SCB PORTER’S Five Forces Model

Threat of New Entrants:

The threat of new entrants is high as there more banks are coming up to satisfy customers. The

number of banks is increasing at a faster pace for the last 6 to 7 years. Moreover, some foreign

banks like HSBC, Citibank, and Ceylon started their operations in Bangladesh with a view to

market share. The banking sector in Bangladesh is under consolidation and strong competition

and is expected to continue to do so in the next few years. Because of that threat of potential

entrants is high.

Bargaining power of suppliers and customers:

The bargaining power for individual customer and corporate customer is very different. The

main reason behind it is that the deposit of an individual customer is very insignificant compared

to the total amount of deposits. Some corporate entities do have large deposits in SCB, and

exercise strong bargaining power to receive special rates from the bank. SCB is currently market

leader in providing wide range of banking services as result of that they have strong strategic

advantage. Depositors are considered to be the suppliers of the banks. There are thousands of

depositors from all walks of life. There are businessmen, service holders, farmers, students and

people from virtually any other professions who are depositors of the banks. Big amount

depositors have strong powers in determining interest rate of their deposits. Creditors are

considered to be the buyers of the banks. There are thousands of creditors from all walks of life.

Mainly businessmen are the major buyer of Bank’s credit. Big amount creditors have strong

powers in determining interest rate of their credit amounts. Banks distinguish their prime

customers from others by setting a prime interest rate for them. So currently the bargaining

power of Buyers (customers) is low and the bargaining power of the Suppliers (banks) is

moderately high.

Threat of Substitute Services:

Various financial institutions are coming up to provide financial services in Bangladesh. They

are coming up with various services, which might act as a replacement for the banking services.

But these institutions will take time to establish. So threat is absent in the short or medium term.

There are substitute financial institutions that do many of the activities and transactions of a bank

in the leasing field but these financial and leasing institutions are too small in size. These

institutions can shrink the profit margin of commercial banks. Industrial Leasing and

Development Company Ltd. (IDLC), Industrial Promotion and Development Corporation

(IPDC), United Leasing Company are the key players. They provide industrial leasing to many

companies in the country. Vanik Bangladesh

Ltd., a merchant bank provides investment counseling and credit services among its other

financial activities. But some ofthe operations of the banks like exporting importing have no

substitutes.

Rivalry among Existing Banks:

The competition level among the foreign banks is very intense, but what is more amazing and

gradually more marked is the growing aggressiveness and competitiveness of the local banks to

battle with the foreign banks. Local banks such as Dhaka Bank, Eastern Bank Ltd, Standard

Bank and Premier Bank are coming up with new banking products and services to compete and

even make better products and services than foreign banks. Therefore, there is intense

competition in the banking industry. By analyzing the above points we can say that the threat of

new entrants is considerable and there is intense competition and rivalry. It would be very

difficult to survive in a market where almost every bank- foreign and local, is waiting to grab

market share away with the slightest of chances. Therefore, SCB must strive to be more

innovative and competitive in order to protect its customer base, and expand it. In the banking

industry, rivalry among the competing banks is moderate to high due to the following reasons:

Major rivals are equal or close to in size and capability (revenue and volume).

Exit barriers are high.

New private banks are snatching share from the NCBs and each other’s customers by

providing extra benefits.

Slow market growth due to the sluggish economy.

Depositor’s cost of switching banks is low.

PRIME BANK PORTER’S FIVE FORCES

Threat of New Entrants

Whenever new firms can easily enter a particular industry, the intensity of competitiveness

among firms will increase. 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 Prime

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, PBL has to concentrate on the current and future market condition so that new

entrants do not penetrate the market and take the market share.

Bargaining Power of Buyers and Suppliers

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 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.

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.

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 Prime 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, PBL 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