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 .