Knight Vinke vs HSBC - damn nuisance or good point?

Last week Eric Knight, the founder of Knight Vinke renewed his assault on HSBC. He unveiled a 75 page report that he argues provides irrefutable evidence that HSBC has underperformed its peers in the global banking industry. His central argument is that HSBC’s current strategy of diversifying into more and more countries and joining up the pieces would produce only an extra 3 per cent of value for shareholders. By contrast, a strategy of building big positions in a few countries and withdrawing from others would deliver a 50 to 75 per cent gain.

“Some kind of radical restructuring is required,” Mr Knight said. “No matter what HSBC says, there are some real issues here.”

Right now it appears the argument centres on which strategy will deliver the best return to shareholders, the current strategy being pursued by HSBC or that proposed by Knight Vinke. We have applied a Competitive Strength perspective to the situation and find there is really more to it than that.

First we agree with Mr. Knight that there are “some real issues here”. However we also find there is a significant factor that has not been considered that indicates that the strategy Mr Knight proposes may NOT of itself deliver the results he claims.

Applying the Competitive Strength perspective suggests that HSBC is in a condition we describe as Comfortable. At this level the Competitive Strength research base shows that the company could have an improvement potential of more than 50%.

However if Knight Vinke’s analysis actually points to deeper weaknesses, as it might, then HSBC could be classified as in Constrained condition. The overall picture, and the response tactics of HSBC, seems to have many of the characteristics of an organisation that is nearer to Constrained than to Comfortable. In this case HSBC might have an increased shareholder potential growth value of up to 84% greater than its current performance, even higher than Knight Vinke’s assessment of 50% to 75% improvement.

What we can say with certainty is that if HSBC were operating in a Competitive Strength condition above Excellent, then the questions that are being asked would not exist. Excellent rated companies deliver the level of shareholder value that Knight Vinke is calling for from HSBC. What is more in order to keep on doing so they constantly and rapidly review, re-visit and re-adapt their strategies as circumstances and markets change.

Knight Vinke’s alternative strategy proposals for HSBC may appear attractive, even logical. Building strong positions and scale with the emphasis on markets with the greatest growth potential can be a recipe for success. However it is also the product of conventional thinking and does not take account of the Competitive Strength factor, the ability to implement the strategy effectively.

We can say, with confidence, that Knight Vinke’s alternative strategy proposals are unlikely to deliver anywhere near the full potential suggested. This is because a Comfortable organisation like HSBC has a low potential to change itself; it does not know how to do it. Indeed HSBC's current strategy reflects this as it is very much "more of the same". A “better strategy” might deliver a marginally better result for a time but without a complete transformation of the culture of the business from top to bottom the full potential will not be realised. Indeed the organisation may become fatally damaged in the attempt to implement the strategy. To succeed HSBC will have to become better than Excellent. In a leviathan with their scale, complication and history that will be a massive challenge.

In an internationally competitive banking and finance marketplace, being average, or just below average, is a temporary and precarious position. Is that where HSBC stands? Is that what Knight Vinke have spotted? Almost certainly they have a “good point” and appear determined to go on being a “damn nuisance” to get their arguments heard. If their proposals also spark the level of change throughout HSBC that we believe would be needed then they may well deliver. If not you really have to ask - why bother?

To find out more about the Competitive Strength perspective go to the Competitive Strength Report website.