A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity. To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing. Porter’s Five Forces looks at five different aspects of a business: Level of competition in the industry Threat of new entrants into the…
A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity.
To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing.
Porter’s Five Forces looks at five different aspects of a business:
- Level of competition in the industry
- Threat of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
So with these in mind, let’s run through the framework with Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05).
Competition in the industry
Banks, when boiled down to the basics, are a place for depositors to store their money and for borrowers to seek loans.
While that role is important in a functioning economy, the services which banks provide are generally viewed as “commodities-like”. Put another way, there is very little a bank can do to differentiate its services from other banks other than through the prices it charges for its services.
Thus, we can view the level of competition in the banking industry as very intense.
Threat of new entrants into the industry
The threat of new entrants into banking, in Singapore at least, is very low. This is partly because banking is a highly regulated industry.
On a related side-note, the banking industry in Singapore has actually been consolidating for many decades now, such that there are only three major banks in Singapore currently. DBS is the largest of them in terms of asset size.
Power of suppliers
Suppliers for DBS are essentially the depositors.
As there are only three local banks in Singapore in comparison to millions of small depositors, it would seem that DBS’s suppliers are in a relatively weaker bargaining position: Depositors can neither influence the deposit rates they can obtain for their savings nor demand a higher level of service.
Power of customers
From DBS’s point of view, its customers are basically its borrowers, the people or organizations that it lends money to. It is by lending out the funds that it has obtained from depositors that DBS Group can earn a profit.
On this aspect of Porter’s Five Forces, DBS would also seem to have the upper hand over its customers given that the bank is a huge company with a large number of customers. This dynamic gives rise to the phenomenon of borrowers having little say over the pricing of their loans, in most cases.
Threat of substitute products
Banks are in the business of supplying money. In this sense, the threat of substitute products is very slim as money will likely always be needed – that is, unless society transitions to barter trading or other new forms of currency beyond the current system of using fiat money.
So there you have it, my quick analysis on the competitive strengths and weaknesses of DBS.
To sum it up real quick, DBS is in a commodity-like business dealing with money, but due to its large size and years of consolidation in its main geographical market, the bank actually has pretty strong pricing power over its suppliers and customers.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned.