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Strategy study w0 3

Kristina Safarova
Kristina Safarova

One of our most advanced training programs with >270 videos, is where we help a major Latin American Bank determine if they should enter the highly competitive US retail banking sector. We asked the partner leading this study, Michael, to document each day of the study as he thought through the issues, managed the client and led the engagement team on this complex assignment. The subsequent live-blog was one of the most popular programs we ever released. The posts were prepared at the end of each day of the study so you can see how the thinking on the study evolved. We have since re-edited the live blog. At 600 pages long, the re-edited live blog is probably the most detailed guide anywhere demonstrating how a partner thinks on a study. You will see that it is not a linear process. It is not a function of simply finding and plugging in a framework. Though there is a clear logic to the thought process. On StrategyJournal.com we are publishing the entire re-edited live-blog. On the Strategy Skills podcast channel, we will publish an accompanying free podcast series. Insiders, our most loyal clients, who want to see how we conducted the analyses, the actual engagement slides and follow the training to replicate this type of partner-level thinking can view all ~270 detailed videos at StrategyTraining.com and Premium members can view the videos on StrategyTV.com.

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StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. 3 Why does LAB exist? The founding mandate of an organization plays a critical role in determining its strategy to execute that mandate LABs mandate The 1st consideration is important but largely ignored. What is the banks mandate? Why was it created? And, obviously, how does entering the US market help the bank reach its mandate? The bank receives money from a national government and the government is their majority shareholder. What does the government want from their investment and from the bank? Is this expectation explicitly captured in the banks founding articles of incorporation or a national law that governs the client? They are a quasi-state owned bank working with large private sector equity investors. Which investors needs takes precedent? Ultimately, the success of the bank is determined by its ability to meet the written expectations set up during its founding. We need to be vigilant about this and ensure that anything that takes them away from this goal is not pursued. Cursory reading of the banking founding legislation indicates the client is governed by a legislative mandate, which requires them to: (1) Earn a return greater than or at least equal to inflation. (2) Increase employment in the country. (3) Increase job creation. No matter where we go with the analyses, we need to be guided by the mandate of the bank. We obviously need to validate this by getting a copy of the original articles of incorporation and the bill that went through the senate. A simple reading of the situation would say entering the US market does not help the bank create jobs in its own market so it should not do it. Unfortunately, the situation is not that simple. That brings us to consideration 2, cross-subsidization. Cross-subsidization There are two ways to look at this. (A) Is the banking client, Latin American Bank (LAB), so unprofitable in their current business and/or markets that they want to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to cover their losses?
StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. This is not implausible. If the banking client needs to create jobs in Latin America and this critical need is forcing them to incur losses, they would need to offset it somehow. Otherwise they would need government funding in perpetuity to offset the losses from entering markets with low to negative returns. The Industrial Development Corporation (IDC) did this in Mozambique when they funded smelter operations, by requiring higher returns than they could get in their home market. Yet, the IDC issue was slightly different, which brings us to option B. (B) Is the client, Latin American Bank (LAB), profitable in their current business and/or markets but unable to extract higher returns due to their social mandate, job creation, and therefore wants to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to do more good work? Again, this is a very plausible option. This is the IDC situation and a common strategy used around the world. But there is a wrinkle. If a Mexican national, for example, crosses the border to work in the US and remains a Mexican national, should LAB charge him/her higher interests rates for a loan merely because he/she is based in the US? Is it ethical? What about Mexicans who borrow money and create businesses in Mexico? Are they treated differently? This is definitely an area the team needs to consider and some of the tough decisions we need to make. It is worth remembering the quote from Emma Lazarus etched into the tablet on the Statue of Liberty. Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, and tempest-tost to me, I lift my lamp beside the golden door! My final note is an important reminder. Since, we personally want this banking client to succeed so much, we need to take the opposing stance and play devils advocate. We need to prove this will not work. If we are wrong, everyone is happy. If we right, we saved the banks capital. Bias is no friend to a consultant. We need to be right irrespective of our personal preferences. QUESTION(S) OF THE DAY: Why do you think LAB is entering the US market? Due to issue A or B above?
StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. We answer this question, additional reader questions and discuss more issues raised in this article on the accompanying episode on the Strategy Skills podcast channel on iTunes, Google Android Podcasts, Libsyn, Spotify, Acast, Podbay, Podbean and Listen Notes. This is the worlds #1 ranked business strategy podcast channel. If you have a question, please post it as a comment on iTunes and we will respond in a podcast. If you would like sample episodes of our most advanced strategy programs all taught by ex-McKinsey, BCG et al. senior partners please visit the FIRMSconsulting.com homepage and provide your contact details at the top.

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Strategy study w0 3

  • 1. StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. 3 Why does LAB exist? The founding mandate of an organization plays a critical role in determining its strategy to execute that mandate LABs mandate The 1st consideration is important but largely ignored. What is the banks mandate? Why was it created? And, obviously, how does entering the US market help the bank reach its mandate? The bank receives money from a national government and the government is their majority shareholder. What does the government want from their investment and from the bank? Is this expectation explicitly captured in the banks founding articles of incorporation or a national law that governs the client? They are a quasi-state owned bank working with large private sector equity investors. Which investors needs takes precedent? Ultimately, the success of the bank is determined by its ability to meet the written expectations set up during its founding. We need to be vigilant about this and ensure that anything that takes them away from this goal is not pursued. Cursory reading of the banking founding legislation indicates the client is governed by a legislative mandate, which requires them to: (1) Earn a return greater than or at least equal to inflation. (2) Increase employment in the country. (3) Increase job creation. No matter where we go with the analyses, we need to be guided by the mandate of the bank. We obviously need to validate this by getting a copy of the original articles of incorporation and the bill that went through the senate. A simple reading of the situation would say entering the US market does not help the bank create jobs in its own market so it should not do it. Unfortunately, the situation is not that simple. That brings us to consideration 2, cross-subsidization. Cross-subsidization There are two ways to look at this. (A) Is the banking client, Latin American Bank (LAB), so unprofitable in their current business and/or markets that they want to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to cover their losses?
  • 2. StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. This is not implausible. If the banking client needs to create jobs in Latin America and this critical need is forcing them to incur losses, they would need to offset it somehow. Otherwise they would need government funding in perpetuity to offset the losses from entering markets with low to negative returns. The Industrial Development Corporation (IDC) did this in Mozambique when they funded smelter operations, by requiring higher returns than they could get in their home market. Yet, the IDC issue was slightly different, which brings us to option B. (B) Is the client, Latin American Bank (LAB), profitable in their current business and/or markets but unable to extract higher returns due to their social mandate, job creation, and therefore wants to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to do more good work? Again, this is a very plausible option. This is the IDC situation and a common strategy used around the world. But there is a wrinkle. If a Mexican national, for example, crosses the border to work in the US and remains a Mexican national, should LAB charge him/her higher interests rates for a loan merely because he/she is based in the US? Is it ethical? What about Mexicans who borrow money and create businesses in Mexico? Are they treated differently? This is definitely an area the team needs to consider and some of the tough decisions we need to make. It is worth remembering the quote from Emma Lazarus etched into the tablet on the Statue of Liberty. Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, and tempest-tost to me, I lift my lamp beside the golden door! My final note is an important reminder. Since, we personally want this banking client to succeed so much, we need to take the opposing stance and play devils advocate. We need to prove this will not work. If we are wrong, everyone is happy. If we right, we saved the banks capital. Bias is no friend to a consultant. We need to be right irrespective of our personal preferences. QUESTION(S) OF THE DAY: Why do you think LAB is entering the US market? Due to issue A or B above?
  • 3. StrategyTraining.com l StrategyJournal.com l StrategyTV.com l FIRMSconsulting.com We teach business strategy in compelling and creative ways. Our clients solve mankinds toughest problems. We answer this question, additional reader questions and discuss more issues raised in this article on the accompanying episode on the Strategy Skills podcast channel on iTunes, Google Android Podcasts, Libsyn, Spotify, Acast, Podbay, Podbean and Listen Notes. This is the worlds #1 ranked business strategy podcast channel. If you have a question, please post it as a comment on iTunes and we will respond in a podcast. If you would like sample episodes of our most advanced strategy programs all taught by ex-McKinsey, BCG et al. senior partners please visit the FIRMSconsulting.com homepage and provide your contact details at the top.