Using Porters Five Forces Model

As a agency to Explain Why One Stock Market Might Take Over Another


Stock markets are merely markets where capital instruments like exchequer measures, corporate bonds and portions are traded. The major stock markets in the universe are NYSE ( New York Stock Exchange ) , Japan Stock Exchange, Hong Kong Stock Exchange, Germany, and Singapore among others. Over the old ages, some capital markets have been bigger than others in footings of volume of trading and efficiency. The New York Stock Exchange has been ruling over the others due to some factors like efficiency. Other stock markets that have been dominant over the others are the Japan Stock Exchange and the London Stock Exchange.

Other stock exchanges are nevertheless coming up and over the old ages, some have been observed to take over the others. There is hence a possibility that a stock market can coup d’etat another in footings of efficiency and volume of operations ( Porter, 1990 ) . This context seeks to discourse the possibility of a stock market taking over another utilizing the Porter ‘s five forces of competition. A stock market is an administration like any other and it is hence affected by the external and the internal factors. The fight of stock markets can hence be evaluated utilizing the Porter ‘s five forces of competition.

Competition amongst stock markets

Whenever there is two or more similar concerns runing in one topographic point there must be competition amongst themselves. With the of all time increasing figure of stock markets in the planetary sphere, this competition is non expected to acquire any less stiff. There is competition amongst the stock markets to pull purchasers and Sellerss of capital instruments. The competition has even become competition and the markets use assorted ways to pull investing. There are ever a large figure of companies using for enrollment with stock markets for the intents of raising capital and following with assorted regulative commissariats. There are big, medium every bit good as little stock exchange markets in the planetary fiscal market and new stock markets continue to be established ( Porter, 1990 ) .

The stock markets vie against each other in footings of merchandise invention such as usage of information engineering and green concern. The stock markets strive to be extremely liquid in order to run into the fiscal demands of both the clients and providers of capital. Information proviso to the investors and listed companies is besides really of import since it makes the participants to do informed determinations. The stock markets besides seek to hold a clear regulative model that will protect the involvements of the investors and companies and at the same clip offer flexibleness to the participants.

Competition amongst stock markets is a reasonably recent phenomenon because in the yesteryear, the stock markets were monopolies and the nature of their operation was seen as particular. There was therefore no competition amongst the companies until late ( Porter, 1990 ) . The competition among the stock markets has produced consequences, some positive and others negative. It has resulted to monetary value wars, coup d’etats and creative activity of new stock markets even in the same state. More significantly, the competition has a long term deduction that the strong stock markets will last and the weaker 1s may be taken over by the strong 1s.

Globalization has brought about competition amongst the stock markets. Globalization means the proviso of goods and services that are acceptable worldwide. Over the recent old ages, globalization has picked up and administrations are taking a planetary disposition. In the context of fiscal and stock markets, globalization refers to a stock market offering a broad scope of similar merchandises that are suited to clients from all parts of the Earth. The universe is meeting and going a planetary small town due to technological promotion and political clime ( Porter, 1990 ) .

Globalisation is an indicant that competition is in the addition. Stock markets are no longer limited to the local markets ; they can now offer goods and services to clients globally. The stock markets are faced with stiff competition from other stock markets which are offering similar merchandises and services that are within the clients ‘ range globally.

Coup d’etats of stock markets in the planetary fiscal market are nil that has non been heard of, it has happened before and the possibility of future coup d’etats can non be ruled out. Equally long as globalization lives and every bit long as some stock markets will go on to be more competitory that others, so coup d’etats can non be avoided. The inquiry is how a stock market can take over another. This can easy be answered utilizing the Porter ‘s five force theoretical account in finding the fight of a stock market.

Possibility of utilizing porter ‘s five forces theoretical account to explicate fight of a stock market

The Porter ‘s five forces of competition are ; new entrants ‘ menace, purchasers dickering power, providers dickering power, competition between bing houses and menace of replacement merchandises. The new entrants ‘ menace to stock markets can be viewed as a competitory force coming from debut and growing of little stock exchanges. If the there are many approaching stock markets, it poses a menace to bing stock markets. Over the recent yesteryear, there has been an addition in stock markets in the Earth. In 2000, the stock market that had been antecedently known as Euro following stock market disintegrated into Amsterdam stock exchange, Brussels stock exchange, Paris stock exchange and Lisbon stock exchange. The debut and growing of these stock exchanges will increase competition in the planetary capital markets. Therefore if there is increasing figure of stock exchanges, there is possibility that some stock markets will take over others due to increased competition ( Porter, 1990 ) .

Menace of new entrants is dictated by some facets like capital demands, regulative model, and range of economic systems, repute of bing participants in the market, costs of alterations and the entree to the market. The easier it is for new stock markets to emerge, the more the figure of stock markets will come up. In the planetary economic system, it is easy for stock markets to come up because each and every state aspires to hold its ain stock market. This is because there are no ordinances restricting the figure of stock markets and the capital required is non beyond range. If the bing stock markets do non happen strategic responses to counter new entrants in the planetary capital market, there is possibility that the approaching stock markets can coup d’etat the bing 1s.

The other factor is dickering power of providers. Stock markets like any other administration usage supplies from other administrations. The most of import providers to the stock markets are the investors who are willing to put their money in capital instruments. They are the providers because they supply the capital that is needed by the companies for enlargement and covering operating disbursals. The investors are both persons and corporate organic structures. The dickering power of investors in a stock market can be determined by the figure and size of fiscal establishments, the wealth of single investors, the figure of investors and the information available to the investors ( Porter, 1990 ) . The degree of information can be determined by detecting how clients in a stock exchange evaluate stocks for investing based on hazard and return. A stock market that has more and big fiscal establishments is likely to be confronting high dickering power from providers. If the investors are affluent and their figure is large so there is high dickering power of the providers. For a stock market where the investors have entree to information, the bargaining power is high. Consequently, high dickering power of providers is a disadvantage to any administration including the stock markets. It therefore follows that a stock market with high provider dickering power is disadvantaged and can be taken over by another stock market with low dickering power.

Dickering power of purchasers is the 3rd factor of the Porter ‘s five forces of competition. The purchasers for the stock markets are the companies seeking to raise capital by selling instruments in the stock markets. They are the purchasers because they purchase the services offered by the stock markets and they pay a premium for it. Being of large companies in an economic system pose high dickering power of providers and frailty versa. If the companies are many in figure, the bargaining power of the purchasers is high. Multinational companies pose high bargaining power to stock markets because they have the flexibleness of switching from a stock market to another easy ( Porter, 1990 ) .

The companies have the ability to beat up for alterations of regulations of stock markets and this is a disadvantage to the stock markets. Companies have besides been known to act upon the operations of stock markets through collusions and runs. The companies can besides endanger to unite and organize their ain stock market or go forth one stock market for another. A stock market faced with a high bargaining power of purchasers is more likely to be taken over by a stock market that is confronting lower dickering power of purchasers. Lower dickering power of purchasers is characterised by few companies, absence of transnational companies and deficiency of cooperation amongst companies.

The other force of competition harmonizing to Porter ‘s theoretical account is rivalry between bing houses. It has been noted earlier in this paper that stock market compete amongst themselves in footings of attractive force of purchasers and Sellerss. There is cut throat competition amongst the stock markets particularly at this epoch of globalization. The competition between the stock markets has resulted to take down costs of trading in the stock markets, processs for entree of companies to stock markets being made less rigorous, lower legal costs, relaxed accounting and revenue enhancement ordinances and general efficiency in the stock markets ( Porter, 1990 ) .

Stock markets are out to vie with the others in footings of decrease of trading costs, broad regulations and ordinances and increased efficiency. Following this, there is high competition amongst the stock markets and it is the stock markets which are reasonably simple, cheaper and more efficient which will thrive ( Porter, 1990 ) . The stock markets which can non offer efficient and less dearly-won services will be taken over by those which can.

The last force is handiness of replacement merchandises. Handiness of utility merchandises makes an administration to lose market for its goods and services and this applies to stock markets excessively. Substitutes to stock markets are alternate methods of raising capital such as banking finance, household finance, reinvestment by stockholders, and trust of finance from the authorities and usage of private capital. A stock market runing in an economic system where there is handiness of alternate methods of raising finance is likely to be taken over by those operating in economic systems where the alternate beginnings of finance are limited ( Porter, 1990 ) .

The Porter ‘s five forces theoretical account is therefore a good theoretical account to explicate the possibility of coup d’etat of a stock market by another because it shows the strengths and failings of a stock market. It is good known that administrations that have competitory advantage over the others are likely to be bidders to the less competitory companies. It therefore follows that a stock market that is more competitory than the others can take over the less competitory stock markets. Using the Porter ‘s five forces of competition, a stock market with high dickering power of purchasers and providers, one facing menace from new entrants and those operating in a state with alternate beginnings of capital has low fight ( Porter, 1990 ) . This company may therefore be taken over easy by another stock market runing in a clime with low dickering power of providers and purchasers and those operating in an environment with barriers to entry of new participants have high fight. A company with high fight can offer and win against one with low fight.

A return over is a purchase of a company by another company. Coup d’etats may be friendly where the command company makes an offer to the mark company through the board of managers and/ or hostile where the bidder makes an offer to the stockholders straight without traveling through the direction. The rule grounds for coup d’etats are to increase gross revenues, explore new markets, increase the profitableness of the mark company and cut down uneconomical competition among companies. Other grounds may be to widen the merchandise scope, derive the advantage of economic systems of graduated table and to achieve operational efficiency.

Although the Porter ‘s five forces of competition is a possible theoretical account to explicate the possibility of a stock market taking over another, it suffers from some restrictions that make it less utile. These restrictions do non do the theoretical account irrelevant in explicating why a stock market may take over another but it is good for one to be cognizant of the restrictions. Academicians have argued that the Porter ‘s five forces of competition are partial and are non based on the resources available to a stock market ( Porter, 1990 ) . It is hence necessary to unite the Porter ‘s five forces of competition with another theory based on resources in order to acquire a complete position of the competitory advantage of stock markets.

Another defect of the Porter ‘s five forces of competition is that, the theory is based on the external environment parametric quantities. Suppliers, purchasers, competition between bing houses and menace of new entrants are all external elements to competition. This theory therefore ignores the internal factors like the direction, resources available, employees and operational efficiency.

The other large restriction of the Porter ‘s five forces theoretical account is that the theoretical account has an component of power that is irrelevant in the perfect market theoretical account. With mention to purchaser and supplier power, the Porter ‘s theoretical account goes against the premise of perfect market theoretical account. The Porter ‘s theoretical account is besides against the perfect theoretical account by concentrating on houses and markets alternatively of concentrating on the houses and markets. Porter ‘s theoretical account has nil to make with determination devising of peculiar stock markets which is another major defect since the parametric quantities are all external to the stock markets ( Porter, 1990 ) .

Academicians besides argue that the Porter ‘s five forces theoretical account is non suited for extremely regulated industries such as the stock and fiscal markets which is another restriction of the theoretical account. Regulation can nevertheless be incorporated in the theoretical account as a barrier to entry of new stock markets but this is non sufficient plenty. The Porter ‘s theoretical account does non factor in e-business which is a new and developing factor in concern ( Porter, 1990 ) . This is a large defect given that the finance is a subject that requires input of information and e-business is a tool to assist in proviso of the information required for determination devising in finance.

The Porter ‘s five forces theoretical account can non be tested easy because informations about the parametric quantities is non ever available. The theoretical account besides emphasises much on competition and competition and regulations out the possibility of cooperation between houses in an industry. It is deserving observing that, competition is a broad construct and has many dimensions ( Porter, 1990 ) . However, cooperation can be built into the theoretical account by sing it as a negative competition among existing houses.

Despite these defects, the Porter ‘s five forces theoretical account is powerful in explicating the possibility of a stock market taking over another stock market. This is because the theoretical account is suited to compare the fight of the stock markets. The Porter ‘s five forces theoretical account can besides be improved to go more relevant and suited for explicating the possibility of a stock market taking over another stock market. Some betterments can be inclusion of the external factors and sing e-business. The Porter ‘s five forces theoretical account can besides be made more suited by being combined with another theoretical account: For illustration, a combination of the Porter ‘s five forces theoretical account and the PESTLE theoretical account can be a good manner to determine the fight of administrations.


From the above treatment, it is clear that the Porter ‘s five forces of competition theoretical account is suited for comparing the fight of stock markets hence it is possible to explicate why a stock market may take over another utilizing the theoretical account. This is because the theoretical account chiefly focuses on finding fight of an administration over the others based on the environment of operation of the administrations. This theoretical account is nevertheless faced with some defects which make it less suited. Despite the restrictions, it is deserving observing that the Porter ‘s five forces theoretical account is of import and a force to think within competitory issues. It is hence relevant to explicate the possibility of a stock market taking over another stock market. The theoretical account can besides be improved through some alterations and combination with other theoretical accounts so as to go more suited for measuring fight of stock markets therefore measuring possibility of some stock markets taking over the others.