This week’s U.S. edition of Business Week features a cover story on McDonalds, the recent challenges it faced, and the path it has taken to renewed profitability and growth. Facing a slower growth environment in 2007 and beyond, banks should evaluate and learn from the basic steps taken by McDonalds.
McDonald’s Challenges and Their Relevance to Banks
Until a few years ago, McDonald grew by new-store sales. However, saturation occurred across many geographies, resulting in declines in margins and same-store sales.
As the article states, the company realized that it needed to focus on quality rather than quantity of growth: “Today the mantra is ‘better, not bigger.’ Instead of building more restaurants, McDonald’s is increasing its financial results by squeezing more from the ones it has. The new focus has forced it to rethink every element of its business, from product development and marketing to restaurant design and technology. In the process, McDonald’s, which seemed out of touch with consumers just a few years ago, has attempted to realign itself with contemporary tastes.”
While money rather than fries is a bank’s product focus, the parallels between McDonald’s and the situation many banks find themselves in today are striking. As with McDonald’s, banks find themselves with slower or flat revenue growth. The branch explosion (like McDonalds’ stores) that at least some banks pursued without a clear approach to successful execution has ended. Today, virtually all banks bemoan the impact of the inverted yield curve and competition on their margins. Again, similar to fast food, growth expectations in banking are not what they once were.
The McDonald’s Solution
The Business Week article emphasizes how the company’s switch to a 24/7 approach to business helped to resuscitate the company. We are not suggesting that approach for most banks, although expanded hours has been an effective tool for Commerce Bank of New Jersey and BankAtlantic of Florida, among others.
The lesson for banks may center more on the related changes McDonald’s needed to make to its product development, sales and marketing approaches as well as on the way it made those changes. The article highlights four initiatives, not ground breaking, as part of what it terms the company’s “secret recipe.” Let’s look at McDonald’s approach and compare it to what we find at the typical bank.
1. Make it easy to eat. Focusing on the products themselves, McDonald’s determined that more than half of its food was sold at drive-through windows. This indicated that, going forward, food needed to be easy to eat. The article presents the somewhat frightening image of “snacks and meals that can be held in one hand while the other is on the steering wheel.”
In contrast, most banks fail to provide customers with “easy to eat” or use products. Examples include: complex account opening procedures, loan applications that require unused and unnecessary information, and onerous processes related to cash management onboarding. In many cases, banks need to evaluate and simplify procedures, removing unnecessary hassles and redesigning products from the customer’s perspective. This is a fundamental focus, but one that is often left undone.
2. Make it easy to prepare for the employee. McDonald’s faces front line staff turnover that exceeds bank personnel problems; typical turnover exceeds 100 percent a year: “To maintain consistency amid this churn, tasks much be simple to learn and repeat.” Each counter employee and manager knows what McDonald’s expects of them; the company has instituted that discipline across its footprint.
Conversely, at too many banks, consistency in procedures simply does not exist. At these institutions, local staff appears to have the option to follow what is supposedly corporate policy or, seemingly at its option, ignore it. This phenomenon occurs relatively infrequently in areas related to regulations and operational procedure, but often involves sales-related activities — that is, growth. For example, branch manager calling activities often vary dramatically within regional banks. The branch manager who wishes to sell does so; if they want to avoid what some may consider an onerous task and focus on service, too often they are given the latitude to do so.
Examining calling and sales levels across your bank and their effectiveness demonstrates the level of inconsistency your bank tolerates. Particularly in light of a tougher growth environment, banks should clarify and communicate employee roles and responsibilities whether that involves the branch, small business, commercial banking, or other areas. Banks often do that; most are very good at creating job descriptions. Where management fails is in enforcing those descriptions across the bank. However, increasingly, the bigger banks, apparently without straight-jacketing their staff, promote consistency and discipline throughout their banks. In our view, it is one factor in their continued strong performance.
3. Speed of Service: make it quick. Customers do not want to wait for their fast food. Similarly, they do not want to wait for their mortgage approval, cash management account opening, money transfer, or other transaction.
Many banks have already successfully focused on reengineering internal processes to speed up decision-making and shorten the time it takes to respond to customer service requests. Oftentimes, they have been prodded on by non-bank mortgage, card, and small business players that differentiate themselves in part by their speed. Customers have a reduced tolerance for waiting for their banks to respond to requests, particularly when competitors are knocking on their doors, either directly or by the use of mass media.
4. The Customer: make what the customers want. To quote Business Week: “McDonald’s prowls the market and then spends months in carefully-monitored field tests to ensure that people will buy its new concoction.”
To this day, too many banks are selling (or trying to sell) what they want to offer rather than selling what the customer wants. Further, while speed of loan decision-making has improved, in many instances we see speed of product development actually slowing down. In general, banks take too long to bring products to market, burdened by internal silos, extreme risk avoidance, and cumbersome approval processes. This is an area meriting major change in 2007 and beyond.
Concluding Thought
We all know that too much McDonald’s is bad for you. But, the company’s willingness and ability to examine itself and change offers a model for many banks that seem incapable of addressing their changing customer demands and the intensifying competitive environment.