ANY UAE bank CEO seeking to calibrate a corporate strategy in the current cutthroat market should reread Professor Micheal Porter of the Harvard Business School on the link between strategy, innovation, technology, market structures and competition.
Porter demonstrates that the nature of competition exists in the threat of new entrants, substitute services, the scale of existing competition and the relative bargaining power of product suppliers and consumers. It could prove an excellent doctoral thesis for a young economist to apply the Porter/Harvard competitive strategy paradigm to UAE banking's real world processes and prospects. Well, a column is a sorry substitute for a Ph.D tome but I do believe that Porters ideas can help UAE bank CEO's understand their strategy, revenue models and competitive dynamics with a degree of sophistication that could have all too real an impact on market share, margins, profit growth and share prices.
So how does the Porter matrix migrate to UAE banking in the late summer of 2004? New Entrants? Look no further than the DIFC, the emergence of new banks (Dubai Bank), new international players (GCC banks, for instance), new mortgage finance specialists (Amlaak, Tamweel), new specialist investment banks (Shuaa Capital). The Arab world's most open, competitive banking and financial services market is going to have a quantum increase in competition as players scramble to eat each other's lunch.
Porter's ideas on substitute products and services is also relevant to UAE banks. Banks now compete with consumer finance companies, government agencies, hawala, on line financiers, insurance companies, department stores for business as diverse as credit cards to wealth management to project finance to electronic money transfer. However, if I was a UAE bank CEO, I would view the potential product/substitution power of Islamic finance as my greatest macro threat in the Porter/Harvard model. Islamic banking and finance, for a myriad historical and institutional reasons never took off in the UAE as it did in Kuwait, Saudi Arabia or Bahrain.
This is ironic since the UAE incorporated the worlds first Islamic bank (Dubai Islamic Bank) and the world's largest capitalised Islamic Bank (ADIB). However, the recent management changes at ADIB and the strategic makeover - and exponential balance expansion of DIB - under Dr. Mohammed Khalfan Kharbash, UAE Minister of State for Financial and Industrial Affairs (and himself no stranger to the Harvard Business School!) - has created formidable new competitive realities for conventional UAE banks. In Kuwait, Islamic banks captured 25 per cent of deposits, primarily via cannibalisation among existing banks, three years after their emergence in a Gulf Arab state whose socio-economic/affluence metrics most resemble the UAE. Will UAE banks face something similar if and when the DIB or ADIB get their growth strategy right and find the right people to roll them out? Michael Porter's competitive strategy paradigm could help UAE bank CEO's respond to the new realities of Islamic finance in the UAE.
The relative shift in bargaining power between suppliers and consumers is a key determinant of a competitive strategy in UAE banking. Factors relevant to UAE bank CEO's here include everything from defacto deposit lotteries, prices competition in retail banking, escalating personnel costs, soaring real estate prices, multi-million dirham media budgets, the critical importance of product branding and brand equity, technology infrastructure services/marketing outsourcing. Any strategic planning head in UAE banking knows that a strategy that does now define the nodal points where suppliers, stakeholders and customer's can pressure the the bank's business model is doomed to failure.
Porter's "competitor rivalry" factor plays a major role in the size, success, profitability, riskiness and growth of UAE banking. However, I would add that regulatory and macro-political realities distort the Adam Smith classical model of free competition, which does not exist in the UAE - or most places on earth other than a few shady Caribbean money laundromats. For instance, it is no coincidence that the largest local banks in the UAE are all government owned, starting with the National Bank of Abu Dhabi. Infact, with the exception of the Al Ghurair family's Mashreqbank, the most entrepreneurial, open and pro-private sector economy in the Arab world has simply no major private sector banks. This is, however, something that may well change in the next decade.
While the Porter/Harvard model helps us to understand the myriad macro competitive forces that impinge on UAE bank strategies, unique local economic, social regulatory and demographic realities make the UAE one of the most fluid, complex and fascinating banking markets on earth. As a strategy consultant, I am sometimes stunned by the sheer money making potential in this market of products and ideas I source from Western Europe or Southeast Asian banks. Innovation, process reengineering, product launch, distribution ideas etc can and do mean a profit binge.
Innovation will help UAE bankers redefine their competitive edge, respond to new entrants/threats, boost margins and access new client constituencies. The bedrock of innovation can be a new technology infrastructure. For instance, Mashreqbank's success as one of the most successful reinvented retail banking businesses in the Middle East was preceded by a brand new technologist in the 1990's. On a smaller scales, Habib Bank AG Zurich embraced a technology revolution that transformed it from a sleepy, niche ethnic bank to one of the most modern, efficient international retail banks in the UAE. Yet, creating a lovely technological infrastructure is not enough - it has to be integrated with innovative leadership, viable strategy and an intelligent business model. Take Citigroup, for instance, present in the UAE since 1964. It has arguably the best brand in global finance, it is to banking technology what Mozart was to opera, its balance sheet exceeds a trillion dollars, its management includes the crme de la crme on Wall Street. Yet did Citicorp ever make 150 million year after year in the UAE, a feat Mashreqbank achieved in the 1990's under CEO Abdul Aziz Al Ghurair ? No. Why not? Stay tuned on Creek View as I travel to the curve of Sandy Weil in search of insight, ideas and illumination!
Creek View By Matein Khalid
© Khaleej Times 2004
