Exploring Market Dynamics in Taiwan’s Financial Holding Industry: A Hidden Markov Approach

Abstract

This chapter explores the application of strategic group dynamics using a hidden Markov approach to model the market structure evolution of financial holding companies (FHCs) in Taiwan. We propose a framework that integrates strategic management theories with empirical financial data to investigate how FHCs’ strategic dynamics within groups influence performance over time. First, we find that the five strategic variables are conceptualized into three strategic groups: lending, leveraged, and balanced. Also, the selected variables are significant in representing dynamic strategies for improving performance. Second, the study utilizes a first-order Markov process to examine the low probability of FHCs switching groups. FHCs in strategic groups seem stable over time, and the switching probabilities are asymmetric. Also, we visualize the evolution of transition probabilities to demonstrate each FHC dynamic behavior. The research study reveals that Fubon FHC has experienced three strategic transformations. Moreover, in assessing the impact of various strategies on performance, we find that loan is the best strategy for enhancing market perceptions in the lending-growth group and improving sales performance in the balanced-sales group. Furthermore, the leveraged-efficient group primarily adopts the borrowing strategy to maximize return on assets. Finally, the dynamics of strategic groups revealed by this study provide a theoretical basis for strategic adjustments and offer empirical support for FHCs facing market fluctuations, aiding in formulating more effective business strategies.