You are on page 1of 3

HE EFFECT OF PORTERS 5 FORCES MODEL ON

BRAMER BANKING CORPORATION LTD


Introduction
Porters 5 forces model can be defined as a framework for analysing the nature and extent of
competition in an industry. The banking industry in Mauritius is a very competitive sector
and thus banks are finding new ways and means of gaining greater market share. This can be
done through product differentiation, pricing and different marketing strategies amongst
others. However, since the banking industry is a group of firms providing for the same type
of products and services aimed at same customer group, it is then of vital importance for
managers of particular banks to understand the competitive forces in that industry. Thus,
Porters 5 forces model are as follows:
1. Threat of new entrants/competitors
2. Threat of substitutes
3. The intensity of competition among existing firms
4. The bargaining power of buyers
5. The bargaining power of suppliers
If all of those factors are high, then the industry is not attractive to enter in. Therefore, to
better understand Porters 5 competitive forces analysis, it is being applied to the Bramer
Banking Corporation Ltd.

Threat of new entrants


It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that
new firms may enter the industry also affects competition. In theory, any firm should be able
to enter and exit a market, and if free entry and exit exists, then profits always should be
nominal. In reality, however, industries possess characteristics that protect the high profit
levels of firms in the market and inhibit additional rivals from entering the market. These are
barriers to entry. Barriers to entry may be low or high implying the fact that if the threat of
new entrants is high, there are low barriers to entry and vice-versa. However, threats of new

entrants might be the only force that will have a low score. This is due to the fact that
opening a bank requires a lot of capital and every member of the board of directors need to be
checked and verified by the Bank of Mauritius which will usually takes a long time. The
filling also takes a long time for the central bank to approve. As a result, the conditions set
for registering banks are quite complex, hence entry barriers become high.
On the other hand, according to the Mauritius Bankers Association 2012, the banking sector
today comprises of 20 commercial banks. This is so because with the recent setting up of the
first Islamic bank Century Banking Corporation Ltd, the banking sector shows that it is
expanding and continuously flourishing. This indicates that in certain cases, the barriers to
entry are low as new entrants can enter the industry and provide for product differentiation.

Threat of substitutes
In Porter's model, substitute products refer to products in other industry. Substitutes can
reduce the demand for a particular class of goods and services if customers switch to other
alternatives. In fact, in the banking sector, there are so many products and at the same time
there are so many substitute products. For example if someone is looking for a travelers
cheque and that could not be provided, one might decide to opt for Telegraphic Transfer.
In the case of the banking industry in Mauritius, the easiness of changing to substitutes
products or services is rather medium. This is due to the fact that customers can always put
money somewhere to make interests, for example bonds, mutual funds, stocks etc. Moreover,
the banking sector is also faced with the threat of substitutes as nowadays there are insurance
companies such as BAI, SICOM, SWAN Group, only to mention a few that can satisfy the
same needs of the customers. Thus, if customers have high bargaining power, they can easily
switch substitutes which provide them with satisfaction. Thus, Bramer Banking Corporation
is also faced with this threat of substitutes in case its customers switch to insurance
companies to put their money rather than dealing in borrowing or lending transactions with
the bank. However, though there are many other financial institutions, there are some features
and products of which they can only be obtained from the banks. For instance, the power of
check clearing of the bank is undeniable. All the pay checks, payments go through banks to
clear. As a matter of fact, the whole economy will go in halt if there were no banks to clear
checks

clear. As a matter of fact, the whole economy will go in halt if there were no banks to clear
checks.
.
Competitive rivalry
Rivalry refers to the competitive struggle for market share between firms in an industry.
Extreme rivalry among established firms poses a strong threat to profitability. This implies
that competition among rival firms drives profits to zero. However, competition is not
perfect and firms are not unsophisticated passive price takers. Rather, banks strive for a
competitive advantage over their rivals.
In the context of Mauritius, there is competitive rivalry in the banking industry due to the fact
that there are many current and potential competitors (20 commercial banks). This implies
that when there are many banks there is high level of rivalry. Moreover, since the market is
expanding at a fast speed, this rapid growth leads banks to fight for market share. However,
since Economists measure rivalry by indicators of industry concentration, it can be found that
Concentration Ratio (CR) is one of such measures. As banks are not of equal size (some
being large and others small and medium sized banks), not all of them have a large market
share. It can be noted that giant banks such as MCB and SBM are the large players in the
banking industry, account for 75% of the market share and thus have a high concentration
ratio as compared to other rivals. Therefore, small and medium sized banks including
Bramer Bank may be reluctant to challenge the larger ones. Moreover, the fact that only
MCB and SBM hold a larger market share, the competitive landscape of Bramer Bank is not
intense.
The intensity of rivalry is further referred to as being cutthroat, intense, moderate, or weak,
based on the firms' aggressiveness in attempting to gain an advantage. In order to gain
competitive advantage over its rivals, Bramer bank can compete on the several competitive
moves as follows:
Price wars - lowering prices to gain a temporary advantage.
Product differentiation This is possible through the investment in innovation, research and
development and new products and services. Furthermore, brand identification can also lead
towards customer loyalty and thus reducing the customers to switch to other banks as well.
As such, it will have a unique opportunity to attract customers.
Exploiting relationships with suppliers- Since there is only one supplier, the Central Bank of
Mauritius, it is crucial for Bramer Bank to follow the rules and regulations as per the
agreements and to keep good customer-supplier relationships

Bargaining power of buyers

Customers are essential for the survival of any business. The fact that most of the Mauritians
have a bank account in more than one bank, the number of customers is abundant thus
implying that in this case the bargaining power of customers is low. Even in the case of large
corporate clients, the bargaining power of the client is limited. Any negotiation of terms and
conditions of a banking deal will take the form of a win/win negotiation where both sides are
attempting to develop a "deal" that is optimum for both participants. The client wants the
money a loan represents, and the bank wants interest on the loan. The structure of the loan
such as the term and the repayment must be structured in such a way that the client can meet
the requirements in term of cash flows and the bank is assured of repayment. The price of the
credit may be negotiated a few basis points in one direction or the other, but both parties
know going into the negotiation approximately what the outcome will be.
However, customers in Mauritius can easily switch to other substitutes like insurance
companies that can satisfy their same needs; in such a case customers do have strong
bargaining power. Therefore, buyers can threaten the price of goods and services to go down
and bargain for higher quality goods and services as well. Thus, the fact that buyers face low
switching costs and the fact that they can always find an equivalent product and tend to play
one vendor against the other, they do have strong bargaining power.

Bargaining power of suppliers


Suppliers are those who supply the firm with what it needs to produce the products/services.
There are three suppliers of the banks products and these are
1) The Central Bank
2) The depositors
3) The credit market
The Central Bank of Mauritius, that is, the Bank of Mauritius has full control over the
commercial banks. This also implies the fact that if the central bank changes the rate of
interest, this can have negative effects on commercial banks as well. Furthermore,
commercial banks should also adhere to the rules and regulations and the minimum capital
requirements of the central bank. Furthermore, the central bank is also the resource of last
resort and may also provide loans to banks in need.
Depositors usually do not have a strong bargaining power in reality. This is so because,
whatever the depositors save with the banks, it is the banks which determine the rate on
interest on the type of savings made. However, if the clients are large corporations, wealthy
individuals or government agencies and if they threat of switching to other banks, the threat
may have certain significance.
The credit market as a source of supply of raw material is numerous in number thus only
those who are qualified suppliers will be open to all at all times. This implies that the credit
market has a low bargaining power as buyers can easily find other suppliers of goods.

You might also like