Bank of America Five Force Analysis Essay
Bank of America Five Forces Analysis Threat of new entrance The sector offers a considerable barrier to new entrants due to the high capital required to establish a new bank. As banking is professional services type required high creditability, strong brand presence is the key obstacle for newcomers. However, in line of Global consumer & small business banking especially payment service the entrepreneur or new company could compete in this segments e. g. internet bill payment. Additionally, the trend of other company offers other financial services like insurance company starts offering mortgage and loan services, etc.
Importantly, most of these financial and payment services is good source of fee-based revenue. Power of Suppliers Products and services suppliers like capital suppliers are usually many and do not have strong bargain power. Nonetheless, as financial and banking industry requires specialized knowledge and skills, high potential employees or talented staffs could be enticed away by other bigger banks or investment firms. Power of Buyers There are two major types of customer in banking industry.
Firstly, individual customers do not pose a very big threat as there is “medium-high switching cost” like if a person has mortgage, car loan, credit card, saving account and particular mutual funds, there is quite hard for them to switch all product to another banks. In an attempt to convince individual customer to switching bank, each bank tries to lower switching cost for clients for example special promotion (discount) in credit card segment. As for corporate clients, although they are large portion of banking, they face very high switching cost in certain aspects especially mega project funding by large bank.
It is extremely difficult for them to find another bank to approve the same huge amount of money. Although financial institutions try to offers better exchange rate, more services support and exposure to foreign capital market, it is quite difficult for them to get high margin corporate clients. Substitutes Products In some segments of banking business, customer faces medium-high switching cost. Normally banks offer a suite of services over and above taking deposits and lending money, but Non-banking financial Services Company could offer similar service in some extent like insurance, mutual funds or fixed income securities.
In the case of lending sides, bank also faces unconventional companies like General Motor, Sony or Microsoft offer preferred financing to customers who buy big items with relatively low cost. Thus, each bank needs to differentiate their product offers to customer, strengthen their portfolio, and improve services, etc depending on its strategies. Competitive Rivalry Banking industry is highly competitive as there is high exit barrier. Moreover, competitors are large and quite equally balanced.
Additionally, as banking industry has emerged for hundred years, just about everyone who needs banking services already has them. Normally, each bank tries to attract competitors clients by lower financing, preferred rate and investment services. This market is in the stage who could offer the best product with fastest service at reasonable price however this also causes bank to experience lower margin or return on asset (ROA). Generally, larger banks would prefer to grow inorganically by taking over or merge with another bank rather than spend money to market and advertise to clients.
PEST (EL/R) Analysis Political (P) As Bank of America Corporation operated throughout the United States and in more than 30 foreign countries, the government stability in each country and change in international alignment directly affect strategy and tactics implemented. Economic (E) Economic condition affect how easy or difficult it is to be successful and profitable at any time because it is directly related to capital availability, cost and demand. Additionally, economics factors effects the purchasing power of potential individual customers and corporate clients in terms of the firm’s cost of capital.
Moreover, the level of government spending can increase or decrease money supply and stability of capital market. Socio-cultural (S) The social culture environment encapsulate demand and tastes, which vary with fashion and disposable income, and general changes, can again provide both opportunities and threats for particular bank. Especially, income distribution in different countries effect strategic direction and implementation issues. Technological (T) Technology has played an important role currently. Transactional websites or online banking-internet is both major opportunity and challenge to the banking industry.
Also, time to market is the key in the world of financial markets or money matters in every single minutes, this will be a definitely competitive advantage. Environmental (E) There is a growing trend of environmental friendly and global warming issues. Bank of America maintains environmental policies and commitments. We could clearly see in retail business, BoA offer customers a variety of environmentally beneficial products and services such as the Brighter Planet Visa card and other affinity partnerships, which rewards customers for preserving the environment.
Also, online banking offers both convenience to clients and encourage paper saving policy. Moreover, BoA has established many partnerships with local governments and organizations to help make neighbourhoods more environmentally responsible. Legal or Regulatory (L or R) Financial regulation of each countries has effected on new products offered to clients and new policies implemented by each bank. Lack of consistency in financial policy is a problem as serious lack of transparency.