The megamergers that would create Citigroup and the new BankAmerica raise questions about the benefits of size.

After all, consumers long ago thumbed their noses at one-stop shopping in banking. And bigness in banking has not historically yielded the expected economies of scale or scope.

This industry consolidation, therefore, raises several fundamental questions:

Is big better?

Can big be managed?

Are smaller banks marginalized by this activity?

Despite its dramatic consolidation, the U.S. banking industry has not yet realized the benefits of scale. Efficiency ratios have shown marked improvement during this consolidation, but the improvement has not benefited the top banks more than others.

The benefits of scale and scope have been observed in individual businesses-for example, in securities processing and the credit card business-but these relationships have still not materialized companywide. Indeed, little evidence of the benefits of size exists despite widely held theories about economies of scale and scope such as:

Size is necessary to overcome ever-larger spending requirements for branding, distribution, and technology.

Benefits will emerge from cross-selling more products.

Simple operating leverage can result from spreading corporate overhead across a larger operating and revenue base.

To date, the benefits of size have been undone by the complexity of running multiline businesses. Product costs and specialization have significantly increased as a portion of banks' total expenses, but the technology and sales management practices to fuel greater cross-selling have not materialized.

The primary value of bigness depends on the bank's position with respect to the scale requirements for each business in which it competes. They drive size at the business level, not the company level.

A second size hurdle will develop if the newly created financial groups develop technology and/or branding strategies that benefit the entire company. A first mover can lock out others by creating scale "overlays" of the economic benefits realized in the individual businesses, for example, a national brand strategy.

Finally, bigger companies with higher price-to-book ratios can buy smaller companies.

The task now is to translate high-level statements of strategic intent into actions that yield tangible competitive advantage-and premium stock prices. This benefit is likely to center around using technology to improve distribution channels to build broad-based brands.

These new mega-firms will also need to be managed significantly differently. For instance:

Recognize that distinct businesses need to be benchmarked against focused pure-play competitors-that is, market positions, productivity, cost, and so on.

Ruthlessly track market standing and cost positions in each competitive sector.

Explicitly track cross-subsidization and cost-sharing among business units.

Though it is late in the game, banks worried about their size must review their business portfolio and ask several fundamental questions:

What businesses am I in and do I have needed market position/scale in each?

What needs to be rationalized in my portfolio? What needs to be reinforced?

Where do I need to upgrade or add new capabilities?

What can I do to communicate my distinctiveness?

We say that there are three focused, strategic end points in this journey:

Focus on and specialize in specific customer segments.

Focus on the distribution or "retailing" of products and services.

Specialize and build volume and scale in a single business-become a "category killer."

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