Academic journal article ABA Banking Journal

Where Do We Go from Here?

Academic journal article ABA Banking Journal

Where Do We Go from Here?

Article excerpt

Good-news-headlines about banking have been scarce for so long that there's an almost palpable pleasure in seeing them now. We're referring to the reports on 1992 earnings.

The numbers for community banks that appear in this issue (p.18) are fresh evidence that 1992 was an extraordinary year. This year could be at least as good, according to the majority of respondents in our survey group.

Nag. nag. nag. Now that things are looking up, allow us to throw a little cold water on the party. The fact remains that the industry is still in a long-term decline in terms of its competitive position in the financial services market.

We've talked before in this space about the need to update federal banking laws. But that isn't our message this time, although it's closely related. No, we're talking about how each bank can improve its competitive position.

Harvard Business School Professor Michael Porter focused on that message in a speech at the ABA Annual Convention in October. His comments are a good starting point for reevaluating your strategy.

Not market share. The central concepts banks should focus on are positioning and competitive advantage, said Porter, but they tend not to do that. "Banking has an intense desire to imitate," he said. "Imitation will not produce a competitive advantage." If the industry goes up, you're up, if the industry goes down, you're down, Porter noted.

Competitive advantage means having a lower cost than your rivals or some degree of differentiation--something unique you offer customers--or both. "The worst error in strategy," said Porter, "is to be stuck in the middle--to worry about cost but not be low-cost." That's what's happened to General Motors, he added.

What banks should not focus on, Porter counselled, is market share. "In a risk-based business," he said, "market share is a disastrous goal because it drives you to take more risk [than you should], and you end up getting slammed in the end. …

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