Competitive Forces to Maximize Profitability - MyAssignmenthelp.com

Question: Discuss about the Competitive Forces to Maximize Profitability. Answer: Introduction: Banking has evolved dynamically over the years. The banking sectors stereotypical activities of Branch Banking and Corporate Finance are being replaced by retail and technology based channels of delivery(Bhattacharya, Basu, Deivikaran, Shaikh, 2006 - 07). CBA takes its place among the top four bank of the country along with National Australia Bank, ANZ and Westpac. It has its headquarters are in Sydney. It employs 51,800 employees over 11,000 branches. It has a customer base of 16.6 million(Corporate Finance Institute, 2016). It was founded by the Australian government in 1911 and listed in the Australian Securities Exchange in 1991. Its privatisation occurred in the year 1996 (Austalian Financial Services Directory, 2018). There are a wide range of functions that CBA performs which include corporate financial services, various types of loans and credit services, wealth management, retail and business banking, institutional banking, investment advisory services, insurance, share broking products/ services, security services, superannuation and many others(Austalian Financial Services Directory, 2018). Segmenting, Targeting and Positioning (STP): STP strategic approach plays an important role in the modern marketing and is widely accepted and used(Hanlon, 2017). It is an audience-oriented approach rather than product-oriented. It helps to identify, classify and focus on the target audiences separately. It separates the market based on certain common characteristics for the ease of marketing. Segmentation could be done on various grounds like: Demographics Geography Psychographics (Hanlon, 2017) Services Provided After having identified and classified various potential markets, targeting is done. Potentiality of each market is assessed along with its commercial attractiveness. One or more suitable markets/ segments are chosen to supply the goods and services. Potential and commercial attractiveness of each market can be assessed by the following (Hanlon, 2017): Size of each market Each markets accessibility Costs and profits associated Variations in markets Other benefits (if any) Positioning is the final step in which different products to be supplied are identified in each market. It caters to the needs of different segments or markets. Each market is supplied commodities as per their requirements. A separate marketing mix is identified and developed in each segment. Positioning is often done to keep up its market position and sustain in the line of business. STP in Commonwealth Bank of Australia: Geography: It has its branches across nations like New Zealand, USA, United Kingdom, Asia and Fiji(Austalian Financial Services Directory, 2018). Services provided: CBA provides various loans and credit services, wealth management, retail and business banking, institutional banking, investment advisory services, insurance, share broking products/services and security services. Demographics: CBA not only targets young and middle-aged people, but also extends its facilities to the old-aged and specially-abled group of the society. CBA targets both individual customers as well as big corporate houses. On the basis of segmentation; it provides personal banking and individual loans, corporate banking and loans, investment, institutional financing, retail banking, business banking and share broking. CBA conducts many Corporate Social Responsibility (CSR) activities and provides innovative products and schemes to keep up its positioning. It takes up many opportunity initiatives towards the society, community and education(Commonwealth Bank of Australia, Oppoutunity Initiatives, 2018). It operates in various local areas of Australia for the sustainable social growth(Commonwealth Bank of Australia, Opportunity Initiatives Brochure, 2017). It works with conduct code of highest levels and increases its accessibility by making the banking process easier(Commonwealth Bank of Australia, Customer Commitment, 2018). Product v/s Market orientation: Product orientation refers to the production where the firm makes and supplies the best quality product; and the market falls for its quality. It does not take into account the needs of the customers. On the other hand, market oriented production refers when the firm analyses the markets hidden needs and supply the products accordingly. Production in this case is based entirely on the needs of the consumers(Kokemuller, 2018). CBA is both product as well as market oriented. It conducts surveys throughout the year to analyse the market requirements and then provide products and services accordingly. It invests in the consumer feedback to improve the products as per the requirements. CBA on the other hand also tries to give services of the best quality to attract the new customers as well as maintain the old ones. Value proposition refers to the innovative bundle of benefits, the firm has promised to deliver to its customers. It acts as a tool which differentiates one firm from the others. It is thus important to weigh the value propositions as per the price premium (Kotler, Keller, 2012). CBA not only provides banking but other services like insurance, investment advisory, broking products and services, various schemes on purchase through debit and credit cards, and superannuation. It launched a campaign called Determined to be different, in 2008. Customer satisfaction surveys are conducted to meet the growing needs of the customers. Ambidexterity is attained by providing high-quality services at reduced costs and increased productivity(Trevelyan Howard, 2011). CBA publicises with innovative and creative advertisements, specifying the customer needs and the offerings of the bank, for the globally diverse customers(Strategy, 2016). CBA also extends its services to the old-aged and specially-abled section of the society by handling clients personally and being accessible. It also organises and sponsors many events and cricket matches for men as well as women. CBA also values the growth of its employees through human resource development. It targets competence, technical capacity, leadership quality and personal behaviour(Commonwealth Bank of Australia, Employee Value Proposition, 2017). It promotes performance culture; provides loan benefits, health insurance, pension funds, reward programs, employee discounts along with regular salary and bonuses. Customer need, want and demand: A rational customer wants high quality product with moderate prices. There are three types of customers- brand loyal, connoisseurs and bargain hunters. CBA thus, needs to cater to requirements of all the sections(Commonwealth Bank of Australia, CommBank Retail Insights, 2017). It may be through different schemes for different groups or by having a moderate one that caters to all. Customers choose the banks which provide them low rates of interest on loans and high rates of interest on deposits. It also has simple-to-comprehend policies, customer support services, net-banking, good location and other after sales services(BAI Research Study, 2012). Today, banks also provide schemes and offers on purchase through debit/ credit cards Customers search for factors like convenience, distance, facility of internet banking and customer support services from a given bank. Also, they compare the prices, quality of services, interest rates, security of assets, collateral requirements and technology before the purchase(Wee, Shie, Cong, Ying, Hou, 2015). The purchasing power, economic conditions, group influence, personal preference and marketing campaigns also play an important role in the decision making. Commercial banks competitive nature depends on the size of the capital and the deposits mobilized by it. It is also based on the ability to realise the obligation of deposits and the other services offered. In case of investment banks, the nature of the competition depends on the type, cost and flexibility of the services provided. It is also affected by the reputation of the bank and its client base. CBA is a multi-service provider and hence covers the both. It is important to identify the opportunity and increase the investment in technology and human resource development. Innovation can also be in the fields of cost reduction, processing and income generation capacity. It is important to increase the customer base for long-term growth of CBA. Innovative marketing strategies can also be adopted for the same. Market Positioning Strategy: Market positioning strategy is a concept of marketing in which the product of marketing strategy is defined. The aim is to create an image of the product, highlighting the needs of the customers. It is basically done with the help of pricing, placing, promotion and product. It highlights the strengths and differentiates it from the others. CBA had an income of US$19.52 billion in 2016, making itself the market leader. While its followers ANZ bank, NAB and Westpac had an income of US$4,106 million, US$5,144 million and US$8,161 million respectively in the same year(Corporate Finance Institute, 2016). CBA needs to make strategies for increasing market share and reducing costs. It needs to innovate constantly with products and techniques to attract people. Also, it needs to keep note of the strategies of the competitive firms and modify the prices accordingly. Different distribution channels focusing on time and place advantage can also be adopted along with advertisements. Market nichers provide highly customised commodities, which are not otherwise readily available. They focus on a specific segment of the market. These could be the banks catering to small sections of the society. Micro-finance banks like Good Shepherd and Grameen Australia are market nichers. It is a model given by Michael Porter to determine the industry structure with the help of five forces(Juneja, 2018). The stronger the fives forces, lesser attractive the market is and lower is the profitability(Strategic Management Insight, 2013). It helps establish the necessary strategies to enter the market as well as to sustain in it (Mind Tools, 2018). As the firms grow, they need to discover and make use of the new opportunities in the market. Today, it is a matter of differentiation on the basis of new service models rather than new products. Thus, Porters five factor model can be established in the operational strategy(Fuller, 2013). The model is used to find the level of competition and the profitability associated, with the following five forces: Bargaining power of buyer: Given a good bargaining power, a customer is able to extract higher quality products and lower prices from the producers. This increases the costs to the producers and lowers the profitability(Strategic Management Insight, 2013). It depends on factors like: Buyers in the market Buyers size Order size Cost of switching Substitutes availability Price sensitivity of demand Threat of backward integration Bargaining ability of suppliers: Unlike the buyers bargaining power, this force allows the producers to supply high-priced or low quality products to the consumers. Suppliers increase the profits of the producer by lowering the costs of inputs. Strong suppliers have the ability to increase the costs of firms in the industry. Buyers do not possess a serious threat in the case of strong suppliers. There exists a threat of forward integration. Factors influencing this are: Suppliers in the market Size of the supplier Ability to find substitutable inputs Scarcity of the inputs Cost associated with switching Forward integration threat Threat posed by substitutes: Substitutes have the ability to put an upper limit to the price of the commodities(Juneja, 2018). It reduces the returns from industry. The higher the number of substitutes, the lower the profit margin because the buyers can switch to the closer substitutes with a lower price or better quality. Substitution possess a threat on the following terms: Availability of close substitutes Cost of switching Quality of the substitutes Risk of entry posed by potential producers: Potential producers are the ones, who are not in the same business line currently, but may enter if given an option. If the entry is free, the potential producers may enter and increase the competition. This can lower each firms market share. To sustain in the competition, the costs have to reduce. This force is closely linked to the entry barriers like: Economies of scale Loyalty towards the brand Government Regulations Absolute Cost Advantage Strong Capital base(Juneja, 2018) Rivalry amongst the current competitors: High level of competition establishes a threat to the profits of the firms(Strategic Management Insight, 2013). The strength of rivalry can be expressed as a function of: Number of exit barriers Fixed cost prevailing in the market Global customers Presence or absence of switching costs Industrys growth rate On the basis of the above points, for an industry to be favourably competitive and profitable; it must have lower bargaining power of buyers and suppliers. There should be barriers of entry, fewer close substitutes present and lower level of competition in the market(Strategic Management Insight, 2013). Application in Commonwealth Bank of Australia: The model has a holistic approach which refines the strategy and the position of the firm. It can help CBA build a long- term sustainability and competitive advantage(Fern Fort, 2018). Bargaining ability of buyer: Buyers pressurise CBA to lower down the interest rates and its profits. The size of the customer base is negatively related to the bargaining power of the buyers. Increasing the customer base will be beneficial, both in terms of lower bargaining power of customers and by increasing the economies of scale. New and innovative products can also reduce the bargaining power of the customers and prevent the withdrawal of the old customer(Fern Fort, 2018). Bargaining ability of suppliers: Strong suppliers are responsible for decreasing the profit margins of CBA. When there is competition among the suppliers, their prices reduce and so does the bargaining power. This can be avoided by having large number of suppliers in the supply chain. Innovation with the products using various materials, lower the risks at the time of price rise inputs. Threat posed by substitutes: Fewer substitutes are favourable to CBA. To avoid the problem, CBA can be service orientated. Innovation and customisation in services is more sustainable. Increased cost of switching is another factor. Risk of entry posed by potential producers: This acts as a threat to CBA because of its innovation. Lower costs and higher value propositions are tools to attract the customers. When the entry is restricted, the competition in the industry decreases. The prices can be lowered by adopting the economies of scale and increasing its customer base. Innovation is the key to sustainability. Investment in research and development is important to build higher capacities with lower cost and increased product value. CBA often revises its standards which reduce the scope for super-normal profits in the industry(Fern Fort, 2018). Rivalry amongst the current competitors: Banking is a very competitive industry with fierce rivalries. This, therefore, affects the profitability of CBA in the long-run. The level of competition is dictated by the policies and regulations of the government. It benefits CBA when the policies are stringent and the competition is limited(Fern Fort, 2018). The key is to have sustainable differentiation. Collaborations and mergers are also an option to decrease the competition. Bibliography Austalian Financial Services Directory. (2018). Commonwealth Bank of Australia. Retrieved February 28, 2018, from https://www.financedirectory.net.au/commonwealth-bank-of-australia-7.html BAI Research Study. (2012, March). 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