Topic 1: Introduction & Bank Strategy Flashcards
Michael Porter - how does a company outperform rivals
“A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost” ‐ Michael Porter (1996)
How to differentiate (4 ways)
• Variety‐based (“focused specialist”)
Tgt all customers, offer small subset of G and S that are delivered exceptionally well / efficiently
• Needs‐based (“tailored offering”)
Tgt subset of customers with a package of G and S tailored to partic needs
• Access‐based (“convenient delivery”)
Tgt customers who wish to access G and S in a part way
• The hardest part is often not picking the strategy, it is excluding others (=“focus”)
• Differentiation alone isn’t enough – if not sustainable, competition will return
Make it harder for competitors (2 ways)
• Synergy
The G and S offered are complimentary and reinforcing (e.g. iPod + iTunes)
Deliver competitive advantages.
To match those synergies, a competitor would need to replicate several activities (costly)
• Legacy ‐ the downside of synergy
Interlocking activities can reduce ability to respond to technology / disruptions
Strategy Models
- why use
- common models (3)
- balanced scorecard
• Use models to organise and structure thoughts
– See the problem clearly
– Generate a comprehensive list of options, with pros and cons for each
• common models
– SWOT Analysis
– The Delta Model (Arnoldo Hax)
– The Five Forces Model (Michael Porter)
• May also encounter “Balanced Scorecard” as a strategy model, however that is more concerned with implementing strategy (or incremental change)
Delta Model
- draw diagram
- list points of triangle
SYSTEM LOCK IN
- success via market dominance (compare with access based)
BEST PRODUCT
- success via competition (compare with variety based)
TOTAL CUSTOMER SOLUTION
- success via customer relationship (compare with needs based)
Five Forces Model
- list the 5 forces, draw diagram
- Threat of New Entry
- Supplier Power
- . Buyer Power
- Threat of Substitution
- (in centre): Competition between existing rivals
How do banks generate returns
• Fees for Service
Provision of advice, transaction execution (access to infrastructure)
• Credit Intermediation and Maturity Transformation (Accepting deposits, making loans, at low margins magnified by balance sheet gearing
• Explicitly Taking Risk
Currently an unfashionable class of revenue generation, for instance prop trading
• Some activities don’t fit neatly in one category, e.g. market making = execution + risk taking
• Banks normally prefer to avoid risk entirely, however take managed risks is core to the basic banking business model (credit intermediation)
• Society is also dependent on the services (currently) provided by the banking system
Roles Banks play in Society
- Build / Maintain Infrastructure for Financial Transactions (communicate / reconcile debits and credits to support economic activity and trade
- Productively Deploy Society’s Surplus Financial Capital (Transform savings and excess transactional balances into loans
- Distribute and Shape Financial Risk (Lower risk of extreme loss via collective investment , diversification, and cap reserves)
- Provide Delivery Channel for MP (CBs influence liquidity and the MS via the commercial banking system
- Less than 10% of what we think of as money exists as physical currency (=“M0”)
- Most exists only in the form of bank records (=“M2 – M0”), and banks create that money!
Banks seen as both for-profit and public utilities - explain
Banks: For Profit • Generate wealth for S/H • Compete and innovate to deliver more value at lower cost • Fail as part of a functioning market ecosystem, and S/H bear that risk
Public Utility • Deliver a “common good” and can often enable broader wealth creation • Are often natural monopolies • Attempt to minimise failures as they can wreak widespread damage to society
How is the “bank as public utility” and “bank as for profit enterprise” characteristic resolved
• REGULATION
- try to limit market‐driven behaviours incompatible with banking’s utility role
- regulation also applied to healthcare, water, food supply, etc. (similar issue)
• So bank strategy has to achieve sustainable differentiation within regulatory constraints
Porter
What is Strategy..
- strategy is not operational effectiveness -
What is Operational Effectiveness?
What is Operational Effectiveness?
- Operational effectiveness and strategy and both essential to superior performance.
- Includes but not limited to efficiency
- Better utilisation of inputs
- Performing similar activities better than rivals
Difference between Operational Efficiency and Strategic Positioning
What are activities?
Operational efficiency (or effectiveness): performing similar activities better than rivals Strategic positioning: performing different activities from rivals or performing similar activities in different ways.
Activities are the basic units of competitive advantage - consider choice of activity and efficiencies, eg cost effectiveness.
Porter
Productivity frontier
- define
- how is it shifted out
the sum of all existing best practices at any given time.
The max value a company can create from delivering a particular product or service for a given cost using the best available inputs
Frontier shifts outwards with new technologies, management approaches and new inputs (eg IT)
Porter
How is operational effectiveness insufficient
- absolute improvement is not necessarily relative improvement therefore a company does not capture superior profitability. Sometimes resulting productivity gains are captured by customers and equipment suppliers, not in superior profitability
- competitive convergence - the more benchmarking used, the more firms look alike.
Porter: Strategy
- competitive strategy is about choosing a set of activities to deliver a unique mix of value
- choosing what not to do - tradeoffs
- Strategy is about combining activities - how the chosen activities relate to each other (Southwest airlines - acitivities fit and reinforce each other)
- Creating fit amongst a company’s activities
Porter
STrategic positions emerge from 3 distinct sources
- “variety based positioning” - producing a subset of an industry’s products or services. Choice of product or service varieties rather than customer segment, company is the best at producing a particular set of products. Vanguard
- “Needs based”: Serve most of the needs of a particular group of customers; target a customer segment. eg price sensitive customers: Ikea; or different approaches to HNW vs UHNW
- “access based positioning” - segmenting customers who are accessible in different ways. Can be a function of geography or customer scale (eg provision of country cinemas - rural vs urban;
Porter
What is Strategy
Strategy is the creation of a unique and valuable position involving a different set of activities.
STrategic positioning: choose activities different to rivals.
Porter
Choosing a unique position is not enough to guarantee a sustainable advantage - list the ways of imitation, example
- Competitor may reposition itself to match the superior performer (clone)
- Straddling: the straddler seeks to match the benefits of a successful position while maintaining its existing position.
- example - Continental (full service airline) vs Southwest (budget). Note COntinental was not able to straddle, as needed to maintain full service (not efficient) meals, service staff etc.
Porter Trade-offs and straddlers - why do trade-offs occur - tradeoffs are essential to strategy - false tradeoffs
- Tradeoffs occur when activities are incompatible - more of one thing necessitates less of another
example: Neutrogena - gave up volume selling in supermkts to focus on niche)
2, tradeoffs are essential for strategy - they create the need for choice - false tradeoffs between cost and quality - primarily when there is redundent or wasted effort, poor control or weak coordination
Porter
List 3 reasons for tradeoffs
- inconsistencies in image or reputation
- tradeoffs arise from activities themselves (inflexibility in machinery, people or systems. Consider specialised sales person wasting time on budget shopper)
- Tradeoffs from limits on internal coordination and control (clarity of organisational priorities, confusion in the trenches)
Porter
Simulateous improvement of cost & differentiation is possible only when…
… a company begins far behind the productivity frontier or when the frontier shifts outwards
At the frontier, the tradeoff between cost and differentiation is very real.
Porter
- how does fit aid strategy
Fit locks out imitators by creating a value chain that is as strong as its strongest link
STrategic fit creates competitive advantage and superior profitability
Discrete activities often affect one another
Porter - the whole matters more than the part - FIT
Entire system of activities
List 3 types of fit
- consistency between each activity (function) and overall strategy - competitive advantages cumulate and do not erode or cancel (vanguard - lower costs)
- activities are reinforcing - Neutrogena - medical & hotel promotions
- optimisation of effort - coordination and information exchange across activities (eliminate redundancy and wasted effort)
Porter
Strategic fit and the sustainability of advantage
- view strategy in terms of activity systems
- tailor organisations to strategy - complementarities are more achievable and contributes to sustainability
- horizon should be a decade or more
Sustainable competitive advantage (6 key points)
- Unique competitive position for the company
- Activities tailored to strategy
- Clear trade-offs and choices vis-a-vis competitors
- Competitive advantage arises from fit across activities
- Sustainability comes from the activity system, not the parts
- Operational effectiveness is a given.
Porter
Threats to sound strategy
- misguided view of competition (imitation, prefer action, pursuit of operational efficiency (erroneously))
- organisational failures (no choice made, vs bad choice made)
- desire to grow (tradeoffs appear to constrain growth, strategic positions blurred) Compromises and inconsistencies in the name of growth will erode competitive advantage
Porter
COmpetitive convergence arises by focusing on
.. operational effectiveness.
ie, improving operational effectiveness is a necessary part of management but it is not strategy.
Porter ****
Operational agenda
Strategic agenda
Operational agenda:
- continual improvement everywhere there are no tradeoffs
- Constant change, flexibility, relentless efforts to achieve best practice
- shift productivity frontier
Strategic:
- define unique position,
- make clear tradeoffs,
- tightening fit
- extend uniqueness by strengthening fit
