Competitive Analysis : Porters Five Forces Model and the key External Forces having an effect on ONE Bank

Limited

4.1.2 Porters Five Forces Model Porters Five Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity among firms varies widely across different industries. In the banking industry, the competition level among the different pubic and private banks is also seen. Due to the emergence of many commercial banks in Bangladesh, there exists a competitive environment as all the banks try their level best to stay in the challenging competitive environment. (See Figure 36) I have also considered the Porters Five Forces Model and the key external factors that effect the operations ofONE Bank Limited. According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces. They five forces of Porters Model that have the effect on the operations of ONE Bank Limited are as follows: 4.1.2.1 Rivalry among Competing Firms 4.1.2.2 Threat of New Entrants 4.1.2.3 Bargaining Power of Buyers 4.1.2.4 Bargaining Power of Suppliers 4.1.2.5 Threat of New Substitutes Porter argues that the stronger each of these forces is, the more limited is the ability of established companies to raise prices and earn greater profits. Thus, a strong competitive force can be regarded as a threat since it

depresses profit. Similarly, a weak competitive force can be viewed as an opportunity, for it allows a company to earn greater profits. 4.1.2.1 Rivalry among Competing Firms Rivalry among competing firms is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering prices, enhancing quality of services, adding features to the existing services and increasing promotional tools to attract customers. The intensity of rivalry among competing firms tends to increase as the number of competitors increases. Such as the case for the banks in Bangladesh, where the competition is having effect on the banking industry and this environment is growing day by day. As the emergence of many new commercial banks has taken place, therefore the banks are trying to get the competitive advantage over their rival banks. By introducing new schemes and attracting customers through promotional activities, the banks are having a close and interactive competition in the industry. Such is the case for ONE Bank Limited also. In the years of operation, since its establishment, the bank has faced stiff competition from the competing banks. To stay in the market, OBL has to concentrate on improving the quality of service and introduce attractive schemes and packages to attract new and retail the existing clients. Therefore continuous development and market research regarding the services offered has to be conducted. The extent of rivalry among established companies within an industry is largely a function of three factors: a) b) c) The Industrys Competitive Structure Demand conditions The height of exit barriers in the industry

4.1.2.1.1 The Competitive Structure Competitive structure refers to the number and size distribution of companies in an industry. Structures vary from fragmented to consolidated and have different implications for rivalry. (See Figure 37). A fragmented industry contains a large number of small or medium-sized companies, none of which is in a position to dominate the industry. A consolidated industry may be dominated by a small number of large companies (oligopoly) or in extreme cases, by just one company (a monopoly). In many countries, banking is a consolidated industry, with a

few major players in the market. But in our country, the industry is very much fragmented, as a

whole. Competitive Structure of the Banking Sector The prime characteristics of a fragmented industry are low entry barriers and identical product offering from the firms. Such is the case in our banking industry. Banks operate with pre-fixed and unanimously agreed interest rates, and their offerings are somewhat identical. The only way to differentiate product offerings from those of the competitors is to lower prices. Such phenomenon occurs as new entrants flood into a booming fragmented industry. This also creates excess capacity. A vicious price war is usually followed by the situation of excess capacity. It can be expected that our banking industry will experience severe price cuts in the following years. As a whole, a fragmented industry increases competition, and it also depresses overall industrial profitability. 4.1.2.1.2 Demand Conditions An industrys demand conditions are another determinant of the intensity of rivalry among established companies. Growing demand from either new customers or additional purchases by existing customers tends to moderate competition by providing greater room for expansion. Growing demand tends to reduce the rivalry because all companies can sell more without taking market share away from other companies. In the case of banking, the demand has been growing at a satisfactory rate, throughout the last decade. However, it is not certain whether the trend will sustain or not. 4.1.2.1.3 Exit Barriers Exit barriers are economic, strategic and emotional factors that keep companies in an industry even when returns are low. If exit barriers are high, companies can become locked into an unprofitable industry in which overall demand is static or declining. The common exit barriers are:
1. 2. 3. 4. Investment in plant and equipment that have no alternative uses and cannot be sold off. High fixed costs of exit Emotional attachments to an industry Economic dependence on the industry

In order to keep up-to-date with todays complicated banking practices, a bank needs to invest on computers, software, secured vaults, security systems and different other controlling and monitoring measures. Most of these assets are customized, and therefore serves the purposes of the intended organization, only. This customization invalidates the resell value of these assets.High fixed costs of exit can appear in the form of employee severance payments, and also in the form of government penalties, etc.

Many local banks of our country have become part of our everyday lives. Thus many people, both within the government and the mass have emotional attachments with these banks. This acts as a serious exit barrier for these banks. So, in spite of being highly inefficient and loss bearing, some banks are still operating. Some banks are so big that shutting any of them will give a serious blow to our foreign and domestic trade. Such an occurrence can impact the whole economy. 4.1.2.2 Threat of New Entrants Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firm increases. New Entrants are companies that are not currently competing in an industry but have the capability to do so if they choose. The banking industry in our country is still in its growth stage. So the threat of potential New Entrants is quite high. Usually the existing companies try to deter potential competitors by setting certain entry barriers. Barriers to entry are factors that make it costly for companies to enter an industry. The common barriers to entry are Brand Loyalty, Absolute Cost Advantage, Learning Curve Effect, Economies of Scale and Government Regulations. In Bangladesh, the question of Brand Loyalty is somewhat evident in the banking industry. A person who is a loyal customer of a local or government owned bank usually does not prefer an account in a multinational bank, whatever lucrative the benefits seem. This creates barriers for new entrants. No bank enjoys an absolute cost advantage, due to the fragmented nature of the industry. Most of the government banks and some local banks enjoy learning curve effect as well as the scale of economy; due to the fact that they have been doing business for quite a long time, they have gathered a long time experience of operating in Bangladeshi environment, and they have branches all over the country. The multinational banks are also on the process of achieving scale of economy. The increasing number of branches supports this statement. Government regulation is quite supportive towards the formation and operation of new banks. So this factor is not a significant entry barrier in this sector. For ONE Bank Limited, there also exist Threats of New Entrants as these new banks sometimes enter the banking industry with higher quality products, lower prices and substantial marketing resources. Therefore, OBL has to concentrate on the current and future market condition so that new entrants do not penetrate the market and take the market share. 4.1.2.3 Bargaining Power of Buyers When customers are concentrated or large or buy the products services in volume, their bargaining power represents a major force affecting the intensity of competition in an industry. Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial. Bargaining power of consumers also is higher when the products being purchased are standard or undifferentiated. Bargaining power of the buyer can be viewed as a competitive threat when they are in a position to demand lower prices from the company or when they are in a position to demand better service that can increase operating costs. On the other hand, when buyers are weak, a company can raise its prices and earn greater profits. For the banking industry buyer means customers who take loan from the banks. The bargaining power of the buyers depends on the following factors 4.1.2.3.1 Number of Loan Applicants There are more than 50 banks in our banking sector including multinational and nationalized banks. There are not enough original business loan applicants in our country. Investment opportunities are not growing as well; for lots of other factors. So, banks are setting with their idle money for giving loans; mostly in the form of personal credits. As a result, competition for doing business is increasing day by day among these established Banks. 4.1.2.3.2 Switching Cost

Switching cost is very low in banking industry. Every bank is giving the similar types of loan at similar interest rate. So, an individual who wants to take loan from banks can switch easily to other banks if he or she does not like the terms and conditions. Customers of many banks are switching to other banks because of low interest rate and lots of other reasons. Lower switching cost makes the industry more competitive. 4.1.2.3.3 Threat of Backward Integration In banking industry, there is always a chance for threat of backward integrations. Big multinational companies or corporations can give threats to the commercial banks that they will arrange their funds by forming another bank by themselves, where the cost of fund is low compared to other banks. For this reason, giant customers of this industry always possess more power than their banks. However, the individual non-corporate clients do not possess this type of bargaining power. 4.1.2.4 Bargaining Power of Suppliers The bargaining power of suppliers affects the intensity of competition in an industry, especially when there is a large number of suppliers, when there are only a few good substitute products or when the cost of switching the services is especially costly. Bargaining power of suppliers can be viewed as a threat when the suppliers are capable of forcing up the price that a company must pay for its inputs or reduce the quality of the inputs they supply, thereby depressing the companys profitability. On the other hand, if suppliers are weak, this gives the company the opportunity to force down prices and demand higher input quality. For the bank the main supplier of fund is the depositor. Bank also gets its funds from the directors. So, the strength of the suppliers depends on the following factors: 4.1.2.4.1 Number of Supplier Bargaining power of the fund suppliers is low in banking industry because there are lots of individual savings in the economy but banks dont have too many opportunities for investment. 4.1.2.4.2 Threat of Forward Integration Sometimes suppliers of funds can give threat to the bank as well. Corporations or big multinational companies can give threat to the private bank that they will form another bank for depositing their money. They will not supply any fund to other banks. We all know that bank makes money by investing others money. So, this can lead to a higher competition in procurement of fund. Therefore, OBL have to be concerned about the issues of the suppliers in carrying out the day to day operations regarding the services provided to its valuable clients. 4.1.2.5 Threat of New Substitutes In many industries, firms are in close competition with producers of substitute products and services in other industries. Competitive pressures arising from substitute products increase as the relative price of substitute products declines and as consumers switching costs decrease. Substitute products are those of industries that serve consumer needs in a way that is similar to those being served by the industry. Loans, the major banking product, have some substitutes. All informal sources and channels of financing are treated as viable substitutes. Some wealthy individuals lend out money at a very high interest rates. These loans do not often require securities, and also do not require any special conditions, e.g. age, certain service time, set monthly income, etc. which makes them a very lucrative option. However, most of these activities are illegal, and therefore bears high risk. For this reason, most people tend to avoid these channels. Thus it appears that the threat of substitute products is not that much prevalent in the banking sector of Bangladesh, till date.