You are considering investing in new stocks or adjusting your portfolio to keep up with market trends. But there are so many different factors to consider. So how do you do that? There are several ways to analyze companies and their stocks. One way to do this is to analyze Porter’s Five Forces Model, a methodology that examines external factors within a particular industry. Keep reading to see how these five forces relate to JPMorgan Chase, one of the world’s major financial institutions.
- When JPMorgan Chase is analyzed, competition in the financial sector is probably the strongest of Porter’s five teams.
- Large groups of retail customers, large corporate businesses, and the high value of individuals can significantly impact the bottom line of JPMorgan.
- The threat of replacement goods-payment services and peer-to-peer lending threatens the financial sector.
- The bargaining power of suppliers and the threat of new entrants have little effect, as does JPMorgan.
Five country models Porter
Developed by Michael Porter, a professor at the Harvard Business School, the Five Forces Model is a business technology analytics tool that examines the relative strengths of the five critical competitive market makers in almost any industry.
Porter’s analysis considers the level of competition among the leading companies in the industry. It then considers four other factors that affect the industry and the success of companies within that industry:
- Contracting power of suppliers
- Negotiating power of consumers or customers
- Threatening new entrants to the industry
- The threat posed by substitute products
JPMorgan Chase: Overview
JPMorgan Chase (JPM) is a large international banking and financial services company. It is a comprehensive banking company that provides commercial, retail, and investment banking services. It is one of the four central money banks in the United States, along with Wells Fargo, Bank of America, and Citigroup. With more than $ 2.3 trillion in assets, JPMorgan is one of the ten largest banks worldwide.
As we know it today, the company results from a series of mergers by a group of central US banks. It is one of the four major banks in the United States, Citibank, Bank of America, and Wells Fargo. JPMorgan operates as a bank holding company with several subsidiaries operating in four main areas of the financial undertaking:
- Retail banking
- Commercial banking
- Corporate and investment banking
- Asset management
In addition to standard retail, commercial banking, and investment banking services, JPMorgan offers Treasury services, loans for domestic or international payments, foreign exchange, fund management, and private banking services.
JPMorgan’s market capitalization was USD 261.7 billion as of May 15, 2020. The company announced a combined net income of USD 36.4 billion for 2019.
Analysis of JPMorgan Chase using Porter’s five forces reveals that the company must focus on competition from industry competitors, consumer bargaining power, and the threat of substitute products. Suppliers’ bargaining power is less powerful, but the threat of new parties to the industry is minimal.
Competition from industry competitors
Competition in the financial sector is probably the strongest of Porter’s model when analyzing JPMorgan Chase. The company is facing stiff competition from the three major central bank banks in the United States, but it also poses a threat from international banks such as HSBC and Barclays.
JPMorgan faces stiff competition from domestic competitors and significant global banks worldwide.
Relatively low switching costs from one bank to another amplify the importance of competition within the industry, especially in the retail and commercial banking divisions. It does not cost much – in most cases, nothing at all – to close an account at one bank and open a new account at another. And to reconcile the pot, central banks extend offers to withdraw customers from their competitors. JPMorgan is no exception. New customers can earn up to $ 600 when they open a checking and savings account as long as they meet specific eligibility requirements.
Overall, JPMorgan succeeds in competing with the industry in three main ways:
- By distinguishing itself in the market primarily based on its history and experience
- By remaining at the forefront of offering customers convenience and cheap and excellent service
- By acquiring smaller banks and thereby removing potential competition from the market
Consumer bargaining power
The banking sector relies heavily on consumer bargaining power. Some have more ability than others. For example, individual consumers, especially those in the retail banking market, have relatively little bargaining power. This is because the loss of one account has little or no effect on the business’s bottom line. Consider what effect Mr. Jones has on the bank when he decides to close his account. Overall, a loss on his account will not disturb the bank too much.
But the bargaining power of large groups of customers is more remarkable because the bank can not afford to suffer from the mass collapse of depositors. Customers and high-value individuals (HNWI) also have a higher bargaining position, as the loss of significant accounts and sources of income can have a greater impact on the bank’s profitability.
JPMorgan primarily deals with customer negotiations by extending new customers attractive listing offers. It also focuses on getting existing customers to open additional accounts and sign up for other services, which increases consumers’ switching costs by making it more difficult for them to transfer their finances to another bank.
Threatening of a substitute product
The threat of substitute products has increased in the banking sector as companies outside the industry have begun to offer specialized financial services previously only available at banks. PayPal and Apple Pay, prepaid debit cards, and online peer-to-peer (P2P) lenders such as Prosper.com or LendingClub.com offer numerous options that cost JPMorgan and other central banks – considerable revenue.
So how is JPMorgan doing? The bank has initiatives that include a department that focuses on lending to small companies. It also founded Chase Pay, its digital wallet service.
The bargaining power of suppliers
There are two leading suppliers for banks. The first group consists of depositors who provide the leading capital resource, while the other is its employees, also known as the resource of labor. The threat from individual depositors is minimal, just as it is with consumers’ bargaining power. However, large customers, HNWI, and large groups of depositors tend to be a significant threat.
JPMorgan’s approach to dealing with this force is to attract new customers and increase the extent to which current depositors have money and access to the bank’s services. When it comes to the bargaining power of labor suppliers, individual employees have little bargaining power unless they are the foremost managing directors. JPMorgan must address its bargaining power by offering attractive pay and benefits packages to retain the best employees.
Threatening of new parties in the industry
The threat to new entrants in the financial sector is relatively small. It is not easy for a new bank to enter the market and try to compete at the same level as JPMorgan. A new competitor would face several significant obstacles, particularly a large amount of capital required, the time needed to establish a substantial type of identification, and the cumbersome governance rules that apply to a bank’s operations.
While brand new entrants may not be a significant threat, JPMorgan needs to maintain some competition from already established banks in other countries. For example, the company has to keep track of essential banks in developing countries such as China, which will eventually compete internationally.