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Essay: Lloyds bank analysis (inc. Porter’s, PESTEL)

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1.0 Introduction

Lloyds bank originally formed in 1765. In 2009 however Lloyds banking group was formed and is the UK’s largest leading provider of current accounts, savings, personal loans, credit cards and mortgages with over 30 million customers. Currently they employ around 75,000 employees and operate a multi – brand strategy with their main brands including Lloyds bank, bank of Scotland and Halifax. The group has over 2000 branches throughout the UK (Lloyds info, 2016).

Since 2011 the group has had the strategy to become the best bank for customers and shareholders, as well as focusing on the UK market to try to help it prosper. The banking group has three main goals to help achieve this: creating the best customer experience, becoming a simpler and more efficient business, and delivering sustainable growth (Lloyds strategy, 2016). Being more UK focused gives the Banking group a unique position within the UK. As opposed to trying to do everything, Lloyds is focusing on doing less but doing it better.

2.0 Strategic claim

In 2011 Lloyds employed a drastic strategy which has helped the company become more UK focused. The company decided that it would reduce its international presence from more than 30 countries to 7. This allowed non-core assets to be reduced by more than £140 billion. Along with removing their presence in countries, they also simplified the way the business operates to save an additional £2 billion per year. (Lloyds strategic update, 2014).

2.1 Porter’s generic strategies

The strategy Lloyds follows is a mixture of Porter’s generic strategies. Firstly, “cost – leadership” strategy, which constitutes a “vigorous pursuit of cost reductions, tight cost overhead control and cost minimization” (porter, 1980). It aims to help a company beat its competitors through efficiency as opposed to product quality or service.

The strategy also follows “focus”, which concentrates on a “particular client, segment of the market or geographic market” (porter, 1980). This allows a company to serve a target very well and would help a company, to avoid wasting time and resources in areas that aren’t creating as much profit.

2.1.1 Lloyds Banking Group Current Strategy

Continuing with their 2011 strategy, in 2014 Lloyds created a new strategic update to last up until 2018. Lloyds will continue to become simpler and more efficient. This will aim to save £1 billion further per annum by 2017. Lloyds will achieve this by re-engineering processes to be more efficient in the digital world, reduce their third party spend and increase their investment in IT efficiency.
They will also aim to create a better customer experience by investing in their digital infrastructure as well as keeping their multi brand distribution. They will aim to deliver sustainable growth as the UKs economy continues to recover. Lloyds will achieve this by maintaining a leading position within the market and increasing their presence in unrepresented areas including London and the south east. They will make sure they have a seamless multi-channel distribution between different devices and tailor products more to meet customer needs and invest more into their services.

Lastly Lloyds aim to build the best team. Having an efficient and hardworking workforce is fundamental to the achievement of Lloyds current strategy. They will do this by creating a great place to work that is customer focused, build a high-performance organisation, build an inclusive workplace with a diverse workforce and ensure that reward structures are fair and easy to understand for colleagues.
Using these strategies, Lloyds banking group at the end of 2015 created £8.1 billion in profit (Lloyds annual, 2015) up from £2.2 billion before commencing the strategy in 2010 (Lloyds annual, 2010). This is a huge leap in profit for the company achieved by focusing on customers which provide it with higher revenue, whilst overall reducing the costs at which it could provide its services overall.
On top of Lloyds banking group showing profits, share prices also show a rise once having implemented their current strategy in 2011, after falling dramatically with the government bail out in 2009. Share prices were as low as 23p in 2011, but in 2015 it showed highs of 88p. With Britain leaving the EU, shares again dropped slightly to 47p, but they are now on the rise again, fluctuating at around the 60p mark (HL, 2016).

2.2 Key Performance Indicators

Lloyds uses KPI’s to measure financial performance whilst also measuring progress towards becoming the best bank for customers. An Extract from Lloyds annual report of 2015 which includes performance data can be seen in the appendix (a). here are the main performance indicators measured by Lloyds:

  • Profits and overall capital position – all show to be positive with profit up 5% from previous years.
  • Shareholder return and value – total shareholder return fell to 2% which is still ahead of the sector and market but relatively low.
  • Customer information including satisfaction and complaints made – customer satisfaction at 59.3% up from the previous year. Lloyds has received more complaints but this remains below its competitors.
  • Measuring performance of the helping Britain prosper plan.

3.0 Industry Environment

There are many methods that can be used to determine how the industry’s environment is affecting a business and what it can do to prevent any weaknesses found. One method that can be used is Porters Five Forces.

3.1 Porters Five Forces

A company develops its business strategies to gain a competitive advantage over its competitors. It can do this by responding to five primary forces, assessing them, and developing the points where the company is at its weakest. Analysing the forces can help a company discover the drivers of an industry’s profitability, as well as how the profitability would be able to evolve in the future (Azadu and Rahimzadeh, 2012). The five forces that affect Lloyds the most are as follows:

Threat of new entrants: When the market is good, there is a possibility of new entrants entering the market. Barriers for entering the financial service industry are quite low. The main barrier is that it is very expensive to establish a financial service company. Supermarkets have entered this market as they have the capital to do so. “When entry barriers are low, new firms can freely enter the industry, which increase rivalry and deplete profits” (Robson, 1997). Even though entering the market may be easy, gaining a large market share can be quite difficult. Tesco bank for example was recently hacked, allowing capital from 20,000 customers to be stolen (ITV, 2016). Something like this would make customers want to change banks to one that’s more secure. And with companies like Uswitch this is easier than ever. Although the market is easy to enter, it’s very hard to have a large market share and keep it.

With Lloyds already established as a well-known bank, the main concern for a company like Lloyds would be rival brands merging, or creating a strategy that would make a rival stronger and dominate a larger sector of the market. Lloyds made a strategic move to dominate a larger sector of the market by splitting up Lloyds TSB in 2013 to become two separate banks. However, it was forced to sell off TSB by the European commission in 2015 (Salmon, 2015).

Rivalry among existing firms within an industry: Lloyds has a few large rivals including Barclays, Royal Bank of Scotland, and HSBC. However, the company does a lot to set it apart from its rivals. For example, it insures around 94% of the FTSE 100 and Dow Jones industrial average company (Bartlett, 2016). This means that there isn’t a lot of space left for its rivals, so essentially it has ownership of that specific market. The terrorist attacks of 2001 also changed the way Lloyds as a company dealt with business. Employing a “deal now, detail later” mentality is what has allowed them to become the biggest bank in the UK and not to worry as much about rivalry (Lloyds history, 2016).
The bargaining power of customers: Customers do not have a high level of bargaining power in comparison to a company selling a specific product. High investors would have power but these types make up a very small percentage of the customer base. Bargaining power however could come from the fact there are so many other options for banks out there. If a customer isn’t happy and finds a better deal with another bank, there’s no reason to stay with Lloyds. This links back to threat of substitute products and is why it’s so important Lloyds has a strategy which looks to make customers happy and keep accounts with them.

Although customers do not directly have a high level of bargaining power, companies like Uswitch make it very easy for people to compare banks and make an informed decision to change. This means banks like Lloyds must make sure they’re offering the best deal, so that on websites like Uswitch customers will want to choose Lloyds for their current account, loan, or credit card.

4.0 External environment:

There are many methods that can be used to see what’s happening to the environment that the business trades in and how it impacts their strategy and performance. One method that can be used is called a PESTLE analysis.

4.1 PESTLE Analysis

A PESTLE analysis is used to identify any unavoidable macroeconomic changes that may take place within the environment, that would affect the development of a company. A company uses it so that it can anticipate any changes that may occur and strategize so that it can remain successful through them (Marmol, 2015).

Political factors are important to banks as the government may impose a new tax or a new policy which could make Lloyds completely change the way it generates revenue or operates as an organisation. One of the main political factors that it must consider is it could be deemed too large by the monopolies commission. If only a few companies control most of the market share within a specific market, it reduces the amount of choice available for customers. This is because the smaller companies within the market wouldn’t be able to compete and offer similar deals, perhaps even fail due to not having a large enough market share.

With the European commission following the monopolies commission idea of not allowing companies to dominate a market share, Lloyds were recently forced to sell TSB. With Lloyds borrowing £20 billion in 2009 as a bail out following the economic crisis, the sale was a condition set by the European commission. It has aided in a boost in competition, due to many Lloyds customers being transferred to TSB with the sale, creating a halved market share between the two banks (Salmon, 2015).

The fact the government can aid a bank is another political factor Lloyds would keep in consideration. It means that a bank like Lloyds is relatively secure when it comes to its capital, but would need to strategize due to the government having a level of control over the company after a bail out (the sale of TSB).

Economic factors are important as they directly affect an economy’s performance. A poor economy means fewer people wanting to borrow and spend, meaning less revenue for a bank. Unemployment rates would affect the economy. Currently the UK is seeing the lowest unemployment rates since 2004 at 4.8% (BBC unemployment, 2016). Having low unemployment would allow customers to invest more with Lloyds and encourage spending which is good for the bank.

Low interest rates are another factor that must be taken into consideration. Having low interest rates means that people are more likely to borrow, but limits the amount Lloyds can make from borrowed money. If the interest rates could be set higher they wouldn’t need as many customers to make the same revenue. And if unemployment rates were high, low interest rates would make the situation worse as people wouldn’t want to or have the capability of borrowing, due to having difficulties repaying.

Lloyds are currently trying to help the UKs economy with their “Helping Britain Prosper Plan”. More information can be seen in “appendix c”, but it plans to address: the shortage of affordable homes; supporting small businesses and the UK’s manufacturing base; helping people and organisations acquire the digital skills and capability they need, and tackling disadvantage in local communities in order that more people can share in the UK’s economic growth. (Lloyds prosper plan, 2016).

Technological factors are important due to the level of technology now used in everyday life. People want things done now and technology makes that easier than ever before. Use of technology is rising every day, a demographic produced by the UK government shows, 82% of adults use the internet every day (ONS, 2016 and Appendix B). It’s therefore important that Lloyds allows its customers to use the internet to bank making sure it’s a good experience so that they’ll want to continue using this facility. In their strategic update, they highlight the fact they are constantly investing in their digital infrastructure.

With people wanting a quick and easy experience from banking, what they also want is a high level of security. No one can walk into a bank vault and steal money. Banks also need to protect their customers against online hacks or fraud. With hackers attempting to hack websites every day using new techniques, Lloyds needs to make sure that it is constantly updating its software to counter any hacking attempts. Recently around 20,000 of Tesco banks customers were hacked and had money stolen from their accounts (itv, 2016).

5.0 Strategic Capabilities

It is important that a business understands how to gain a competitive advantage. Barneys VRIO model does this by using four indicators: value, rareness, imitability, and organised. Then asking if it has a sustained competitive advantage (Barney, 2002). Being able to gain a competitive advantage within a market would make a company more successful as it would be offering something its competitors are not. The VRIO model is a newer version of Barneys VRIN model created in 1991.

Resource or capability Valuable (exploits opportunities whilst neutralising threats Rareness (few competitors have this) Imitability (easy to copy) Organised to capture value (the systems employed are organised to reach full potential) Substitutability (there is an equivalent that could be used by a competitor)

  • IT/ Technology (website design, features and security) Yes No Yes Yes Yes
  • Product/service development (personal accounts, finance, and cards) Yes No Yes Yes Yes
  • Customer care (dealing with customer complaints, queries and any other issues that may arise such as hacking) No No Yes Yes Yes
  • Marketing (how the company markets their products/what the bank stands for) Yes Yes No Yes Yes
  • Sales/ services (how the bank sells its products) Yes Yes No Yes Yes

The way that Lloyds markets its products is successful due to the strategy they have employed. The way Lloyds has focused on the UK and shown enthusiasm for the UK to succeed is what has given it the highest account market share in the UK. They have done this by showing that they are focusing on the UK, using their “helping Britain prosper” program and adopting the slogan of “Becoming the best bank for customers and our shareholders”. Lloyds has had to cut back a lot to achieve this, which is what makes it more difficult for other banks to follow suit.

The way that Lloyds makes its sales/ services is specific to the company. Lloyds contributes to social responsibility highly, with the “Helping Britain Prosper” program, but also helping with activities like education, employability, the environment, and social welfare around the world. Showing this level of care isn’t something that many other banks have done. It may make losses by engaging in a lot of different activities. But this would overall win in the eyes of the public. Something that other banks don’t seem to be taking part in.

6.0 Strategy Evaluation

To evaluate Lloyds current strategy, using Rumelts evaluation criteria, the strategy must have: Consistency, so that coordination within the business stays strong (everyone’s working for the same objective). Consonance, so that the strategy is relevant to the environment today. Advantage, so the strategy maintains a competitive advantage vs the company’s rivals. Feasibility, meaning the strategy isn’t over taxing on resources (Glueck, 1980). I chose this model over Johnson and Scholes Suitability, Feasibility, and Acceptability model due to it asking four questions about the strategy as opposed to three, therefore being a more comprehensive analysis.

The strategy Lloyds employs for the most part is consistent. Everyone within the organisation is working towards being the best bank for customers. They are doing this by making sure their digital infrastructure is easy to use, ensuring a high level of security, but also offering the products and services they need. Also, trying to simplify the way the business operates, improving the efficiency of the company, and offering services in the UK where they’re currently unrepresented. The inconsistency is here however. How can a company both become simpler whilst also expanding their network to new customers? Here Lloyds must be careful, as making the company simpler in one area may stop the company from expanding to new ones.

The strategy is quite relevant in today’s environment but there is room for improvement. The UK’s economy needs strengthening which is why the making Britain Prosper Program is a sound strategy to use. Trying to become the best bank for customers is also important in today’s environment since the bank must operate on obdurate low interest rates meaning it needs a high number of customers to make capital. However, whilst the business is becoming simpler and more efficient it should also follow what banks like Halifax who are offering people £125 for switching then £5 a month for opening an account (Andrews, 2015). In a damaged economy and one with uncertainty, people love free capital.

Within the UK, Lloyds has an advantage over their competition. They currently own 27% of the market share with accounts. This is 9% higher than their nearest rival. Their current strategy has been able to achieve this by focusing on the UK. Trying to make the UK’s economy prosper with their “make Britain Prosper” program, and attracting customers to join the bank, whilst making a bank that customers are less likely to leave. Although recent data shows a net loss of account switches for Lloyds, this is somewhat down to the sale of TSB, but also due to the fact other banks are offering better deals.

Lloyds current strategy is exactly the opposite of taxing on resources. It has managed to reduce non-core assets by 140 billion and save a further 3 billion per annum. This has allowed Lloyds to have a boost in its profits despite having lower revenue. Being more efficient puts Lloyds in an extremely unique position within the market, as whilst currently making a good amount of profit it can now slowly expand to new areas using the same methods and grow into a stronger business overall.


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