Porter's Five Basic Forces of Competition - Analysis of the Banking Industry

Introduction

A number of the students in the class work in the banking industry and as such I have chosen to focus on the this industry for this discussion. I will analyses each of Porter’s five basic forces of competition as described in Capon’s book “Understanding Organisational Context” [1, pages 363 - 368] and apply these to the banking industry.

Over the last decade the way we bank has dramatically changed as banks move from a “bricks and mortar” operation to a “virtual on-line operation”. Whilst most banks will probably never get rid of all their “brick and mortar” operations, there are some that have successfully started up with no shopfronts and yet they are successful. Banking is big business, everywhere in the world they are big and powerful, but as Keen observes “bank offers basically the same product to the same customer base”[2]. So what makes a consumer choose one bank over another? Not all banks make huge profits but banks position themselves to attract customers through product differentiation, pricing, marketing and promotion and this makes the difference and thus will be examined using Porter’s five forces of competition.

Competitive Rivalry

The banking sector is well established and consequently rival is fierce to maintain market share. In order to gain a higher market share in such a competitive environment is through differentiation. The problem for the banking sector is that when technologies first get developed, for e.g. ATM’s the bank that first adopts and promotes the product usually obtains a lion’s share of the market, but this is usually very short term as market competitor’s very quickly catch up. In fact, with by the internet banking came about most people didn’t change banks because they knew it wouldn’t be long before their bank adopted this technology as well. With the hassle of changing banks customers are usually reluctant to change to change so this didn’t not change the market share all that much.

Threat of New Entrants

With easing of regulatory rules in many countries new banks are emerging almost daily. Due to these banks entering a well established and mature environment they must come up with a value added service or a discount service in order to survive. Trends here indicate that many banks are being established through existing companies and they are using their current client base to gain entry to the market. For example, insurance companies and supermarket chains.

Threat of Substitute Products or Services

Two decade ago the traditional banks had no competition in this area. The banking industry was heavily regulated for e.g. loans were only available through them. Now we see credit unions, pawn shops, and independent lenders all loaning money. Consumers with low credit ratings are drawn to some of these options as a means to obtain a loan that the banks have denied them.

Services traditionally provided by banks are also being erode by “predators” as Keen observes “Other predators include non-bank leaders in credit cards such as Sears and AT&T, which exploit business logistics links to banks and other organisations for services such as telecommunications processing and payments.” [2] , by the same token the banks are doing the same to other industries like the industry. Keen demonstrates this when he cites “First Line, an insurance service set up by a bank, captured 20 percent of the UK car insurance market in its first two years of operation by carefully focusing on a simple product in terms of knowledge demands.” [2]

Bargaining Power of Buyers

The consumers are the buyers in this industry. Whilst one consumer leaving does not have an impact, many consumers especially if they are businesses rather than personal customers can have an impact. The banks have traditionally had a significant bargaining power as businesses and personal customers are highly dependent on their services and especially their viability. The cost of switching loans to another institution and the amount of effort required gives the banks even greater bargaining power. With the traditional “bricks and mortar” bank closing down, banks were forcing consumers to operate their way, i.e. electronically. In Victoria, Australia, one regional bank decided to go against the trend. Bendigo Bank decided to aim for the service orientated market and went with an “innovative franchise program in which the local community owns and operates a Bendigo Bank branch. Bendigo Bank provides all the banking infrastructure and support. The community company and Bendigo Bank share all branch revenue with whatever is left over after the company pays its branch running costs remaining