AMERICAN EXPRESSAndrew Clos

PEST & INDUSTRY ANALYSIS

Snapshot Founded by Henry Wells and William G. Fargo in 1850 as a

delivery service company Quickly evolved into a traveling expenses company with the

Traveler’s Cheque and later, travel charge card International company that operates in more than 130

countries but headquartered in New York Sales come from many countries because AMEX continually works

with international merchants on accepting their credit card so sales are growing internationally

Credit issued in US, Canada, Australia, Mexico, Italy, Japan, and many more

Employees a total of 60,500 people as of 2010 Average cardholder spent $11,213 per year

This is 2 to 4 times higher than competitors Shows heavy card use for business cardholders rather than

individual consumer cardholders

Snapshot Issued the first widely accepted plastic charge card in 1958

Credit card sector became one of their most profitable branches within a decade Target market: high net worth/big spending individuals and businesses Sales (TTM) are 27 billion dollars

Kenneth Chenault named

CEO in 2001Market share of the four largest credit card companies worldwide

PEST - Political

Government Regulations The Credit Card Accountability, Responsibility and Disclosure

(CARD) Act Restrictions on interest rate increases 45 day notice before changing interest rates Restrictions on fees that can be charged Requirements for more disclosure Limits on the ability of people under the age of 21 to obtain cards

These regulations could result in less transactions, transaction amounts, and a negative impact on earnings because of increased rates and decrease on credit extended

Proposed regulation that could limit interchange fees to just 12 cents per transaction This would not affect companies that have a direct relationship with cardholders

The Federal Reserve’s open market policy of buying or selling securities affects interest rates

Political unrest could cause security concerns in countries Potential to reduce traveling abroad

PEST - Economic

Unemployment rates The FED does not see unemployment rates dropping

dramatically in the foreseeable future Causes individual consumers to have less money to spend

Economic recession Consumers would limit spending, especially on credit cards Cause individuals/businesses to save the money they do

have, rather than spend Individuals/Businesses may be more likely to pay off credit

card balances Could potentially hurt small business more so, than

corporations because they do not have the same availability of funds during economic downturns

Businesses would limit expenses on international travel

PEST - Economic

PEST - Social

Consumer trends in payment means Consumers started spending more on credit cards than

cash/check in 2006 Spending on credit cards has reduced since then though

but back on the rise Debit card usage has doubled over the past few years

This has reduced the market for the use of credit cards Perception of debt after the credit crisis

Debt is perceived as major factor of economic meltdown

PEST – Technological

Contact-less payments that eliminates swiping the card through a machine Cardholder just taps the machine instead of sliding the

card through so just saves time Mobile applications that can keep track of a

person’s account Applications that show the status and balance of

cardholders’ accounts Applications that serve as a virtual wallet, could replace

the physical card if it catches on with consumers and businesses

PEST - SummaryFactor Trend Evaluation

(O=Opportunity;

T=Threat)

Impact (1 = low; 5 = High)

Rank in terms of importance

Political Government Regulations

Fed’s Open Market Policy

Security Concerns

T

O/T

T

4

4

42

Economic Unemployment Rates

Economic Recession

T

T

3

51

Social Trends in Payment Means

Perception of Debt

O/T

T

3

4 3

Technological Contact-less Payment

Mobile Applications

O

O/T

1

3 4

Credit Card Industry Overview

The credit services industry is an industry that gains profit from an interchange fee charged to merchants with every transaction as well as interest payments and fees from the cardholder.

Credit card companies provide loans, in a basic sense, for their costumers to buy goods and services. The credit card company pays the merchant and the customer pays the balance of the “loan” at a later date. So it is a financial service that provides a convenience for the consumer to buy products without having the funds at the time of transaction.

Credit Services Industry

Buyers Suppliers (Funds)

Individual ConsumersSmall BusinessesCorporations

Federal ReserveBanks

Competitors Substitutes

VisaMasterCardDiscover

Paying for products using:1. Cash2. Checks3. Debit Cards4. Small loan from a bank

Do not purchase as many goods/services

Industry - Buyers

Buyers have an abundance of options to choose from that are slightly differentiated *Differentiation occurs in the fees, interest rates, and promotions The basic service remains standard because it is just money a customer can pay back

later

Factor Degree of Power

Number of Buyers High

Purchases volume Low

Product Differentiation Medium*

Vendor Switching Costs Low

Degree of backward integration High

Industry - Suppliers

Factor Degree of Power

Switching costs Medium

Suppliers offer differentiated products Low

Number of substitutes available High

The product suppliers would be offering credit services companies would be money

Funds could be received from commercial banks, or from the Federal Reserve at lower rates because AMEX converted into a bank holding company to become a Federal Reserve member and receive the benefits from being a member

Rates would slightly vary on the received funds Many possibilities for a company to create more capital

Industry - Competitors

Power Degree of Power

Number of competitors High

Industry Growth Medium

Exit Barriers High

Industry - Substitutes

Nature of Threat of Substitutes Extent of Threat

Quality of substitute High

Buyers’ willingness to substitute Medium

Relative performance of substitutes High

Costs of switching to substitutes Low

Industry – New Entrants

Nature of Barrier Extent of Barrier

Capital Requirements High

Incumbency advantages independent of size

High

Customer-switching costs Low

Unequal access to distribution channels High

Restrictive Government Policy High

There is also brand loyalty associated with all the major players in the credit services industry

Porter’s Five Forces

Factor Evaluation

Buyer Power Strong Force

Supplier Power Benign Force

Intensity of Rivalry Strong Force

Threat of Substitute Products Strong Force

Threat of New Entrants Weak Force

Blue Ocean Strategy

American Express competes in a red ocean Hard to differentiate the product of a loan Would firmly need to entrench itself in a market

segment that the other players do not compete in AMEX would need to continue to capture the “big

spenders” market With their products such as the Centurion (Black) Card and

Green Rewards Business Card The Black Card is a status symbol for rich people

Blue Ocean Strategy Conclusion

The only way AMEX can develop a Blue Ocean would be by: To continue differentiation of rewards Increase the focus on market segments that are not as

competitive Strengthen the already established brand name to high net

worth individuals

Conclusion

American Express competes in a highly competitive industry, where all the major players are firmly established and branded.

The economy and government have a major impact on the company as well as the rest of the industry. Technology has minimal impact on the industry relative to other

factors but has been an increasing recently over the recent past. AMEX has produced profits because they earn so much per

swipe compared to the competition because of the big spending individual and business cardholder. Needs to continue to dominate this niche to produce high profits

They also need to look into acquiring competitors, if possible, which could reduce the intensity of competition and buying power of customers.

COMPETITOR AND MARKET ANALYSIS

Introduction of Key Competitors

Company Headquarters

American Express New York, NY

Visa San Francisco, CA

Mastercard Purchase, NY

Discover Riverwoods, IL

Activity American Express

Visa

Mastercard

Discover

Credit Payment Card Services

x x x x

Debit Payment Card Services

x x x

Prepaid Cards x x x x

Contactless Payment x x

Financial InformationAmerican Express

Discover Mastercard Visa

Market Cap 55.5 billion 13.54 billion 33.73 billion 53.59 billion

Employees 61,000 10,300 5,600 6,800

Sales Growth

23.4% 71.9% 10.7% 14.2%

Profit Margin

15.84% 22.16% 33.33% 37%

Revenue 25.61 billion 3.45 billion 5.54 billion 8.34 billion

Net Income 4.01 billion 667.94 million 1.84 billion 3.09 billion

Stock Price 37.13 – 46.29 12.11 – 24.90 191 – 269.22 64.90 – 97.19 Sales growth is measured quarterly Stock price is a 52 week range

All the companies were near their high except for Visa Amex does not use banks as a distribution channel for their credit card

so that could be a reason for the need of more employees

Strategy Business Groups

Company Product Diversity Reach of Sales

Marketing Focus

American Express

Personal , Small Business, Corporate, and Prepaid Cards

Global

Recent focus has been on travel/entertainment, rewards, and security on cards.

Visa

Personal and Business Cards; Debit and Prepaid Cards

Global

Focus has been on the debit/check card and the wide acceptance of their card by merchants

Mastercard

Personal and Business Cards; Debit and Prepaid Cards

Global

Over the past few years the focus has been on the “Priceless” campaign and how a person can buy almost anything with their card

Discover

Cashback Cards, Miles Cards, Business Cards, Student Cards, and Debit Cards

Global

Focus has been on superior service and rewards comparatively

Strategy Business Groups

Based upon the marketing of the main competitors in the industry it can be seen that each company brands itself

Even though American Express is late on offering debit cards (because of no bank affiliations), they can not be counted out by the other companies do to the fact of reward alignments with air travel companies which attract businesses and high spending individuals

Competitor Analysis

Company Objectives

American Express

Wants to make it easier, safer, and more rewarding for consumers and businesses to purchase the things they need

VisaWants to make it easier to pay and be paid from both the consumer and merchant prospective

Mastercard Wants to be a driving force in worldwide commerce

DiscoverWants to strive to be the best in customer service and reward programs

How the Industry Competes

Each competitor has to be able to adjust with economic conditions by competitive pricing through rates. They also have to keep up with the technology that save people time and is convenient for cardholders.

Each company also has a strong marketing and advertisement campaign which continues to brand the product to consumers and businesses

Product Scope

Each competitor offers a product that is attractive to cardholders in these ways:

•The fees need to be comparable to all the other major competitors

Comparable fees

•Must offer rewards that people would want

•Differentiation of rewards can also brand a company toward a particular type of reward

Reward Programs

•The card needs security measures so fraudulent charges are avoided, which ties into high quality service

Security/Service

Geographical Scope

Company Number of Countries that Accepts Card

American Express 130+

Visa 200+

Mastercard 210+

Discover 185+

Discover was the first widely accepted card in China which was a major advantage in such a large and growing market

Core Competencies

Company Competency

American Express Number one in customer satisfaction

VisaHalf the credit cards in circulation worldwide are Visa cards

Mastercard The high acceptance rate by merchants

Discover High satisfaction with rewards

Size of the Market

9%

31%

50%

10%

Cards in Circulation Worldwide (Year End 2010)

American ExpressMastercardVisaDiscover

Visa and Mastercard have major distribution advantages concerning card circulation because they use banks to issue their cards

Size of the Market

471.1

951.74

631.4

120.14

Purchase Volume Worldwide (billions) in 2009

American ExpressVisaMastercardDiscover

Key Trends in Credit Services

Trend Result

Global BankingRelatively regional in the United States and need to infiltrate emerging markets such as Africa and Asia

E-Banking3.5 billion people have cell phones with a 10-20% year over year growth and transactions are taking place more and more through cell phones

Self-ServiceCustomers can check the status of their account instantly and have access to available services

Key Trends in Credit Services

Growth

Growth is definitely prevalent in the emerging markets such as China, India, and South Korea

Credit card growth in developed countries is limited because the market is already so saturated with them

Growth can also be seen in revenue in all the major competitors

Target Market

Key Customers: Individual Consumers Small Businesses Corporations

Importance of Social Media

Social media provides a cheap way to reach many potential cardholders. Many businesses are on facebook and twitter so even B2B can be targeted by the credit card companies.

Social media can also point the companies in the right directions to fill job openings.

Conclusions

The credit services industry is highly competitive and dominated by only a few companies

Marketing, branding, and loyalty are crucial parts to all the major players in the credit card industry

Each player is able to survive in the industry by implementing unique strategies

Conclusions

Each competitor tries to align itself with something different such as: Best service Differentiated Rewards Most Widely Accepted Card

There is definitely a place for social media in this industry because advertising and marketing are such huge ways that the competitors implement their strategy

Social media provides a cheap way to do so

INTERNAL ANALYSIS

Business Model

Focuses on satisfying the customer and building loyalty

Operates the most successful closed-loop credit card network in the United States and many other around the world

Spend-centric rather than lend-centric like their competition

Well- respected and widely known brand Well-managed rewards program

Change in Sales and Profits

2006 2007 2008 2009 2010%

Change

Revenue (in millions)

25,900 27,731 28,365 24,523 27,819 13%

Net Income 3,707 4,012 2,699 2,130 4,057 90%

Revenues have had a steady increase with the exception of 2009

American Express has reduced expenses in 2010 to reach a five-year high in net income

Percent Change measures the change between 2009 and 2010

Past Five Year Performance

Amex gushes cash at the moment, which allows the firm to return capital to investors

They did suffer during the financial distress

Distribution of Sales

Segmented into three main businesses U.S. card services International card and global commercial

services Global network and merchant services

Had a former financial advisor segment (American Express Financial Advisors) that spun off to shareholder in 2005 and now known as Ameriprise

Key Assets

Asset 2008 2009 2010 % Change last two years

Cash and cash equivalents

8 billion 11 billion

16 billion

45%

Receivables 37 billion 38 billion

40 billion

5%

Investments 25 billion 24 billion

14 billion

41%

Loans 40 billion 30 billion

53 billion

76%

Property and equipment

3 billion 3 billion 3 billion 0%

Company Resources

Resource Explanation Benefit

Global distribution

Their card is accepted in 130 countries

The card has shown promise in those countries and can continue to try and penetrate other emerging markets

Historic Brand First company to issue a plastic charge card

Helps to be synonymous with credit cards

BCG Matrix

The big four of the industry (Visa, Mastercard, American Express, and Discover) have the majority of the total market share of credit cards

The market for credit cards has been dwindling recently due to the increase use of debit cards and other payment means

Value Chain Analysis

The most important activity of Amex when it comes to the value chain would be marketing and sales. In the credit card industry it is very important to be branded which can be accomplished through effective marketing

SWOT Analysis

Strengths Weaknesses

• Large amount cash on hand at the moment

• Brand name• One of the top global market

leaders• Customer Loyalty• Unique Financial Products• Cost saving systems• Diversified revenues through

customer spending, lending, and fees

• Depends on securitization market to fund credit card loans

• Lack of debit cards• Declining Traveler’s check

business

SWOT Analysis

Opportunities Threats

• Global expansion/emerging markets

• Acquisitions• Financial innovations • New financial technologies

• The U.S. unemployment rate may remain high for a prolonged period

• Credit market crisis• Political risk in other countries• Changing spending habits• Government regulations• Intensely competitive industry• Credit card write offs in bad

economic times

Overview of Amex’s Strategies

•Differentiation Focus

Generic Strategy

•Disposals/ Acquisitions

Grand Strategy

•High perceived services benefit

•Differentiated product

Strategic Clock

Generic Strategy

American Express does not compete in low rates such as other companies like Visa. So they focus on differentiation themselves from the competition.

They do not try to appeal to everyone. They have more of a focus on the big spenders.

Overall Cost Leadership

Differentiation

Cost focus Differentiation focus

Comparative AdvantageLow Cost Higher Cost

Com

peti

tive S

cope

Narr

ow

Bro

ad

Strategic Clock

No Frills

Low Price

Differentiation

Hybrid

Strategies Destined for Failure

Focused Differentiation

Low High

High

Price

Perceived Service Benefits

American Express provide customers with high perceived service benefits and a differentiated product but at a higher price. They have had this same strategy since it first pioneered the credit card industry

Grand Strategy

• This signified a greater focus on their core business – credit cards• Would free up money to make investments in the credit card area

Recently divested American Express International Deposit Corporation and American Express Bank

Ansoff’s Growth Matrix

Amex should consider both market penetration and product development

Use the market penetration for emerging markets

Product development, such as debit cards, in the United States

Competitive Position

Scope Focus

Segment Main focus is on small business and high spending individuals

Geographic Main focus right now is to get their card accepted by as many locations as possible worldwide

The focus on segment alludes to the fact that they want their card swiped as many times as possible for large amounts of money

Amex is trying to get on the same level as Visa and Mastercard in terms as being the most widely accepted card worldwide

Conclusions

The credit card market as a whole still remains relatively strong

The high cash on hand should be a very positive aspect of American Express

They can use that cash on hand to continue along with their current strategies that are in place

Conclusions: Recommendations

Continue to use the concept of a differentiated product to benefit the company

Also continue to focus on market segments that benefit the company most

Do not waste the investment dollars available on marketing or acquisitions, that do not fit with the current business model