Improving competitiveness of commercial banks in context of international economic integration

Nội dung text: Improving competitiveness of commercial banks in context of international economic integration

1. IMPROVING COMPETITIVENESS OF COMMERCIAL BANKS IN CONTEXT OF INTERNATIONAL ECONOMIC INTEGRATION PhD. Doan Thi Thuy Anh thuyanhdt3101@gmail.com Faculty of finance and banking department of Trade Union University. MA. Duong Thuy Ha Faculty of Institute of finance and banking department of National Economics University. Abstract The paper examines competitive approach under the principle of determining competitive advantage mentioned by Michael E. Porter in two books "Competitive strategy" and "competitive advantage". Accordingly, the paper will examine the development of the competitive strategies of commercial banks in parallel with the development history of the banking industry in Vietnam. Then, the study applied a fuzzy-AHP method as well as game theory in order to evaluate and select the most competitive Vietnamese commercial banks . The final part of the study will provide numerous recommendation to improving competitiveness of commercial banks in the context of international economic integration. Keywords: competition, improving competitiveness, international economic integration, commercial banks 1. Introduction 1.1. Definition of competitiveness of commercial banks Along with supply and demand, competition is one of the economics basis. However, due to many different approaches, there are many ways to understand what competition is. Accordingly, competition in business can be described as "competitive activity among producers, traders in a market economy and it can be dominated by supply- demand relations in order to win the most favorable production and consumption conditions in the market” (Vietnam Encyclopedia, p.69). Or, according to Michael E. Porter (1985), "Competition is the rivalry between business firms in the same market to attract more customers, more profitable for themselves, usually by selling lowest price or provide the best quality of goods ”. Thus, it can be understood that competition is an economic relationship in which economic entities compete to find all means to achieve their economic goals, usually to dominate the market, to win customers or market segments. The ultimate goal of economic entities in this process of competition is to maximize profit or other business’ benefits. 147
2. In order to compete with other firms, businesses need to be competitive. It is understandable, the competitiveness of enterprises is to show its strength and advantages compared to other competitors in satisfying the customers' requirements to gain higher and higher benefits for their businesses. in the domestic and international competitive environment (Michael E.Porter, 1985). Accordingly, the competitiveness of a commercial bank will be established by 5 factors including: (i) cost advantages (ii) differentiation (iii) chain value (iv) Technology and (v) human resources. Improving the competitiveness of businesses is essentially the construction of competitive strategies to take advantage of their competitive advantages to win competitors in business. 1.2. Determinant factors of competitiveness of commercial banks It is definitely that the competitiveness of commercial banks must to be built on competitive advantages: First: Cost advantages A bank will be called to have a cost advantage if the costs accrued from the performance of its value-creating activities are lower than its competitors. For example, the costs of management and maintenance of equipment, general costs for a transaction with customers These costs will vary depending on their value chain structure compared to their competitors. paintings as well as depending on the size or operation of each bank. In general, there are a total of 10 factors that can affect a bank's cost. Therefore, focusing on optimizing costs through balancing asset structure, capital structure, scale, choosing how to manage and operate operations will be prerequisites for creating a good competitiveness for commercial banks. Second: Differentiation The differentiation could create the uniqueness of the bank. Factors such as the color of the logo, the color of the brand identity and the slogan are only a small part that creating differentiation of banks. In addition, factors that can also make a difference may include: Diversity Services provided Marketing activities Earn value to customers Operational process control (such as credit, investment, valuation activities) Skills and experience of personnel In order to meet the competitive requirements in the new era, the bank needs to diversify products as a strong point and a key point to develop banking services, 148
3. especially personal banking services. In particular, focusing on products with high technology content, outstanding features in the market to create differences in competition; take advantage of new distribution channels to diversify products, expand and develop consumer credit Third : Chain value Each bank is a collection of activities such as capital mobilization, credit, investment, ect. All of these activities are gathered in a unified cycle called that bank's chain value. The value chain represents the total value, including value and profit activities. Thus, banks with higher value chains will be able to generate more profits and it will eventually have greater competitiveness in the market. The ability to increase chain value depends on many factors such as cost structure, management process, network and distribution channels as well as industry structure. Fourth: Technology Recently, it has also witnessed a fierce competition to develop payment accounts, credit cards, electronic payment among banks, through attractive promotions when using real estate. Products. In the long term, banks that dominate the market share in electronic payment products not only get a stable base of customers but also have the opportunity to cross-sell other products. It can be said that technology plays a key role in the current competitive race of commercial banks. Banks that apply and adapt well to the development of new technologies in the industry will create tremendous advantages in retaining old customers as well as attracting new customers to them. Fifth: Human resources Even in the 4.0 era, when machines were expected to replace people in many stages of the economy, the role of human resources could never be replaced. Because people are still the center of development. The development of science and technology, including AI, still has its limits when machines cannot express emotions. In many studies have shown that customer actions depend on many factors such as emotions or interaction with bank employees. However, in order to improve competitiveness, commercial banks need to ensure both quality and quantity, commercial banks need to develop a human resource development strategy in accordance with their development requirements. Accordingly, the creation of a friendly and harmonious working environment between both competitive and collaborative factors must be calculated and considered carefully. 149
4. 2. Methodology The scope of this study is to develop a fuzzy MCDM model to solve the customers’ selection and evaluation about which is the best competitive bank in Vietnam. We asked 220 random customers (mostly in Hanoi) about their opinion toward various commercial banks, namely: The bank for foreign trade of Vietnam (VCB), Vietnam Bank for Industry and Trade (CTG), Joint Stock Commercial bank for Investment and Development of Vietnam (BIDV), Vietnam Technological and Commercial Join Stock Bank (TCB), Northern Asia Commercial Joint Stock Bank (BAB), Saigon Hanoi Commercial Joint Stock Bank (SHB), Military Commercial Joint Stock Bank (MBB) and Vietnam International Commercial Joint Stock Bank (VIB). The procedure of the proposed fuzzy MCDM method can be developed as follows: Step 1: Determine the criteria In this study, a questionnaire survey is designed in order to determine the most competitive banks in Vietnam using statistical methods. The respondents will be policy makers or employees who relative to banking sector and customers. Step 2: Aggregate importance weights of criteria using the new fuzzy AHP method Using the collected criteria from step 1, another questionnaire survey is developed based on pair wise comparisons between criteria. The shortcoming of existing fuzzy AHP approaches are mentioned in this step. Then, a new fuzzy AHP method is proposed to determine the importance weights of criteria. The committee assessed 8 commercial banks through the criteria based on scale for the scoring the banks of S = (VL, L, M, H, VH) where: VL= very low= (0,1,3), L=low=(1,3,5), M=medium=(3,5,7), H=high= (5,7,9) and VH=very high= (7,9,10). Step 3: Normalize the fuzzy decision matrix To ensure compatibility between averaged ratings and averaged weights, the averaged ratings are normalized into comparable scales. Suppose rabcijijijij (,,) is the performance of investor i on criteria j. The normalized value xij can then be denoted as: abcijijij xjBij ,,,, cccjjj aaajjj xij ,,,, j C cij b ij a ij a min a , c* max c , i 1, , m ; j 1, , n , where j i ij j i ij B and C are benefit and cost criteria, respectively. 150
5. Step 4: Construct the weighted normalized fuzzy decision matrix Considering the different weight of each criterion, the weighted normalized decision matrix can be computed by multiplying the importance weights of evaluation criteria and the values in the normalized fuzzy decision matrix. The weighted S d h i( , , ) S d h i ( , , ) normalized decision matrixes iiii1111 and iiii2222 versus capabilities criteria (C , 1, jl , )  and willingness criteria (,1,,)Cjlnj  are respectively defined as: 11ll Ssxwiijm1.  lijj (), nnjj 11imjl  1,,;1,,, 11nn Ssxwiijmn2.()  lijj (), nnjljl imjln  1,,;1,,. Step 5: Defuzzification This paper applies a novel ranking approach proposed by Dat et al. (2011) to defuzzify the final evaluation value of each alternative. The ranking procedure of Dat et al.’s (2011) method is described as closeness coefficient. 3. Results 3.1. Overview of development of commercial banks in Vietnam The establishment of Vietnam's banking industry is closely linked to the growth of Vietnam economy. Accordingly, almost immediately after President Ho Chi Minh read the Declaration of Independence giving birth to the Democratic Republic of Vietnam, it was almost immediately done to take over Indochina bank to strengthen and empowering the young government. The establishment of the Credit Department in 1947 and the State Bank of Vietnam in 1951 were the first prerequisites for the future development of Vietnam's financial and banking sector. Since 1945 until now, the banking industry has experienced many events as well as its transformation. However, in this study, the author only considers the period of development after 1986 (Doi Moi) so far because in this period, the banking sector really operates under the market mechanism. Accordingly, the development of the industry can be divided from 1986 into 5 stages, as follows: Period 1986-1989 On March 26, 1988, the Council of Ministers issued Decree 53 / HDBT with the basic orientation of "transforming the banking system completely”. The organization and apparatus of the State Bank are strengthened and reorganized to perform the function of state management of money and credit and at the same time function as banks; specialized banks perform credit business and banking 151
6. services. Accordingly, four commercial banks were established on the basis of transfer and separation from the State Bank, including: The bank for foreign trade of Vietnam (VCB), Vietnam Bank for Industry and Trade (CTG), Joint Stock Commercial bank for Investment and Development of Vietnam (BIDV), Bank for Agricultural Development (Agribank). During this period, the competition among banks was very low when the main task of banks was to ensure the smooth operation of the system. Period 1990-1996 In May 1990, the State Council passed 2 Banking Ordinance. The banking system started a strong, fundamental and comprehensive transformation process in line with the policy of developing the foundation. The State Bank has implemented a positive interest rate policy, combining the use of indirect and direct control instruments in operating monetary policy; forming monetary markets; initially modernizing technology and strengthening human resource for the new banking systems. Credit is extended to all economic sectors and reaches an average growth rate of 36% per year, contributing to economic restructuring towards industrialization and modernization and promoting economic growth in many years. During this period, the cooperation between Vietnam and international financial and monetary institutions (IMF, WB, ADB) was re-established. This is the period when banks start to shape and go into stable orbit. Competition between banks appeared and increased years by years. The main competitor in this period is to win good customers such as foreign trade enterprises, manufacturing enterprises with foreign factors. Period 1997-2007 In 1997, the National Assembly through the Law on the State Bank of Vietnam and the Law on Credit Institutions, creating a more fundamental and strong legal foundation for the banking system to continue to innovate in accordance with the market mechanism and the association sacrifice. The State Bank has implemented a flexible monetary policy, contributing to minimizing the negative impact of the Asian financial crisis in 1997; continue to improve the operating mechanism of monetary policy, especially the interest rate management mechanism. The system of credit institutions was rectified and strengthened, gradually handling outstanding debts and improving financial capacity. Banking technology has a strong development; The inter-bank electronic payment system was put into operation officially in May 2002, e-banking services appeared (E-Banking, Internet banking, ). The State Bank participated in 152
7. negotiations on WTO accession and actively implemented commitments on international integration in the banking sector. This is a period that can be said to be an important hinge for the development of the banking industry in Vietnam when many joint-stock commercial banks are established, promoting the excitement and competition of the market. This period is also a period of relatively stable economic development of Vietnam. Therefore, the demand for capital for business and production has grown well over the years, creating conditions for the development of the banking and finance sector. Moreover, the fact that Vietnam has completed the necessary procedures for WTO accession has created a huge motivation for banks to receive many new competitors from abroad. 2008-2014 period The financial crisis and global economic recession in 2008 had a very negative impact on our economy. Implementing the Resolution of the National Assembly and the Government, the State Bank has operated a proactive and flexible monetary policy, from prioritizing to curb high inflation in 2008 to focusing on preventing economic decline in 2009, restore the growth momentum in 2010 and curb inflation, stabilize the macro economy, support economic growth in 2011 and 2012. The financial crisis has had certain effects on Vietnam market when some weak competitive banks were forced to merge or restructure. This is considered to be a form of improving the competitiveness of banks in the context of their limited capacity. 2014-2018 period The period 2014 has now emerged with the industrial revolution 4.0. Accordingly, every industry in the economy will be linked together in a huge information network and the financial-banking industry is not out of that trend. Machines and artificial intelligence will promise to replace the role of people in many stages. New services tied to technology are expected to change customers' financial habits. With such a fast and unpredictable development, banks will have to be proactive in creating their own competitiveness if they want to survive and develop in the future. 3.2. The evaluation and selection of the most competitive banks in Vietnam To evaluate the competition of banks, we asked 5 banking experts to help building the important weight of criteria. After that, over 200 questionnaires was used to ask about responses’ opinion about which bank have the greatest competitive power. The ranking of banks based on the closeness coefficient and it is shown in below table 153
8. Table 1: The score of each bank under 5 criteria Cost Chain Human Bank Differentiation Technology advantages value resources VCB M M L M H CTG L VH L VH VH VIB VH VL L VH L BIDV L VH M M VH SHB L L L VH L BAB M L L VH M TCB L VH L VH VH MBB M L L VH VH Table 2: Aggregate weight of criteria and weight normalized decision matrix Aggregated wights of decision makers matrix Criteria D1 D2 D3 D4 Cost advantages VI AI AI AI Differentiation AI AI AI AI Chain value I VI I VI Technology VI VI I VI Human resources AI AI AI AI Figure 1: Ranking of the banks Cci Cci, MBB, 0.472 Cci, TCB, 0.579 Cci, BAB, 0.42 Cci, SHB, 0.401 Cci, BIDV, 0.484 Cci, VIB, 0.373 Cci, CTG, 0.582 Cci, VCB, 0.494 154
9. There are some main findings as follows: Firstly: The fuzzy-AHP method show that the competitive ranking order is CTG, TCB, VCB,BIDV, MBB, BAB, SHB, VIB. It is quite easy to understand this result and it is consistent with the ranking report published by well known rate agencies such as Moody, Standard and Poors). Four out of eight are well-known and leading bank in Vietnam baking market. Secondly: Techcombank (TCB) have nearly same score with CTG. It could be shown that privated-base commercial banks have equal competitive power as state- owner-base commercial banks. The findings also suggested that the State bank of Vietnam should establish fair and competitive market in the future. 4. Recommendations to build the competitive strategy of Vietnamese commercial banks in the context of integration As Vietnam integrates toward international market more and more deeply, it will face more and more strong competitors and many difficult competitive strategies. Therefore, in order to deal with these rivals, Vietnamese commercial banks need to figure out what to do in assuming what the opponent will do. Applying game theory to the management of competitive operations of commercial banks can determine two competitive strategies including: defense or attack 4.1. Defending strategy Defensive strategies aim to reduce the ability of other opponents to attack or divert opponents' attacks into less dangerous areas. It can be said, instead of seeking to improve the competitive advantage of a business, it becomes more sustainable. The most effective strategy must be a perfect combination of attack and defense. Defense strategies that may be considered for use include: First: Preventive strategy Preventive strategies are often more effective than other strategies because they are less expensive than handling consequences. This strategy works by identifying existing or potential competitors. It is necessary to determine which competitors are the most dangerous, along with their behavior and behavior. Specific ways include the following: (i) understand barriers to entry or exit from the market(ii) Identify opponents. The specifics include answering a series of questions such as who is the current opponent? and who are potential opponents? (iii) predict the opponent's "path" of attack. In this way, Vietnamese commercial banks may have ways to cope with their competitors in the future (iv) show a strong image of defense against 155
10. competitors. This is to create an impression for competitors that businesses always have clear determination and strategy to deal with competitors' competitive strategies. Second: Response strategy Response strategy is the next step to be taken if the strategy to prevent failure. When blocking is no longer effective, the next strategy needs to cause the opponent the same damage as ours. It can be said that response strategies are unwanted businesses but need to be done if they want to compete with rivals. It is important to predict the opponent's possible reactions when response measures are taken. In order for the response strategy to be effective, it needs to adhere to some principles such as (i) respond as soon as possible (ii) find out the opponent's true move when responding (iii) pay attention to everything challenge both existing and potential (iv) to respond as a way to gain status. 4.2. Attacking strategy Attack is a strategy that any bank must do if it wants to compete, dominate its market share. Attacks can be broken down into attacks and subjugate smaller, faster competitors than yourself or attack leading opponents. Here, the study only talks about attacking strong opponents more or less than the banks themselves. Because the integration of Vietnam has become more and more extensive, Vietnamese commercial banks have to deal with many competitors with strong capital potential, good management ability and a large coverage network. Attack strategies can be considered including: First: Reshaping Reshaping is a competitive way through making a difference with competitors even when the products and services are similar. This strategy is extremely important in the banking and finance industry when retail products and services are easy to copy. The more reshaping activities, the higher the bank's competitiveness. Some ways to reshape Vietnamese commercial banks may include: (i) continuous changes in services. This is extremely important when the industrial revolution 4.0 completely changes consumer habits and financial use of customers. Banking services that want to be competitive need to be inextricably linked to technology and internet devices, while ensuring the consistency, compatibility and security of all the above platforms (ii) marketing changes. Marketing methods of banks also need to change constantly to meet customers' changes (iii) changes in the way of operation and operation. Need to strengthen the online platform, mobile banking and gradually reduce the traditional operation form. Adding information technology and artificial intelligence to more operational operations (iv) quickly dominate the new distribution channel. It can be said that the 4.0 revolution created a new playing field that is relatively equal for 156
11. competitors. The only problem here is who will quickly see new opportunities and who will quickly gain the most market share of that market. Second: Redefine Definition is meant to change the market. Accordingly, banks can choose the most profitable segment for themselves to compete with rivals. There are 4 methods that can be used including (i) focusing on one segment. The bank will narrow and focus on a market that is the strongest and dominate the market share of that segment (ii) integration or separation. This strategy involves separating the market to expand or narrow the current activities. These decisions must be based on a benefit-cost analysis to ensure that the ratio reaches the highest level (iii) geographic redefinition . International economic integration and technology era 4.0 allow Vietnamese commercial banks to expand their markets to foreign markets. Currently, Vietnam has commercial banks with enough financial resources to expand markets to neighboring countries. Therefore, we need to consider this in our future competitive strategy (iv) horizontal strategy. The horizontal strategy is to expand the market through links with related industries such as the combination of banks and insurance into bancassurance. Such horizontal integration will create new markets for Vietnamese banks. Third: Forming alliances In the condition that commercial banks in Vietnam are not really able to compete directly with strong rivals from abroad, the establishment of alliances is extremely necessary. A solid alliance will be a condition to take advantage of each other's comparative advantages to complement its weaknesses. The establishment of an alliance may be through acquisitions or unions. Whatever the form is, the prerequisite is to have a strong alliance with specific rules and clear constraints between the parties to avoid a conflict of interest that leads to the collapse. It can be said that the application of the above methods needs to be very flexible because the market when there are many new competitors to join will make the competition strategies have to change. Therefore, Vietnam's commercial banks need to pay more attention to market research through either hiring independent consultants, or establishing specialized units for market research and determination. Competitive strategy for units by year or even quarterly. 5. References 1. Kaylyan Chatterjee (2001), "Game theory and business application". Kluwer Academic Publishers, 2001 157
12. 2. Duong Thi Thanh Hai (2015), "Enhancing the competitiveness of Vietnamese commercial banks". Financial magazine in May 2, 2015 period 3. Doan Thi Hong Nga (2017), "Enhancing the competitiveness of commercial banking systems in a new context". Financial magazine September 1, 2017 4. Le Hong Nhat (2007), "Game theory and application in business administration". Alpha Book Publisher, 2007, 2nd edition 5. Pham Tan Men (2008), "Solutions to improve the competitiveness of Agribank in the integration trend", the master's thesis in economics, Ho Chi Minh City University of Economics 158