Core Competency; What is its Advantage for Banking Sector?

As the competition gets tougher in banking sector in Turkey, the banks are trying to find or develop different applications in order to be in that competition. We know that the banking in Turkey has been improving since the financial deregulations have accepted in 1980. The former governments have understood that in order to develop the economy and help the real sector, the subsidizations of the government were not enough. There should be a sector which can create money and pump into the market. This role has been previously assigned to the state banks which were Ziraat Bankası, Halk Bankası, Emlak Bankası, Sümerbank, Denizbank, Vakıfbank etc. But, after the effect of globalization which has affected all world, some of the state banks have been sold to other Turkish or foreigner investors. Therefore, this role of the state banks has transferred to all banks regardless of their ownership.

 

However, since the conditions are completely different than 30 years ago, the banks know that they need to find new customers which should be satisfied by using different lines of business. Although the population is rapidly growing in Turkey and the potential of new customers is very high due to the high young population; there are several banks in the sector which are active in different types of products. The experienced banks and well known foreign banks are usually preferred by the customers due to their reliability. But, after the spread of internet, a big revolution happened in the life styles of the customers and they understand that they can bank through information channels such as WAP banking, internet banking, mobile banking etc. Although only about one decade has passed after the use of internet, the banks have gone under big transformation to attract more customers. This has given a big competitive advantage to some banks which have previously invested into the information technology.

 

The technology is always being improved with the most recent trends and the staff is chosen according to this change in the technology. This technological capability puts the banks a head of the others since they can easily develop new products and derivatives of the existing products with this new technology. In this study, we will try to show this technology and core banking as a core competency of the bank.

 

Before going into detail, we need to define core competency. Core competency is something that a company can do well and that meets the following three conditions:[1]

·         It provides consumer benefits,

·         It is not easy for competitors to imitate,

·         It can be leveraged widely to many products and markets.

 

A core competency is a fundamental knowledge, ability or expertise in a specific subject area or skill set. For example, an individual who becomes certified as a Microsoft Certified Software Engineer is said to have a core competency in certain Microsoft systems and networks.

 

Core competencies are extreme capabilities that serve as a source of competitive advantage for a firm over its rivals. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.

 

The core competency of a company depends on the three major factors which help the company to differentiate among the others. This core competence gives the company a competitive advantage to attract more customers. Furthermore, since it is very difficult to copy the core competency of a company, the company can use it before a new and more differentiated ability, expertise or knowledge is discovered.

 

Furthermore, the core competencies of the companies should be determined according to their financial impact. This means that the activities or processes that are not the core competencies of the company will not have big financial impact on the activities. These should be outsourced. However, the others should be seen as the core competencies of the company since they satisfy all conditions depicted above.

 

Core Competency Financial Impact Analysis

 

The areas shown in the above figure represent the following:[2]

·         First Area: Low Core Competency Relevance, Low Financial Impact: They could be outsourced as early as possible since they are not core to the business and their financial impact may be minimal.

·         Second Area: High Core Competency Relevance, Low Financial Impact: These are the business processes that could be easily outsourced but you may need to seek out specialists in that area.

·         Third Area: Low Core Competency Relevance, High Financial Impact: These are business processes that are the last to be outsourced.

·         Fourth Area: High Core Competency Relevance, High Financial Impact: These could be business processes that the company may not want to outsource at all. The company is making money on the transactions coming mainly from this area.

 

As it was discussed above, the core competency of a company is the main source of the competitive advantage. Competitive advantage occurs when the company makes profit that exceeds its industry average. The way to do it has been shown by Michael Porter as follows:[3]

·         Cost advantage

·         Differentiation advantage

 

These two items are the main competition strategies of Porter and they give cues to the company to decide on which strategy is the best for them. They need to look into their organization and decide on one of them or both of them.

 

After defining the competitive advantage, we need to show the effect of the core competency to this advantage in the following figure.

 

Effect of Core Competence to Competitive Advantage

 

When we revisit banking, the first thing that the bank should have is the sufficient capabilities and resources which will give the bank a few core competencies. These core competencies will be used to design new processes or products that will either have a cost advantage or differentiation advantage that will make the bank different from the sector by means of either price or attributes of the product or process. This will create value which will lead the bank to have the competitive advantage over the others. Since the bank will create competitive advantage by using its core competencies that cannot be imitated easily, the competitive advantage will last for a long time.

 

 

In order to show how a bank can differ from the others by using technology, we can have the core banking infrastructure as an example. This has been selected as one of the few core competencies of the banks due to the following reasons:

• It cannot be imitated easily by the other banks since they are developing it by their own information technology department. They don’t mainly depend on the outsourcing companies.
• If the system wanted to be imitated by the other banks it will take at least three years to implement this system. The gap analyses can be done in one year and the implementation and the training will last for another two years. Therefore, three years is quite long for adapting a new technology which is being used by a rival in the sector. This means that the imitator accepts to be backward by three years from the bank which has previously developed its own core banking system
• The system would be very flexible and could be used for each product or activity without referring to another system. This shows that the bank can use the system to develop different products which targets different customers.
• This creates customer loyalty and it gives opportunity to the customer to use the company products as per his or her interest.

 

These show that the bank which has a core competence over its rivals creates a big advantage in the market. I think in the future, the big banks will try to implement their own systems which do not depend on mainly the vendors.

 

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[1] Wikipedia, “Core Competency”,  http://en.wikipedia.org/wiki/Core_competence#cite_note-0

[2] Nari Kannan, “A Simple Way To Use Core Competency and Financial Impact Analysis in Outsourcing Planning”, http://www.sourcingmag.com/content/c060830a.asp

[3] Quickmba, “Competitive Advantage”,  http://www.quickmba.com/strategy/competitive-advantage/