Globalization and Porter’s Five Forces
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Globalization and Porter’s Five Forces
Introduction
The advent of globalization brought benefits and disadvantages to different sectors and countries. Embracement of globalization with opening foreign markets has seen many companies undertaking multinational strategy to diversify their sources of revenue. This move has seen some companies and countries benefiting by penetrating international markets. However, some domestic companies and sectors have suffered due to increased competition in the home markets. Thus, the paper evaluates the effect of globalization on the Australian banking sector.
Question 1
The five forces under Porter’s model are competitive rivalry, buyer power, supplier power, the threat of substitution, and threat of new entrants in the market (Mind-Tools, 2020). Thus, the effect of a market entry barrier on the profitability of four Australian banks should be viewed from the threat of new entrants and competitive rivalry in foreign markets. In the event of a barrier for foreign companies to enter different foreign markets has a negative effect on the profitability of the Australian banks.
One of the reasons behind this argument is the unfair competition the four major Australian faces from banks from such countries barring entry of foreign banks, but their banks have been entering the Australian banks (Porter, 2017). The entry of foreign banks to the Australian banking sector while denying the home banks to enter their markets that they are exposed to the threat of new entrants without an alternative. Porter’s five forces model provides that threat of new entrants has the effect of weakening existing companies’ position and market power.
The increase of competing banks from foreign countries while Australian banks are denied entry across the border has the effect of increasing the buyers’ power in negotiating for lower interest rates while borrowing and demanding higher interest rates for their savings (Stringham, 2012). The increase in competitors gives customers enhanced alternatives. Similarly, the power of the suppliers for essential commodities and services is increased once the competitive power is increased in Australia without an alternative to diversify internationally (Bertozzi, Ali, & Gul, 2017). Consequently, the barrier that the four Australian banks face entering some foreign markets while it maintains a free market has an adverse effect on its profitability.
Question 2
The availability of substitute financial companies offering services such as credit card has a negative effect on the average profitability of four main Australian banks. The presence of such a substitute financial effect has the effect of discouraging customers in the financial sector from making savings due to ease of credit in enabling them to buy commodities on the spot using credit cards compared to the traditional automated teller machine (Joshi, 2018). Even though the banks have adopted a mobile banking strategy to counter the competition from the substitute financial providers, the increased competition has taken a substantial portion of their customers.
The decision by the customers to consider using the substitute financial services implies that the savings that the four banks have been using in lending money have hit drastically (Ansoff, 2016). Thus, the interest rates from lending that make the most significant chunk of the bank’s revenue source have reduced significantly, causing the average profitability of the four banks to reduce. Moreover, the buyer’s power has been enhanced with the entry of the substitute financial services.
The enhanced power of the customers means that the four banks have been forced to beg the customers to make savings promising higher interest rates (Prasad, 2015). Similarly, customers considering saving are demanding for lower costs from the four banks in making withdrawals since they have an alternative substitute offering the services at a lower cost. Accordingly, the revenue generation from lending and banking fees has been reduced while the operating costs of the four banks have been increasing with the availability of the substitute service providers. The scenario has the effect of hurting the average profit the four banks have been generating in the past.
Question 3
The emergence and popularity of blockchain technology and the effect of bitcoin have hurt the average profitability of the four banks. A blockchain is a form of a substitute financial service compared to traditional banking. Bitcoin profitability has seen most of the Australians preferring to invest in it instead of making savings to enhance their wealth creation at a higher rate. The move by the Australians to deny the four banks a significant proportion of their money by considering the alternative bitcoin has caused a substantial drop in the savings available for lending (Morden, 2016).
Consequently, the liquidity of the four banks has been affected significantly, causing them to reduce the money available for lending. The reduction in the amount the four banks lends has the effect of causing the revenue generated from the interest rates significantly. Thus, the average profitability has been affected adversely due to the decrease in the revenue amount. Equally, the decision by the savers to adjust their preference to bitcoin holding forced the four banks to undertake huge marketing investment to reclaim their market position (CNX, 2016).
The increase in marketing efforts has the effect of causing the operation costs to increase while the revenue generation is diminishing. Accordingly, the average profitability of the four leading Australian banks has been affected negatively due to the increased operating costs as the revenue from the lending sources and service fees is decreasing due to the advent of blockchain technology and the bitcoin profitability effect. Moreover, the power of the financial services buyers has increased with the entry of blockchain technology and bitcoin profitability effect (Porter, 2017). The negotiation power of the customers to demand higher interest rates from their savings and lower service fees has increased if the banks want them to save instead of holding the valuable bitcoin currency. Consequently, the revenue the four banks have been generating from the management fees from the savers is decreasing while the interest rates been offered the savers is increasing, causing the average profit they were generating before to decrease.
Question 4
The strategic plan of the four main Australian banks to invest in risky financial assets or lending to highly leveraged companies has been affected adversely by the various banking regulations from different government agents. The riskiness of high leveraged companies of failing to honor their liability is quite high that can expose the banks from eventual collapse in the future (Brue & Grant, 2012). Equally, investing in high-risk financial assets, such as bonds from risky high corporations, has the potential of exposing the banks to potential losses in the future once the expected returns are missed. In contrast, the various regulatory bodies in banking are highly interested in the protection of the customer’s money in the banks (CNX, 2016).
Consequently, the management of the four banks is highly adverse from investing in risky financial assets or lending to high indebted companies to the potential consequences they will face from the regulators in case the savers is lost from the losses faced. The top management is held legally liable for protecting the savers’ money by prudent strategic investment decisions (Morden, 2016). Consequently, the possibility of suffering losses by investing in risky opportunities will expose them to potential prosecutions and forced to repay the money lost by auctioning their properties. The fear of facing the legal and financial consequences in the future has discouraged the management from investing in risky investment despite the high returns they promise.
Moreover, the four main Australian banks are publicly held companies. The top management of the public companies is legally held responsible for the financial collapse exposing the shareholders to lose their wealth (CNX, 2016). In the event any of the banks face financial distress, it is auctioned to meet its financial liabilities before the shareholders are paid their shareholding dues. Consequently, the management will face prosecution for failing to make prudent decisions protecting the interest of the shareholders. The scenario has seen the management of the four banks from avoiding risky undertakings due to possible consequences they face in case of bankruptcy outcomes.
Question 5
The decision to diversify internationally has a positive effect in enhancing the revenue sources for multinational companies. Thus, the revenue generation of the banks has been boosted by expanding their operations internationally. Similarly, market diversification is a strategic move of spreading the risk of suffering losses (Brue & Grant, 2012). The loss suffered in one market is countered by the profit generated from the different international markets. This aspect implies that the possible risky of the four banks would have suffered by operating only in the Australian market has been spread in the different international markets they have diversified (Moon, 2018). The enhanced revenue generation, combined with the risk reduction due to the divergence measure undertaken by the four leading Australian banks, has the effect of enhancing their profit generation.
Moreover, the decision to spread across the world has the effect of enabling the four banks to generate a diversified workforce. The diversity of a workforce is recommended due to the impact it has on enhancing its creativity by sharing diversified ideas of solving ideas from different backgrounds (Joshi, 2018). The enhanced creativity of the diversified workforce realized by the four banks has the effect of promoting their creativity. Consequently, the revenue generation and profitability of the four banks have been improved by the decision diversify internationally.
Conclusion
The evaluation of the various scenarios demonstrates the effect of globalization and new developments on the performance of a given economic sector. The entrant denial to the global markets, the presence of substitute financial services, the development of blockchain and effect of bitcoin profitability, and stringent regulations have a negative impact on the four leading Australian banks. However, the decision by the four banks to spread internationally is recommendable due to the positive effect it has on their profitability.
References
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