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Globalization is the integration of worldwide markets. It changes everything enabling corporations, countries and individual to approach around the world deeper and cheaper never ever before (Freidman, 2005).
According to Cato (cited Ervin & Smith, 2008), “Globalization” defines the current inclinations towards the unbound flow of international investment & trade beyond borders and the emerging merger of the economy around the world. Globalization hikes development & standard of living of the countries that expose themselves to global market as it increased economic freedom and drive competition (Ervin & Smith, 2008).
‘Globalization is the merger of historically distinct and separate national market into huge global market. Falling down of barriers to sell internationally’ (Hill, 2012)
There have also been changes in the composition of trade and financial flow and trade flow are increasingly made up of intermediate factors of production. Hummels, Ishii, and Yi (2001) detail the growth in vertical specialization, and Jones, Kierzkowski, and Lurong (2005) detail the rise in fragmentation and outsourcing. At the same time, capital market transactions are an increasing part of international Financial Flows. Lane and Milesi-Ferritti (2007) document the increasing importance of cross-border capital flows since the mid-1980ís. Globalization, in brief, is a process of increasing economic integration and growing economic interdependence between countries in the world economy. It is a relative softening up of economic and trade barriers across the countries so as to facilitate a free interflow of capital technology, people, goods and services.
Demand and competition in the market has been increased and changed. From production to services each and every sector is looking for international exposure. So many national companies become International in the last decade. Most of U.S. Companies have their Head offices in USA, but all the production work done by Asian countries like China, India and Philippians (Hill, 2012).
The banking sector is one of the most important economic sector and most influential and responsive to change whether international or domestic (Kenaway, 2009)
The world banking system has gone through many transformations in last decade. There are drastic changes in service as well as technology. There is huge increment and integration of international financial sector. Transformations create the opportunity and challenges for international banking. It also provides the opportunity to expand internationally. Banks come with different changes like high quality customer services and less face to face interaction for example customer can contact with bank through call centre many miles away or when they can buy goods and send the money through online transaction system within minimum time period. Deregulate the banking acts and combines with globalization and integration of financial markets. Create new competitive environment to increase the efficiency of baking services. Increment in competition due to globalization and deregulate should affect on small and large scale banks. After adopting globalization government stopped protecting their local banks, world become a level playing field with survival of the fittest. Due to high competition banks provide best possible services in the most efficient way. Now banks start providing all financial solution to customer. They are providing loan and so many third party cross sell products. Competition made traditional banks come out of comfort level and turn to more effective way to service customers. So many small scale domestic banks merge with big players of industry
‘Many of research studies show that large scale impact on banking industry in all over the world. Due to global competition many of small bank merge with large banks. For example Bank of Rajasthan merge with ICICI BANK in 2010.’ (Business standard.com, 2010)
According to Henry A. (2011) Porter’s five forces framework can help organizations to ascertain the attractiveness or profit potential oftheri industry by analysing the relative impact of each of the five forces on their industry structure. (Henry, 2011)
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)
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.
Fig: Porter’s five forces model (Exploring Management, John R. Schermerhorn, Jr)
According to Hill and Jones (2009) potential competitors are the companies that are not currently competing in the industry but have capability to do so if they choose. The threat of entry of new firms into an industry depends on extent of barrier to entry like economies of scale, capital requirement, government policies, switching cost for buyers, etc. (Kew & Stredwick, 2005)
To open a new bank, huge capital investment is required. Moreover, there are lots of regulatory issues like government regulations for licensing, etc. Despite of these obstacles, a large number of banks are entering the market so the threat of new entrants should be high. But, due to bank failures and mergers according to FDIC, the number of banks opened from 1977 through 2002 is roughly 215 per year. Trust is one of the biggest hurdles for entry of a new bank.
It is difficult for new banks to start up due to involvement of money & financial information of other people. People tend to trust big brand names that are well known big banks, which, according to them are trustworthy.
Today, banks are providing facilities for serving all financial needs of the customer at one place. Customers tend to allow a major well known bank to look after all of their accounts and financial needs. This centralization further makes it difficult for new banks to enter.
As a result, the threat of new entrants is relatively low in banking industry.
Suppliers are the individuals or companies that provide inputs in terms of resources and materials, services etc into the industry (Hill & Jones, 2009). The power of suppliers is dependent on Number of suppliers, Brand Power,possibility of forward integration and dependence of customers, etc.(Kew & Stredwick, 2005)
In banking industry, capital is the major resource and primarily there are 4 suppliers of capital i.e. Deposits of the customer, loans & mortgages, mortgaged securities and loans taken from other financial institutions. Through these major suppliers, the bank can meet its requirements like borrowing needs of the customers and at the same time keeping enough money to fulfill withdrawal requirements.
The power of the suppliers is widely based on the market and impact of this power is between medium to high.
An industry’s buyer may be the individual or end user that will ultimately consume/buy the product of the firm or the companies that distribute the products further. (Hill & Jones 2009). Buyer’s power depends on concentration of buyers, alternative sources of purchase, possibility of backward integrations. (Kew & Stredwick, 2005)
As far as an individual is concerned, it is not a major threat. But, if the cost of switching is higher, then this can affect the power of the buyers. If a single bank looks after all the banking requirements of the customer like savings, mortgages and other financial needs, then it will be a big botheration for the customer to move to some other bank.
In order to persuade customers to move to their bank, the entrepreneurs may use different tactics like lowering the switching costs, but most of the customer may still choose to stay with their current bank.
The internet has played a vital role in increasing the power of the customer in this industry. Customer can very easily and conveniently compare various banks at almost no cost at all. The cost of opening and maintaining an account as well as the rates offered by different banks can be checked by the customer anytime, anywhere.
The more substitutes a product has, the demand for the product becomes more elastic. Elastic demand means increased consumer price sensitivity which equates to less certainty of profits (Kew & Stredwick, 2005). Availability of substitutes of products places limits on the prices market leaders can charge (Hill & Jones, 2009)
The banking industry is not as much affected by rival banks but the non-financial organizations pose bigger threat of substitution. Although these organizations do not provide deposits, withdrawals, etc, but services such as mutual funds, insurance and fixed earning securities are offered by these companies in much convenient way.
Method of payment and loans pose a threat of substitutes, which is relatively higher. For example, dealer who sell costly items like automobiles, ornaments, electronics, etc usually prefer financing expensive items. Usually, these companies give lower rate of interest on bill payment as compared to loan taken from any bank.9
Rivalry refers to the degree to which firms respond to competitive moves of the other firms in the industry (Hill & Jones, 2009). Rivalry among existing firms may manifest itself in a number of ways- price competition, new products, increased levels of customer service, warranties and guarantees, advertising, better networks of wholesale distributors, and so on Barnat, 2014.)
There is very high competition is banking industry. This industry is into existence since hundreds of years and is servicing people since then. Due to this reason, banks need to try to inveigle customers from their rival banks. This is done through lower rates of interest on loans, higher rates on deposits, better convenient after sale services and other investment related services.
The basic competition is this industry is to give best services within minimum time period. But due to this completion banks are suffering from lower Returns on Assets (ROA). Due to this nature of the banking industry, there is possibility of more consolidation of the industry. Bigger banks go for acquiring or merging with smaller banks instead of spending valuable money on advertising and marketing.
Industrial Credit and Investment Corporation of India founded in 1955 as a joint venture of World Bank. Its parent company is ICICI group. ICICI bank promote in 1994 by ICICI limited and whole subsidiary of ICICI shareholding. It is an Indian multinational bank and financial services provide based in Mumbai. ICICI have global banking operation 19 countries.
ICICI Bank Ltd is India’s second largest financial services company headquartered in Mumbai, India. It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank has a network of 2,533 branches and 6,800 ATMs in India, and has a presence in 19 countries, including India.
The bank has subsidiaries in the United Kingdom, Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre; and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The company’s UK subsidiary has established branches in Belgium and Germany.
ICICI Bank’s equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).
To cope with globalization and increasing customer demand, ICICI was one of the new banks to start internet banking, private banking services and mobile banking services and mobile ATM services. Influenced by globalization, ICICI was the first ever bank from India to borrow Currency Units from European countries.
With globalization and presence of multiple national and international firms, it was necessary to provide payment facilities through credit cards. Hence with Airtel and HPCL, ICICI bank launched multi-branded credit card to enhance customer base. ICICI has collaborated with Lloyds TSB of UK to make it easy for people of Indian origin living in the United Kingdom to access more branches and ATM in UK as well as India.
In terms of profits, there has been a substantial improvement. It was a conscious strategy to pare the size: the bank decided to focus on profitability and efficiency. It has improved the composition of funding by reducing high cost funds. There was growth in international business. The international business which was 25% of the bank’s balance sheet now has come down to 23%. In the UK and Canada, the loan books are flat and in Russia it shrank. In terms of financial performance, ICICI has improved its Earnings Per Share, from 2009 through 2013 EPS has grown from 33.76 to 72.22; an increase of approximately 114%. Also, the net profit margin has risen from 5.63 to 12.94 in the period of past 5 years. ICICI has reduced its total expenses by 17% and increased its income by 15% approximately
ICICI had adopted a strategy of aggressive sales and introduced new innovative expansion strategies and launched new different products which attracted the customers. ICICI had also taken over couple of companies which did give a major boost to its business and deposits recently it had also taken over Bank of Rajasthan. ICICI is successful in catering to the needs of its Indian Customers who are overseas (Non Resident Indians) by introducing many NRI services. ICICI was successful in opening many current and savings accounts and increase its deposits and has also introduced savings accounts for children as well.
With this kind of exemplary performance and coupled with superb customer service in a very short span ICICI had emerged and successfully became one of the leading private sector banks of India.
The overall impact of globalization on ICICI bank is good. The net profit margin of the bank has increased by 2.5% annually in the past five years. The business strategy of the Bank has mainly been driven by the increased globalization of the Indian economy, the growing trend of Indian corporate expanding overseas, the large population of non-resident Indians and persons of Indian origin across the globe and overseas companies looking to invest in India.
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- Ervin J, Smith Z.A, Globalization:A Reference Handbook, 2008
- Friedman T.L. (2005), The World is Flat
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- Reporter B.S., Bank of Rajasthan to merge with ICICI Bank, available at: http://www.business-standard.com/article/finance/bank-of-rajasthan-to-merge-with-icici-bank-110051900028_1.html [Last Accessed: May 19, 2010]
- Schermerhorn J.R. (2009), Exploring Management, John Wiley & Sons
- Subsidiaries of ICICI Bank – Annual Report FY2013 Availabel at: http://www.icicibank.com/aboutus/annual.html
- Upender M., Shreedhar V.(2013) Growth Rates and Responsiveness of Credit to the Changes in Deposits in the Indian Banking, Journal of Knowledge Management, Economics and Information Technology
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