Marketing and investment banking II: relationships
and competitive advantage
Follows the previous article
by presenting results of
empirical research using a
sample of investment banks
and their large corporate
customers. Focuses on how
the banks define their source
of competitive advantage.
Compares and contrasts the
views of the banks with those
of their customers relating to
the purchasing of investment
bank services and the princi-
pal criteria used for selection
of those services.
In order that this article can
be “free-standing” in the
sense that it should not be
necessary to read the previ-
ous article in order to follow
the arguments presented
here, there is a need to
summarize the relevant
theoretical position adopted
and also to describe the
more salient characteristics
of the investment banking
industry and its markets.
These are, of course,
described more fully in the
previous article.
International Journal of
Bank Marketing
14/2 [1996] 38–49
© MCB University Press
[ISSN 0265-2323]
[ 38 ]
Peter W. Turnbull and Theofanis Moustakatos UMIST, Manchester School of
Management, Manchester, UK
Introduction
In the previous article the authors describe
the importance of the investment banking
industry, the challenges currently facing the
industry and the central position that mar-
keting currently plays in the corporate strat-
egy and competitive positioning of the major
investment banks. Furthermore, an attempt
is made in that article to determine the rele-
vance and application of marketing theory to
the industry and its markets.
In this article we present the results of
empirical research carried out with a sample
of both investment banks and their large
corporate customers. In particular we focus
on the strategic challenges facing the banks
and how they define their sources of competi-
tive advantage; we then compare and contrast
the views of the banks with those of their
customers in relation to the purchasing of
investment bank services, the nature of deci-
sion making, and the principal criteria used
for selecting and evaluation of investment
bank services.
Investment banking
Investment banking is part of the financial
services industry and offers an increasingly
important range of services to corporations
throughout the world. The range of products
and services is increasing rapidly and it is
difficult to distinguish the most important
services because investment banks offer their
services in different ways and forms. How-
ever, Chu (1980) identifies two basic functions:
raising capital and giving advice on mergers
and acquisitions (M&A). All other services
are largely supportive of or developed from
these two functions; examples include corpo-
rate securities for fund-raising and handling
mergers and acquisitions. Hayes et al. (1983),
however, define three investment banking
services:
• origination and management of new finan-
cial issues;
• underwriting of issued securities;
• distribution, involving selling securities to
ultimate holders.
In summary then, and taking into account
the developments of the last decade, we can
say that the function of investment banking is
to create and mediate the flow of assets
between “issuers” and “investors”. Issuers
include companies and other entities that sell
assets, such as stocks, bonds and even parts
or all of the company itself. Investment banks
have a very active role in “creating issuers”,
for example, spotting companies that could be
a takeover target. Investors include invest-
ment banks (merchant banking), companies,
institutions and people who buy these assets.
The President of Hikko Securities, Takao, in a
letter to customers (Nikko Securities, 1991)
defines the investment banking function in
the following way: “We see our role as facili-
tating the movement of funds from clients
with financial assets to invest, to clients in
search of capital. In fulfilling this role, our
goal is to provide consulting and advisory
services of unsurpassed quality to all our
customers”.
Throughout the past ten years or so there
has been continuing and rapid growth in
investment banking transactions and
although it is somewhat difficult to estimate
the total value of business of the industry, in
1991 underwriting business totalled about $32
billion (Euromoney, 1994) and M&A totalled
about $267 billion (Mergers & Acquisitions
International, 1994). The management of
these huge flows of money transactions has
led to the development of very special exper-
tise largely concentrated among a relatively
small number of companies.
Large institutional investors seeking to
diversify their portfolios, and large industrial
and commercial companies searching for the
best terms on which to finance their own
multinational operations, have looked for
opportunities outside as well as inside their
domestic financial markets. The amount of
funds which the former have to invest and the
latter need to finance their operations has
grown rapidly. In consequence, there has
been an expansion in international bond
markets, especially the Eurobond market; in
cross-border investment in national bond and
equity markets; and in international equity
issues. There has also been a striking growth
in the invention and use of new instruments
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
Successful financial
firms now go through a
careful transformation
process by which they try to
identify the true costs of
services and products,
analyse the true costs of a
transaction or a deal and
determine a price for each of
the component parts that go
into servicing the client.
such as swaps, financial futures and options
(OECD, 1991). At the same time many invest-
ment banks have grown from small partner-
ships to international firms with several
thousand employees.
The most important results of the rapid
growth and magnitude of financial transac-
tions and volumes have been:
• the emergence of “super-powerful” market
participants;
• shifts in competitors’ strength and market
share;
• renewed attempts by regulators to under-
stand and ultimately influence financial
market stability;
• failures and large losses among financial
market participants.
The huge scale, extent and speed of the
changes has meant that financial service
institutions have had to struggle to develop
management practices and systems to accom-
modate the fund flows, to be able to provide
services to all parties of a transaction, and
contain the risk to themselves and to their
customers. In the 1980s, many firms expanded
rapidly without ensuring that they were
adequately managed. Since they did not mon-
itor the real costs or benefits of serving the
customers their actual decisions and cus-
tomer selection were often sub-optimal and
uneconomic. Successful financial firms now
go through a careful transformation process
by which they try to identify the true costs of
services and products, analyse the true costs
of a transaction or a deal and determine a
price for each of the component parts that go
into servicing the client.
Theory relevant to the marketing
of investment banking services
Almost no research has been done within the
academic/marketing discipline to guide
investment banks towards better marketing
strategies and operations. There are, how-
ever, at least two main areas of conceptual
and empirical research which provide appro-
priate frameworks of analysis and action: the
interaction approach to buyer-seller relation-
ships and the field of services marketing and
service quality.
As Lovelock (1991) points out, services
businesses can grow in one or more of three
ways: attract new customers; encourage
existing customers to purchase greater quali-
ties and/or higher-value services; terminate
unprofitable stagnant or otherwise unsatis-
factory relationships and replace them with
new customers who better match the firm’s
profit, growth and positioning strategies. All
these strategies require the effective
management of relationships, which is one of
the most important issues facing investment
banking. Ford (1980) states:
… a company cannot treat its market in
some overall way. Not only must it segment
that market according to the different
requirements of the companies, it must also
see its potential market as a network of
relationships. Each of these relationships
must be assessed according to the opportu-
nity it represents and how it can be devel-
oped. The company’s marketing task then
becomes the establishment, development
and maintenance of these relationships,
rather than the manipulation of a gener-
alised marketing mix. Furthermore, this
management of relationships must take
place with regard to the company’s skills
and the costs involved as well as the alloca-
tion of its resources between different rela-
tionships according to the likely return.
Levitt (1986) says about relationship manage-
ment in professional firms: “Relationship
management requires company-wide pro-
grammes for maintenance, investment,
improvement and even for replacement”.
Ford distinguishes the strategic manage-
ment of relationships from the operational
management of a single relationship. Strate-
gic management covers the portfolio of rela-
tionships. It is concerned with the interac-
tion between relationships, their respective
importance and the consequent resource
allocation between them. It is often difficult
for relationship managers involved in
detailed interaction with a customer to see
the relationship in perspective.
Clearly, investment banks must develop
both strategic relationship management and
operational relationship management, taking
into account the fact that not all existing
customer relationships are worth keeping.
Some customers no longer fit the firm’s posi-
tioning strategy, either because that strategy
has changed or because the nature of the
customer’s behaviour and needs has changed.
Careful analysis may show that many rela-
tionships are no longer profitable for the
firm: the cost of their maintenance is higher
than the revenues they generate. Each invest-
ment bank needs to evaluate its customer
portfolio on a regular basis and consider
terminating unsuccessful relationships. Ford
(1980) enumerates a series of questions which
a seller should consider in evaluating its
network of relations:
1 What is the likely potential of this relation-
ship?
2 What resources are required to fulfil this
potential?
3 Where do the threats to this relationship
come from?
[ 39 ]
Peter W. Turnbull and 4 Where does this relationship fit within the
Theofanis Moustakatos context of the company’s overall opera-
Marketing and investment tions and resource allocation in that mar-
banking II: relationships and ket?
competitive advantage
5 Are the current efforts devoted to the rela-
International Journal of
tionship appropriate to this overall strat-
Bank Marketing
14/2 [1996] 38–49 egy?
6 Are we over-committed to this customer?
7 Finally, are our ways of dealing with this
customer appropriate both to its needs and
our strategy or are they based on habit or
history?
One of the most critical areas of strategic
relationship management is the identifica-
tion and analysis of the different relationship
stages. Ford describes five stages (pre-rela-
tionship, early, development, long-term,
final). Yorke (1990) proposes a life cycle model
with five stages (ignorance, interest, initia-
tion, involvement, integration). Dwyer et al.
(1987) also propose five stages (awareness,
exploration, expansion, commitment, disso-
lution) and refer to the new stage of the rela-
tionship’s dissolution and replacement, a
stage which has not attracted much attention.
Each investment bank might use its own
model of stages or life cycle, but what is ulti-
mately important is, as Yorke (1990) suggests,
the use of different tactics at each stage with
respect to:
• determining the benefit which members of
the client organization expect to receive or
are already receiving;
• translating these benefits into an appropri-
ate range of services;
• generating positive perceptions among
clients in respect to the supplier’s ability to
satisfy needs;
• delivering the service in terms of the quali-
ties desired by the client.
It is within this general theoretical frame-
work that this research was defined and car-
ried out.
Research objectives and
methodology
Introduction
The primary objective of the research
reported here was to gain insights into the
marketing practices of the investment bank-
ing industry, revealing what role different
marketing practices played in the conduct of
everyday business and which marketing
management objectives were of principal
importance. A second objective was to
explore the attitudes and service require-
ments of financially sophisticated corporate
customers in terms of different marketing
variables such as selection policies and
[ 40 ]
relationship management. This secondary
objective has a supplementary role to the
primary objective, since it may reveal “a gap
of understanding” between the main charac-
teristics of the service demand and the char-
acteristics of the service supply.
Methodology
Given that little published research existed,
inevitably led us to the view that what was
needed to meet our research objectives was
in-depth exploratory research as defined by
Churchill (1990). The qualitative data pro-
duced from this qualitative-exploratory
research consisted of “detailed descriptions
of situations, events, people, interactions and
observed behaviour; direct quotations from
people about their experiences, attitudes,
beliefs and thoughts” (Quinn, 1986).
Data collection by personal interview has a
number of very significant advantages over
other methods, in terms of the quality of data
collected. As Sykes (1990) states ,“the poten-
tial superiority of qualitative approaches for
obtaining information is the flexible and
responsive interaction which is possible
between interviewer and respondents which
allows meanings to be probed, topics to be
covered from a variety of angles and ques-
tions made clear to respondents”. Data were
collected from 20 in-depth interviews, which
was considered the most suitable method for
researching the confidential aspects of the
investment banking industry practices. The
respondents needed to know the reasons for
the research, the uses to which the informa-
tion was to be put and they felt that it was
“reassuring to know who you are talking to”.
Interviews were largely unstructured but
carried out within a framework of prepared
topics and questions. Interviews lasted
between one-and-a-half and two hours.
Respondents in the banks were all senior
executives from corporate finance divisions
of the banks and in two cases, directors of
corporate communications.
In the respondent corporations, interviews
were with senior financial staff, such as
deputy group treasurers, group treasurers
and senior financial officers whose main
responsibility was the mergers and acquisi-
tions (M&A) activity. The fact that the corpo-
rations in the sample are very sophisticated
users of M&A and other investment banking
services allowed us, in some cases, to have
information input from both group treasur-
ers and senior financial offices involved in
M&A.
The sample
The sample of investment banks and the sam-
ple of corporate clients were both judgemental
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
‘...It is a small sample, although some respondents from
investment banks considered it almost a survey of their industry
since it included the majority of major players in the industry...’
samples. Judgemental samples are often
called purposive samples; the sample ele-
ments are chosen because it is expected that
they can serve the research purpose. Judge-
mental samples are non-probability samples
selected in such a way as to increase the
chances of covering the range of issues, phe-
nomena, types of individuals and so on, that
are of interest. Sykes (1990) argues that “such
designs … ensure better representation
across dimensions of theoretical or applied
interest to the researcher. They are not hap-
hazard samples in that systematic procedures
are generally employed, which make use of
currently held information and expectations
about the important dimensions of a research
problem”.
The sample consisted of 20 respondents, of
which 12 were investment banks and eight
were large corporations. It is a small sample,
although some respondents from investment
banks considered it almost a survey of their
industry since it included the majority of
major players in the industry.
The sampling frame for the sample of the
investment banks was the list of members of
the British Merchant Banking and Securities
House Association. Although at the request of
some respondents we cannot name all the
companies participating, we can list some of
the major respondent companies: the Ameri-
can investment banks of Goldman Sachs,
Morgan Stanley and Merrill Lynch, the Eng-
lish merchant banks of Barings plc, Hambros
Bank Ltd, Morgan Grenfell Group plc,
Schroder Wagg (J Henry), County NatWest, a
specialist corporate finance house (one of the
two leading in the area), and the Japanese
Daiway Europe Ltd, Nikko Securities and
CSFB.
In-depth interviews were conducted with
the following firms: BAT, Unilever, British
Petroleum Finance, WPP, Pearson plc, Tate &
Lyle, and another large British corporation,
while Grand Metropolitan Finance partici-
pated with a partly answered questionnaire.
With the exception of WPP, all the corpora-
tions are among the 100 corporations of the
Financial Times Stocks index or 100 FT-SE
INDEX.
The corporations selected for inclusion in
the research were all very active users of a
broad range of investment banking services,
were very sophisticated customers and by
being among the largest European corpora-
tions, they were frequent targets of many
investment banks’ marketing efforts. We also
selected them because they have activities in
different industrial sectors.
Research results – the marketing
challenges facing investment
bankers
In this first part of the research results, we
present findings relating to market structure
and market segmentation and the long-term
challenges facing investment bank
marketers. The information presented is
derived from the empirical research with
bank executives and therefore presents a
supply side perspective only.
Market structure and entry barriers
In general entry barriers are the industry
characteristics which deter new firms from
coming into the industry and include such
things as economies of scale, product differ-
entiation and branding, patents and cost
advantages (Porter, 1980). Yet, although some
entry barriers will protect all firms in an
industry, it is clear that, overall, entry barri-
ers depend on the particular strategic group
that the entrant seeks to join. A strategic
group is the group of firms in an industry
following the same or a similar strategy along
a strategic dimension. Entry barriers not
only protect firms in a strategic group from
takeover by firms outside the industry but
also provide barriers to shifting strategic
position from one strategic group to another.
In the investment banking industry we can
distinguish on the one hand the strategic
group of the large international banks, which
provide a wide range of investment banking
services, and on the other hand the group of
small, specialized and highly flexible national
companies.
According to the bank respondents’ ratings,
the three most important entry barriers in
the investment banking industry are shown
in Table I.
Table I
Entry barriers to the investment banking
industry
Importance ratings
(number of responses)
Entry barrier 1st 2nd 3rd
Reputation 6 5 1
Market expertise 4 3 5
Capital adequacy 2 4 6
Note: The small size of the sample (n = 12) makes it
more meaningful to present results as number of
respondents rather than percentages
[ 41 ]
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
“...As clients become increasingly sophisticated, it is important for
an investment bank to display that it has the track record and the
experience to deliver a high quality service...!”
[ 42 ]
Reputation, market expertise and capital
adequacy were identified as the main barri-
ers to entry which the respondents identified
as important. Respondents discussed two
main facets of reputation; the “hard” and the
“soft” features. The hard part is the reputa-
tion that results from a specific product-ser-
vice, while the soft element is the overall
reputation of the firm and the culture of the
firm. The soft element may be a by-product of
the hard element, as is the case in Salomon
Brothers, where its outstanding trading skills
have created a firm with an excellent trading
reputation and a trading-based corporate
culture. What the hard element of reputation
displays is whether you have the track record
and the experience to deliver the service,
while the soft element demonstrates the dis-
tinct culture of the firm. For example, respon-
dents identified Merrill Lynch’s tradition for
trustworthiness as the overall framework
that leverages the particular product-service
strengths and skills. Equally, Goldman
Sachs’s emphasis on teamwork, a soft ele-
ment of reputation, influences the way in
which a product-service is delivered.
The second most important entry barrier,
market expertise, is closely related to reputa-
tion. Market expertise is critical for
customers because it is associated with high
quality advice and high quality execution. As
clients become increasingly sophisticated, it
is important for an investment bank to dis-
play that it has the track record and the expe-
rience to deliver a high quality service. This
raises the question of whether market exper-
tise generates reputation or whether a good
reputation enables the bank to attract the
people that have high expertise.
Capital adequacy is an important barrier
within the framework of an established repu-
tation and market expertise, as it gives the
opportunity for an investment bank to estab-
lish its presence across critical market seg-
ments, to develop its trading activities and to
participate in extremely profitable propri-
etary trading. It also provides qualitative
advantages, since a well-capitalized invest-
ment bank gives the impression of being a
solid market player and attracts new cus-
tomers.
Competitive advantage in investment
banking
It is not necessary here to expound the impor-
tance of competitive advantage or to try to
review the plethora of literature on this topic
which has emerged in the past ten years. It is
sufficient to note that competitive advantage
is at the heart of corporate and marketing
strategy (Porter, 1980) and is achieved when a
company performs better than competitors
on some factor of performance which is
important to the customers.
Respondents were asked to rate eight fac-
tors which the preliminary research had
identified as possible competitive variables.
Interestingly, only four factors were rated as
significant by investment bank respondents
as important, as shown in Table II.
The primary position that an investment
bank has in its domestic business was consid-
ered by the respondents as the most impor-
tant source of competitive advantage. To
quote: “our strength is the ability to use our
US reputation and integrate it within the UK
and European environment”; “our UK client
base lends credibility in the rest of the
world”; “Japan, our Japanese link, is our
main advantage”, were some of the responses
that emphasized the importance of this factor.
A respondent from an American investment
bank noted that their reputation as an
acknowledged leader in M&A in the USA
proved helpful in gaining access to the UK
flow of M&A deals.
Not surprisingly, given the importance
attached to reputation as an entry barrier, it
was also judged to be a critical success factor.
A reputation for the quality and indepen-
dence of advice, for integrity, for relation
orientation, and for a broad range of products
and services are the major dimensions of
reputation to which the respondents referred.
The fact that some investment banks have
built unique overall or product-related repu-
tations is an important competitive factor.
For instance, Goldman Sachs has a reputa-
tion due to its refusal to act as a dealer-man-
ager in unfriendly tender offers, which, it
was suggested, enhances its credibility and
improves its competitive position since “it is
viewed as the investment bank with princi-
ples”. Through the “weapon” of reputation,
an investment bank can not only gain busi-
ness from its competitors, but can also attract
the best people in the industry to work for it.
The other two factors, people and strength
of network, were judged important but much
less so. Clearly, investment banking is more
than anything else “a people’s business”
where relationships are critical and business
success is dependent on highly personalized
value-added services. People, through their
breadth of experience, their quality of
training, as well as their integrity and dedica-
tion to the firm, generate business and add
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
“...It also emerged that the majority (ten respondents out of 12) of
investment banks also now combine different segmentation
criteria in terms of nature and usefulness in order to increase their
effectiveness...!”
Table II
Sources of competitive advantage in investment banking
Source of competitive advantage
Primary position in domestic business
Reputation
People
Strength of network
n = 12
value to the firm. Such qualities as their
professionalism and integrity are seen as
important contributors to competitive advan-
tage.
The network strength of an investment
bank was considered as a secondary source of
competitive advantage. For example, where
an investment bank was part of a large Euro-
pean or domestic banking group or, for
instance, part of the strong Japanese “club”,
this was seen as a valuable competitive ele-
ment.
Segmenting corporate clients
One research objective was to prospect the
existence or not of segmentation methods and
practices in the investment banking industry
together with the industry-specific segmenta-
tion criteria and the ways of evaluating the
market potential of a specific segment or
account. The first, and not surprising, find-
ing, is that the investment banks do segment
their markets but more interesting is that a
number are doing so using quite elaborate
methods. Apparently this is a relatively
recent development in marketing in this
sector, having developed in the last five years
or so.
Traditional segmentation bases such as size,
geographic area and industry are used by all
respondent companies in the investment
banking industry. However, other new and
interesting segmentation bases are also being
used by a number of investment banks. For
example, transaction and activity bases are
two new foundations of segmentation and are
used by half of the respondents, mainly the
international full-service investment banks.
It should be emphasized that these new seg-
mentation approaches are in the early stages
of development and are based on:
• size and value of the transaction;
Respondent rating
(number of responses)
1st 2nd 3rd 4th
6 4 2 the deals is also used for segmentation and
3 3 4 2
2 2 4 4
1 3 2 6
• complexity and difficulty of transaction;
• level of activity in buying of investment
banking services.
It also emerged that the majority (ten respon-
dents out of 12) of investment banks also now
combine different segmentation criteria in
terms of nature and usefulness in order to
increase their effectiveness.
As previously noted, all banks utilize geo-
graphic and industry type variables for seg-
mentation and develop industry and regional
specialist teams in order to combine knowl-
edge of local markets and specific industry
expertise. However, it is interesting that the
industry-based segmentation is largely lim-
ited to the “global” industries such as oil and
telecommunications. The size of these indus-
tries and their high demand for investment
banking services justify the targeting and
provision of industry expertise from invest-
ment banks. Respondents explained that a
major challenge is to transfer the industry
expertise from one country to another, to link
the industry experience to country expertise.
On the other hand, as six respondents empha-
sized, there is the danger in overstretching a
particular country experience into another
country’s industry, which may affect the
quality of advice and service provided.
Within the industry and country segmenta-
tion, customer company size is used for more
specific targeting and half the respondents
said that they target the top 50 companies in
each country, or the top-quality names, if it is
for debt products.
Turning to the more recent and interesting
segmentation developments noted previously,
the size and value of the transaction are very
frequently used, because economies of scale
operate in the industry and profitability is
usually linked to the size of the transaction or
deal. Investment bankers also believe that
activity is linked to profitability. There are
also side-benefits. For example, a relationship
between innovation and a large flow of invest-
ment banking transactions exists. Innovation
usually flourishes in the context of highly
active relationships with customers and a
steady high flow of transactions is a prerequi-
site.
Finally, complexity of the transactions or
eight respondents expressed the belief that
deals will in future increase in complexity
and difficulty with higher added value and
higher profitability.
[ 43 ]
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
‘...all investment banks have a grading system for ranking
customers according to their estimated future capital requirements
and growth opportunities that might present themselves
regarding M&A work...’
[ 44 ]
Customer targeting and relationship
evaluation
An important issue addressed in the research
was how investment banks estimate the cus-
tomer potential of a particular account or of a
particular market segment, and respondents
reported that the appraisal of a segment’s
business potential may determine the invest-
ment bank’s commitment of resources and in
general its market position. The most impor-
tant appraisal parameters that emerged were
the future needs for raising capital (nine
respondents), estimates of the corporation’s
organic and non-organic growth prospects,
(six respondents), and the quality of manage-
ment of the company (four respondents).
“Growth prospects” appears to be a very
important variable and investment banks
examine the degree by which the corporation
will grow organically or develop a “propen-
sity for acquisitions”, as one respondent
called it.
Another important factor is the manage-
ment of the company: the kind of manage-
ment the company applies and whether or not
it has acquisition plans for the near future. In
many cases management changes will dra-
matically increase the business potential of a
company from the investment banking point
of view. An equally important dimension is
the degree of internationalism of the com-
pany; international companies obviously
have a higher potential for international
investments of high added value.
Despite the ascribed importance of these
analyses only four investment banks use a
formal methodology in order to assess the
relationship potential of the customer. The
rest of the respondents analyse the parame-
ters “informally” or “intuitively”, without
using a formal grading system or any other
formal process.
However, all investment banks have a grading
system for ranking customers according to
their estimated future capital requirements
and the organic and non-organic growth
opportunities that might present themselves
regarding M&A work. From the in-depth
discussions with investment bankers it is
possible to suggest a customer portfolio eval-
uation framework as shown in Figure 1. It
was clear from the discussions with the
investment bank respondents that they
almost all were, at least implicitly, position-
ing customers on such a matrix for strategic
and tactical planning purposes.
The purchasing process and
decision-making criteria
In this section we examine the nature of the
purchasing process, transaction interface
and important supplier selection and evalua-
tion criteria. The attitudes and perceptions of
both buyers and sellers are brought together
in this section to determine the degree to
which there is a real understanding between
the two parties in the necessarily complex
and often close relationships which exist.
However, before presenting the comparative
analysis it is useful to comment on the extent
and nature of investment bank relationships
which large corporations have and the major
decision-making unit participants. Clearly
this information is drawn solely from the
customer research with eight major corpora-
tions.
The buying centre
Not surprisingly, decision making for invest-
ment banking services is taken at high levels
in all companies, although it was reported by
all respondents that the buying team varies
with the product being purchased. In the case
of debt instruments, decisions are taken in
the treasury department, while for equity
instruments or advice-related services the
decisions are usually taken at the highest
level, with the involvement of not only the
finance director but also the chief
executive/chairman and often the whole
board of directors.
Number of bank relationships
Other research has noted the general ten-
dency of corporate customers to increase
their number of bank relationships (Turn-
bull, 1983; Turnbull and Gibbs, 1987) and in
this research this trend was also evident. All
eight respondents were multi-sourced in
terms of investment bank relationships with
a range of from three to 25 principal relation-
ships existing.
Table III shows the reasons given for multi-
banking by corporate respondents and the
majority quoted their complex service needs
as the primary reason for multiple bank rela-
tionships. Their belief is that there is no sin-
gle investment bank that can cover all their
needs properly; single-bank relationships
could not provide the broad range of exper-
tise and global coverage required by their
needs for increasingly complex services and
markets. Also, respondents believed that
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
Figure 1
Customer evaluation matrix – relationship potential
High
Customer’s
non-organic
growth
prospects
Low
Table III
Main reasons for multiple bank relationships – clients’ views
Main reasons for multiple bank relationships
Complex service needs
Reduce risk and exposure to one bank
Better pricing
Encourage competition
Table IV
Main reasons for multiple bank relationships
Investment banks’ perceptions
of customer priorities
1 Competition encouragement
2 Reduction of risk and
exposure to a single bank
3 Better pricing
4 Complex service needs
multiple bank relationships increase the flow
of market and technical information and
appropriate expertise. Therefore, since differ-
ent investment banks have varying capabili-
ties, the corporations try to optimize the
servicing of their needs by building multiple
bank relationships. Further, by being an
important client at a number of high-quality
banks, firms can benefit from the knowledge,
ingenuity and expertise of various groups of
professionals.
The second important reason was reported
to be the need to reduce the risk of the expo-
sure to a single bank, not only in terms of the
financial risk but also the “relationship” risk,
whereby one leading investment bank might
take advantage of the customer by being less
Attractive Very attractive
Marginal Attractive
Low High
Future needs for raising capital
Importance rating
1st 2nd 3rd 4th
5 1 1 1
3 3 2
3 2
1 3
Corporations’ priorities
1 Complex service needs
2 Reduction of risk and
exposure to a single bank
3 Better pricing
4 Encourage competition
responsive to the changing requirements of
the customer or by being less committed to
the relationship – the phenomenon that Ford
(1984) describes as “institutionalization”.
Pricing considerations and the encourage-
ment of competition are relatively less impor-
tant, according to the respondents, since a
better price can be achieved through a
smaller number of banking relationships and
not necessarily through a broad network of
relationships.
At this point it is interesting to contrast
customer reasons for multiple bank relation-
ships with the perception of the banks’
respondents as shown in Table IV.
The difference between investment banks’
and corporations’ views on the issue of multi-
ple bank relationships is very interesting.
What the investment banks consider as a
corporation’s primary reason for having
multiple bank relationships, encouragement
of competition, is the least important consid-
eration for corporations, which consider
their complex service needs and minimiza-
tion of their exposure as the primary reasons.
Behind the investment banks’ ranking
exists a transaction-intensive experience.
The transaction-orientation of customers has
convinced the investment banks that they
wish to encourage competition. But this
transaction orientation is a result of the cor-
porations’ belief that they have complex and
multiple needs that cannot be satisfied by
even a full-service investment bank. Thus an
investment bank must persuade the customer
about its ability to offer a high quality service
in a range of product-services, rather than
reacting to an apparent unfavourable compet-
itive setting that the customer creates. The
customer wants exposure to a constant flow
of innovative ideas and market information
and it secures this by establishing multiple
bank relationships. It seems that the encour-
agement of competition is the result of these
needs rather than the cause and it will be
more beneficial for the investment banks to
3
recognize and address these needs.
4
Investment bank selection criteria
A list of nine possible criteria which corpo-
rate customers might use in selecting and
evaluating banks was derived from previous
research (Turnbull and Gibbs, 1987) and
tested in pilot interviews. Ultimately only
seven criteria were rated by both bank and
corporate respondents as significant and
these are shown in Table V, which again
allows comparison of bank and corporation
perceptions.
[ 45 ]
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
Table V
Bank selection criteria – corporations’ most important selection factors
Investment banks’ view
1 Quality of available advice
2 Evident understanding of company’s
business and objectives
3 Readiness to initiate new ideas and
solutions
4 Size and reputation of investment
bank
5 Earn credibility with senior
management
6 Range of services offered
7 Competitive pricing of services
n = 12
[ 46 ]
Interesting contrasts emerge even from a
qualitative assessment of Table V, with some-
what different levels of importance being
attributed to the various factors by each
“side”. However, if we take an overview in
terms of the most important three factors,
there is at least some common ground,
although some differences in terms of rela-
tive importance exist. Factors 4 and 6 are
equally rated while factors 5 and 7 are
“reversed” in rated importance. Investment
banks clearly recognize the importance of all
competitive selection variables but ascribe
different relative levels of importance than do
their customers. This may lead to inappropri-
ate emphasis/resources being allocated.
A banker’s ability to enhance client value
through innovative and creative service pack-
ages is also critically important as is quality
of advice given. Since advice is itself an
important product of the investment banking
industry, this factor is closely interrelated to
the first two factors.
The respondents all believed that the size of
an investment banking organization is
related more to its global network rather than
to the range of provided services. If an invest-
ment bank is selected for advice on domestic
M&A, its ability to offer advice on M&A in the
USA or in Europe is very important, while its
ability in Eurobond issues of commercial
paper is not of interest to the customer and it
seems not to affect his/her selection decision.
Somewhat surprisingly, earning the credibil-
ity of senior management does not seem to be
an important selection factor for the invest-
ment bank during the development and main-
tenance of the relationship with the customer.
Clearly, the intangible aspects of the
demanded service are the most important in
bank-customer relationships. This raises the
Corporations’ view
1 Evident understanding of company’s
business and objectives
2 Readiness to initiate new ideas and
solutions
3 Quality of available advice
4 Size and reputation of investment bank
5 Competitive pricing of services
6 Range of services offered
7 Earn credibility with senior management
n=8
question of whether this would be equally
true for smaller firms? However, in an indus-
try where the differentiation between invest-
ment banks is based on the added value and
where there are increasingly sophisticated
clients, it is likely that the factors discussed
will gain an increasing importance.
What is, however, very clear is the need for
the banks to research and understand the
nature of the customer company’s business,
their objectives and strategies. To quote one
customer respondent: “First they must
understand and then advise”.
Relationship versus transactional
banking
The deterioration of the quality of service
and a failure to innovate are the most power-
ful reasons that can make a relationship-
oriented customer change investment bank.
According to our findings, the CEO, the board
of directors, the finance director and the
group treasurer constitute the buying centre
of investment banking services, while the
group treasurer has greater influence on
advice- and equity-related issues than invest-
ment banks anticipate. The difficulty for
investment banks is to estimate who has the
major influence in each decision and to reach
this decision maker effectively.
The development of relationships with
corporations at all decision-making levels,
from assistant treasurer to the board of direc-
tors, needs a multi-tier coverage, instead of
the traditional two-tier one. Not covering the
“significant others” might affect in an unpre-
dictable way the investment bank’s demand
for other investment banking services such
as debt-related investment interests. In par-
ticular, multi-tier coverage implies the neces-
sity to assign different people from different
levels in the investment bank to deal with
their appropriate counterparts within the
client organization along with counterparts
at a lower level. A cross-coverage appears to
be the best method for the promotion of the
whole range of investment banking services.
In this context it is useful to compare the
perceptions of customers and bankers on
what are the critical elements of an effective
relationship (Table VI).
Only two factors emerged as common ele-
ments of a good relationship – “trust and
integrity” and “frequency of contact”.
Although there are differences in ranking,
trust and integrity are commonly regarded as
key elements of good relationships, as is the
sharing of information. Not surprisingly,
bankers hope for loyal customers, while cus-
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
Table VI
Elements of banking relationship – what constitutes a good relationship?
Investment banks’ view
1 Frequency of contact
2 Trust and integrity
3 Information sharing
4 Loyalty of customers
tomers stress, as would be expected from the
selection criteria analysis (Table V), the
importance of professionalism.
Interestingly, while only half the respon-
dents have a small group of principal banking
relationships, the overwhelming majority
recognized the benefits of relationship bank-
ing. Customers prefer to establish banking
relationships which are founded on long-term
mutual support with a view to developing
future returns on a broad range of business.
They know also that relationship banking is
more expensive than transaction banking
and that different respondents have different
cost-tolerance zones.
According to the results of this research,
the best strategy for investment banks is to
develop a balanced approach between rela-
tionship and transaction banking by improv-
ing and enhancing their transactional ability
while at the same time building long-standing
client relationships. Since even relationship-
oriented customers have on average six bank-
ing relationships, an investment bank can
retain a customer by demonstrating compe-
tence in each transaction and by maintaining
its trust. The most important objective of an
investment bank must be to gain customer
confidence and trust. The flow of new ideas
and the sharing of information facilitates the
building of trust, while investment banks
must control the frequency of contact with
the customer in order not to be considered as
too aggressive.
By attaining lead status, an investment
bank is the main supplier of investment bank-
ing services, and it will continue to have a
dominant position as long as the customer
perceives its products, services, and its pric-
ing as better than those available from com-
petitors. The quality of the main contact is
the major yardstick against which customers
judge investment banks’ service
performance, although it is not the only one.
Customers demand that the main contact not
only has technical expertise but also that
he/she is their “internal salesman” in their
bank. The relationship “manager” needs to
have his/her own network within the invest-
Corporations’ view
1 Trust and integrity
2 Professional advice and
knowledge of the industry
3 New ideas and information
4 Frequency of contact
ment bank that will be used to promote the
customer’s interest. Additionally, the rela-
tionship manager must be distinguished by
integrity, commitment, an ability to adjust
his/her language to different “audiences”,
interest and involvement in customers’ busi-
ness. The flexibility and seniority of the main
contact are important dimensions, while the
consistency and reliability of service are
more important to the customers than the
continuity of the main customer.
Finally, investment banks, in order to
increase the effectiveness of their new client
solicitations, must first of all bring new ideas
to the prospective client and respond quickly
to any special requirements which might
arise from the presentation of its ideas.
Conclusions
The investment banking industry’s competi-
tive structure is characterized by both
increased concentration and increased frag-
mentation. Specialist corporate finance
houses have focused on either local niches or
specialized service niches. There are, how-
ever, two prevailing views regarding the
future competitive structure of the invest-
ment banking industry. The first is that a
rapid polarization will take place among the
major players who are full service investment
banks with a worldwide capability and spe-
cialist-niche players on a geographical or
product basis. A conflicting view expressed
by many bank respondents is that the indus-
try will continue to be a “mixed” industry,
retaining the present structure.
The findings reported here, based on small
sample, in-depth qualitative research, show
that the critical determinants of a bank’s
competitive position are reputation, people
and primary position in the domestic market.
The effective management of these three
parameters is essential to meet the
challenges facing the industry. A major task
for investment banks is to follow their client
base, domestic or not, beyond current geo-
graphical and industry boundaries and to
increase their technical skills continually;
they must gain substantial industry expertise
on an international scale, especially in the
global industries (aerospace, telecommunica-
tions, petrochemicals, automotive) and
develop both multinational and local exper-
tise through the understanding of the main
economic and regulatory characteristics of
the local and foreign markets. It is critical for
investment banks to identify the main busi-
ness and geographic areas that offer growth
opportunities (e.g. privatization in Eastern
[ 47 ]
Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
[ 48 ]
Europe) and segment their customer bases
using segmentation parameters such as the
size of the customer, its buying activity, the
complex nature of its service needs. Underly-
ing this is the need to evaluate the relation-
ship and business potential of each segment
and even potential client.
The availability of capital and investment
in human and technological resources is also
a major issue. Capital is critical because it
enables an investment bank to “buy” its entry
into segments where it does not have a “tradi-
tion of excellence”. Nomura’s stake at
Wasserstein Perella is an example of how
Nomura entered the M&A area, even though
not yet with great success. The bank is will-
ing to suffer short-term losses in order to
gain market position. Equally, the penetra-
tion of the Japanese market by Morgan Stan-
ley and Salomon Brothers are other examples
of market entry investment strategies.
The importance of strategic relationship
management cannot be over-emphasized.
Banks must re-examine existing operations
to see if they continue to be relevant to partic-
ular client relationships and market condi-
tions in order to allocate appropriate
resources between different relationships
according to their potential and stage devel-
opment. A prerequisite is the definition of the
best indicators of added value from a cus-
tomer relationship. While the size of a cus-
tomer’s business and its buying capacity are
good indicators of value, there are many
others such as: whether the growth rate of the
customer’s business is greater than the sector
average; the power of customers to influence
others in the market; and the loyalty of cus-
tomers. Buyers who are especially demand-
ing and sophisticated can be very important
in stimulating the bank to higher levels of
service and product innovation. However, we
must not forget the importance of operational
relationship management. The research
indicates that the quality of the main contact
between investment bank and customer is the
main yardstick against which customers
judge the service performance of an invest-
ment bank. Quality of advice was another
important dimension and generally the ser-
vice quality is one of the most critical issues
in the investment banking industry. The mar-
keting literature can offer significant insights
into this critical issue (Parasuraman, 1985).
Investment banks must improve and
emphasize various service dimensions in
order to enrich their service quality. Reliabil-
ity, responsiveness and assurance were the
most frequently cited features in
participants’ responses which respondents
use to judge service. Investment banks sell
their independent advice, their expertise and
their responsiveness, while corporate clients
emphasize the importance of trust, reliability,
the speed in decision making and in the
response. Investment banks must appear
reliable, responsive to clients’ needs and
special requirements; they must gain cus-
tomers’ trust and inspire confidence in them
and finally they must demonstrate empathy.
These are customers’ service demands and
meeting them is the best way for an invest-
ment bank to improve its competitive posi-
tion.
Providing all the elements for a high qual-
ity service is not enough, however; managing
the quality is crucial. Investment banks have
to manage in a different way the outcome of
the service from the service process, in order
to optimize the rendered service quality. As
research has shown, the dimension of relia-
bility is largely concerned with the service
outcome, while the other dimensions are
more related to the service process (Parasura-
man, 1985). For example, quality of advice
means first of all correct advice. Providing
correct advice at the right times
demonstrates that you are a reliable financial
adviser and meet your client’s expectations.
But it is also important to exceed customers’
expectations during the service process.
Being responsive and willing to help and
explain to the customer, inspiring confidence
to the customer and adopting an individual-
ized approach are the key elements of a high
service quality. Investment banks can use this
knowledge in order to position and develop
their provided services in a more effective
way. As Grönroos (1983) suggests, marketing
activities must be performed throughout the
process, to ensure customer satisfaction and
competitive advantage in the next relation-
ship encounter.
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Peter W. Turnbull and
Theofanis Moustakatos
Marketing and investment
banking II: relationships and
competitive advantage
International Journal of
Bank Marketing
14/2 [1996] 38–49
Authors’ address
Peter W. Turnbull and
Theofanis Moustakatos
UMIST
Manchester School of
Management
PO Box 88
Manchester M60 1QD
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[ 49 ]