The Bridgeton Industries Death Spiral is a famous Harvard Business Review case study that has been studied in business schools for over 25 years. It is one of those case studies that seem so straight forward in the classroom, as all of the fateful decisions (and their disastrous outcomes) are blatantly obvious even to 22-year-olds with no real world experience.
However, the real world is rarely so cut and dry, and almost every day we run into banks that are making some of those same ill-fated decisions. We believe there are still valuable lessons for banks to learn from Bridgeton Industries.
For those not familiar, Bridgeton Industries was an auto parts manufacturer facing a brutal market in the mid-1980s. The firm essentially had three customers – the “Big 3” domestic automakers – all of which were facing their own uphill battles against foreign automakers offering higher quality automobiles at lower costs. In order to compete, the Big 3 were aggressively squeezing their suppliers, including Bridgeton. With shrinking demand and immense price pressure, Bridgeton called for backup.
Enter the consultants, and this is where the story really gets interesting.
Bridgeton’s consultants did a deep review of the firm’s product line, and using some sloppy cost accounting, categorized products into three buckets: world class, potentially world class, and non-world class. Following the classic GE style blueprint, they recommended outsourcing the non-world class (and unprofitable) products and focusing exclusively on producing the other two categories.
After lopping off the worst offenders, the team reevaluated the product line a few periods later. They took the remaining overhead, and divided it amongst the products and the reduced revenue. With this bigger overhead burden, a few more product lines slipped to “non-world class” and were put on the chopping block.
Wash, rinse, repeat, and pretty soon Bridgeton was officially in a death spiral from which they would never recover. They cost cut themselves out of business, and their aggressive and misguided actions doomed them when many of their competitors eventually recovered.
Many bankers describe their current situation as similar to Bridgeton’s. They face increased regulation, declining revenues (due to margin compression and lost fee income via Dodd-Frank), and aggressive competition on several fronts. Listen to a few earnings calls and you’ll quick discern the strategy of choice: aggressive cost cutting. Banks are cutting branches, cutting staff, and cutting product lines.
I agree that the industry had a lot of fat that needed to be trimmed, but banks have been on this path for nearly a decade now. The cuts have gone from removing excess to actually impacting the customer experience, and many are dangerously close to “death spiral” territory, where the remaining overhead after the cuts gets spread over fewer products and a smaller revenue pot.
One of the benefits of our pricing platform is that we get a unique peek behind the curtain, to see how banks make decisions and to look at the hard data that those decisions produce. What we see is that there is a growing divide in the industry between the “haves” and the “have-nots.”
The high performers continue to pull away from the pack, putting more distance between themselves and the competition each quarter. They aren’t doing it by cutting expenses. These banks have realized that cutting expenses by another 100 basis points is likely verging on impossible. Even if it is achievable, it has only a minimal impact on returns to shareholders.
Instead, these banks are focused on revenue growth. They are investing heavily in the customer experience, paying for people and systems that generate value for customers instead of people and systems that focus internally on risk and compliance. The result is gained market share, and even more revenue to pay for growth.
This is the opposite of a death spiral. This is positive momentum, and it is incredibly powerful even beyond short-term performance. These banks are building a brand and reputation in the marketplace, and that has a value far beyond any cost cutting measures.
For more on how some banks are building relationships and earning better returns, check out our book – Earn It: Building Your Bank’s Brand One Relationship at a Time.
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