Bankers should immediately read Richard Rumelt’s brilliant business book, Good Strategy/Bad Strategy. As the author states, his purpose is to wake the reader up “to the dramatic differences between good strategy and bad strategy.” Based both upon his comments and our years working with banks, most banks operate with a bad strategy, if the word strategy is even appropriate for the grab bag of hopes and tactics that many banks rely on.

 

 

Three elements of a good strategy.

Here is how Rumelt describes a good strategy; “[It] has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry put the guiding policy.”

 

Diagnosis can transform.

Let’s review each of these three elements in light of a typical bank’s strategy. To begin with their strongest area first, banks tend to spend time and dollars on diagnosis. They love to study problems, often to death. Hence, consulting and research firms that conduct market analysis or promise to cut client data multiple ways continue to succeed. However, the quality of the diagnosis often fails to get at the root issues.

 

Spouting back what the customer says is not diagnosis. A good strategic diagnosis succinctly explains the current situation and in fact may “transform” the company’s view, “bringing a radically different perspective to bear.” Assuming that either outsider or internal analysis provides management with the type of rigorous and clear diagnosis outlines above, how many bankers would accept it? My experience is that, unfortunately, very few bank executives would appreciate the value of a “radically different perspective” or would embrace it. Therefore, “radically different perspectives” that could transform a bank and set it on a different strategic path seldom see the light of day, even if merited.

 

Guiding policies provide the way forward.

The guiding policy “channels action in certain directions without defining exactly what shall be done.” Rumelt cites Wells Fargo as a bank that operates with a strong guiding policy. He discusses that the bank’s corporate vision expresses an ambition related to serving all the needs of customers and being the premier financial services provider. Following Dick Kovacevich’s belief in the power of cross-selling, the bank’s guiding policy suggests “a way of competing? a way of trying to use the company’s large scale to advantage.”

 

Part of the power of a guiding policy is that it anticipates how competitors will react, reduces complexity and creates “policies and actions that are coherent, each building on the other rather than cancelling one another out.” The emphasis on coherence highlights a major gap at banks. Bank policies are often in conflict, resulting in internal confusion. Examples include:

 

• Compensation that rewards lending despite management’s stated emphasis on fee businesses or other cross-sell activities.

 

• Many banks’ stated emphasis on promoting their interest in small businesses versus the trend to increase fees and tighten lending hurdles for that segment.

 

Many banks stop at developing a guiding policy. In effect, this is their strategy. However, as Rumelt so succinctly states “Good strategy is not just ‘what’ you are trying to do. It is also ‘why’ and ‘how’ you are doing it.”

 

Action is not an option.

We always include an implementation plan as part of our strategic work. At a minimum, this plan captures the action step required, the person who should be responsible for accomplishing it, and the necessary timing. It provides the why and how. We also usually tell our clients that unless they follow through on the implementation in a rigorous manner, our project will be of little value. As Rumelt states: “Strategy is about action, about doing something.” But, to what degree are banks oriented toward action?

 

Bad strategy predominates in banking.

While writing more generally, Rumelt’s comments about bad strategy seem to have banking in mind; “Leaders may create bad strategy by mistakenly treating strategy work as an exercise in goal setting rather than problem solving. Or they may avoid hard choices because they do not wish to offend anyone — generating a bad strategy that tries to cover all the bases rather than focus resources and actions.”

 

A good strategy requires clear priority setting and a leader who makes specific decisions about which actions to take and when. It may also require banks to downplay certain ongoing businesses or to replace staff that do not fit with future staffing needs. A good strategy results in addressing a few critical issues (“the pivot points”) rather than diluting an organization’s effort in multiple and sometimes contradictory directions.

 

Bad strategies are likely to predominate until bank management embraces the value of coherent action and sees strategy culminating not in high sounding words but in day-to-day actions.