Business essentials translated: the five forces that shape strategy

by MPA17 Nov 2014
As cooling house prices demonstrate our industry is not unremoved from the rest of the economy, it’s also worth remembering brokerages are subject to many of the same forces as normal businesses. That said, a great deal of business strategy literature is simply unsuited to the mortgage space, often failing to understand the impact of commission and the status of clients.

We’ve gone out to adapt business strategy essentials to the mortgage sphere. Here we consider Harvard Business School Professor Michael Porter’s five forces competition analysis.
1. Buyers
Known to us as clients, in Porter’s analysis buyers are always trying to drive costs down.

Similarly, clients are often on the lookout for the best rate, but, crucially, they don’t pay brokers for most residential business. However, whilst getting the best rate doesn’t necessarily involve the broker’s return taking a hit, it might take more work, and thus reduce time for other money-earning tasks – i.e. cost the broker that time.
2. Suppliers
The second force of the five forces is suppliers who would like us to pay them more and deliver less.

Even a small brokerage will have a number of suppliers, such as the stationers that supplies your paperclips. But for the purpose of this analysis, let’s concentrate on lenders and aggregators. Lenders supply finance, and pay brokers, but they also want brokers to save them time and money by doing more of the processing work and cross-selling. Aggregators supply support and processing, and are looking for brokerages to maximize their volume using that same level of support.  

3. Substitutes
Buyers often have alternative options to get what they need, particularly in the mortgage space.

Bank branches might appear the biggest example of substitutes, but perhaps the substitute brokers should be concerned about most is online comparison sites. While brokers offer something branches can’t – choice of a number of institutions – comparison sites can appear to offer this choice, whilst being clearly differentiated from brokers, making them a true substitute option.
4. New entrants
For porter, new entrants can reduce profitability, but this is complicated when applied to the 3rd party channel.

Many people are looking to move into broking, and brokerages may need to improve their customer service and lender panel in response. However more people in broking won’t necessarily reduce broker profits nationwide, because brokers don’t yet write all loans in Australia; there is more of the pie to go around.
5. Existing rivals
Finally, the intensity of existing rivalry can reduce profits by consuming resources.

This can be applied to broking in a sense; franchise brokerages lavish money on advertising; to compete, independent brokerages need to differentiate their product offering, perhaps by increasing the number of support staff, or spend money experimenting with innovation.


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