Evaluation of Banks Using Porter's 5 Forces

Topics: Bank, Tesco, Royal Bank of Scotland Group Pages: 5 (1785 words) Published: May 5, 2012
This report will investigate how Porter’s five forces might be used to evaluate the future potential of modern banks, such as Tesco Bank and Virgin Money. This question has occurred through recent research into market structure and has highlighted its significance in the current market place by introducing more competition to traditional banks, supermarkets and other businesses. However, this also gives customers more choice in today’s climate, where in some cases banks have lost customers’ trust. Porter makes clear that when there is competition in the market place, every business should have a strategic plan so they are able to manage the competition. The plan should include the additional four factors; customers, suppliers, potential entrants and substitute products. These factors will form the “competitive interaction within an industry” (Porter, 2008:3-8) and will ultimately give an insight into how successful these new banks could be. Barriers to entering the banking industry include regulators such as the Financial Services Authority. Banks have a number of regulations they have to meet in order to get a banking licence. This takes a lengthy period of time to comply to prove “that they have the integrity, financial and managerial resources necessary to run a bank, that they are worthy of the trust that people expect to be able to place in the bank that holds their deposits and in many cases, their life savings” (Buckle & Thomson, year:page no). (The UK financial system: theory and practice By Mike Buckle, John L. Thompson) Thus it is very costly. Likewise this is not the only cost, when banks start-up they need a wide range of specialist contractors, buildings, and I.T. For example Tesco Bank recently built a new building in Glasgow creating 200 new jobs, thus it is pricey. However unlike some “barriers such as asset specificity” (Wengler, 2006:176) banks tend not to have this problem because although the buildings are costly and they have a lot of highly specialised I.T, it can be turned into another asset, so if you are an established firm like Tesco that could put these assets to other use, this is an attractive opportunity. To conclude, the set up costs of setting up a bank are enormous, therefore the chance of new banks entering the market is low, unless they are an already accomplished business with the finance to support them. There three factors that make suppliers powerful are “demand for suppliers products-more demands drives the price of supplies up in a market based system”. Secondly “whether quality and performance of inputs are differentiated-greater uniqueness of an input allows a higher price to be charged and decreases the ability of clients in firms in the industry to switch easily between suppliers” and finally “the ability of the industry to vertically integrate” because this would mean owning your own supply method, cutting the costs (Ahlstrom & Bruton, 2009: page no). Every industry requires suppliers and in banks they would supply I.T-computers, printers, telephony equipment and software. They would also need supplies of stationary-paper, pens etc. For example the Glasgow and Newcastle insurance and banking customer services in Tesco Bank signed a deal with Cable and Wireless for their managed data centres and hosted telephony (King, 2010). Kurtz, MacKenzie & Snow (2009:57) use Porters idea that “the number of available suppliers to a manufacturer or retailer affects their bargaining power.” Cousins (1999:112) states that “and due to the decision of the OFTEL regulator in July 1999 to remove this monopoly will benefit the consumer by allowing the access of new broadband technologies to his home”. Although the service is for businesses instead of homes, there are now many competitors in the cable industry, so the suppliers do not have as much power. However, in products like software, because of the specialist, patented, technology that has developed, they can charge high prices. Nevertheless in...
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