Ten years ago, I wrote a newsletter with the above title, focusing on why and how to conduct a strategic planning process. While most of what I wrote then remains relevant, the need for a rigorous strategic plan has increased significantly.

 

Most banks are dealing with reduced margins, limited avenues for growth, increased operating costs, and greater capital constraints. Before the downturn of the last decade, many banks were minting money, but no more. Bank management needs to be more targeted in what it does and how it does it. Of course, having a strategic plan does not guarantee success. However, it seems both short-sighted and dangerous to operate without an annual process that confronts assumptions, reaches out across the bank for employee input, and encourages consideration of external best practices and an independent perspective to challenge a bank’s traditional approach. The downside of not developing a well-developed strategic plan far exceeds any costs in doing so.

 

What follows, with a few changes, is a reprise of that earlier newsletter. Sometimes it is remarkable how little has changed.

 

For many companies, the next few weeks inaugurate their annual strategic planning cycle. But, we hear much grumbling from our clients and others about the value of the planning process. One frequent comment: “I hope we accomplish more than we did last year.” Too often, this annual ritual brings to mind the Bill Murray movie “Groundhog Day” in which activities are repeated endlessly without any signs of progress. The strategic planning process at many banks often fails to achieve its potential impact, resulting in agreement on various tactics without the power of a strategic core. Rather than considering it another activity to be checked off, in fact, senior management may have no more important role than agreeing to a strategy, committing to it, and, then, executing it.

 

 

What is strategy?

Textbook definitions of strategy abound. One, by Thompson and Strickland (in Strategic Management), provides a practical focus: “A company’s strategy is the ‘game plan’ management has for positioning the company in its chosen market arena, competing successfully, pleasing customers, and achieving good business performance.” They go on to write, “In crafting a strategic course, management is saying that ‘among all the paths and actions we could have chosen, we have decided to go in this direction and rely upon these particular ways of doing business.” Strategy means choice and focus.

 

The second part of the quote above, highlighting “going in a specific direction and relying on a particular way of doing business,” is at the heart of the matter for the senior executive. We find that many companies resist, either explicitly or implicitly, making the type of decisions required to develop an effective strategy. To repeat one comment from the head of a bank about the market he serves: “Everyone is our customer.” In a sense, if everyone is your customer, then you have no targeted segments or differentiating products and your ability to generate sustainable above market returns is unlikely.

 

 

What don’t banks fully embrace strategy?

Many banks simply don’t get the need to choose a defined strategy, determine priority customer segments, or tier customer focus based upon on current and expected profitability. Oftentimes, banks seem comfortable going in multiple directions; the hard part for many involves narrowing their focus and choosing a handful of “directions” and then sticking with them. Why?

 

* Most banks continue to be consensus driven. Satisfying various internal factions marginalizes potentially bold decisions. We remember one project that began with a Steering Committee of 12 members; by its end about 20 bankers were attending, many of whom were primarily focused on turf protection.

 

Banks are too often consensus driven and (using the word advisedly) “gentlemanly” in how they approach and resolve problems. Optimal decisions get marginalized in the face of organizational issues, the “tenure” of long-time employees, and the lack of management’s “will to manage.”

 

* Strategy is often considered amorphous. A well-created strategy is specific and actionable, but too often the end result of a strategy project is a document that lacks focus and meat. Strategies set a direction. And, for a structured institution like a bank, once strategies are set they are meant to stay set for a period of time. A company’s strategy should not often change in a fundamental way. However, once “set”, strategies are quickly ignored as the documents gather dust rather than become dynamic tools.

 

* Strategy implementation takes time. A strategic plan often takes multiple quarters or years to have an impact. But, signposts of success can, and should, be set so that progress is clear and further refinement of the strategic approach is possible.

 

* Many banks act as if they have to serve virtually everyone. Contrast this view to the comments of one non-bank financial services executive: “We pick our competitors.” Non-banks know the specific types of customers they want to serve and have designed products to suit them. Their focus does not blow with the wind. Even smaller banks often offer too many products to too many customer types, diluting their effectiveness.

 

We spoke with a client recently who bemoaned the failure of one since abandoned offering: “We tried it for six months and it did not work.” In our view, the “it” he referred to plays a fundamental role in account retention and enhanced per account profitability. To this banker, however, it was just another tactic that had been tried (ineffectively) and could then be dismissed. Companies operating with a sharp strategic focus have too great an appreciation of their end goal to abandon an important element of success. They set and keep to priorities.

 

 

Focusing on the Five Components of Strategic Planning

As suggested by Thompson and Strickland, five elements are necessary to build, execute, monitor, and improve a strategic plan.

1. Developing a strategic vision and business mission.
2. Setting objectives.
3. Crafting a strategy to achieve the objectives.
4. Implementing and executing the strategy.
5. Evaluating performance, monitoring new developments, and initiating corrective adjustments.

 

 

1. Developing a strategic vision and business mission

Even as consultants who from time to time help develop them, we approach the writing of an aspirational mission statement with great skepticism. Many of them are disingenuous, ringing false with both customers and employees. After all, what company does not say that they will offer premier customer service or that customer relationships are what they stand for? As Thompson and Strickland say, mission statements tend to focus on the business today.

 

Conversely, a strategic vision statement should serve as a roadmap for a bank’s future course, “the direction it is headed, the business position it intends to stake out, and the capabilities it plans to develop.” Mission statements and visions are not worth the paper they are on unless they are backed up by clear objectives and implementation plans.

 

2. Setting objectives

In effect the objectives are the quantitative and qualitative yardsticks by which managers measure performance. The objectives setting process should involve stretch and fiercely rout out the often prevalent sandbagging that occurs.

 

Objectives can be both financial and strategic. Financial goals relate to growth, profitability, credit quality, etc. Too often these are the only types of goals on which management focuses. However, strategic objectives are equally important and usually center on longer-term goals related to culture, quality, customer service, and reputation building.

 

What happens when a long-term objective conflicts with the short term? In 99% of the cases, managers go for the short term. Here is Thompson and Strickland’s view: “Long-run objectives should take precedence. Rarely does a company prosper from repeated management actions that put better short-term performance ahead of better long-term performance.” On one level, their comment expresses the naïve view of two professors who do not have to face increasingly demanding analysts and investors. However, we have seen many managers who are so short term oriented that they undermine ongoing strategic initiatives. Top management has to possess the self-confidence and the vision to balance the short and long term.

 

 

3. Crafting a strategy to achieve the objectives

At this point in the process a company has decided its vision for the future and the general objectives by which it will measure success. The strategy consists of the specific steps that will allow management to achieve the objectives.

 

If your vision is to be the number one or two bank in your catchment area, your objectives will include a focus on growth, profit, market share, and perceived customer service. The strategy is the “how,” based on a bank’s current and anticipated capabilities (core competencies), competitive environment, and customer perception, among other factors.

 

Many managers fail in the self-assessment process involving current capabilities and customer perception. Think of The Emperor’s New Clothes. We know of one bank that has been a great new business source for its rivals (describes by a rival as “the gift that keeps on giving”). This bank’s customer service and the overall customer experience is widely viewed as abysmal, but conversations with that bank’s management indicate that they are clueless and simply fail to understand how their customers view them. Unless they change their approach and face up to the disconnect between themselves and their customers and targets, they will never achieve the goals they have set for themselves.

 

This is a critical area for Board and top management emphasis. Frankly, and of course self-servingly, outside consultants can play a critical role here. You want someone who will “push” the thinking without political concerns; that is a very hard role for an insider to play. In addition an outsider brings experience with a myriad of bank and, more important than ever, non-bank financial services competitors as well a perspective on the needs of the post-Baby Boomer generations.

 

 

4. Implementing and executing the strategy

Even with a well-defined and rigorous strategy in place, the work has only begun. Execution is very hands-on and requires great persistence as well as attention to detail, including:

– Addressing organizational issues.
– Redefining employee roles and responsibilities.
– Building cost efficient IT support.
– Instituting enhanced approaches to compensation .
– Changing the culture.

 

Someone has to be in charge of execution. That person must have both the responsibility and the authority to make things happens. And that is exactly the point at which many strategic initiatives fail.

 

5. Evaluating performance, monitoring new developments, and initiating corrective adjustments

One of the most frustrating elements of strategic planning is that it is never ending; once agreed to, strategies need to be reevaluated and enhanced while maintaining their core consistency. That’s why management must view it as an ongoing dynamic process and not a one-time event.

 

Observations

To take advantage of the benefits of strategic planning:

 

* Set clear, quantifiable goals for the strategic planning process.
* Have senior management in front and committed throughout.
* Appoint an internal implementation czar.
* Use an outsider to assist in designing the process, raising the tough questions, and introducing external best practices and relevant market information.
* Make the strategy a living document that is reviewed and revised yearly based upon market realities, core competencies, or others factors.