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Strategic intent of entering a new market was not clear

DUBAI - Over the past 20 odd years, a few GCC banks, given the small size of home markets, decided to expand their horizons to larger and potentially more profitable markets. Apart from the politically correct presence in London, they expanded into India, Sri Lanka, Pakistan, Egypt, Jordan Oman, Qatar and so on".

Some made a little money, some didn't lose any and others lost a bundle. Some cut their losses and got out, some stopped the bleeding and remained, a few stayed on to make small profits.

So what went wrong? The reasons are many and sometimes complex. Some are to do with why the banks went into these markets in the first place, whether they were clear what they were doing there, how they were doing it or who was running their shops for them. In many cases, the strategic intent of entering a new market was not clear. Why exactly did they open a branch? Did they think about what they wanted to accomplish? Was the decision based on a conclusion that their core competencies could be leveraged in that particular market? Did they have anything unique to offer - to be able to exploit the imperfections in an unknown and dissimilar market? It is possible that these banks did not have a clear idea of self - about what exactly they stood for and whether geographic expansion made sense within that framework. If they knew who they were, they would have known what exactly to do and how to do it. Second, some confused market size with opportunity. There is opportunity if there is a market for what you have to offer, or, what you offer is of such high value (or uniqueness) that you create one. Multinational companies have often made the same mistake - overzealous head office types did their numbers and evaluated the Indian middle class at 300 million. A few product launches (and millions of dollars) later, they discovered the Indian and American definitions of "middle class" were as different as chalk and cheese. The take-away? The "market" is not some number that is gospel and cast in stone, it is how each company truthfully sees it, through the lens of its own purpose and core competencies.

Third, many seemed to lack the ability to manage dissimilar markets. A successful business model at home means nothing, if it is based on market peculiarities rather than your own strengths or uniqueness. For example, at home, the firm's brand (built over a long time) and distribution network may have allowed it to raise large customer deposits at low cost. This advantage is simply not available immediately in foreign markets, dramatically changing the economics of doing business. Did they go in there because they were familiar with these neighboring countries - familiarity with culture does not mean expertise in those markets.

Fourth, despite what everybody says, size matters. Small is suicidal. Size is critical, especially if you are competing with the big boys, in their home markets. This is where the problem is. If you are small and compete with peers drawn from the home market (not the foreign one you are entering), it's a case of comparing apples and oranges. For example, small means difficulty in raising stable deposits to fund your growth, high borrowing costs if your rating is not top notch. On the lending side, small size means small lending limits, which means there is a tendency to go down-market to lend to small and sometimes poor quality borrowers, leading to credit losses.

Fifth, an unknown brand image abroad makes it difficult to attract top quality talent. Attracting and retaining high caliber staff is extremely difficult, and expensive. Because of size and the pressure to turn in results, banks have been tightfisted with salaries - getting poor and sometimes crooked talent, with disastrous consequences.

Expansion, whether geographic or otherwise is a good thing. As long as the reasons for expansion are clear and, more importantly, the benefits of the expansion are expected to follow from core competencies and the essential values of the company and not from perceived arbitrage opportunities alone. The analysis of opportunities is neither a "numbers game" nor a "gut feel" decision, although both elements play important roles. It also involves a hard alook inwards about the company's own skills.

Vikram Venkataraman is Head of Corporate & Institutional Banking at Dubai Bank.