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
