Spotting golden opportunities in turbulent markets

Even in the most volatile environment, companies do not face a constant rush of golden opportunities. Instead, periodic golden opportunities are interspersed among many smaller chances. The trick is to keep in the information flow, talk through alternative scenarios, and keep discussing possible opportunities as a management team to decide identify the most attractive.

In the case of Itaú, the golden opportunity came with the privatization of state-owned banks beginning in the mid-1990’s. The Federal Government decided to privatize most public companies in telecommunications, energy, and banking to attract capital to these sectors after years of underinvestment. Roberto Setubal – a member of one of the families that controlled the bank – was appointed Itaú’s CEO in 1994 in the midst of this privatization. In addition to a variety of operational positions in the bank, Roberto Setubal had received a masters degree in engineering from Stanford University, and apprenticed under John Reed, the legendary former CEO of Citibank. Setubal’s breadth of experience helped him to quickly realize that the privatization process was a decisive opportunity for the bank’s future.

Between 1995 and 2002, Itaú purchased eight large banks. Major competitors, including Banco Bradesco and Unibanco, were less aggressive in acquiring assets during the privatization period. Itaú’s ability to see this opportunity was not the result of luck. Rather, the top management team had actively gathered and processed data to identify and evaluate potential opportunities:

  • Stay in the flow of information. In a constantly changing environment the top management team must stay in the flow of information in real-time to keep abreast of the fluid state of affairs to spot emerging opportunities and threats early enough to act on them. Managers who are deeply immersed in operating data on a real-time basis can also make connections among apparently unrelated events that can signal a looming danger or a potential opportunity. Itaú has institutionalized a system of cross-functional committees that weekly – or in some cases daily – discuss critical aspects of the business. From the earliest date the government began to consider the possibility of privatizing banks, Itaú’s executives made themselves available to discuss options with government officials.
  • Talk through scenarios on an ongoing basis. The top executive team also spent a great deal of time discussing privatization among themselves, working through possible scenarios as to how the process might evolve and what it might mean for the bank. They also studied what happened in other countries after banks were privatized, to identify how the Brazilian market might evolve.  In addition to informal discussions and cross-functional committees, Itaú senior managers follow a structured approach to scenario planning. Each week the economic department prepared forecasts on exchange rates, inflation, economic activity and interest rates, among other variables. The executive committee scheduled meetings twice a month to review these forecasts and discuss the likely implications of alternative scenarios on the bank’s activities. As major scheduled events – such as elections or trade negotiations – approach, the process became even more thorough and time-intensive, with studies and formal discussion groups commissioned by the company. One critical aspect of Itaú’s scenario planning is that the alternatives discussed vary along a broad range of possible outcomes
  • Thorough due diligence. When the first major bank – Rio de Janiero’s Banerj – was put up for sale in 1997, Itaú was by far the most thorough in conducting due diligence on the possible acquisition. Henri Penchas, Senior Vice-President and Board Member later recalled, “We were clearly the bank which was most engaged in the due diligence process… [Banerj] set a 20-person limit on the number of people who could be conducting due diligence at any point in time. There were many times where 90% of the bankers in the room were Itaú people.”
  • Diverse management team. Frequent interactions among top executives are most effective when the members represent a diverse set of perspectives. This diversity allows them to see the situation from different angles, spot warning signals earlier from different positions, and disagree with one another (and the conventional wisdom) in a constructive manner. Looking at the composition of the executive committee of Itaú, 40% of managers came from acquired institutions, which injected diversity to the management team. Antônio Jacinto Matias, head of corporate marketing and formerly at Banco União Comercial, explained: “Itaú has always worked hard to retain management from acquired companies. Our ability to retain them brings diversity and creates a long-term advantage”. This diversity stands in stark contrast to competitors, particularly Bradesco, notable for the homogeneity of its top management team.

Next up–experiments to systematically evaluate potential opportunities.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.