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Strategy alone won’t create competitive advantage

Sep 24, 2020 / Consumer Banking

An old adage states, “If you are failing to plan, you a planning to fail.” This statement is a gentle reminder that every institution benefits from focus and focus comes from planning.

Every business cycle, especially during a pandemic, requires planning.  The purpose of strategic planning is to recognize the manner by which the financial institution competes for business and the comparative success that the financial institution has achieved by pursuing its selected strategy.  This fundamental understanding of strategy dictates the actions required to triumph.

Every planning cycle offers unique opportunities and threats, as well as the prevailing context that will span the life of the plan.  The economic environment associated with the pandemic presents opportunities to leverage digital banking efficiencies and to address threats associated with potential credit-quality deterioration and loan losses.  Historically, however, low interest rates and the adverse effect on narrowing margins represent the prevailing context that spans the planning time horizon.  Navigating this headwind and effectively addressing opportunities and threats requires strategy.

Consumers and businesses make purchase decisions based upon a price-value continuum.  Therefore, a financial institution’s positioning platform is a cognitively defined exercise.  A pricing advantage is revealed by examining overhead or cost structure.  The ability to compete on a differentiated basis articulates a value proposition that is demonstrated by margin.  As a result, the landscape reveals four competitive postures – institutions that compete on price, on value, on both price and value, or on neither price nor value.

The selection of a strategy, in and of itself, does not guarantee success.  The financial return generated offers an enduring commentary on every financial institution’s executional effectiveness.  Ultimately, earnings explain every financial institution’s ability to execute tactically. A well-executed tactical plan can help ensure the success of a given strategy.

Strategy choices by smaller financial institutions

When analyzing FDIC and NCUA data among financial institutions with less than $10 billion in assets, the popularity of a competitive positioning platform is revealed and the success at executing the selected strategy uncovered.

Competing on price and value:  A quarter of financial institutions establish firm footing by owning advantages in both cost structure (overhead) and value (margin).  Because of this positioning, each possess the financial flexibility to compete on either price or value, accelerating organizational growth and producing superior financial performance.

Competing without price or value:  In contrast, one in eight financial institutions operate without a strategy and possess no discernable means to compete.  Each operate with cost and margin disadvantages.  Absent a sustainable market position and trapped by comparatively high overhead and thin margins, the path to earnings is compromised and the viability of the brand is challenged.

Price competitor:  The single most popular strategy pursued by financial institutions is price.  More than one in three possess a comparative overhead advantage and use this financial flexibility to select price as their go-to-market strategy.  However, when introducing the context of earnings into the equation, shortcomings regarding the executional effectiveness of implementing this strategy are revealed.  More than half generate inferior financial results, questioning the sustainability of the selected pricing strategy.

Value competitor:  While the popular thought is that most financial institutions pursue a strategy of market differentiation, financial analysis indicates that roughly three in ten financial institutions use a value proposition as a means of differentiation.  Financial institutions that compete on value have consciously dedicated overhead – often in the form of location convenience, personnel or both – to acquire market share on a dimension other than price, and are rewarded by the margin advantage that each possesses.  The challenge lies in execution, as the majority of value-oriented institutions possess depressed earnings, placing the brand vulnerable to competitive attack.

This analysis indicates that strategic planning has not provided the clarity of purpose to create competitive advantage.  In total, half of all strategic plans have failed financial institutions, with the preponderance suffering from shortcomings in execution.  With economic challenges and opportunities on the horizon, the planning process needs to change.

A strategy needs to be executed effectively in order to be defended, and this requires an in-depth understanding of the market, client base, competitive set and the financial institution’s operation.  Market knowledge identifies the path for growth and strategic actions and investments support the sculpting of the balance sheet.  Driving revenue and controlling cost are more than goals – they are requirements.

Tom Long is the principal at The Long Group LLC.