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
