The foundation of a successful banking business such as Citibank lies with a strong understanding of the environment in which the institution is located. The most important environmental variables are those operating outside the bank, known as the external environment and those within the organization, known as the internal environment.(McMahon, 1986).

It is very critical for Citibank to understand the importance of its external environment, which includes remote, operating and industrial environments before developing its future objectives. Each environment is based on different factors; therefore the analysis of external environment will help the company seek new opportunities in many areas as well as discovering challenges that might have direct impact to the organization in the future.

The immediate factors, also referred to as the operating environment, include aspects such as suppliers, financial institutions, customers and the labor markets. The operating environment also provides important information that will assist the company's development plan in the future. The operating environment concentrates on the new and existing competitors. Understanding the level of competitiveness in the market will help the company develop its future tactics to compete with others in the industry. Besides studying the competitor, the operating environment also concentrates on the customer profile. The study of buyer behavior will assist the bank in developing new products. The most important drivers of this external component for Citibank are customers, the labor market and competitors. Customers are important because listening to them determines whether Citibank will be able to fulfill their needs and therefore keep them as revenue producing customers which are the key to keeping Citibank afloat now and for the foreseeable future. The labor market is important because a large segment of it, those of the baby boom generations, are getting ready to retire in large numbers leaving behind a vast talent shortage which can leave Citibank scrambling to hire qualified staff or worse go without and suffer the consequences in lost revenue. This major change is likely to continue for the next ten years until the supply of baby boomer labor is gradually exhausted. Competitors are important because with the advent of new technologies banks are scrambling to offer new and different services to their customers which will differentiate them from their competitors. Citibank must stay on top of its competitors' service offerings or risk losing customers and getting left behind.

The remote environment consists of the study of the economic trend such as the level of disposable income, inflation rate and prime rate, the study of social factors such as life style of consumers. The political factor also plays an important role in external environment. Political factor focuses on the legal and regulation that has direct impact on the organization. The two most important drivers in the remote environment for Citibank are the political and technological factors. Political changes can cause changes in banking regulations, and inflation and prime rates which affect how Citibank treats its customers' money. Changes in technology are critical and will continue to affect customer account security well into the future. This is one of the biggest issues facing banks today due to the proliferation of identity theft and other financial crimes. Technological advances also affect what service offerings Citibank will be able to offer its customers to stay ahead of its competitors. For example, financial institutions first served their customers through the use of teller-manned windows, but the arrival of the ATM machine revolutionized this service by taking the teller out of the equation allowing for extended banking hours. The advent of online banking has taken this one step further by eliminating the need for the drive to the ATM machine.

Without the implementation of the ATM, and online banking most Citibank would not be able to stay competitive. Technological changes will continue to occur over the course of the next ten years and on into the future impacting both the type and quality of services that Citibank and its competitors offer.

Another external environment component which can impact Citibank's performance is its industrial environment. An industry is a group of producers of items or services that can easily be substituted for each other. In the case of Citibank these substitutes are banking services (Gallagher, 2006).

The larger banks of today are complex financial organizations that offer a wide variety of services to customers all over the world and control billions of dollars in cash and assets. Driven by the latest technology, the banking industry is trying to identify customer segments, and to develop customized services to offer to these customers to capture their business and gain additional market share. Globalization, consolidation, deregulation and diversification are driving forces in the banking industry, causing it become an ever more complex and challenging environment (IISD, 2006).

The banking industry today is a fast changing environment and to keep up Citibank needs to stay on top of these changes not only always aware of existing consumer needs but also working to discover new customer niches ahead of other competitors in the industry. The banking industry will continue to change at a quick rate over the next ten years and beyond as available technologies change.

Sometimes elements from the remote, operating and industrial components interact and cause an impact on a business. For example, in 1986, Arizona and Utah passed laws permitting in-state banks to be acquired by out-of-state banks (McMahon, 1986). This allowed banks like Citibank to take over local bank chains that were former competitors and incorporate them into their existing organization. In this case an element of the remote environment, the government caused an element of the operating environment, competitors, to be altered. This impacted not only Citibank but also its industrial environment, the entire banking industry. The diagram below (Fig 1) illustrates the interactions and separation of the components of the external environment.

Fig 1 (MSU, 2006)

References:

Gallagher, S. ( 2006). Why does firm performance differ? Retrieved from: http://falcon.jmu.edu/~gallagsr/WDFPD%20-%20External.pdf.

International Institute for Sustainable Development, (2006). Trends in the banking industry. Retrieved from: http://www.bsdglobal.com/banking/sus_trends.asp

Michigan State University, (2006). External analysis. Retrieved from:
http://www.msu.edu/course/abm/437/documents/introextanal.prn.pdf

McMahon, Robert J. (1986). Bank Marketing Handbook: How to compete in the Financial Services Industry. Bankers Publishing Company: Boston.