Identification of Linkage between Strategic Group and Performance of Indian Commercial Banks : A Combined Approach Using DEA and Co-Plot

This paper explores the linkage between strategic grouping and performance of the Indian banking sector. Strategic grouping and performance were identified using published financial information for all public sector banks. Grouping of Indian public sector banks following comparable financial strategy – with similar asset quality, operational efficiency and profitability was operationalized using the graphical display method of Co-plot. From their position in the two dimensional conceptual map, banks with identical financial performance formed strategic groups with significant positive linkage between better groups and their superior financial performance, which showed their inherent homogeneity in business policy decisions. Relative performance of the banks in terms of their efficiency in converting the resources to financial outputs was obtained using data envelopment analysis technique. The measures for potential financial improvements were obtained from the output slacks calculated. Efficient banks were found to be more profitable and their grouping as observed in the efficiency-profitability matrix was found to be identical to the strategic groups obtained using financial ratios. This paper offers a framework to commercial banks to make informed policy decisions about their competitive positioning in the target market, develop long-term strategic focus and identify a benchmark for improving their performance