TABLE OF CONTENTS

INTRODUCTION……………………………………………………………………………02

SELECTION OF ORGANIZATION……………………………………………………….03

MICHAEL PORTERS 5 FORCES MODEL………………………………………………04

VALUE CHAIN FRAME WORK OF MICHAEL PORTER…………………………….10

CONCLUSION………………………………………………………………………………12

REFERENCES………………………………………………………………………………13

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INTRODUCTION

In the words of Hammer and Champy (1993), Business Process Reengineering

(BPR) is the analysis and design of workflows and processes within an organization.

Why we reengineer the existing processes is to become more efficient and modern and

to make the organization in sync with the external environment.

According to Davenport (1993), Business Process Reengineering (BPR) is implemented

by many organisations to achieve radical advantages of their processes. But again

despite of being attempted by numerous organisations, BPR is a huge risky, time

draining activity with no guaranteed success. In actual no universally accepted definition

of BPR exists but common characteristics of BPR, acknowledged everywhere are

radical redesigning of business functions, extensive use of IT for enabling, disruption to

the organizational function during reengineering process and efforts to achieve

improved performances within the firm (Belmonte & Murray,1993).

Figure: Cycle of BPR

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SELECTION OF ORGANISATION

In this assignment we will discuss the BPR initiatives in one of the largest banks in

India, State Bank of India. The bank has started Business Process Reengineering in the

mid-nineties and almost took nearly more than 5 years to implement the reengineered

processes across its 9600 branches in India and abroad.

State Bank of India is the biggest bank in India with assets ranging from 10000 Billion

Rupees in assets as of 2010 and having employee strength of around 200,000. The

bank was established in by an act of 1955 and is the first nationalized bank in India,

THE BACKGROUND:-

Till the early nineties (till 1992) the Indian banking sector was dominated by the

nationalized banks. Private Banks were few and are operated in a very small scale.

Private Banks (non-nationalized banks) were not allowed to raise capital and there was

a cap on number of braches they can open.

With the government of India, deciding to bring in reforms in the banking sector

authorized the Reserve Bank of India (RBI), the banking sector regulator in India to

identify the possibility of reforms in banking sector. The regulator RBI relaxed the norms

for banking sector and allowed the private banks to raise capital from abroad and

allowed them to be listed on the stock exchanges.

At that time State Bank of India had around 8000 Branches and none of the branches

are computerized, and inter connectivity between branches was

This change has brought in a remarkable change in the banking sector.

In this assignment we will see what challenges State Bank of India faced, the need for a

Business Process Reengineering and how the Michael Porters models can explain the

Business Process Reengineering in State Bank of India. Mostly the business process

reengineering is driven by technology.

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MICHAEL PORTERS 5 FORCES MODEL

There is no better model than Michael porters model to explain the predicament and the

need for Business Process Reengineering for State Bank of India in the early nineties.

Figure: Porters’ five forces

We will discuss one by one the forces that Porter describes and see how they have

influenced the State Bank of India.

Threat of New Entrants:-

Till the early nineties State Bank of India enjoyed near monopoly being BIG daddy of

banking industry and virtually no one to challenge. From the start of reforms a slew of

new banks obtained licenses and started operating. The institutes that obtained the

licenses were already operating in the finance industry, some are leading housing

fiancé corporations like HDFC ( Housing finance and Development Corporation) and

some are institutional financing companies like ICICI (Industrial Credit and Investment

Corporation of India).

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These institutions have already has a huge customer base and their opening their

branches. These new banks were crafty, i.e. they knew that about 20% – 30 % of the

population contributes to more than 80% of the assets of the bank. They also knew that

most of the banking happens in Metros and other cities them small towns and Villages,

so they first targeted the metro customers. The new entrants opened posh looking

branches in the metros with excellent interiors and layouts. The new branches

automatically attracted the new generation customers and made them to complain

about the old and dilapidated branches of State Bank of India.

In response to the new entrants State Bank of India opened new branches called

“Personalized Banking Branches”, where personalized care is provided to the

customers, of course the branches catered to only the High Net worth Individuals (HNI).

The new entrants brought a change the strategy of State Bank and to adopt different

strategies for different markets.

Threat of Substitute Products

Banking is predominantly a service industry and there can be hardly any difference in

the products since the products need to comply with the regulations in the banking

sector. Unsurprisingly the new banks wanted to create the differentiation based on how

the service is offered.

Take the example of term deposits. We all know that Term Deposits carry better interest

rates than other accounts. What the private banks started offering is something called

Auto Sweeping. What Auto Sweeping does, when the balance in an account (say

current account) crosses a threshold (say 10,000) the amount above the threshold is

converted to a term deposit. This was possible because of the technology they brought

in with operating branches and they had no legacy systems like State Bank of India.

State Bank of India had to respond and match the competition. Bank has to revamp its

existing process of creating and closure of fixed deposits.

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State Bank introduced a new product called Multi Option Deposit (MOD). State Bank

has identified the branches which are facing tough competition from the private banks

and introduced the product selectively in those branches. The product has certain

advantages over the Auto Sweep products offered by private banks. The MOD product

not only allowed for creation of deposits but also allowed for partial withdrawal of the

term deposit in multiples of hundreds. Example:- If the Term Deposit was for Rs 10,000

then user can withdraw Rs 400 and the rest of the amount Rs 9,600 will be treated as a

term deposit and will remain attracting higher interest rate.

The product was a huge success, however State Bank of India need to revisit their

processes of creation of term deposits and training of staff on the new product. Bank

also needed to spent considerable amount on advertising the new product to the public.

It was almost first time in many years that State Bank visited their term deposit process.

The process change also demanded investments in creating infrastructure for the new

product like enhancing their existing IT systems etc. and training staff.

Bargaining power of Suppliers

Though the bargaining power of suppliers is applicable only for manufacturing industry,

in finance industry the suppliers can be equated with suppliers of capital.

Since State bank of India is a nationalized bank, most of the capital for the bank was

contributed by the government of India by having the president of India as the biggest

shareholder. In the nineties with more than 50% of the population under below poverty

line government of India was more concerned about State Bank serving the poor than

serving the burgeoning middle class and the rich. The possibility of adopting different

strategies to cater to different needs was not taken up on priority. In the mid-nineties

government of wanted to dilute its stake (Still a major shareholder with nearly 60%

share) and wanted the people of India become shareholders. The initial public offering

by the bank was a huge success. The bank was listed in the Bombay Stock Exchange

(BSE).

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After becoming a public listed company, the bank started to feel the pressure from

Share Holders who expected a better return for their investment. Unlike before, State

Bank of India has become answerable to the public in the Annual General Meetings and

to show the performance based results.

State Bank of India also needed to comply with the regulations of Securities Exchange

Board of India (SEBI) as it is a listed company. This involved in change of processes

related to reporting. Initially bank was reporting its performance once a year, after listing

it has to report its performance every quarter. Because of this the entire process of

collecting information from about 8000 branches across India had to undergo change.

This is how the suppliers and regulators have successfully changed the business

processes of State Bank of India.

Bargaining power of Customers

The advent of new private banks in the early nineties the banking customers were

facing a situation like oligopoly, where the Banking Industry is dominated by few

nationalized banks and lack of innovation and shabby services.

The banking operations were conducted in specialized counters. There are counters in

each branch for every specific banking activity. There were cash counters with tellers

who perform only cash related transactions. There were ledger operators who post the

transactions in the ledgers (No computers), there were clearing counters who just

perform activities related to local clearing transactions.

If there were 10 people standing in the queue at the teller counter, and none at the

clearing counter, there is no way the person clearing could attend the queue at the teller

counter. This led to the inefficient use of human resources, where one resource was idle

while other resource was over the over working.

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Here it is also important to highlight the changing profile of the customer. The

demographic profile of the customer in the nineties was very much different from earlier

generations. The new age customers were young and were willing to adopt change fast.

The new age banks wanted to prove the difference. Backed by the latest technology

they have done away with the specialized counters. Any operation was possible at any

counter. They also introduced ATMs at every branch.

The customers were surprised by the swift service rendered by the private banks.

Customers started complaining about the services offered by State Bank of India. Many

customers moved to the new banks to get the services offered. Another most common

complaint was availability of cash transactions (India was predominantly cash carrying

nation, checks and plastic cards were not introduced at that time) after the office hours,

which is just 4 banking hours in a day.

Hit by the private banks State Bank of India started looking into its operations and

process and introduced a concept called Single Window, where any banking related

transactions could happen at a single window. That is one of the Major initiatives in the

area of BPR taken up by State Bank of India. Expectedly the move to introduce Single

Window was protested by the labor unions, which feared job losses. After much

negotiation with union bodies the Single window was finally introduced in 1998.

The existing infrastructure technological as well as physical was not ready for the

change. Bank had to entirely redesign its office layouts to accommodate Single

Window. State Bank also tied up with NCR and Diebold the two major ATM machine

manufactures and started rolling out ATMs at all branches. Now State bank of India

owns the maximum number of ATMs in India. Even though this moved cost a lot for the

bank, there were two strategic advantages gained by the bank

1. The customers were happy and stopped moving to private banks

2. Employees changed their attitude towards changing technology and embraced

the change.

This is how the bargaining power of customers has forced a change in State Bank of

India business processes.

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Competitive Rivalry within an Industry

The competitive rivalry means, companies try to gain competitive advantage over other

companies. The common indicator of competitive rivalry is measured by Industry

Concentration. The Industry concentration is measured by Concentration Ratio(CR).

Measures of Concentration: An Empirical Analysis of the Banking Sector in India a

study in summer 2010 by Summer 2010 by Sharma, Manoj Kumar, Bal, Harpreet Kaur

shows that the CR in the banking Industry has come down from 44.92 in 1998-1999 to

39.38 in 2008-2009.

The more the ratio the less is the competition. As we can see that the ratio has come

down which means there is more competition in the Banking Industry than ever before.

State Bank of India is ready for the new challenges by reengineering its business

processes and ready for the competition.

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VALUE CHAIN FRAME WORK OF MICHAEL PORTER

Figure: Value Chain frame work

The Michael Porters value chain may not be a suitable model to discuss service related

industry where the support activities take the position of Primary activities. In the

banking Industry the activities Service, Human Resource Management, Technology,

Operations and Marketing and sales play a major role, than the other primary activities

mentioned in the Porter’s model. However we can use the model to analyze specific

activities through which firms can create value and competitive advantage. The relevant

activities are discussed below.

Service: - Banking being predominantly a service industry, the services offered can

bring huge competitive advantage to the company that excels in customer service.

Striving to increase the customer service quality will provide a sustained competitive

advantage. Banks needs to look for the possibility of improving the existing processes

for better customer service.

Human Resource management: - The people who deliver the service are more critical

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for the success of the service. It is essential that people who are delivering the service

are customer centric, and have sufficient knowledge about the services they are

offering. Training of human resources makes a lot of difference to the delivery of the

service. Training need to be included as one the major process that can impact the

business.

Technology:-Technology plays a crucial role in offering banking services. Internet Banking, Phone

Banking and Mobile Banking all are possible because of fast adaptation of technology

by banks to reduce their operational costs. Technology helps banks to reduce costs and

become more efficient. The banks that adopt the technology will have a unfair

advantage over their competitors.

For state bank of India, the success of business process engineering can be attributed

to the quick adaptation of technology. First wave was computerizing of branches, this

was done using “Bank Master” Software, which was not a graphical User interface,

rather a menu driven system. This basic computerization had the following benefits 1)

The employees became familiarized to a computer environment 2) The critical banking

operations were computerized and this laid the foundation for future process

reengineering. Second Wave was introducing core banking solutions, with this, the bank

has shifted from menu based Bank Master to GUI based State Bank Core Banking

System (SBCS). This time the adaptation was very quick, and all the banking operations

were centralized, with Mumbai being the hub. During this wave all the 9000 branches

are inter connected and brought under one huge network which paved the way for

anywhere banking in India. All this was possible due to technology.

Operations:- Banking operations help in delivering quick and timely service to the customer. Every

now and then banks need to visit their process in operations to look for increasing

efficiency. It is in the operations where maximum efficiency is possible. Not surprisingly

most of the IT investment by banks goes into automating or optimizing the processes.

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The operations of the bank have also undergone dramatic change along with the

changes in technology.

During first wave, most of the efficiencies were achieved due to the reduced time taken

for each transaction, however each branch worked as standalone branch and everyday

each branch had to perform end of day operations and take backups of their

transactions. During the second wave the effectiveness has taken precedence, most of

the operations were centralized especially the ATM and Clearing operations and which

reduced the burden of the staff so that staff can focus on cross selling to the customers,

which increased the profitability of the bank.

Marketing and Sales:

It is not enough if a bank offers excellent customer service and has efficient processes.

Bank needs to make the customers aware of its products and services to grow and also

new customers and businesses. This activity is done by the marketing and sales teams.

The marketing and sales teams need to be backed by technology by providing them

new channels for marketing like Internet, Mobile and Social Media. A sales force

equipped with excellent product and supported by technology is a real competitive

advantage that banks vie for.

CONCLUSION

It can be observed that State Bank of India process changes has been mostly reactive

then proactive. This is expected given the unique characters of the bank like

government holding, rural focus, and numerous branches and staff strength of around

200,000. It is not easy to make elephants dance. Like any strategic initiate Business

Process Reengineering is a costly, time consuming and change management related

affair. In the early phases State Bank of India hired the famed McKinsey consulting for

its Business Process Reengineering initiatives.

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The success of the Business Process Reengineering in State Bank of India can be

attributed to managing the other two pillars of a business apart from Business Process

alone.

1) People

a. State bank had to literally train the entire staff of 200000 on more than

one of the business processes.

b. Successfully handled the pressures from the labor unions.

2) Technology

a. Investment in technology in Banking in India is topped by State Bank of

India.

b. Integrated all of its more than 9000 branches through CORE banking

solutions.

c. First bank in India to have more than 1000 ATMs

d. Introduced anywhere banking across India.

We can conclude that though the Business Process Reengineering was reactive and

took a lot of time to implement, the initiative was very successful and the bank became

stronger than ever before.

REFERENCES

Belmonte, R. W. k Murray, R. J., "Getting Ready for Strategic Change: Surviving

Business Process Redesign", Information Systems Management, Summer 1993, 23 -

29.

Davenport, T. H. & Short, James E., "The New Industrial Engineering: Information

Technology and Business Process Redesign", Sloan Management Review, Summer

1990, pp 11 - 27.

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Guha, S., Kettinger, W. J. & Teng, J. T. C., "Business Process engineering: Building a

Comprehensive Methodology", Information Systems Management, Summer 1993, pp

13 - 22.

Hammer, M. & Champy, J., To Re-engineering, the Corporation A Manifesto for

Business Revolution, Nicholas Brierly Publishing, 1993.

Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard

business Review, January 2008

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