Porter 5 Forces Article
Porter 5 Forces Article
Porter 5 Forces Article
4 December 2004
The emergence of the Intemet has created both threats and opportunities for banking
executives. Those who are able to leverage competitive benefits from the Intemet are
confronted with significant business potential. The Internet has fundamentally changed
traditional relationships and services within the banking industry. It shifts the overall
competitive landscape, the technical and standards infrastructure, and the requirements
of individuals and business users. The impact of the Intemet on the banking industry
and Internet banking as a source of competitive advantage have become challenging
issues for both business managers and academics. This article uses the theoretical
framework of Michael Porter's Industry 5-Force Competitive Model as the theoretical
framework to analyze the ways that the Intemet is affecting the competitive dynamics
of the banking industry.
Introduction
The Internet's compelling effect on the commercial world is its ability to pull enormous
infonnation from virtually every comer of the globe (Engelman, 1996). Today every
business model is evolving to adapt to the growing acceptance of the Intemet and E-
commerce. Banking is no exception. E-commerce fundamentally changes the existing
business models, shifting the balance of power fi-om the bank to the individual customer
(Brennand, 1999). The impact of the Intemet on the banking industry is often under-
valued by executives. The primary problem is that Intemet banking is often confused
with the traditional Personal Computer (PC) Remote Home Banking, which has been
available for more than 20 years. Despite its innovations, this form of banking did not
live up to its predicted level of success.
Many banks have experienced problems with home banking. The Chemical Bank in
the United States introduced Pronto Home Banking and Pronto Business Banker for
small businesses in the early 1980s. Pronto failed to attract enough customers to break
even and was abandoned in 1989 along with Citicorp's Direct Access and Chase
Manhattan's Spectrum home banking. The fundamental questions facing most executives
are whether Intemet banking will face the same situation and whether customers will
adopt this service. Their concems are understandable considering that the Security First
Network Bank, recognized as the first virtual bank in the world, and other Intemet
banks are still struggling for profits.
However, things are changing. Netbank, launched in 1996 as Atlanta Intemet bank,
reported $4.5 million in net income for 1998, versus a $5.6 million loss the year before.
International Journal of Management Vol. 21 No. 4 December 2004 515
demonstrating that the words "Intemet banking" and "profitability" are not mutually
exclusive. The issue of whether Intemet banking can satisfy what customers want remains
an unanswered question for most executives. The difficulty may be inadequate
understanding of the competitive aspects of the Intemet in the industry as a whole, or of
how the Intemet can be leveraged to act as a competitive weapon in businesses.
In view of these issues, this study aimed to examine how the emergence of the Intemet
is likely to affect the competitive landscape of the banking industry. This paper analyzes
ways in which the Intemet impacts on the competitive dynamics of the banking industry,
using the theoretical framework of Porter's Industry 5-Forces Competitive Model.
Internet Banking: A New Paradigm
Today, the Intemet has evolved into a commercial technology usable by a broad spectmm
of business people involved in E-Commerce. The real value of E-Commerce comes
from enhancing communication and transactions with customers, business partners,
suppliers, govemment regulators and the public at large and ultimately moving towards
an electronic marketplace where goods and services are transacted over the Intemet
(Watson, et. al 2000).
Intemet banking refers to the use of the Intemet as a channel in the delivery of banking
products and services (Starita, 1999). Intemet banking and traditional PC banking differ
with respect to the application software resident on the user's computer and hence the
requirement for ongoing software upgrades and distributions. In most home banking
ventures, the bank provides the customer with an application software program (or
PFM by customer) that operates on a customer's designated PC. By contrast, with Intemet
banking, potential customers already have the software they need to do their banking
services as application software resides on the bank's server in the form of the home
page.
The Security First Network Bank (SFNB) in the United States inaugurated the world's
first transactional Web site on October 18, 1995. Since then, the number of Intemet
banks has increased significantly each year. In 1999, according to the Online Banking
Report: The Tme US Intemet Batiks (www.onlinebankingreport.com), the United States
alone saw over 200 new Web-based start-ups and/or spin-offs from existing conventional
banks.
Impact on the Competitive Landscape in the Banking Industry
Many research studies cu-gue that Intemet banking will be the predominant trend in the
future of the banking industry (Birch & Young, 1997; Humphreys, 1998; Crede, 1998;
Franco & Klein, 1999; Brennand, 1999; Cisco, 1999). The FS Intemet Value Creation
Study conducted by Emst & Young (1999b) suggested, "While FSI (Financial Services
Institutions) executives cite many reasons for undertaking initiatives, most are not
developing business cases to quantify their investment." The root problem is that most
of the banking executives fail to recognize the real impact of the Intemet on the industry,
which is to be analyzed in detail below.
516 International Journal of Management Vol. 21 No. 4 December 2004
Customer Segmentation: It has been claimed that 20% of a bank's customers often
account for 150% of its profits (Sheshunoff, 1999). Therefore financial institutions
attempt to maximize their profits by focusing more resources on those valuable customer
segments. However, as Intemet banking becomes an effective channel for reaching that
20%, it allows competing banks to target those same customers with their own Intemet
services. Reseju-ch studies indicate that the Intemet banking customer provides from
two to three times as much profit as the traditional banking customer (Cisco Systems,
1999; Brennand, 1999). Intemet banking customers have higher deposits, more banking
products, lower attrition and a lower service cost than traditional banking customers
with similar demographics; they are also more affluent and more educated (Cisco
Systems, 1999; Brennand, 1999). So the profitability of banks now depends on
developing a lucrative market segment, identifying the potentially most profitable
Intemet batiking customers, and targeting them. The danger is, that if you don't do it,
your competitors will.
new non-financial entrants, such as Microsoft, AOL Time Wamer, and Amazon.com,
are more threatening to traditional financial services companies than the new virtual
entrants, because these non-financial companies (which may be unknown as financial
service competitors) have established credibility, loyal customers and deep pockets.
This phenomenon has already been apparent for some time in the United States and has
recently become common in Europe and Asia.
From Proprietary Standards to Eliminating Switching Costs
Over the past several decades one of the most common tactics that organizations have
adopted to sustain competitive advantage has been to establish a set of proprietary
standards that keeps their customers from their suppliers and competitors. Such
proprietary standards tend to impose high switching costs to their existing customers to
prevent them from defecting to other competitors. The intent of the V Generation PC
Proprietary Remote Online Banking in the early 1980s partly evolved from this
competitive concept. Unfortunately, proprietary standards and the Intemet's open-system
architecture are contradictory in nature. The investment that banks have made in
developing their own proprietary software to manage the user interface is perhaps tuming
from an asset to a liability as the Intemet becomes a universal channel for information
access.
Another important shift from the old gatekeeper model is that competitors are now
keen to get control of the gateways. The one who wins may not necessarily be a bank
but a non-financial entity, such as Intuit, Microsoft or AOL Time Wamer. As it is believed
that eventually there will only be a few gateways (suppliers) such as AOL Time Wamer
and Microsoft, the bargaining power of suppliers is now strong. The potential power of
the gateway as a supplier is strong. Once the bank is partnering with a gateway, high
switching costs may be imposed on the bank.
Managerial Implications
This paper has provided a systematic and holistic view of the overall impact of the
Intemet on the banking industry. The Intemet has far exceeded its apparent role as just
a new distribution channel. A thorough analysis of the Intemet's actual impact is useful
to managers who wish to gain the greatest value from Intemet banking. It is equally
important for managers to gain an understanding of how the Intemet affects the five
contending forces identified by Porter. Firstly, managers of companies entering the
field of Intemet banking can attain an understanding that will help them systematically
assess likely profitability before entering. Secondly, for banks already in the industry
this analysis can be used periodically to assess the stmctural changes that have occurred
since the emergence of the Intemet. And lastly, but most importantly, this analysis can
be used to guide a company in the process of formulating its competitive strategy.
To be competitive in this Intemet economy banks need to hamess the power of the
Intemet and use it as a competitive advantage. Banks that anticipate the power of the
Intemet will be in control of events. Conversely, banks that do not respond will be
forced to accept changes that others initiate and will effectively find themselves in a
position of competitive disadvantage.
522 Intemational Joumal of Management Vol. 21 No. 4 December 2004
Conclusion
With the emergence of the Intemet, the banking marketplace has become more dynamic
and volatile. For some executives it poses a threat to existing businesses; for others it
represents great opportunities. Whether it is a threat or an opportunity depends on two
basic factors. Firstly, executives need to understand thoroughly the impact of the Intemet
on the banking industry as a whole. It is essential for them to comprehend how the
marketplace is evolving. Secondly, executives need to develop a strategic agenda that
helps the bank deal with such changes.
The Intemet is essentially affecting the competitive landscape of the banking industry
in several ways. First, it changes the industry stmcture and, in so doing, alters the mles
of competition. Second, it creates competitive advantages for banks by giving them
new ways to outperform their rivals. And finally, the Intemet has spawned the creation
of new businesses that are beyond the traditional banking domain.
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