How to Think Strategically

At CUNA Mutual’s Business Development Unit we are always on the lookout for a compelling new business book.  Unfortunately, the business genre, which is flooded with new titles, is sorely lacking in strong material.  Many business books these days focus on the three popular themes of finance, strategy and leadership.  Too many take a single concept, which might have made for a good magazine article, and expand it with filler to 300 pages to satisfy their publisher.  The end result is at best a painful reading experience and at worst a waste of time.

Occasionally though, a new business title emerges that grabs our attention and sparks new discussion.  A recent example is a book titled “Deep Dive” by Rich Horwath (pub. Greenleaf Book Group Press, 2011).  The book’s subtitle is “The Proven Method for Building Strategy, Focusing Your Resources, and Taking Smart Action”.

While this book has much to offer, one idea in particular stands out.  Horwath makes the case that strategic planning and strategic thinking are two very different concepts.  He notes that too many organizations invest substantial time and resource in strategic planning processes, without ever having developed a true culture of strategic thinking that must necessarily precede and underly the planning process.

Of course, Horwath is not the first to make such an observation.  Horwath, in fact, quotes Professor Henry Mintzberg, one of the great pioneers of corporate strategy development, thusly:  “Strategic planning is not strategic thinking.  Indeed, strategic planning often spoils strategic thinking, causing managers to confuse real vision with the manipulation of numbers.”

Horwath also cites Professor Richard Rumelt of UCLA, another great strategic thought leader:  “Most corporate plans have little to do with strategy.  They are simply three-year or five-year rolling resource budgets and some sort of market share projection.  Calling this strategic planning creates false expectations that the exercise will somehow produce a coherent strategy.”

The book goes on to describe practical approaches to embed strategic thinking into an organization’s DNA.  Many years ago when John Lass was a new consultant at Boston Consulting Group, he learned one such practice.  Whenever BCG would approach a new strategic problem, the case team would begin by forming a hypothesis as to what the ultimate strategic findings and recommendations might be.  That hypothesis was then tested using various approaches – empirical data-driven, anecdotal, common sense – and typically the initial hypothesis would be modified as new data and ideas emerged.  In some cases the initial hypothesis might be abandoned altogether.  But the process of developing the initial hypothesis forced a process of true strategic thinking.

Horwath’s book offers other good ideas as to how to make strategic thinking an ongoing mindset in your organization.  It’s a great read, and it’s less than 200 pages.  Enjoy.

2013 Research Theme

Every year our Team picks a major theme around which our research efforts will center. In 2011, we focused on Sustainable Growth, looking at the relationship between earnings, capital and asset growth. 2012’s focus was Strategic Inflection Points, showing how fast an industry can change in the digital world. In fact, one particular slide showing the convergence and competition we saw in financial services generated a lot of discussion and will become our theme for 2013: “The Battle for the American Consumer”.

We've seen a number of new competitors enter the market to provide financial services to the American consumer. Traditional financial institutions, like credit unions, are competing head-on with retailers, mobile network operators, card issuers, and web-based platforms. This process of convergence around the four basic components of financial services (i.e. savings, lending, investments and insurance) has intensified as new technological advancements have changed the way financial services are delivered to the consumer. The battle is most intense in the area of payments. Checking accounts have historically been a key factor in identifying a consumers’ primary financial institution (PFI) but major shifts are underway in how consumers are paying for goods and services, challenging this conventional definition.

Much of our market research this year will explore “The Battle for the American Consumer” and discuss the strategic impacts to cooperative financial services.

The “Disappeared”

Since the beginning of 2008, the year the financial crisis began, 1,175 credit unions have merged or otherwise closed for business according to NCUA’s 5300 Call Report data.  These credit unions, whose last reported total assets sum to $31B, range from $2.3B to numerous smaller credit unions with total assets measured in the thousands of dollars.  In this post we’ll take a deeper look at these merger / closures.

The rate at which credit unions have merged or closed has been quite volatile as can be seen in the chart below (blue line). Mergers / closures appear to follow a seasonal pattern with a pronounced uptick in the number of mergers / closures occurring in the fourth quarter of each year. There was also a notable slowdown in the number of mergers / closures starting in 2010 and lasting through the first half of 2011. 

Interestingly, NCUA noted in its “NCUSIF and TCCUSF Quarterly Statistics - September 30, 2012” report (page 8, slide 16) that the number of credit union failures in 2010 matched the previous high of 28 in 2009.  The slowdown of 2010 and early 2011 can thus be attributed to a reduction in the number of voluntary mergers.  

Note: Timeline in above chart marks the quarter when a CU ceased reporting its NCUA 5300 Call Report data.  Total assets shown above represent the last reported, i.e., prior quarter’s, total assets.

The assets involved in these mergers / closures (red columns in previous chart) have also been unevenly distributed across this time period.  A surge of consolidation activity occurred in the fourth quarter of 2008 and first quarter of 2011 when total assets of merged / closed credit unions exceeded $3B.  The fourth quarter of 2008 was marked by four $200M+ credit union mergers / closures and the $2.3B First Tech – Addison Avenue merger occurred in the first quarter of 2011. In contrast, total last reported assets of merged / closed credit unions fell below $1B in 4 of the 18 quarters since the start of 2008.

While there have been a few mergers / closures of relatively large credit unions since 2008, the overwhelming majority of mergers / closures involve relatively small credit unions.  Nine out of 10 credit unions that disappeared had last reported total assets of $50M or less.  Only about 2% of these mergers / closures involved credit unions with last reported total assets in excess of $250M.

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

Credit unions with last reported assets greater than $250M comprised approximately 47% of total assets of all credit unions that disappeared since 2008.  In contrast, credit unions with assets of less than $10M comprised over 70% of the total number of credit unions that merged / closed, but only a little more than 7% of the last reported total assets of these credit unions.

Source:  NCUA 5300; base equals total last reported assets of credit unions that merged / closed since 2008.

A lack of long-term profitability is another common characteristic of credit unions that have merged / closed. As the following chart shows, 2 of every 3 of these credit unions had a negative average ROA over the last 3 full years prior to their merger / closure.

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

Most of the credit unions (66%) that have disappeared were well capitalized based on their last reported net worth ratios, i.e., their net worth ratios were 7% or higher.  Almost one half had net worth ratios of 10% or higher.  

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

In summary, the pace of credit union mergers / closures has been quite volatile and typically peaked in the fourth quarter of each year.  Also, credit unions that merged / closed since 2008 were generally:

• Smaller in size (91%  with total assets <$50M)
• Earnings challenged (68% with negative 3-year ROAs )
• Well capitalized (66% with NW ratios ≥ 7%)

Will these trends hold going forward?  Will the economic and regulatory dynamic in financial services impact consolidation?  Will the pace of merger activity accelerate in 2013?  Will mergers of larger credit unions pick up?  When pondering these questions, it’s important to remember a disclaimer that is commonly used on investment prospectuses:

“Past performance is no guarantee of future results”.