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 as profit. The program was a response to a massive closure of
bank branches in rural areas" [3]. Local businesses sign up as potential
clients, once the branch has enough collateral they open a shop front. These
customers then transfer their banking to Bendigo Bank.

Bargaining Power of Suppliers

Banks are supplied with money from their customers but this is only a very
small proportion of their supplier base. The international money markets
and to a lesser extent governments are the real suppliers for banks. "The
supply of money can only increase if the money is first "printed" by the

issuer of money, usually the government central bank. The central bank
"prints" coins and bills and electronic money."

The "printing" is usually done with the central bank buying government
debt. The government debt can be bought directly from the government or
from public holdings (primarily banks)." [4] These two institutions
(Government and money markets) wield extraordinary influence and power
on the banks. An example of their influence could be when the money
markets choose to lend money to the banks but with certain conditions, i.e.
they will lend a bank $200 million dollars but the bank can only use it on
loans in the industrial sector for a minimum $5 million, and for clients who
have no other loans, and clients must have a sales turn-over of $500,000.
These strict criteria on the lending mean that the money markets get to
protect their assets and demand a powerful influence over banks that need
money in order to lend it at higher rates and make a profit.

Summary
The competitive environment for banks has certainly changed in the last two
decades. In the earlier days banks were regulated and powerful as they had
little competition. With the advent of new technologies and the deregulation
of the sector banks are in a far more competitive environment. By using
Porter's five basic forces of competition banks can review their strategies for
todays environment and emerging trends. A website epaynews reveals that
there were 34.4 million online banking users in 2000 for the world. By 2004
this number had risen to 122.3million [5], with this significant market shift
and with a much more competitive market the banking sector needs to
review their services and products. As Keen points out "Banks need to think
carefully about what is their own brand,and their own
product/channel/customer. What can they offer to the variety of players
with so many strategies which are in the middle of what is clearly a
revolution in just about every aspect of customer services and relationships?
Success in electronic commerce depends on making a distinctive
contribution to these players" [2]. For the banking sector it is time for a
wake up call as the external environment has changed the forces of
competition and awoken a new spirit of competition in a previous noncompetitive dominating sector.

References:
[1] Capon, C (2004) "Understanding Organisational Context", 2nd Edition.
Pearson Education Limited: Essex, England, pg. pages 363 368 [2]
http://www.peterkeen.com/recent/books/extracts/ediecb05.htm#preds_franc
h_brands [3] http://en.wikipedia.org/wiki/Bendigo_Bank

[4] http://en.wikipedia.org/wiki/Money_supply#Money_Supply_and_Cash [5]

http://www.epaynews.com/statistics/bankstats.html