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5 A bank's resources determine its core competence
56 British and German Banking Strategies
“piecemeal social engineering” (Popper, 1960, 1985), Lindblom argues that
policies are directed at a problem and that any implementation reveals the
policy’s weaknesses. Consequently, “the policy” has to be modified and a
successive implementation brings further flaws to light. An ongoing process
of trial and alteration should eventually resolve the problem.
Lindblom describes incrementalism as a process that is more concerned
with solving a problem than with seizing certain opportunities (Mintzberg
et al., 1998). The lack of a deliberate direction or a collective perspective
(Mintzberg et al., 1998) is addressed by Quinn, who proposes the modified
concept of “logical incrementalism” (Quinn, 1978, 1980a, 1980b, 1989).
Essentially, Quinn argues that “managed or ‘logical’ incrementalism is not
the ‘disjointed incrementalism’ of Lindblom, or the ‘garbage can’ approach
of Cohen et al., or the ‘muddling’ of Wrapp and others. It demands conscious process management. It often involves a clear, thoroughly analyzed
vision and set of purposes. But it also recognizes that the vision could be
achieved by multiple means and that it may be politically unwise, motivationally counterproductive, or pragmatically misleading and wasteful to
specify a particular set of means too early in the strategic process. It also
recognizes that both the strategic program and the vision itself may be
improved by incremental changes as new information becomes available.
To believe or act otherwise is to deny the value of new information” (Quinn,
1989, p. 56).
As remarked by Mintzberg et al., Quinn’s logical incrementalism complements Lindblom’s original thoughts on aspects taken from the design
school and emphasises the role of conscious learning (Mintzberg et al.,
1998, pp. 180–182). Thus, Quinn paves the way for the prominent concepts
of Hamel and Prahalad, which maintain that strategy is a function of learning and learning essentially depends on capabilities. Hamel and Prahalad
consider a firm’s competitive advantage to be largely determined by its core
competence which is again dependent upon its resources and capabilities
(Hamel & Prahalad, 1990).
An organisational structure that fosters communication and cooperation
across divisional boundaries promotes the development of the company’s
core competence as intangible resources and capabilities are enhanced as
they are applied and shared. Hamel and Prahalad consider core competence
to be the glue that binds existing businesses and the engine for new business development. Moreover, it provides the patterns of diversification and
market entry (Hamel & Prahalad, 1990). Since each firm has a unique set of
resources and capabilities this constellation of intangible assets should form
the basis for a firm’s strategy, making it difficult for competitors to imitate
(Hamel & Prahalad, 1989, 1990, 1993).
In order to leverage an organisation’s core competence Hamel and
Prahalad also introduce the concept of “strategic intent” which encapsulates
the firm’s general direction, providing orientation and an objective for the
Corporate Strategy Analysis
entire organisation. Strategic intent is about consistently focusing on essentials, motivating staff and leveraging limited resources.
Hamel and Prahalad challenge the conventional concept of “fit”.
Originating from the contingency approaches to organisation theory, the
concept of fit in strategic management usually refers to the consistency of
a company’s organisational structure with the industry environment for
its strategy to be successful (Lawrence & Lorsch, 1967; Grant, 2002, p. 316).
According to Hamel and Prahalad, strategic intent creates an extreme misfit between resources and ambitions, implying a noticeable stretch for the
organisation. They suggest that leveraging resources is as important as allocating them, thus they claim that their proposed concept of “stretch” supplements the idea of “fit” (Hamel & Prahalad, 1993).
This view is shared by Senge (1990) who holds that “leadership in a learning organization starts with the principle of creative tension” (Senge, 1990,
p. 9), whereby creative tension emerges as the gap between where the organisation wants to be and the realistic assessment of where it currently stands.
Hamel and Prahalad postulate that a critical component of resource leverage is determined by a firm’s ability to maximise the insights gained from
everyday experience with clients, competitors and products. They conclude
that some companies are better than others at extracting knowledge from
those experiences (Hamel & Prahalad, 1993, p. 80). Hamel and Prahalad go
one step further than Senge by arguing that it is not sufficient to be a learning organisation, but that a company must also be capable of learning more
efficiently than its competitors (Hamel & Prahalad, 1993).
The results of learning are translated by an organisation into innovation,
thereby bringing their resources and capabilities to the market. It is argued
that banks are relatively averse to innovation (Büschgen & Börner, 2003;
Börner, 2000), which could be a sign of their learning difficulties. Büschgen
and Börner suggest that banks’ risk aversion seems to impede their willingness to innovate (Börner, 2000; Büschgen & Börner, 2003). Moreover,
financial products are easily copied, as reflected by their high degree of
homogeneity. Thus, innovative banks cannot maintain their competitive
edge for long on the basis of mere product differentiation, which does not
incentivise banks to innovate.
However, innovative approaches in banking based on the bank’s resources
and capabilities offer a viable strategy to cope with the homogenous nature
of most banking products. Therefore innovation has not only to anticipate
the needs of clients and to be the first to offer solutions for these problems (Canals, 1999, p. 573), but more importantly to differentiate the means
of bringing the product to the client. Banks can best protect themselves
against imitators by developing a unique set of resources, with a constellation of employees and technologies that cannot be replicated easily.
For Shaw, competition among banks is essentially a technology battle (Shaw, 2001, pp. 1–18), which only a few can survive. Technological
58 British and German Banking Strategies
superiority is of particular significance for transformation services. It is
argued that the speed and accuracy of transformation services can be unique
features of banks that are not effortlessly copied (Börner, 2000; Shaw, 2001;
Büschgen & Börner, 2003). For transaction services technological leadership
is less relevant and can be compensated by specific market expertise (e.g.,
product or geographical) that is perceived by clients who are willing to pay
for it as adding value.
The proponents of this so-called resource-based view of strategic management focus on an organisation’s resources and capabilities and internal
structure for establishing a competitive advantage. It is argued that “[...] in
a world where customer preferences are volatile and the identity of customers and the technologies for serving them are changing, a market-focused
strategy may not provide the stability and constancy of direction needed as
a foundation for long-term strategy. When the external environment is in a
state of flux, the firm itself, in terms of its bundle of resources and capabilities, may be a much more stable basis on which to define its identity. Hence,
a definition of the firm in terms of what it is capable of doing may offer a
more durable basis for strategy than a definition based on the needs that the
business seeks to satisfy” (Grant, 2002, p. 133).
Furthermore it is put forward that, due to the increasing internationalisation and deregulation, competitive pressure has intensified within
most sectors, leaving only a few industries protected from severe competition (Grant, 2002, pp. 136–137). Hamel notes that according to a MCI/
Gallup poll a majority of CEOs consider the strategies of their competitors
to have converged during the 1990s (Hamel, 1997). This however calls
for more unique strategies and differentiated approaches. Subsequently
it pinpoints the necessity for more managers to go against the current,
withstanding the collective pressure to do the conventional – or as put
by Hamel: “It takes leaders who question conventional wisdom” (Hamel,
1997, p. 70).
In contrast to the arguments presented by the resource-based view,
the positioning school emphasises the industry structure and considers
resources merely as one input factor which is subject to the same competitive forces as any other input factor. Porter encounters the criticism of the
resource-based school by acknowledging that the value of resources and
capabilities is inextricably bound to strategy (Porter, 1998, p. xv). However,
he also rightly points out that “resources, capabilities and other attributes
related to input markets have a place in understanding the dynamics of
competition, attempting to disconnect them from industry competition
and the unique positions that firms occupy vis-à-vis rivals is fraught with
danger” (Porter, 1998, p. xv).
From the few academics who publish research on banking strategies, it is
mainly Börner who extensively discusses the diverse strategic management
concepts in the context of banking (Börner, 2000). Börner contrasts the
Corporate Strategy Analysis
understanding of strategy derived from industrial organisation economics
(Porter) with the resource-based view (Hamel & Prahalad) and concludes,
in agreement with Mintzberg, that these two schools should be regarded
as complementary. He considers the market positioning approach and the
resource-based view as compatible and proposes a “client group/resource
matrix” for the strategic analysis of banks (Börner, 2000).
Recognising the market for “resources and capabilities” as an important
component of the competitive environment is most evident in the banking industry. For example, in investment banking London enjoys a relative competitive advantage over other European cities as it is home to a
large pool of experienced and specialised investment bankers which in turn
enables it to attract young and well-educated graduates from all over the
world. Therefore, in addition to the aforementioned competitive forces,
which determine the relative bargaining power of buyers and sellers, labour
should be highlighted as a distinct input factor, not least to also emphasise
the service character of the banking business.
Unlike proponents of the resource-based view, Porter’s focus on industry structure and products assumes clearly defined markets and industries
(Grant, 2002, pp. 86–87). Grant notes that a “market’s boundaries are defined
by substitutability, both on the demand side and supply side” (Grant, 2002,
p. 86). Porter responds to his critics by conceding that there can be ambiguity about where to draw industry boundaries, but that “one of the five forces
always captures the essential issues in the division of value” (Porter, 1998,
p. xv). It is argued that Porter’s model “defines an industry ‘box’ within
which industry rivals compete, but because competitive forces outside the
industry box are included – entrants and substitutes – the precise boundaries of the industry box are not greatly important” (Grant, 2002, p. 87).
Moreover, Kenyon and Mathur argue that a specific product can serve different needs, thus the market is effectively defined in a bottom-up approach
by the customer (Kenyon & Mathur, 1997; Grant, 2002).
This can be illustrated by examples from banking. Assume a bank’s commercial client may be interested in insuring the value of its exports to
another country (e.g., the United States of America). If the firm expects the
US dollar to fall, it would buy US dollar put options against its domestic currency (e.g., against euros), thereby safeguarding the right to sell its US dollars in return for euros at an agreed rate. The same firm could also buy euro
call options to achieve the same result. Another client considers buying the
same product, that is US dollar put options as part of an investment portfolio in anticipation of negative US budget deficit numbers. Alternatively,
the same investor could express a bearish view of the US economy by short
selling the Dow Jones, that is all shares on this index. An infinite number of
examples could be provided, showing that customers do not choose markets
but solutions to problems – thus a top-down definition of a market seems of
limited use for the analysis of strategic management.
British and German Banking Strategies
Banking: the link between micro- and macrostructures
Criticism about how the relevant industry, thus the relevant market, is
defined is further enriched by a lively academic debate about the significance of industry structure for a firm’s performance. In Porter’s model,
which emerged from the industrial organisation school, industry structure
is central to a firm’s profitability. This assumption is challenged by proponents of the resource-based view, who argue that a company’s performance is
largely influenced by unique organisational processes. Although the question of the extent to which industry matters is pivotal for the analysis of
strategic management, the few existing empirical studies seem to offer different answers (Schmalensee, 1985; Rumelt, 1991; McGahan & Porter, 1997;
Hawawini, Subramanian, Verdin, 2000).
Empirical research by Rumelt suggests that “stable industry effects account
for only 8 per cent of the variance in business-unit returns” (Rumelt, 1998,
p. 105). A study by McGahan and Porter (McGahan & Porter, 1997) indicates
that industry effects account for 19 percent of the aggregate variance in
profitability. Research by Hawawini, Subramanian and Verdin (Hawawini,
Subramanian & Verdin, 2000) confirm the mixed picture as the totality of
its sample shows that the industry effect is very small on firms’ EVA, whereas
if the least and most profitable companies are excluded from the sample,
then the overall industry effect significantly increases. Porter remarks on
the debate about the significance of the industry structure for competitive
strategies that “it is hard to concoct a logic in which the nature of the arena
in which firms compete would not be important to performance outcomes”
(Porter, 1998, p. xv).
By comparing British and German banking strategies over a decade this
work also attempts to understand whether there are national patterns which
could be attributed to profoundly different industry structures. The prevailing cooperative and savings bank landscape in Germany, which contrasts
sharply to the market structure in Britain, calls for such an investigation.
Moreover, this book addresses the significance of the changing European
financial system as the bank’s principal playing field, that is the relevance
of European financial integration as an environmental factor. Yet, unlike
the quantitative empirical works of Schmalensee (1985), Rumelt (1991),
McGahan and Porter (1997) and Hawawini et al. (2000), this book pursues a
multiple longitudinal case study approach to understanding the realised corporate strategies of banks. A balanced qualitative and quantitative approach
to researching patterns over a substantial length of time should deliver less
ambiguous data than a mere quantitative analysis based on incommensurable data.
The significance of industry structure for competitive analysis is also illustrated by the varying sensitivities of competitors to decisions of their peers.
As Porter notes, the structure determines the basic parameters within which
Corporate Strategy Analysis
competitive moves are made (Porter, 1998, p. 91) and he adds that “a company may have to change its strategy if there are major structural changes
in its industry” (Porter, 1996, p. 78).
For obvious reasons Porter needs to concede that structure does not
entirely determine the workings of a market and that there is still room
for different strategic moves (Porter, 1998, p. 91). Unfortunately, it remains
unclear with Porter how much strategy matters and to what extent strategies are somehow “pre-determined”. Unlike this book, which is informed
by Giddens’ concept of structuration, Porter does not sufficiently address
the interrelatedness of a system with its principal entities which through
their interaction constitute the system and determine the structure.
However, Porter maintains that “in most industries, competitive moves
by one firm have noticeable effects on its competitors and thus may incite
retaliation or efforts to counter the move; that is, firms are mutually dependent” (Porter, 1998, p. 17). Consequently, Porter introduces an oligopolistic market structure of the type elaborated in Section 3.4 of this chapter.
Despite elaborating different offensive and defensive competitive moves he
subscribes to Sun Tzu’s (Sun Tzu, 1963) dictum that the best strategy is to
prevent the battle in the first place and that “ideally, a battle of retaliation
never begins at all” (Porter, 1998, p. 92). Subsequently, he favours strategic
approaches that do not threaten competitors’ goals.
An important contribution to the analysis of a firm’s competitive environment, which recognises the co-existence and cooperation of competing
parties, is put forward by game theorists Brandenburger and Nalebuff (1995,
1996). Their concept of co-opetition is widely accepted as complementing
Porter’s five forces model (Grant, 2002, pp. 90–91). Co-opetition takes into
account that buyers, suppliers, and producers of complementary products
do not only interact as competitors, but may also work cooperatively with
each other. Even Porter acknowledges Brandenburger and Nalebuff’s concept as “the most important single contribution” (Porter, 1998, p. xiii).
Brandenburger and Nalebuff (1995, 1996) point out that in addition to
the widely recognised interdependencies between customers, suppliers
and competitors a company needs to consider complementors as a distinct
group among the players of a “business game”. According to Brandenburger
and Nalebuff, “[...] a player is your complementor if customers value your
product more when they have the other player’s product than when they
have your product alone. A player is your competitor if customers value
your product less when they have the other player’s product than when
they have your product alone” (Nalebuff, 1996). As most businesses have
to compete as well as to cooperate, the authors suggest using the term
co-opetition. Co-opetition emphasises to perceive the interdependencies
of these players from an allocentric as opposed to an egocentric viewpoint.
This should allow players to better recognise win-win as well as win-lose