Porters Five Forces Model application on my organization –People’s Bank.

Porters Five Forces Model application on my organization –People’s Bank.

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.

My 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…

How can we apply BSC to the Sri Lankan Banking Industry?

Background:

The above “Balance Score Card” has been captured from a research paper which has been applied for Bank of America. According to the above, main four objectives that had been focused are Customers, Employees, Business Ethics/Natural Environment and Financials.  In this scenario they try to measure the quantitative and qualitative performances during a certain time frame as per the delegated authority levels.

How can we apply above to the Sri Lankan Banking Industry?

1. Customers  - Satisfaction and Brand identity

Challenges	A Customer survey can be done via internet without spending a huge cost for personal interviews/mail questionnaire or telephone survey. But the most challengeable task is the knowledge on IT literacy of our customers. Therefore, it is difficult to select the sample with the existing methods to obtain the accurate data. Accuracy of the data is based on customers’ understanding of the questions. Therefore, cannot rely 100% on the data collected. Selection of sample is also a challenging task.
Opportunities	Since the availability of customer database, a direct mail/questionnaire can be sent or interview the customer when they visit the bank. By understanding the customers’ needs and wants properly, we can identify the existing gaps and bridge them with innovative novel products to satisfy/delight the existing customer. By offering a user friendly IT process we can retain the existing customers and attract more potential customers.
Disadvantages	If the bank’s product mix is too complex and higher numbers, difficult to get a clear idea about all products brand identity from a single sampling method.  Therefore, accuracy of product identity and customer satisfaction cannot be measured from the data collected.
Advantages	We can collect first hand data from the customers who visit the banks. In Srilankan context most customers love to visit the banks since they are satisfied with human touch instead digital touch and the requirement of fulfilling their social needs. Therefore, banks can take the advantage of people’s behavioural pattern to conduct this survey.
Barriers	It incurs a huge cost for conducting a customer survey. Management’s involvement and fullest cooperation is highly needed to conduct the research. Customer awareness about the products is a must. Selection of research method, sampling mechanism is also much complicated.

 

2. Employees – Quality and Service Training / Employee Satisfaction

Challenges	Difficult to measure the qualitative data since it depends on the attitude of people. Service quality is purely based on the moods, perceptions and other personal characteristics of each individual. Service training can be done on the job or specific training programmes conduct through professionals but it will be high costly. Employee satisfaction is based on the people’s expectations. It cannot be measured by a straight forward mechanism, it can be done by observations of their behavioural pattern.
Opportunities	Service quality can be improved by fulfilling the basic requirements of the employees. Service training can be arranged with the experienced senior officers at a lower cost. A motivational programmes can be arranged to satisfy the employees by giving performance based incentives.
Disadvantages	Since we could not arrange appropriate quality and service training, the employees can be demotivated. It will cause to the dissatisfaction of employees.
Advantages	By introducing motivational programmes like incentives on performance base, we can satisfy the employees
Barriers	Cost of conducting training programmes is a barrier. Selection of training needs and the feedback after training is also matters. The employees’ reaction, attitude towards training is also an important factor.

3. Business Ethics / Natural Environment

Challenges	Due to the existing cut throat competition in Sri Lankan financial industry, it is difficult to comply with business ethics and work in a peaceful manner. There is no ethical behavior of people, processes, and pricing mechanism, as well as ethical communication pattern. The government impose rules and regulations, but people insist to comply with. Protection of natural environment is the biggest task of today’s industrial development. Air pollution, water pollution and destroying natural environment are the major challenges today.
Opportunities	Still the Srilankan people have faith on their religions. By getting involvement of each and every religion advices, we can implement higher standards on business ethics and inspire people to comply with the higher business standards with fair and peaceful work environment. Utilization of IT reduce the paper usage. Paperless work environment protect the trees. Developed sophisticated systems and processes will reduce the discharge emission to the environment by reducing visits the bank by vehicles instead using internet banking, mobile banking etc.,
Disadvantages	Having a favourable competition improves the quality of production and convenient processes with easy access. If the business ethics are too much rigid, difficult to perform well in the industry and no development can be expected.
Advantages	By comply with ethical business standards, people can improve the quality of business environment. It will lead to increase the volume of transactions and attract more customers. It will build the confidence in stakeholders mind that the market is safe. More investors will attract the market.
Barriers	Generally Srilankans reluctant to comply with rules and regulations. They always search for the short cuts, not in the systematic way of doing things. Therefore it is very difficult to get the involvement of people to comply with existing rules and regulation and protect the natural environment

4. Financials – Revenue increase & Ratio analysis

Challenges	Due to the heavy competition and high cost, it is difficult to increase the revenue by 50% very easily. It can be done by motivating staff and improve the service and thereby increase the revenue. Ratio analysis also the same. To improve the ratios proper strategies to be adopted.
Opportunities	Introducing innovative products and services with superior quality, can increase the revenue and strengthen the ratios. By reducing price with the expectation of economies of scale, can increase the revenue.
Disadvantages	When increase in revenue, the cost of sales may increase. It will damage to the profit margin and consequently we will run at loss. To overcome that situation, we have to increase the price. But it will lead to decrease our market share,
Advantages	Despite the fact that of cost of sales, price can be reduced and increase the revenue by economies of scale. Organize special promotional campaign and increase the volume of sales. It will increase the profit margin and lead to increase market price per share.
Barriers	All parties concern the target should agree for the strategy to be implemented to increase the revenue. If any conflicts arise within the organization, such as Marketing Dept. pricing mechanism is not compatible with Finance Dept. pricing mechanism. Therefore, internal conflicts may erode the performance of the bank.