In 2011 we published a post titled “Kill the Credit Union Org Chart” that continues to drive a substantial amount of site traffic. In that post we outlined a different way of thinking about credit union organizational structure than the typical departmental approach taken by most credit unions. Consider this post a long overdue supplement.
A key question arising from the Kill The Org Chart post is this: Should we rigidly adopt the value chain concept as we define credit union activities, or is it best to customize?
There are two different paths to take in constructing a value chain. The first is to adhere to the tenants of the value chain “religiously,” meaning that the value chain mimics that originally drafted by Michael Porter in Competitive Advantage. The second is to adapt, or customize, the model.
The Challenges Of Rigid Adoption
If the value chain is adopted as Porter describes and without modification, then the primary functions of the value chain look like this:
- Inbound Logistics
- Outbound Logistics
- Marketing & Sales
Upon adopting the value chain model, Porter suggests the critical next step is to define the discreet activities that make up each primary function listed above. This task exposes the challenges of rigid application of the Porter model because it is quite difficult to define and properly allocate credit union activities using the framework of the generic model. Right off the bat we run into the difficulty of defining our activities in terms of “logistics.” Logistics implies sourcing raw materials. What are the raw materials, or parts, that make up credit union products?
Certainly there are options, which include (but are not limited to):
- Cash that is “manufactured” into an earning asset (a loan) as it travels through the value chain. Cash options include:
- Member deposits;
- Other cash sources such as lines of credit and grants.
- Raw loan requests, meaning consumer loan needs that are “manufactured” into earning assets at an appropriate price.
- Consumers, meaning individuals as “raw materials” from which we “manufacture” financially connected and profitable members.
Each of those options exposes unique ways of thinking about a credit union’s end-product, and each introduce their own challenges and subsequent questions. Consider the challenges associated with cash-as-raw-material.
If “cash” is the raw material, then establishing deposit services as key to member relationships poses a challenge mainly because the credit union may need to ratchet down deposit growth and/or balances if it cannot “build” that cash into an earning asset (loan). This approach is inconsistent with historical credit union philosophy that looks to balance the loan and deposit relationships with members. On a positive note, less time may be spent trying to become the transaction account provider for every member, which results in a cost savings due to the elimination or curtailing of ancillary products. Cash needs can simply be met by offering as-needed price incentives on simple savings, CD, Money Market accounts or by tapping established credit lines.
Similar challenges and opportunities for cost-focus excellence exist for the other two options as well, but in all cases, the challenges seem to outweigh the benefit of rigid adoption of the value chain model and/or model terminology.
Adapting The Value Chain
The second, perhaps better way to construct a value chain for a credit union is to disregard Porter’s generic primary activities and terminology in favor of defining primary activities unique to the credit union’s strategic interests. This concept does not go directly against the guidance provided by Porter in Competitive Advantage for he suggests that the value chain may need modification for service firms. In any case, Porter’s model, if truly understood, is really less about the rigid adoption of the value chain as presented than about identifying the discreet activities that add value to the organization’s margin and enhance underlying competitive strategy.
In constructing the value chain with a more free hand, it is critical to understand the macro flow of credit union-specific activities that lead to “margin” in order to identify specific primary value chain activities and associated discreet activities.
Consider the case of a credit union wishing to offer its members highly competitive rates. Translating the direction in terms of Porter’s generic strategy model, the credit union is looking to deliver cost focus, with the benefits of cost focus given back to the members in the form of “better” prices as compared to competitors. In this, we assume that the credit union is looking at balanced loan and deposit relationships.
What, then, are the primary activities associated with developing and maintaining the largest volume of relationships within the narrow target in the most efficient way possible? Simply these three:
- New Account Acquisition
- Relationship Management
- Account Service and Support
In rationalizing the appropriate primary activities for a credit union, we thought about the expectations a price-focused credit union might have and how those expectations relate to the three primary activities listed above. We’ve defined the following:
Membership Growth: The credit union would likely expect to grow, and perhaps seek to become the primary financial institution for all qualified individuals in the field of membership. To succeed, the credit union must unlock the value of the marketplace by making the marketplace a critical focus. This thought led to the identification of the primary activity defined as “new account acquisition,” which suggests a function devoted to continuous growth of new member relationships sourced from the credit union’s marketplace (field of membership).
Deeper Share of Wallet: The credit union would likely envision developing/maintaining long-term, in-depth member relationships rather than singular account interactions (such as what typically occurs as a result of stand-alone indirect lending strategies). To succeed, the credit union must continually ensure that member relationships do not end as soon as loans are paid off, or that members do not get away with one-off account relationships. This thought led to the identification of the primary activity defined as “Relationship Management,” which suggests a function devoted to evaluating member relationships and proactively responding when any given relationship appears to be drawing down (such as when loans are nearing payoff, account balances drop to minimum levels, etc.).
Good Service: The credit union would likely envision that members will receive “good service,” meaning that questions, transaction requests, etc. are addressed in a prompt and accurate manner. To succeed, the credit union must separate transactional service requests and support (which include transfers, wires, new loan requests from existing members, etc.) from the process of relationship development – a distinctly different activity as noted above. This thought led to the identification of the primary activity defined as “Account Service and Support,” which suggests a function devoted to managing the transaction and support requests originated by members.
Where Does Marketing Fit?
A key question does arise if primary activities are restricted to the three areas of focus above: What about marketing? There are a few options. The first would be to consider marketing a support activity, layering the marketing function over the top of the primary activities in the same fashion as HR, Technology Development, Procurement and Firm Infrastructure are in Porter’s generic model. In this structure, marketing would support the unique activities of the new member acquisition effort and, separately, the unique activities of the relationship development effort. This is an interesting way to segment marketing activities given that most credit unions lump the two separate marketing efforts under one marketing strategy/approach.
Because new member acquisition marketing is different from member relationship marketing, another option would be to drive marketing responsibility to each primary activity. In other words, New Account Acquisition would “own” its own marketing process as would Relationship Management. A concern here is that the primary activities might be duplicating certain marketing efforts, such as collateral printing, design, etc. which would serve to undermine the credit union’s cost focus. This strategy would require careful evaluation of the specific marketing efforts of each primary activity so as to ensure effort and cost duplication did not exist.
Yet another option would be to consider marketing a separate primary activity, which is somewhat consistent with the structure of Porter’s original value chain (the primary activity is called Marketing and Sales). A challenge here is that the work product of both member acquisition and relationship development is member account relationships. By moving the responsibility of communication and outreach to another primary activity in the value chain, the marketing process risks becoming disconnected from the work product of these other two primary activities.
For this reason, it seems more logical to either place control of the unique marketing tasks for new member acquisition and relationship development in their respective primary activities, or to establish marketing as a support activity. We would consider the options equal in benefit.
Adopting The Model
Should the credit union decide to adopt a model similar to the one described above, the next step is for credit union team members to work together to identify every conceivable “discrete activity” that contributes to, or makes up, each of the primary activities. In other words, the team should identify every task, step, and action associated with “New Account Acquisition,” and then for “Relationship Management,” and finally for “Account Service and Support.”
This exercise can be completed using Affinity Diagramming, and can include every credit union employee – which would be helpful in terms of gaining employee buy-in for executing realignment of activities around primary and support activities. Glatt Consulting often uses Affinity Diagramming on consulting projects as it is an efficient method of gathering input from large groups of people.
Once tasks are identified, the next step is to review task associations/groupings and, most importantly, the “costs” of tasks, with cost meaning both time and dollars. Once an understanding of cost is developed, the credit union can then work to reduce costs which in turn aids in unlocking the full value of the value chain. This means expanding margins, which can either be reinvested in the credit union or passed back to members in the form of improved pricing.
Challenge Your Org Chart and Workflow
The purpose of this post is really not to suggest that every credit union adopt a value chain approach to organizational structure. What we endeavor to do is illustrate that there are other, perhaps more productive and lucrative methods to structuring the operating environment – with the aim of sparking discussion at your credit union about improving your structure.
We believe that if your structure was copied from another credit union or from training material provided by associations or regulators, you are almost assured a lack of a competitive advantage. Credit union products are fast becoming commodities, which means that differentiation in process and experience may be the only way to stand out against a sea of similar competitors. Differentiation will not result from a structure that is “unique” to all credit unions. It will require a structure unique to your own credit union.
Glatt Consulting assists credit unions in defining and supporting a unique competitive advantage. Schedule a complimentary consultation to discuss developing such an advantage at your credit union.