Today it is so common for businesses and societal leaders to adorn their speeches and corporate literature with the words ‘strategy’ or ‘strategic’. Their intention is usually to convey their ideas’ importance. They want to suggest a sense of elevated aims, coherent thinking and careful planning. Strategic management textbooks focus on missions, goals and values considered indispensable tools for success.
Little importance is given to how businesses should avoid failures that still litter corporate history, not least in the financial services industry.
The financial crisis that started in 2007 was the cause of many failures of banks and other financial services operators due to flawed strategies.
Management students and industry observers have an embarrassing choice of well-written books and official reports to help them understand the reasons behind strategic failures.
Some blame the devil, at least metaphorically, in books with titles like The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street (Dunbar, 2011).
Others blame greed or the size of companies like The Age of Greed (Marrick, 2010) and Too Big to Fail (Sorkin, 2009), while others attribute strategic failures to errors of judgement, with titles like A Colossal Failure of Common Sense (McDonald, 2009).
The reasons behind strategy failures are often more mundane: a poor understanding of strategy formulation and execution elements by directors, CEOs and executive managers.
Standard strategic theory teaches that the choice of business in which to operate, and the balance among these businesses, is a central concern of strategy formulation.
Financial services leaders need to distinguish between business strategy and corporate strategy. In financial services, business strategy focuses on how a company plans to compete in its market. In contrast, the corporate strategy focuses on the markets it wants to enter and businesses it wants to compete with.
The subtle layers of meaning in the use of the word ‘strategy’ point to the different responsibilities that have to be carried by the executive management and the board or directors of a financial services company.
Executives are primarily responsible for creating value for the consumer, being competitive in the market by offering customers a product or service that is unique to their competitors’ products, and cost leadership by having the best prices in the industry.
The financial crisis that started in 2007 was the cause of many failures of banks and other financial services operators due to flawed strategies
The board of directors have more onerous responsibilities. They are expected to deal with what businesses a company should be in and, by implication, what businesses it should avoid. Corporate strategy should provide long-term
sustainability, maximising profits while minimising risk. It must ensure that the business has the financial, technological and human resources necessary for efficient operations.
Execution of strategy is also prone to failure when risk management frameworks are defective. No board of directors should ever approve the introduction of new products or services before it is 100 per cent convinced that the executive management has the competence to manage the risks involved effectively without putting at risk the company’s existence. The board’s responsibility to ensure the company’s stability cannot be delegated to executive management.
In the last two decades, the massive strategic failures of financial services giants like insurers AIG, Bear Stearns, Lehman Brothers in the US and RBS bank, Monte dei Paschi, Northern Rock and HBOS in Europe can all be attributed to failures in different stages of strategy formulation and execution.
Failed responsibilities must also be attributed to financial services regulators, who are ultimately responsible for safeguarding the stability of the financial services sector and the interests of depositors and shareholders.
Strategy meetings in some companies are often reduced to the classical exercise of defining strengths, weaknesses, opportunities and threats. When inadequate experience or hubris afflicts those participating in such strategy meetings, delusional perceptions of what a company can and cannot achieve are not uncommon. This often leads to decisions being taken that sooner or later will expose a financial services business to massive risks.
When this happens, the blaming game takes over. It is not uncommon for the weakest link in the management process to carry the bulk of the consequences.
Some people wonder why the many failures of financial services businesses often leads to those responsible at the very top of the organisation to get away with little or no consequences. Sir Fred Goodwin, who practically single-handedly brought down RBS bank in 2008, lost his knighthood in 2012 but still managed to recycle himself as a consultant.
The harsh reality is that incompetence is not a criminal offence.