Porters Five Forces Model application

Porters Five Forces Model application

World renowned marketing philosopher Michael Porter has introduced the “Porters Five Forces Model” in 1979 at Harvard Business School. It is well known framework for enhance competitiveness and to increase its competitive edge in highly competitive business environment. Porter identified the forces that influence competitive advantage in the market place. This model is vital tool for organizations to measure their position and identify factors which are needed development or changes.

Bank is established in 1961 as a Govt. bank and successfully completed 57 years of journey. Banking industry in Sri Lanka is highly competitive and rapidly growing too. Banks are represented in the top business in the country. Here I’m going to apply the Porters five forces model to my bank and to find out how factors effected to success. Porters, five forces are Threats of new entrants, Bargaining Power of Customers/ Buyers, Bargaining Power of Suppliers, Threat of Substitute Products and Rivalry from Competitors within the Industry. There are several competitive strategies for the success of the five forces application. Those are, Cost leadership Differentiation, Innovation, Growth and Alliances.

1. Threat of new entrants

Our regulator (CBSL) has strengthened the easy entrance by imposing new capital requirements for establishing a bank from Rs.5Bn (Previous) to Rs.10Bn presently and further increased to Rs.20Bn year 2020 onwards. Meantime according to the BASEL 111 accord banks are compelled to increase the capital structure by 2019/20 to survive in the business. Due to high regulations, controls, monitoring and procedures starting a bank and surviving in heavily competitive industry is not possible. This industry is highly competitive in Sri Lanka due to high profitability. But with recent finance companies collapses entrance to banking business is very strict. More importantly a new comer cannot survive as banking density very high. In a small country SriLanka, which has around 15Mn bankable population there are 26 Licensed commercial banks,7 licensed specialized banks,43 licensed finance companies,65 registered finance leasing companies, 15 primary dealers, many more money brokers  and plenty of unauthorized money lenders are competing to grab those customers. But Govt.is already granted permission to Bank of China to open branch. Further Govt. wanted to establish an Import/Export bank and another SME bank. So little threat is also developing. But being Govt. bank we are in safe position with Govt. ownership, stability and trustworthiness banners. Further Govt. planning curtail no of small banks in the country via consolidation to create few large scale banks to mitigate unnecessary competition. Further PB have more than 865 branch/Service centre’s, around 13Mn customers, more than 500ATMs, around 110 SBUs and more than 12000 human capital strength  & any threats can be easily managed with 57 years of experience. Hence threat of new entrance is quiet low.

2. Bargaining Power of Customers/ Buyers

Customers are the live wire of the banks. Due to heavy competition prevailing in the banking industry, customers are well aware of banks, products, norms, procedure, rates/commission and other factors. Hence present days customers are always with bargaining characteristic. Specially corporate or large level customers are always demanding to get the maximum and they are utilizing the huge banking competition well for their betterment. They used to ask for higher rates for deposits and very lower rate for borrowings and used to demand time period for borrowings. In SriLanka switching cost is not high except to early settlement charges of loans. Except loyal customers others are always having relationship with other banks too. Some customers are mostly wanted better service and convenience in operations and if failed to deliver they move to others. Except to rural and small level customers it is difficult to handle large or corporate level customers presently. Due to this demanding, banking industry margins narrowing continuously from 7%/8% in the past to presently 2%/3% range. Our bank also facing this threat but our customer base is mixed category such as rural level small customers, Govt.& other sector employees, small scale traders/entrepreneurs, medium/SME customers ,Govt.instituions, co-operatives, corporations and corporate level customers etc…..Our bank has changed physical evidence, SBUs, CDMs, ATM/Kiosk, Wave app, Express banking likewise so many extra features are added to serve customers. Therefore the bargaining power is not very higher level and even demands are raised we under Govt.bank shelter mitigate those threats successfully.

3. Bargaining Power of Suppliers

Not like other businesses, banking concern suppliers are depositors, shareholders, other lenders, and vendors. Our bank is the largest in the country and well expanded. Our share holders are Govt., very little co-op and EPF. Majority is the depositors. No threats from Govt.,Co-op and EPF as shareholders but threats are from depositors and from vendors to some extent. EPF, ETF, Lotteries board (NLB), TRC and Armed forces are very large level depositors of our bank and they utilize Govt. label and demand for very high rates. Exg.EFF invests Billion rupees for 12.5% pa it is equal to lending rate of some scheme landings. Depositors are looking high return, less risk, stability and liquidity & the other side we go for low cost funds.

Other side our bank is depending on heavily on vendors and service providers. Ex. Our core banking IT system was from a Malaysian company and bank pushed to depend on them. They charging heavily for updations and those not done as it is and mostly they have to visit here. Also present banking businesses are totally depending on the telecommunication service providers and their demands also increasing. Specially to get done a breakdown from Dialog is huge task and never turn-up in time due to this our bank is moving from them to SLT.  Same as other service providers too lacking in their obligations we are depend on them. Meantime threat is under control from other stationary suppliers, advertising firms, CDM company, insurance and   logistic providers etc….

4. Threat of Substitute Products

This threat is gradually increasing in the banking industry. There are 141 legally registered bank/financial institutions; those are well spread all over the country. Many more unregistered Microfinance institutions, illegal money lenders, Poli mudalali, Telecommunication providers, Insurance companies, Western Union agents, Sub post offices. Pawn brokers, Money exchangers, Undiyal system and Welfare societies are catering the banking services. Ex. mCash-SLT, EzyCash-Dialog, western Union, Insurance guarantees-Insurance companies. Our bank is the pioneer in the pawning business and now it is done by everyone. All leasing companies started to give personal and mortgage loans, open savings & foreign currency accounts, Money exchangers are given authority sell currencies. Our pawning portfolio was decreased from Rs.220Bn to Rs.120Bn presently. This threat is not only for our bank for entire banking industry become high threat. Factoring for cheques and .PD cheque discounting facilities are only available facilities created by finance companies. Hence this kind fake products are becoming very famous in the market.

5. Rivalry for Competitors within the Industry

There are 26 licensed commercial banks, 7 licensed specialized banks, 43 licensed finance companies, 65 registered finance leasing companies, 15 primary dealers, many more money brokers and plenty of unauthorized money lenders are competing to grab the 22Mn population.  Sri Lankan bank industry is well developed and competition is rocketing in the market. Around 6800 bank branches and more than 1350 leasing /finance branches are competing and it is too high for small country like Sri Lanka. (Saurce-www.cbsl.lk and CBSL annual report 2018). All are trying to grab the little customer base. Our bank also facing numerous threats from banks and financial institutions and some products introduced by us are imitated by others and we have lost market share. Ex. Pawning, Children’s Accounts (Sisu Udana, Isuru Udana), Parinatha(Senior Citizen), Gurusetha Loan (teachers) This threat is going to increase more and more and banks are applying various strategies to gain competitive advantage. Our bank too introduce lot of strategies like Self banking units (SBU), Cash deposit Machines (CDM), Express banking, Peoples Wave app, Digitalized banking and  Extended banking hours etc…

The Effects of IT Expenditures on Banks’ Business Performance: Using a Balanced Scorecard Approach

The Effects of IT Expenditures on Banks’ Business Performance: Using a Balanced Scorecard Approach

Information Technology  is a very important strategic tool for banks in these days. And also banks are highly investing for information technology. In the banking industry, many expenses are focused by the services required by individual customers rather than by corporate customers.

Therefore most of the transactions processed for individual customers are routine, which can be easily provided by on-line banking system.

IT provides more timely and accurate information to improve management decisions. IT operations in the banking industry are various. IT operation such as ATM, internet banking, and computerized bank functions allows banks to provide financial services anytime and anywhere. This gives an easy access to their customers.

The use of IT also gives an opportunity for banks to innovate processes in developing and distributing financial product as well as procedures in lending and depositing. This strategic role of IT will contribute to the banks’ increased operational quality.

IT operation helps banks to better serve their customers by supplying a variability of financial services quickly as possible at the nearest location.

In this case,

§  The effect of IT expenditures on increasing labor productivity is greater for high IT level banks than low IT level banks

§  The effect of IT expenditures on reducing administrative expenses  is greater for high IT level banks than low IT level banks

§  IT utilization for high IT level banks has a greater positive impact on increasing market share than one for low IT level banks.

§  Banks that spend more on IT will have a greater positive impact on financial performance than other banks.

Applying in to local situation:

In Sri Lanka most of government banks and commercial banks are highly investing for Information Technology. Because of these days customer requirements based on virtual aspects.

They need more efficiency at on line banking. Time and the cost are most vital indicators of their day to day life style.

Opportunities:

§  Increasing productivity by investing for Information Technology in banks.

              For an example: Electronic Funds Transfer at Point of Sale is an on-line system that

              allows customers to transfer funds immediately from their bank accounts to

              merchant accounts when making purchases.

              Increased banking productivity results from customers shopping payment  

              requirements instead of clerical duties in handling cheques and cash withdrawals for

              shopping.

§  Improving new customers for virtual banking systems by winning their trust for accuracy of online banking systems.

                      The idea of Internet banking is; "to give customers access to their bank accounts via a web site and to enable them to ratify certain transactions on their account, given compliance with stringent security checks"

Internet banking by its nature offers more convenience and flexibility to customers

coupled with a virtually absolute control over their banking. Service delivery is

informational and transactional

It is most cost-efficient technological means of yielding higher productivity.

It eliminates the barriers of distance, time and provides continual productivity for the

bank to beyond belief distant customers.

§  Introducing high technologies to the banking Industry.

         Computers have been used in the banking industry since 1980s. However, their impact was

limited because there were not enough of them. As technology has already advanced,

it has become a major influence in the banking industry.

          This development has affected nearly all aspects of the banking industry. The improvement in Information and Communication Technology (ICT) has enhanced the creation of new business models and has revolutionized the distribution channels of financial system resulting in not only a reduction in the transaction costs but also has improved the convenience and accessibility for the customer.

Challengers:

§  Security level of transactions.

§  Speed of transactions.

§  Privacy of customer Information.

Conclusion:

  The effect of IT expenditures on increasing productivity is depending on IT level of banks.