Competitive Strategies of a Late Entrant - Case Study Example

1 The late mover’s advantage While most private banks like HDFC, ICICI and UTI entered the Indian domestic financial market back in 1994 Yes Bank initiated its operations almost ten years later in 2004. This timing of the entry of Yes Bank, though often referred to as ‘late’, was in fact one of the major causes behind its success. Not only did it allow Yes Bank to avoid the difficulties that the early movers had to face, it also helped determine the strategies and business plans better with valuable information being available from examples of the previous entrants and the successes and failures of their strategies which were to be significantly instructional. The Banks which chose to enter as early as the mid nineties had to face reduced profitability since as a part of contractionary monetary policy which sought to control inflationary pressures, the interest rates were institutionally hiked up. Liquidity problems arose for most of the new entrants as call money rates exceeded the 100 percent mark and in spite of high demands, while forwarding loans banks had to exercise caution since default rates were also mounting during this phase and Yes Bank was able to avoid such difficulties. Further, in the latter half of the 1990s the Indian economy faced a slowing down of overall growth which also had strong adverse impacts on the financial market and thereby caused pitfalls in profits of most private banks. Initially the bank’s business was centred on forwarding loans to corporate clients and then it also entered the sphere of wealth management. Business banking as well as small and medium enterprises (SMEs) was the prime focus of the bank. Later, in 2007, the bank moved into retail sector though institutional and corporate banking accounted for approximately 70 percent of the business. The most important contribution of the timing of entry to the bank’s success has been the technology advantage it facilitated. Compared to banks that entered the market years back, Yes Bank had access to much more modern and advanced technology and that constituted a significant competitive advantage. 1.2 The Strategy of Differentiation The timing of the entry with a large number of rivals already present in the market thus generating a sense of the market being overcrowded in a sense worked for the bank as it implied to achieve any degree of success, Yes Bank had to assert, establish and sustain itself as different. That the bank had to chart a course of product differentiation through adopting innovative strategies was thus determined with the timing of the entry. And the tremendous growth performance of the bank in spite of its late arrival is thus a testimonial to its success in attaining the goal of differentially placing its products. Specific Strategies This successful differentiation has been achieved through the innovative strategies of what has been termed as ‘knowledge banking’, adoption and adept utilisation of frontier level technology and emphasised recognition and utilisation of human resources. The bank’s promotional strategy also has been different and noteworthy, contributing significantly to its success. However, the first noticeable differentiation lies in the brand name of the bank. Compared to all of its rivals, Yes Bank is the only firm in the sector to have a brand name with an emotional connotation. It is an attempt to reflect the customisation and specialisation offered in catering to the customer’s specific needs. It is as if, whatever be the query of the consumer, due to extent of flexibility of the bank’s services, the answer will always be ‘yes’. The concept of Knowledge banking, introduced by Yes Bank itself was a unique strategy to differentially place the bank through providing specialized and customised services to clients from select industries with strong growth potential. The most advanced technologies were acquired and utilized to cater to the clients’ needs and provide them innovative solutions. Information technology infrastructure was outsourced to experts in the field thereby improving greatly upon the service provided along with reducing costs significantly. This outsourcing also allowed the bank to specialise in its core operations thus generating significant competitive advantages. The emphasis on human resources was high from the outset as it was recognised to be a source of strong sustainable competitive advantages. Advanced winning HR practices were adopted to facilitate a perceivable differentiation in the entirety of the company. The promotional approach of the bank was also significantly differentiated. For corporate and wealth management clients it relied on client acquisition by the management. It was rather the experience of dealing with the bank that was focused upon so that the delight the client derived from it made him/her a permanent client. A very innovative commercial where a money plant flourished thereby reflecting a growth of individual business ideas introduced the bank to the viewers of television. The bank innovatively gifted potted money plants as gifts to clients as part of the campaign. Further, instead of walking the much trodden path of presenting clients with diaries, calendars etc, it chose to send them potted money plants. The campaign appealed to the intelligent class and the perception of the bank as different was ably established. 1.3 Knowledge Banking and its contribution The introduction of Knowledge banking has been one of the major reasons behind Yes Bank’s significant success. With the banking sector reasonably crowded with earlier entrants, to secure any considerable market share Yes Bank had to provide products and services that differed in quality as well as variety. It is effectively in this pursuit that Knowledge banking was introduced. In essence knowledge banking was the provision of specialized services to the clients. It was the method of attaining the necessary customization to suit the customer’s exact needs that made the services of Yes Bank stand out. Sectors of the economy with good growth potential were identified and the bank with the objective of catering to the specific requirements of these sectors through industry specialists recruited people with considerable experience in these sectors as knowledge bankers. This led to a heightened perception of the industry specific needs and thereby facilitated the provision of high end customization to industry specific clients. Such customized services led to greater value generation for the clients and this in turn generated a niche market for the services of Yes Bank. Thus knowledge banking was a form of differentiation that was based on market segmentation and optimization in the placement of products and through it Yes Bank made itself stand out from its rivals. 2.1 Emphasising Technology and Human resources Technology and human resources have been recognised as the two most important sources of sustainable competitive advantage by Yes Bank and are thus two focal points of the differentiation strategy. 2.2 The scope of technological advantage and its potential As already mentioned, the single most important advantage that Yes Bank derived from its late entry was the access to superior technology compared to its rivals which chose to enter early. A conscious decision was made to invest in the most advanced IT to build a technology base that would serve as a strategic tool in attaining and sustaining competitive advantage. To place its services as differentiated, harnessing modern day frontier levels of automation was crucial and the Bank has succeeded in that. The bank identified attaining enhanced efficiencies through greater automation, maintenance of centralized databases for rapid information retrieval, enhanced connectivity with customers, utilisation of most advanced technologies to ensure undisrupted intra and inter office connectivity, establishing advanced surveillance and security to ensure client comfort and trust and utilisation of real time environment to ensure efficient disaster management and recovery and backup systems as the most crucial areas on the technology front. Not only does it use latest technology to improve upon the quality and pace of the service provision, strategic partnerships with certain other business concerns also allow high end customization in catering multi-product solutions to the clients. Outsourcing certain parts of the service to specialists with time-tested technological superiority is also another benefit that has accrued to the bank due to its late arrival. It has been able to observe the performances and value generations of various participants and thus has been able to choose the collaborations to suit its purposes. Apart from ensuring best services in products that are beyond the core competencies of the Bank, such outsourcing has significantly reduced costs as well as moderated the risks involved while simultaneously saved the bank from the hassles of establishing and managing an integral concern that would be able to indigenously produce all these services. All these have significantly contributed to enable Yes Bank in differentiating itself from its rivals. Yes Bank strives to provide world class services to a focused clientele to acquire them as loyal customers. The considerable efficiencies generated from utilisation of latest technology, coupled with outsourcing certain services to technology specialists therefore is a strategy that should lead to further success with the various new sectors in the Indian market emerging gradually and with the demand for specialised services mounting consequently. 2.2 Stressing on human capital The Yes Bank also recognises achieving an efficient human capital base as being the single most important objective in its pursuit of competitive advantage sustainable in the long run through product differentiation. Subsequently, the bank has followed a strategy of recruiting and retaining the most talented performers in the financial sector. Not only does the bank pay higher than the industry average to pool in the best talents, the post recruitment training ascertains that the human resource base becomes more and more efficient in generating value for the clients so that there is a significantly perceivable difference in the provided services compared to the rivals and further the employees in various segments are able to work coherently to ensure perfect synergy. Applications of innovative performance management programs such as 5 percent executive ownership which motivated employees to become innovative and strive for the company’s success and aligned the motivations to ensure an overall balance have resulted in a highly efficient employee base with various divisions working in perfect harmony with each other thereby generating value for the customers to the end that Yes Bank services are significantly perceived as differentiated in being of higher quality and greater customized to the requirements of the customers. With the primal objective of the bank being achievement of significant differentiation of services the human resource base assumes critical importance mostly since such services are skilled-labour intensive. Thus it is crucial to ascertain that employees particularly in the top and medium level management are sufficiently skilled and more importantly are innovative in their pursuits. Yes Bank with its special performance management programs achieves this, a fact well reflected in the significant growth of the concern. But the development of a highly efficient human capital base remains vital particularly in the long run since with expansion of the market and with new entrants in the specific domain over the long run, innovativeness and ability to place products closest to the customer’s requirements will be the determining factor of the company’s success. 2.3 Strategic Market Segmentation and competitive advantage Yes Bank’s strategy of catering to a Niche market is in essence an instance of effective market segmentation. In the already overcrowded Indian market Yes Bank chose to establish itself as differentiated to gain market shares. The bank has exhibited a remarkable growth based on its strategy of differentiation and provision of customized services to a specific clientele. Instead of catering to the entire market Yes Bank adopted the innovative policy of acquiring and securing long term clients and for this it chose to provide industry specific services to clients from certain choice sectors with high growth potential. If the customized services met the needs of the clients satisfactorily, then the growth of these sectors are likely to have strong spill over effects for the bank itself. The Niche market, chosen strategically with utmost care and considerable innovativeness thus should actually have great results in the long run. With mounting competition, specialised services are likely to be in demand more and more and in the long run, with an already established reputation of being great customised service providers are therefore likely to serve as a significant advantage. Selling traditional and already marketed services and searching for customers for a late entrant does not seem to be a better alternative since not only does the customer receive any value added in terms of the product satisfying the particular needs any better and the approach of acquiring customers and customizing services to their specifications do seem to translate into greater long run benefits. 3. Threats and opportunities and future strategies The Indian economy has been exhibiting great growth performance and predictions are that the growth rates are to improve further over the next few years. This presents itself as a great opportunity for the banking sector. For the Yes Bank which particularly caters to emerging businesses with growth potential, the clientele is thus likely to rise. On the other hand, in 2009, the financial sector is to be opened up significantly and a significant number of foreign banks are likely to enter the market. This is one of the most important threats facing the domestic players in the market. Though the Yes Bank has established itself within a very short period of time and grown at the highest pace within the banking sector, it still remains at its infancy. The bank has to ensure greater proliferation and secure a larger part of the market as loyal clients before the foreign firms enter the market. Albeit Yes Bank through its differentiated products has not had to enter price competitions with rivals, once foreign players enter, this is likely to change as many of these such as the UBS AG for instance, are also renowned for customised services and specialisations. Having a strongly secured client base by then therefore seems to be essential for future success. Increasing the number of branches as well as the introduction of newer products therefore remains important and in fact it is expected that the bank will achieve the 100 branch mark by March of 2008. Though retail banking presently constitutes only a small part of the entire business its development for long term success is essential. The knowledge base of the bank remains its prime advantage and this should be utilised in innovations that make the newer products and services lucrative through effective differentiation. For this the plans of opening KPO sections have to be realised as have to be the plans of entering new market segments like broking and microfinance. However, in spite of the great success of the management in nurturing the bank in its initial stages, it may not be as easy to retain the same level of managerial efficiencies as the bank grows into larger proportions. Further, as it introduces newer products into the retail sector, it will face strong rivalries from already established players of the domestic markets. If the plans of successfully establishing branches in smaller and medium towns which are emerging as potential business centres can be realised, the bank can be assured of success as not only do these towns have a potential client base with specialised demands that suit the scheme of the Yes Bank, this is a market that is to be yet tapped into by the rival private banks. The Yes Bank thus has a good opportunity of penetrating these markets to secure long term clients. However, to significantly succeed in the long run in the era of gradual integration of markets, Yes Bank will have to go international. Since its policy is to cater to industry segments with good growth potential, the emerging markets of South-East and Western Asia are likely to be profitable destinations. After the Domestic expansion plans are materialised fully, full scale global operations should be planned. If Yes Bank can strengthen its base, its operations have great international potential since the demand for specialised services are likely only to rise and with Yes Banks competitive advantage lying in providing exemplary customised services to the clients the international demand for its type of products are also likely to grow with burgeoning of global business enterprises. However, the bank is likely to face stiff international competition and could thus benefit by merging with some global player. The benefits of such a merger would be mutual with the foreign bank helping Yes Banks global quest and in return gaining profitable access to the growing domestic market of India. Read More