visualizing strategies

8/8/2019 Visualizing Strategies

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Visualizing strategies forfinancial servicesMar ia G onz a le z and H e n r y M intz be r g

THE PAST DECADE has witnessed unprecedented change inth e selling of financial services. An enormous amount of con-vention and regulation has given way before new patterns offinancing, advances in information technology, fierce domestic andinternational competition, and the increasing integration of inter-national financial markets . Not surprisingly, this change hascreated much confusion. Our intention in this article is to helpmanagers see their way through that confusion. What we proposeis a simple, visual depiction of the industry - as it was and as it isbecoming.Tr adi t iona l s t r a te g i e sConventional industry s t ruc ture exhibited clear accountabilitiesand responsibilities within part icular segments . Each w as limitedas to the produ cts sold, who could sell them , and the kinds of com-panies that could own and be owned by financial inst i tut ions. Com-mercial lending was, for example, clearly distinguished frominvestment banking. In Canada, banks could not own securitiesfirms before 1986; in the United States, although deregulation isunder way, t rue nationwide banking is still not yet in place.The financial services cylinderThe overall industry can be depicted as a cylinder, as shown inExhibit I. The cylinder's cross section or per imeter circle can bedivided into basic services: investing, as in mutual funds and sav-


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Exhibit I Dim ensions of financial services

Lending

/Prolecting \ / Transacting /Increasinggeographical

IncreasingJ size ofI customer

to the major corporate customers with the largest volume of trans-actions in the center.Einally, the cylinder's lateral dimension shows the geographicalscope of re levant m arke ts - from local to region al, natio na l, m ulti-national, and global.Wedge strategiesWith this figure in mind, we can describe the traditional posture of


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In this way, individual players took their wedge-like positions inwell-defined sectors of th e industi-y. Indee d, the word "ind us try" isreally m islead ing h ere, for each of th e sectors was really an in du s-try unto itself. In the United States, the major sectors - banking/trust, savings and loans, insurance, and brokerage - were to agreat extent separate entities, each with its own customers andspecific focus, much of it local or regional in scope.Note that we are not equating particular sectors with the particu-lar services shown on our circle. Banks operated largely in thelending and transacting areas, but they also provided protectionservices such as safety deposit boxes, even though the most lucra-tive protection m ark et - insu rance - was closed to them . Th us, forsome players at least, the wedges were not single but multiple. Thetrad ition al strategy of a local US ban k is shown in Ex hibit II; tha tof a national brokerage house in Exhibit III .N ew s t r a t e g i e sThe many changes that have buffeted the financial services indus-try in recent years have, in effect, blown apart many of the strate-gic wed ges, which often rep res en ted largely undifferen tiated andunsegmented bundles of services protected by regulatory barriers.The resu lting debris has settled down in a variety of new pa ttern s,according to how firms have selected and combined their services,customers, and markets. Visually, on our cylinder, wedges havebeen replaced by all kinds of strange and wonderful shapes, whichwe call strategies. We find six such strategies common today.

Exhibft II Traditional local US banking strategy


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Exhibit III Trad itional national brokerage house strategy

Transacting

Informing

The disk strategyCommunity-based firms typically use a geographic niche strategy,offering a wide spectrum of products to a limited range of cus-tomers in a restricted geographic market. Thus, they tend tosegment markets by geography rather than by customer type(although the largest customers do, of course, have an incentive toshop away from home). Accordingly, we show this strategy as awide but thin disk (see Exhibit IV).Eirms following a disk strategy are sometimes unchallenged bylarger ones because of the costs of providing services to their geo-graphic niches and because of strong customer loyalty based onpersonalized service. Credit unions tend to use this strategy - theDesjardins Group of Quebec, for example, a major competitor toCanada 's largest banks. I tcomprises 1,339 such unionsin Quebec alone, rivalling the

total for the largest bank inCanada, the Royal, which bas

Exhibit [V The disc strategy


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Exhibit V The rifle shot strategytarget their offerings tospecific customer groups,using specialized expertise todevelop their niches. We showthis strategy, essentially one ofproduct differentiation, as arifle shot, restricted to onepart of one segment - and to afairly narrow range of cus-tomers within that (see Exhib-it V). This strategy may ormay not be focused geographi-cally.For a time before its dem ise, Drexel, the U S ju n k bon d pow er-house, veered away from and then tried to get back to its focus onmedium-sized wholesale customers. Wasserstein Perelia & Com-pany, one of the most successful of the small firms specializing inmerger advice, also uses the rifle shot strategy.

Exhibit V I The thin wedg e strategy

The thin wedge strategyA strategy often adopted by firms seeking entrance to a new mar-ket is that of being a price leader. These firms generally providea narrow range of unbundled services and concentrate on theirdelivery at the lowest possible cost. Whereas boutiques differen-t ia te their products, priceleaders differentiate their costto the customer. This, ofcourse, tends to attract cus-tomers a t the lower end of thescale. That is why we showthis strategy as a thin (andtruncated) wedge (see Exhibit

VI).


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t i on , it is l e ss susc e p t i b l e to a d d i n g o v e r h e a d t h a n m a n y o f i t s compe t i t o r s .T h e c h u n k s t r a t e g yA few g i a n t s ha ve be e n a b l e to a d o p t a focused s t r a t e g y t h a t con-c e n t r a t e s h u g e r e s o u r c e s on s ing le s e g m e n t s in the l ower p a r t oft h e m a r k e t . Genera l Motors ' f inancia l a r m . G e n e r a l M o t o r s Accept a n c e Corp . , w i t h $105 bil l ion in a s s e t s , is a m o n g the top t h r e em o r t g a g e b a n k s in the U n i t e d S t a t e s and one of tb e m o s t prof i tableof all t y p e s of financial c om pa n i e s . AT & T , wi t h 70 p e r c e n t of theU S l ong - d i s t a nc e m a r k e t , has been m o v i n g into financial servicess ince 1984. In M a r c h 1990 it l a u n c h e d a combina t ion ca l l ing and

c red i t ca rd . Wi th in 10 m o n t h sExhibitVll The chunk strategy -^ b e c a m e the s i x t h m o s t popu, ^ lar ba nk c r e d i t c a r d in the

U n i t e d S t a t e s .W e depic t the s t r a t e g y of t h e s edominant players as one bigchunk - in effect, a thick trun-cated wedge (see Exhibit VII).The donut s tra tegyOne strategy that has receiveda great deal of attention forsome years now is t ha t of the composite rebundler or simply thefinancial supermarket - the ul t imate in one-stop financial shop-ping. The intention here is to provide the widest range of serviceto a well-defined customer segment in the hope of creating syner-gies among the various offerings. Previously unbundled servicesare often bundled in innovative ways.

We call this a donut strategy (see Exhibit VIII) because the inten-tion is to offer the services all the way around the face of our circle


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explicitly focuses on "being allthings to some people" and ExhibitV!ll The donut strategyoffers the gamut of retail , ^financial se rvices - se cu ritie s,savings ins t ruments , insur-ance, realty products, andcounselling - to relativelyaffluent investors. Its competi-tive presence is felt in bothdomestic and foreign markets.I ts s tra tegy of cross-selling itsproducts and services requiresa large and expensive infras-tructure , which puts i t a t adisadvantage in competing with price leaders such as Dreyfus.Indeed, its problem is much l ike that of the traditional food super-ma r ke t s whose marke t s have been eroded by discount warehousestores on one side and specialty groceries on the other.Sears is another well-known financial supe rmarke t , a l though atthe lower end of the market. I t first sold financial services to itsown charge card customers . By 1986 it had evolved into a financialservices network with the stated objective of becoming the "one-stop financial provider to Main Street America." At present, itss tra tegy is to refocus its financial services business on consumerservices such as insurance, real es ta te , retail brokerage, invest-me n t banking, card services, and consumer lending. Early on.Sears created a "Synergy Committee" to capitalize on tbe linksamong its acquisitions. As is often the case, synergy has been slowto materia l ize .Food supermarke ts na tura l ly tend to be efficient: there is no needto seek out synergies between cans of frozen peas and packages offrozen ice cream - beyond the obvious one of getting the same peo-ple to pile them into their shopping carts . Financial sup erm arkets ,however, m ay prove costly. Still, if executed with creativity and


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strategy is to think globally while marketing locally, delivering itswide v ariety of services to carefully-targe ted seg m ents of th eworldwide market .Nomura Securities Co. Ltd also pursues a donut strategy. In 1988it ranked first in net income before taxes among all internationalfinancial institutions, and by mid-1989 had achieved the largestmarket capitalization of any such institution in the world. Nomuraprovides the widest range of investment-related services in Japanand abroad. Its research capabilit ies, among the best in the worldhave been carefully integrated with its information managemencapabilities. It exploits synergies through a globally-integratednetwork. Nomura differs, however, from other financial super-markets in its use of alliances with top-tier boutiques in local mar-kets ra ther than making s tra ight acquisi t ions or building de novo

The shotgun s tra tegyRelated diversifiers are less concerned with offering a tightly-integrated set of synergistic services than with growing a portfolioof offerings, often linked together loosely by electronic data pro-cessing networks. Deal making around the globe is of centralimportance to these firms, although different services may betargeted to different types of selected customers with differengeographical scopes - regional, national, international. Thesefirms may target high-end wholesale customers as well as provid-ing services to retail customers. Citicorp would seem to be a primeexample.Institutions employing this strategy may try to provide a widevariety of products and services in as many sectors or geographicareas as regulation permits. Where regulatory barriers probibithem from operating in a geographic area directly, they sometimestry to enter the market by acquiring a local company. There mayhowever, be lit t le ap pa ren t integ ration amon g the ir different busi-nesses .


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A f a sc i na t i ng e x a m p l e of theExhibitlX The shotgun strategy s h o t g u n s t r a t e g y is the ge ne r -a l a p p r o a c h p u r s u e d bytheH o n g k o n g and S h a n g h a iB a n k i n g C o r p o r a t i o n ( H K B ) .I t is the l a r g e s t b a n k in H o n gKong , the o w n e r of the secondl a r g e s t one, and the m o s tac t ive i n t e r n a t i o n a l b a n k inC h i n a . It o p e r a t e s a dd i t i ona l l yi n N o r t h A m e r i c a and E u r o p e ,in re t a i l , co rpora te , andi n v e s t m e n t b a n k i n g . H K B ' ss t r a t e g y has b e e n to e x p a n dt h r o u g h s t r e n g t h in its b a s ic b u s i n e s s e s . It is a t echnolog ica l l ead-e r , pa r t i cu la r ly in r e t a i l b a n k i n g , andu s e s a g l oba l da t a ne t wor k tol i nk allof its of f i c e s wor l dwi de . I nve s t m e n t ba nk i ng is a n o t h e r of

i t s s t r e n g t h s , w i t h o w n e r s h i p of se ve r a l big p l a ye r s , i nc l ud i ngW a r d l e y Ho l d i ngs , J a m e s Ca pe l , Ca r r o l l Mc E n t e e & McGinley .O t h e r HKB b u s i n e s s e s i nc l ude i n s u r a n c e , r e t i r e m e n t be ne f i t s ,l e a s i n g and h i r e p u r c h a s e , and t r u s t e e and n o m i n e e c o m p a n i e s .Einal ly , Bane One Cor po r a t i on p r ov i de s a r a t h e r good e x a m p l e of are l a t ed d ive rs i f i e r on a sm a l l e r s c a l e . It has be c om e oneof th e lead-i n g s u p e r r e g i o n a l s in the U n i t e d S t a t e s t h r o u g h an a c qu i s i t i ons t r a t e g y s p a n n i n g a de c a de , c om bi ne d wi t h an i n n o v a t i v e use oftechnology.B a n e One o w n s 55 b a n k i n g o r g a n i z a t i o n s o p e r a t i n g in Ohio , Ind i -a na , W i sc ons i n , Mi c h i ga n , Ke n t uc ky , and Texas . Addi t iona l ly , itssu bs id ia rie s offer f inancial ser vic es in the a r e a s of m o r t g a g e b a n k -i n g , e q u i p m e n t l e a s i ng , consumer finance, fiduciary and t r u s t ser-vices , c red i t l i f e insurance , and d i sc oun t s t oc k b r oke r a ge . Theorgan iza t ion ' s bas i c l end ing po l i c i e s d ic t a t e tha t the g r e a t ma jor i tyof c om m e r c i a l l oa ns be m a d e to sm a l l - and m i d d l e - m a r k e t cus-t o m e r s o p e r a t i n g w i t h i n the a f f i l i a t e ba nks ' m a r ke t a r e a s .


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They can also use it to plot where their organizations fit, wheregap s exist, and wh ere com petitors a re likely to come from. Einally,the framework can be an effective tool for communicating anorganization's strategy to employees, sbareholders, and otherinterested constituencies. By making strategies visible, i t makesthem easier to talk about.A final question: is th ere really a financial services indu stry ? Yearsago, in his article "Marketing Myopia," Theodore Levitt imploredmanagers to look beyond their immediate businesses to thebroader missions they served. Oil companies were to conceive ofthemselves as being in the energy industry, railroads in trans-portation. It is not clear th a t an energy indu stry ever emerged, bu ta transportation industry has surely never materialized. Few rail-road s run airlines, let alone taxicabs, and some tha t tried (such asCanadian Pacific) have given it up. Broad missions are concepts inthe m inds of people. Som etimes they rem ain ju st t h at - l i t t le morethan dreams - and sometimes they do influence the behavior oforganizations, though not always successfully.Companies that pursue the strategies we have labelled disk,donut, and shotgun are betting that there is a financial servicesindustry. Those with rifle shot, thin wedge, and chunk strategiesare less committed to the concept. Only time will tell whose betspay off. Our guess is that there will prove to be more than a bank-ing business, more than a brokerage or an insurance business, butprobably less than a fully-integrated financial services industry. Q


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visualizing strategies

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