Porter ‘Five Forces Analysis’ for the Banking Industry in Ghana

This essay is aimed at analyzing Porter’s five forces for the banking industry in Ghana.

It gives a brief introduction to the industry and provides a detailed application of the five forces to the industry. Porter’s Five Forces Analysis in the Ghanaian Banking Industry “Competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants and substitute products” (Porter 2008:79).Porter (2008:80) also mentioned that, “understanding the competitive forces and their underlying causes reveals the roots of an industry’s current profitability”. These statements explain the underlying dynamics in relation to competition within the confines of parameters that determine the success or failure of any business entity.

The banking industry in Ghana has been selected for this analysis because in the opinion of writer, all five forces directly relate to the banking industry with an influence on profitability and growth.The industry has customers who are the main beneficiaries of products and services offered, suppliers who provide the industry with the necessary tools to ensure services could be delivered satisfactorily, threat of substitutes due to improvement and usage of innovative technology, rivals and threat of new entrants due to the high profitability of the industry.There are currently 27 commercial banks, made up of both foreign and local banks(Bank of Ghana 2013) which are regulated by Bank of Ghana (BOG),the Central Bank and it ensures all banks comply with regulatory requirements and maintain a healthy level of competition. In the mid 2000’s Nigerian Banks started investing in Ghana posing a threat to local indigenous banks.

The competition however had an upside to it as it made the Ghanaian banks improve services, turnaround time(TAT) and even extend working hours in order not to lose their customer base to the Nigerian Banks which were seen to be aggressive.Products and services provided by the industry include retail, corporate, SME and personal banking, cash management services, fixed deposits, treasury services, custodial services, trade finance, term loans, overdrafts, treasury bills, mortgages, confirmation of Letters of Credit (LC Confirmation) and various payment services. The main players in the industry as at June 2012 according to profitability are Standard Chartered Bank (GHS57Million), Agricultural development Bank (GHS51Million) and Ghana Commercial Bank (GHS49Million)( Ghana Stock Exchange 2013).Application of five forces Threat of New entrants “New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, cost and the rate of investment necessary to compete”(Porter 2008:80).

The banking industry in Ghana has become a very lucrative industry and has attracted many new firms, both local and foreign into the industry to invest. “Ghana continues to be an ideal investment destination to Nigerian investors” (Modern Ghana 2012). Some of the leading Nigerian Banks in Ghana include Zenith, UBA, and Guaranty Trust (Modern Ghana 2012).The central Bank is however taking measures to raise the entry barrier in order to ensure quality services in the industry.

The first phase of this was completed by 31st December 2012 where the minimum capital requirement was increased to GHS60 million (Modern Ghana 2012). Power of Suppliers Porter (2008:83) mentioned in his work that a supplier group is powerful if it does not depend heavily on the industry for its revenue, if the industry participants face switching costs in changing suppliers and if there is no substitute for what the supplier group provides.The main suppliers in the banking industry in Ghana are IT providers, ATM providers and printing companies for cheque books. Bargaining power for almost all the main suppliers mentioned above in this industry is very high because only a handful of providers are licensed to provide them.

Familiarity results in discounts and purchasing on credit, there is therefore a high switching cost. This gives the suppliers more leverage. Power of Customers Powerful buyers can capture more value by forcing down prices, demanding better quality or more services and generally paying industry participants off against one another all at the expense of industry profitability”(Porter 2008:83). Porter (2008) attributes buyer leverage to when there are relatively few buyers in the industry, when each purchases in large volumes in relation to the size of a single vendor, when the industry’s products are standardized and buyers believe they can always find an equivalent product and lastly when buyers face switching costs.

The level of bargaining power a customer has depends on the nature of transaction. Where the transaction are unique to a particular banks or where these banks specialize in these transactions, the customers have low bargaining power. E. g.

LC confirmations and swift transfers. Also, where the transaction is of a cross border nature, the parties involved prefer to deal with known and reputable International banks e. g. Standard Chartered Bank and Barclays Bank.

Threat of Substitutes “A substitute performs the same function as an industry’s product by a different means” (Porter 2008:84).In inference, the banking industry in Ghana faces a threat of substitutes from some various other industries which provide some of products and services banks provide such as the telecom companies now offering money transfer across country for both banked and unbanked population. Although the services may not be as well structured, some individuals find it rather convenient for reasons such as presentation of less documentation, non-provision of collateral for borrowing, less cumbersome processes.Other examples are Savings and Loans Companies, Forex Bureaus, Mortgage Houses and Micro Finance Companies.

Competitive Rivalry “High rivalry limits profits” (Porter 2008:85). Porter (2008) stated that it takes many familiar forms including price reduction, discounting, product innovation and service improvement. Rivalry in the banking industry in Ghana is very high especially between the local banks and the foreign banks. Each firm tries to win the most customers and get them to stay loyal.

These are usually achieved through forms mentioned above from Porter’s work.Concentration of rivalry is greatest if competitors are numerous, industry growth is slow, the products is perishable and products and services are nearly identical (Porter 2008). Conclusion Although the Ghanaian banking industry is experiencing fast growth, there are many emerging substitutes, making customers powerful. Entry barrier is also low, allowing new entrants who are in turn competing for profits.

2. Strategically, which are the most important forces for organizations in this industry to consider, and why? (1000 words). IntroductionThis section aims at identifying the most important forces in the Ghanaian banking industry and explains why they are important. Presently, the most influential forces in the Ghanaian Banking Industry are threat of entry, Supplier bargaining Power and threat of substitutes.

These three forces have a great impact on profitability of the industry and should be critically examined and strategies formulated to minimize their negative effects on the industry. Threat of Entry As Porter (2008) explained, entry into an industry depends on the height of entry barrier and the reaction entrants can expect from incumbents. Fast growth can put suppliers in a powerful position and high growth with low entry barriers will draw in entrants” (Porter 2008:86). Usually, profitable industries are attractive to new firms.

It is therefore up to those firms to provide unique services and products to maintain their market share, customer base and brand recognition. Until the Nigerian Banks entered into the Industry, demand for banking services exceeded supply. The Industry therefore had more power over the customers. E.

g. before the entry of Nigerian banks, banks closed to the general public at an earlier hour than they do now because of the power the industry had over customers. Nigerian banks in an attempt to poach customers upon entry extended their working hours to meet the needs of the busy customers, all other banks had no choice but to follow suit in order to retain their market share and prevent their customers from being poached. The solution the Central Bank sought was to raise the entry barrier to curb the rate at which banks are entering the industry.

The first phase of this was completed by 31st December 2012 where the minimum capital requirement was increased to GHS60 million. The Central bank is still proposing increasing the minimum capital requirement to GHS100 (Modern Ghana 2012). Supplier Bargaining Power “Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality of services or shifting costs to industry participants” (Porter 2008:82). The key service providers in the industry have an upper hand due to specialized nature of their services.

Prices and terms of payment often lie in their hands. With ATM providers for example, NCR Ghana ltd is the only company in the country which provides ATM machines and software to all the firms in the industry, meanwhile, the provision of ATM machines and its maintenance is key, supplier bargaining power is thus very high. The suppliers of IT have high bargaining power in the banking industry in Ghana. There are only a handful of such providers who are known to provide durable and reliable products and services end-to-end.

IPMC and Best Net are two companies well known for this.There are however smaller companies who occasionally bid and win contracts but on the whole, bargaining power is high due to limited number of well-established and known providers. With the suppliers of cheque books, there is high supplier bargaining power as there are currently only two companies in the country responsible for the provision of these services hence there is monopoly in the market. Bargaining power is therefore very high.

These companies are Camelot, Checkpoint, and Yawsako CAMELOT is the oldest and foremost of them (Camelot Ghana Limited 2011).Checkpoint is more popular and has a greater market share, their services are therefore employed the most by the key players in the industry. The banking industry having a high supplier bargaining power means that suppliers indirectly determine the quality of services customers in the industry get. With the provision of cheque books for example, the most popular, Checkpoint, got flooded last year after a heavy rain storm and this created a backlog of provision of cheque books which affected customer’s businesses.

Firms within the industry must therefore develop strategies which will serve as a buffer against the amount of control suppliers have. Long term service agreements can be made with the suppliers to prevent spontaneous price increases and quality of services. With provision of cheque books for example, firms could include in their long term strategy, the printing of their own books in-house. Threat of Substitutes Porter (2008) mentioned that threat of substitutes are high when the buyer’s cost of switching to the substitute is low and if it offers an attractive price-performance trade-off to the industry’s product.

In Ghana, the level of threat is high with certain products, services and nature of transaction. When it comes to the buying and selling of forex for e. g. , a customer can easily substitute a bank with a forex bureau.

With cash management and short-term lending, the banks can easily be substituted with a savings and loans company or other microfinance company who do not demand as much collateral as a bank would and are able to deliver to the customer in a shorter time frame sometimes instantly. Non-bank Financial institutions (NBFIs) are the biggest threat to the banking industry in Ghana.They have a lower minimum capital requirement of GHS7Million (i-Broker 2013). NBFIs in Ghana which are a threat are Bayport Financial Services and Procredit savings and Loans.

Mortgage companies can also be seen as a threat because they usually provide lower interest rates and milder terms and conditions of payment. With unique transactions such as swift transfers, cheque clearing, payment of salaries etc. , banks do not face a threat of substitutes since these NBFIs are currently not licensed to offer them. A high threat of substitutes means that over time, the banking industry would share its profits and customer base with other industries.

The banks must therefore include in their strategy, a means of preventing their customers from substituting those services which can be substituted. This can be achieved with the use of technology to make processes more simplified and at the same time secure. Conclusion “Understanding the forces that shape industry competition is the starting point for developing strategy” (Porter 2008:88). The firms in the industry must therefore know the forces which affect their profitability the most and formulate strategies to manage the situation.

3. Critically evaluate the outside-in approach to strategy formulation. (1500 words). IntroductionThis section gives a critical evaluation to the outside-in approach to strategy formulation.

It defines what strategy formulation is and its importance. It also briefly talks about the inside-out approach and the various frameworks of the outside-in approach. “Strategic planning determines the direction an organization needs to take to achieve a desired future, not to mention a competitive advantage” (Civichin, 2012:14). Due to changing needs of the consumer and a lot of competition, organizations need to put in place, strategic plans which will drive them towards long term sustainability and help them maintain their market share.

The Outside-In strategy is a set of external elements which form non-controllable elements in an industry or organization and most often act as constraints on the parameters within which the strategist is required to operate (Anon 2009). The main focus here, is on the external environment and the customer. The nature of these elements are such that the strategist has little or no control over them, example political, cultural, legal, socio-economic, technological and demographic factors as well as opportunities and threats from outside.Most often, strategists tend to concentrate on internal factors more than the external since these are most likely controllable.

However, “critics say organizations that adopt an inside-out strategy are too slow to respond to major changes in the marketplace” (Civichin, 2012:14). A typical example is with RIM and NOKIA who failed to see and respond to changing needs of customers and new offerings by rivals, Samsung and HTC (Cummings cited in Civichino 2012) .The inside-out strategy is more concerned with internal resources such as machinery, manpower, money, materials and methods as well as strengths and weaknesses of the organization. Evaluation of the Outside-in Approach The frameworks used in the evaluation of the Outside-In approach to strategy are the PESTLE, SWOT analysis and Porter’s Five Forces.

PESTLE The PESTLE stands for political, economic, socio-cultural, technological, legal and ethical factors which have an impact on an organization from the outside. Political systems shape decisions regarding the manner in which a society is organized” (Anon 2009:68). Example, political upheaval could result in a temporary or even permanent halt in operations for a particular organization, likewise, Government policies may exempt certain organizations from tax etc. With economic indicators such as GDP, inflation and exchange rates, an organization has no control over them and would have to strategize leaving room for volatility and conduct periodic reviews and re-align their strategies.

Example, organizations in the lending or trading business are directly affected either positively or negatively by fluctuations in economic indicators. “The influence of religion, family, education and social systems of the society resent further concern for the organization” (Anon, 2009:69). Example, the religious background of a group of people will determine whether or not a particular product or service will be purchased and an organization has no control over that and would therefore have to strategize in line with the socio-cultural traits of the beneficiaries.Technology in the 21st century has had a great impact on organizations.

Banks for instance have been forced by the change in technology to go electronic. Customers can now transact via the internet instead of walking into a banking hall. The improvement in technology has however had some negative impacts on industries such as travel and tour since customers now purchase tickets online and employ their services less. “Although a market offering might be legal, it need not necessarily be perceived as ethical; likewise a product might be illegal but still be considered ethical”(Anon”2009:69).

How a product is perceived depends on the background of the beneficiaries and most often, and industry has little control over that. Example, the sale of cigarettes may be legal but is perceived as unethical in certain communities. SWOT The SWOT is another outside-in strategy formulation tool. It is a tool used in formulating strategy where managers examine both their external environment to identify opportunities and threats and examine the internal to identify strengths and weaknesses (Anon 2009).

In analyzing an organization from the outside-in, the SWOT analyses only takes the opportunities and threats posed by the external environment into consideration. Opportunities can become threats and vice versa, (Anon 2009). The invention of the internet was an opportunity to simplify activities in many organizations, this has however turned out to be a threat in some cases due to internet fraud and has also rendering some industries dormant, e. g.

travel and tour.Organizations are unable to control the impacts of technology on them but can only strategize in line with its growth in order to fit into the 21st century. They must keep changing their products and services to match the change in technology. Systems and software used in the provision of these services must also be regularly upgraded in accordance with changes in technology.

Porter’s Five Forces Porter’s Five Forces examines the effect external competitive forces have on an industry’s profitability. These five forces are out of control of the industry and as such, strategic planning should focus on them.The Five forces consist of threats of new entrants which results in a competition for profits, threat of substitutes which reduces the customer base of an industry, rivalry which sometimes breeds unhealthy competition, power or suppliers and power of customers which gives the industry little leverage over price negotiations. New entrants will most likely act upon an attraction for profitability to enter into a market when there are minimal barriers to entry such as low capital requirement (Anon 2009).

Organizations already in the industry would therefore have to come up with strategies they can adopt in order to protect their profitability in the long term such as adopting economies of scale. Rivalry defines competition amongst firms already in the industry providing identical goods and services (Anon 2009). e. g.

, MTN and Vodafone in the Ghanaian telecom industry. Rivalry drives an organization to outplay each other in order to poach customers and increase their market share. These are usually done through various promotional offers. The central premise of Porter’s approach is that, the profitability of an enterprise is determined by the bargaining power it enjoys in negotiating prices with its suppliers and customers” (Anon, 2009:73).

Suppliers and customers have more bargaining power when they are relatively few. Substitutes are products or services which can perform the same function as the one in question but are not specifically the same. E. g.

a banking services and services offered by a Savings and Loans company. The level of threat of substitution defines how much power a customer has.When products and services can easily be substituted, a customer has high bargaining power, likewise a customer has low bargaining power when the product or service cannot easily be substituted. Unlike the SWOT, Porter’s Five Forces takes into consideration, all the competitive forces from outside which affect an industry’s profitability and is much broader and more well defined than just opportunities and threats which may not give a clear picture since some opportunities become threats and threats become opportunities in the ong run.

One may however ask if these three frameworks are sufficient enough to help an organization in its strategic planning. For a strategist to do a complete outside-in analysis, they must step outside an industry or organization and view it from the perspective of the customer, after all, the services and products are eventually going to the customer. Besides, “What happens outside always drives how an organization reacts inside” (Cummings cited in Civichino 2012:15).Day and Moorman (2011) noted that most successful firms began with management stepping outside the company and looking to the market and asking questions such as what their customers need, how their problems can be better solved and why they are shifting their demand.

This makes it easier for the strategist to know exactly what to plan for, how to provide the customers with what they need and when they need it. It was also discovered by Day and Moorman (2011) that generating economic profits over the long term involves strategies which are built and renewed through a customer value lens.This therefore suggests that taking the customer into consideration goes a long way to sustain profitability since the services are tailored for them and provided to them. Day and Moorman (2011) suggested that outside- in strategies are achieved though customer value imperatives which are to be a customer value leader, innovate new value for customers, capitalize on the customer as an asset and capitalize on the brand as an asset.

Conclusion “Organizations need to begin by looking at the bigger picture and the bigger picture includes the competition and the customers” (Sheehan cited in Civichino 2012:15) .Companies guided by these outside-in strategies deliver better long-run performances because what they always know constitutes value to their customer( Day and Moorman 2009) It is therefore very important for organizations to also take into consideration a customer’s perspective and not just the SWOT, PESTLE and Porter’s Five Forces. Bearing this in mind will not only help an organization grow, but also help it sustain its existence in a dynamic society.