HSBC’s target customer base, primarily consist of business’s of good repute and standing and hence these organizations are always head hunted by competitor banks. In addition in Sri Lanka customers could easily transfer funds within banks without much restriction and at a relatively low cost. Hence the switching cost to customers is considered low.
In the above scenario the bargaining power of the customer is relatively high. However this is mitigated to a certain extent due to the international network available with HSBC, which is not found in many banks in Sri Lanka.
Bargaining power of Suppliers
HSBC corporate banking uses the services of the following service providers.
- Auditors
- Legal Advisors
- Information Technology service providers
- Stationary suppliers
- Outsourcing agency
- Advertising agencies
- Courier Company
Most of the functions performed by these organizations are widespread and offered by many companies in Sri Lanka. This has created competition among the suppliers and has helped HSBC obtain better deals. Further the service provider has a sense of worth in been associated with a reputed organization such as HSBC, hence the bank has an edge over its suppliers and has the ability to make certain demands. Further HSBC maintains a close relationship with its service providers and hence are able to obtain quality service at the best prices.
Therefore the bargaining power of suppliers is considered to be low, for HSBC corporate banking.
Threat of Substitute Products or Services
The following could be considered as the primary substitutes for banking services in Sri Lanka.
- Non Banking Financial Institutions
Mobilization of financial resources outside the traditional banking system has witnessed a significant growth over the couple of years due to the attractive interest rates offered by these organizations. However due to the issues faced by consumers in Sri Lanka with several finance companies such as Golden Key, Ceylinco Finance etc , consumers have lost confidence in such institutions and have resorted to conventional banking methods.
- Government Treasury Bills and Bonds
Consumers perceive this method as secure in comparison to depositing their funds in Commercial Banks. However, due to the inflexibility in these methods it is not considered a threat in todays business environment.
Some business’s perceive the stock market as a very good investment opportunity. These customers are willing to take a calculated risk in anticipation of the high returns expected through such investments. The stock market could pose a threat in a stable economy, however in Sri Lanka business organizations prefer to invest in the conventional banking sector and obtain credit facilities against such investments.
Although the above options are available, the large corporates prefer to follow conventional banking methods as this offers more security and flexibility which is not derived from most of the substitutes. Hence we could safely conclude that the threat of substitutes is not a concern for HSBC Corporate banking, as the bank is geared to offer much more flexibility, products, safety and convenience banking.
Rivalry among Existing Competitors
The appended strategic group map will illustrate HSBC Corporate Banking primary competitors in the corporate banking segment. The mapping is based on the each banks innovative capability as opposed to its target segment reach.
There are many players offering similar products in the corporate banking sector in Sri Lanka. HSBC Corporate Banking considers players such as Standard Chartered Bank, Citi Bank, Deutsche Bank, Commercial and Hatton National Bank as its main competitors. Although the product propositions are similar HSBC tends to adapt a differentiation strategy in terms of customer service. The bank also has an edge over competitors in the trade services segment primarily due to the quality of service, availability and international network. The local banks however has the larger branch network in Sri Lanka whereas HSBC is centered around Colombo and its suburbs with the exception of Kandy and its latest addition in Jaffna. Due to this intense competition the industry is open to price wars and reduced profitability. However HSBC ensures that profitability is met in all instances. An annual review of each customer is done at which point the profits generated from the customer is analysed. The minimum return on risk assets (RORA) for a given customer currently is at 3.5% and if this is not met the bank may take steps to increase other fee based income in order to compensate for the low RORA.
HSBC Corporate Banking is aware of its competitors and keep a close tab to asses the proximity of its competition which helps the bank change its direction in order to remain competitive in the dynamic environment.
As per the above analysis it is prudent to state that competition within the industry is high.
Interconnectedness of the Five Forces
Even though the each force was analysed in isolation, if all of this was connected together we could clearly visualize interconnectedness between some of the forces. To explain this further we need to start at the size of the target segment which is relatively small. In terms of competition, all players tend to compete to capture a larger wallet share. Due to this intense competition there is a price war which ultimately may lead to reduced profitability. In addition the consumers have a better bargaining power due to the banks clamoring for a bigger wallet share. In terms of suppliers, since the items provided are freely available the suppliers bargaining power is low and hence the banks are at an advantage as they could obtain the best deals. Although substitutes to traditional banking may be found, in the current environment consumers are apt to choose a bank over a substitute preferring the safety and flexibility offered.
Conclusion
The banking sector has witnessed many changes in the recent past. The above analysis confirms that the industry is still perceived as attractive. Although there has been a significant increase in competition, rivalry is still low in the banking industry.
Most banks seem to target large corporates and high net worth individuals as the preferred client although in turn this segment wields a lot of power and therefore difficult to sustain in the long run. To the contrary the other segment (small business’s ) could generate higher margins and are easier to manage and sustain throughout the organizations growth phase.
In conclusion it could be seen that banks are operating in an environment which is unpredictable. Further we could reasonably assume that as long as the existing players continue to generate satisfactory return on investments, there would be a clamoring from competitors for a share of the pie. However due to the prevailing high entry barriers this situation is mitigated to a great extent.
HSBC’s position within the industry currently is comfortable. However been an innovative bank, HSBC has at no time been known to be complacent and has always been proactive in order to manage its competition and stay ahead of the rest. Hence we could conclude that HSBC holds a competitive position within the corporate banking sector when compared with its peers.
References:
Retrieved on 15 April 2010 from
http://www.cbsl.gov.lk/pics_n_docs/09_lr/_docs/licensing/bsd_licensing.pdf
Link between the Macro Environment and Industry Analysis
