You're looking at investing in new stocks or adjusting your portfolio to keep up with the trends in the market. But there are so many different factors to consider. So how do you do it? There are a number of ways you can analyze companies and their stocks. One way to do so is through an analysis using Porter's Five Forces Model, a methodology that looks at external factors within a specific industry. Keep reading to see how these five forces apply to JPMorgan Chase, one of the world's leading financial institutions.

Key Takeaways

  • Competition from within the financial industry is probably the strongest of Porter's Five Forces when analyzing JPMorgan Chase. 
  • Large groups of retail clients, major corporate clients, and high-net-worth individuals can have a big impact on JPMorgan's bottom line.
  • The threat of substitute products—payment services and peer-to-peer lending—continues to threaten the financial industry.
  • The bargaining power of suppliers and the threat of new entrants have minimal impact on the likes of JPMorgan.

Porter's Five Forces Model

Developed by Harvard Business School professor Michael Porter, the Five Forces Model is a business analysis tool that examines the relative strength of five primary market dynamics that govern competition within virtually any industry.

Porter's analysis considers the competition level among the leading companies in an industry, then considers four other factors that affect the industry and the success of companies within that industry:

  • The bargaining power of suppliers
  • The bargaining power of consumers or clients
  • The threat of new entrants into the industry
  • The threat posed by substitute products

JPMorgan Chase: An Overview

JPMorgan Chase (JPM) is a major global bank holding and financial services company. It is a universal banking company that provides commercial, retail, and investment banking services. It is one of the four principal money center 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 10 largest banks worldwide.

The company, as we know it today, is the result of a series of mergers of a group of major U.S. banks. It is one of the four major banks in the United States, along with Citibank, Bank of America, and Wells Fargo. JPMorgan operates as a bank holding company with a number of subsidiaries engaged in the company's four main areas of financial enterprise:

In addition to regular retail, commercial, and investment banking services, JPMorgan offers Treasury services, letters of credit for domestic or international payments, foreign exchange, fund administration, and private banking services.

JPMorgan had a market capitalization of $261.7 billion as of May 15, 2020. The company reported consolidated net income of $36.4 billion for the 2019 fiscal year.

An analysis of JPMorgan Chase using Porter's Five Forces reveals that the company must concentrate on the competition from industry rivals, the bargaining power of consumers, and the threat of substitute products. The bargaining power of suppliers is a lesser force, while the threat of new entrants to the industry is considered minimal.

Competition From Industry Rivals

Competition within the financial industry is probably the strongest of Porter's model when analyzing JPMorgan Chase. The company not only faces intense competition from the other three major money-center banks in the United States, but there's also a threat from international banks like HSBC and Barclays.

JPMorgan faces stiff competition from domestic rivals as well as major international banks on a global scale.

The relatively low switching costs from one bank to another intensifies the importance of competition from within the industry, especially in the retail and commercial banking spheres. It doesn't cost much—in most cases, nothing at all—to close an account at one bank and open a new account at another one. And to sweeten the pot, major banks extend offers to draw customers away from their rivals. JPMorgan is no exception. New customers can earn as much as $600 when they open a checking and savings account as long as they meet certain eligibility requirements.

Overall, JPMorgan deals with industry competition in three main ways:

  • By distinguishing itself in the marketplace primarily on the basis of its history and experience
  • By staying on the cutting edge of offering customer convenience and low-cost and cutting-edge services
  • By acquiring smaller banks, thereby removing some potential competition from the marketplace

The Bargaining Power of Consumers

The banking industry relies heavily on the bargaining power of consumers. Some have more power than others. For instance, individual consumers, especially those in the retail banking marketplace, have relatively little bargaining power. That's because the loss of a single account basically has minimal to no impact on the company's bottom line. Consider what effect Mr. Jones has on the bank when he decides to close his account. On the whole, the loss of his account won't bother the bank too much.

But the bargaining power of large groups of customers is greater because the bank cannot afford to suffer mass defections of depositors. Corporate clients and high-net-worth individuals (HNWI) also have greater bargaining power since the loss of sizable accounts and sources of revenue can more substantially affect the bank's profitability.

JPMorgan addresses the issue of customer bargaining power primarily by extending attractive sign-up offers to new clients. It also makes efforts to get existing clients to open additional accounts and sign up for additional services, which effectively increases the switching cost for consumers by making it more troublesome for them to transfer their finances to another bank.

The Threat of Substitute Products

The threat of substitute products has increased in the banking industry, as companies outside the industry have begun to offer specialized financial services that were traditionally only available from banks. PayPal and Apple Pay, prepaid debit cards, and online peer-to-peer lenders (P2P) such as Prosper.com or LendingClub.com offer a multitude of options that cost JPMorgan—and other major banks—a considerable amount of revenue.

So how does JPMorgan keep up? The bank has initiatives that include a division that focuses on small business lending. It also established Chase Pay, its own digital wallet service.

The Bargaining Power of Suppliers

There are two main suppliers for a bank. The first group comprises of depositors who supply the primary resource of capital, while the second is its employees, also known as the resource of labor. The threat from individual depositors is minimal, just the way it is with the bargaining power of consumers. Major corporate customers, HNWIs, and large groups of depositors, though, tend to be a big threat.

JPMorgan's approach to dealing with this force is to try to attract new clients and to increase the extent to which existing depositors hold funds and access the bank's services. When it comes to the bargaining power of suppliers of labor, individual employees have little bargaining power unless they're major executive employees. JPMorgan must address its overall bargaining power by offering an attractive salary and benefits package to retain the best employees.

The Threat of New Entrants to the Industry

The threat of new entrants from within the financial industry is relatively small. It isn't easy for a new bank to enter the market and try to compete on the same level as JPMorgan. In fact, a new competitor would face a number of significant obstacles, notably the massive amount of capital required, the length of time needed to establish a significant brand identity, and the cumbersome government regulations that apply to the operation of banks.

While brand new entrants may not be much of a threat, JPMorgan does have to brace for some competition from already established banks in other countries. For instance, the company must keep an eye out for major banks in developing economies such as China that will eventually compete on an international scale.