The essence of strategy is about being different (read more about sharp strategy here).
To be successful in business, one doesn't have to follow the crowds. Alas, most companies today follow others by copying each other – until everyone in the industry looks and acts the same (even though they are in highly saturated and competitive markets where differentiation will deliver the most significant impact).
This is especially acute in the banking industry. For example, in UK retail banking, 80% of the consumers see no difference between the banks. Similarly, in the USA, banks are struggling to differentiate themselves. But a Bangladeshi bank – the Grameen Bank – successfully differentiates itself and achieves significant impacts.
The case of Grameen Bank can teach us how being different can make such a big difference – both from the business and society perspective. After all, being different means being innovative.
Photo by Mamun2a from Wikimedia Commons - link: https://commons.wikimedia.org/wiki/File:Grameen.JPG
Muhammad Yunus, a professor of economics at Chittagong University in the 1970s, witnessed extreme poverty in Bangladesh. He could see that people were trapped in poverty because they didn't have access to banking services. As a result, they couldn't get affordable credits to open or grow their business and improve their living standard. Here, Muhammad identified a market gap – a large proportion of demands not served by the industry's incumbents.
According to the legend, the story began when Muhammad visited a poor village with his students: a woman who made bamboo stools explained that she had to borrow money to buy the bamboo, but the interest rates charged were high. So by the time she had paid back the loan after selling the stools, she had little money left – to live on or expand her business. The cycle continued, as the woman never had enough money to buy bamboo, she always had to get another expensive loan.
The traditional banks didn't want to lend money to micro-businesses as they deemed the risks too high and profits too low. First, the banks considered the poor people behind the micro-business as too high risk: they had no reliable credit story, no collateral, and no apparent means of paying back the loan. Second, the loan amounts were too small. The negligible returns on small loans weren't worth the effort and the risk. Third, with their high overheads, the banks weren't able to serve this market segment efficiently. Thus, they weren't interested.
As a result, poor people had to rely on high-interest loans from loan sharks. Muhammad Yunus realized that the exorbitant interest rates (over 10% a week) prevented the poor from building successful businesses and rising out of poverty. With no money to invest and expand, the cycle of poverty could never be broken.
So, in 1983, Muhammad decided to open a bank for micro-businesses called Grameen Bank (which means village bank in Bengali). Muhammad had to use his own money to offer affordable micro-loans (because no banks nor government agencies wanted to fund him; they thought his idea was doomed to fail as poor people couldn't be trusted to repay loans).
Since no other competitors (traditional banks and loan sharks) were offering long-term loans at low-interest rates, Grameen Bank's unique offering quickly became successful. In a short time span, the bank has loaned over $9 billion, reaching over 8 million borrowers in over 80,000 villages. It also has the highest rate of successful repayments, i.e., over 98% of loans are repaid (beating the rates of traditional banks and loan sharks).
From a social perspective, Muhammad was creating affordable rates that allow the local people to keep more of their revenue, thus enabling them to invest in the future, raise their standard of living, and break the poverty cycle.
From a business perspective, he was creating a unique offering in the market that no competitors were offering. Don't forget that business is essentially a fabric of society – both successful and unsuccessful businesses have social impacts.
Today, Grameen Bank has enabled many families to cross the poverty line. In addition to business loans, it has extended its products and services. Its housing loans have enabled people to build houses: more than 700,000 have been constructed. Its education loans have helped many to improve their chances of getting work. Its educational scholarships have helped bright but disadvantaged children access education. It has been a lifeline for millions of poor people – proving that micro-credits work.
Muhammad Yunus can make his banks work because he isn't following what other banks do.
Other banks have high overheads; Grameen Bank has negligible overhead. This allows Grameen Bank to make a profit on small returns.
Other banks don't provide financial advice; Grameen Bank does. This ensures that the invested ventures would be successful and minimizes the risks to the bank.
Other banks cannot serve people without formal documentation; Grameen Bank can rely on the local village's knowledge and therefore knows who can be trusted. No written contract and expensive lawyers are required.
Other banks tend to dismiss female borrowers without qualifications; Grameen Bank believes village women are reliable in running their businesses efficiently and responsibly. Around 97% of the customers are women.
Other banks don't bother building personal relationships with small customers; Grameen Bank uses these relationships to enhance people's responsibility and commitment.
Other banks don't care about whether borrowers save or not; Grameen Bank requires the borrowing members to save very small amounts regularly in a number of funds. These savings help serve as insurance against contingencies.
Other banks employ expensive debt-collection services; Grameen Bank relies on social solidarity. The Grameen Bank's group members often contribute the defaulted amount of an individual borrower (with the intention to collect the money from the defaulted member later). Such behavior is encouraged because Grameen does not extend further credit to a group in which a member defaults.
Muhammad's business model was so successful that it is now adopted by over 60 countries – including developed countries such as the USA, France, and the Netherlands. It is now at the forefront of a world movement that aims to eradicate poverty through micro-lending. For helping people to rise out of poverty, Muhammad Yunus was awarded the Nobel Peace Prize in 2006.
As you can see, being different can make a big difference. So, next time you are developing your strategy, pay special attention to how you can be different.
Continue to explore the secrets of winning strategy here.
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