Essay: Synopis – businesses profitable

INTRODUCTION

Organizations continually face the challenge of keeping their businesses profitable. Profitability in today’s cutthroat competition depends to a very large extent on the volume of business that an organization generates. In words of Jack Welch, ex-chairman & CEO of General Electric, “A company should either be number one or number two in a particular industry, or else leave it completely”. Welch’s strategy was later adopted by other CEOs across corporate America. All industries including banking work for achieving leadership position. This necessitates that organizations look for different avenues to fuel growth in business, which cannot merely be achieved by increasing the operational efficiency or cost cutting. It has to be complemented by increasing the share of pie through acquisition of new customers or deriving greater value out of existing customers.

For achieving these objectives, different corporate strategies are adopted by the organizations. “Corporate strategy” is defined as establishing criteria by which a firm chooses the market segment it will serve, that is, where and how the firm will compete (Grant, 1991). Basically, there are two alternative philosophies to design strategic criteria for any type of firm including banks (Mason, 1979). The first is a forecasting effort, in which the bank establishes its competitive potential, and then the managers develop the course of action as much as the environment allows. This approach considers growth opportunities that are internally determined. According to the second philosophy, the bank’s managers recognize the available types of growth opportunities and then pursue them. This approach considers that growth opportunities are basically external to banks.

In order to exploit growth opportunities, a product market framework was provided by Igor Ansoff (1965) known as “Ansoff’s Matrix”. This matrix outlines four strategies viz. Market Penetration, Product Development, Market Development and Diversification (Figure 1). Ansoff defined Market Penetration as a growth strategy of increasing market share in present product-markets, product development as a growth strategy of creating new products for current markets, market development as a growth strategy of selling current products in new markets and diversification as a growth strategy of expanding with new products in new markets. As a result of change in the markets and rise of global competition, banks have been forced to explore the trade-off between winning new customers and retaining old ones. Market Penetration is one of the most popular strategies and is a good fit for industries such as Indian banking. The risk associated with this strategy is also lesser as compared to other strategies. Oster (1994) contended that the size of the market share held by the firm as well as the size of the major firms in the market are important considerations. He suggests that firms with relatively small market shares can increase their market share many times over without adversely affecting the overall market share of a large market leader.

Figure 1 Source: Iqor Ansoff. “Corporate Strategy”, McGraw-Hill. 1965

According to Wikipedia, Market penetration occurs when a company enters / penetrates a market with current products. The best way to achieve this is by gaining competitors’ customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service by advertising etc. The employment of this strategy in banking aims at attracting new customers from the market that the bank is already in. A bank which has identified the market and market’s needs is in a position to make the most of it’s marketing mix. A well-planned market penetration strategy would also win new customers through better understanding of their needs and such banks would be able to target right segments and thereby increase market share. Market penetration strategy also refers to the increase of the "usage rate" of its branches and services by new or existing customers in present markets (Meidan Arthur, 1983).

MARKET PENETRATION IN INDIAN BANKING

Liberalization in early nineties had a huge impact on the way banks had been doing business in India. With coming of many private players in Indian Banking Industry, the mantra of ‘High reliability and Less profit orientation’ of Public banks began to change. Though Profit maximization remained the secondary objective for Public Sector Banks, adequate profit was deemed necessary for their survival because even socioeconomic obligations, like branch expansion in rural areas cannot be fulfilled without adequate profit (Mittal & Dhade, 2007). Although the presence of private sector banks has generated a competitive spirit among the state-owned nationalized banks, still these banks are far behind the private counterparts with regard to quality, intensity and range of services offered. Presently, Public sector banks are busy working out strategy to fight private players by improving customer services in key areas and increase market share.

Marketing has become an imperative part of functioning of every bank today, either private or public. The Indian banking system, by habit and tradition, considered deposit growth as the business objective. With time crunch affecting every individual, marketers saw a huge scope of promoting value added services such as ATMs, net banking, phone banking etc. to create differentiation from others in the industry. These products provided bouquet of services to the customers along with additional revenue streams to banks. All these products were not limited to particular category of banks but were adopted sooner or later by most of the banks. The banks over the years have tried to make inroads into different segments and untapped niches. Private banks like ICICI have been the leaders in making tailor made products for different sectors. Hence, understanding the importance and effectiveness of marketing techniques used by different banks has gained all the more importance in today’s scenario.

According to the latest data released by the Reserve Bank of India (RBI), Public Sector Banks – comprising 19 nationalized banks, State Bank of India and its six associates, increased their share of deposits to 74.3 per cent, while they accounted for 74.2 per cent of the gross bank credit at the end of September 2009. A bigger share of the pie came at the expense of private and foreign banks. This has resulted as a result of credit crisis since many depositors, including large companies, had moved their funds from private and foreign banks to PSBs in what was described as flight to safety. Public Sector Banks like SBI got very aggressive in the market and tried to regain whatever market share they had lost.

Oriental Bank of Commerce Chairman & Managing Director TY Prabhu expects the share of PSBs to improve steadily as these banks now have efficient operations with most of business being run on core banking platform. Also, Cost management has improved significantly in a highly competitive market. At the start of the last decade when private players came with retail products, technology and brand building initiatives, they had virtually occupied everyone’s mindshare. According to Union Bank of India Chairman & Managing Director MV Nair, “This decade belongs to the public sector since they have responded to the competition by repositioning themselves, upgrading their technology and processes through brand-building”.

In developing economies like India, having huge population, many rural areas are still untapped. Rural branches of Private banks account for only 20 per cent of their total branches. While old private sector banks have around 25-27 per cent of their total branches in rural areas, the new ones have only about 15 per cent. In contrast, 65 per cent of the PSBs’ total branches are in rural and semi-rural areas. In Punjab, the total number of branches of Scheduled Commercial Banks is 3340, out of which 1239 are in rural, 983 in semi-rural and 1118 are in urban areas as on end of Quarter III, 2009.

In the absence of a formal banking system, people living in these areas are forced to opt informal financial system and mostly private money lenders for their financial requirements. It also prevents flow of funds from such areas in form of deposits into the formal banking system. ‘Reserve Bank of India’ policy on ‘Financial Inclusion’ is a boon in this regard and aims at providing a formal banking solution to areas with population as low as two thousand by March, 2012. Government of India has also proposed to extend insurance and other services to the targeted beneficiaries. These services will be provided using the Business Correspondent and other models with appropriate technology back up. In Budget 2010-2011, Rs.100 crore has been earmarked for Financial Inclusion fund, which shall be contributed by Government of India, RBI and NABARD.

REVIEW OF LITERATURE

There have been various Market Penetration related studies conducted in banking and other sectors in various parts of the world. Some studies focused on finding the untapped segments / neglected niches, while others have discussed various marketing strategies like Bundling, Cross-selling, use of internet etc to look for new customers. Still others have worked on various service development strategies adopted by different organizations including banks for retention of existing customers.

Schiele (1974) conducted a study to look for untapped segments and ways to target young market. He suggested that a “Net” approach should be used to "catch" the youth market as they drift downstream from adolescence to adulthood. The research findings indicated that this is a simplification of reality and that a number of interrelated streams exist before young people reach the "pond of adulthood", at which they are likely to be "locked into" a financial service organization.

Howley John, Savage Grahame (1980) discussed Cross-selling, wherein, having opened a current account, customers are "sold" loans, travel facilities, insurance and other services for further banking penetration of each customer. He also shared a word of caution as well, saying that there’s undoubtedly great potential in Cross-selling, but there are dangers of placing too much emphasis on peripheral activities to the overall corporate purpose of being a bank.

Bartos (1982) in his study worked on the untapped niches and concluded that financial service providers have typically viewed their primary customer base as males between 30 and 50 years old. These men have been considered the primary wage earners and decision makers for financial planning in their households. These individuals offered the maximum profitability since they not only have the resources but also the necessary focus on increasing their assets. Increased growth from sales of financial products to this segment has been the primary strategy of financial service providers and this segment has been the golden geese for the financial organizations.

Diamond & Douglas (1984) studied another strategy to increase market penetration. Their study tried to justify the existence and effects of intermediaries. For them, agents exist to reduce moral hazard and asymmetric information. The study concluded that that financial intermediation is a necessary condition for development.

Javalgi et al. (1990) further shared views related to the findings of Bartos and went on to say that while some growth was achieved through the introduction of new financial products and services, the financial services needs of women and consumers over 50 years of age were blurred for the financial service providers. The study concluded that during the strategy implementation, financial service providers focused myopically on male customers. This market segment certainly has potential for limited growth, but to achieve the higher growth desired, the financial service providers must also evaluate marketplace in light of demographic and attitudinal shifts.

Reichheld & Sasser (1990) discussed the reasons for organizations’ interest in activities such as cross-selling. They concluded that the organizations were interested in Cross-selling practices because selling additional services to existing customers could reduce the need to spend money on customer acquisition (e.g. advertising) and lead to a pricing advantage over competitors. Moreover, the customer’s knowledge of the service provider’s service delivery processes lowers his / her resistance to the provider’s cross-selling propositions. The firm also has a lower risk and liability exposure due to its knowledge of the customer.

Lewis and Bingham (1991) in their study concluded that banks need to consider the costs and benefits of attracting young customers and try to pinpoint the stage when a customer may be expected to become loyal, i.e. where the net should be cast. Typically, the cost of retaining a customer is less than that of attracting new business from other institutions. The study further said that the future market shares of banks will depend on their ability to attract and retain the youth market. However, this market is not homogeneous with respect to needs, attitudes, and behaviour regarding financial services, and so different service mixes need to be developed to satisfy the sub-segments.

A study by Philp, R. Haynes, P. & Helms, M. (1992) stated that growth through a market penetration strategy, reaching and influencing customers already served, has proved to be a less profitable course of action than expected. This has happened not because of the basic plan itself, but rather due to its improper implementation. Many financial service providers made the mistake of rushing into the marketplace with an array of products and services with little distinction as to the needs of different customer sub-segments. In the highly competitive retail financial marketplace, it is more critical than ever to narrowly define the markets. Customizing services for undervalued and neglected market segments in the financial and service industry can yield opportunities for growth and profit.

Finlay (2000) suggested that Market Penetration fits strategically for a firm when current markets are not saturated for the types of offer the firm is making and its present customers can be induced to buy more. And typically, when a company wants to attack the market share of the competitors, they will undertake market penetration as a way of increasing their own share in the market. Moore (2000) stated that many banks were not developing and adapting their products and services to meet the needs of the poor. Instead, the formal banks were continuing to market complex products and services designed for more affluent consumers whose market behaviour is markedly different from that of the poor.

The evidence also suggests that many companies have engaged in e-commerce activity, without any consideration towards a return on investment (Damanpour and Madison, 2001). One of the reasons for this may be that many businesses fear that without an Internet presence, the firm will get left behind. The research stated that internet can be used to sell more existing products into existing markets but a number of companies have turned their focus towards e-commerce, often by emulating the business module of another firm, as “me too” entities (Ruth & Margaret, 2003).

The study conducted by Hill (2003) stated that demographics provide managers with a means of determining which segments of the market are feasible in terms of achieving greater market penetration. Moreover, to remain competitive, companies must be able to develop and refine their services to meet the needs and preferences of different consumer segments (Pennington-Gray et al., 2003).

Yadav and Monroe (2003) studied the effectiveness of price bundling as a marketing strategy. The assumption was that the bundle priced items offer more value and are therefore more attractive to the buyer. The seller makes the buyer aware that the buyer is getting a bargain in the bundle because if the items are purchased separately, the aggregate price far exceeds the bundle price. They also stated that while price bundling is frequently used by marketers, its effectiveness needs more research, especially when used with other marketing variables.

Ngobo Paul (2004) in his study “Customers’ cross buying intensions” concluded that it is reasonable to expect that customers with strong repurchase intentions will also be likely to cross-buy from the same service provider. This was consistent with the view shared by earlier studies that it is easier to cross-sell new services to existing customers than to the new ones. At the same time, the research also indicates that it is not that easy either because when it comes to new services, customers consider not only their previous experiences with the service provider but also its capacity to deliver high-quality services and the benefits of buying all the services under one single roof.

Differentiation through claims of excellent customer service fails to provide competitive distinctiveness, particularly to key segments of the existing customer base. A study conducted by Douglas Blakey (2006) concluded that banks rank advertising as much less important in the marketing mix. Vyas, Rudrayya, Math (2006) in their research, cautioned the Private sector banks against cross-selling. The study analyzed that Public sector banks can introduce specialized training and incentives, whereas private sector banks need to introduce appropriate control mechanisms and avoid indiscriminate cross-selling.

Arora Raj (2008) also focussed on an important strategy to increase sales to existing customers – Price Bundling. The study pointed out that the intent of bundle pricing is to increase sales by offering a discount when a pre-specified bundle of items is purchased at the same time. Usually, the additional items in the bundle are those that are complementary to the main product. This provides a scope to sell more to same customer.

A study by Singh & Malhotra (2010) made an attempt to present the present status of Internet banking in India and the extent of Internet banking services offered by the banks. The study concluded that the diffusion of technology is somewhat slow in Public Sector banks when compared to Private Sector banks and Foreign banks. The research also found that the private and foreign banks have performed well in offering a wider range and more advanced services of Internet banking in comparison with public sector banks.

Hence, there have been many studies relating to Business Strategies, neglected niches, Price Bundling, Cross selling etc. conducted in different geographical areas, but there are gaps that exist in the literature. First, the knowledge is deficient in Indian context, especially region of Punjab. Secondly, the studies talk of different growth strategies in general and there is ample scope of studying “Market Penetration” strategy of banks specifically. At the same time, different studies have put different fronts on finding new customers in same market (Use of internet, advertising, Referral schemes, marketing channels like DSA, DMA) selling more to existing customers (Use of techniques like Price Bundling, Cross Selling) and increasing usage of the customers, but the findings are isolated and lack holistic strategic perspective vis-à-vis Market Penetration. This presents a major gap and scope for further research in this area.

NEED OF THE STUDY

This research aims to bridge these gaps by probing into the field of market penetration. It aims to study the different strategies adopted by the banks as regards attracting new customers and retaining existing customers. The study aims to investigate and compare Market Penetration strategies currently employed by Public & Private sector banks. At the same time, study proposes to enumerate the importance of above said factors from bank staff and customers’ perspective.

OBJECTIVES OF THE STUDY

1. To identify the area of market penetration as a component of corporate strategy of banks under

study.

2. To find out the marketing strategies adopted by banks to attract new customers and to retain

the old customers.

3. To evaluate the new market entry and service development strategies adopted by banks under

study.

4. To study the perception of customers of banking services with regard to the service marketing

strategies of banks under study.

5. To give suggestions on the basis of study conducted.

RESEARCH METHODOLOGY

Research Design:

The study will be descriptive in nature based on Primary as well as secondary data both with their well-known limitations. The primary data collection will be done using standardized questionnaires. The secondary data will be collected from various sources such as Reserve Bank of India Bulletin, International Journal of Bank Marketing, The Indian Banker, magazines, research papers, books, internet websites etc.

Sample Size:

Five Public Sector Banks and five Private Sector Banks will be selected from the universe for conducting the research. Study will be carried out in different areas of Punjab. The customer data will be collected from 500 respondents. This number has been taken on the basis of proportionate representation. Fifty customers will be taken from each public and private sector bank. The total number of employees to be contacted for collection of data will be hundred. Only the employees working at designations above ‘Manager’ will form the sample of the study.

Collection of Data:

For the purpose of collection of data, two set of questionnaires will be prepared. First questionnaire will help in knowing the strategies being adopted by the banks to increase Market Penetration and would be filled by the bankers. Second questionnaire, to be filled by the customers will be used to collect preferences of customers related to various strategies being adopted by banks to increase Market Penetration.

Analysis and Interpretation:

The analysis will be done on the basis of review of existing literature and information collected through questionnaires filled by the employees and customers of the Public and Private sector banks. Microsoft Excel and other appropriate statistical tools will be used for Data Analysis.