Sometimes there are stranded businesses – once successful companies whose competitive advantage has disappeared. Does Barclays new chief executive find himself in this position?
I never got round to applying for the post of chief executive at Barclays, but I am glad it was John Varley who got the job instead of me.
Sometimes businesses get stranded. Large once successful organisations, like grounded hulks, proudly carry the attributes of their former glory, but no longer fit their environment. It is a tough job being the captain of such a hulk. And perhaps being chief executive of Barclays is such a role.
The most common reason for a business becoming stranded is that technology has changed. Railways were once great organisations but, once the lorry and the car came along, their rationale disappeared. Other businesses become stranded because demand changes, or competitive advantage shifts elsewhere. The F.W. Woolworth five-and-dime stores and US Steel faded, not because people did not want to shop or to buy steel, but because they no longer wanted to shop the Woolworth way and because the Japanese and the Koreans became very good at making steel.
The most problematic stranded businesses are those that grew big, rich and often complacent behind regulatory protection that they subsequently lost. Fixed-link telephone companies, once impregnable monopolies, are now everywhere in decline. Terrestrial broadcasting networks will have to be quick on their feet to avoid the same fate.
Strategy gurus urge stranded businesses to reinvent themselves. This was the eloquent theme of Ted Levitt’s The Marketing Imagination: your market is always growing if you define it widely enough. The makers of buggy whips, faced with decline as the motor car supplanted the horse-drawn carriage, would have prospered if only they had seen themselves as makers of instruments of correction, or transport accessories.
But this misunderstands the true nature of business success, which involves matching internal capabilities to external environment. There is no reason to think those buggy whip makers would have had skills that were appropriate to marketing to sadists or to producing mascots for car windows. The railway operators who tried trucking or aviation did not do well. The revamped business is often as embarrassing as the aged pop star’s comeback tour. The stranded business that did successfully reinvent itself – International Business Machines – could do so because its real competitive advantage was in sales and service activities, rather than the hardware with which it was identified.
Barclays, like other big banks, came into being when bank branches were a means of gathering small deposits to lend to big businesses. But the growth of securities markets broke the direct link between deposit-taking and lending.
Barclays lost the market for savings accounts to building societies a generation ago. Specialist providers did better at making and selling investment products. The company made a brave shot at developing an investment bank, but BZW never really made it into the top tier of UK firms, and even these were swept away in the US takeover of the City of London. Barclays still has a strong position in current accounts, but it is a declining share of a declining market.
The credit card business is a source of big profits for the foreseeable future. But this is the result of Barclays’ success in pioneering the product in the UK three decades ago, and the company is today – entirely rationally – allowing entrants to erode its market share with more competitive products. Perhaps the best element of the portfolio is the index fund management business, where economies of scale benefit strong incumbents.
A bank founded two centuries ago retains substantial assets – a great name and an irreproducible branch network. But many of the branches now seem to have been converted into restaurants. And reputations are not what they were in the modern financial services market. The lure of short-term profits too often seems to outweigh the long-run benefits of customers’ trust.
So good luck, Mr Varley. Your predecessor has left a good impression mainly by not doing much, and you will probably be wise to do likewise. The best course for the master of a grounded hulk is usually to sit tight.
