The Opportunity in Disruption

By Roger G. Powell, Corporate Consultant and Investment Banker

It is impossible to avoid the word 'disruption' in any business conversation. Each generation coins a new term for the process — call it 'opportunity' or 'creative destruction,' it is happening every day. You need to make it an opportunity rather than distress. How do you take advantage of disruption? Make it part of your strategy, then find a way to enhance your profits and franchise.

MBNA, FirstUSA and CapitalOne all emerged from disruption: they stole market share from Citibank and Bank of America. A convergence of improved marketing and processing technology, emerging securitization techniques and the market leaders' inability to respond created that opportunity.

The factors which converged:

These factors have changed the face of competition across a range of products. However, the resources to take advantage of them are not evenly distributed. Engaging in the newest technology is expensive and risky, and new customers may not come simply because you build it.

How do you find disruption opportunities around which you can succeed?

Here are two cases:

Case 1. Washington County, MD: Acquisition of major competitor leaves market share vulnerable.

Washington County, MD financial institution market share

Susquehanna Bank had a stronghold in Hagerstown, Maryland — the county seat of Washington County. They and their regional bank competitors, M&T Bank and The Columbia Bank (trade name for Fulton Financial) each had more than 20% of the market in 2006. PNC acquired a 10% market share in 2008.

Susquehanna was acquired by BB&T on August 3, 2015; the transaction was announced in November 2014. Please note that the change in market share was over 5%, or $80 million in deposits between June 30, 2015, and 2017. While insignificant to BB&T, these deposits are meaningful to the major beneficiary: Middletown Valley Bank.

Middletown Valley approached Hagerstown and Washington County as a 'hometown' bank allowing superior total growth in a small footprint in central Maryland. They are currently (i) building existing business lines that (ii) they fund and control with existing infrastructure (iii) at the expense of a competitor which is unable or unwilling to respond effectively.

Selected Bank Deposits for Washington County, MD

Is BB&T unable to respond? No. They are unwilling because the balances in Washington County are insignificant to them; they cannot bring commercial focus to one market of its size. They must manage to a standard across all similar markets and are at a scale where it is difficult to respond to threat on a Washington County scale. The benefit to Middletown Valley is substantial, while the loss to BB&T is small.

While the shift in market share is nearly symmetrical, Middletown Valley must be careful that they are not taking the customers that BB&T would like to lose. They must not underestimate their competitor.

Case 2. Nationwide: Product expertise allows effective asset growth.

Proven Scalable Business ModelSource: http://investor.liveoakbank.com/

Live Oak Banking Company (NASDAQ:LOB) was chartered in 2008 with a business plan based on efficient SBA lending in selected niches. Entry during the Great Recession enabled robust growth as legacy competitors focused on credit deterioration in their portfolios. Live Oak's niche strategy development from founding to 4Q:2017 is illustrated in their investor presentation of January 25, 2018:

Total Losses

Note that the volumes of origination for each set of specialties is laid out below the segments, e.g. "Live Oak 1.0" showed $1,096 million in 2016 and slowed to $973 million in 2017 while "Live Oak 2.0" ramped up from $441 million to $805 million in the respective periods — Live Oak's press release of June 14, 2018 announced $500 million in renewable energy loans — and "Live Oak 3.0", begun in 2017 has already reported significant growth.

This niche attack strategy leads to specialization expertise to manage risk and to the record of loan and lease growth exhibited in the Company's 1Q:2018 CFO Highlights accompanying their earnings release.

Live Oak has developed software, processes and staff to steal a march on traditional SBA lenders and others and become an instrument of disruptive change.

Conclusion

Change will not stop; we call it 'the future' because we don't know what it holds. But 'here and now' is the platform from which you leap into your future - you must use what you do well to make that leap. Measure your success and analyze the factors that deliver results. Keep your strategy and tactics consistent with your resources and constraints. Be aware of the weaknesses and constraints impacting your competitors. In the end, strategic utilization of your strengths and weaknesses is necessary in order to seize opportunities that disruption puts in your path.

Roger G. Powell

Roger Powell is an independent corporate consultant and investment banker. His 35 years of experience as an investment banker (with Deutsche Bank Securities and Alex. Brown & Sons) and entrepreneur have made him a sought-after director and counselor to Boards and "C"-suite executives in strategy, M&A, tactical planning, investor communication and governance. Contact Roger Powell at 443-253-4516, by email roger.powell@rogergpowell.com, or visit his website at rogergpowell.com.

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