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Does strategy still matter? E-mail

With more constraints coming, you must find ways to differentiate

By Joseph H. Cady, CMC, managing partner of CS Consulting Group LLC, a San Diego-based strategy consultancy specializing in financial institutions. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , (858) 530-8250.

The Great Recession has brought massive turmoil to the financial services industry. The proposed regulatory overhaul in response to the recent crisis is far reaching and expansive. Among the actual and proposed changes are steps to limit aggregate asset size, reduce institution complexity, and restrict risks (the sum of which aims to eliminate “too big to fail” institutions from the industry landscape). Other draconian restrictions to management authority and latitude include further caps on interest rate pricing and fees (including overdrafts and credit cards), and added limits on investments. Lines of business (LOB) offerings could be restricted to plain vanilla products and services, in addition to being forced to offer “social policy” loans and deposits. Portfolio mixes may be controlled to a greater extent. Measures to limit executive compensation are already well under way. Further governance guidelines are possible. More stringent capital and liquidity requirements are a near certainty. Even measures to re-regulate the industry (reimposing all Glass-Steagall walls; or separating commercial and investment banking once again) have been discussed.

With all these changes in the offing, regulatory reform is certain to further increase the grip and span of control of the regulators in the affairs of institutions, and shift key decision making from the executive offices and boardrooms to regulatory and political officials. As further changes are enacted, it is reasonable to question who will actually be running financial institutions: management or the regulators? Will management and boards primarily serve as caretakers, simply staying within specified boundaries and carrying out the decisions imposed by various agencies? With greater government control, and little discretion afforded to management and boards, one wonders why bother with strategy. Does strategy still matter?

Strategy is possibly best explained as the proactive positioning of an institution to best succeed in the predicted future environment. The ultimate aim is to better serve your customers, distinguish yourself from others, and outmaneuver your competitors. But will regulatory reform still provide us with enough latitude to proactively position our institution, distinguish ourself, and outmaneuver our competition?

Once regulatory reform takes its final form, it is likely that there will still be enough room to position and distinguish oneself from others, although that space will be more tightly defined. At the most fundamental level of positioning, decisions as to which banking niches to participate in (i.e., retail, business, and/or investment banking) will need to be reevaluated. Entry and exit decisions within promising or declining geographic markets, including M&A choices, will continue.

In product/service positioning, the changing needs of customers and your competition—not regulators—will likely continue to exert greater influence in defining your LOB boundaries. But even if simplified LOB offerings (now common within community institutions) are imposed industry-wide, strategic repositioning shifts over time towards those plain vanilla LOBs offering greater growth, earnings, and safety contributions will still be permissible and highly valued, and should require the ongoing diligence of management.

Many strategic options will also still exist in attempting to outmaneuver others. While brand distinctions and value propositions may be more difficult (given LOB and pricing sameness), actual service and relationship performance, IT tools, and delivery channels will continue to be areas of strategic focus and ways to distinguish. Another driver in competing against others will be cost leadership. Outside of possible scale limits for the largest institutions, the continual push towards greater internal efficiencies will be mostly untouched directly by regulators, and will be of increased importance, given the aforementioned restrictions to other ways of competing and distinguishing.

One area where regulatory reform will stifle most strategic decision making will be choices related to the safety and management of risks for the institution. Further restrictions to LOB offerings, pricing, portfolio mixes, investments, and the balance sheet will dictate many decisions to management and boards, with little discretion available to internal decision makers.

It can be argued that in highly turbulent times such as now, strategy not only does matter, it is actually more important than ever—and more difficult to do well. Given the greater risk of a strategic misstep now causing the failure of an entire institution, the increased importance of a comprehensive, consistent, and logical strategy becomes abundantly clear. Moreover, with expansive regulatory control limiting creative abilities and narrowing strategic options, it certainly will become increasingly difficult for executives to effectively position, distinguish, and outmaneuver others.

Making strategy more useful

Given the continuing relevance and importance of strategy in a post-regulatory reform environment, it will be equally valuable to optimize the use of strategy going forward. For most financial institutions, this could be accomplished by gaining a better understanding of strategy, its proper role, and its impact on the organization.

Too often, strategy is treated as an once-a-year obligation to the board or regulators. Moreover, in busy or tough economic times such as now, the instinct is to cut back, save money and time, focus exclusively on the demands of regulators, and otherwise retreat into foxholes. Many executives feel they have no control over the situation, and are doomed to just reacting to events as they are encountered.

I have recently overheard some CEOs talk of recent planning retreats scaled back (fewer days; no outside facilitator; and/or done onsite) to save money and time. They commented “how well the session went,” and “how much money we saved.” What they fail to realize is that the session may have been harmonious only because no one with an independent perspective was present to push or challenge their own group think. In such cases, they are left unaware of the mistakes or omissions they may be making.

In these instances, it is critically important to remember the potential value and impact strategy has upon the organization, perhaps by posing only a few questions: How valuable is it to the organization to formulate an effective direction, put detailed “how to” strategies behind it, and then actually achieve each of these desired aims? Or in times such as now, how valuable is it to successfully reach a direction and fulfill a plan that ensures the survivability of the institution?

In either case, the influence and power of the strategic decisions, and the ability to execute them, can often determine the difference between the success or failure of the institution. Indeed, these decisions and their execution can influence earnings by billions of dollars in the largest of institutions, and millions in even the smallest of community institutions, each year. To be certain, unless you are a simple institution with no critical issues and few LOBs, strategy is never an area to save time and economize, no matter what economic or institution conditions exist. As management guru Peter Drucker has noted, the primary job of executives is to ensure the long-term health of their organization. Turbulent times, Drucker observed, requires even greater foresight into possible future events and changes, as well as judgment into what to keep constant.

This means that the process for formulating strategy, and its implementation, must be properly structured. Among the most important elements is understanding that effective strategy is not an occasional, two or three day, event each year. It must be viewed as an ongoing, living part of the organization. The strategic direction should be inculcated within the fabric of the institution, including its daily operations. Additionally, in rapidly changing environs, strategy shouldn’t exclusively be focused on the long term. Sudden revolutions to industry paradigms require nimble shifts in order to continue to compete effectively. This can necessitate shortening the planning horizon and cycle times, abandonment of formal processes, and a focus on quick but effective short term repositioning decisions.

It is also best for the process to have an experienced outside professional, free of bias, bring a different and fresh perspective to the effort. It is too easy for internal executives and directors to declare themselves “expert” in strategy, capable of self-facilitating planning events. Independent facilitators bring the experience of working with many institutions to the table. As such, they can offer solutions, broaden the team thinking, identify unforeseen implications and risks of proposed strategies, and provide a “forest from the trees” perspective. This frees management and the board to participate more readily, focus on the issues and solutions at hand, sharpen their thinking, and challenge conventional wisdom where appropriate.

Strategy is perhaps best viewed as a football or chess match, where you use proactive positioning to outmaneuver and beat your competition. Most powerful is where you can give your customers a compelling reason for wanting to do business with you, on an ongoing basis. Once this is in place, you then have an ability to compete that should sustain you for some time to come.

[This article was posted on April 22, 2010, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2010 by the American Bankers Association.]
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