Depending on your organization, strategic planning time is here or soon will be. I know Raddon is ramping up with facilitation dates for clients. Recently, I came across an old article from the California Management Review I first read in 2017.¹ It discusses something called diligence-based strategy. I hope everyone is diligent when contemplating strategy, but this article addresses an interesting idea in the strategic planning process: Firms tend to underinvest in areas where they have less perceived capability. This idea derives from the psychological school of strategy that recognizes that humans are usually the ones engaging in strategy considerations, so there is value in analyzing how people go about strategizing. A human tendency is to invest resources disproportionately into areas where we have more capability.  The other side of that statement is that we tend to underinvest in areas where we stink. 

The primary reason for “overfunding” initiatives in strategic planning is to ensure deliberate and effective resource allocation. Financial institutions operate with limited budgets, which makes it imperative to allocate resources wisely. By identifying underperforming areas and recognizing the potential upside of overfunding them, financial institutions can make informed decisions that will yield greater returns in the long run. For instance, if a financial institution’s loan processing unit is experiencing delays and borrower dissatisfaction, targeted investment in technology or staff training could streamline operations, ultimately enhancing customer experience and retention.

During planning, incorporating discussions about overfunding underperforming areas can instill/reinforce a culture of continuous improvement within a financial institution. A significant aspect of strategic planning is fostering an environment where feedback is valued and innovation is encouraged. By openly identifying areas that need improvement and discussing the possibility of overfunding these initiatives, financial  institutions can provide the opportunity for consensus between executives (and board) on areas that are not performing well. This collaborative atmosphere can lead to heightened engagement and ownership among management and staff, ultimately driving better results for the institution as a whole.

Strategic planning is not only about seizing opportunities; it is also about mitigating risks. Neglecting underperforming areas could lead to greater challenges down the line, including reputational damage, regulatory scrutiny and loss of consumer trust. By addressing these weaknesses through targeted funding and resources, financial institutions can reduce the likelihood of negative outcomes while simultaneously strengthening their overall position in the market.

The financial services industry is rapidly evolving, with technological advancements and changing consumer preferences shaping the landscape. Financial institutions that do not innovate risk falling behind their competitors. Overfunding initiatives that are currently underperforming can serve as a catalyst for innovation. For example, if a financial institution has been hesitant to invest in fintech solutions, recognizing this hesitance during strategic planning sessions allows for discussions about the potential benefits of overfunding technology initiatives. Investing in innovation, even in areas that have shown limited success, can lead to breakthroughs that remarkably enhance the overall customer experience.

There is a quasi-mathematical reason to overinvest in areas that are underperforming as well. We tend to think about the relationships between units in our financial institutions as being additive and not multiplicative. For example, if we are comparing our onboarding program, call center, mobile banking and commercial lending areas, the tendency is to think of them as simply adding together to create firm value.

Assume we can reduce all the outputs of all our divisions into a single, common unit of measure. Figure 1 looks at this additive paradigm for evaluating the overall impact of improving two areas within our financial institution’s departments. The improvement is just two units in the two lowest divisions, compared to the impact of improving the two highest divisions by two output units. The overall impact to the firm is the same: a total of four units of improvement. So, if the relationship between all our lines of businesses and service channels were simply additive, then it doesn’t matter where we invest. The increase in firm output is the same.

Figure 1: Improving division output in a context lacking  synergy results in similar overall firm output regardless of where investment is placed. Yellow bars indicate highest/lowest performing business units

Additive output scenario

However, look at the difference between investing in areas that have lower output versus higher output when the relationships are multiplicative, which in our firms they most certainly are. Another business term used to describe this effect is synergy. Figure 2 demonstrates that improving poorly performing areas increases the firm’s overall output, in this made-up example, by more than 50% more than investing in the higher-performing areas. 

Figure 2: Improving division output in a context with synergy results in higher firm output when lower performing areas are favored. Yellow bars indicate highest/lowest performing business units

Multiplicatives/synergistic output scenario

So, if your business units have no synergy, it doesn’t matter what areas you improve from an overall output perspective. If there is synergy,  you see substantially more output overall from improving the lowest-performing areas.

Obviously, wisdom plays a role in the strategic planning process. This is not an argument to invest in areas from which you will be divesting or in old technology the market is leaving behind. And overinvesting has its limits. Management should always be wise in resource allocation. However, the point of this blog is to highlight that there is a tendency in managerial decisions to let underperforming areas remain underperforming as simply a cost of doing business. Strategic planners should be on the alert for this tendency and ensure that when underperforming areas are identified, they are examined to determine what the improvement could be to the firm overall when those areas are improved. Impacts beyond the individual department should be assessed: What would the firm gain, overall, from investing more in these underperforming divisions?

Strategic planning sessions are an invaluable opportunity for financial institutions to evaluate their operations, set clear objectives and allocate resources effectively. Including considerations for overfunding initiatives where the institution performs poorly can significantly enhance the financial institution’s ability to adapt to challenges, meet customer needs and drive growth. For most institutions, the relationship between departments is synergistic; thus, the impact is multiplicative. By deliberately addressing underperformance through focused investment, financial institutions can increase overall performance compared to investing disproportionately in high-performing areas. In addition, they can cultivate a culture of continuous improvement, mitigate risks and position themselves for long-term success in an ever-evolving financial landscape. Empowering strategic planning sessions with these insights ensures that financial institutions remain customer-centric, innovative and resilient.

¹ Powell, T. C. (2017). Strategy as Diligence: Putting Behavioral Strategy into Practice. California Management Review, 59(3), 162–190.