Choosing Strategies that Matters cont...

Strategic Response of Public Sector Banks to Reforms
The public sector banks (the State Bank group and the nationalised banks) had to face a tough challenge when the new private sector banks made their entry in early nineties. The new banks had the benefit of starting on a clean slate and had started with state-of-the-art technology which in turn helped them save on man power costs and provide better services. On the other hand, the older banks had not kept up-to-date with technology and were facing competition of this kind for the first time. How did the public sector banks respond to the new competition?
Introduction of new products and services:
Many of the public sector banks launched an array of products and services, especially on the retail front, to match the competition. Some of the new products include debit cards, credit cards, international cards, special deposits, sweep-in accounts, demat accounts and any-where-banking. Some of the new services include round-the-clock phone-banking, Automated Teller Machines (ATMs), inter-city, inter-branch banking, net-banking and bill payment services. Many public sector banks have even launched their own asset management companies to offer mutual fund services to their customers.

Computerisation and networking of branches:Banks invested aggressively in computerisation and networking of branches. The oldest and the biggest bank, SBI, had computerised 3701 branches by March 2003, constituting nearly 41 per cent of its total branches. Many of these branches were also networked so that their customers could be offered ‘any-time, any-where’ banking services. The other public sector banks too embarked on a similar computerisation drive.

Installation of ATM networks
All banks have made heavy investments in the installation of large networks of ATMs. As of March 2003, SBI had a network of 1305 ATMs, Canara Bank had 282 ATMs, Corporation Bank had 475 ATMs to match the ATM network of private sector banks such as HDFC Bank and ICICI Bank. ATMs proved a tremendous success by reducing the load on branches significantly as, apart from carrying out routine transactions such as cash withdrawal etc, customers can avail such services as transfer of funds and payment of utility bills by visiting any of the ATMs located conveniently.

Risk Management and Capital Adequacy
Many public sector banks were saddled with large non-performing assets (NPAs) and suffered from low capital adequacy. Banks have since put in place stringent Risk Management Systems to address not only credit risk, but also market risk and other operational risks. There have been attempts to systematically recover from defaulting customers and make adequate provisions for NPAs. Many Banks have raised capital either on their own strengths or with the help of government’s infusion of capital to raise the capital adequacy levels to meet prudential norms. All these measures resulted in a much better financial structure for the older banks compared to the position a decade back.

Do these strategies yield any Sustainable Competitive Advantage?
Most of the public sector banks have focused their efforts on the above strategies and a cursory glance at the management reports in any of the latest Annual Reports of these banks would reveal lengthy discussions of the improvements achieved on these fronts. However, the key question to be asked is whether these strategies provide any sustainable competitive advantage?
It is easy to observe that most of the above strategies can be categorised as measures to improve operational efficiencies and effectiveness. Most of the above can be replicated by any competitor with adequate capital at its disposal. They are me-too strategies. The only advantage is the time required by the competitor to implement them, which too does not yield any long-term advantage. While all these measures to improve operational efficiencies are certainly necessary to survive the competition, they are by no means sufficient. These are what are typically called by organisational behaviourists as ‘hygiene factors’.
The realisation of the fact that the above measures do not provide any distinctive advantages is reinforced by the recent announcements by many banks to share their ATM networks. On February 10, 2004, the largest public sector bank SBI and two of its largest private sector competitors HDFC Bank and UTI Bank announced plans to share their ATM networks for the combined benefit of all their customers. In fact, if the ATM networks did not provide any distinct strategic advantage it raises a key question as to whether these banks should have outsourced the whole networks to a third party in the first place.

Competing on Valuable Resources
If the above strategies are merely measures to improve operational effectiveness, then what strategies should banks follow to gain a sustainable competitive advantage? The current thinking in Strategy Research advocates those strategies that generate valuable resources to the firm2 . Every bank has a collection of physical and intangible assets and capabilities that it has developed over a period of time. These can be broadly termed as ‘resources’ and each company’s or bank’s unique stock of resources is the basis for its competitive advantage. For example, possession of a wide network of interconnected branches is a resource for a bank. A resource is termed ‘valuable’, if it possesses some characteristics, which we will elaborate later, that make it very difficult or impossible for competitors to acquire. Possessing such valuable resources lends a bank a sustainable competitive advantage because it becomes very hard or sometimes impossible for competing banks to acquire similar resources. Hence successful strategies are those that enable banks to acquire such valuable resources which cannot be competed away.

What are the characteristics of a resource that make it valuable?
¶ Inimitability: Is the resource easy or hard to copy? Possessing a resource that competitors can easily copy generates only temporary advantage. One of the ways in which a resource becomes inimitable is due to physical uniqueness. For example, the physical location of a branch of a public sector bank in the heart of the financial centre of Nariman Point in Mumbai is a unique resource that cannot be replicated. Another example of an inimitable resource is a strong brand name. Even if a competitor spends billions of rupees, it will find it difficult to acquire the trust and brand equity that customers associate with, say for example, SBI.
· Scarcity: For the resource to be valuable it should be scarce or rare. A prime example of such resources is the Human Resources. The best quality manpower is very limited in number and is scarcely available. For a service industry such as banking where human resources form a significant source of value addition, possession of excellent quality manpower generates a key competitive advantage.
¸ Durability: In today’s world of increasing dynamism, the durability of a resource becomes a valuable characteristic. How quickly does a resource depreciate? The longer a resource can last, the more valuable it will be. For example, technological superiority is not a durable resource because new technologies are becoming available at a rapid pace. Brand equity, on the other hand, is an example of a resource that is durable.
¹ Superiority: The resources need to be evaluated relative to competitors. Whose resource is really better? Many banks may assert that their customer service standards are the best. But banks have to conduct an honest assessment of whether their customer service standards are so distinct and superior to competitors that it can qualify to be a valuable resource.

Choosing the Strategies that Matter
Hence, in addition to pursuing strategies that keep them up-to-date on operating efficiencies, public sector banks have to pursue strategies that generate inimitable, scarce, durable and superior resources. It is not possible to propose a generic list of best resources that are applicable to all banks because no two banks are alike and each bank may possess its own stock of unique and valuable resources. Each bank has to conduct a detailed internal assessment to identify what are its unique assets and capabilities that can serve as valuable resources.
Two choices for consideration are brand image and a wide network of branches. In multiple customer surveys, the brand recollection and positive image of SBI has come out to be so strong that it is comparable to many well-known consumer brands. This is a valuable resource that SBI could continuously nurture and build into a strong competitive advantage. Many other older banks such as Bank of Baroda, Bank of India, Indian Bank etc., which are currently bigger than many private sector banks may find themselves rapidly losing market share if they do not invest in building strong brands.
Another resource that is potentially valuable is the wide network of branches that public sector banks possess. For example, SBI, Bank of India and Indian Bank have a network of 9033, 2550 and 1377 branches respectively, compared to HDFC Bank’s 278 branches. While the large branch networks of older banks are currently being looked at as a liability, they can be potentially a very valuable resource. It will take many, many years for any of the private sector banks to build such a wide-spread network. It is possible for the older banks to try and find ways to leverage on their branch network in rural areas in ways that a new bank will find difficult to match.
A winning strategy has to be unique and different. Each bank can find its own set of valuable resources that can be the foundation for winning strategies.

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