A Porter's five forces analysis of JPMorgan Chase (NYSE: JPM) reveals that the strongest forces that the company must take into account are competition from rivals in the industry, the bargaining power of consumers and the threat of substitute products. Bargaining power of suppliers is a lesser force, and the threat of new entrants to the industry is minimal.
The Porter's Five Forces Model
The five forces model, developed by Michael Porter, is a business analysis tool that examines the relative strength of five primary forces that govern competition within virtually any industry. Porter's five forces analysis considers the competition level among the leading companies in an industry, and then considers four other factors that affect the industry and the success of companies within it: the bargaining power of suppliers, the bargaining power of consumers or clients, the threat of new entrants into the industry and the threat posed by substitute products.
An Overview of JPMorgan Chase
JPMorgan Chase 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. JPMorgan stock has a market cap value of $210 billion. The company operates as a bank holding company with a number of subsidiaries engaged in the company's four main areas of financial enterprise: retail banking, commercial banking, corporate and investment banking, and asset management. 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.
Competition From Industry Rivals
Competition within the industry is the strongest of Porter's five forces for JPMorgan Chase. The company faces intense competition domestically from the other three major money-center banks and globally from other large multinational banking firms, such as HSBC and Barclays. One of the industry elements that intensifies the importance of competition is the relatively low switching costs that consumers face, especially in the retail and commercial banking areas. The major banks, much like the principal cell phone companies, are continually extending offers to draw customers away from other banks.
JPMorgan deals with industry competition in three main ways. It attempts to distinguish itself in the marketplace primarily on the basis of its long, recognized heritage and experience. It aims to stay on the cutting edge of offering customer convenience and low-cost and cutting-edge services. It has a history of acquiring smaller banks, removing some potential competition from the marketplace.
The Bargaining Power of Consumers
Consumers' overall bargaining power is an important factor influencing the industry. Individual consumers, especially in the retail banking marketplace, have relatively little bargaining power since the loss of any one account has a minimal impact on JPMorgan's bottom line. However, in the aggregate, the bargaining power of consumers is greater, since the bank cannot afford to suffer mass defections of depositors. Corporate and high net worth individual (HNWI) clients have relatively 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 offers to potential new clients. It also continually 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. Examples of such substitute products include payment processing and transfer services such as PayPal and Apple Pay, prepaid debit cards and online peer-to-peer lenders such as Prosper.com or LendingClub.com. The intrusion of these substitute services has cost both JPMorgan and the other major banks considerable revenue.
JPMorgan has responded with initiatives that include a division focusing on small business lending, and establishing its own digital wallet service, Chase Pay.
The Bargaining Power of Suppliers
The two main suppliers for a bank are the depositors, who supply the primary resource of capital, and employees, who supply the resource of labor. In regard to depositors, the situation is essentially the same as that delineated under the bargaining power of consumers. Individual depositors, other than major corporate or HNWI depositors, have relatively little bargaining power but taken as a whole, their bargaining power is considerable.
JPMorgan's approach to dealing with this market force is, again, to work diligently to attract new clients and to increase the extent to which existing depositors hold funds and access services through JPMorgan. In regard to the bargaining power of suppliers of labor, individual suppliers have little bargaining power other than major executive employees. JPMorgan must address its overall bargaining power by offering an attractive salary and benefit packages to retain the best employees.
The Threat of New Entrants to the Industry
The threat of new entrants as a significant force within the industry is relatively small. Any company attempting to compete directly on the same level with JPMorgan or the other major U.S. money-center banks would face significant obstacles. The primary obstacles for potential new entrants are the massive amount of capital required, the length of time required to establish a significant brand identity and the numerous and cumbersome government regulations that apply to the operation of banks.
In the future, however, JPMorgan and other major banks are likely to face increasing competitive threats in the industry arising from major banks in developing economies such as China that will eventually compete on a more international scale.