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  • Porter Five Force Model

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    Abhishek
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    The Porter Five Forces model identifies five competitive forces that shape every industry: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among existing competitors. The document discusses each of these forces as they relate to the banking industry, noting moderate threats from new entrants due to regulatory barriers and capital requirements, medium to high power of suppliers of capital, increasing power of buyers due to the internet enabling easier comparison, threats from non-banking substitutes offering similar services, and high competition among existing banks. It provides strategies banks can use to mitigate threats from each force, such as innovation, economies of scale, and differentiation.

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    Porter 5 force model on the banking industry

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    PORTER FIVE FORCE MODEL

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    The Porter Five Forces model identifies five competitive forces that shape every industry: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among existing competitors. The document discusses each of these forces as they relate to the banking industry, noting moderate threats from new entrants due to regulatory barriers and capital requirements, medium to high power of suppliers of capital, increasing power of buyers due to the internet enabling easier comparison, threats from non-banking substitutes offering similar services, and high competition among existing banks. It provides strategies banks can use to mitigate threats from each force, such as innovation, economies of scale, and differentiation.

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    © All Rights Reserved
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    306 views5 pages

    Porter Five Force Model

    Uploaded by

    Abhishek
    The Porter Five Forces model identifies five competitive forces that shape every industry: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among existing competitors. The document discusses each of these forces as they relate to the banking industry, noting moderate threats from new entrants due to regulatory barriers and capital requirements, medium to high power of suppliers of capital, increasing power of buyers due to the internet enabling easier comparison, threats from non-banking substitutes offering similar services, and high competition among existing banks. It provides strategies banks can use to mitigate threats from each force, such as innovation, economies of scale, and differentiation.

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    © All Rights Reserved
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    of 5

    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 new entrants.

    • Bargaining power of suppliers

    • Bargaining power of buyers

    • Threat of substitutes

    • Rivalry among existing competitors


    Threat from new entrant-:

    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.

    • It is governed by government regulation.

    • Products in which banks deal are nearly similar such as FD, TD, savings etc interest rate.

    • Reaching economies of scale is a difficult task.

    How bank can tackle the Threats of New Entrants

     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.

    Bargaining Power of Suppliers

    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.

    How bank can tackle Bargaining Power of the Suppliers

     By building efficient supply chain with multiple suppliers.


     By experimenting with product designs using different materials so that if the prices go
    up of one raw material then company can shift to another.
     Developing dedicated suppliers whose business depends upon the firm.

    Bargaining Power of the buyer


    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 one bank that
    services their banking needs, mortgage, savings, checking, etc, it can be a huge hassle for that
    person to switch to another bank.
    To try and convince customers to switch to their bank they will often times lower the price of
    switching, though most people still prefer to stick with their current bank.
    The internet has greatly increased the power of the consumer in the banking industry. The
    internet has greatly increased the ease and reduced the cost for consumers to compare the prices
    of opening/holding accounts as well as the rates offered at various banks.
    ING Direct introduced high yield savings accounts to catch the buyers' attention, then they went
    a step further and made it very easy for customers to transfer their money from their current bank
    to ING. ING was successful in their attempt because they managed to make switching costs very
    low in terms of time and capital.
    How bank can tackle the Bargaining Power of Buyers
     By building a large base of customers. This will be helpful in two ways. It will reduce the
    bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its
    sales and production process.
     By rapidly innovating new products. Customers often seek discounts and offerings on
    established products
     New products will also reduce the defection of existing customers of HDFC Bank Limited to its
    competitors.

    Threats of Substitute Products or Services

    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.

    How bank can tackle the Treat of Substitute Products / Services

     By being service oriented rather than just product oriented.


     By understanding the core need of the customer rather than what the customer is buying.
     By increasing the switching cost for the customers.
    Rivalry among the Existing Competitors

    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

     By building a sustainable differentiation


     By building scale so that it can compete better
     Collaborating with competitors to increase the market size rather than just competing for small
    market.

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