The market for investment products continues to grow and developments from the internet to pension r...
The market for investment products continues to grow and developments from the internet to pension reform are opening the way for rapid expansion. With such opportunities come the challenges of convergence, globalisation, new technology and the ever more exacting expectations of an increasingly segmented and sophisticated customer base.
The impact of these new imperatives, in particular the shift in power from seller to customer, is likely be a growing polarisation within the industry. Tomorrow's Leading Investment Managers, a joint study by PricewaterhouseCoopers (PwC) and the Economist Intelligence Unit, concluded that firms will need to choose where to position themselves - as manufacturer, distributor, or as the newly emerging integrators. Few will manage to cover the entire spectrum.
We are also seeing the emergence of a genuinely global industry. Many of the global players have developed through merger and acquisition. Others, such as Fidelity, have grown organically on the back of powerful international brands. All have the advantage of significant leverage potential, which for firms such as Prudential UK and SSB Citi Asset Management includes the extensive distribution channels of their parent groups.
Following hard on the heels of the global leaders are a series of local and regional players, looking to develop their international presence through strategic alliances and joint ventures. Despite the scale of consolidation within the asset management industry, there is room for such ambitious aspirations, particularly as research has shown no correlation between the market capitalisation of emerging global players and their level of funds under management. This suggests relative success can be achieved without access to huge resources.
Despite the scale and urgency of these competitive challenges, many companies in the UK have been slow to respond. A recent report by the Centre for Research in Employment and Technology in Europe, commissioned by the Fund Managers Association, concluded that "outside a minority of firms, there is, as yet, no strong tradition of forward thinking and preemptive actions". Such complacency is especially perilous at a time of rising margin pressure and declining profitability, as revealed in the survey.
When firms do take action, the response has all too often addressed the symptoms of underperformance rather than attempting to develop a coherent long-term strategy. Others have poured resources into costly marketing campaigns - the PwC survey revealed a 50% rise in marketing spend between 1998 and 1999. While much of this increase can be justified by the need to build global brands, many campaigns have failed to take account of changing customer demands. The rush to win new clients seems also to have been at the expense of investment in account retention, which has actually fallen. Many recent takeovers also suggest a lack of forethought. Firms need to be mindful of the potential fit and how to meet the challenges of integration.
PwCs Global Business Advisory practice is currently helping a number of clients to redefine their vision for this evolving marketplace, based on the building blocks of strategy, global platform, product structure and product rationalisation. Underpinning this approach is what the study identified as the new emerging management imperatives of risk, knowledge and technology, which are increasingly seen as the keys to optimising client focus, operational efficiency and competitive differentiation.
Build, acquire or partner
The central challenge is to identify the key markets for growth. Firms must choose the best method of entry: build, acquire or partner. With most global players having evolved through a series of mergers and acquisitions, they can find themselves with both gaps and overlaps in their product portfolio. It is therefore essential to rationalise, restructure and where necessary create new product lines. The legacy of acquisition and extended product lines can also be a variety of administrative platforms, IT systems and/or outsourcing arrangements. Through consolidation firms must bring these down to the most efficient number given local rules and regulations.
Such players operate in local or regional markets like Asia or Latin America. While their first priority is to fortify their position in their home markets, many are now looking to adapt their products for other territories. In aspiring to be global players, their chief routes for expansion are strategic alliances with distribution product, and administrative partners in their target markets.
Firms are becoming more selective in choosing those markets where their brand or performance can create a competitive advantage. This requires extensive analysis of product offering to identify gaps and develop optimal restructuring plans. Economic modelling is also critical as smaller players do not tend to have the resources enjoyed by their global rivals. Having targeted the market, firms will need to create a web of distribution relationships, capable of bringing products to new territories. This requires close scrutiny of potential and existing partnerships. When competing with the distribution muscle and product range of the larger players, it is essential to emphasise performance and specialist expertise.
Teresa McGonagle is a partner at PricewaterhouseCoopers
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