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Porter’s five-factor model provides a structure for analyzing the investment value of an industry or market/submarket, i.e., how profitable the average firm in the industry will be. Using this structure, assess whether each of the five factors is "good", "bad", or "uncertain" news for the retail banking industry (e.g., Wells Fargo, Fifth Third, etc.). Based on this analysis, what level of ROI would you expect firms in the industry to achieve, on average?

Question

Porter’s five-factor model provides a structure for analyzing the investment value of an industry or market/submarket, i.e., how profitable the average firm in the industry will be. Using this structure, assess whether each of the five factors is "good", "bad", or "uncertain" news for the retail banking industry (e.g., Wells Fargo, Fifth Third, etc.). Based on this analysis, what level of ROI would you expect firms in the industry to achieve, on average?

check_circleAnswer
Step 1

Porter’s Five Forces Analysis: Porter’s five forces framework is a method to analyze competition for any business. According to this method, the industry whose overall profit decreases due to these five forces is called an unattractive industry.

Porter’s Five Models are as Follows:

  1. Industry Rivalry
  2. Power of Suppliers
  3. Power of Buyers
  4. Threat Substitutes
  5. Threat of New Entrants
Step 2

Assessment of Porter’s Five Factors for Retail Banking Industry

 

  1. Industry Rivalry

Banking sector is known for its competitiveness. Competition with other banks may force the banks to:

  1. Decrease interest rates on loans
  2. Offer higher rates on deposits
  3. Provide more services for customers’ convenience.

These kind of services can help them to retain customers, but there is uncertainty whether it will increase the customer base as much as the bank expects as rivalry and services offered to customers may decrease the return on assets and bank must achieve the target of certain number of customers for its different activities to cover this.

Thus, the result is Uncertain.

 

  1. Power of Suppliers

Banking Sector needs adequate capital to run the bank and compete in this highly competitive sector. Customer deposits, loans from other financial institutions, etc. are some major sources of capital. If the bank gets adequate capital from their suppliers, then it will be easy for the bank to achieve the target. Thus, it depends on the power of suppliers whether these sources are able to meet the expectations or not.

Therefore, Power of Suppliers is Good for the bank.

 

  1. Power of Buyers

The power of buyers is not a much relevant factor in banking industry because customers hardly switch banks and close their existing accounts. Given that switching of bank accounts involves high costs, customers try to get all the required banking services from a single bank. This creates a problem for banks because they are not able to attract new customers easily. To solve this problem, banks need to lower rates on loans or provide more flexibility in other services too. Th...

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