Posted on Tuesday, April 6, 2010
While Citigroup still has plenty of problems ahead of it, we applaud the simplification that is going on there. Our research for “Billion-Dollar Lessons” found that, far too often, companies confuse size with scale. Studies show that if you double in size by doing twice as much of exactly the same thing then you get economies of scale, but that if you double in size by doing something even slightly different then the additional complexity makes you markedly less efficient. Generating additional revenue isn’t enough; it has to be the right kind of revenue. While studies haven’t looked at businesses of Citigroup’s size or complexity, the company has demonstrated rather conclusively that if you grow by doing a whole range of rather different things then the result is unmanageable.
The simplification occurring at Citigroup should remove so much complexity that it could become a good business again. The company does have its challenges because, especially in this environment, it will only get fire-sale prices for many of its assets.
Citigroup has to show, too, that it has learned its lesson. Many companies will spend a decade making acquisitions, then spend the next decade unwinding them after realizing that they were too far afield–then start making similar acquisitions again. With Sandy Weill safely in retirement, Citigroup may avoid that fate, but we’ll have to wait and see.