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FIVE FORCES SHAPEING THE BANKING INDUSTRY

Tarun kacker 0911325 Suvansh Mengi - 0911323

. y The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.The purpose of Five-Forces Analysis y The five forces are environmental forces that impact on a company s ability to compete in a given market.

Porter s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants .

Threat of New Entrants Economies of Scale Barriers to Entry Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Expected Retaliation .

What would it take for an insurance company to start offering mortgage and loan services? Not much.Threat of New Entrants y . but there are services. on which entrepreneurs can capitalize. y Another trend that poses a threat is companies offering other financial services. The average person can't come along and start up a bank. Banks are fearful of being squeezed out of the payments business. because it is a good source of feebased revenue. remember that the possibility of a mega bank entering into the market poses a real threat. . when analyzing a regional bank. y Also. such as internet bill payment.

Porter s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers .

Bargaining Power of Suppliers Suppliers are likely to e powerful if: Supplier industry is dominated by a few firms Suppliers exert power in the industry y: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profita ility if firms are una le to recover cost increases Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs Supplier poses credible threat of forward integration .

If a talented individual is working in a smaller regional bank. there is the chance that person will be enticed away by bigger banks. etc. . investment firms.Power of Suppliers y The suppliers of capital might not pose a big threat. but the threat of suppliers luring away human capital does.

Porter s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers Bargaining Power of Buyers .

Bargaining Power of Buyers Buyer groups are likely to e powerful if: Buyers are concentrated or purchases are large relative to seller s sales urchase accounts for a significant fraction of supplier s sales roducts are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration roduct unimportant to quality Buyer has full information Buyers compete with the supplying industry y: * Bargaining down prices * Forcing higher quality * Playing firms off each of other .

it can be extremely tough for that person to switch to another bank. more services. and exposure to foreign capital markets . checking account and mutual funds with one particular bank. y On the other hand. If a person has a mortgage. banks try to lower the price of switching. but one major factor affecting the power of buyers is relatively high switching costs. . The individual doesn't pose much of a threat to the banking industry. car loan. large corporate clients have banks wrapped around their little fingers. but many people would still rather stick with their current bank. credit card. In an attempt to lure in customers.Power of Buyers y .work extremely hard to get high-margin corporate clients. Financial institutions by offering better exchange rates.

Porter s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Su stitute Products .

Threat of Su stitute Products Keys to evaluate su stitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mai delivery .

Banks offer a suite of services over and above taking deposits and lending money. mutual funds or fixed income securities. why would anyone want to get a car loan from the bank and pay 5-10% interest? . If car companies are offering 0% financing. General Motors (NYSE:GM) and Microsoft (Nasdaq:MSFT) all offer preferred financing to customers who buy big ticket items. chances are there is a nonbanking financial services company that can offer similar services. but whether it is insurance. banks are seeing competition rise from unconventional companies. On the lending side of the business. Sony (NYSE: SNE). there are plenty of substitutes in the banking industry.Availa ility of Su stitutes y As you can probably imagine.

Porter s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Su stitute Products .

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions Occurs when a firm is pressured or sees an opportunity often leaves the entire industry worse off Price competition Advertising battles may increase total industry demand. but may be costly to smaller competitors .

Because of this. They then have an incentive to take on high-risk projects. y Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people. y They do this by offering lower financing. In the long run. The financial services industry has been around for hundreds of years.Competitive Rivalry y The banking industry is highly competitive. we're likely to see more consolidation in the banking industry. preferred rates and investment services. and just about everyone who needs banking services already has them. . but this also causes banks to experience a lower ROA. banks must attempt to lure clients away from competitor banks. The banking sector is in a race to see who can offer both the best and fastest services.

the five forces affect all the other businesses in that industry. y Yet.The Five Forces are Unique to Your Industry y Five-Forces Analysis is a framework for analyzing a particular industry. .