Tuesday, March 22, 2016

Why digitalization might require an adaptive/ a shaping strategic style for the Consumer Finance Industry

The article “Your Strategy Needs a Strategy” outlines that there is no single best-practice approach to create a corporate strategy but that mostly two critical aspects determine the best approach for each industry. These are the predictability and the malleability of the market. Based on these criteria, four different strategic styles can be determined: A classical, an adaptive, a shaping, and a visionary strategic style. Often, however, companies solely focus on the classical and shaping strategy. Besides, for critical situations, such as a capital shortage a fifth strategy, a survival strategy, is identified.

In the article different industries are allocated in a matrix consisting of the four main strategic styles to identify “the right strategic style for your environment”. Here, I believe that the current technological innovation and digitalization has the potential to make a regular adjustment of the positioning of the industries to the changes necessary. This will especially affect the more predicable industries. If one for example looks at the Consumer Finance industry, which has been identified as an industry best suited for a classical strategic approach, key determinants that allow for good predictability and planning opportunities but not for shaping opportunities have already or might change in the future:

Firstly, banks are more and more in danger to become a pure payment service provider. Especially emerging mobile payment providers, such as Apple Pay, or the replacement of traditional banking by online banking make the establishment of customer relations much more difficult. With significantly increased transparency by online comparison platforms and decreased switching barriers for customers by the introduction of account switch services, e.g by Comdirect in Germany or Santander in the UK, banks might find the classical 5-10 year planning difficult because of problems to reliably predict customers and account deposits for the next years. Considerations for a cash-free future, such as they are currently made in Sweden, might further reduce the importance of branches and thereby reduce customer loyalty instruments.

Instead, innovative platforms (“Fintechs”) now more and more have the ability to shape the market and transform it towards a more peer-to-peer (“P2P”) based market, in which companies only act as intermediaries. This might affect the way loans are given, as we already see at Prosper or Lending Club, the way people invest, or the way people insure themselves collectively, for example at Friendsurance. In such an environment, however, the intermediaries would be under constant pressure to offer the most innovative and customer-oriented product as customers would only have to download a new app to switch to a competitor.

Such a development would certainly require traditional consumer finance companies to switch to a more flexible adaptive strategic style, if not even a shaping style to successfully compete in such an environment. Not all of the aforementioned aspects might come true, but the more digital natives prevail the future customer mix, the more difficult it will become to succeed with classical strategic approaches in the consumer finance industry and to not be overrun by disruptive platforms.

Reeves, M., Love, C. and Tillmanns, P. (2012). Your Strategy Needs a Strategy. Harvard Business Review.


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