APPLICATION OF PORTER 5 FORCES TO THE BANKING INDUSTRY

By

Anthony Tapiwa Mazikana

[email protected]

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06/03/2023

Introduction
It has been demonstrated that competition is an essential factor in the operation of a wide
variety of organizations, despite the sector to which these organizations belong. The author
chose to use the Five Forces Analysis model because of the important role that these five
factors play in the Zimbabwean banking industry. Other tools for analyzing the competitive
environment include the Game plan, Value Chain model, PESTEL model, and the Strategic
group analysis (Lumpkin et al., 2015). However, despite the availability of these other tools,
the author chose to use the Five Forces Analysis model. The Five Forces Model developed by
Porter is widely considered to be the most effective strategic analysis tool currently available.
The only aspect of the external environment that will be discussed in this study is the
competitive one because of its expansive nature.
Figure 1.1 below presents Porter 5 forces

Figure 1.1: Porter 5 forces

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The researcher decided to use the Five Forces Analysis model because of the significant role
that these five factors play in the Zimbabwean banking industry. Other tools for analyzing the
competitive environment include the Game plan, the Value Chain model, the PESTEL model,
and the Strategic group analysis (Porter, 1998). However, despite the availability of these
other tools, the researcher decided to use the Five Forces Analysis model. An illustration of
how the Five competitive forces can be used to explain low profitability and potential entry to
an industry is provided by Porter's Five Forces Model of Competitive Analysis (Hill & Jones,
2007). These five forces include the competition among previously established businesses,
the threat of new entrants, the power of buyers and suppliers, the possibility of alternatives,
and the threat of new entrants. It is helpful to have a comprehensive understanding of each of
these forces, both on their own and in combination, when making decisions about which
industries to enter and determining how a company can improve its competitive position. The
intensity of these forces is one of the primary factors that determines the average expected
level of profitability in an industry (McGanan, 1997). Because the strength of each of the five
forces is inversely related to the price and profits, a competitive force that is weak may
present an opportunity, while a competitive force that is powerful may pose a threat to the
firm (Hill & Jones, 2017).

The risk of entry by new potential competitors

The potential for incumbent institutions in the sector to see their earnings reduced as a result
of new entrants into the market is what is meant by the phrase "threat of new entrants." The
magnitude of the threat is inversely proportional to the number of existing obstacles to entry
and the aggregate responses of existing rivals. Threat of entrance is reduced when there are
strong entry barriers or when the newcomer anticipates a severe reaction from established
competitors (Porter, 1998). The conditions are discouraging to potential new competitors.
There are a lot of important obstacles standing in the way of new entry, such as patents and
brand recognition (Bateman & Snell, 2004).

The major barriers to new entrants

The practice of dividing the total expenses of manufacturing by the total number of units
manufactured is known as "economies of scale." As the absolute volume of a product sold
during a given time period rises, the cost of the product per unit falls. This discourages entry
because it forces potential competitors to either enter the market on a big scale, where they
run the danger of provoking a hostile response from already established banks, or enter the

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market on a small size, where they face a cost disadvantage. Both are poor choices that
should be avoided. The sources of economies of scale include cost production gained through
mass producing a standardized output, discounts on bulk purchases of inputs and component
parts, the advantages of spreading fixed production costs over a large production volume, and
the savings from spreading marketing and advertising costs over a large volume of output.
Economies of scale can also be defined as the reduction in unit cost of production that results
from mass producing a standardized output. Because of these characteristics, any potential
small-scale competitors are discouraged from entering the market because they face a
considerable cost disadvantage and a high requirement for capital (Hill & Jones, 2007).
Product Differentiation is the strong brand identification, customer loyalty, and
differentiation in established industries that creates a barrier to entry by forcing new entrants
to spend heavily to overcome existing customer loyalty.

This barrier to entry is created because product differentiation in established industries

creates a barrier to entry. Because of the necessity to invest significant financial resources in
order to compete, as well as potentially dangerous or unrecoverable advertising and research,
high capital needs also constitute a barrier to entrance (Bateman & Snell, 2004). Another
issue to consider is the switching costs, which come into play in situations in which a barrier
to entry is produced as a result of the existence of one-time charges that the consumer must
bear when moving from purchasing a product or service from one supplier to purchasing it
from another.

Access to distribution channels is another factor that discourages new entrants. This is
because new businesses have to work harder to establish a distribution route for their goods.
There are other cost disadvantages, which are independent of size or economies of scale,
which prevent new entrants from entering the market. The already established industries may
have advantages that are not dependent on economies of scale, such as a patented product,
good access to raw materials, and government subsidies. The lower the barriers to entry, the
greater the risk of new companies entering the market. If a new company is able to start its
business with a little capital investment and continue to run efficiently despite the fact that it
is on a smaller size, then it is likely to pose a danger to the existing company. When a
company enters a market that has exceptionally low entry barriers, the company puts itself in
jeopardy (Bateman & Snell, 2004).

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Bargaining power of buyers
Customers have the potential to pose a threat to a sector by driving prices lower, haggling for
improved quality or additional services, and pitting companies against one another. As a
direct consequence of this, profitability will suffer. The strength of any buyer group is
determined by the characteristics of the current market environment as well as the relative
significance of the group's purchases in comparison to those of the entire company
(Alkhafaji, 2003). Institutions, organized groups, non-governmental organizations (NGOs),
faith-based organizations (FBOs), community-based organizations (CBOs), and individual
customers are all examples of customers who purchase banking services.

Bargaining power of suppliers

A supplier might exert pressure on an industry by raising the prices of the products they sell
or by lowering the quality of the goods that are bought. The profitability of the banking
business can be squeezed by powerful suppliers to the point where the industry cannot
recover the expenses of the raw material inputs. They are businesses that provide labor as
well as raw materials, equipment, and machinery, in addition to connected services. Banks
may have a variety of suppliers, some of which include trade unions for the provision of labor
force, providers of automated vending machines, cleaning services, IT consultants, and
marketing agencies, to name just a few of these categories (Dagmar, 2001).

The supplier group is controlled by a relatively small number of enterprises, and the industry
as a whole is more tightly consolidated in the hands of a relatively small number of banks.
Suppliers operating in fragmented industries have an impact on the prices, quality, and terms
of their products. Another requirement is that the supplier group should not be required to
compete with alternative items that are being offered for sale to the industry. This is due to
the fact that even large and influential suppliers might have their influence curtailed if they
face competition from replacements (Alkhafaji, 2003). The third criterion is that the industry
in question is not a particularly key consumer for the supplier group. This happens when a
supplier sells to multiple different industries, and one of those industries does not represent a
major fraction of the supplier's revenue. In this scenario, the supplier is more likely to exert
dominance over the other sectors. A supplier's power might also be significant if the product
they provide is an essential component of the buyer's operation. When such inputs are crucial
to the performance of the manufacturing process or the quality of the product being produced
by the buyer, the bargaining power of the suppliers is significant (Dess, et al., 2005).

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One more condition that must be met for a supplier to be considered powerful is that the
products offered by the supplier group must either be differentiated from one another or it
must have built up switching costs for the buyer. This is because both of these costs prevent
the buyer from playing one supplier off against another. Last but not least, the supplier group
has the potential to wield significant power if it is able to credibly threaten forward
integration, which acts as a control mechanism against the capacity of the industry to improve
the conditions of procurement (Riley, 2012).

Threat of substitute products

All banks within an industry compete with industries producing substitute products and
services because substitutes reduce the potential returns of an industry by placing a ceiling on
the prices that banks in that industry can profitably charge. Identifying substitute products
involves searching for other products or services that can perform the same function as the
industry’s products (Riley, 2012). In the banking industry, substitutes have been noted to be
the Savings and Credit Societies with low levels of interest and less strict terms and
conditions regarding their loan services. This is a delicate role that leads a manager into
businesses seemingly far removed from the industry such as digital technology, wireless
forms of telecommunication, teleconferencing, and e-commerce as viable substitutes for
traveling.

Rivalry among established firms

Rivalry is the competitive struggle between banks in an industry to gain market share from
each other (Hill & Jones, 2007). It is jockeying for position whereby banks use tactics like
price competition, advertising battles, product introductions, quality competition, and
increased customer service or warranties (Pearce & Robinson, 1994). The competitor is the
first to be dealt with in competitive environment (Bateman & Snell, 2004). There are 43
banks that compete with FBC in provision of similar services under the same external
environment. These include banks such as NMB, Stewart, Bank ABC among others. Rivalry
occurs when competitors sense the pressure or act on an opportunity to improve their market
segment (Dagmar, 2005). Some forms of competition, such as price competition, are typically
highly destabilizing and are critical for profitability level in an industry. For example, price
cutting lowers profits for all banks while advertising battles inflate the demand and enhance
the level of product differentiation for the benefit of all banks in the industry. The intensity of
rivalry differs across industries and this may be due to various factors.

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Examples of Exit Barriers
Investment in expensive assets such as machines, equipment and operating facilities which
need writing off their book value, high fixed costs of exit such as severance pay, health
benefits and pensions in case of liquidation and emotional attachments to an industry such as
sentiment or pride which prevent banks from leaving the industry. Other exit barriers include
economic dependence on the industry because of failure to diversity in other industries, the
need formaintaining an expensive collection of assets for effective participation in the
industry, and tough bankruptcy regulations (Hill & Jones, 2007).

Porter’s Competitive Strategies

After conducting a successful competitive analysis, Porter outlined a number of potential
strategies, including corporate, generic, and competitive approaches. He also outlined three
general business level strategies that can be used to gain a competitive advantage over other
banks operating in the same industry. These strategies were the cost leadership strategy, the
differentiation strategy for the broad industry-wide environment, and the focus strategy for
the narrow market segments. All of these strategies can be used to gain a competitive
advantage over other banks operating in the same industry. The low cost focus strategy and
the focus/niche differentiation approach are both components of the focus strategy (Porter,
1980). In addition, Porter outlined the specific generic techniques that can be used to fight
against the five industrial pressures.

Using the cost leadership strategy, a financial institution has the option of being the lowest
cost producer in its sector by offering its products and services at the most competitive rates
possible (Porter, 1985). One or more of the following, along with economies of scale,
proprietary technology, preferential access to raw materials, and other variables, may provide
a financial institution with a competitive cost advantage. A low-cost producer is one that
seeks out and capitalizes on all possible sources of cost advantage. In addition to this, they
must be able to be an above-average performer in their industry to such an extent that they
can command prices that are at or at least close to the average for their industry. A bank can
stand out from the competition within its industry or among its products by implementing a
differentiation strategy. This will allow the bank to excel in areas that are extremely
important to its customers. This may involve picking one or more characteristics that a large
number of buyers in the banking industry consider to be significant, and then positioning
itself in a way that is distinctively suited to satisfy those requirements. This one-of-a-kind

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quality is rewarded through the charging of a higher price (Hamel, 2002). If a bank chooses
to employ a focus strategy, this indicates that the bank has made the decision to limit the
breadth of the competition within the banking business.

The concentrating bank identifies a specific market or set of segments within the sector and
then molds its business strategy around effectively and efficiently catering to those
customers, to the exclusion of all other customers. Cost containment or market differentiation
could both be focus strategies. When pursuing a cost focus strategy, a bank looks to gain a
cost advantage in its target market, but when pursuing a differentiation focus strategy, a bank
looks to gain a competitive advantage in its target market (Thomson, 1990). Both of these
variations of the focus strategy are predicated on the distinctions that exist between the target
segment and the other segments. Either the buyers in the target segments must have unusual
requirements, or the production and distribution system that is optimized for serving the
demands of the target segment must be distinct from those of the other segments. A focus on
cost can capitalize on differences in cost behavior in particular segments, whereas a focus on
differentiation can capitalize on the unique requirements of buyers in some segments.

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