Bank of America: Porter's Five Forces Industry Analysis

Executive Summary

Bank of America is one of the largest financial services companies in the United States. It is the largest bank by assets, the largest commercial bank by deposits, and the second largest by market capitalization in the country. In Porter's Five Forces model, Bank of America's main competitors include JPMorgan Chase and Wells Fargo. Bank of America has a number of key factors working in its favor. The first is simply its name and brand recognition. Additional advantages include the high capital requirements and the government policies that govern the financial industry. Long-term tangible investments — such as paintings, antiques, gold, and yachts — tie up dollars that could otherwise be deposited by customers and subsequently invested by Bank of America. For Bank of America, the main supplier is the Federal Reserve. Buyers of Bank of America's products and services include people from a wide variety of backgrounds across American society.

Historical Background

Amadeo Peter Giannini, whose parents were Italian immigrants, established Bank of Italy in 1904 in San Francisco, California. On its first day — Monday, October 17, 1904 — 28 deposits totaled $8,780. Separately, Orra Eugene Monnette purchased a controlling interest in the American National Bank of Los Angeles (ANB). In 1909, ANB was merged into Citizens Trust and Savings Bank of Los Angeles. In 1911, Monnette purchased the Broadway Bank & Trust Company, which, when merged with the family's other holdings, formed the Citizens Bank & Trust Company, of which Orra E. Monnette served as Chairman of the Board. Citizens Bank & Trust Company was renamed the smaller Bank of America in Los Angeles, California, in 1923.

Bank of America was born from the 1929 merger between Bank of Italy and the smaller Bank of America. The combined institution was called BankAmerica, headed by Amadeo Peter Giannini and co-chaired by Orra Eugene Monnette. BankAmerica created the BankAmericard credit card in 1958, which was later renamed the VISA card in 1975. NationsBank purchased BankAmerica — which held $64 billion in assets — in 1998. The combined institution had $570 billion in assets, 4,800 branches across 22 states, and was renamed Bank of America, with its headquarters moved to Charlotte, North Carolina.

In 2004, Bank of America purchased Boston-based FleetBoston for $47 billion, solidifying its position as the nation's leading bank. The combined institution held $513 billion in assets, served 35 million customers, and operated 5,700 branches in 29 states. In 2006, Bank of America expanded its business into Brazil, Chile, and Uruguay, and also acquired Maryland Bank National Association (MBNA), which held $35 billion in assets. That merger made Bank of America the third largest bank and the largest credit card provider in the United States. In 2007, Bank of America acquired LaSalle Bank Corporation from the Netherlands' ABN AMRO for $21 billion, bringing its total assets to $1.7 trillion. In 2008, Bank of America acquired Merrill Lynch in a $50 billion all-stock transaction.

Mission and Vision

At the time of writing, Bank of America served approximately 60 million customers — including 25 million online banking users — and operated 20,000 ATMs and 6,000 branches across all 50 states. Kenneth D. Lewis, who had served as Chief Executive Officer since April 2001, President since July 2004, and Chairman since February 2005, announced his retirement from all three roles, effective December 31, 2009.

Porter's Five Forces Model Overview

Mission: To boost the economic power of the communities in which we do business by providing funds and financial services that will fulfill their needs and have a positive long-term impact, bringing measurable success not only to our stakeholders but also to our business.

Rivalry Among Competing Sellers

Vision: To be among the greatest financial institutions in the world — able to innovate and create new products that address most types of financial needs and gaps — in order to maximize our potential and grow our business. We will obtain a competitive advantage in customer service and product offerings, and we will measure our success through increases in overall market share and improved customer satisfaction.

Michael Porter, a professor at Harvard Business School, developed an influential model that analyzes five key competitive forces and helps businesses decide whether to enter a given industry. The model revolves around the competitiveness and rivalry within an industry and suggests that when these forces are particularly strong, a business should carefully reconsider market entry. The five forces are: rivalry among competing sellers, the threat of substitute products from other industries, bargaining power of buyers, the threat of potential new entrants, and bargaining power of suppliers. High rivalry can lead to decreased market share, price wars, and other scenarios that erode profitability. The sections that follow examine each of these competitive factors as they apply to Bank of America.

Bank of America is one of the largest financial services companies in the United States — the largest bank by assets, the largest commercial bank by deposits, and the second largest by market capitalization. Nevertheless, it still faces significant rivalry. Its main competitors are JPMorgan Chase and Wells Fargo. In the banking industry, profitability depends on marketing skills, efficient operations, and sound risk management. Bank of America has performed reasonably well in marketing and operations, but its acquisition of Merrill Lynch did not demonstrate strong risk management, as it negatively impacted the bank's revenue in subsequent quarters. Large economies of scale exist in certain segments of the industry, which has encouraged consolidation. Bank of America also competes with smaller banks and credit unions, which can succeed in segments where customer service or local market knowledge is paramount.

Bank of America competes across multiple industries, primarily in money center banking, but also in asset management, investment banking, and lending. In all of these areas, competitors are actively making moves to improve their market standing. Rivals may also pursue diverse strategies, including moving portions of their operations overseas. The rivalry between Bank of America and its competitors is likely to intensify given the bank's own aggressive growth strategies.

JPMorgan Chase and Wells Fargo are Bank of America's two biggest rivals. Wells Fargo's acquisition of Wachovia gave it one of the strongest asset management departments in the industry. Chase's acquisitions of Washington Mutual and Bear Stearns expanded its expertise in investment banking and increased its share of the consumer banking market. Competition in banking can be usefully analyzed by segmenting customers into those who have been with a bank long-term, those actively searching for a new bank, and those opening their first account. The fiercest competition occurs in the latter two groups. For first-time customers — primarily college and high school students — Bank of America holds a clear lead, as its broad presence resulting from many acquisitions has enabled it to hold more accounts than any other U.S. bank.