliver for our customers, clients andshareholders, trust in our team, embrace the power of our people, act responsibly, and promoteopportunity”.64 As stated in the BofA 2010 Annual Report, “… [W]e has developed employeeincentive, reward and recognition programs that align with our customer experience goals.”65Though BofA has received criticism in the media since the financial crisis, overall it can beassumed, because of the current awards and accolades that it has received, that the company iswell aligned with the core values that it puts forth. Honors such as, World’s Most AdmiredCompanies, Top 50 Companies for Diversity, and Top 200 of the Global 2000, demonstrates thatBofA supports its people and fosters a safe, ethical environment in which to work.66III.C. BofA – Strategic Position DefinitionIII.C.1 BofA - Corporate Level StrategyBusiness PortfolioBofA‟s business portfolio under CB includes Deposits, Global Card Services, Home Loans andInsurance, and Global Commercial Banking. The CB scope of product offerings includes aportfolio targeted to mass-market consumers and small-to-mid size businesses: 1. The Deposits group offers products and services that represent traditional retail banking offerings; these include checking, savings, money market accounts, and CDs and IRAs. 2. Global Card Services is a leading credit card issuer in the US and provides consumer and business cards, consumer lending, and international credit/debit cards. 3. Home Loans and Insurance provides consumer real-estate products, including first-lien home mortgages, home equity loans and lines of credit, and insurance-related products Global Commercial Banking offers customer lending-related products, working capital management, commercial loans, and asset-based lending.BofA IB provides a portfolio geared towards large corporations, institutions, and high-net-worthindividuals: 35
  36. 36. 1. The Global Banking and Markets group caters to the financial needs of institutional clients.2. The Global Wealth and Investment Management unit provides investment and other banking services to affluent individuals and institutions.67Corporate StrategyIn the context of Rumelt‟s framework, it is clear that BofA employs a related constrainedcorporate strategy. BofA competes in the CB and IB markets within the financial servicesindustry; however, neither aggregation of business units comprises greater than 70% of BofArevenues, with CB garnering 54% and IB representing 41%.68 (Exhibit 24).BofA has shares linkages and attributes between the CB and IB business units. This sharing isevident in BofA‟s focus on an integrated customer experience across products and services,customer segments, and generally through its servicing channels. Integration extends to itsoperations, where shared technological platforms, training that promotes cross-selling, andoperational efficiencies across management attest to the cross-functional nature of the firm.This high integration and linkage between business units was prevalent before the large-scalecost-cutting measures, and will continue after these measures have been implemented. ProjectNew BAC will not affect BofA‟s core businesses and need for broad integrated product suitesand customer service support. In fact, even tighter integration of operations and businesslinkages will likely be needed to drive the operational efficiencies that will allow cost-cuttingsavings to be realized with minimal impact to the customer experience.Recent Merger / Acquisition / Divestment ActivityBofA has made significant acquisitions with MBNA (2005), Countrywide Financial (2007), andMerrill Lynch (2008) in the past six years.In line with the ally vs. acquire framework outlined by Dyer, Kale, and Singh69, the acquisitionof MBNA70 made sense from BofA‟s strategic business perspective. The reciprocal synergiesand redundant resources between the two firms (BofA also had a credit card division) pointclearly towards acquisition, as does the high level of competition for resources (credit card 36
  37. 37. users). In addition, the medium-to-low degree of market uncertainty – consumers werecontinuing to use their credit cards more extensively – also directs BofA to an acquisitionstrategy. BofA was able to leverage the customer base resources from MBNA to pursueeconomies of scale (operations efficiency) and economies of scope (increase affinity credit cardofferings). In addition, applying Michael Porter‟s Diversification framework shows that both theattractiveness test and better-off test were satisfied as both high credit card industry profits and astronger competitive advantage in the credit card market could bring continual value to BofAover the long term.71The Countrywide acquisition initially appeared to offer many benefits. The reciprocal synergiesand redundant resources borne of both companies originating in consumer mortgages, as well asthe medium-to-low degree of market certainty for mortgages at the time of all point to a strategyof acquiring or merging. While it could be argued that the soft resources of Countrywide (e.g.workforce) may be partially lost in merging the two companies, synergy did exist in the hardresources of back office technological synergies. In addition, the acquisition would allow BofAto leverage Countrywide‟s capabilities in mortgage servicing to its own captive mortgageportfolio.72Finally, BofA‟s 2008 acquisition of the Merrill Lynch brokerage was a unique situation wherethe US government may have nudged BofA to acquire Merrill Lynch on the same day thatLehman Brothers collapsed into bankruptcy to help it avoid the same fate.73 Synergies did existbetween the two firms, as BofA would be able to offer Merrill‟s retail brokerage services to itsown customers as well as fill out BofA‟s investment banking and asset management services,which were relatively weak as compared to Merrill‟s offerings.74 Aside from leveraging theseresources and capabilities that Merrill brought to BofA, the large extent of redundant resources(primarily employees and technological infrastructure) also pointed towards an acquisitionstrategy, with operational efficiencies manifested through cost-cutting measures such aslayoffs. 75 The Porter framework for diversification value-add was also satisfied through thebetter-off test, with Merrill Lynch integration bringing a competitive advantage to BofA‟s CB. 76This advantage was evident on the customer side through increased product and service offering,as well as internally through cost-lowering by sharing of activities in the value chain. 37
  38. 38. Recent Alliances / Partnership / Joint Venture ActivityIts membership in the Global ATM Alliance beginning in 200277, as well as a joint venture withFirst Data Corp. in 2009 to build a „next generation‟ payments company are two of BofA‟s morerecent partnerships.78The Global ATM Alliance, formed with other international banks, allows for customers ofmember banks to use debit cards at member banks‟ ATMs internationally without operator feesor international ATM fees (aside from currency conversion). 79 According to Walker‟spartnership motivations, the advantages of the ATM alliance structure are that BofA can provideexpanded market access for customers to international ATMs while also avoiding the fixed entrycosts of establishing its own international ATM network (cost reduction). 80In 2009, BofA created a joint venture with First Data Corp called, “BofA Merchant Services”, toprovide “next generation” payment solutions to businesses. The suite of products offeredincludes credit and debit cards, as well as e-commerce payments and mobile commercetechnology solutions.81 In the context of the Walker partnership framework, BofA‟s motivationstems from technology transfer and development provided by First Data Corp.82 This technologypositioning strategy by BofA includes an investment of significant financial and technicalresources, which will allow existing BofA merchants to benefit from the payment technologyoffered by First Data.83III.C.2 Business Level StrategyBusiness Level Strategy - Commercial BankingThe four business units that comprise BofA CB employ a mix of cost-leadership and broaddifferentiation business-level strategies in its operations and targets consumers and small-to-midsize business. This focus is evidenced by the fact that BofA serves nearly 57 million consumersin the US with its Deposit products and 12% with US small businesses.84 In addition, BofA is #2in credit card issuance in the US as well as the #1 provider of commercial and industrial loans tosmall and mid-size business.85 BofA serves these markets through multiple channels includingphysical bank branches, virtual phone and web/mobile interfaces, and through third-partyservices (e.g. mortgage servicing). 38
  39. 39. The cost-leadership element of the CB business-level strategy is evident in the product pricingstructure for the CB product suite (Exhibit 5). Among its primary competitors, BofA has thelowest average monthly fee for checking accounts ($15), is tied for lowest average credit cardrate (~16%), and has an equivalent Commercial and Industrial Loan Rate range (~3-4%) ascompetitors. While BofA displays cost leadership amongst primary competitors, it is not thecheapest provider of financial products in the overall industry; institutions such as small regionalbanks and credit unions routinely provide lower-cost or free basic banking services.However, BofA also employs a broad differentiation strategy to distinguish itself from theserivals by offering a diversified suite of integrated products, services, and customer support.Through both acquisitions and organic internal product line extensions, BofA leverages itsbreadth of product offerings as a competitive advantage. BofA promotes the convenience ofaccessing and managing products through a single interface be it virtual or physical. A largeproduct breadth also allows BofA to provide financial products and services that more optimallymeets its customers‟ needs than other financial institutions with more limited product portfolios.In terms of the BCG matrix, it is clear that BofA‟s CB can be classified as a „cash cow‟, as it hashigh market share (many products are #1 in its category) but a negative growth rate of -15%.86Given this, BofA should look to allocate capital from CB units to a „star‟ or „question mark‟business unit as the higher growth rate promises greater upside return potential (Exhibit 25a).Business Level Strategy - Investment BankingBofA business units classified as IB pursue a focused differentiation business-level strategy. TheIB portfolio targets a focused customer segment that includes large corporations, institutions, andhigh-net-worth individuals through the same physical and virtual channels as CB. However,BofA provides higher levels of personalized relationship banker service as well as a product andtechnology support staff dedicated solely to IB clients.In the IB market, BofA‟s differentiation strategy focuses on promoting its extensive experience,product breadth and depth, existing relationships with other corporations, and effective strategicconsultation as a unique package of offerings that competitors cannot imitate. 87 BofA‟s IB 39
  40. 40. strategy can be classified as a „star‟ within the BCG matrix. It commands the #2 position formarket share for investment banking services in the US while maintaining a 15% growth rate,among the highest for IBs. As such, IB should be allocated funds from the CB segment to helpfuel overall corporate revenue growth (Exhibit 25b).Business Level Strategy Fit with Corporate StrategyBofA‟s business-level strategies for its CB and IB segments fit closely with its overarchingrelated-constrained corporate strategy. Business level strategies that focus on providing broadand integrated suites of product offerings alongside seamless customer service inform thecorporate level strategy, where strong linkages and attributes between business units mean thatCB customers can easily incorporate IB services into its relationship with BofA. BofA supportsthis integrated experience through employee cross-training, internal business processes thatsupport and reward cross selling, and bank-wide technology platform integration to removeoperational obstacles to providing this integrated customer experience.88Business Level Strategy Change Based on Strategic MoveBofA‟s strategic cost cutting move to preserve its market position and overall business viabilitymay have an effect on its business-level strategy. If BofA selects mass layoffs, this could affectthe „seamless‟ and integrated customer experience, as the customer service staff will besignificantly decreased.Conversely, a partial or complete divestiture of a particular product or department, such as theailing consumer mortgage unit, could impact the broad product suite offering that is core toBofA‟s value proposition to customers. This product or service offering gap would impairBofA‟s business-level strategy for either CB or IB, and would effectively decrease the valueprovided to customers by either business unit.While it is unlikely that BofA will decimate any internal business unit or resource group that iscentral to its value proposition and competitive advantage, cost-cutting measures that impactcritical resources and capabilities will likely erode customer value creation to some degree. 40

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