Harvard Case - Providian Financial Corporation
"Providian Financial Corporation" Harvard business case study is written by John R. Wells. It deals with the challenges in the field of Finance. The case study is 16 page(s) long and it was first published on : Sep 19, 2006
At Fern Fort University, we recommend that Providian Financial Corporation pursue a strategic shift towards a more diversified business model, focusing on asset management and investment management while strategically divesting non-core businesses. This strategy will leverage Providian's strong financial analysis capabilities and capitalize on the growing demand for investment management services.
2. Background
Providian Financial Corporation, a leading provider of financial services, was facing significant challenges in the late 1990s. The company's core business, credit card lending, was under pressure due to increased competition, rising delinquency rates, and regulatory scrutiny. This case study explores Providian's strategic options in the face of these challenges, particularly its pursuit of mergers and acquisitions to diversify its portfolio and enhance shareholder value.
The main protagonists of the case study are:
- Shailesh Mehta: CEO of Providian, tasked with navigating the company through turbulent times.
- The Board of Directors: Responsible for overseeing the company's strategic direction and approving major decisions.
- Investors: Concerned about the company's declining profitability and seeking a turnaround strategy.
3. Analysis of the Case Study
To analyze Providian's situation, we can utilize the Porter's Five Forces framework:
- Threat of New Entrants: High, due to the relatively low barriers to entry in the credit card market.
- Bargaining Power of Buyers: High, as consumers have numerous credit card options available.
- Bargaining Power of Suppliers: Low, as Providian has access to a wide range of financial resources.
- Threat of Substitute Products: High, as consumers can choose alternative forms of financing, such as personal loans or home equity lines of credit.
- Competitive Rivalry: High, due to the presence of numerous established players and the emergence of new fintech companies.
This analysis highlights the competitive pressures facing Providian and the need for a strategic shift to mitigate these challenges.
4. Recommendations
Providian should implement the following strategic initiatives:
- Strategic Diversification: Shift focus from credit card lending to asset management and investment management. This will leverage Providian's strong financial analysis capabilities and capitalize on the growing demand for investment management services.
- Strategic Divestment: Sell non-core businesses, such as the auto finance and mortgage lending units, to streamline operations and focus resources on core competencies.
- Organic Growth: Invest in developing new investment management products and services to attract a wider customer base.
- Mergers and Acquisitions: Explore strategic acquisitions in the asset management and investment management sectors to gain market share and access new technologies.
5. Basis of Recommendations
This strategic shift aligns with Providian's core competencies in financial analysis and investment management. It addresses the challenges posed by the competitive credit card market and capitalizes on the growing demand for investment management services. The recommendations also consider the following:
- External Customers: The shift towards investment management caters to the growing demand for wealth management services among affluent individuals and institutions.
- Internal Clients: The strategic divestment of non-core businesses will streamline operations and allow Providian to focus resources on its core competencies.
- Competitors: By focusing on asset management and investment management, Providian can differentiate itself from competitors in the credit card market and compete in a less saturated market.
- Attractiveness: The investment management industry offers attractive growth potential and profitability, as evidenced by the success of other players in the market.
6. Conclusion
By pursuing a strategic shift towards asset management and investment management, Providian can mitigate the challenges facing its credit card business and position itself for long-term growth. This strategy will leverage the company's core competencies, capitalize on market trends, and create value for shareholders.
7. Discussion
Other alternatives not selected include:
- Double Down on Credit Card Lending: This strategy would involve increasing marketing efforts and expanding into new markets to gain market share. However, this would expose Providian to increased competition and regulatory scrutiny.
- Focus on Niche Markets: This strategy would involve targeting specific customer segments with tailored credit card products. However, this would limit Providian's growth potential and expose it to market volatility.
The key risks associated with the recommended strategy include:
- Execution Risk: The successful implementation of the strategic shift requires careful planning and execution.
- Market Risk: The investment management industry is subject to market fluctuations and economic downturns.
- Regulatory Risk: The regulatory landscape for investment management is constantly evolving, which could create challenges for Providian.
8. Next Steps
To implement the recommended strategy, Providian should take the following steps:
- Develop a detailed strategic plan: This plan should outline the specific goals, objectives, and timelines for the strategic shift.
- Allocate resources: Providian should allocate sufficient resources to support the development and implementation of the new investment management business.
- Hire key talent: The company should recruit experienced professionals in investment management to lead the new business.
- Communicate with stakeholders: Providian should communicate the strategic shift to investors, employees, and customers to ensure their understanding and support.
By taking these steps, Providian can successfully navigate the challenges facing its business and position itself for long-term growth and profitability.
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Case Description
On October 3, 2005, Washington Mutual acquired Providian Financial Corporation, the ninth-largest credit card issuer in the U.S., for $6.5 billion. At the time, Providian had approximately 10 million customer relationships and a balance of $18.6 billion. For some observers, the transaction was merely the end of another chapter in the history of the fast consolidating credit card market. For Providian CEO Joseph Saunders, it was vindication of four years' hard work in turning around a company that many thought was close to bankruptcy.
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