People’s Bank is a multi-service financial institution that has grown to have assets reach nearly $12 billion. When it started in 1842, it opened as a general savings bank aimed at the blue-collar worker who wanted to save his/her money. Now People’s offers many services such as mortgage loans, credit cards, checking accounts, and investment advisory and brokerage services. People’s also offers many different ways in which to do your banking whether it be at the local branch, the supermarket branch, online with PC banking, or over the phone.
Currently, People’s primary market is Fairfield County. However, statewide it is the number one mortgage lender and it does business with about 25% of the households in Connecticut. It is also known internationally for offering a credit card with a low, fixed rate.
The following paper will dissect People’s Bank through Michael E. Porter’s five forces model. The five forces model is the framework for analyzing determinants of industry profitability. It is used to identify the threats and opportunities confronting a company that is thinking of entering into a particular industry. The model focuses on five particular forces that Porter says shape the competition that is in each particular industry. Rivalry among established firms is the central focus that is surrounded by the threat of potential entrants and substitute technologies, as well as bargaining power of buyers and suppliers.
The first of Porter’s five forces is the extent of rivalry among established firms in the industry. If there is strong rivalry in the industry, then competition will be fierce and profits will be limited. This will also limit other potential firms from entering the market.
The second of the forces listed is the threat of potential entrants into the industry. These are the companies that are not currently in the industry but have the resources to enter the industry at any time. This is a threat because it is another company that can potentially take away market share.
The third force that Porter mentions is the threat of substitute technologies. These are substitute products that can serve the industry as a replacement to the current technology. This is a threat because if a firm does not change with the times it could go bankrupt.
The fourth force that Porter discussed was the bargaining power of the buyers. He believed that the buyers, or customers, were threats when they were able to force prices down and quality up. In this case, the operating cost of the supplier would increase and profits would decrease.
The final force that is talked about is the bargaining power of the suppliers. The suppliers became threats when they also had influence on raising prices, which in turn raised the operating costs.
The extent of competition between rivals in an industry dictates the effectiveness of different individual company’s business strategies. In a weak competitive environment, company’s can set prices to maximize profits. In an environment of stronger competition, companies will see themselves involved in more intense price competition, and possibly even a price war. The extent of rivalry is determined by three main factors: the industry’s competitive structure, demand conditions, and the height of exit barriers in the industry.
The number and the size of the companies that make up the industry determine competitive structure of an industry. This make up can range from fragmented, with many small to medium sized companies and no clear dominator, to consolidated, which can be characterized by either an oligopoly or a monopoly. Competition in either of these environments can lead company’s to try to pursue a position of price leadership, which can result in an all out price war.
Companies attempt to avoid price wars by competing on non-price factors. These types of competitions can include strategies in advertising and promotions, brand positioning, and product quality, functionality, and design. In general, companies try to differentiate their products or services from those of their competitors.
One factor determining the extent of rivalry is demand conditions. If demand is growing, either for new customers or for additional purchases from existing customers, then rivalry is moderate. Each company can have room to grow, without necessarily having to encroach on their competition’s customer base. However, when a market begins to decline, competition becomes more fierce. This decline can occur from consumers leaving the market place or when each consumer purchases less. This situation forces companies to reach into competitors customer base in order to maintain revenues and market share.
Another factor attributed with determining the nature of competition is exit barriers. These are economic, strategic, and emotional factors that keep companies in an industry even after it has become unprofitable for them. These barriers are significant in industries that are stagnant or declining. The threat is magnified if a company will have to right off a large amount of assets that have no redeemable value other than production in a failing industry. Attempts at diversification are often used to combat this problem, and introduce the firm into new markets. Other strategies can include trying to be the market leader, or “last man standing”, and riding it out till the bitter end, or selling out to a competitor who is trying to incorporate that strategy.
In the banking industry, competition is intense. Large banks with deep pockets are buying up smaller banks everyday. Local “mom and pop” style banks are rapidly becoming a thing of the past. People’s Bank is not one of the giant national banks competing in this fashion. However, they are a far cry from a “mom and pop” waiting for their turn to become the latest acquisition of some financial conglomerate.
People’s bank is the largest independent bank in Connecticut. It has a relationship with more that 50% of the households in Fairfield County, People’s primary market. Throughout the state, People’s maintains relationships with greater than 25% of the households. Started as a small savings bank in 1842, People’s served the needs of local middle class and blue-collar workers. Today, People’s is a multi-service financial institution, boasting more than 3700 employees, 127 branches, 45 banking locations in Super Stop & Shop stores, and in excess of $11.8 billion in assets (www.peoples.com).
All of these facts are impressive, but they still do not ensure that People’s is safe from being purchased by a larger corporation. However, the formation of People’s Mutual Holding on July 6, 1998 (www.people’s.com) does ensure the fact that the company will not be bought out. Being a customer of a bank and knowing that bank will still be under the same ownership as the years go by is becoming a novelty in today’s competitive banking industry.
People’s bank has realized this position in the local arena by designating themselves as a mover, not a follower. Although People’s is forced to compete with large regional banking operations, it is still recognized as an industry leader in service to its constituencies, and as an innovator in banking concepts. They have managed this tremendous success by being at the forefront of banking innovation. A number of factors that keyed their success are:
Established first bill-paying-by-phone service in the nation in 1974
Introduced People’s VISA and MasterCard in February 1985
Established Connecticut’s first full-service branches in supermarkets in 1993
Launched customer service on the Internet in March 1995
Established video banking in November 1995
Launched People’s “PC Banking” in 1995
It is not just the technical differentiation that has allowed People’s to flourish against their competition. Although People’s is the largest independent bank in CT, they are not all that large in the overall industry. They capitalize on this by continuing to offer people services that are normally only associated with small local banks. Even though they offer all of the technological banking options, they never try to push customers, especially those who may be tech-wary, into using these services. It is the combination of these services, this strong focus on putting the customer’s needs first and foremost, that makes up the total package that People’s offers.
This total package has worked to inspire a lot of customer loyalty and confidence in People’s. This is quite possibly their greatest competitive advantage in the local industry. They offer big bank rates and services, with the small bank customer responsiveness. However, this will not always ensure customer loyalty. When People’s opened a branch in the Super Stop & Shop in Torrington, CT, the people of Torrington were slow to accept them. It seems that the Torrington Savings Bank had been good to the town over the years, and no one saw any reason to abandon them. In an aggressive move, People’s offered savings accounts at the branch that far surpassed anything that the local bank could possibly offer their customers, and guaranteed the rate for a number of years. With this move People’s pulled away a large portion of the local banks customers, and are able to maintain this rate with them due to their deep pockets in relation to the small bank.
Where would People’s stand if a large national bank came in and did the same to them? Maybe offering mortgages to homeowners at rates far below anything that People’s could possibly afford to offer. The simple answer is, customers would leave People’s for the better rate. Fortunately, since the economy is continuing to grow, increasing the need for banking and investment services, no large bank has come along to try to get away People’s customer base with such aggressive tactics. And at the rate that People’s continues to grow, boasting such diverse offerings that include issuing VISA cards in Great Britain, that day may never come.
The Threat of Entry by Potential Competitors
The more banks got opened, the more difficult it becomes to hold their share of the market and to generate profit. Thus, a high risk of entry by potential competitors represents the threat to the profitability. On the other hand there are barriers to entry for the Peoples Bank to open the chain of Banks in the other states or go for the international market. The Brand Loyalty is another threat and advantage in the same time for the Peoples Bank. The small, local banks have the advantage of the Brand Loyalty factor, the Peoples Bank is standing somewhere in the middle, that is why it has the advantages over the bigger banks and disadvantages over smaller banks. The next threat is the absolute cost advantage, when the other banks can lower the rates or give the better service for the same amount of fees. The last threat is the governmental regulations which slower the business or not giving the way to get through something.
Few small banks got opened. There are local banks, which have the brand loyalty from the local customers. The example of such banks are New Haven Saving Bank or Bank of Darien. This banks are aimed for the particular group of people who is located in that area and the bank gives them service and the requirements are needed for that particular kind of people. For example, usually the person in the small bank has his own bank representative. That representative is helping him/her with the transactions or other banking business, as getting a loan or financing something. The customers are getting in the close relationship with the bank. They know the name, work telephone, probably even home phone number of their bank helper and in this case they feel themselves important, then be in the large, well known bank, were they are just one of the many customers.
From the other side the large banks are opening their branches in the Connecticut area, which are taking away the customers. The large banks have the advantages as advertisement, the brand name, and the amount in the assets and so on. That is the Economy of Scales factor, which is the cost advantage associated with the large company size. The sources of scale economies include cost or rates reduction gained through mass-producing the standardized output or service given, discounts, and the economies of scale advertisement.
The Peoples Bank is considerate for the middle class people; they have the focus on particular class of people, like people living in the Bridgeport. They are a lot of people, who are responsible and punctual for their payments, but they do not have enough money to pay everything in full, let say the payments for the mortgages or credit cards. That people are very valuable for the bank because they are paying percentages and late fees.
There is also competition outside the banking industry. The banks are responsible for taxes, but at the other hand the Credit Unions get the tax brakes. That gives the opportunity for the Credit Union to lower the rates and have the cost advantages over the Peoples Bank.
The substitute of alternative goods or services can mean a decline in the demand for a product reducing sales and profitability. Even an established company in a given industry can still face the threat of a new or existing company surfacing with an item that replaces their product. The threat of substitute products or technology is the final stage of Porter’s Five Forces Model. Substitute products are those products that satisfy the customers’ needs in the same way, or better, than the product it is replacing.
The existence of substitute products causes a company to keep their prices at a competitive rate with their competition. If a company raises the price of their product, consumers will switch and buy the cheaper, substitute product. However, if the company’s product has substitute products that are weaker in demand and value than the company may be able to charge a higher price. The price a company charges for its product depends largely on the competitive force of the substitute product(s).
Companies can take defensive measures in order to avoid their products being taken over by newer and better products. If a company gives excellent service, consumers may be swayed to stay with that company and sacrifice better technology for better service. Secondly, a company that can differentiate their product to appeal to specific groups will be able to maintain customer loyalty. A third defensive measure is to lower the costs of a product, which will allow a company to charge a lower price and maintain consumers interest in a market where price is a main concern. Lastly, companies should always be on the lookout for new substitute goods or services and be able to plan countermoves against other companies that threaten their competitive advantage.
Zacks.com, the leading source of investment data, and People’s Securities, Inc., a wholly-owned subsidiary of People’s Bank, have recently joined together in order to offer U.S. stock research to People’s online brokerage clientele. The alliance gives People’s Securities customers who are independent online investors, the capability of trading on the Internet through People’s Securities brokerage services with access to Zacks’ Premium Research. People’s Securities, Inc. offers a complete range of investment products, including stocks, bonds, options, mutual funds and fixed- and variable-rate annuities, and asset management accounts. Founded in 1983, and based in Bridgeport, People’s Securities offers Internet trading and interactive video technology, through which customers can make long-range investment plans for retirement and a child’s college education.
The biggest commodity for banks and other financial institutions has to be the Internet. Companies have to learn to take full advantage of what the Internet can offer, which is a wide spectrum of ideas. The Internet, in its ever-evolving state, has become a serious method of business communication and data transfer. As such, banks are beginning to use the Internet as a new vehicle for doing business. The Internet allows banks to offer both new services and new levels of convenience for existing services, and allows the consumer to interact from any computer capable of making the appropriate connection. Due to this upswing in popularity, there are many policy decisions involving security, technology, and other matters that financial institutions have to consider before making full-featured banking services available on the Internet. With the introduction of banks that exist solely on the Internet, this technology threatens banks that have a physical existence where consumers interact with the institution. However, some financial institutions, such as People’s Bank, have both a physical presence and are available on the Internet as well. Regulators of banks require all the same safeguards that are required of real banks. This creates uniformity among all financial institutions and might frighten legitimate commerce away from Internet transactions.
Security and transaction fraud are important issues that banks have to deal with, because the remote access nature of the Internet obviously makes a bank’s
identification of customers a more serious risk as compared to walk-up services. Recent studies show that potential consumers on the Internet are unwilling to place their personal information out on the Internet for fear of fraud. In addition, customers fear companies’ marketing departments might gain access to this information and cause them to receive annoying phone calls, mail, or e-mail. Another issue that banks must deal with besides the security of transactions as they occur, but also of all bank records. The concern over accessibility to financial records is a real and serious one, and has long been a concern in the banking industry. The appearance of banks on the Internet simply magnifies the problem by potentially exposing bank information to the full range of Internet users.
While there have been numerous advances in banking technology, there will always be a need for people to put their money away in a safe place. It is hard to imagine any kind of technology would steal the market away from banks and financial institutions. Banks emerged with drive-thru windows and over-night deposit drop off boxes in order to make banking more of a convenience for their customers. Recent years have brought about one of the biggest technological advances in the banking industry, ATMs (Automatic Telling Machines). ATMs allow customers to withdraw and deposit money without the hassle of long lines and dealing with tellers. Despite this tremendous luxury, the banking industry still strives to cater to their customers more.
People’s Bank offers the ultimate luxury to customers with a 24-hour banking service that is automated through the use of a telephone or on-line. This on-line banking is referred to as PC Banking. People’s Bank is attempting to convince customers that on-line banking transactions are safer than they have ever been. Recently, People’s Bank has been on a quest to test the market with supplying a chain of their banks in strategic locations such as inside supermarkets. An example of this new surge can be seen in the Stop & Shop store located in Fairfield where customers have the ease of withdrawing money to spend right there on their groceries. People’s Bank has also opened up a bank in the University of Connecticut where students can access money right on campus.
In the future, People’s Bank wants to continue to exploit the benefits of technology in order to increase the speed of its service. A service that People’s Bank has offered for over a decade is direct deposit. This feature gives customers the ability to have their paychecks directly deposited into their bank account avoiding the hassle of physically going to a bank.
People’s Bank hopes to have clients such as SNET, Old Navy, and Record Town upgrade their technology so they can start implementing automatic debiting. For SNET, for example, customers will be able to receive a full statement, showing all the customers’ service numbers, on an electronic bill. The customer will be able to choose between paying the bill automatically when the bill is received or the customer can choose to wait. This new technology will save customers the time and cost of writing checks and stamping envelopes, while companies will save the expense of writing and mailing bills to all of their clients. Users of this service will be able to review their bill periodically if they so desire. It is advances like these that make a medium-sized bank like People’s Bank a first mover in their market segment of the banking industry, thus maintaining their competitive advantage by squeezing out the little banks.
According to Porter, the bargaining power of the buyers can be viewed as either a competitive threat or as a competitive opportunity, depending on the economic circumstance. As a threat, the buyer would be in the position of bargaining power. He/she would be able to demand lower prices or better service, which costs money. However, as an opportunity, the buyer would have virtually no bargaining power. This circumstance would allow the company to raise its prices and gain a larger profit and the buyer would have basically no choice but to comply.
In the banking industry, the buyer or customer can be either an ordinary person or an entire business. At People’s Bank, a full range of financial services is offered to both individuals and businesses. People’s offers such products as mortgage loans, savings accounts, credit cards, equipment leasing, and brokerage services. From these examples you can see that the everyday customer transactions at People’s is very broad and diversified. Through traditional branches, supermarket branches, automated teller machines, PC banking, and a telephone banking service, People’s is able to offer worldwide service to all of its customers.
In order to truly comprehend the bargaining power of the buyers at People’s, one has to examine a few circumstances that Porter says occur in the every industry that either give power to the buyer or the supplier. These are the circumstances that companies analyze in order to determine whether or not the industry can be profitable.
If the industry is composed of many small companies and there are few customers, all of which are large, then the customer is at the advantage. In the case of People’s, there are many banks, some small and local, some large and global. There are also many customers, some of which are small and some of which are also large. This circumstance seems to favor Peoples’ because the range of customers is too broad.
When the customer is buying the product in large quantities in order to achieve economies of scale, the customer has leverage to drive the prices down. People’s does not sell a product that would be available in large quantities so this circumstance would not apply.
When the product differentiation of the suppliers in the industry is low, then the customer has more leverage to either drive down the cost or increase the quality of the product that he/she is looking for. In this case, People’s needs to differentiate itself from the competition by offering better service, free checking accounts to important customers, low introductory interest rates on credit cards, and so on.
Another circumstance that is similar to the one previously mentioned is when the customer has the option to switch his/her order/purchase to a rival company at a low cost. This is possible in the banking industry because you can just empty your account and open a new one with another bank. Also, with mortgages, you can re-finance and switch to a rival company, and with credit cards you can consolidate your debt onto the card with the lowest rate. In this case, the banks again have to offer better service, lower rates, etc.
Also, when it is possible to purchase a product from several companies at the same time, the customer has more power. The customer can have more than one credit card or more than one savings account with other banks. This can hurt People’s by taking away their market share.
When the customer can use the threat of supplying themselves with the needs that the supplier regularly fulfills, the customer has the upper hand. In this case, an example would be that instead of having a savings account, you could put all of your money under the bed. This is a rash circumstance and probably would not occur. As a result, this would most likely not affect People’s.
After evaluating these circumstances one would see that the most important stakeholder to People’s is the customer, or buyer. People’s Bank relies heavily on the profit that it receives from net interest incomes as well as fee-based revenues. These incomes come from the bank accounts, loans, and credit disbursed by the bank. As seen, the banking industry is reliant on the customer for its survival. Without the customer, there would not be any cash inflows or outflows, not to mention loans or credit cards distributed.
In saying this and by evaluating the circumstances given to us by Porter, it is difficult to tell where the power rests when it comes to the bargaining power of the buyer. The bank seems to have some of the power on its side but not enough to have control of the customer. The customer is truly the center of the banking industry and it seems as if the banks are aware of this. They have to continue to offer personalized service that is convenient to the customer. Also, each bank has to strive to offer something that the customer cannot get anywhere else such as a guarantee of no lines at any branch at any time. In order to increase market share and customer loyalty, People’s has to give in or adjust to the bargaining power of the buyer.
When thinking of a bank such as People’s, it is difficult to think of it as having someone who “supplies its product.” It seems as though banks do not have a tangible product, so to speak. The “product” is money, which is tangible to an extent. But many times, the money is represented by something else, such as a piece of paper or even words on a computer screen. The “supplier” of that product ends up being each customer that the bank may obtain. Banks use the money from one customer as the “supplies” for another customer, creating a kind of chain reaction.
In evaluating the bargaining power of suppliers of the banking industry, it is hard to generalize whether or not that power is high or low. It seems to be right in the middle, each aspect outweighing another. There are five points to look at when doing this evaluation: number and availability of substitute products, the importance of the industry as a customer to the supplier, the ability for the bank to switch suppliers, the ability for the supplier to compete directly with the bank, and the ability of the bank to supply it’s own products.
First, when thinking in terms a bank’s product, which is money, there aren’t really any substitute products that a bank could use. A bank has many customers, and therefore, has many suppliers. The bank needs its customers, not only for all the traditional reasons that an organization needs customers, but also for the additional reason of being it’s supplier. Without the customers, a bank has no supplier, and in turn, this creates more of a need for banks to have customer satisfaction. When a bank has customer satisfaction, it also has supplier satisfaction. Since there are no substitute products for a bank, and it relies heavily on its customers (suppliers) to bring in it’s product, the bargaining power of suppliers is very high for this point.
The next point that needs to be evaluated is the importance of the industry as a customer to the supplier. In this case, the banking industry is very important to the supplier. The bank handles the money (supplies) for the customer, leaving the financial well being of the customer dependent on it as well. They need to have a relationship with the bank just as much as the banks need to have a relationship with them. Since the industry is so important to the supplier, the bargaining power of suppliers is very low for this point.
The ability for a bank to switch suppliers is something that is not very costly for the bank. The bank has many suppliers, as mentioned before, so it has many other choices as far as whom it’s suppliers are. If for some reason a bank had to let one of their suppliers go, there are many more that will take their place that are both already existing and not yet existing. The bank will lose any supplies from that supplier, but it will gain them back quickly, and not lose any money in the long run. Because it is not costly for the bank to switch suppliers, the bargaining power of suppliers is low in this point, too.
The next point to be evaluated is the ability for the supplier to compete directly with the bank. The suppliers aren’t a threat to the bank in this instance. The suppliers are most likely not going to open their own banks. This would defeat the purpose of banks in the first place. If people want to manage their own money, they wouldn’t go to a bank. The suppliers can’t do the things that banks can do. Being the actual customers of the bank, the suppliers want the service, and they probably wouldn’t give that up. There is no threat of competition for the bank by its suppliers, so the bargaining power of suppliers in this point is, again, very low.
The last point to evaluate is the ability of the bank to supply it’s own products. A bank cannot possibly supply itself with money, no matter what its reason for trying is. The suppliers of a bank are very important to its success and sustainability. Without it’s suppliers, a bank has no other means in which to obtain it’s supplies. It cannot very well create the money itself, and with no customers (suppliers), there is no money…no supplies. The bank does not have the ability to create it’s own products, therefore, making the bargaining power of suppliers in this point very high.
Two of the three points necessary to evaluate the bargaining power of suppliers indicate that the bargaining power of suppliers for a bank is very low, while the other three indicate that it is very high. It reaches the extremes of both sides, creating a sort of equality. It does shift slightly towards the bargaining power of suppliers being high, though. Customers are one of the most important assets that a bank can obtain because they are also the suppliers. Without the customers (suppliers), the bank would not survive, but without a bank, the customer could still survive. As long as they both need each other, the equality in the bargaining power of suppliers will remain constant, and neither will fail.