In classic Western films, distinguishing the good guys from the bad guys was easy — the villains always wore black hats. Similarly, in the old days of the investment banking industry, competition followed a clear narrative: clients were the good guys, rivals were the bad guys. You aimed to keep your clients happy and gave no quarter to your competitors. The lines were unmistakable. However, in today’s business landscape, competition has become more intricate, blurring the lines between friend and foe. Now, they come in all shapes and sizes, making it challenging to discern who’s who.
Sometimes, however, foes can become friends, e.g., by leveraging skills, professional relationships, and scale economies. It’s important to remember that true competitive advantage lies not just in market share, but in maximizing client value-added. Adopting a ‘share of market’ mindset demands competitive skills, while embracing a ‘share of client value-added’ mindset requires collaborative prowess.
In investment banking and other professional services businesses, success hinges on achieving the right balance between two key factors: economies of scale (market power) and distinctiveness in terms of value-added services (see, for example, my book: On Becoming Extraordinary — Star Professional Service Firms). This trade-off between ‘reach’ (scale) and ‘richness’ (distinctiveness) defines a firm’s competitive edge. The critical question is how to leverage this ‘reach’/’richness’-dynamic. Investment banks can achieve this by forming smart partnerships. These partnerships complement and strengthen the firm’s own proprietary assets and capabilities, unlocking new opportunities and maximizing value delivered to clients. Why buy US boutique bank Greenhill when an alliance would be the smarter strategy — for both Mizuho and Greenhill?
Contrary to its Japanese peer, SMFG is walking a different, more effective path with Jefferies by enlarging its share in the American investment bank based on a mutually discussed approach in which both parties leverage their geographical and product/service skills, all focused on delivering more effective value to both firms’ clients. The underlying math isn’t that complex, said the majority of executives and senior managers of my latest empirical study focused on finding the Rosetta Stone of great investment bank management (titled: ‘Cracking the Code of Excellence in Investment Banking’).
The key challenge for many investment banks lies in embracing a new ‘dominant logic’: shifting from primarily intra-industry competition to a model that also actively leverages intra-industry and inter-industry collaboration. That said, it usually takes a mental quantum leap to clear a strategic hurdle. Message: never judge a stranger by the color of his hat.