APPLICATION OF PORTER’S FIVE FORCES FRAMEWORK IN THE BANKING ...

APLICATION OF PORTER’S FIVE FORCES FRAMEWORK IN
THE BANKING INDUSTRY OF TANZANIA:
Determine, Develop and Deliver Competitively.


By
Dr. Elisante Ole Gabriel (PhD)
Head of Entrepreneurship Development Centre
Faculty of Commerce
Mzumbe University
P O BOX 6
Dar es Salaam
Tanzania
elisante_gabriel@yahoo.com : Tel. +255-754-434412

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Abstract:
The banking industry of Tanzania has been growing fast during the last decade. There are
so many things happening within the industry after the liberalization of the sector. The
aspect of competition is now crucial for the operators who are within the banking
industry. Porter’s Five Forces Framework is one of the strategic models used to assess the
attractiveness of the industry (being service or manufacturing). This model is defined by
the five key forces which are; Rivalry among the existing firms, Threat of new entrants,
Threat of substitutes, Bargaining power of suppliers and bargaining power of customers.
The banking industry of Tanzania has 22 full-fledged banks, 5 Regional unit banks, 5
Financial Institutions and 102 bureux de change operators. The rivalry among the
existing banks, threat of new entrants and bargaining power of customers is found to be
unfavorable forces to the industry. Threat of substitutes and bargaining power of
suppliers are found to be favorable forces to the industry. The industry is therefore of two
starts, hence not attractive. Those who are already in the industry need to operate
competitively by using a differentiation strategy to win the confidence of the customers
who have higher bargaining power. A good customer service is necessary. This can be
achieved through synergy and Total Quality Management (TQM) approach. The forces
are not and will never be static but dynamic, hence a need for the banks to be reviewing
their strategies from time to time.













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Introduction:
The banking Industry in Tanzania has tremendously changed its dynamics for the last one
decade. Many banks have joined the industry both local and foreign. Notably, the no-
banks financial institutions have been mushrooming by an alarming speed. For this very
reason the players in the banking industry need to consider their competitive positioning
and repositioning strategically. In mid 1960s the industry had only one bank, National
Bank of Commerce. It can therefore be said that in 1960s the industry had a monopolistic
structure. In 1986, Corporate and Rural Development Bank (CRDB) was established
hence to make the industry to experience a duopolistic market structure. In any industry,
including the banking industry, the nature of competition is always a function of the
market structure. The trend today is a perfect competition and the central bank has
withdrawn from managing the market forces. Banks are now working on their own about
what are relevant products and rates to be offered to the market. In this regard the need
for the assessment of the attractiveness of the industry becomes a necessity. Porter’s Five
Forces Framework has been widely used in analyzing the attractiveness of an industry.
Any firm (in this case a bank) needs to answer two fundamental questions; (i) What
makes an industry attractive? (ii) What positions within an industry lead to superior
performance? Answering these two questions is vital for any firm, which needs to
compete competitively. This article makes a clear discussion of the banking industry in
Tanzania and how the Porters Five Forces can be used as a tool of analysis for
profitability.

The Banking Industry of Tanzania
The industry has various key players. These to include; Fully fledged banks (commercial
and non Commercial), Regional Unit Banks, Financial Institutions, Regional Financial
Institutions, Regional Unit Financial Institutions and Bureaux de Change. As of
December 2005, the banking supervision of the Bank of Tanzania has approved and
register the key players of the banking sector of Tanzania as follows:
Fully Fledged banks (22), Regional Unit Banks (5), Financial Institutions (5), Bureux de
Change (102). The summary of the player is given as appendices (1 – 5).


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Fully-fledged Banks.
A bank is an institution authorized to receive money on current account subject to
withdrawal by cheque. It can offer various products and services including loans, letter of
credits, guarantee, etc both locally and internationally. A list of fully-fledged banks
operation in Tanzania with the locations of their headquarters is given as Appendix 1.

Regional Unit Banks.
A regional unit bank is an institution authorized or licensed to operate as a regional unit
bank. The institution may receive money on current account subject to withdrawal by
cheque. Since it is a regional unit, it has no mandate to open branches in other regions. A
list of licensed regional unit banks operating in Tanzania is given as Appendix 2.

Financial Institutions
A financial institution is an institution licensed by Bank of Tanzania and authorized to
engage in banking business not involving the receipt of money on current account subject
to withdrawal by cheque. A list of the licensed financial institutions operating in
Tanzania is given as Appendix 3.

Bureaux de Change Operators
These are institutions registered by the Bank of Tanzania and entrusted with the task of
changing money over the counter. The bureaux are regulated under the Foreign Exchange
Act, 1992 and Foreign Exchange (Bureaux de Change) Regulations, 1999. There are 80
operators in Tanzania Mainland and 22 in Zanzibar. This makes a total of 102 operators
in the United Republic of Tanzania (Bank of Tanzania, 2005). A list of the registered
operators is given as Appendix 4 and 5, for Tanzania Mainland and Zanzibar
respectively.

Licensing Conditions in the Banking Industry (See Bank of Tanzania Reports, 2005)
Any individual or company wishing to establish a bank or financial institution in
Tanzania must submit the following information to the Bank of Tanzania:

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1. Letter of Application in prescribed format.
2. Proposed Memorandum of Association (unregistered with the Registrar of
Companies).
3. Proposed Articles of Association (unregistered with the Registrar of Companies).
4. Proof of Availability of Funds for Investment as Capital of the Proposed
Institution e.g bank certification.
5. List of Incorporators/Subscribers and Proposed Members of Board of Directors
and Other Senior Officers.
6. Information Sheet of Every Incorporator/Subscriber and Every Proposed Member
of the Board of Directors, and Senior Officer.
7. Proof of Citizenship of Every Incorporator/Subscriber and Every Proposed
Director and Senior Officer. This Includes Detailed Curricula Vitae (CV),
Photocopy of the First Five Pages of a Passport, a Passport Size Photograph and
Historical Background.
8. Audited Balance Sheet and Income Statement of Every Incorporator/Subscriber
and Every Proposed Member of the Board of Directors and Senior Officer who is
engaged in Business.
9. Certified Copies of Annual Returns of Every Incorporator/Subscriber and Every
Proposed Member of the Board of Directors and Senior Officer (together with
accompanying schedules/financial statements) Filled During the Last Five Years
with Income Tax Office for Income Taxation Purposes.
10. Tax Clearance From the Income Tax Office
11. Statement From Two Persons (not relatives) Vouching for the Good Moral
Character and Financial Responsibility of the Incorporators/Subscribers and the
Proposed Directors and Senior Officers.
12. Business Plans for the First Four Years of Operations Including the Strategy for
Growth, Branch Expansion Plans, Dividend Payout Policy and Career
Development Programme for the Staff, Budgets for the First Year Must Also be
Included
13. Projected Annual Balance Sheets for the First Four Years of Operations.
14. Projected Annual Income Statement for the First Four Years of Operation.

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15. Projected Annual Cash Flow Statements for the First Four Years of Operation.
16. Discussion of Economic Benefits to be Derived by the Country and the
Community From the Proposed Bank/Financial Institution.

Other Players in the Industry
There are other players, who can also be offering a challenge to the banking sector of
Tanzania. These to include some micro finance institutions which offer various products
which are either similar or substitute of what the banks are offering. The example for
these includes organizations like; FINCA, PRIDE, SACCOS and various NGOs. To some
extent even some passenger transporters and currier companies are providing some
substitute products to some customers (E.g A passengers’ transporter: Scandinavia
Express Service, offering money transfer service to various parts of the country in
Tanzania by charging a reasonable transfer fee = 3% of the amount to be transferred)

The availability of the various players makes the industry so competitive and dynamic.
This calls for a need for each individual player to operate competitively in order to
sustain its business. The players in the industry need to make a strategic analysis of the
industry in order to know the appropriate strategies to be applied in order to sustain the
business continuity. One of the useful models in assessing the attractiveness of any
industry is Porter’s Five Forces Framework (Porter, 1980)

Porter’s Five Forces Framework (PFFF)
More than two decades ago, Professor Michael Porter suggested some driving forces
which could help to analyse the attractiveness of any industry/sector as well as its
competitive positioning. This framework is widely used and known as ‘Porter’s Five
Forces’. Professor Porter invented this model in 1979 and this was published in his book
in 1980. Whether the business is service oriented or physical goods, there are always
competitive forces in any perfect competitive business environment, like that of the
banking sector in Tanzania.


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Rationale of the Porter’s Five Forces Model in the Banking Industry
The model attempts to address key strategic issues in a wider scope. Many of the issues
mentioned in the model, including the forces and the management of those forces, are
relevant to the banking sector as well as any other service-oriented business. The results,
which will be obtained by the application of this model, should be given the value of the
time of the analysis and that a continuous review is necessary in order to avoid to be
myopic or obsolete with the results. Michael Porter provided a framework that models an
industry as being influenced by five forces (Porter, 1980). Figure 1 provides details of the
framework.

Figure 1: Porter’s Five Forces Framework



THREAT OF
NEW

ENTRANTS

-Absolute cost

advantages

-Learning curve





SUPPLIERS’

DEGREE OF
BUYERS’
POWER
RIVA

LRY
POWER
-Supplier

-Exit barriers
-Bargaining
concentration

-Products
leverage.
- Inputs
-Switching costs
–Buyers’

differentiation
-Brand identity
information.





THREAT OF

SUBSTITUTES

-Switching costs
-Buyer inclination

to

substitute

SOURCE: Porter, M E. (1980)

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It is a model of pure competition, which implies that risk-adjusted rates of return should
be constant across firms and industries. However, numerous economic studies have
affirmed that different industries can sustain different levels of profitability; part of this
difference is explained by industry structure. Any strategic business manager seeking to
develop an edge over rival firms can use this model to better understand the industry
context in which the firm operates. The manager can then use the analysis as a basic tool
for strategic decision making for the current situation or future. The banking sector of
Tanzania can also consider the application of this model for some strategic decision
processes. A discussion of each component of the model is as follows;

Degree of rivalry
In the traditional economic model, competition among rival firms drives profits to zero.
However, competition is not perfect and firms are not unsophisticated passive price
takers. Rather, firms (banks) strive for a competitive advantage over their rivals. The
intensity of rivalry among firms varies across industries, and strategic analysts are
interested in these differences. These differences give some firms a competitive
advantage while to others a disadvantage. These differences also pose a challenge to the
uniform application of this model across the board. Economists measure rivalry by
indicators of industry concentration. The Concentration Ratio (CR) is one of such
measures. A high concentration ratio indicates that a high concentration of market share
is held by the largest firms - the industry is concentrated. With only a few firms holding a
large market share, the competitive landscape is less competitive (closer to a monopoly).
A low concentration ratio indicates that the industry is characterized by many rivals, none
of which has a significant market share. These fragmented markets are said to be
competitive. The concentration ratio is not the only available measure; the trend is to
define industries in terms that convey more information than distribution of market share.
If rivalry among firms in an industry is low, the industry is considered to be disciplined.
This discipline may result from the industry's history of competition, the role of a leading
firm, or informal compliance with a generally understood code of conduct. Explicit
collusion generally is illegal and not an option; in low-rivalry industries competitive

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moves must be constrained informally. However, a maverick firm seeking a competitive
advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense,
moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm (in this case a bank) can choose from
several competitive moves:
• Changing prices - raising or lowering prices to gain a temporary advantage.
• Improving product differentiation - improving features, implementing innovations
in the manufacturing process and in the product itself. The banks can equally
reposition themselves from the ‘old way’ the customers have been perceiving
them. Those institutions, which will differentiate their products from others, will
have a unique opportunity to attract customers at a premium price. A good
example for this is the way Barclays bank is charging a premium fee for
customers of ‘queueless category’. These customers have no time to wait in a
queue hence ready to pay any fee for them to be treated differently.
• Creatively using channels of distribution - using vertical integration or using a
distribution channel that is novel to the industry.
• Exploiting relationships with suppliers.

The intensity of rivalry is influenced by the following industry characteristics:
(i)
A larger number of firms increases rivalry because more firms must compete
for the same customers and resources. The rivalry intensifies if the firms have
similar market share, leading to a struggle for market leadership.
(ii)
Slow market growth causes firms to fight for market share. In a growing
market, firms are able to improve revenues simply because of the expanding
market.
(iii)
High fixed costs result in an economy of scale effect that increases rivalry.
When total costs are mostly fixed costs, the firm must produce near capacity
to attain the lowest unit costs. Since the firm must sell this large quantity of

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products, high levels of production lead to a fight for market share and results
in increased rivalry.
(iv)
High storage costs or highly perishable products cause a producer to sell
goods as soon as possible. If other producers are attempting to unload at the
same time, competition for customers intensifies.
(v)
Low switching costs increases rivalry. When a customer can freely switch
from one product to another there is a greater struggle to capture customers. In
the case of banking sector in Tanzania, the switching cost has become very
low. Some competing banks a located just adjacent to one another (eg CRDB
Holland House and Kenya Commercial bank). Some of the banks are located
in the same building (E.g Stanbic Bank and African Banking Corporation,
both of them in Sukari House Building, see Table 1a).
(vi)
Low levels of product differentiation are associated with higher levels of
rivalry. Brand identification, on the other hand, tends to constrain rivalry.
(vii)
Strategic stakes are high when a firm is losing market position or has potential
for great gains. This intensifies rivalry.
(viii) High exit barriers place a high cost on abandoning the product. The firm must
compete. High exit barriers cause a firm to remain in an industry, even when
the venture is not profitable. A common exit barrier is asset specificity.
(ix)
A diversity of rivals with different cultures, histories, and philosophies make
an industry unstable. There is greater possibility for mavericks and for
misjudging rival's moves. Rivalry is volatile and can be intense.
(x)
Industry Shakeout. A growing market and the potential for high profits
induces new firms to enter a market and incumbent firms to increase
production. A point is reached where the industry becomes crowded with
competitors, and demand cannot support the new entrants and the resulting
increased supply. The industry may become crowded if its growth rate slows
and the market becomes saturated, creating a situation of excess capacity with
too many goods chasing too few buyers. A shakeout ensues, with intense
competition, price wars, and company failures. The founder of Boston
Consulting Group (BCG) model, Bruce Henderson, generalized this

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