Avoiding strategic error
Do you know the story of the frog who is placed a pot of nice cool water, gets comfy, does not notice the water is slowly heating up and eventually boils to death?
Do you also know the story of the lemming who is, as always, running with the pack, has little warning that those ahead are plummeting off an unseen cliff edge and, just like the others, plummets as well?
Well, Bank of America was neither the frog nor the lemming in 2008 at the height of the financial crisis when it purchased Countrywide Financial Corp. for $4.1 billion. No, it was obvious Countrywide was awash with toxic mortgage assets that everyone had been fleeing from.
So why did B of A stab itself in the chest? What led it to make such an egregious strategic error?
How about hubris, ego and lack of respect for the limits of knowledge? With CEO Ken Lewis taking the lead, the bank thought, "We are the big and mighty B of A. We surely can easily fix the problems this institution has, quickly clean up its portfolio and become even bigger and mightier on the cheap." Yes, the federal regulators were encouraging B of A and other major financial institutions to step up and take on Countrywide (as well as Merrill Lynch, which is another chapter in the story of B of A, which we will save for another time), but it was B of A that took the bait. (Here's the Associated Press story from 2008 announcing the acquisition and the bank's logic in making it. Great reading in hindsight!)
Of course, there is the argument that this transaction looked like a once-in-a-lifetime strategic opportunity to vastly grow B of A's mortgage business for a song. Time however, has shown this argument to be flawed.
B of A is struggling to regain profitability and bolster capital. It has just announced it is cutting 30,000 jobs as massive problems in its mortgage business are overwhelming the success of the bank's other five core businesses.
Hmm, maybe B of A is that frog in the pot, and now that the water has gotten mighty hot realizes it should hop out if it only could.
That's how it goes with strategic error. When you bet the ranch on a major strategic move that is based on hubris, ego and/or outside pressure and was not cooly assessed in light of the changing environment and the organization's true capabilities and resources, you can lose in a big way.
The moral is to exercise strategic thinking rather than follow ego and the pack: Better to keep monitoring the water temperature and looking ahead for the cliff edge than assume all is well and no abyss is ahead.
Disclosure: In the 1980s the author was an executive of Continental Bank, Chicago, coming in to help change the corporate culture and communications after the bank was rescued by the FDIC. The bank had nearly failed after it made bad oil and gas loans in Oklahoma and depositors began a run on the institution, whose capital had eroded. In that situation, B of A eventually made a smart acquisition by buying Continental to grow its commercial lending portfolio and extend its presence in the Midwest.
