A strategy must be simple and focused. When you are trying to do many things, that is a recipe for disaster – even when you have the greatest minds in the world of business. For example, take a look at Goldman Sachs's disastrous Main Street strategy. They have just recently (in Oct 2022) announced the third reshuffle in almost as many years – mainly because they tried to enter retail banking.
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Expanding from Investment Banking to Retail Banking
You would think, how hard can it be? Goldman Sachs is supposed to employ the sharpest minds in finance:
Traders on the other side of a deal shake in fear;
bosses flock to its bankers for advice;
investors hang on its analysts' every word.
So, when, in 2016, Goldman launched its consumer business, it seemed only a matter of time before these masters of the universe mastered the pedestrian business of making loans to ordinary people.
Goldman started Marcus in 2016, named after one of the bank's cofounders, to help it diversify revenue away from its core trading and advisory operations.
Big retail banks, including JPMorgan Chase and Bank of America, enjoy higher valuations than Wall Street-centric Goldman.
On their website, Marcus (Goldman Sach's brand for its retail banking) proudly announced the services it offers:
Savings: It offers a high-yield Online Savings Account and certificates of deposit with competitive interest rates in the US through Goldman Sachs Bank USA.
Lending: It offers fixed-rate personal loans ranging from $3,500 to $40,000. There are no late or prepayment fees. Their loans can be used for major purchases, home improvements, paying off high-interest credit cards, and special occasions.
Investing: It provides investment portfolios designed by Goldman Sachs experts with technology that monitors activity and triggers rebalancing as needed, in addition to brokerage and investment advisory services.
But it is clear now—after the third reshuffle in four years was announced on October 2022—that Goldman should have stuck to Wall Street Investment Banking.
Marcus suffered from product delays, executive turnover, branding confusion, regulatory missteps, and a significantly high loan loss rate (as a large proportion of loans – around 28% are to people with low credit ratings, i.e., FICO score lower than 660).
According to the bank's internal projections in June 2022, losses at Marcus are pegged at more than $1.2bn in 2022. These losses would drag down the bank's entire profits by over 40% and lead to layoffs and reductions in bonuses.
Well, we have to admit that profits are falling across the big banks as the economic cycle turns. High-interest rates are killing lucrative investment bank revenues and putting pressure on consumers. In the third quarter of 2022, compared with a year ago, net income fell by:
17% at JPMorgan Chase,
25% at Citi,
29% at Morgan Stanley,
But by a whopping 43% at Goldman!!
This partly reflects that Goldman's dominance in the investment banking business that has slowed sharply. But it's also because, without those vast profits in trading and investment banking to distract shareholders, the credit cycle turn reveals just how terrible Goldman is when it comes to consumer lending. A big, big failure!
The poor performance leads to Goldman Sachs pulling back its retail banking ambitions.
Goldman Sachs CEO David Solomon said the bank was pivoting away from its previous strategy of building a full-scale digital bank with Marcus.
During an hour-plus-long conference call, Solomon was forced to admit missteps as analysts, one after another, peppered him with critical questions.
Recently, Bloomberg reported that Goldman is cutting back the resources dedicated to building a full-service digital bank. Ah, the poor employees – as usual, become the victims of a bad strategy.
What happened?
The classic case of using a cleaver to cut paper. Although the cleaver has a sharp edge, it is unsuitable for cutting paper. It would be best if you had scissors for that. Similarly, don't use an axe if you want to cut meat. Instead, you will use a cleaver (and use the axe to chop trees). Although all the tools look similar (i.e., they all have sharp edges), you use them for different purposes.
For a company to be successful in one field, it means its business model (i.e., its implemented strategy, aka its design, processes, culture, systems, incentives, etc.) is geared well toward one function. So, while Goldman Sachs's business model is well-attuned to investment banking, it's not tuned to retail banking. For example:
Goldman's aggressive approach in Investment Banking backfired when applied in retail banking (i.e., too much exposure to low credit score customers).
Goldman's lax expense control policies (while acceptable in a high-stress, high-margin investment banking environment) don't do well in low-margin retail banking.
Goldman's incentive system (geared to encourage high profit) makes the best talents dislike the retail banking business (i.e., they cannot earn big bonuses).
In other words, Goldman Sach's is a well-designed, highly-performing cleaver. But the executives tried to use this cleaver to cut paper. The result, of course, is not as expected.
Classic Strategy Lessons
So, what can we learn from this case? The classic strategy lessons:
Your strategy should focus on your core competence. You win by focusing on your strengths.
Don't pursue two directions at the same time. It simply won't work. You must focus on one direction only.
If you had to do it (e.g., to create a new growth engine), then you need to split both businesses cleanly. This allows the people in each business to focus on a single direction.
If you are interested about winning strategy, check my blog.
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