Analysis Of Jp Morgan's Competition Level Using The Porter's Five Forces Model
JP Morgan is one of the 10 top banks in the world. JPM resides in the financial sector, specifically the banking sector. This industry is highly competitive caused by a variety of forces or factors. To analyze the level of competition in the JP Morgan’s industry, we are going to use an analytical tool – the Porter’s Five Forces Model. The Porter’s Five Forces Model examines the degree of competition among the leading competitors in the industry. The forces this model considers are rivalry among existing competitors, threat of entry, the power of suppliers, the power of buyers, and the threat of substitutes.
Competition within the industry is one of the strongest Porter’s Five Forces for JP Morgan as a result of price competition, similar players in regards to size, and low market growth. Rivalry among banks has increased substantially domestically and globally because they offer the same products which creates less differentiation between competitors. As a consequence, they try to attract clients away from different banks.
JP Morgan’s competitors such as Wells Fargo, HSBC, Bank of America, CitiGroup and others are almost the same size, which means the firm’s moves and strategies are noticed by the other players and they try to copy them; this leads to a slow market growth, which make competitors fight for market share. Overall, JP Morgan operates in a highly competitive environment, but make attempts to differentiate themselves from other banks and financial institutions by focusing on long term customer relationships, improving technology, providing expertise, and acquiring other smaller banks.
The threat of new entrants to the banking sector is relatively small due to many obstacles; some of these obstacles are higher capital requirements, length to build a brand and reputation, and government regulations. The primary barrier for financial institutions to enter into the banking sector is the need of massive amount of capital required to compete on the same scale as JP Morgan. This huge need of financial resources limits the pool of new entrants. Another barrier is brand and reputation. Customers are looking for trust, and JPM can provide reliability and accountability due to its positive brand and reputation.
However, for a new competitor will take a long period of time to build a significant brand identity and have a positive image in the market. And lastly, another barrier is government policies applied to the operation of banks. After the recession in 2008, banks have been regulated more than ever; government limits other institutions to entry into industry by requiring strict licensing and legal requirements. Altogether, JP Morgan actively manages some of the barriers to entry to the industry, by continuity merging and acquiring small banks. As a result, JPM increases its size and continue entering new markets with a powerful brand and reputation. Therefore, high capital requirements, long time to build a brand and reputation, and government regulations are the most relevant to establishing barriers to entry in the financial sector.
Presently, JP Morgan strategy is to expand their services around the world. They made an announcement about expanding their retail branches into nine new U.S markets which are North Carolina, South Carolina, Kansas, Tennessee, Pittsburgh, and others states in the United States. Also, JP Morgan is considering providing certain services in China. Their aggressive growth plans is to scale JP Morgan Chase branch locations and attract more customers. Their plan is to grow their presence in low-medium income communities and large university areas.
As a result, this expansion will help the retail bank to serve more customers, small businesses and communities. However, their broader strategy or plan is to open 400 branches and hire approximately 3,000 employees by the end of 2023. Currently, their goal is to add 90 new physical retail bank locations and hire up to 700 employees by the end of 2018. JP Morgan is entering into China’s market in order to compete with the world’s largest bank, Industrial and Commercial Bank of China (ICBC). The bank chose this strategy because it seeks to cover most of the United States population and compete with their other banks at a domestic and global scale.
The financial industry is greatly influenced by the buyers, particularly the banking sector. In regards to JP Morgan, some individual clients, particularly within the retail banking services have little bargaining power because these customers have minimal impact on the firm’s bottom line if they close an account. However, large clients such as corporations, wealthy individuals, and institutional investors have a strong bargaining power because of the loss of sizable accounts impact the bank’s source of income and profitability. In general, the clients have low switching cost which means the cost of transferring their account to a similar firm are low-priced. JP Morgan tries to tackle the bargaining power of buyers by providing incentives and rewards for current customers and new potential customers. Also, it regularly make efforts to get current clients to open extra accounts and sign up for new services in order to increase client’s switching cost, the higher the switching cost the harder it will be for them to switch their funds to a different financial institution.
JPM has two main suppliers which are clients and employees. Clients supply sources of income and the employees provide labor to the bank. These suppliers play an important role in the bank’s operation, however they have a moderate level of bargaining power. As previously mentioned, individual depositors have low bargaining power and high net wealthy individuals and corporations have a high bargaining power due to their huge impact to JPM’s bottom line. Additionally, their employees are satisfied and receive appealing salaries, non-monetary incentives, and bonuses.
According to the JP Morgan Annual Report 2018, they had a 10% wage increase in all levels. Also, they have made efforts to increase workers’ satisfaction by increasing wages, providing financial help to employees to continue studying, and improvements in the wellness programs. All these changes and improvements help the firm to retain their employees. Briefly, JP Morgan’s clients and employees have an intermediate supplier power.
The threat of substitute products places a high risk in the banking industry because other firms outside of the industry are beginning to offer similar services as JPM. For example, Apple offers Apple Pay and Credit Cards and Acorns offers financial services such as saving, investing, and debit cards. Apple Pay and Acorns is only two examples of substitutes for JPM, however there are thousands of other substitutes affecting the industry by decreasing profit potential and increasing competition. JPMorgan can tackle the threat of substitute products and services by increasing customers switching costs, improving the Chase Pay app, and investing in technology.
According to my research and study, the banking industry will be disrupted soon due to technology. Today, banks have no other option then to implement a digital platform in their business model while also adopting new technology along with it. To emphasize, JP Morgan is committed to ramping up their digital platform. In the last few years, the firm has been exploring and testing new technologies such as Block chain, Big Data, JP Morgan Coin, and others. The article “Dimon Sounds a Cautious Note as JP Morgan Prepares for Recession” by Michelle Davis states JP Morgan technology budget for 2019 is expected to be $11.4 billion, which makes them one of the top financial institutions to spend the most money in digital innovation.
In conclusion, Porter’s competitive forces influence the banking sector or industry. It can be observed by the five forces of competition impact JP Morgan prices, cost, and size. However, JPM has also been able to manage all these forces by increasing switching costs, attracting new customers, and investing in technology.
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