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Porter's Five Forces of Ally Bank

Essay by   •  March 20, 2016  •  Coursework  •  997 Words (4 Pages)  •  1,678 Views

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Ally Bank, the child company of Ally Financial, is a bank for the customers. They use all the information they can, from surveys, and customer feedback in order to make the banking process convenient and less stressful for their customers. I decided to do the Five Forces to describe the industry of banking.

        The first step in examining the competitive nature of the banking industry is to look at the threat of new competitors entering into the industry. Since the economic crisis in 2007, many banks failed and were closed due to financials. In 2011, there was no new banks that had come into the fold, which has not happened since 1984. One for this is, as mentioned before, the conditions that banks faced because of the economic crisis made it easier for someone who was looking to obtain a bank to purchase one that needed a bailout rather than spending the money to build a new one. The second reason being that the crisis made it difficult for the banking industry to earn a profit. Other barriers to entry besides capital requirements, are switching costs and product differentiation. Customers can obtain a high switching cost when moving between banks because the longer they have been with a financial institution, the deeper the relationship becomes between the customer and bank. There isn’t much of product differentiation between banks, which makes it harder to enter into an industry where other banks have already established themselves. The threat of new entrants into the banking industry is low due significant barriers of entry.

        Where the threat of new entry is low, the bargaining power of suppliers is high. The suppliers in the banking industry include those who supply capital. Banks that seek capital obtain it from depositors, other banks, and the Federal Reserve. Customers are also a supplier because they place their money into the bank, who in turn can use that capital. The bargaining power of suppliers is high because banks need funds in order to operate efficiently, making suppliers goods critical in order for success.

        The bargaining power of buyers is also high in the banking industry. Customers are not just suppliers, but buyers as well because they purchase the products that banks have to offer. Customers have higher bargaining power because they are able to switch to a different bank at any time if they feel their money isn’t being handled fairly. Even though the switching costs can be high if choosing to transfer to another banks, in this situation the costs don’t matter as much since how their money is handled is important to customers.

        The availability of substitute products is low in the banking industry because it is hard to find something else that is able to handle your money as efficiently. The only substitute product I can think of is investing your money with an investor, who is a non-financial competitor. The investor can help you determine what you do with your money, however you may not always earn a return on your money and it may not be as readily available to you in comparison to being in a bank.

        Rivalry among competitors in the banking industry is very high. This is due to the lack of differentiation, high strategic stakes, and high exit barriers. Between banks there isn’t much differentiation when it comes to the products they offer. Banks offer loans, savings and checking accounts, and more. When customers choose a bank, they mainly look for a low interest rate for if they open up a credit card, they aren’t losing as much money. There are high strategic stakes because it is important for all competitors in the banking industry to perform well, or they may risk bankruptcy. Lastly, there are high exit barriers because of the strategic interrelationships they develop between other financial institutions and their access to those markets, there is emotional barriers because of the relationships they have created with their customers and the loyalty a customer has developed with their banks, and there can be government restrictions.



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