Looking across the banking industry today, it is increasingly apparent that strategic planning is broken. Given the economic challenges of the times, one would hope that we would be seeing some true innovation and differentiation in the strategies being pursued by banks. Instead, disruption and innovation have been left to niche providers such as Simple, Lending Club or Square while the banking space continues to look to service as the panacea.
Put simply, the industry has become plain vanilla and shortsighted. If we think back over the last 30 years, we can probably count on a single hand the examples of bold strategic differentiation in banking. Mellon’s decision to exit retail banking, ING’s high yield direct banking model, USAA’s military focus and City National’s focus on the entertainment and legal professions are a few that come to mind. Today’s banking industry has been strengthened with financial capital, but the brutal truth is that most banks lack strategic capital – the combination of brand, innovation, culture and unique ways of doing business that will ensure future relevancy.
A key flaw in most banks’ planning processes is that they assume strategy equates to merely defining business objectives. They do nothing to address the other essential components of strategy that delineate the “why” and “how” behind the bank. Good strategy gives a team their raison d'être and defines the game plan for fight ahead.
Crafting an effective strategic plan requires executives to think hard about what makes up a good strategy:
Vision – why the bank is in business. Suppose a bank chose to be the premier lender for pilots and the financing of personal aircraft. Its vision might be, “We help people fly.” And if truly focused on its vision, the bank would devote the majority of its resources to pursuing this niche segment.
Business Model – the way in which the bank competes. In its simplest form, an institution can compete on value or on price. Since, as an industry, we have trained our customers that most deposit services are free, by default price is no longer a point of differentiation. Thus, the only option left is service value. Importantly, service cannot be some vague concept but rather must be defined by specific capabilities the bank has that are difficult for competitors to match.
Brand – the promise to the customer. Branding is about positioning and promise. Done right, it personifies the Mission, Vision and Business Model and sets expectations for the customers. Brand is more than a logo or set of collateral. It lives in the culture of the organization and in each and every interaction with a customer. It is important for bank executives to understand just how challenging the branding effort can be. With the exception of USAA, it’s difficult to think of any brand in banking that evokes a true sense of passion. Perhaps this is the reason that high Net Promoter scores in banking don’t translate into new customers.
Risk Appetite – the safety and soundness conscience of the bank. Managing risk is at the heart of any business, but in banking it often stops with the management of credit, interest rates and liquidity. Every strategic decision, whether it be entering a new market or updating account offers, should be assessed in terms of strategic risk and the potential returns. Only by taking a risk-adjusted view of opportunities can an organization effectively select and prioritize objectives.
Objectives and Priorities – the way the bank will measure success and achieve its vision. With objectives and priorities, the bank converts its strategy into tangible commitments toward execution. A strong strategic plan is not a laundry list of tasks, but rather a set of a few critical “we will” statements that act as the ongoing guidepost to ensure actions and initiatives align with the strategy. These bold statements are not the strategy in and of themselves but do establish clear strategic intent. When Jack Welch ran GE, one objective was to be number one or two in all markets GE served. This objective allowed the company to exit some businesses where it felt inadequate market share could be achieved and opened the door to investment in other business where the opportunity was enhanced.
While experts in academia and management gurus often complicate the components of great strategy, the litmus test for an effective strategic plan can be boiled down to clearly answering four key questions:
Where are we? Answers will lie in a rigorous external environment review that looks for both the obvious as well as the “weak signals” related to emerging trends, and an internal assessment of strengths, weaknesses, opportunities and threats (SWOT) focused on finding “the brutal truth” that facilitates the identification of key strategic issues and potential pivot points for the bank.
Where could we be? These objectives are the foundation for the bank’s areas of strategic focus and should be based on a well-articulated vision for the future state, a clearly defined business model that makes strategic choices, a brand promise that personifies the business model, risk assessments that weigh both financial and strategic capital and formal long-term measurable objectives that elevate the big, hairy, audacious goals (BHAGs). Equally as important as where the bank will be is where it will not be. Done right, a bank will have defined the decisive attitude needed to differentiate itself in the market.
How do we get there? In a word: “alignment.” What must the bank pursue across products, channels, people, process and technology to enable execution of the strategic objectives? Even the best organizations are not aligned in all areas, and changes must be made and key strategic priorities established. By setting priorities, the bank will strongly articulate its strategic intent and ensure that the structure and processes needed to execute the strategy are understood.
What is the strategic and financial impact? Put another way, how will the bank know if the strategy is successful? Strategic discipline requires that metrics be established to monitor progress toward the plan. Quality metrics go beyond three- to five-year financial projections. They take a balanced scorecard approach that looks at each initiative and hones in on the desired outcomes and needed enablers to drive results.
To quote author Frans Johansson, “The purpose of strategy isn’t to figure out what to do (there will be right and wrong things to do and companies will and should make mistakes), but to convince you to act.” Good strategy defines what we do that is valued by our customers in order to differentiate ourselves from our competitors. Good performers align their culture, brand and business model to implement the strategy. Only then can planning move from platitude to attitude and effectively leverage both financial and strategic capital.
Mr. Burson is a senior director with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at firstname.lastname@example.org.