Does strategy matter?
If you do not think that it matters then you are in good company. There are many who question the value of strategy. And I see many companies where there is no formal strategy; the informal strategy is to keep doing what has worked in the past or to chase what is fashionable today.
Strategy v Execution
When it comes to questioning strategy there are two schools that are particularly prominent. First, there is the school of execution. The execution school which says that strategy is waste of time. Why? Because strategies are generic-obvious and what matters is execution. The ability to turn strategy into the daily live of the organisation. Clearly, there is some truth in this school. Strategy which cannot be operationalised is waste of time-resource.
Strategy v Culture
Then there is the school that says “culture eats strategy for breakfast”. Yes, culture is powerful. Culture determines what gets done and how it gets done. A strategy that does not take into account the fit with culture will meet lots of resistance. Getting people to enact such a strategy will be like fighting a guerilla war with an enemy who is patient and cunning. What is forgotten is that culture can be and is influenced-shaped-shifted through strategy.
To see strategy and culture as being separate and distinct is a gross misunderstanding. This misunderstanding arises due to our reductionist-analytical thinking. Strategy and culture are interlinked. Put differently, if you change strategy, you will take actions that will influence the culture. And if you change culture it will eventually influence the strategy.
HBOS: strategy shapes culture and leads to downfall?
If you still have doubts over the importance/significance of strategy then I say let’s consider the case of HBOS bank and the latest report on how this bank was brought to its knees. The HBOS bank was rescued, after significant arm twisting and sweeteners by the UK Govt, in 2008 by Lloyds bank. Why did a bank that was valued at £30bn when it was created in 2001 need to be rescued? Because it racked up £47bn of losses on bad loans.
Who were the architects of the HBOS downfall?
Three Tops have been singled out in the report published by the parliamentary commission:
The primary responsibility for the downfall of HBOS should rest with the Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from it’s birth to its death.
How was strategy responsible for the downfall of HBOS?
Here is what the parliamentary report says:
The strategy set by the Board from the creation of the new Group sowed the seeds of its destruction. HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the Group. Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite. :
The growth of HBOS’s Corporate Division was not the result of superior performance but of its high-risk strategy. The nature of its activities did not alter after the creation of HBOS, although the pace of growth accelerated and the scale significantly increased. When the Division later incurred huge losses, these too were due to the particular nature of its business and resulted directly from its high-risk strategy. Its losses were on a larger proportionate scale than those incurred by any other major UK bank. This was caused specifically by its distinctive loan book, including concentration in commercial real estate and leveraged loans, high exposure to single names, a high proportion of non-investment grade or unrated credit and holdings of equity and junior debt instruments. The loan book was therefore significantly more exposed to the domestic downturn than that of any other large UK corporate banking businesses.
The acceleration in loan growth, in part caused by the Division’s neglect of the storm signals of 2007 and 2008, is likely to have exacerbated the scale of the subsequent losses. However, even without this acceleration, the Division would still have incurred disastrous losses. The roots of all these mistakes can be traced to a culture of perilously high risk lending. The picture that emerges is of a corporate bank that found it hard to say ‘no’.
In view of the reckless lending policies pursued by HBOS Corporate Division, we are extremely disappointed by the attempts of the most senior leaders of HBOS at the time to attribute the scale of the consequent losses principally, or in significant measure, to the temporary closure of wholesale markets. The lending approach of the Corporate Division would have been bad lending in any market. The crisis in financial markets was merely the catalyst to expose it. Losses in the Corporate Division did not prove temporary. Indeed, we estimate that the HBOS Corporate loan book has continued to incur significant impairments in every year since 2008, demonstrating that the losses were the result of incompetent lending and not caused solely by the events of 2008. Furthermore, HBOS’s Corporate Division was significantly more exposed than other banks to the downturn in the economy due to the nature of its loan book.