Porter Tells Banks: Differentiate and Have a Strategy or You'll Eventually Die
ORLANDO, Fla. - Retail banks are accustomed to hearing Michael Porter's blunt comments about their industry, and this year was no different. Building on themes he first touched on when he spoke at BAI's Retail Delivery Conference & Expo in 1997, the Harvard Business School professor gave attendees at the...
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ORLANDO, Fla. – Retail banks are accustomed to hearing Michael Porter’s blunt comments about their industry, and this year was no different. Building on themes he first touched on when he spoke at BAI’s Retail Delivery Conference & Expo in 1997, the Harvard Business School professor gave attendees at the 2005 conference another harsh piece of advice: learn to differentiate yourselves and develop an effective strategy, or you’ll die. “Most banks don’t have a clear strategy,” said Porter. “They’re trapped by their size, existing customer base, legacy delivery systems and footprint. The banking industry is basically riddled with `me-too competition’. “That works fine when tides are rising but not forever,” he continued. “Banks have been protected a lot by inertia and stickiness on the customer side. But the pressure will grow as the era of consolidation and restructuring abates. We’re entering a period of strategic positioning. Increasingly banks will have to be able to deliver something distinctive to their customers.” He added that, “Just bulking up and being big and having lots of branches in lots of states is soon not going to be any sort of advantage. Ultimately you are going to have to deliver something distinctive.” But not only do banks not have a clear strategy, they don’t what that means, he offered. Wanting to be the best is not a strategy, he said. Porter said an effective strategy has to include five elements: * a unique value proposition * a different, tailored value chain * clear tradeoffs, or deciding what not to do * mutually reinforcing activities that support the value proposition * continuity, or sticking with the strategy. “Competing to be the best is not a strategy,” said Porter. “Although it’s a natural way of thinking, it’s also a dangerous one. You’re competing to be unique, not the best. Strategy is what will allow you to be unique, how you’re going to create a distinctive value and the action steps that value. Banks have to start making some strategy choices.” According to Porter, winning strategies that lead to competitive advantage fall into one of two categories: differentiation of products and services, and lower overall cost structure. He cited Whole Foods and Southwest Airlines of examples of companies that have achieved a superior return on invested capital in their respective industries. “There are too many banks with similar infrastructures that are trying to come up with gimmicks. That creates a `me-too’ competition that won’t work forever. Every bank needs to know how it will get to be distinctive,” said Porter adding that, “operational effectiveness is not a strategy.” Porter criticized banks for trying to serve all customer segments and trying to be all things to all people. Customer segmentation tactics, he said, make no sense at all. Banks need to decide which customer segments they want to serve and then mold their delivery systems around those choices or value propositions. However, he told the audience, “Very few banks have the courage to have a distinctive value proposition from their competitors. You must have clarity of purpose.” While devising a strategy is difficult and there are a lot of barriers, Porter stressed it’s incumbent on banks to have a strategy. We are entering an era of strategic positioning, he told the audience, and commitment to strategy is tested everyday. -
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