Every institution benefits from focus, and focus comes from planning. The purpose of strategic planning is to recognize the manner by which the credit union competes for business and the comparative success achieved by pursuing its selected strategy. This fundamental understanding of strategy dictates the actions required to navigate headwinds and effectively address threats and opportunities.
Competitive Positioning and Executional Effectiveness
Consumers and businesses alike make purchase decisions based upon a price-value continuum. A pricing advantage is revealed by examining overhead or cost structure. The ability to compete on a differentiated basis articulates a value proposition that is demonstrated by margin. As a result, the landscape — dichotomized simultaneously by overhead and margin —
reveals four competitive postures: Institutions that compete on price, on value, on both price and value or on neither price nor value.
The selection of a strategy, in and of itself, does not guarantee success. Ultimately, earnings offer testimony to every credit union’s effectiveness at executing the strategy selected. A tactical plan that is well executed guarantees the success of a given strategy.
With a path to recognize both strategy and executional effectiveness outlined, objectively evaluating performance is enlightening. When examining financial institutions with less than $10 billion in assets, the popularity of a competitive positioning platform is revealed and the success at executing the selected strategy is uncovered.
Competing on Price and Value: 25 percent of financial institutions are on firm footing owning advantages in both cost structure (overhead) and value (margin). Because of this positioning, each possess the financial flexibility to compete on either price or value, accelerating organizational growth and producing superior financial performance.
Competing without Price or Value: In contrast, one in eight financial institutions operate without a strategy and possess no discernable means to compete. Each operate with cost and margin disadvantages. Absent a sustainable market position and trapped by comparatively high overhead and thin margins the path to earnings is compromised and the viability of the brand is challenged.
Price Competitor: The single most popular strategy pursued by financial institutions is price. More than one in three possess a comparative overhead advantage and utilize this financial flexibility to select price as their go-to-market strategy. However, when introducing the context of earnings into the equation, shortcomings regarding the executional effectiveness of implementing this strategy are revealed. More than half generate inferior financial results, questioning the sustainability of the selected pricing strategy.
Value Competitor: Financial analysis indicates that approximately three in ten financial institutions utilize a value proposition as a means of differentiation. Financial institutions that compete on value have consciously dedicated overhead, often in the form of locational convenience, personnel or both, to acquire market share on a dimension other than price, and are rewarded by the margin advantage that each possesses. The challenge lies in its execution as the majority of value-oriented institutions possess depressed earnings, placing the brand vulnerable to competitive attack.
Creating Competitive Advantage
This research indicates that strategic planning has not provided the clarity of purpose to create competitive advantage. In total, half of all strategic plans have failed financial institutions. As a result, the greatest threat to the long-term survival of the majority of financial institutions is internal, which means that it is controllable, and it is the shortcomings revealed by their strategic planning process. With economic challenges and opportunities on the horizon, the planning process needs to change. The future of half of the nation’s financial institutions rely upon it.
A strategy needs to be executed effectively in order to be defended and this requires closing the knowledge gap. It is critical to gain an in-depth understanding of the market, the member base, the competitive set and the credit union’s operation. Exploring the market reveals incremental opportunities. Self-interest is identified when connecting opportunity to profit and the study of competitors assesses the level of resistance to achieving the desired performance. A tactical plan that is well executed is a necessity.
Tom Long presented at NAFCU’s 2019 Strategic Growth Conference on the importance of data-driven growth.
For more than 25 years, The Long Group has been providing tactical guidance and insights to financial institutions through strategic planning, staffing and productivity analysis, customer and market analytics, distribution planning, and marketing. The Long Group’s proprietary consumer and business financial database forms the basis of its trademarked, predictive analytics platform. Tom Long can be reached at firstname.lastname@example.org or at 603-424-5664.