Talking about strategy » banking

Previous strategic incompetence in banking

Kim Warren — Tue, 23 Dec 2008 08:30:48 +0000

Watched a great TV series recently The Ascent of Money presented by Professor Niall Ferguson. If you cannot view it, the book is probably good too. It makes the dry and obscure world of banking and its origins brilliantly accessible. One little nugget in the latest episode reminded me, though, that it’s not long since the last time those clever folk in banking messed up so badly that governments had to bail out the disaster at our expense – remember emerging market debt? Our own Gordon Brown became a hero by getting the developed economies to sign up to “The Enhanced HIPC Initiative” pledging $100 billion to 26 countries with unsustainable debt burdens at Cologne in 1999. That time huge loans were given not to sub-prime consumers but sub-prime countries! And just as this time round, what was not a bad idea on a small and cautious scale blew up because the banks and the analysts that drive their behavior went over-board. If you want a lively telling of the story, see the Wikipedia entry on developing countries’ debt, complete with dire warnings about ‘weasel words’ and ‘biased’ commentary [though it looks reasonably accurate to me] – or a more dispassionate entry under emerging market debt.

So – do top executives in banking have to achieve any qualification in strategic management at all? [Probably not - because there isn't one.] So just how do they have to demonstrate their competence before being given the power to mess up all our lives? Perhaps some of them or their consultant advisors would like to explain themselves.

Losers from the down-turn

Kim Warren — Wed, 19 Nov 2008 15:25:39 +0000

Whilst business schools are seeing more applications by analysts and execs being down-sized from banks and other sectors, I see from the Economist [Giving advice in adversity] consulting firms are not faring so well. I hope they were expecting this and prepared their staffing plans for it over the last couple of years, as it’s exactly what happened after the dot-com bubble. Last time round some messed up so badly they withdrew MBA job offers within weeks of making them, and I am told Harvard B School actually banned some from hiring there as a result – now there’s strategic mastery!

Anyone experienced similar this time round?

Industry ‘power curves’ for real competitive strategy

Kim Warren — Wed, 19 Nov 2008 13:43:46 +0000

Now here’s a really useful tool from McKinsey. Using ‘power curves’ to assess industry dynamics shows the value of seeing the size-distribution of competitors in an industry. It shows the tool for banking, chemicals, software and biotech. You can do much, much more with this though.

Merely seeing the pattern is interesting but so what? This is a fundamental tool for something virtually no companies do well – truly competitive strategy.

The basic principles are simple:

Trying to do a bit better than everyone, at everything, to get a bit more market share [as most firms do] is hopeless – very costly, everyone can see what you are doing and does the same, and it just doesn’t work.
Competitors vary in their scale and strength, and therefore in the benefit you would gain if they weren’t around.

… so it is clearly best to pick your 1-2 key victims and focus competitive efforts just on those - for which the ‘power curve’ is the ideal tool. Having picked which wounded wildebeest to take down, some simple principles help identify how to do it. These are explained in chapter 5 of Strategic Management Dynamics, and you can download the extract that explains how to destroy competitors [the power curve is what you need for Figure 5.27].

Ethics vs. competence

Kim Warren — Sat, 18 Oct 2008 10:25:54 +0000

I took the trouble to post a query on one of the Academy of Mgmt discussion lists, asking what colleagues felt we had failed to do to allow professionals to graduate with the basic strategic incompetence [as well as financial] to bring about the current global crisis. Replies so far seem to focus almost entirely on the issue of ethics – not at all on what those people actually learned or didn’t whilst in our tender care. Whilst the ethics issues are important and challenging, we don’t know how much this contributed to the problem vs. simple incompetence … which is both clearer and more tractable. It seems unlikely that everyone involved in bringing about this crisis knew exactly what they were doing and nevertheless pursued it dishonestly.

As educators, we can’t reasonably be held responsible for immoral behaviour by our graduates, since we clearly don’t condone it!, Society at large might, though, reasonably want to know why we didn’t make sure they got the basic professional skills needed to not mess up on this huge scale.

So .. what should they have understood, why did the education we gave them fail, and what are we going to do differently to ensure the next generation don’t perpetrate the same foolishness?

The banking crisis – again

Kim Warren — Wed, 17 Sep 2008 12:59:01 +0000

I’ve gone on about this before, but it’s gone way, way worse since I last brought it up, so let’s not forget that this whole mess started with gross strategic incompetence on the part of a few dozen CEOs of ordinary banks over-selling high-cost mortgages to more-and-more people who, more-and-more, couldn’t afford it – and egged on by equally incompetent analysts lauding those same CEOs for their foolishness – and then compounded by further incompetence when those toxic loans were packaged and sold on to top-top banks who should have known far better.

Boy do we need some professional standards of strategic management amongst CXOs !