Michael E. Porter, Harvard University's high priest of corporate strategy, has blessed the theory that banks will grab more and more market share in mutual funds.
Traditional fund companies are "going to have to learn what rivalry is all about," Mr. Porter told 1,500 mutual fund executives who gathered in Washington for the Investment Company Institute's annual convention last week.
Rocked by financial problems, the banking industry has spent much of the last five years contracting, not competing, he said.
Pursuit of Shareholders
But those days are over, he said, and banks are beginning to use both their customer base and technology to go after fund shareholders.
That spells new competition for the mutual fund industry, which has expanded so fast in recent years that it has had little reason to worry about competition from outsiders, he added.
Mr. Porter, a professor at Harvard's business school, is a leading authority on business strategies. A book he published in 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, is revered as a classic in its field.
In his address to the mutual-fund trade group, Mr. Porter warned that a cooling in torrid growth of total fund sales will add to the competitive struggles of the next few years.
The fund industry cannot sustain the nearly 50% growth rate it h as experienced over the past three years, Mr. Porter told the institute.
"The explosive growth that you've been struggling to keep up with is over," he said. "1993 may be the peak or maybe 1994, but industry growth has to decline. Economics demand it declines.'
Mutual fund assets now stand at more than $1.7 trillion, and banks have carved out between a 15% and 18% market share, he added.
As growth winds down, companies will start to wrangle over market share. "What that means is that being in business will no longer be enough."
Fund companies will be faced with two choices: "Ride the market down" or focus on competing through pricing or product differentiation.
Automobile Industry Model
Taking an example from the automobile industry, Mr. Porter said Toyota has mastered pricing, while Mercedes Benz has successfully created product premium. "You can't do both," he warned.
To date, companies that create and offer mutual funds have done neither very well, said Mr. Porter, who maintains that the industry is plagued by a "metoo" mentality that includes cloning competitors' products and following the latest hot trend.
"I read a lot and I've had a hard time finding any crisp strategy," he said.
Until fund companies develop such strategies, investors will end up buying fund shares based on price alone, which will be detrimental to the industry, Mr. Porter said.
Ms. Longo is a financial reporter in Washington.