Deutsche Bank and Twitter do not appear to have much in common apart from the fact that each is worth about $16bn and is in the news. One is a 146-year-old bank facing a crisis of confidence and a demand from the US Department of Justice for $14bn; the other is a 10-year-old US social network that could soon be acquired by Google, Salesforce or even Walt Disney.
But both epitomise in different ways one of the toughest strategic challenges for any company. How does it expand profitably and sustainably beyond the business on which it was founded? Deutsche Bank has been trying for longer than Twitter but neither has succeeded.
They now face the impact of failure. Deutsche’s attempt to transform itself from a bank founded to finance German companies’ foreign expansion into a global investment bank that would rival Wall Street’s leaders such as JPMorgan Chase and Goldman Sachs has stuttered. As it attempts to reshape itself, its past misconduct is being investigated and its capital strength questioned.
The obvious lesson from Deutsche’s experience is not to lose touch with your roots. “It strikes me that a lot of banks have lost a sense of what made them special in the first place,” says Chris Zook, a partner of Bain & Company, the management consultancy. The bank’s corporate business is outweighed by retail banking and securities trading, neither of which is doing well.
Both epitomise in different ways one of the toughest strategic challenges for any company. How does it expand profitably and sustainably beyond the business on which it was founded?
Twitter shows the converse risk: unless a business finds a way to diversify and grow, it gets stuck. “Someone said it was too simple and needed something more interesting, like video or pictures,” Biz Stone, one of Twitter’s co-founders, wrote in his book Things a Little Bird Told Me of the first time he and Jack Dorsey showed off their idea. “We said that the whole point was that it was supposed to be really simple.”
Since its initial public offering in 2013, Twitter has tried to broaden out. It has added videos and photos to make it less like a collection of exclamations and more like a media platform. But growth has slowed and users are spending less time tweeting, despite Mr Dorsey’s return to the helm. Goldman is now searching for a suitable acquirer.
This is a common problem. Many companies struggle to expand beyond their core business. One study by McKinsey & Co, the management consultancy, found that nine out of 10 companies were diversifying or had plans to do so within five years, but only a third of those that had tried gained more than 10pc of their revenues from these new ventures.
It is hard to change character and especially difficult when the original business is narrow, as Deutsche and Twitter know. From early on, Deutsche decided that its founding mission — to challenge the hegemony of UK banks in financing foreign trade in the late 19th century — was too small a niche. But expanding into retail and small business banking, as it did after being reconstructed in 1957, was tricky.
The strength of public sector and co-operative banks in Germany squeezes private sector banks like Deutsche: the latter have a quarter of the lending market. Deutsche’s lack of profitability at home pushed it into trying to leap into global investment banking, but it has not made high enough returns to come anywhere close to justifying the risk.
The smallness of Twitter’s niche is no surprise given that it set out to place restrictions on itself: it limited tweets to 140 characters and was deliberately easy and playful. That helped it to grow initially but made it harder to diversify later. It is now trying to ‘own live’ by streaming videos of live sports and political events alongside tweets but investors are unconvinced.
Compare Twitter’s approach with that of Amazon in its early days. Jeff Bezos, founder, astutely started a business that was neatly defined yet had equally clear room to grow. He entrenched it in the public’s mind as an online bookseller before expanding into other products. With this core established, he experimented with offshoots such as cloud computing via Amazon Web Services.
Does the fact that Deutsche and Twitter were more confined absolve their leaders from the fix they are in? No, because others have been more ingenious in escaping their limits.
None of the US banks that dominate global investment banking looks like its original incarnation. Goldman started as a commercial paper house in 1869, only later expanding into equity trading and corporate finance. Morgan Stanley reshaped by merging with the retail broker Dean Witter in 1997.
Facebook, Twitter’s biggest rival, was founded as an online network for college students with strict rules on who could befriend users. But Mark Zuckerberg, chief executive, steadily loosened its borders and widened its scope, adding videos, messaging and other services while buying Instagram and WhatsApp to neutralise competition.
Neither Deutsche nor Twitter was that clever. Deutsche now wants to turn back to something closer to its origins, rebalancing towards corporate finance and asset management with less of the expensive grandeur of investment banking. Twitter seems more likely to take shelter within a bigger company. That is one beauty of capitalism: it tells you when you are lost.
Published in Dawn, Business & Finance weekly, October 3rd, 2016
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