Analysing the marketing environment
4.4 The market environment
The market environment focuses on the immediate features of the market in which the firm operates. Understanding this aspect of environment is of particular impor- tance, as the market environment will have a very immediate impact on an organi- zation’s activity. There are many different approaches that might be used to understand what is happening in the market environment. One of the most widely employed is the idea of analysing the five forces that determine market/industry profitability – an approach that was developed in the 1980s by Michael Porter. This is shown in Figure 4.3.
An effective marketing strategy will need understanding of how these forces work together and what they mean for the organization. If a particular market envi- ronment is favourable or attractive, then an organization should find it easier to compete effectively. A market is considered favourable or attractive if the forces
working against an organization are relatively weak. Where the forces are strong they impose constraints upon what an organization can do, and marketing strategies will need to consider how best to neutralize and respond to the problems that the organization faces. Thus, for example, customers may be in a strong position (high bargaining power) because it is relatively easy to switch between different providers.
In this situation, a bank may consider focusing attention on marketing strategies that build a strong relationship with customers (perhaps via cross-selling a range of products), making them more likely to remain with the bank. If successful, this strat- egy will make the market more attractive and thus enhance the bank’s competitive position.
Porter argues that market or industry attractiveness and profitability depends (as economic theory would suggest) on the structure of the industry, and specifically on five key features:
1. The bargaining power of suppliers. Powerful suppliers can force up the prices paid by an organization for its inputs, and thus reduce profitability. Suppliers in financial services include the suppliers of essential business goods and services (computing equipment, training, etc.), and to the extent that these suppliers are in a strong position they can affect the prices paid for relevant goods and thus affect costs. It could also be argued that, in some instances, the term ‘suppliers’
could also include customers. Customers making deposits with financial institu- tions are effectively acting as suppliers of certain essential raw materials, and again, if these suppliers are in a relatively strong position they can impact on the cost of providing certain related financial services.
2. The bargaining power of consumers. Powerful consumers can insist on lower prices and/or more favourable terms, which may impact negatively on profitability.
Threat of substitutes
Competitive rivalry Bargaining
power of suppliers
Bargaining power of buyers
Threat of new entrants
Figure 4.3 Five-force analysis (source: Porter, 1980).
Clearly, the bargaining power of buyers in financial services varies considerably.
In personal markets it seems that the bargaining power of individual consumers is relatively weak, although consumer pressure groups may partly counterbal- ance this – particularly through their evaluations of the performance of financial institutions. In corporate markets the situation may be rather different, with relatively large businesses being in a rather more powerful position.
3. Threat of entry. A profitable industry will generally attract new entrants; if it appears relatively attractive for new organizations to enter a market, profitability will tend to be eroded. While there are certainly barriers to entry to the financial marketplace, not least of which are the many regulatory requirements, the finan- cial sector does attract a variety of new entrants. In some cases, these are new entrants from other sectors of the domestic economy. A growing number of retail- ers offer consumer credit and store cards to fund consumer purchases. In the US, General Motors offers credit cards, while in the UK, supermarkets such as Tesco and Sainsbury offer a wide range of financial services alongside their traditional grocery products. Richard Branson’s Virgin Group, originally in the music business, now offers a range of financial services ranging from credit cards to personal pensions. In many cases these new entrants may still rely on traditional financial services providers, which are then offered to consumers using the new entrant’s own brand. Even though they may depend upon existing suppliers of financial services, they still constitute a significant new source of competition.
The threat of new entry is not restricted to firms in other sectors of the economy;
there is increasingly a very real threat from new entrants from overseas, as is discussed in greater detail in Chapter 6.
4. Competition from substitutes. The existence of products which are close substitutes enhances customer choice and provides an alternative way of meeting a particular need. Thus, in markets where there are close substitutes, the buying power of consumers is effectively enhanced because they have a much greater degree of choice. The extent to which there are real substitutes for financial services is perhaps limited, although in certain sections of the market, such as investment services, gold, jewellery, antiques and other collectibles may be regarded as substitutes for investments in mutual funds, equities and other forms of saving. It is interesting to note the extent to which increasing numbers of people view investment in property as a substitute for traditional investment in pensions as a vehicle to pro- vide income and capital in old age. This, in part, has fuelled a rapid increase in what is termed the ‘buy-to-let’ market.
5. Rivalry between firms. Clearly, the greater the degree of competition, the more likely it is that the industry will be less profitable and therefore less attractive.
While there are few close substitutes for financial services (as indicated above), there is considerable competition within the industry. Most countries have seen some degree of consolidation in their financial services sector and, while this has reduced the number of competitors, the remaining players are often strengthened, resulting in increased competition. Moreover, as financial markets have liberalized and the barriers between institutional types have been reduced, competition has also increased. Insurers no longer compete just with other insurers – they also compete with banks, savings institutions and investment companies. The devel- opment of bancassurance (a term used to describe a system in which banks broaden their product offerings to include a more extensive range of insurance,
savings and investment products which would have traditionally been offered by more specialized companies) in many financial sectors worldwide is just one example of this type of development. Equally, in the banking sector, current accounts and housing finance may be offered by companies that traditionally specialized in insurance. In Malaysia, for example, the insurer AIA now offers housing finance in direct competition with traditional suppliers. In the UK, the insurer Prudential launched the on-line bank Egg, which offers a range of tradi- tional banking products with very competitive terms and conditions.
These five forces determine the attractiveness of the industry through their impact on either costs incurred or prices received, or both. The development of an effective marketing strategy will depend upon a thorough examination of the market in order to enable the organization to identify strategic approaches to counterbalance the effects of these five forces.