Q. Porter 2001 wrote: "The internet then is often ..in many cases it actually makes those sources even more important." Discuss this statement on the banking sector

Essay by AbrarxxUniversity, Bachelor'sB+, March 2004

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Porter's (2001) statement from his article Strategy and the Internet summarises his discussion on the relative advantages of the Internet and how these are worthless without a strategic approach. He uses his own five forces analysis to analyse the "underlying forces of competition", this analysis is necessary to "illuminate" areas of potential profitability. Applying this framework to the banking industry uncovers interesting revelations. The threat of substitutes in the banking industry is high in that switching costs are low or non-existent for domestic accounts, which ensures that rivalry is intense and the market remains efficient in the simple sense. However, most established companies have set up subsidiary online companies to take advantage of arbitrage opportunities. HSBC with First Direct, Abbey National with Cahoot and Prudential with Egg all these companies illustrate success as an Internet company that is dependent upon support and image of an established company. This complies with what Feeny (2001:2) identifies as "established companies and new competitors...forging


In Porter's analysis the Internet can bring substantial cost savings in terms of logistics and communication systems. These cost savings however can be detrimental to the industry in which they are achieved in that they reduce profits through creating increased competition. The Internet as stated by Porter (2001:64) "alters industry structures in ways that dampen overall profitability". This may be true of the banking industry, as established banks must compete with offers from on-line banking companies in order to remain competitive. Cooke et al (2001) in Wheelen and Hunger (2001:13-1) relates this through a US example of new Internet only entrant's on-line banks such as Telebank, Netb@nk and Security First Network Bank. The suggestion is that 'bricks and mortar' locations are expensive and online transactions are much cheaper and that "Internet banks could pass cost savings onto customers...