Wednesday, March 26, 2008

Applying Porter's 5 Forces Model to Banking Inudstry

Porter's 5 Forces Model is a reality check to see if a industry is attractive enough to enter. The 5 forces are: 1)Threats from new or potential competitors. 2)The intensity of competition among existing firms. 3)The power of the suppliers. 4)The power of the customers. 5)The easiness of changing to substitute products. If all of those forces are high then the industry is less favorable to enter. Before entering a industry, one firm should check whether those forces is low, so its favorable for the firm to enter.

Banking industry is among the most competitive industry. Which happen to be the industry I am working in. Lets break it down and see how Porter's 5 Forces Model apply in this industry.

Force 1: Threats from new or potential competitors--- Low---This might be the only force that will score a low. Opening a bank requires a lot of capital. Every member of the board of directors need to be checked and verified by the fed, this usually takes a long time. The filing also takes a long time for the fed to approve.

Force 2: The intensity of competition among existing firms---High--- As you can see, banks are branching everywhere. The banks are offering incentives for opening accounts. You might heard of "Free Checking for Life", "No ATM fee EVER", "FREE $75 for opening a new account". Some of the bankers are required to open certain amount of accounts every month. This makes the competition very fierce.

Force 3: The power of the suppliers---High--- There is only one supplier, the fed. All bank in the United States has a account with the Fed. This is account number is their routing number. This means that Fed has total control over the industry. A little change in interest by the Fed will have tremendous effect on the whole industry. Other key influences are fed fund rate, required reserve ratio, etc..

Force 4: The power of the customers---High---If the customer doesn't like anything, and I mean anything of his/her bank. He can open account in another bank, which it won't take him more than 30 minutes. This is why customer service is becoming so important in this industry. The bank I work at offers a tons of stuff for the customers, including: free pens, free coining counting machine, lollipops, dog biscuit, even a greeter at the door, etc.

Force 5: The easiness of changing to substitute products---Medium---Customers can always put money somewhere to make a little interests, there are all kind of bonds, mutual funds, stocks etc. However, the power of check clearing of the banks are undeniable. All the paychecks, payments goes through some banks to clear. Imagine if there is no banks to clear checks, then the whole economy will goes in halt. There are other financial institutions other than banks, such as thrifts, credit union, etc

Porter's 5 Forces Model says that banking industry is unfavorable to enter since most of the forces scored high.

10 comments:

Madoc Okaikoi said...

I like your analysis as you make your points clear and orderly.

I ran this industry through Porter's model and I came up with an attractive industry. Some of the factors that influenced my analysis are (a) The Fed (supplier) is not the government - it's a representative reserve board of the participating banks themselves (they supply each other and lend to each other); (b) there aren't much substitutes to banking services. Even if you wanted put your money in a some other investment or trading account, it will be nearly impossible to use a credit/cooperative union account as your fund source; etc. . . .

I think what this difference tells us is exactly what others have cited, that Porter's model yields different results when applied by different analysts.

Thanks

Lala said...

A nice and easy to read entry :)

While thinking of an industry to write the blog about, the banking industry never came to mind, so it's interesting that you have chosen to analyze it. You have made excellent points on each force.

I definitely agree with Force 4, the power of the customers, because nowadays, signing up for a bank is the easiest thing to do and takes no time at all. You can even do it online!

To comment on Force 2, the intensity of competition among existing firms, the incentives that banks offer for consumers to sign up for their accounts are incredible. I actually got an iPod shuffle from Chase just for opening a checking account and signing up for direct deposit.

Again, great analysis--keep it up :)

HONORE YONLI - yonloss@gmail.com - 6462061960 - http://yonlossblog.blogspot.com said...

Allan , Good job
Your arguments were simply clear as someone said previously. It was easy to read and keep it on.

Yuan Li said...

You did a great job by applying Porter’s 5 force model into Banking industry. You analysis is very clear and straight to the point. I agree with you that banking industry is highly competitive and unfavorable for the investors.

Nirjhar I. said...
This comment has been removed by the author.
Nirjhar I. said...
This comment has been removed by the author.
Nirjhar I. said...

I thought your post was interesting since you were the only one who did Banking and I also have some personal interest to it as well. I work in the Banking Industry also, though not directly in a bank, but I have in the past.
Anyway, I have two points regarding your post. Since you mentioned there is only one supplier—the FED—doesn’t that give them a lot of bargaing power? I would think this is low attractiveness, given that the FED pretty sets its own rules and regular and has major in influences on the interest rates and money supples.
And also, I will have to both agree and disagree with you about the substitute products for banking. I think someone who has a lot of money would need a bank,instead of having it sit at home; but for someone who barely earns enough to save, they may be able to get away with replacing banks with check cashing places and mutual fund brokages.
PS: I apologize for posting and deleting so many times, first it didn't go through and then it showed up all togather.

ewqasd said...

HI SIR:
Good points and nice analysis
I 'm Mahdi Zare (male) from Iran . I'm studying banking in Iran Banking Institute for MS. I'm writing my thesis "a survey of factors influencing the formulation of marketing strategy of Tejarat Bank ", by using porter's five forces. I work for bank Tejarat, a big state-owned commercial bank in Iran . I need a thesis or an article that a state-owned (public) bank has used porter five forces framework to evaluate its industry. Would you please help me by introducing such a bank .I need your extra help, guidelines or information about this?
Best

Hayk Minasyan said...

Interesting job.

It will be more interesting, if you add some quantitative ratios for comparison with different banking systems of different countries.

yaqoot said...

well, i m feeling better after read this analysis, my paper of strategic mgmt will be held on thursday dated 28-11-2013, p5f included in my course thnxxxxxxxxxx buddddyyyy