Porter Five Force Model
Porter Five Force Model
Michel porter five force model is an analysis tool that uses five industry forces to determine the
intensity of competition in an industry and its profitability level. He identified five forces that
make up the competitive environment are-:
• Threat of substitutes
This force determines how easy or difficult it is to enter a particular industry. If an industry is
profitable and there are few barriers to enter, rivalry soon intensifies. Threat of new entrants in
banking industry is moderate
As require huge capital to enter put still the competition is high because of technology
companies, fintech start-ups and challenger banks continue to be be viewed as a triple
threat, with 77% of banks believing that the overall threat is high or very high from these
players. Payments (86%) and mobile wallets (78%) are the areas where disruptors are
expected to have the greatest impact, with products like areas like savings, insurance and
investments viewed as having the lowest risk.
The banking industry can do little to retaliate with the competitors.
• Products in which banks deal are nearly similar such as FD, TD, savings etc interest rate.
By innovating new products and services. New products not only brings new customers
to the fold but also give old customer a reason to buy HDFC Bank Limited ‘s products.
By building economies of scale so that it can lower the fixed cost per unit.
Building capacities and spending money on research and development. New entrants are
less likely to enter a dynamic industry where the established players. It significantly
reduces the window of extraordinary profits for the new firms thus discourage new
players in the industry.
Capital is the primary resource on any bank and there are four major suppliers (various other
suppliers [like fees] contribute to a lesser degree) of capital in the industry.
1. Customer deposits.
2. mortgages and loans.
3. mortgage-baked securities.
4. loans from other financial institutions.
By utilizing these four major suppliers, the bank can be sure that they have the necessary
resources required to service their customers' borrowing needs while maintaining enough capital
to meet withdrawal expectations. The power of the suppliers is largely based on the market, their
power is often considered to fluctuate between medium to high.
Some of the banking industry's largest threats of substitution are not from rival banks but from
non-financial competitors. The industry does not suffer any real threat of substitutes as far as
deposits or withdrawals, however insurances, mutual funds, and fixed income securities are some
of the many banking services that are also offered by non-banking companies.
There is also the threat of payment method substitutes and loans are relatively high for the
industry. For example, big name electronics, jewelers, car dealers, and more tend to offer
preferred financing on "big ticket" items. Often times these non-banking companies offer a
lower interest rates on payments then the consumer would otherwise get from a traditional bank
loan.
The banking industry is considered 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. They do
this by offering lower financing, higher rates, investment services, and greater conveniences than
their rivals. The banking competition is often a race to determine which bank can offer both the
best and fastest services, but has caused banks to experience a lower ROA (Return on Assets).
Given the nature of the industry it is more likely to see further consolidation in the banking
industry. Major banks tend to prefer to acquire or merge with other banks than to spend money
marketing and advertising.
How bank can tackle Intense Rivalry among the Existing Competitors in Foreign Regional
Banks industry