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Porter’s Five Forces Model and the key External Forces having an effect on ONE Bank Limited
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Competitive Analysis : Porter’s Five Forces Model and the key External Forces having an effect on ONE
Bank Limited
4.1.2 Porter’s Five Forces Model
Porter’s 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 Porter’s 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 Porter’s 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) The Industry’s Competitive Structure
b) Demand conditions
c) 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 industry’s 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. Investment in plant and equipment that have no alternative uses and cannot be sold off.
2. High fixed costs of exit
3. Emotional attachments to an industry
4. Economic dependence on the industry
In order to keep up-to-date with today’s 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 company’s 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 don’t 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 other’s 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 consumer’s 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.