An Assignment on Industry Analysis and strategy analysis

Prepared For:
Md. Emdadul Islam Lecturer Department of Banking University of Dhaka

Prepared By:
NAME ROLL NO

Sonjib Talukder Afroja Akther Mithun Kumar Biswas Dulal Chandra Pattak Ruma Mondol

13-017 13-020 13-043 13-057 13-082

Date of submission: 7th August, 2010

Industry Analysis
The Porter "Five Forces" analysis is only approximately applicable to the banking industry. Certainly, banks do compete with each other, but they also must cooperate with one another in many respects. There is an underlying problem in that the major banks of the world are so similar that there is essentially nothing one of them can do that the others cannot easily duplicate. Because, contrary to some beliefs, bankers are perfectly normal human beings they do have individual abilities and interests that may have a perceptible influence on their institutions, but in the final analysis, all are essentially the same.

The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure

Porters five forces analysis and interpretation:

Rivalry among existing firm: There are two "real" areas in which banks can compete, price or interest rate and credit quality. As the market becomes stronger, more lucrative, all the participants will become more aggressive. They will offer more and more attractive rates to clients and pursue clients more aggressively. There is obviously a finite number of really prime credit risk clients in the market at any point, so to increase market potential it is necessary to increase market size. The only way to do this at any give time is to accept less credit worthy clients. In an expanding market environment which implies an economic upturn, the perceived risk of lending to less credit worthy borrowers is lower because of the strength of the economy where everyone is employed and earns increasing amounts of money.

There are cases of one or a few banks developing a particular service of class of services ahead of rivals. Internet banking in the early days was such a service, and the first banks to develop it had a competitive advantage briefly, but after a few years virtually all banks offered Internet application packages to customers and the ability to bank on line. The futility of trying to build sustainable competitive advantage in retail banking is demonstrated by a classic banking joke. One bank, frustrated by its competitors offers of gifts in exchange for deposits offers, "Bring us your toaster and we will give you a $1,000 deposit." The other classic ploy in retail banking is the addition of branches. The concept is that the additional branches attract additional clients. The result is a bank on each of the four corners of an intersection complete with bricks and mortar investment and personnel costs.

Criteria
B.1 Rivalry among existing firms a. Industry Growth Rate 20%

Weight

Parameter

Score

Actual parameter
4

5.00%

High Moderate to high Moderate low to moderate Low

5 4 3 2 1

b. Economies of scale

5.00%

High Moderate to high Moderate low to moderate Low

5 4 3 2 1

c. Degree of differentiation

5.00%

High Moderate to high Moderate low to moderate Low

5 4 3 2 1

d. Exit Barrier

5.00%

High Moderate to high Moderate low to moderate Low

5 4 3 2 1

Industry growth rate: The number of banks is still increasing but at slower rate in Bangladesh. There are lots of people outside this market which indicates a big scope for existing and new banks. Now-a-days the number of banks is not growing so quickly. The main reason may be the lack of infrastructure. Thats why the growth rate of banking industry is moderate to high.
Economies of scale: Mainly it is more applicable in the production industries. But in banking industries it is hard to determine the economics of scale. Here if the product or service is sold at a high volume than the profit of the bank will increase. We found that in case of banking industry the effect of economies of scale is moderate to high.

Degree of differentiation: Banking products normally provide the same or unique benefit to its customers- the need of money. But different banks always try to differentiate their products by name, terms & conditions, maturity security etc. so from the analysis we see that the degree of differentiation in case of bank services is moderate to high. Exit barrier: Bank faces the most exit barrier than other financial institutions. They have to go through so many rules and regulations to exit from the market. The deposited money of the people would be returned, the credit would be returned to the creditors which may not be profitable or possible also. So exit barrier is assumed to be high.

The Threat of new entrants: There is no real problem in the formation of a new bank, and it is not even an unusual occurrence. It is also not unusual for an entity to offer very bank like services to clients. The market is so large and so fragmented, that the significance of a new entrant or even entrants is minute. If the concept of the combination of existing participants into what amount to "new entities" the importance of the concept changes, but only slightly. The ""new entity" is nothing more than a combination of formerly existing entities, and its immediate effect on the market will probably me minimal. Longer term, its increased size and financial strength may alter the market situation slightly.
B-2. Threat of new firms a. Access to technology 20.00% 4.00% High Moderate to high Moderate low to moderate Low 4 3.5 3 2 1 4

b. Capital Requirement

4.00%

High Moderate to high Moderate low to moderate Low

4 3.5 3 2 1

c. Brand loyalty

4.00%

High Moderate to high Moderate low to moderate Low

4 3.5 3 2 1

d. Legal Barrier

4.00%

High Moderate to high Moderate low to moderate Low

4 3.5 3 2 1

e. Government Price Regulations

4.00%

High Moderate to high Moderate low to moderate Low

4 3.5 3 2 1

3.5

Access to technology: Now-a-days technology is the most important thing. For better service technology is a must. Though the infrastructure is not so developed, most of the banks are trying to adopt modern technology. Today the banks are providing ATM services, online banking services etc where technology is a must. Technology plays a key role to differentiate one bank from others. So the profitability by access to technology is high. Capital requirement: According to government regulation the paid up capital of a bank must be 200 million to be run in our economy. This amount is very high. This requirement reduces the profitability of quick entrance of new bank which increases the profitability of the existing banks. So the profitability of bank for capital requirement criteria is assumed to be high. Brand loyalty: In banking industry customers are normally loyal to brand name. This increases the profitability of existing bank. So the profitability by brand loyalty is high.
Legal barrier There is also legal barrier in this sector. This is actually the requirements for the bank. The government has set a set of rules for many reasons because the banks deal with public money. So if the government is unable to save the public interest, it indicates the governments disability. Thats why there is moderate legal barrier in the banking industry that indicates 3 points. Government price regulations: Government price regulations are good parameter for this analysis. In the banking industry, Bangladesh bank controls the price of banking industry and that is interest rate. The price of the banking industry is actually the interest rate. Bangladesh bank also controls the money supply of the economy. Sometimes Bangladesh bank tells that loan should be given to the agriculture at 8% rate. Or at least a specified percentage of deposits must be given loan to specific sector. Thats why the ranking is 3.5 that indicates moderate to high.

The threat of substitute products:

For the most part there is no real threat of substitute products in the banking industry. It could be argued that a personal loan is a substitute for a loan of a leasing company, but in reality both are loans and the loan is taken out because the customer wants money. The same can be said of other bank products, and even institutions. A leasing company is a substitute for a bank, but it is the same product offered by an alternative vendor. There is a good chance the leasing company is owned by a bank holding company in any case. The only question is the origination of the loan. They serve approximately the same function as checks and some of the new Internet banking services are actually transfers. There probably will be a continued evolution of products from paper to electronic in coming years. This is an area of potential competition, and probably innovation, but the final services, moving money from account A to account B will not change.
B-3 Threat of substitute a. Profitability of Substitute Industry 20% 5.00% High Moderate to high Moderate low to moderate Low 1 2 3 4 5 1

b. Price performance relationship of substitutes

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

c. Buyers willingness to substitute

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

d. Cost of switching to substitute

5.00%

High Moderate to high Moderate low to moderate Low

5 4 3 2 1

Profitability of substitute industry: The financial sector of Bangladesh is very much diversified now. Different types of institutions are coming with new substitute products. Rather the insurance companies and microcredit institutions are also proving the same service like banks. So the substitute products are decreasing the profitability of the existing banks. So the rating is 1. Price performance relationship of substitutes: In banking industry price of the substitute products is almost same. Banks have the low chance to discriminate price of the banking services. If a bank could provide quality service at low cost, it could increase the profitability of that bank. So the price performance relationship of substitutes is moderate to high. Buyers willingness to substitute product: Buyers willingness to substitute product is moderate to high that indicates the point of 2. It actually indicates that there is almost high willingness to substitute products. The availably and good supply of substitute products have made this possible. Now a man can easily satisfy his financial need from finance company, leasing company, non schedule banks etc instead of commercial banks. The cost of switching to a substitute: The cost of switching to a substitute is low to moderate that indicates 2 points because there is a lot of a bank. And they are providing same products with almost same price and features. The products are not diversified. Rather every bank is providing all products we need. So if anybody does not like the home loan of Brac Bank ltd, he can easily take this product from Bank Asia Ltd. And the cost of switching is not high.

The bargaining power of customers: Retail customers, ordinary individuals, have no bargaining power whatever as a negotiator. A classic bit of banking wisdom is, "If you owe the bank tk.10, 000, you have a problem. If you owe the bank tk.10, 000,000, the bank has a problem. The disparity in size and power of the bank and the client is so great in most cases that the client has essentially no bargaining power. 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 price of credit and the credit standing of the client are pretty much givens. 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.
B-4 Bargaining power of Buyer a. Number of buyers and volume of purchase 20% 5.00% High Moderate to high Moderate low to moderate Low 1 2 3 4 5 3

b. Concentration of buyers

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

c. Buyers Knowledge

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

d. Price Sensitivity

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

No. of buyers and volume of purchases: There is large number of buyers in banking industry. But the volume of their purchase is very low. Sometimes big institutional investors hold a significant portion of purchases of services of some banks. So considering all these things we assume moderate grade for this criteria. Concentration of buyers: Bank customers are not concentrated. So concentration of buyer is assumed to be low which increases the profitability of bank and the rating is 5. Buyer knowledge: Generally the people of our country have little knowledge about bank services. Only educated persons or the city dwellers are concerned about some specialized services of banks. The rural people still avoid banks because of lack of knowledge. But the scenario is changing very fast because of the increase of educated people. So we assume that the knowledge of customers about banks product is moderate. Price Sensitivity: Price is not a dominant factor in banking service. Price of same product of different bank is nearly same. The customer only expects better service and good behavior from the employee of the bank. Customers are service sensitive rather than price. Here price sensitivity is low to moderate.

Bargaining power of suppliers: A bank has three suppliers of its product, money: 1. 2. 3. Its depositors The credit market The central bank

The first source, depositors, has no bargaining power whatever in reality. If they make time deposits the bank will set the price or interest rate it will pay. If they have a demand deposit the bank pays nothing or effectively nothing for the deposit. It is possible that there may be some variation in services as a form of competition, but a demand account (DDA) is not subject to great variation and most customers simply want an account and don't even know the exact terms of their account. Larger clients, corporations, government agencies, and wealthy individuals are offered packages of services in what is actually a form of "market orientation" in current management terminology. The bank is still the dominant party, even with very large clients, but the client can make the threat of going to another bank, and if he/she/it is large enough, the threat may have some significance. There is a distinct element of competition for the business of large accounts, but even here it would be very difficult for any entity to offer anything significant that its competitors could not duplicate almost instantly. This part of the business becomes very much one of personalities and individuals as opposed to "marketing initiatives." The credit market as a source of supply of the raw material, money, is open to all at all time if they are qualified participants. The source of supply can be argued to be infinite. The Central bank is effectively the resource of last resort. Apparently, at least for the moment, it will continue to supply liquidity to the banking system in virtually unlimited quantities at very reasonable cost.

B-5 Bargaining power of Supplier a. Availability of substitute products

20.00% 5.00% High Moderate to high Moderate low to moderate Low 5 4 3 2 1 5

b. Portion to supplier business c. Concentration

5.00% 5.00%

High High Moderate to high Moderate to high Moderate Moderate low to moderate low to moderate Low Low

11 22 33 44 55

45

d. Criticality of buyer business

5.00%

High Moderate to high Moderate low to moderate Low

1 2 3 4 5

Availability of substitute products:

Today nearly 50 banks are running in the economies of Bangladesh. All the banks are proving the same service. Besides the insurance companies and microcredit companies are also proving the financial services like banks. So the Availability of substitute products is high in banking industries. Concentration: Bank customers are not concentrated. So concentration of buyer is assumed to be low which increases the profitability of bank and the rating is 4. Portion to supplier business: The depositors are the supplier of banking industries. The numbers of suppliers are many. A single depositor deposits a little portion of banks fund. So the portion to supplier business is low in banking industry. Criticality of buyer business: Banks have high influence on the business of the loanee. The rating for these criteria is moderate to high.

Rating at a glance:

The Threat of new entrants

18.5

Rivalry among existing firms

The bargaining power of customers

17
TOTAL Industry Attractiveness 73.5 (A-)
Moderately Attractive

16

Bargaining power of suppliers

The threat of substitute products

15

Bank strategy analysis

Basically there are two types of strategy that are followed by most of the business organization. First one is cost leadership that means providing the products and services at lowest cost compare to others. Second one is differentiation which means providing innovative and quality product or services rather than cost. In case of bank there is limited chance to be cost leader, because we know that interest rate is the significant part of the cost of a bank product. And this interest rate is determined by the central bank. So the interest rate is same for all the banks. Generally, Interest rate = Rf + Rp + I + Other cost Rf= Risk free rate of return Rp = Risk premium I = Inflation Other cost = including processing fee, hidden cost, brand value etc. Here, Rf, Rp and I are almost same for all the banks. The variation is only in the other cost like processing fees, hidden cost, brand value etc. This variation is very insignificant. So, it is very difficult for a bank to be a cost-leader.

Differentiation: As there is limited scope for the banks to be a cost leader, they go for differentiation to sustain in the competitive world. The success of Uttara Bank limited can be attributed its differentiating strategy. The bank differentiated itself on four basic parameters. Knowledge banking approach Human Resources Modernization Favorable environment

 Knowledge banking approach Uttara bank limited decided to follow an innovative approach to break into the heavily cluttered Bangladesh commercial banking system. Knowledge banking ---a unique method of acquiring customer and retaining them. The bank provides specialized service to the emerging sectors of economy through better understanding of its clients business and industry. The bank focused on providing the customer with specialized banking service depending upon their requirement. The bank identified some sectors of economy which had growth prospect: 1. Agriculture 2. Industrial 3. Commercial 4. Real estate 5. Lease financing 6. Bills discounting and purchase
7. Special program and 8. Others

Human Resources

The banks human resource policy is to recruit and build up quality man power having skill and professional expertise. Skilled human resource is like blood for development of any

service industry. Keeping this universal truth in mind, human resource development has always been receiving special emphasis in this bank. Key initiative by bank to recruit and train manpower: Own training institute with sophisticated instruments Guest speakers specialized in banking are hired to train employees A number of executives and officers were sent to various Training Institutions including Bangladesh Institute of Bank Management (BIBM), Bangladesh bank and abroad for higher training.

Modernization Uttara bank limited is one of the private sector banks having wide network of branches in the country. The branches of the bank are operating through computer network using the banks own software in day to day banking. Banks specialties are: Speedy services in International Business E-mail is in operation in Head office and in almost all branches International Division of Head office and 38 branches under SWIFT operation Own web site

Favorable environment

This bank provide favorable environment to its customers as well as its employees. It provides prompt service to its customers and clients. All the branches are well decorated and the banks differentiated things are as follows:

Well-labeled counters Separate pay-off & withdrawal counters etc. Customer convenience Uniformity of appeal to all segments of customers Noise free working environment for the employees Employees are friendlier not only with the customer but also with their staff.

Conclusion:

Every industry follows the normal distribution of business cycle including four stage introduction, growth, maturity and decline. The banking sector of Bangladesh has crossed the growth stage. It is now in a stable position. The banking business is very much customer oriented. Customer plays a key role for the profitability of a bank. Most of the people have little knowledge about bank services. From our analysis, we found that the score is 73.5 which indicate the banking industry is moderately attractive. But still we have the shortage of banks because long line in the government and non-government banks proves that the present banks are not sufficient to meet up the growing need of the people. This problem will be more severe if the village people are fully engaged in banking services.