FIVE FORCES SHAPEING THE BANKING INDUSTRY

Tarun kacker 0911325 Suvansh Mengi - 0911323

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. 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.

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

Threat of New Entrants

y . The average person can't come along and start up a

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

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

Power of Suppliers
y The suppliers of capital might not pose a big

threat, but the threat of suppliers luring away human capital does. If a talented individual is working in a smaller regional bank, there is the chance that person will be enticed away by bigger banks, investment firms, etc.

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

Power of Buyers
y . The individual doesn't pose much of a threat to the

banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure in customers, banks try to lower the price of switching, but many people would still rather stick with their current bank. y On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions by offering better exchange rates, more services, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients.

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

Availa ility of Su stitutes

y As you can probably imagine, there are plenty of

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

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

Competitive Rivalry
y The banking industry is highly competitive. The financial

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

The Five Forces are Unique to Your Industry

y Five-Forces Analysis is a framework for

analyzing a particular industry.

y Yet, the five forces affect all the other businesses in

that industry.