‘Herding’ eliminates differences among investment banks’ product/service offerings, client strategies, pricing/fee models, innovation strategies, marketing (relationship management) approaches, and more. When investment banks in a ‘strategic group’ — full-service investment banks, boutique banks, financial conglomerates, or universal banks — begin to herd around a single strategy, declining margins are bound to follow. But it is change over the longer term that establishes whether herding has taken place. A decline in differentiation and uniqueness demonstrates that firms are engaged in strategic herding. Since the global financial crisis, this trend has negatively impacted investment banks, as observed by myself and other clients, leading to a decline in reputation, employee appeal, client loyalty, and financial performance.

Strategic herding has destroyed margins in many industries. For example, in the 1990s, the Federal Reserve Bank of Boston examined the degree of ‘strategic differentiation’ and its effect on the margins of the biggest companies that accounted for 98 percent of the PC market from the mid-1970s to the late 1980s. During that period, the PC industry’s ‘strategic differentiation index’ declined by more than 35 percent as firms clustered around the then dominant ‘IBM-clone’ PC model. As a result of this decline in uniqueness, margins fell during the same period by more than 50 percent, representing $3 billion in destroyed margins by the end of the 1980s. Interestingly, the study’s most distinctive firm, Apple Computers, became a true icon — many years later.

The solution for the investment banking industry? Look for ‘white spots’ — unexplored areas on the client landscape. ‘White spots’ can take the form of new product niches, value-added services, sales/market/relationship management, etc. strategies, as well as unexploited fee/price structures. Don't forget people with unique backgrounds (e.g., experienced hires from other industries).

The number of ‘white spots’ — business opportunities — in the investment banking industry is almost unlimited, with opportunities ranging across many dimensions. Message: in the long run, failure to (re)invent products, services, client approaches, people acquisition strategies, and so forth to ensure ongoing strategic differentiation will lead to a steady decline in performance. Herding, today’s dominant investment banking logic, ultimately undermines the reputation and status of individual investment banks.