A common catchcry in the strategic management literature is the phrase stick to your knitting.
This refers to the need to focus your intention clearly within a well-understood competitive domain. We might call this domain ‘an industry’, or we might call it ‘a market’, or a bunch of ‘consumers’.
The argument rests on the logic that firms often cannot replicate business models or business strategies when the underlying technology/production or distribution process differs too substantially; or put differently, when they can’t get any synergies across value chains.
This opinion spot from the Wall Street Journal makes a pretty convincing case that US banking giant Citi ignored this mantra, as they pursued the idea of a financial supermarket – a one-stop shop for everyone’s financial needs.
Citi made claims that they wanted a billion customers(!), which is a viable (if enormously hairy and audacious) goal if there were sufficient commonalities between the customers.
The reality of the financial sector is that it isn’t a supermarket or even a hypermarket. We don’t have a large swathe of relatively inert consumers picking and choosing between whatever mass-produced goods are plonked down on the shelf. Running the store is not as simple as offering shelf space and negotiating with suppliers, real estate developers and building big and efficient warehouses.
Banking works in a much complex way. Banks are, in essence, intermediaries between a range of different parties who in themselves often play multiple roles.
Thus we have firms and individuals who supply the input (money through savings and investments), and more of them again who purchase these funds (via mortgages and loans). We have more folks, again, designing complex products that may serve to generate returns and offset risks, and more again spruiking such products, or bundling them up.
And don’t forget those interested in attracting equity to their business, or in facilitating sales and purchases of other businesses. Nor should we overlook that most of roles are not mutually exclusive and the same firms may be seeking some or all services at a given time. As household consumers we play a less multifaceted but still complex role.
Citi look to have got their value chains very tangled up. They failed to adequately deal with significant (and perhaps irreconcilable) conflicts of interest. They neglected to distinguish between suppliers and buyers.
They are finally starting to extricate themselve from this mess. They have spun off their brokerage arm and rumours are flying about more to come.
It remains to be seen whether such efforts are too little too late. Without bailout money from the US government it is unlikely this strategy would have survived this long. So, remember, stick to…