The
twelfth case study for CMA (Final) Group 3 students-
Paper
15 - Business Strategy and Strategic Cost Management
CASE
STUDY ON PORTER’S FIVE FORCES MODEL
Taifa Bank, a
subsidiary of an International Bank has experienced a serious decline in its
business performance. The deposits are down, the loan portfolio has a lot of
bad debts and head office is planning to slash the level of investment in the
bank. Use Porter‘s Five Forces of Competition Model to establish the impact of
competition on the overall performance of the bank. Explain how Taifa Bank can
use Porter‘s Five Forces Model in evaluating why there has been a decline in
performance.
Answer:
The
Five Forces model can provide useful information in regard to the decline in
performance of the bank. It is worth assuming that forces in the market such as
competition has resulted in declining profits, inability to attract quality
clients and general poor reaction to competitive moves in the market. Michael
Porter's 5 forces analysis is a framework for industry analysis and business
strategy development developed by Michael Porter of Harvard Business School in
1979. It uses concepts developed in Industrial Organization (IO) economics to
derive 5 forces that determine the competitive intensity and therefore
attractiveness of a market. Porter referred to these forces as the
microenvironment, to contrast it with the more general term macro environment.
They consist of those forces close to a company that affect its ability to
serve its customers and make a profit. A change in any of the forces normally
requires a company to re-assess the marketplace.
Strategy
consultants use Porter's five forces framework when making a qualitative
evaluation of a firm's strategic position. The framework is textbook material
for modern business studies and therefore widely known. Porter's Five Forces
include three forces from 'horizontal' competition: threat of substitute
products, the threat of established rivals, and the threat of new entrants; and
two forces from 'vertical' competition: the bargaining power of suppliers,
bargaining power of customers. Each of these forces has several determinants.
The
Bargaining power of suppliers
Every
organization has suppliers of services which are used to produce the final
services and porter suggested that the suppliers are more powerful when; there
are only a few suppliers, there are no substitute for the products supplied,
when suppliers price form a great part of the total cost of the organization, (Richard
lynch 2003.). The major suppliers of fund to Taifa bank are the depositors. The
customers‟ deposit form a huge part of the banks working capital, however the
bank has investment in overseas countries with a competitive advantage of
sourcing for funds from overseas. In order to increase its customers deposit
and maintain its sustainability there is a need to offer higher interest rate
to its customers, and maintain its tenacity in the corporate world.
The
Bargaining power of buyers
Buyers‟ bargaining power increases in
situations where; there are higher concentration of buyers than suppliers,
there is ability to easily switch to undifferentiated substitute products,
availability of market information to the buyer. The customers have more
bargaining power due to higher concentration and market knowledge, however
Taifa bank should have an advantage in term of product offered; free credit
cards along with e-banking and insurance services, which are different from
what is offered by its competitors making it uneasy for buyers to switch.
The
threat of potential new entrants
According
to (John L Thompson 2002) “where barriers to entry are high new entrants are
likely to be deterred”, however he also stated that, “if there is an attempted
entry there are likely to be reaction from existing competitors.” Barriers to
entry can be caused by the following factors; economies of scale, product
differentiation, capital requirement, switching cost. There are statutory
capital requirement to entry into the banking sector which stands as barrier to
new firm entering the industry, also over the years the Taifa bank has invested
huge funds from its years of operation to build a huge capital base, which new
entrants would find very difficult to meet.
However
microfinance banks can pose a threat to Taifa bank by targeting the low income
earners and the small business owners which Taifa could not reach due to high
transaction cost.
The
Threats of Substitute
If
there are close substitutes, demand for a particular brand will increase or
decrease as its price move upwards and downwards relative to competitors, (John
L Thompson 2002). Furthermore, (Richard lynch 2003), is of the opinion that
substitutes do not entirely replace existing products, but may limit the profit
in an industry by keeping prices down. Key issues analysed are; the possible
threat of obsolescence, the ability of customers to switch to the substitute,
the cost of providing some added services to prevent customers switching. Taifa
bank operates in an environment where competitors offer identical products, for
Taifa to be ahead of its competitors it offers different products, which ranges
from; insurance, mutual funds or fixed income securities. However the presence
of non-banking financial institution providing the same services poses a great
threat to the sustainability of Taifa bank.
The
extent of competitive rivalry
Competition
among companies may take the form of price competition, innovations,
advertising and promotions, or value added services. However before deciding
upon competitive actions firms must attempt to predict how their competitors
will react. (John L Thompson 2002). The intensity of competition, according to
(John L Thompson 2002), depends on; the number of competitors and degree of
concentration, the rate of growth in the industry, degree of differentiation,
the extent of which competitors are aware of the strategies of their rivals and
exit barriers.
The
analysis of the competitive advantage of Taifa bank shows that;
The
bargaining power of the suppliers is high;
The
bargaining power of the buyers is high;
The
threats of potential new entrants are medium;
The
threat of substitutes is high;
The
extent of competitive rivalry is high.
Useful
information that the Bank can derive is as follows:
Statistical
Analysis
1.The
Five Forces Analysis allows determining the attractiveness of an industry. The
decline in profitability may be due to the industry becoming less attractive.
2. It provides insights on profitability. The model can assist determine how the
forces have driven the costs up or reduced turnover that the bank can make. 3.
Thus, it supports decisions about entry to or exit from an industry or a market
segment. This is helpful for the bank in the context of whether it has been
easy for new firms to enter or difficult for other banks to leave. The
combination intensifies competition that may impact on the performance of the
bank. 4. Moreover, the model can be used to compare the impact of competitive
forces on their own organization with their impact on competitors. Taifa bank
must evaluate the extent to which the forces have impacted on their operations
in relation to competitors. 5. Competitors may have different options to react
to changes in competitive forces from their different resources and competences.
A comparison of how the bank has developed strategic options in response to the
forces can be helpful.
Dynamical
analysis
In
combination with a PEST – Analysis, which reveals drivers for change in an
industry, Five Forces analysis can reveal insights about the potential future
attractiveness of the industry. Expected Political, Economical,
Socio-demographical and Technological change can influence the five competitive
forces and thus have impact on industry structures.
Analysis
of Options
With
the knowledge about intensity and power of competitive forces, organizations
can develop options to influence them in a way that improves their own
competitive position. The result could be a new strategic direction, e.g. a new
positioning, differentiation for competitive products of strategic
partnerships.
This,
Porters model of five competitive Forces allows a systematic and structured
analysis of market structure and competitive situation. The model can be
applied to particular companies, market segments, industries or regions.
Therefore, it is necessary to determine the scope of the market to be analysed
in a first step. Following all relevant forces for this market are identified
and analysed. Hence, it is not necessary to analyse all elements of all competitive
forces with the same depth.
The
five forces Model is based on microeconomics. It takes into account supply and
demand, complementary products and substitutes, the relationship between volume
of production and cost of production, and market structures like monopoly,
oligopoly or perfect competition.
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