Question

Globalisation is at work in banking industry, where globalisation refers to increase in competition by foreign competitors and home institutions’ doing business in the global market. To face up to the challenges of the internationalisation process banks of all sizes and from different countries should deal with long‐term issues and industry analysis as well as firm-specific strategies. Banks are no longer in the business of buying (i.e. saving) and selling (i.e. lending) money but that of offering complete financial services to the banking public. Australia’s major banks include CBA, ANZ, NAB and Westpack.

Drawing on the M. Porter’s Five Forces Model, analyse how entry barriers from global markets affects (average) profitability of the four banks

Answer 1

Let us first know what are Micheal Porter's 5 forces

1. Threat of new enterants - To open a new bank, huge capital investment is required. Moreover, there are lots of regulatory issues like government regulations for licensing, etc. It is difficult for new banks to start up due to involvement of money & financial information of other people. People tend to trust big brand names that are well known big banks, which, according to them are trustworthy. With competition already existing between the existing big players, a bank in order to be on top of its games has to innovate by providing new products and services, reaching economies of scale to lower its cost.

2. Bargaing power of suppliers - In banking industry, capital is the major resource and primarily there are 4 suppliers of capital i.e. Deposits of the customer, loans & mortgages, mortgaged securities and loans taken from other financial institutions. Through these major suppliers, the bank can meet its requirements like borrowing needs of the customers and at the same time keeping enough money to fulfill withdrawal requirements. A successful bank can overcome this obstacle by building effecient supply chain, developing dedicated suppliers whose business depend on them.

3. Bargaining power of buyers - This cannot be considered a major threat for the banks. A buyer always want to buy the best offerings available by paying the minimum price as possible.

4. Threat of Substitute Products - The banking industry is not as much affected by rival banks but the non-financial organizations pose bigger threat of substitution. Although these organizations do not provide deposits, withdrawals, etc, but services such as mutual funds, insurance and fixed earning securities are offered by these companies in much convenient way. However, even the new payments modes like domestic IT players building new apps for disbursal of payments but still it can't match the security the banks provide when dispersing the money from one place to another. Banks can overcome this problem by being more service oriented rather than product oriented.

5. Competitive Rivalry - There is very high competition is banking industry. This industry is into existence since hundreds of years and is servicing people since then. Due to this reason, banks need to try to inveigle customers from their rival banks. This is done through lower rates of interest on loans, higher rates on deposits, better convenient after sale services and other investment related services.