1 Thesis University of Amsterdam How can Core Competences of a Dutch bank be used and combined to new business models to sustain competitive advantage. Hendrik van Haagen 10901663 University of Amsterdam Amsterdam Business School Executive Program in Management Studies – Strategy track Supervisor: Dr. Ir. J. Kraaijenbrink
2
Statement of Originality
This document is written by Student Hendrik B.F.J. van Haagen who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
3
Acknowledgements
I enjoyed the time at the Amsterdam Business School very much. The tutors and the students have inspired me over the last 2 years.
I could not have completed this thesis all by myself. Without the support from my wife, Esther, and my children Lente, Frederik, Lou, Thomas and Lelie, the task would have been sheer impossible. I just need to think about my wife taking the kids out all day on the Sundays, so I had time to work and all the other time and space she gave me to finalize my studies. She absorbed all the things I shared regarding the studies with her patiently. And she helped me by pre-reading my essays to validate if the flow and writing style were up to standard. It was fun on the Fridays, when the kids were about to go to school, they said, you are going to school today too, right? They loved to say that.
I also want to thank my parents in law as they are always interested and supportive in what I do. Finally, I think about my parents; they are not with us anymore. They were responsible for getting me here in the first place. It would have been nice if they could have witnessed the finalization of this master study.
4
0
Table of Contents
0 Table of Contents ... 4 1 Introduction ... 6 2 Theoretical Framework ... 8 2.1 The Art of Banking ... 8 2.1.1 Risk-taking ... 10 2.1.2 Different types of banks ... 11 2.2 Resource Based View and the Business Model ... 12 2.3 Resource-based view of the firm and innovation ... 17 2.4 Business model innovation ... 19 2.5 Research objective ... 21 3 Methodology ... 22 3.1 Research method ... 22 3.2 Case study ... 22 3.3 Approach and access to the respondents in this research ... 23 3.4 Data collection ... 23
3.4.1 Validity of the research method ... 24
3.4.2 Reliability ... 25 3.5 Analyzing the data ... 26 4 Results ... 28 4.1 Core Competences ... 31 4.1.1 Customer Relationship Management ... 31 4.1.2 Marketing ... 33 4.1.3 International capability ... 34 4.1.4 Information Technology ... 36 4.1.5 Innovative Capacity ... 37 4.1.6 Risk Management ... 38 4.2 Business models innovation ... 40 4.2.1 The resources layer ... 41 4.2.2 The Core Competence layer ... 42 4.2.3 The Core Product layer ... 43 4.2.4 The End Product layer ... 43 5 Discussion ... 45 6 Appendix A: Code Tree ... 48 7 Appendix B: Topics discussed during interviews ... 49 8 Bibliography ... 51
5
6
1 Introduction
Only 15 years ago, the internet dotcom revolution disrupted the business model of mature firms by lowering the transaction cost due to the lowering of information asymmetries: it made the sharing of information easier, the enablement of contracts faster and more open, and reach to online customers further, while at the mean time lowering switching costs. At that time, incumbent banks jumped into the opportunity to introduce internet-banking, online payments and information sharing via their webpages. Additionally, the IPO of internet dotcom startups generated a massive amount of revenues for the incumbent commercial banks.
Today, technology innovations are released in all markets and industries with an ever-increasing speed. Commoditization of Internet technology and cloud services continues and lowers the entry barrier of new entrants in the financial services
industry. Information of consumers about financial products has increased massively due to the “online” and social networking. Consumers increase their bargaining power through better information and understanding of options. Products of banks are replaced by smart comparable services and rivalry is fierce. This is the
emergence of FinTech. Fintech, the use of technology in the financial industry (Financial Technology), is a development, which cannot be ignored. Consultancy firm McKinsey and Company expects that between 10 and 40 percent of the current revenues of banks are under pressure because of this emerging technology (Dietz, Khanna, Olanrewaju, & Rajgopal, 2016). As the new entrants compete with the incumbent banks in certain, less regulated domains, mature firms, consulting firms and media claim that banks need to rethink their competitive strategy and
change/innovate their business model.
The main contribution of this thesis is to assess business model innovation
conducted by a Dutch incumbent bank from a strategic perspective. Business model innovation is still quite fuzzy, because its conceptual framework resides between
7
economics and strategy, and business model innovation lacks theoretical anchoring in either of these fields (Teece, 2010).
The aim of this thesis is to determine how ING bank NV uses its resources to innovate their business model. I will build a business model innovation framework based on the theory of the resource based view. Because the resource based view is anchored in strategy theory, my conceptual model will also have an anchor the strategy theory. This thesis will test this competency based framework to business model innovation on ING bank NV using a single case study.
8
2 Theoretical Framework
This chapter will start with an introduction on banking, this will provide the reader with an overview of why banks exist, how banks earn money, how banks look at risks and it will provide an overview of the general type of banks there are. The chapter continues with a discussion on the concepts of the Resource based view, business models and business model innovation. It will be concluded with the
research objective and the conceptual model which will provide the link between the Resource based view and Business model innovation.
2.1 The Art of Banking
This section will explain how banks generate funds, assess risk and provide revenue driving services. Additionally, the most common banking types are discussed.
Historically, a bank acts as an intermediary between depositors and borrowers. Banks take deposits from clients and use these to provide loans to same or other clients. By doing so, banks earn money by charging interest rates on provided loans. In addition to profiting from these type of interest-bearing activities, banks also
receive a substantial amount of income from noninterest activities which are based on charging fees for provided financial services. Traditionally, these services include: transaction services (checking, cash management), safe-keeping services (safety deposit boxes, insured savings accounts), investment services (trust accounts, Certificates of Deposits (CD’s)) and insurance services (annuity contracts). Noninterest income also comes from non-traditional activities like: investment
banking, insurance agency as well as underwriting, securities brokerage and mutual fund sales.
To be able to operate profitably, a bank must obtain funds which would cost sufficiently less than the issued loan interest rate. The difference between cost of funds and rate of issued loans is known as the “spread”. If interest on loans and owned debt securities sufficiently outweighs interest paid on deposits and other source of funds, the bank is operating profitably.
9
In most cases, deposits represent the largest share of bank funding. In the banking industry, customer deposits are referred to as “core deposits”. Generally, this is considered as a reliable source of funding (WebFinance, n.d.). Wholesale deposits are an alternative funding option for banks which are incapable of attracting a sufficient level of core deposits. Wholesale Deposits denotes a range short term financing operations of banks from other corporates and/or banks. Wholesale deposits are likely to be more sensitive to the credit standing of the borrowing firm (or similar firms) compared to core deposits. (Openrisk, n.d.)
Generally speaking, issuing loans, lending, is the core business for the biggest majority of the banks. It also represents a substantial share of used funds, as well as the principle way they earn income. Consumer lending describes financing to
individuals, which represents a substantial part of the total number of loans globally. Mortgages represent the largest share of consumer loans (Investopedia, n.d.). Another substantial part of total lending consists of business (commercial) customer lending. Business lending services can be listed as: commercial mortgages,
equipment purpose lending, and other loans assigned to particular business operations, expansions and other corporate purposes (Investopedia, n.d.).
Securities (stocks, bonds, options, etc) acquisition is yet another form of a bank’s interest based income. Though a sizable share of capital in banks is locked in securities, it is not amongst the most desirable uses for generated funds. A regulatory requirement for capital reserves in banks around the world is the main force driving securities acquisition and holding. Throughout the history of banking, interest-based income always took the leading share in total revenues, up until a few decades ago. Non-interest income is income that does not originate as interest on loaned funds. Non-interest income typically requires minimal risk for the bank and minimal capital while it often carries very attractive margins and returns on capital. It is therefore a crucial source of income for many banks (Investopedia).
Nonbanking activities such as insurance or leasing are reasonably recent additions to the banking business. When deregulation eliminated restrictions for non-banking
10
activities, one of the first adopted businesses was insurance. Its strict regulatory background shares strong similarities with banks. Furthermore, both businesses rely on similar risk evaluation and pricing practices, as well as a liability backing with a minimal capital approach. Leasing is another popular and similar business to banking.
Modern banks sometimes also offer payment processing services. Setting up payment systems that use credit or debit cards, introducing electronic check handling, automated invoicing and supplier payment, or simply offering automated and efficient equivalents of daily payment related operations, all are among options offered to business customers. By providing such a service, banks charge either an implementation or servicing fee, while the customer is provided with additional payment method options and optimized payment processes.
2.1.1 Risk-taking
Being an essential part of banking business, risk-taking is one of the major concerns for every bank. The initial business objective is to operate on the lowest risk
possible, while charging the highest risk premium. Two major risk-taking strategies exist as a means to profit from this risk and the premium relation; internal risk management and risk-transfer strategy. Internal risk management means that an institution uses a number of developed competitive advantages to limit and mitigate taken risks within its own business structure. Employing this strategy, banks accept credit risk when lending to their customers, holding this asset on its balance sheet and maintaining an appropriate level of capital to cover unexpected risks, which are estimated through customer credit-worthiness analysis.
Using a risk-transfer strategy, banks would seek to transfer risk to an external party. Securitization and other credit derivatives were purposely developed to fit the task. Securitization defines the process when a bank, through financial engineering, transforms an illiquid asset or a group of assets into a tradable security. It allows the sale of loans with credit risk transfer and elimination from the originators balance
11
sheet. An example is the sub-prime mortgage-backed securities which sparked the financial crisis in 2008 (Voxeu.org, n.d.).
2.1.2 Different types of banks
There are various types of banks. This variety among these banks exists because each bank is specialized in their own field.
Universal bank
A universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank as well as providing other financial services such as insurance. These are also called full-service financial firms
(Wikipedia). Well known universal banks are: Deutsche Bank, HSBC and ING Bank.
Retail bank
Retail banking aims to provide a wide variety of financial services on behalf of individual retail clients. Consumers expect a range of basic services from retail banks, such as checking accounts, savings accounts, personal loans, lines of credit, mortgages, debit cards, credit cards, insurances, student loans, etc. (Investopedia).
Investment bank
Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities. These banks concentrate their services on securities (and currencies, commodities and other instruments) trading or promotion. Additionally, investment banks assist in mergers and acquisitions, rising capital or issue securities on behalf of their customers. Goldman Sachs is an example of an investment bank.
Commercial bank
Commercial banks aim to provide a wide variety of financial services on behalf of business clients. Similar to retail banks, the commercial bank also accepts deposits, makes loans and offer basic investment products, but instead, services are focused on large businesses and corporations.
12
Wholesale bank
A wholesale bank provides large scale financial services for other banks, financial institutions and corporations. These types of banks are also involved in large scale financing, underwriting, consultancy and other wholesale financial practices.
2.2 Resource Based View and the Business Model
A business model consists of two elements: what does the firm do, and how do they make money doing these things”. (Malone, 2006), or perhaps four: the customer value proposition and the profit; key resources and key processes (Johnson, Clayton, & Kagermann, 2008).
Figure 1: The elements of a successful business model ( (Johnson, Clayton, & Kagermann, 2008).
The business model of a firm describes how the firm combines its resources and its key processes to create a value proposition towards its customers and how by doing so, ultimately earns its money. The deployment of resources and how these
resources differentiate firms and allow firms to achieve a competitive advantage, is the central premise of Resource Based View (RBV) (Kostopoulos, 2002). This
13
means that there exists a linkage between the Resource Based View and the
Business Model through the use of firm resources. Multiple scholars have described linkages between the resource based view and business models. Venkatraman & Henderson (1998) describe traditional and knowledge assets as resources and suggest that these enable virtual organizing as a new business model. Eden &
Ackermann (2000) define the business model as the dynamic capability that links the firm’s distinctive competencies to organizational aspirations and outcomes, a
capability presents here the capacity for a team of resources to perform a task or activity (Grant, 1991).
The RBV is a theory of strategy management that takes an “inside out” approach. The RBV-approach to strategic management decision-making is on the strategic capabilities as basis for superiority of the firm rather than attempting to constantly ensure a perfect environmental fit. Wernerfelt (1984) suggested that the evaluation of companies in terms of their disposable resources could lead to different insights from traditional perspectives that view competitive advantage as a rather external paradigm and argue that the alignment of a firm to its external environment is the main determining factor for a firm’s profitability (Porter, 1985). The latter is called a Market Based View or Positioning View. This means that from a strategy point of view, it is necessary to reflect upon the organization’s competencies and especially those that are distinctive. The rationale being that resources which are not
distinctive, can never lead to a competitive advantage, as they these are freely available to any firm to deploy. Barney (1991) developed a framework for the identification of the properties of firm resources needed for the generation of a sustainable competitive advantage. The properties include whether resources are valuable, rare, inimitable, and non-substitutable (VRIN). If resources have these characteristics they can be seen as strategic assets. Resources which typically adhere to these VRIN properties, are intangible assets. Intangible assets are central to the RBV approach to understanding competitive advantage since they cannot easily be acquired or imitated, in contrast to tangible assets. Relevant intangible assets would be know-how, product reputation, culture and networks as main
14
skills embodied in people are often associated with core capabilities and are relevant to new product development (Teece et al, 1990). This knowledge/skills dimension encompasses both firm-specific techniques and scientific understanding. The concept of knowledge related to the RBV is described by Leonard-Barton (1992). She describes a knowledge-based view of the firm and defines the knowledge set as being a core capability that distinguishes and provides a competitive advantage. This knowledge set has four dimensions: 1) embodied in knowledge set and skills, 2) embedded in technical systems, 3) controlled by managerial systems, 4) value and norms. The knowledge/skills dimension encompasses both firm-specific techniques and scientific understanding. Embodiment in technical systems results from years of accumulating, codifying and structuring the tacit knowledge in peoples' heads. The third dimension, managerial systems, represents formal and informal ways of
creating knowledge. Infused through these three dimensions is the fourth: the value and norms assigned within the company to the content and structure of knowledge.
The notion of resource heterogeneity across firms also results in the possibility that collaborations between organizations can allow mutually beneficial resource
combinations through the transfer of, or access to, the assets and or capabilities of respective firms. Through partnerships a social venture can gain additional financial, human, physical, or social capital or access to markets that will make the venture more successful and outperform competitors (Meyskens, 2010). Therefore, according to RBV, not only must firms be able to create knowledge within their boundaries, but they must also expose themselves to a bombardment of new ideas from their external environment in order to prevent rigidity, to encourage innovative behavior, and to check their technological developments against those of
competitors (Leonard-Barton, 1995).
To summarize, the RBV argues that the use of VRIN resources of various sorts will lead to a competitive advantage of the firm and a business model defines that the use of resources (and processes) will deliver a value proposition to customers. To bridge the gap between the use of resources and competitive advantage/value proposition, I will use the core competence model.
15
Core competences are an important concept within the RBV (Prahalad & Hamel, 2006). Prahalad and Hamel described three different planes on which firms battle for global leadership: core competences, core products and end products. “Core
competences are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technology. Core competences is communication, involvement and deep commitment to working across organizational boundaries. Core competencies do not diminish in use but are enhanced as they are applied and shared”. Core competencies can be identified because they adhere to three characteristics, 1) they provide potential access to a wide variety of markets, 2) they would make a significant contribution to the
perceived customer benefits of products and 3) they should be difficult to imitate by competitors. Core products are the physical embodiments of one of more
competences and provide the link between core competence and end product.
Prahalad & Hamel (2006) provide the following analogy: A corporation grows from its roots, core products are nourished by competencies and engender business units, whose fruits are end products. This figure is shown below.
16
Figure 2: Roots of competitiveness, from (Prahalad & Hamel, 2006)
The linkage between the resource based view and the business model which is used to build the conceptual model is the following: from resources, capabilities and
competences are built. In case these competences are unique and in case these competences deliver perceived benefit to customer, these are core competences. The core competences build core products and end products which are delivered to customers through business units. The end product is the value proposition to the customer. The business model is the chain from resources to end product. A crucial activity, therefore to define a business model, is to go on and discover the patterns of distinctive competencies, via the supporting resources, so that core competencies can then be identified.
17
2.3 Resource-based view of the firm and innovation
“Organizations can gain competitive advantage only by managing effectively for today while simultaneously creating innovation for tomorrow”. There are multiple linkages between the RBV and innovation. Tushman & Nadler (1986) argue that visionary leadership and also people, structures and values are important factors that affect whether an organization realizes benefits from innovation. Innovative capacity of a firm is regulated by organizational resources and capabilities according to Dosi (1998). From a RBV perspective, resources provide the input that in turn is combined and transformed by capabilities to produce innovative forms of competitive advantage.Kostopoulos et al (2002) provide a model which describes the link between innovation and the RBV. They focus on those aspects of RBV that critically
determine the firm’s capacity to innovate and provide a number of resources that are critical for innovation:
18
the availability of financial resources, technical resources and intangible resources. They put forward the organizational capabilities: entrepreneurship, learning, sense and response, marketing skills and dynamic capabilities which constitute the firm’s capacity to innovate.
In this model, entrepreneurship refers to the articulation of a long-term vision for the firm that aims at higher growth through the introduction of innovative products and technologies at the expense of short-run profit maximization. Learning helps firms to generate new knowledge, recombine existing knowledge and skills, and adapt to changing market conditions. ‘Sense and response’ skills refer to the ability to rapidly sense changes in the environment, conceptualize a response to that change, and reconfigure resources to execute the response. Marketing skills also appear
important for the implementation and exploitation of innovation (Kostopoulos, 2002). Dynamic capability refer to “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997).
It is worthwhile to mention that the relationship between RBV and innovation is bilateral (Kostopoulos et al, 2002) and self-enforcing. RBV expands the knowledge on the factors that determine the firm’s capacity to innovate while at the same time innovation is one mechanism through which a firm can renew the value of its assets. This mutual beneficial relationship helps create and sustain advantage in two ways. First, the firm is able to produce innovative output of increased value, and second, through implementing innovations firms can establish new ‘stocks’ of specific assets that others will find impossible to replicate quickly.
The conceptual model presented in this thesis is augmented with this concept of innovative capacity.
19
2.4 Business model innovation
Innovations related to the financial industry are emerging with an ever increasing speed. Only 15 years ago, the internet really started to get traction to consumers, connecting more households, enabling internet banking, e-money payment systems and online shopping and associated paying. Today, approximately 3 billion people are connected to the internet and internet startups are actually replacing ATM machines and regular payment systems by e-money payment systems. “Internet firms are throwing down the gauntlet to the banking world”, as the author of a report from the Deutsche Bank, eloquently states (DB, 2014).
Consulting firm KPMG state that banks “must find new ways to connect with customers by leveraging information technology to better understand what customers want and how banks can deliver it” (KPMG, 2014) and Bain advises banks that “Strategy should define the attractive markets and whether a bank can develop a strong and sustainable position in those markets so that it can build a few distinctive assets and capabilities that set it apart” (Bain, 2015).
While business models are traditionally concerned with firm-level value creation and capture, business model innovation poses in addition questions about novelty in customer value proposition and about respective logical reframing and structural reconfigurations of firms (Spieth, 2014). Findings from prior research suggests that the manipulation of resources will change/innovate the Business model.
Zott & Amit (2010) suggest that designing a new, or modifying the firm’s extant activity system – a process which they refer to as business model innovation – may offer answers to contemporary questions like: Is there a way for managers to
innovate in their existing markets with their existing products by utilizing their existing resources and capabilities?
20
Can they extract more value from their firms’ existing resources, and, if so, how? Using business model innovation, firms can do more with the resources and capabilities they already have.
Figure 4: Framework that correlates RBV (resources) - innovative capacity - core competences and business models.
The model proposed in this thesis is described above: the resources within the firm are used and combined to create core competences and additionally to create their innovative capacity. The resources – core competences – core products – end
21
products follow the same direction as the core competence model of Prahalad and Hamel (2006). The framework is expanded with an extra layer, the resources layer. The innovative capacity is used to change, upgrade, innovate all levels in the model. Each change in the model will lead to a different value proposition to the customer. By doing so, the target firm is innovating the business model. This model is therefore a business model innovation framework with a theoretical basis of strategic
management: the RBV.
2.5 Research objective
The research question of this thesis is: “How are Core Competences of a Dutch bank used and combined to new business models to sustain competitive advantage.” The purpose of this thesis is two-fold. On the one side, the thesis discusses how ING bank performs Business model innovation using a core competence approach, and more importantly, the thesis develops a Business model innovation framework which is applied to ING Bank as a proof of concept.
As is shown above, Business model innovation is a topic which has a large attention with consulting firms and literature, but there is less theoretical theory support for Business models and business model innovation in relation to strategy literature. In the strategy literature however, there is a convergent view on strategy which is the resource based view. The combination of the resource based view with the topic of business model innovation will therefore provide an approach to business model innovation founded in strategic management theory.
The model that is developed and tested is shown in figure 4. The research question is answered using a qualitative approach based on a single case study within the Dutch organization ING Bank N.V.
22
3 Methodology
3.1 Research method
This study examines the business model innovation of a banking firm. It builds on the literature of the resource based view, business models and business model
innovation, and it will show that the target banking firm innovates it business model across 4 layers: the resources, core competences, core products and end products layers. This study is descriptive in nature and its purpose is to portray an accurate profile of the examined organization. The descriptive part will be a precursor to an explanation. Therefore, the study is descripto-explanatory (Saunders 2009).
3.2 Case study
The research strategy sampling is based on critical case sampling using a single case study (Patton M. Q., 1990). The problem of single cases is limitations in generalizability and several information-processing biases (Eisenhardt 1989). A single case study however is sufficient means to test the conceptual model. Additionally, practical reasons like the duration of the research and access to respondents within the target firm, made me chose a single case.
The single case is used to describe the collection of information regarding the resources of the firm, the method of analyzing the resources and determine how these define core competences. From the core competences onwards, the business model is analyzed. Changes in either layer of the 4-layer-model, will lead to
innovation in the business model. As the result, an approach to business model innovation is described. Replication of the results to other banking organizations is possible, using the same approach and conceptual model.
23
3.3 Approach and access to the respondents in this
research
Access to the respondents is based both on a personal network and a business relation network. A snowball method is used to identify other respondents.
Respondents were explained the possibility of anonymity, the possibility to secrecy of the thesis and the possibility to review the interview transcripts.
3.4 Data collection
Respondents working for ING Bank are targeted in this research. Respondents are employees with different backgrounds and roles within the bank. To determine whether differences or commonalities can be observed, the data is presented on the basis of a shared perspective among the interviews that have been undertaken.
Due to the explorative nature of the study, the goal of the interviews was to see the research topic from the perspective of the respondent, and to understand why he or she came to have this particular perspective. To meet this goal, King (1994)
recommends that one have “a low degree of structure imposed on the interviewer, a preponderance of open questions, a focus on specific situations and action
sequences in the world of the interviewee rather than abstractions and general opinions.” In line with these recommendations, the collection of primary data in this study consists of unstructured interviews. All interviews started with an introduction of the thesis subject the motive of the subject and the purpose of the investigation. The introduction and motive are usually given verbally, but on some occasions, these are shared prior to the interview.
All the interviews are digitally recorded and are transcribed at a later stage. The transcription is done by the auteur himself, as it provides an extra step in
understanding and grasping the data. After the completion of the coding, the auteur has experienced the interview multiple times, two times verbally and 1-2 times written.
24
There are six sources of evidence, which can be used during the collection of case study evidence (Yin 2003). These are: documents; physical artifacts; participant observations; direct observations; interviews and archival records. In addition to the aforementioned interviews, other sources are used, which are public interviews, key-notes and publicly available documents.
In the RBV, Innovation and Business model literature, various intangible resources are discussed. Intangible resources can potentially be used to reach competitive advantage and are the first elements of data that were collected during the data collection phase. The collected resources need to be combined into core
competences, which is not as obvious as one could think. Goddard (1997), provides various domains where potential core competences may reside in the organization. These domains are explored after the collecting of the data. The data collection is conducted in a non-directive manner; this approach will potentially generate a more diverse insight into and beyond the stated domains.
3.4.1 Validity of the research method
Validity of the research is important to build acceptance of proposed concepts. Literature presents two distinct view of validity concept of study internal validity and external validity (Eisenhardt, 1989).
Internal validity explores cause-and-effect relationships between different variables within the research. The variables I have identified are common resources within the firm which are thought to be crucial within the firm to address Business model
innovation. I will propose a framework which can be utilized by other incumbent banks to apply business model innovation.
The external validity deals with generalizability of the proposed framework which can be applied to general cases outside the context of research. The framework is
developed based on generable available theory of resource based view and core competences which are then applied are combined to validate or generate a
25
other banks and other firms.
3.4.2 Reliability
Reliability refers to the extent to which the data collection techniques or analysis procedures will yield consistent findings. In the case of qualitative research, reliability is concerned with two questions (Sykes, 1990): Could the same study carried out by two researchers produce the same findings? and Could a study be repeated
using the same researcher and respondents to yield the same findings? It is likely that due to the open nature of the interviews conducted and the complexity of the organization, that another researcher can end up with new or additional results, which can both strengthen or weaken the final outcome.
The interviews were conducted with employees of the bank from various departments. The purpose was to get a broad view as possible of the banking organization, it was expected that employment in different organizations would provide different perspectives.
Division Role of respondent
Marketing Senior Marketeer
Commercial Banking Project Manager Corporate Credit Risk Management
Wholesale banking Head of Financial Market Operations Private Banking Business Consultant Private Banking
Private Banking Private Banker
Small & Medium Enterprise Lending Product Owner
Retail – Direct Banking Innovation Analyst – Alliance expert
External Expert Board member Eurex and CEO investment firm
As discussed the interviews had a low degree of structure, and were centered about the role of the interviewee. Each of the respondents first discussed his role in the
26
bank, where the role sat within the organization and what the role meant. Then, from the perspective of his role, the respondent would explain what the most important attributes of his department were and how this added value to the bank and customer. Then, the attributes were discussed in the light of strengths and
weaknesses of the target firm and the strengths and weaknesses of the competitors. See Appendix B for an overview of the topics discussed with the interviewees.
The interview then led to how the bank was adapting to these threats by adapting their resources, competences and products. Responses from the interviewees converged towards the same topics, the data was therefore triangulated. In addition, data was added from other sources like (documented) public presentations of key managers and information from annual reports. Furthermore, the rationale behind the research topic, the sampling and data collection procedures, and data analysis are discussed, which adds control for reliability.
3.5 Analyzing the data
The preferred strategy for analyzing case study evidence is to rely on theoretical propositions (Yin R. K., 2003). For each level of the model, the data needs to be validated. For the resources layer, the findings of the interview are analyzed relying on the theoretical propositions from the resource based view, insights from theories of Dierickx & Cool (1989) - Accumulation of Asset stocks and Barney’s (1991) Valuable, Rare, Inimitable Non-substitutable Framework (VRIN). For the Core Competence layers, including the Core Product layer and End Product layer, the theoretical propositions are used from Prahalad & Hamel (1990) and Goddard (1997).
Dierickx & Cool (1989) Barney (1991)
27
- time compression diseconomies, - asset mass efficiencies,
- interconnectedness of asset stocks, - asset erosion, and
- causal ambiguity.
Valuable Rare Inimitable
Non-substitutable
Substitution of Asset Stock
The case study analysis technique to be used is pattern matching. With this technique patterns are drawn from the outcomes. The comparison between the outcome and the predefined theoretical propositions is how the data was tested (Yin, 2003; Saunders, 2007).
Before the pattern matching the data was coded first on base of the theoretical constructs in order to classify the data into meaningful categories (Yin, 2003;
Saunders, 2007). Freeware qualitative data analysis software QDA Miner was used in the process of coding, categorizing and analyzing the data.
See Appendix A for the initial coding keywords.
In the first round of coding, labels are assigned to the transcripts as they emerge from re-listening and re-reading the transcript, through focused coding. At the same time, also other parts were coded in an open manner, the rationale behind it was that these could enforce labels from the focused parts. Subsequently, the statements on different categories made by industry professionals were analyzed and interrelated in regards to similarities, differences and contradictions.
In a second step, axial coding is used. Axial coding involves rebuilding the data in new ways by establishing relationships between categories and their subcategories. It is termed "axial" because coding occurs around the axis of a category (Strauss & Corbin, 1998). Axial codes will result in themes that describe the codes. While
coding, the concept is compared to more incidents (Glaser, 1978). An example is the emerging theme of “International Capability”. Data retrieved from the interview is
28
compared with the recent news that Pay-pal will retreat its service from Turkey due to new regulations. This enforces the theme. Comparison enables the identification of variations in the patterns to be found in the data (Lawrence, 2013).
The next step is selective coding, the aim of selective coding is to integrate and refine the categories into a theory, which accounts for the phenomenon being
investigated (Darke et al, 1998) and validates the statements of relationships among concepts, and fills in any categories in need of further refinement. Data is reduced from many cases into concepts and sets of relational statements that can be used to explain, in a general sense, what is going on (Strauss and Corbin, 1998).
4 Results
To test the conceptual model, the findings were clustered under common themes. The rationale behind this, is that it turned out to be difficult to get directly from findings to Core Competences. As mentioned before, capabilities and competences are comprised of resources, and not all findings from the coding exercise turned out to be resources. Therefore, I first clustered the findings to understand the
commonalities amongst the findings. The clusters are called here themes. Each theme is names after their common denominator; an example is the theme
“customer”. It is not surprising that all interviewees and all studied documentation mentions the word customer, the target firm being a commercial organization.
However, various attributes are mentioned throughout the interviews and documents related to the word customer: “Customer acquisition and retention”, “how do we lower complexity towards our customers”, “earn customer trust” or “primary
relationship”. The first result is a list of themes which contains both resources and associated attributes.
To be able to extract core competences from the themes, the themes needed to be analyzed again. The analysis is done through the “core competence test” defined by Prahalad & Hamel (1990): 1) Core Competences should provide potential access to
29
a wide variety of markets, 2) make a contribution to the customer benefits of the product, and 3) are difficult for competitors to imitate.
Figure 5: The resources are clustered into themes, from the themes attributes are analyzed which make the theme potential core competences.
In the table below, the various themes are listed, next to each of the themes, a summary of mentioned terminology is given:
Theme or concept Attributes
The Art of Banking Money intake (funding), core of banking, Access to markets, financial and alike
Customer Core asset; Trust (confidence)
Relationships (generations, value of customers, access to customers, mass); Learning (Data Analytics,
understanding, Behavior)
Complexity Accumulated Knowledge (Rules and
regulations, products and services) Skills (Reduce complexity for customers).
International Capability International Network; Banks, payment providers, SWIFT, SEPA, local tax; Leverage international skills and lessons
30
learned. (collective learning); Multiple retail markets, forums, try to copy initiatives; Scaling (Scale up; Enlarge products, apply in different markets.
Culture Entrepreneurial Culture; Willingness to
change; Innovative Culture; Branding needs to be in the Culture, friendly image, DNA.
Innovation & Technology IT is the bank, Trust (confidence), idea generation, Tribes, Squads, changing teams, Entrepreneurship.
Branding Product Reputation, Strong Brand,
Direct Marketing, CRM, touchpoints, “Top of the Class”, Trust.
Applying the test to the themes led to the following potential Core Competences: Risk Management, Customer Relationship Management, International Capability, Information Technology, Innovation Capacity and Marketing. The themes
“Complexity” and “The Art of Banking” were aggregated into the core competence “Risk Management”. Complexity referred to the complexity of the landscape of rules and regulation and in the Art of Banking theme revolved around bank services and how risk was handled in the context of the aforementioned rules and regulations. Some of the complexity attributes were used to enforce the “International Capability” core competence, like the complexity of the international banking infrastructure. The theme “Culture” was used to augment the “Innovation Capacity” core competence.
31
4.1 Core Competences
4.1.1 Customer Relationship Management
The most mentioned topic was customer, often also referred to as primary relationship. The relationship between a bank and a customer is based on trust. Head of FMO: Banking is cash withdrawal, a relation based on trust, keeping their
money safe and lend it out wisely.
The relationship between a bank and a customer is complex. An outside observer would see a customer naturally as a paying stakeholder for a variety of services from the bank. But the client is also responsible for delivering funds to the bank, which allows the bank to offer services to other clients in the first place. Additionally, the relationship between a client and the bank usually sustains for a lifetime, and can even bridge generations.
Private Banker: “I have worked with my clients for over 4 to 5 years now, and I also attend to the affairs of their children.”
This characteristic is quite unique and can sometimes be seen with family
businesses and their client relationships. An example from the 2014 annual report (ING Group, 2014): “… provide a new service to a particular group of customer: the
family businesses with their founders, managing directors and their families”.
There is also an aspect of learning from the customer involved, the customer is providing solicited and unsolicited feedback to the bank concerning the services they retrieve and how these are used. This complexity of human interactions and path dependency make this relationship hard to imitate. Due to the complexity and the difficult imitability of the relationship, the Core Competence defined from the theme customer is Customer Relationship Management (CRM).
32
Business value from customer relationship management comes from the capability to draw information from all customer touch-points— including websites, telesales, service departments, direct sales forces and channel partners. The perceived customer benefit is provided by using the gathered information to improve customer services. This information is readily available from the internal systems and is also augmented with social network data.
Project Manager CCRM: “You have to imagine how much a bank knows about the customer, how his company performs, how it is managed and what the financial needs are of that company”.
The bank also develops initiatives to create social networks within the community of customers.
Private Banker: when I understand from a customer that he sold his company and is looking for investment opportunities, while at the same time I have a customer who just started a new company, I link them together.
The capability to build a coherent picture of the customer is costly for firms to imitate and, in many cases, highly idiosyncratic to the firm (Coltman et al, 2011). It has to be noted though, that with the upcoming Payment Services Directive (PSD2), the
access to client information is not for the sole use of the account owner (the bank). Under this directive, information will need to be shared to other parties via standard interfaces: The PSD2 details the information you should be given and makes
payment quicker and safer. It also allows new ‘payment institutions’ (e.g. money remitters, retailers, and phone companies), to provide payment services alongside banks (European Commission).
The possession of customer information and managing the relationship with the customers also provides access to other markets.
Product Owner SME: We have a huge database of people with mortgages. We know that houses need maintenance or improvements at regular timeframes. It should be
33
possible to link this type of information with construction markets, like Gamma, for their direct marketing. Gamma provides the customer with a discount, and we get a kick-back.
4.1.2 Marketing
The ING brand is strong. It started out weak when ING shed the name “Postbank”, but due to consistency in the brand and their message (related to the color orange, the lion and sports), the brand has become strong over the years. Brand reputation is now consistently strengthened by improving and differentiating the customer experience when ING services are used, which will add to the perceived benefit of the services.
The attributes and resources of the theme Branding were used to describe the Core Competence Marketing. The Marketing Competence is built from resources like the strong brand, the direct marketing, product reputation, trust and the customer relationship management mentioned above.
The business value of direct marketing has decreased over the years due to the increase in online banking. Banks used to enclose marketing information in their mailings to their clients when sending out the account status. This generated a lot of new business for the bank. Now that almost all banking is done on-line and mobile, marketing information simply does not fit in mobile apps. Therefore, this method of selling new services has dried up. Marketing is now done via different kinds of touch-points, web, social media and café’s. Market sensing and analytic based capabilities are used to interpret and use customer relationship data effectively, which
represents the investment in Data Analytic technologies (Big Data technologies) within the bank.
Marketeer: “You can only learn from (customer) behavior, no longer through
traditional marketing research, because we just cannot imagine what the world will look like in 5 years (and what will be capable of).”
34
Product reputation also becomes more important. Respondents from the interviews addressed that startups in the stock trading services are treating trading as an alternative to gambling (for instance BUX). The bank however is doing the exact opposite, making the client more aware of what trading is and what it can be used for.
Product Manager PO: “Stock trading… that is what we attempt to make more simple, more understandable and make it less scary. That is not what start-ups do.”
Offering services with high experience or credence attributes benefit from having strong relational and brand resources, because they help alleviate customer
anxieties caused by uncertainties about selecting and evaluating a service offering. Branding can also relate to the inherent trust in banks as being a brand, the bank has a historical trust between client and bank.
Private Banker: “You could put all your valuables in a compound and have it guarded by 50 people, but a safety deposit box in bank holds far more trust, because it is insured by the bank.”
Most of the mentioned resources in marketing which comprise the core competence are intangible in nature which means they are hard to imitate.
Marketing provides a potential access to a variety of markets. Marketing is the promotion of a company’s brand image and product line. Marketing is the competency to put the company and its products into the minds of potential customers.
4.1.3 International capability
All related attributes and resources related to the international nature and presence of the firm is used to describe the Core Competence International Capability.
35
Head of FMO: “…being international is a franchise value”.
The international capability reflects the accumulated experience in handling complex networks, local regulatory understanding in various countries and handling diverse payment standards. Related is the ability to scale the organization and services offered to clients. The bank is able to implement services which are developed in one country across multiple other countries. Multinational Companies are able to transfer their capabilities and exploit knowledge more effectively in the intrafirm context than through external markets, which is called within ING “Best Practice Sharing”. Experience sharing is enabled by the so called Best Practice Forum. Via this platform, subsidiary managers are able to share experience and developments, while retaining their own direction. An example is the ING Direct initiative in the United States which was replicated successfully to other countries and markets, like Germany (Arnold, 2015).
Private Banker: “We are now going to address SME in France, the former CEO of ING Private banking Netherlands has built the bank in France with his Dutch team. This is going to be a success, I am certain of it.”
ING is actively looking for strategic alliances that can add value to their services. For this purpose, ING has assigned a dedicated alliance officer, whose responsibility it is to search for valuable future partners. An example is the alliance with Kabbage, an US based company. ING uses their platform and their Intellectual Property through an alliance and combines these with their own infrastructure. Learning from partners is found to represent a primary motivation for firms to enter alliances (Peng, 2001). By doing so, ING enables an instant lending platform to the market in Spain. From an RBV point of view, this is a form of organizational learning, the capability to learn from partners.
36
4.1.4 Information Technology
Resources and attributes in the theme Technology and IT are used to define the Information Technology Core Competence. This is a challenging one, as Information Technology is used by any organization in the financial services industry, both
incumbents and new entrants. From that point of view, it does not seem to be eligible as a Core Competence. Information Technology is however hard to overlook.
Project Manager CCRM: “We (IT) are the bank”
Head of FMO: “… so the Core Competence of a bank is also IT. The IT competence
is the competence we need to be a smart follower, and determines if you are a fast or a slow follower”.
The annual report of ING confirms it: “Then the key resources we deploy to create value take centre stage in two chapters: ‘People’ and ‘Innovation and Information Technology’. Information Technology alone is unlikely to be a source of direct
competitive advantage (Carr 2003; 2004; Weill and Vitale 2002). In ING, IT systems are embedded in the firm’s business architecture and in the human skills and this competency is therefore difficult to imitate:
Head of FMO: “When I look at the cost footprint, the largest cost is IT: licenses, employees with a variety of skills, like application-specific skills related to trading applications, infrastructure specialists, who jointly need to make sure that the equipment runs smoothly. I think that the bank has shifted tremendously as an ICT company”.
Projects which are started within ING all have a predominant IT component due to the “digital first” mandate, “Retail Banking has been working towards converging its traditional banking model to a digital-first model”.
37
Alliance Expert: “… the first thing I did was talk to the IT people, to understand what the possibilities were, to be able to get all the ideas out”.
Historically, IT was a provider to the business user, and would provide what was requested based on listed requirements, today IT is integrated in the business.
4.1.5 Innovative Capacity
ING CEO: “Increasing the pace of innovation is a strategic priority for ING”.
ING has built an innovative capacity using the resources they either had or acquired. Five most important capabilities which are instrumental for a firms’ capacity to
innovate have already been discussed. Entrepreneurship, which is the articulation of a long-term vision for the firm aiming at higher growth through the introduction of innovative products, services and technologies at the expense of short-term profit maximization:
ING CEO: “Overall we have 3000 ideas and clearly after that you funnel it and new services keep popping up. There is a lot of innovation in our organization, a lot of ideas and entrepreneurship in our organization that we can actually benefit from” Private Banker: “.. what is in the DNA of ING? We strive for innovation.”
Learning, creating new knowledge and recombining existing knowledge and skills and adapt to market conditions,
ING CEO: “The start-ups explained how ING helped them to open up their network, while ING, in turn, learnt from their agile way of experimenting. Matching the external start-ups with ING’s own innovation teams was clearly a win-win.”
Sense and response, identify changes in the environment and reconfigure resources to address this change;
38
(Setting the Pace, n.d.): “You learn to work lean here. Run your experiments, make mistakes quickly and cheaply and learn fast”;
Marketing, integration and interaction between marketing and product development departments,
ING CEO: “with marketing, product development, operations, IT. We moved to working in Tribes and Squads.”
And dynamic capabilities, the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments,
ING CEO: “And we turned the organization completely upside down, completely upside down, which means from a hierarchical structure, with marketing, product development, operations, IT. We moved to working in Tribes and Squads.
ING adopted a new way of working, called Agile: autonomous and empowered units, called squads, which are end-to-end responsible for the delivery of customer specific solutions and services.
4.1.6 Risk Management
Head of FMO: “Well, the Core Competence is Risk Management, because a bank has the accumulated experience… Risk management has different aspects: Market Risk, Credit Risk, Operational Risk, Process Risk, Employee Risk, IT Risk,
Compliance Risk, etc.”
Banks that manage their risks have a competitive advantage. Banks take risks
consciously, anticipate adverse changes and protect themselves from such changes.
Head of FMO: “… but you need to understand, it always is associated with a
39
consecutive “NO’s” from five banks, and a venture capitalist says “yes”, they just look at the risk from a different point of view.”
Figure 1 is a brief description of the types of risks that banks have to protect themselves from.
Figure 6: Main risks undertaken by banks - Bessis (2002).
Credit risk arises when a bank cannot recover the money from loans or investments. Interest rate risk arises when the market value of a bank asset, loan or security falls when interest rates rise. Liquidity risk arises when the bank is unable to meet the demands of depositors and needs of borrowers by turning assets into cash or borrow funds when needed with minimal loss. Operational risk arises out of inability to
control operating expenses, especially noninterest expenses such as salaries and wages. In a competitive environment high operational expenses would jeopardize the bank’s prospects to survive. Additional risks need to be considered when
designing a risk management strategy, like political situations from country to country (country risk), the fluctuations of the foreign exchange rates (foreign currency risk), the technological advances (environmental risks) and so on (Dima & Orzea, 2012).
40
The complexity of the rules and regulations of compliancy and the aforementioned accumulated knowledge and experience in relation to these regulations provides a hard to copy resource related to new financial service providers. A bank with
accumulated experience is able to digest new regulations more efficiently compared to providers without comparable banking experience.
Risk management could also provide access to different markets, risk management is already offered as a separate service by risk management companies. Risk management can of course also be applied to nonbanking services, like project investment of commercial firms.
4.2 Business models innovation
The resources have been identified and the core competences have been
constructed using these resources. Using the conceptual model, the business model innovation of ING will be discussed.
For the purpose of clarity, all the components of the model are plotted in one diagram, shown below. The diagram shows the layers: resources, core
competences, core products, business units and end products. The business unit layer will not be discussed here. In each of the layers, business model innovation takes place due to the innovative capacity of ING (see the conceptual model in figure 4). For each of the layers, an illustrative example of Business model innovation will be discussed.
41 Figure 7: The resources, Core competences, Core products and end products are shown in the competency framework.
4.2.1 The resources layer
In the resources layer, “learning” is one of the resources that builds the CRM competences. Learning means creating an understanding of what the customer is doing while interacting with the bank through the use of services and understanding how the customer is perceiving this service from the bank. As services are offered to clients digitally, the interaction/usage of the service is measured continuously. Based on how much the service is opened, used and touched, the project team(Squad) is
42
able to sense the impact of the service to the customer and respond accordingly: retreat the service, update the service or keep the service unchanged. The increased value of learning will change the user interface, which is the channel to the client. By doing so, the business model is innovated as the value proposition of the service has changed.
4.2.2 The Core Competence layer
In the core competence layer, a new core competence is created: innovate capacity. The core competence is built up using both existing resources like entrepreneurship and culture which are combined with newly acquired or upgraded resources, like the new way of working with existing employees through the concept of Tribes and Squads.
The innovative capacity is able to add more value to the resources in each of the other core competences, it has an effect on at least 10 resources: learning,
touchpoints, skills, product reputation, CRM, brand, partnerships, technical systems, culture and entrepreneurship. Therefore, it increases the value of the other core competence too. For example, the innovations in the mobile app of ING, have a positive impact on the product reputation of ING which also reflects on the brand of ING.
Private Banker: “…He says, your app is the best…I want to handle my banking with
you … it is great the customers are glad that they are part of the ING community.”
Therefore, the marketing competence is upgraded in value by the innovative capacity. An increase in value of marketing core competence is a business model innovation because it will induce a higher perceived benefit of the products and services offered by the firm. Marketing core competence will also purposefully differentiate the firm from its competitors through brand and product recognition and is therefore hard to imitate.
43
4.2.3 The Core Product layer
Core products contribute to the competitiveness of a wide range of end products. In the paper of Prahalad & Hamel (1990), core products are physical embodiments of core competences, like VCR components and compressors. In a services industry like the financial industry, core products are not physical at all. Core products can be embodied into a repeatable process, which can produce services in a standard and reliable manner. The newly introduced core product in the framework is an
integration product. The integration product builds on the international core
competences, with its partnerships, complex infrastructure, scaling ability and skills and combines these with the information technology core competence. Induced by the innovative capacity core competences, the result is a repeatable process, the integration core product, which allows ING to onboard partners and solution providers in a relatively fast and repeatable manner. Through the international capability, ING is continuously searching for eligible partnerships. ING can increase value to future partners by offering scale, infrastructure and an ecosystem
(networks). An example is the onboarding of a US partner for instant lending services. The innovative capacity of ING provides the entrepreneurship to oversee integration complexity and allocates the integration project of this new service to small teams, squads. The multi-disciplined team is then set to work to integrate the partner within the set time-frame. Through sensing, continuous measuring the success of the solution, the lending service, can be continuously updated (scale up, change or retreat).
4.2.4 The End Product layer
The end product layer is the layer most visible to the public. Business units offer end product to their customer, examples are here mortgage products, various loan products, bank-accounts, etc. Innovation in this layer takes place through the combination and use of core products. Various lending product are examples of an end product to customers. The end product is created by the business unit Retail. This business unit combines the lending core product with its risk management
44
competence and validates if the lending product can be offered to for instance a SME organization. Additionally, the product is combined with the product deposits or product markets to verify the needed funding, the applicable interest rates and term of the contract. The end product is a SME loan. SME firms need a loan, because they need money for an investment in their company. Usually, the time needed between the request for a loan and the allocation of the funds took several days to weeks. An innovation in the end product layer is instant lending. The need for instant lending arose by the insight that retail SMEs need money just for a very short while, specifically for a one time purchase of a set of goods, that they then sell in a short time-frame, after which they repay the loan. These SMEs however do not have the funds to do that one-time purchase. Just in time delivery of this loan is imperative for these SMEs: when the loan is not acquired in time, their business-opportunity is gone. The end product “instant lending” is the value proposition of the bank that addresses this need. The business unit commercial banking integrates the lending core product with instant risk management technology (Integration Core product), through a partnership (Core Competence international) to provide an instant lending service in Spain (Scaling – International competence). ING additionally offers the product through their own channels using the own customer relationship database (core product integration and core competence IT).
45
5 Discussion
The aim of this thesis is to determine how ING bank NV uses its resources to
innovate their business model. From the research, it has become apparent that ING has a Resource Based View approach to Business model innovation. ING is
investing in upgrading the resources they already have and are additionally acquiring new ones; in doing so, ING is able to upgrade their existing core competences. In addition, a new core competence is created, innovative capacity, which enforces the resource portfolio upgrade. This new core competence, feeds into all layers of the business model; resources, core competences, core products and end products. By building this core competence, ING is effectively innovating their business model across all 4 layers of the proposed business model innovation framework.
This thesis adds to the business model innovation literature and the Resource Based View literature. The proposed model applies Resource Based View theory to
business model innovation. The model is then tested on a bank through a single case study.
The goal was to create a model that can be applied to other incumbent banks. The model also provides an understanding of what business model innovation actually is, it can be enabled by starting in one layer.
A firm could choose to start with existing resources and combine these in new ways to try to create a new core competence. This provides the firm a basis for innovation in the other layers.
The thesis provides a pragmatic approach of what business model innovation is and how it can be applied using the Resource Based View in a business setting.
While business model innovation literature currently provides a relation between resources and the business model (Zott & Amit, 2010), the applicability of the
theories is quite undocumented. In documented cases, the proof is usually based on historical information littered with examples of success and failures. I think a
contemporary view on business model innovation is needed, as BMI is especially important in times of instability.
