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, for example, by leveraging skills, professional relationships, or 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 (for more details, see the book “On Becoming Extraordinary — Star Professional Service Firms”). The 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. Such partnerships complement and strengthen the firm’s own proprietary assets and capabilities; they unlock new opportunities and maximize value delivered to clients. Why buy US boutique bank Greenhill when an alliance would be the smarter and (much) cheaper option, especially for Mizuho?
In contrast to its Japanese peer, SMFG is pursuing a different, more effective path with Jefferies by enlarging its stake in the American investment bank through a mutually agreed approach in which both parties leverage their geographical and product-service capabilities to deliver greater value to both firms’ clients. The underlying math isn’t that complex, according to the majority of executives and senior managers surveyed in my latest empirical study, which focuses on identifying the Rosetta Stone of outstanding investment bank management.
The key challenge for many investment banks lies in embracing a new ‘dominant logic’ — shifting from primarily intra-industry competition to a point of view that actively leverages intra-industry and inter-industry collaboration. That said, it usually takes a mental quantum leap to clear a strategic hurdle, especially in high-octane business environments. Never judge a stranger by the color of his hat.