The Porter Five Forces Model

Explain The porter’s Five Forces Model.

 

 

Michael Porter developed Porter’s five forces model. It is a business tool or a framework that helps in examining the strength of the five forces that govern competition within industry. The five forces help in analyzing the level of competition within the companies in an industry. The main aim of developing Porters five forces is to help the firms achieve competitive advantage. The companies know the competitive position that they hold in the market. The five forces of Porters analysis are the bargaining power of supplier, bargaining power of buyers, threat of substitutes, threat of new entrants and industry rivalry (E. Dobbs, 2014).

Wells Fargo bank is an American international company that provides international banking and financial services to its customers. It is the world’s largest bank in terms of market capitalization and third largest bank in United States in terms of assets. The main competitors of the company are JP Morgan and chase, Prudential financial and ING group. Porter’s five forces are also known as Industry and competitive analysis (Wellsfargo.com, 2016)

Wells Fargo is a diversified financial services bank that is engaged in providing many financial services to its customers. The power of supplier in this case is very strong as the industry is diversified. The power of the buyers is also strong due to strong purchasing power (Mburu, 2015). Porters five forces model for the banking industry is presented as follows:

 

The threat of new entrants is high for Wells Fargo bank with two hundred and fifteen new banks opening each year. The advantage is that many banks close due to bank failure and the average number of banks decrease. The other reason for decrease in numbers of banks is merger. The biggest barrier for the entry of banking industry is trust. Many companies from outside the industry try to enter and capture wealth. Since Wells Fargo is a diversified company, the threat of new entrants is high. For example, an insurance company can enter the market and start providing loans at cheaper interest rate (Rothaermel, 2015). This will increase the competition for the company. However, the capital requirements and strict regulations by the government hinder the new company from entering the industry. Brand recognition is also an essential factor that helps in determining the threat for new companies to enter the market. Product differentiation is another factor that plays an important role. Wells Fargo Company has an advantage over these factors because the company distinguishes itself from other companies by providing high quality customer service. An established brand makes it difficult for new companies to develop due to failure of brand recognition. Creating a large-scale customer base and infrastructure is essential for generating profit and achieve competitive advantage (Alt & Puschmann, 2012).

 

Substitutes and complements play a crucial role in the banking industry. The banking and financial services have a wide range of substitutes and complements. Many products can maximize wealth that acts as substitutes. For example, complement of standard checking account is ATM cards. The main strategies of the banks are to label the price of complements low in order to attract as many customers it can. The price of switching products or banks increases so customers do not shift its bank easily as it will increase their cost. If a firm has strong grip over its customers then the threat of substitutes become low as is the case with Well’s Fargo bank. The main aim is to strengthen the power of complements and reduce the power of substitutes (Rothaermel, 2015). Increase in interest’s rates leads the customers to switch to substitute products with traditional banking assets such as savings and traditional accounts. It is the responsibility of the bank to form a group of customers in such a way so that they avoid switching to substitute product. Viability of a substitute product weakens the power of the firm as customers can easily switch to other firm (Montes-Stewart, 2013).

Suppliers have a great power in case of financial industry. Since Well Fargo is diversified company that is engaged in providing distinguishing financial services. The company is involved in providing various financial services, conventional banking and small and medium loans operations. The supplier power in case of banking sector is low in case of customer retention and high in case of determining the rates of interests and other prices. In case of a pure banking sector where the company is not involved in supplying diversified financial services the bargaining power of suppliers is almost negligent due to the lack of supply chain process. The infrastructural products such as machines used in the operations gives some powers to suppliers. Price discrimination does exist as the banks may charge higher interests rates from the people who can afford it (Montes-Stewart, 2013). The four major suppliers in case of banking sectors are capitals such as customer deposits, mortgages and loans, mortgage securities and loans from other financial institutions. The power of suppliers depends on the market where the power is said to fluctuate between medium to high.

 

Buyers also play an important role due to strong purchasing power. The real competition starts after determining the amount of the power of buyers. However, the customers cannot influence the prices directly but they can affect it indirectly. The buyers have little ability to influence the price on the retail side of the banking sector. Transaction process is different for customers and clients. The commercial side of the banking sector has greater influence as the power of the buyer. It is essential for the banks to fulfill the needs of the customers according to their demand in order to achieve competitive advantage (Christensen et al., 2013). Satisfying the needs of the customers should be the top most priority of banks in order to improve its customer loyalty. The major factor that influences the buyer behavior is high switching cost. Another factor that has strengthened the power of buyer is internet. Banking has become easy due to internet as it also reduces the cost for consumers.

The banking industry is highly competitive in nature. The bank uses various techniques to compete with its competitors such as price competition, quality and differentiation methods. The main aim of Well Fargo Company is to provide best quality banking and financial services to its customers (Mburu, 2015). The bank provides various price competitions to customers who utilize maximum services. Cross selling is the strategy that the bank plans to use in future strategy to strengthen its plan and achieve competitive advantage. Interest’s rates play a major role in determining the competitive advantage for the firm. The main factor over which the banks compete is services that it provides to its customers. In order to avoid competition many banks end up merging so that the money can be expanded for marketing and advertisement (Hyun & Kang, 2015).

 

Banking sector is a highly competitive sector where the companies have high threats of new entrants, threat from substitutes and complements, threat from industry rivalry and bargaining power of buyers and sellers. There are various factors and methods that the banks can use o achieve competitive advantage. The technique used by Wells Fargo bank is product differentiation and quality service that it provides to its customers. The main factor that differentiates one bank from the other is the services that they provide.

 

Alt, R., & Puschmann, T. (2012). The rise of customer-oriented banking-electronic markets are paving the way for change in the financial industry.Electronic Markets, 22(4), 203-215.
Christensen, C., Anthony, S., & Roth, E. A. (2013). Seeing what’s next: Using the theories of innovation to predict industry change. Harvard Business Press.
E. Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.
Hyun, A., & Kang, H. (2015). Similarities And Differences Of Industry Leaders’ Competitive Advantages. Leadership & Organizational Management Journal, 2015(2).
Keys to competitive analysis. (2016). Wellsfargoworks.com. Retrieved 25 July 2016, from https://wellsfargoworks.com/run/competitive-analysis
Mburu, P. G. (2015). Competitive strategies adopted by Wells Fargo (K) Limited to enhance competitive advantage (Doctoral dissertation, University of Nairobi).
Montes-Stewart, I. (2013). Strategizing for Corporate Social Responsibility: Wells Fargo Case. OSR, 6.
Porter’s 5 Forces and the Banking Industry – The Banking Industry And The Internet. (2016). Sites.google.com. Retrieved 25 July 2016, from https://sites.google.com/site/bankingindustryandtheinternet/home/5-forces
Rothaermel, F. T. (2015). Strategic management. McGraw-Hill.
Wells Fargo – Personal & Business Banking – Student, Auto & Home Loans – Investing & Insurance. (2016). Wellsfargo.com. Retrieved 25 July 2016, from https://www.wellsfargo.com