Strategic Changes for Business Models in the German Retail Banking Industry in the Post Financial Crisis Era

Using the Example of the Postbank AG


Bachelor Thesis, 2010
109 Pages, Grade: 2.0

Excerpt

Table of Contents

List of Abbreviations

List of Graphics

1. Introduction
1.1 Introduction
1.2 Aim of this paper
1.3 Research Approach

2. The Conceptual Framework of Business Strategy
2.1 What is Strategy?
2.1.1 On the Emergence and History of Strategic Management
2.1.2 A Conceptualization of Business Strategy and its Goals
2.2 Strategy as a Quest for Value
2.2.1 How Companies Create Value
2.2.2 Value Distribution in Favour of Share- or Stakeholders?
2.2.2.1 The Shareholder Approach
2.2.2.2 The Stakeholder Approach
2.2.3 Value Distribution at the Postbank
2.2.3.1 Company Overview & Business Divisions
2.2.3.2 How Postbank Distributes Value
2.3 Different Types of Business Strategies: An Overview
2.3.1 Business Strategy as a Strive for Competitive Advantages
2.3.1.1 Competitive Advantage as a Cornerstone in Explaining Corporate Success
2.3.1.2 Determining the Sustainability of a Competitive Advantage
2.3.2 Generic Strategies and the Market-Based View of the Firm
2.3.2.1 Theoretical Foundations of the Market-Based View
2.3.2.2 Generic Strategies: Cost Leadership, Differentiation and Focus
2.3.2.3 Critical Evaluations of the Market-Based View
2.3.3 The Resourced-Based View of the Firm
2.3.3.1 The Emergence of the Resource-Based View as a Critique of Market Based Perspectives
2.3.3.2 Towards a Resource-Based Business Strategy
2.3.3.3 Critical Evaluations of the Resource-Based View
2.3.4 Current Trends in Business Strategy Research
2.3.4.1 The Evolution of the Strategic Management Field - an Outlook
2.3.4.2 Resource-Based and Market-Based Views in the 21st Century
2.3.4.3 Unifying Resource-Based Thinking with Porter’s Work
2.3.5 A Strategy Assessment of the Postbank AG
2.3.5.1 Assessment of the Current Strategy
2.3.5.2 A Comparison of Postbank’s Strategy with the Theoretical Framework
2.4 Elements for a Successful Strategy Implementation

3. Economic Analysis for the Time Period Before and During the Financial Crisis
3.1 GDP, Economic Growth and Business Cycles
3.1.1 Measuring Economic Activity
3.1.1.1 Explaining GDP and what it Measures
3.1.1.2 Real versus Nominal GDP
3.1.2 Economic Growth
3.1.2.1 Describing and Measuring Economic Growth
3.1.2.2 The Main Sources of Economic Growth
3.1.3 Business Cycles - Fluctuations around the Economy’s Long-Run Growth Rate
3.1.3.1 A General Idea of the Business Cycle and its Terminology
3.1.3.2 Characteristics of Business Cycles
3.2 Contrasting Economic Periods: The Early 2000s vs. the Era of the Great Recession
3.2.1 The Boom Period of the Early 2000s
3.2.2 The Great Recession of 2007 - Why Things Got so Bad, so Fast
3.2.2.1 The Significance of Low Interest Rates in the Post-Dotcom Era
3.2.2.2 Securitization and the US Housing Bubble
3.2.2.3 How the Great Recession Affected Growth in Advanced Western Countries
3.2.2.4 Economic Outlook: Sovereign Debt Challenges Lie Ahead

4. German Retail Banking in Transition - Plotting Strategy in the Aftermath of the Great Recession
4.1 The Structure of the German Banking Market
4.2 A Snapshot of the German Retail Banking Market
4.2.1 Defining Retail Banking
4.2.2 Market Analysis
4.2.2.1 Market Analysis in the Retail Lending Segment
4.2.2.2 Market Analysis in the Retail Savings & Investments Segment
4.2.3 The Industry Structure of the German Retail Banking Segment
4.2.3.1 The Competitive Landscape for the Retail Lending Segment
4.2.3.2 The Competitive Landscape for the Retail Saving & Investments Segment
4.3 Postbank’s Position in the Retail Banking Industry
4.4 German Retail Banking Strategy and the Great Recession
4.4.1 The Impact of the Great Recession on German Retail Banks
4.4.1.1 The Crisis’s Impact on the Whole Industry
4.4.1.2 The Crisis’s Impact on Postbank
4.4.2 Can Business Strategy Be Held Accountable for this Hit?
4.5 Routes to Sustained Profitability in the Post Financial Crisis Era
4.5.1 A Review of Postbank’s Current Strategy & Critical Resources
4.5.2 A Categorization of Potential Threats to Postbank’s Competitive Position
4.5.3 Challenges for Retail Banks in the Aftermath of the Great Recession
4.5.4 Strategic Recommendations for the Postbank - A Prioritized Action Plan

5. Conclusion

Appendices

Bibliography

List of Internet Sources

List of Interviews

List of Abbreviations

illustration not visible in this excerpt

List of Graphics

Graphic 1: Overview of the Literature about Sustainable Competitive Advantage

Graphic 2: Three Generic Strategies

Graphic 3: Scarcity Rents with Heterogeneous Factors

Graphic 4: A Market Control - Value Strategy Framework

Graphic 5: Postbank’s Strategy Building Process

Graphic 6: Categorization of Findings in Strategy Execution

Graphic 7: Real GDP Annual Percentage Growth from 2000-2008 across Geographic Regions

Graphic 8: World Real GDP Annual Percentage Growth

Graphic 9: Short Term Interest Rates in the Three Big Currency Areas

Graphic 10: Euro Area Growth Rates Decomposition Annualized

Graphic 11: German Quarterly Change of Real GDP and Real Exports

Graphic 12: United States Consumption and Saving in Percent of GDP

Graphic 13: Structure of the German Banking Industry in Terms of Total Employees.

Graphic 14: Postbank Retail Banking Segment Revenue Source Split

Graphic 15: Cost-Income Ratio Comparison between Postbank and Competitors

Graphic 16: Postbank Expense Breakdown 2008 - 2009

Graphic 17: Postbank Breakdown of Other Administrative Expenses

Graphic 18: Development of Pre-Tax-Profits in Major German Retail Banks

Graphic 19: Postbank Pre-Tax Profit Development

Graphic 20: Securitization Exposure by Rating Category

Graphic 21: Postbank’s Strategic Resources

Graphic 22: Potential Threats Categorized

Graphic 23: Prioritization Framework for Strategic Challenges

Graphic 24: Postbank - Products per Customer, March 2010

Graphic 25: Revenue Potential for Increasing Customer- to-Product Ratios for Credit Cards and Securities Accounts from 1/10 to 1/5

1. Introduction

1.1 Introduction

The Great Recession, as the global financial meltdown has come to be called, has had devastating effects on the global economic landscape - particularly on the banking industry. While the big, multinational investment banks that were at the heart of this crisis were hit most severely, with players such as Lehman Brothers Inc. among others disappearing from the financial landscape, retail banks - institutions primarily engaged in the standard banking business with private customers - also suffered considerably from the global collapse of financial markets.1 Unlike their multinational counterparts, however, retail banks cannot rely on profitable mergers and acquisition activities or proprietary trading to boost income once the economy picks up again. While the challenges created by the Great Recession for retail banks are complex, they are not the only threat to long- run profitability. In many markets - especially in the mature western European ones, other dark clouds appear on the horizon. To name only a few, plummeting sales, narrowing profit margins, consumers’ lack of confidence in the banking system and operational cost problems threaten retail banks in mature markets such as Germany.2 Postbank, a major German retail bank with a strong domestic customer base is one of the players that have to make strategic adjustments to cope with a changing economic landscape. But what will these strategic adjustments be - and in which priority do they need to be undertaken? Although literature on the financial crisis and expected changes in banking industry is paramount, so far little attention has been given to showing how strategy in the retail banking segment in the distinct geographic location of Germany will have to look like for a specific player in the post financial crisis era.

1.2 Aim of this paper

The German retail banking industry faces the daunting task of reversing the disastrous effects of the global economic crisis.

This paper sets out to help one distinct player in German retail banking, the Postbank AG, to cope with a changing economic landscape by building a prioritized strategic action plan to restore long-run profitability. Instead of merely commenting on the changes in the industry that will affect Postbank as well as all other players, this paper seeks to view the company-specific competitive advantages and weaknesses in the context of the ongoing changes in the industry to give a more in-depth assessment of the specific challenges Postbank will have to face. The strategic recommendations that follow this assessment are prioritized since a prioritized strategic action plan includes the dimension of time, helping the company to differentiate between critical and less critical actions.

1.3 Research Approach

As this paper sets out to redefine a company’s strategy in the post financial crisis era, chapter two starts with outlining the two dominating approaches towards business strategy and a critical review thereof. These two views on strategy are then used to analyze Postbank’s current strategy.

The third chapter is devoted to the analysis of the economic parameters before and during the crisis to gain an understanding of how these periods differ and what caused the financial crisis.

On the basis of these findings, chapter four brings it all together to derive a prioritized strategic action plan to help Postbank thrive in the post-crisis environment.

The chapter begins with an in-depth analysis of the retail lending and retail savings and investments segments in the German retail banking industry both from market and competitive environment perspective to identify the relative attractiveness of the two market segments. This analysis is followed by the assessment of Postbank’s relative position within the German retail banking industry by focusing on the company’s competitive advantages and its weaknesses. Having investigated the industry structure and Postbank’s position therein, the impact of the Great Recession on German retail banks and Postbank in particular is shown.

This step allows conclusions on how Postbank fared during the crisis as compared to competitors and what additional challenges apart from already existing weaknesses will arise for Postbank in the aftermath of the Great Recession. Based on findings about Postbank’s industry position and the impacts of the crisis on the company, Postbank’s strategic resources building the competitive advantage that could potentially erode, existing weaknesses and other factors that can threaten the company’s long run-profitability are categorized. The categorization shows systematically how Postbank could lose its profitability. Drawing on this categorization, 15 studies on expected challenges in the retail banking industry are reviewed. The challenges are assessed according to (a) one of the three Postbank specific categories and (b) whether they are market-based (industry structure driven) or resource-based (firm specific) to derive a matrix that captures the strategic category (market - and - resource-based) on the x-axis and the relevance of the Postbank specific categories on the y-axis. The matrix finally shows for Postbank (1) the relative priority of a given challenge, (2) whether it stems from the erosion of strategic resources, an intensification of company- specific weaknesses or other factors and (3) whether the change is due to a change in the industry structure or arises from problems with firm-specific resources (strategic category). Drawing on this prioritization plan, strategic actions Postbank should undertake are outlined to help the company improve its strategy.

2. The Conceptual Framework of Business Strategy

In this chapter I discuss the fundamentals of business strategy, its theoretical origins, concepts and the current state of research and also throw some light on Postbank’s current strategy using these theoretical models. This chapter lays the foundation for chapter four in which new retail banking strategies will be evaluated and categorized.

2.1 What is Strategy?

2.1.1 On the Emergence and History of Strategic Management

The Emergence of Strategic Management as an Academic Discipline

Although the area of strategic management did not become an academic discipline until 1960, its roots can be traced back to the beginning of the 20th century when students of Harvard Business School started discussing corporate development with top executives in courses called “business policy”.3 Once strategic management was accredited an own area of research in the field of business administration in the 1960s, it received impressive academic attention which can be illustrated by both the emergence of a big scientific community and the establishment of several strategy-focused top-tier journals. Observing the underlying dynamics reveals that there are several reasons that have facilitated the rapid development of this discipline.4

An important contribution has been made by the North American business schools that - in an attempt to orchestrate functional business dimensions - have tried to build a holistic, integrating approach towards business education.5 Other areas that impacted the emergence of strategy as a management discipline can be found in business practice where rapid changes in the competitive environment had created a need to explain how to prepare a business for the upcoming future or how to sustain corporate success.6

Besides emphasis on strategic planning was also driven by accountants, engineers and operations research specialists in the belief that firms would be able to control their futures if they allocated their resources according to detailed planning.7

A Brief History of Strategy

The dominant opinion is that the emergence of strategy as a management discipline can be depicted by four periods of orientation which are as follows:8

I. The period of basic financial planning
II. The period of forecast-based planning
III. The period of strategic planning
IIII. The period of strategic management

The period of basic financial planning dates from the aftermath of the Second World War until the beginning of the 1960s. In this time frame scholars were particularly interested in rationalization, increasing efficiency and the organisation of the production.9 However growth and internationalization of markets in the 1960s stressed the shortcomings of the first approach in the respect that it failed to account for long-run planning. So the forecast-based planning approach extended the initial stage by more advanced planning tools such as trend extrapolation.10

Having repeatedly suffered that rapid change in the competitive environment can render market forecasts obsolete, planners of the 1970s started to focus on understanding market phenomena that were driving these changes. In this phase strategists began shifting their analytical focus towards external factors such as suppliers and customers.11

The last period, that includes the 1980s up until today has tried to integrate strategic planning and management into a single process. Hostile takeovers, management of diversified companies and firms’ presence at various markets with different products have pushed further the necessity for more sophisticated planning techniques that link strategic planning to operational decision making.12 In this chapter the different theoretical frameworks that have emerged during the latest research period - that of strategic management - will be the main focus.

2.1.2 A Conceptualization of Business Strategy and its Goals

Originally the term strategy described the decision-making framework that determined a company’s goals by weighing individual alternatives.13 Besides, strategy has often been associated with actions that are undertaken to sustain the long-run success of a company.14

Other definitions characterize strategy as an action plan that lays out how a company wants to compete in a chosen industry.15

Over time, definitions that associate strategy with actions rather than with a decision making framework have become dominant.16 Following this reasoning, strategy is then in essence about the configuration and coordination of a company’s activities17 with the ultimate goal to create value. Value in its broadest sense refers to the amount of money customers are willing to pay for a certain product.18

This raises the question of how a company should perform its activities to create firstly value for customers and secondly extract some of that value in the form of profit to the firm.19

A company that strives to create unique value for customers can only achieve this through outperforming competitors by establishing a difference the company can preserve. Porter highlights in this respect the distinction between operational effectiveness and differentiation. While operational effectiveness means performing a same set of activities better than competitors, differentiation is about performing different activities or similar activities in a different way.20

It follows that operational effectiveness cannot be part of a successful strategy as these productivity gains increase a company’s efficiency only temporarily. This gain however is not sustainable due the diffusion of best practices and competitive convergence. As companies imitate each other through benchmarking, the activities they perform become increasingly similar, undermining the goal of differentiation.21

In addition, creating strategic positions involves fit and trade-offs.

The concept of trade-offs holds that a strategic position is not sustainable unless it involves trade-offs with other positions since certain activities are incompatible, for instance an airline company cannot choose to provide assigned seating and warm meals, while charging very low prices without bearing major inefficiencies.22 Fit in turn, refers to putting effort into tightly integrating activities in order to make it more difficult for competitors to imitate a firm’s strategy. Porter thus describes strategy with regard to fit as “a system of activities, not a collection of parts”.23

2.2 Strategy as a Quest for Value

2.2.1 How Companies Create Value

As outlined in chapter 2.1.2, business is above all about crafting value in terms of creating value for customers from which the company tries to capture a part as profits.24

Companies can create value either through production or commerce. Production creates value by physically transforming products that are less valued by customers into products that customers perceive as objects of higher value. In contrast, commerce generates value by relocating products from places where products are less valued to destinations where they are perceived by individuals as having relatively more value.25

Lastly the difference between a firms output and the costs of its inputs is its value added. 26

2.2.2 Value Distribution in Favour of Share- or Stakeholders?

2.2.2.1 The Shareholder Approach
2.2.2.1.1 The Shareholder Approach and its Goals

The shareholder approach became popular in the North American markets when hostile take-overs among firms increased significantly as managers were seeking ways to improve profitability by buying up other companies. These take-overs, however, turned out to be ineffective for driving up financial performance. Consequently, the question of how to align long-term goals of managers and shareholders was raised.27

In order to resolve this issue, the idea of shareholder value was brought up, making it managers’ overriding duty to maximize future profits for shareholders.28 However, for this approach to be applicable, a company must be built on the separation of ownership and managerial control. Shareholders purchase stock and thus become partial owners whereas the control of the day-to-day business is handed from the entrepreneur to the professional manager.29

Shareholders provide the corporation with equity funds which entitle them to have access to the net profits of the company after all other financial obligations. Thus it has been argued that the company should be run in the shareholders’ interests as they have the greatest interest in ensuring a sound financial performance since these individuals are exposed to a loss of the amount of equity originally provided to the company.30

2.2.2.1.2 The Impact of Shareholder Orientation on Business Strategy

Running a company only in the shareholders’ interests will also affect the strategy that a company chooses to compete with in any given industry. Firstly, shareholder orientation gives a manager strong incentives to make strategic decisions that allocate risk in favour of shareholders. These decisions lead ceteris paribus to an increased risk for other stakeholders. Since the value of the company can only be increased if financial profitability exceeds the cost of capital, shareholders can take advantage of this favourable balance of power, while employees incur greater risk, e.g. through increased work flexibility with temporary employment contracts.31

Moreover, managers have a motivation to focus on profitable strategies that earn at least a rate of return equal to the cost of capital. This increases the company’s likelihood to stay in business as it will be able to replace its assets.32 Although the shareholder approach gives managers indicators for determining the financial prospects of a certain strategy, this approach can lead to the fact that managers disregard qualitative elements of strategies because their ultimate goal is directed towards maximizing shareholder profit.33

Lastly, it has to be mentioned that shareholder orientation encourages managers to rely on short-term management of the firm. Strategic decisions such as an investment in new plants might be delayed to drive up the quarterly reported profit.34

2.2.2.2 The Stakeholder Approach
2.2.2.2.1 The Stakeholder Approach and its Goals

In contrast to the shareholder theory that focuses primarily on the enhancement of shareholder value, the stakeholder approach takes account of a wider group of constituents.35 The origins of this concept can be traced back to the 1960s when stakeholder analysis became for the first time an element in corporate planning in courses taught at Stanford Research Institute.36 The model emerged due to the fact that many enterprises had become public institutions that were heavily interacting with the external environment.37

For managers to increase corporate focus on the interests of stakeholders, it is vital to define stakeholders. The broadest definition characterizes stakeholders as reference groups the company is interacting with.38

A more profound approach describes stakeholders as parties that have a material or immaterial claim in the company, granting them influence in the success and failure of a business. Another important element refers to mutual dependency - meaning that both the company and the stakeholders depend on each other in striving to achieve their goals. In consequence, stakeholders can be considered resource-providers.39

The challenge for strategic management is then to achieve a distribution of value that makes sure that all critical stakeholders deliver their resources in an economic and sustainable way, thus contributing to the overall success of the company. 40 In an attempt to justify stakeholder orientation, scholars have often argued that the uniqueness of stakeholders’ resources makes it necessary for a corporation to take their interests into account. The reasoning is that if the company refused to do so, stakeholders could withdraw these resources - e.g. specialized workers could quit - and consequently severely damage a company’s competitive position.41

2.2.2.2.2 The Impact of Stakeholder Orientation on Business Strategy

When contemplating the impact of integrating stakeholders’ interests in corporate strategy, it is notable that managers experience difficulties aggregating all different stakeholder goals into a few meaningful corporate goals since there are plenty of stakeholders whose interests do not necessarily overlap.42

Unlike shareholder capitalism, a stakeholder approach does allow managers to make long-term strategic decisions without facing the incentive to maximize shortrun results in response to pressure from capital markets.43

Allen et al. have shown that companies that put emphasis on stakeholders’ interests pursue strategies that try to soften competition by reducing output and increasing prices. This however must not necessarily increase profits as competitors that do not show concern for stakeholders can lower their prices to capture a greater market share. This behaviour negatively impacts sales and profits of the stakeholder oriented company.44

Lastly, it should be mentioned that integrating stakeholder interests can increase the competitive position of a company as internal resource providers have incentives to invest in their knowledge capital and stick with the company. This argument indirectly assumes that stakeholder orientation means granting critical resource providers the right to share parts of the enterprise’s economic rent that are at least equal to stakeholders’ individual opportunity cost.45

2.2.3 Value Distribution at the Postbank

2.2.3.1 Company Overview & Business Divisions

Company Overview

Deutsche Postbank AG is a Germany based bank whose core business is retail banking. In addition, the company offers corporate banking as well as back office services for other financial services providers. Headquartered in Bonn, Germany, Postbank recorded revenues of €3.088 billion in the fiscal year 200946 and employs about 20,820 people.47

Business Description

Operating through the four business segments retail-, corporate- and transactionbanking as well as financial markets, Postbank’s focus is on the retail business in which it serves 14.5 million domestic customers.48

The retail business segment offers products ranging from payment transactions to deposit banking and lending business to bond investments and investment funds, home savings contracts and insurance policies to retail customers. The company runs 850 branches, more than 900 counseling centers of Postbank Finanzberatung, and employs around 4,000 mobile advisors who provide services on capital building and provisions. Besides, Postbank currently maintains 3.3 million checking accounts and operates around 0.8 million securities accounts online.49

Serving around 30,000 corporate clients, the corporate banking segment focuses on solutions for payment transactions, commercial real estate finance, traditional corporate finance for small and medium enterprises, leasing and factoring as well as investment management.50

Transaction banking, a rather new business segment that was opened in 2004, provides offerings for other financial service providers. These services include payment transaction, account management as well as credit processing services.51

The financial markets segment’s primary duty is managing the company’s money and capital market activities and the bank’s liquidity.52

2.2.3.2 How Postbank Distributes Value

Deutsche Postbank AG is a company that went public in April 2004. Thus the company’s shares are available to the public. In the light of these facts, the company cannot completely ignore shareholder’s interests as it has to rely on them for equity financing.53

The fact that corporate goals are aligned with shareholder’s interests can be seen in the fact that Postbank is committed to continually increase the company’s value as measured by the share price.54 This aim is stressed even further by a statement of the chairman of the management board in which he promises to shareholders a return on equity of 13% in the medium run.55

When analyzing Postbank’s investor relations information one learns that the company also takes into account stakeholders’ goals. The company explains that it attaches great importance to sustainable relationships with shareholders, customers, employees and society as a whole. Postbank tries to give these statements more weight by carrying out a program that seeks to reduce the company’s CO² emissions by 20% until 2012 compared to 2007.56 Another indicator showing that the bank is not entirely focused on shareholder’s interests is the fact that the company has communicated that it will not pay out dividends from 2009 until the end of the fiscal year of 2012 to strengthen its equity base.57

2.3 Different Types of Business Strategies: An Overview

2.3.1 Business Strategy as a Strive for Competitive Advantages

2.3.1.1 Competitive Advantage as a Cornerstone in Explaining Corporate Success

As laid out in the previous subchapters, strategic management is primarily concerned with determining the very factors that serve as a basis for successful corporate management.

A strategist’s role is therefore to determine and include these success factors in the configuration and coordination of a company’s activities in the attempt to gain advantages over competitors, laying the grounds for the long-run survival of the company.58

While scholars agree on the idea that these competitive advantages, as they will be called from now on, contribute to superior economic profitability of a firm, there is no clear answer as to what constitutes a competitive advantage and how a company can gain one.59 In this respect Powell criticises that “there is no falsifiable, unfalsified theory of competitive advantage, nor any competitive advantage proposition defensible without resort to ideology, dogmatism or faith”.60 This critic illustrates that research still lacks semantic precision and empirical evidence in the context of competitive advantage.

Montgomery, for instance, argues that a competitive advantage arises from a valuable resource that allows a firm to perform activities better or more cheaply than any of its competitors.61

Porter however holds the view that competitive advantage is not related to a company’s ability to do the same activities better than other companies - he calls this capability operational effectiveness and does not consider it part of competitive strategy. Competitive positions can be attained through fit between the company’s activities as it makes it more difficult for competitors to imitate, goes Porter’s reasoning.62

Other research on this subject explains competitive advantage through the manner in which a company applies its skills to a product and market63 or through the lack of substitutes to a firm’s offer.64 Cockburn et al. suggest, however, that competitive advantage is not one-dimensional, but can be attributed to a firm’s organizational capabilities and strategic reactions towards changes in the environment.65 Aggregating these different arguments, it can be concluded that a competitive advantage stems from a capability or resource that is (a.) difficult to imitate and (b.) valuable in helping companies outperform competitors.

2.3.1.2 Determining the Sustainability of a Competitive Advantage

Having defined a competitive advantage as a resource or capability that is difficult to imitate and valuable in helping firms outperform their competitors, this chapter will focus on a discussion of how companies can prevent imitation as this has been identified as a primary driver eroding competitive advantages.66 Thus in striving to build a competitive advantage, firms should try to concentrate on creating an advantage that is founded on resources or capabilities that do neither become obsolete quickly nor can be duplicated easily by others.67

illustration not visible in this excerpt

Graphic 1: Overview of the Literature about Sustainable Competitive Advantage68

The above graphic categorizes literature on the sustainability of competitive advantages either in supply - or demand side barriers that help protect a competitive advantage. It is striking that the overall majority focuses on supply side barriers as a starting point from which to preserve a firm’s competitive advantage. Besides, two sources mention “knowledge” and its cultivation as a determinant for sustainability. This reasoning is again justified by the increasing difficulty with which this capacity can be duplicated by competitors.69 Only one publication refers to erecting demand side barriers to shake off competition. All in all, we can conclude that the past research holds that a competitive advantage can be sustained by raising supply side barriers, be it through a strong link between the company’s primary activities or the creation of specific knowledge that cannot be easily copied by imitators.

Interestingly enough, Adner and Zemsky have shown that the erosion of a competitive advantage does not necessarily need to stem from imitation by competitors but can also be attributed to changing consumer valuation due to a decreasing marginal utility of a firm’s products.70 Future research should thus try to make more efforts to understand how a company can use demand side barriers to preserve its competitive advantage.

2.3.2 Generic Strategies and the Market-Based View of the Firm

2.3.2.1 Theoretical Foundations of the Market-Based View

The market-based school builds its theory on the grounds of industry structure. The intensity of competition within an industry determines the degree to which investment inflows drive profitability down and thus influence a firm’s ability to sustain above average returns.71 Consequently, the attractiveness of any given industry is measured by the average rate of return.72

Economic and technological features impact the strength of the five competitive forces - threat of new competitive entrants, buyer’s bargaining power, competitive rivalry among existing firms within the industry and bargaining power of suppliers.73 Porter argues that these five forces have to be at the heart of any competitive strategy as they determine the industry’s ultimate profit potential, help the company clarify the areas where strategic changes may yield the greatest payoff and indicate where industry trends promise to materialize into either opportunities or threats for a firm.74

The aim of competitive strategy is then to identify a position in the industry where the underlying competitive forces do the company “the most good or the least harm”.75 After the analysis of the above mentioned five forces, a firm can perform an analysis of its own strengths and weaknesses to determine which position would be the most favourable for the company.76

Following this logic, the firm’s focus must consequently be on strategic actions that help occupy or preserve its current market position by defending it against other market participants.

The reasoning of the market based view is embedded in the structure-conduct- performance hypothesis. It is argued that the characteristics of an industry determine corporate actions - e.g. the way companies position themselves in the industry which will then in turn impact the expected profitability of a firm.77

2.3.2.2 Generic Strategies: Cost Leadership, Differentiation and Focus
2.3.2.2.1 From Industry Structure to Generic Strategy

Following the logic of the market based view that the industry structure determines firms’ ultimate profit potential, Porter clams that competitive strategies must necessarily grow out of a thorough understanding of the rules that determine an industry’s attractiveness.78

Porter argues that firms can have a significant amount of strengths and weaknesses but only two fundamental strengths will help to shape a competitive advantage: Low cost or differentiation. These advantages arise from industry structure and the individual firm’s ability to cope with the five forces better than its rivals.79

These two basic types of competitive strategy can additionally be combined with the scope of activities for which a firm seeks to achieve them. This results in three generic strategies, adding focus to differentiation and cost leadership.80

illustration not visible in this excerpt

Graphic 2: Three Generic Strategies81

The above graphic puts the three generic strategies into a systematic concept. It can be observed that each of the strategies chooses a completely different route to competitive advantage. While cost leadership and differentiation strive for a competitive advantage in a broad, wide-ranging industry segment, focus strategies aim at narrower target groups.82

With regard to the three alternatives, Porter stresses that a firm is forced to make choices about the competitive advantage it pursues if the company does not want to get stuck in strategic mediocrity by being “all things to all people.”83

2.3.2.2.2 Cost Leadership

In pursuing a strategy of cost leadership, a firm sets out to become the low cost provider in its industry by serving a broad scope of industry segments. This approach typically involves selling standard products and more importantly a sustainable source of cost advantages. This source in turn can vary heavily depending on the industry but often includes economies of scale, preferential access to raw materials or proprietary technology. If this cost advantage is sustainable and the firm is able to command prices around the industry average, it will be an above average performer as it can reap relatively higher margins.84

Focusing on cost leadership, however, does not mean the company can ignore the rationale of differentiation as products significantly inferior to those of competitors will force the company into discounting products to drive sales, consequently offsetting the cost benefits on the production side.85

In this respect Porter introduces the concept of parity and proximity. He argues that a company’s products must be comparable to the industry average (parity) and that the price discount granted to customers to achieve an acceptable market share must not offset the cost leader’s advantage.86

Lastly, it is emphasized that cost leadership strategy protects against all of the five forces that determine competition in an industry since the profits can only be driven down to the level of the second most efficient competitor until this firm’s profits disappear too. Thus it is reasoned that a company enjoying a cost leadership position has good chances for long-run success and survival in an industry.87

2.3.2.2.3 Differentiation

In a differentiation strategy a firm tries to be exceptional in its industry along dimensions that are valued by buyers. It selects one or more attributes that customers perceive as valuable and uniquely positions itself to meet those needs. In doing so, the company commands a price premium.88

Above average performance will depend in this case on whether the price premium the firm charges for its products will exceed the extra costs incurred for being unique to customers. Parity and proximity also play a role in differentiation strategies. A company seeking a differentiation strategy needs to make sure its cost position is not too inferior compared to competitors (parity) and that the price premium it commands on its products is not perceived as too high for the additional value delivered to customers.89

Porter explains that a differentiation strategy protects against the five competitive forces by reducing customer’s price sensitivity and increasing barriers to entry the industry through uniqueness of products.90

2.3.2.2.4 Focus

The last of the three generic strategies is the focus strategy that rests, unlike the other strategies, on the choice of a narrow competitive scope within the industry. The strategist selects a certain target group and tailors his or her strategy to serving exclusively these customers. The focus approach can either be linked to seeking differentiation or cost leadership in a narrow target group, but it is grounded on the idea that the identified segments are poorly served by broadly targeting competitors.91

However, for this strategy to achieve sustainable competitive advantage there must be clear differences between the narrow target group and the rest of the customer segments that a firm can exploit. In the absence of such differences, a narrow focus is unlikely to result in superior economic performance as the firm restricts its sales potential without being rewarded for it.92

Protection against the five forces in this strategic framework is supposed to arise from the advantages of cost leadership or differentiation, discussed above, in conjunction with a relatively lower threat of substitution by new products in a narrow segment.93

2.3.2.3 Critical Evaluations of the Market-Based View

Porter’s industry analysis and the concept of the generic strategies have been criticized continually for different reasons ever since their publication. If we are to criticize systematically, we shall disaggregate Porter’s logic.

Porter argues that any positioning must be based on an analysis of the five competitive forces in the very first place. This framework for industry analysis however lacks empirical justification. The five forces as such seem arbitrary and there is little to suggest that these forces are necessarily exclusive or exhaustive.94 What is more, the five forces have been disapproved of because of their static approach. Porter’s suggested industry analysis focuses only on describing an industry structure without paying particular attention to how the industry has evolved into the current state (past perspective) or how this competitive environment will look like in the future (future perspective).95

Porter proposes then to draw on this analysis to derive one of the three generic strategies from it that suits the company best according to its strengths and weaknesses. These generic strategies have also undergone a storm of criticism. Generally speaking, scholars have criticized this theoretical framework for its shortcomings in the dimension of strategy execution. Porter indirectly assumes that firms will easily be able to implement an agreed-upon strategy. Corporate practice, however, has shown that implementing a new strategy is a complex process that takes considerable time and needs continuous top-management attention.96 Other disapproval refers to the simplistic nature of the suggested strategies. Kotha and Vadlamani have reasoned that Porter’s concept falls short in today’s complex competitive environment and have suggested disaggregating for instance differentiation strategy concept further into differentiation by quality, by design and by image.97

Research has also focused on the individual strategies - focus, differentiation and cost leadership. Although Porter has always favored to make a choice for one strategy, empirical evidence has shown that companies using combined strategies that were seeking both cost advantages and differentiated products were more successful than organizations dedicated only to one single strategic trust.98 Other empirical studies did not support Porter’s argument that cost leadership or differentiation will necessarily yield superior economic performance. Powers and Hahn have explained that, for instance in the banking industry, companies pursuing cost leadership outperformed other companies that did not have a clear strategic orientation whereas firms following a focus or differentiation strategy suffered inferior performance.99 Since this finding is only based on one industry it cannot be cited as being representative. Nevertheless, it shows that Porter’s theory falls short in the respect that it does not account for industry specific characteristics.

Furthermore, the generic strategies have been criticized for their blindness as far as firm structure is concerned. Wright for instance has argued that big firms have by far better resources to achieve a differentiation or cost leadership strategy than small firms as big companies can draw on their buying power and significant financial resources that are required to produce unique products.100 The overall conclusion to be drawn from this evaluation is that Porter’s market based view of the firm with the concept of generic strategies is not about facing competition - as declared - , but about avoiding competitive confrontations by all means. Thus achieving competitive advantage does not arise from internal strengths of a company, but is an interplay between the shape of an industry and the company’s ability to reduce competitive intensity in an attempt to rake in monopoly rents.101

2.3.3 The Resourced-Based View of the Firm

2.3.3.1 The Emergence of the Resource-Based View as a Critique of Market Based Perspectives

Porter’s framework with the underlying “outside-in” approach focuses mainly on the analysis of the environment-performance relationship while putting little weight on firm-internal attributes on performance.102

Implicitly this work adopts two simplifying assumptions. Firstly, Porter’s environmental model assumes that firms within an industry are identical with regard to the strategically relevant resources they control and the strategies they pursue. Secondly, this approach presumes that should resource heterogeneity emerge in an industry, this phenomenon would be very short lived due to the high mobility of a firm’s resources.103

In Porter’s reasoning, assets are built from performing activities over time or from acquiring them from the environment, or both. In either case the stock of resources only reflects prior managerial strategy-related decisions, leading to the conclusion that activities are logically prior since their successful implementation requires skills. Thus resources are not valuable in and of themselves as they are only means to perform activities which drive strategy.104

The resource-based view school has criticized this argument. For these scholars, strategic behaviour is not only determined by industry structure and firm activity but also by a company’s own asset base that limits the activities a firm can perform. Following this logic, a firm’s future decisions are also dependent on past resource deployment. Accordingly, resources are valuable in and of themselves as they drive the choice of strategy.105

Barney and other authors have also pointed at the fact that Porter’s suggested competitive advantage could not be expected to be obtained when strategic resources are evenly distributed and highly mobile among competing firms, concluding that strategy research should focus more on a company’s resources than the environment the firm is based in.106

[...]


1 cf. Stiglitz, J.E. (2010), p. xi

2 cf. Walsh, I. et al. (2010), www.bcg.com (date: 17.05.2010), pp. 1; Pratz, A. et al. (2010), www.atkearney.com (date: 14.05.2010), pp. 1

3 cf. Robertson, P.L.; Yu, T.F. (2010), pp.190 f.

4 cf. Träger, S. (2008), pp. 1 f.

5 cf. Träger, S. (2008), pp. 1 f.

6 cf. Hinterhuber, H.H. (2004), pp. 38 f.

7 cf. Robertson, P.L.; Yu, T.F. (2010), pp. 190 f.

8 cf. Gluck F. W. et al. (1980), pp. 155-159; Hinterhuber, H.H. (2004), pp.33-36; Robertson, P.L.; Yu, T.F. (2010), pp. 190; Kay, J. et al. (2003), pp. 21 f.

9 cf. Hinterhuber, H.H. (2004), pp. 33

10 cf. Gluck F. W. et al. (1980), pp. 156 f.

11 cf. Kay, J. et al. (2003), pp. 22 f.

12 cf. Gluck F. W. et al (1980), pp. 156 f.; Robertson, P.L.; Yu, T.F. (2010), pp.191

13 cf. Bea, F.X.; Hass, J. (2009), pp.178

14 cf. Camphausen, B. (2007), pp. 12

15 cf. Hitt, M.A. et al. (2009), pp.88

16 cf. Hitt, M.A. et al. (2009a), pp. 104; Collis, D.J.; Montgomery, C.A. (1997), pp. 5; Porter, M.E. (1996), pp. 284

17 cf. Collis, D.J.; Montgomery, C.A. (1997), pp. 5,

18 cf. Bea, F.X.; Hass, J. (2009), pp.178; Hitt, M.A. et al. (2009a), pp. 104; Collis, D.J.; Montgomery, C.A. (1997), pp. 6. Please see chapter 2.2 for a discussion about the distribution of value

19 cf. Hitt, M.A. et al. (2009a), pp. 104

20 cf. Porter, M.E. (1996), pp. 62

21 cf. Porter, M.E. (1996), pp. 63 f.

22 cf. Bachmann, J.W. (2002), pp. 62 f.

23 Porter, M. E. (1996), pp. 70

24 cf. Grant, R.M.; Nippa, M. (2006), p. 63

25 cf. Grant, R.M. (2008), pp. 35

26 cf. Grant, R.M. (2008), pp. 35

27 cf. Toksal, A. (2004), pp. 11; Camphausen, B. (2007), pp. 172

28 cf. Koslowski, P. (2000), pp. 137

29 cf. Hitt et al. (2009a), pp. 278

30 cf. Schmidt, R.H; Weiß, M. (2009), pp. 170; Hitt et al. (2009a), pp. 278; Toksal, A. (2004), pp.11

31 cf. Aglietta, M.; Rebérioux, A. (2005), pp. 294 f.

32 cf. Monks, R.A.G; Minow, N. (2004), pp. 51 ff.; Grant, R.M. (2008), pp. 36

33 cf. Stewens-Müller, G.; Brauer, M. (2009), pp. 197

34 cf. Koslowski, P. (2000), pp. 137

35 cf. Mallin, C.A. (2003), pp. 14

36 cf. Clarke, T. (1998), pp. 186; Metcalfe, C.E. (1998), pp.30

37 cf. Figge, F.; Schaltegger, S. (2000), pp. 11

38 cf. Bea, F.X.; Hass, J. (2009), pp. 113

39 cf. Ryan, L.V. (1990), pp. 108 f.

40 cf. Figge, F.; Schaltegger, S. (2000), pp. 12

41 cf. Blair, M.B. (1998), pp. 196 f.; Clarke, T. (1998), pp. 192; Figge, F.; Schaltegger, S. (2000), pp. 11; Schmidt, R.H.; Weiß, M. (2003), pp. 9

42 cf. Mallin, C.A. (2003), pp. 50

43 cf. Mallin, C.A. (2003), pp. 48

44 cf. Allen, F. et al. (2007), pp. 16 f.

45 cf. Schmidt, R.H.; Weiß, M. (2003), pp. 18 f.; Blair, M.B. (1998), pp. 197

46 cf. Deutsche Postbank (2009), www.postbank.de (date: 31.05.2010), pp. 2

47 cf. Datamonitor (2009), pp. 4

48 cf. Deutsche Postbank (2010), http://www.postbank.de (date: 31.05.2010)

49 cf. Deutsche Postbank (2010a), http://www.postbank.de (date: 31.05.2010)

50 cf. Datamonitor (2009), pp. 5

51 cf. Deutsche Postbank (2010a), http://www.postbank.de (date: 31.05.2010)

52 cf. Datamonitor (2009), pp. 5

53 cf. Deutsche Postbank (2010c), http://www.postbank.de (date: 31.05.2010), pp. 12

54 cf. Deutsche Postbank (2010b), http.//www.postbank.de (date. 31.05.2010) pp. 4

55 cf. Deutsche Postbank (2010c), http://www.postbank.de (date: 15.06.2010), pp. 19

56 cf. Deutsche Postbank (2010c), http://www.postbank.de (date: 15.06.2010), pp. 44

57 cf. Deutsche Postbank (2010c), http://www.postbank.de (date: 15.06.2010), pp. 9

58 cf. Träger, S. (2008), pp. 21 f.

59 cf. Cockburn, I.M. et al. (2000), pp. 1123; Powell, T.C. (2001), pp. 875f.; Hitt, M.A. et al. (2009), pp. 103 f. ; Collis, D.J.; Montgomery, C.A. (1995), pp. 120 f.; Mooney, A. (2007), pp. 112; Boschek,

R. (1994), pp. 137; Porter, M.E. (1996), pp. 70

60 Powell, T.C. (2001), pp. 883

61 cf. Collis, D.J.; Montgomery, C.A. (1995), pp. 120

62 cf. Porter, M.E. (1996), pp. 61 f., pp. 70

63 cf. Mooney, A. (2007), pp. 112

64 cf. Boschek, R. (1994), pp. 137

65 cf. Cockburn, I.M. et al. (2000), pp. 1129

66 cf. Adner, R.; Zemsky, P. (2006), pp. 234; Porter, M.E. (1999), pp. 72; Lubit, R. (2001), pp. 164; Cockburn, I.M. et al. (2000), pp. 1138

67 cf. Hunger, J.D (2003), pp. 52

68 Author’s own illustration based on Coyne, K.P. (1986), pp. 51 f.; Mahoney, J.T. (2000), pp. 92 ff.; Porter, M.E. (1999), pp. 64 f.; Day, G.S. (2001), pp. 8 f.; Lubit, R. (2001), pp. 165

69 cf. Lubit, R. (2001), pp. 164

70 cf. Adner, R.; Zemsky, P. (2006), pp. 234

71 cf. Collis, D.J.; Montgomery, C.A. (1997), pp. 49 f.; Porter, M.E. (1979), pp. 218 f.

72 cf. Jacobson, R. (1988), pp. 416 f.

73 cf. Porter, M.E. (1980), pp. 30; for a more detailed discussion of the five forces cf. Porter, M.E. (1985), pp. 4-10; Porter, M.E. (1998), pp. 21-39; Porter, M.E. (2008), pp. 78-93

74 cf. Porter, M.E. (1998), pp. 21 ff.

75 Porter, M.E. (1980), pp. 30

76 cf. Faulkner, D.; Bowman, C. (1995), pp. 39-48

77 cf. Porter, M.E. (1981), pp. 616

78 cf. Porter, M.E. (1985), pp. 4; Porter, M.E. (1999), pp. 59

79 cf. Porter, M.E. (1999), pp. 64 f.; Corsten, H. (1998), pp. 93-96

80 cf. Porter, M.E. (1985), pp. 11

81 Adapted from: Porter, M.E. (1999), pp. 61

82 cf. Porter, M.E. (1999a), pp. 70 f.

83 Porter, M.E. (1985), pp. 12; Luedeke, H. (2005), pp. 30

84 cf. Porter, M.E. (1985), pp. 12 f.

85 cf. Porter, M.E. (1999), pp. 60

86 cf. Porter, M.E. (1985), pp. 13

87 cf. Porter, M.E. (1999a), pp. 72

88 cf. Corsten, H. (1998), pp. 96 f.; Collis, D.J.; Montgomery, C.A. (1997), pp. 49 ff.; Porter, M.E. (1985), pp. 14

89 cf. Porter, M.E. (1999a), pp. 74

90 cf. Porter, M.E. (1999a), pp. 74

91 cf. Corsten, H. (1998), pp. 96 f; Porter, M.E. (1985), pp. 15 f.

92 cf. Porter, M.E. (1999a), pp. 76 f.

93 cf. Porter, M.E. (1999a), pp. 76 f.

94 cf. Yasmin, S. et al. (1999), pp. 509

95 cf. Luedeke, H. (2005), pp. 37 f.

96 cf. Luedeke, H. (2005), pp. 40

97 cf. Kotha, S.; Vadlamani, B.L. (1995), pp. 82

98 cf. Yasmin, S. et al. (1999), pp. 509

99 cf. Powers, T.; Hahn, W. (2004), pp. 53

100 cf. Wright, P. (1987), pp. 94 ff.

101 cf. Caves, R.E. (1980), pp. 68 f.; Caves, R.E. (1984), pp. 129 f.

102 cf. Spanos, Y.E ; Lioukas, S. (2001), pp. 909

103 cf. Barney, J.B. (1991), pp. 100

104 cf. Spanos, Y.E ; Lioukas, S. (2001), pp. 910

105 cf. Spanos, Y.E ; Lioukas, S. (2001), pp. 910

106 cf. Barney, J.B. (1991), pp. 103

Excerpt out of 109 pages

Details

Title
Strategic Changes for Business Models in the German Retail Banking Industry in the Post Financial Crisis Era
Subtitle
Using the Example of the Postbank AG
College
Baden-Wuerttemberg Cooperative State University (DHBW)
Grade
2.0
Author
Year
2010
Pages
109
Catalog Number
V159081
ISBN (eBook)
9783640724109
ISBN (Book)
9783640724307
File size
972 KB
Language
English
Tags
Business Strategy, Postbank, Strategisches Management, Retail Banking, Banking, Strategy, Bankenindustrie
Quote paper
Tobias Pommerening (Author), 2010, Strategic Changes for Business Models in the German Retail Banking Industry in the Post Financial Crisis Era, Munich, GRIN Verlag, https://www.grin.com/document/159081

Comments

  • solmaz aali on 11/1/2010

    does this book contain SWOT of the bank?

  • Tobias Pommerening on 11/1/2010

    Yes, it does cover SWOT but in a much more thorough way. Instead of merely listing strengths and weaknesses, I explore strengths and weaknesses using the company's financial data.
    You will find this in the chapter 4.3 where I analyze the company's competitive advantage and weaknesses that tend to threaten the company's profitability. Here you will find in-depth information on revenue structure, cost-income ratio benchmarked against competitors and cost analysis.
    Opportunities and Threats are also covered in chapter 4.5.3.
    Hope this information helps you.

    Best,

    Tobias

  • solmaz aali on 11/3/2010

    This book is absolutely helpful and I'll buy the book. But I need some more information . It seems that you have analysed strengh,weakness,opportunities and threats of postbank . But I need the documnet that contains analysed SWOT by postbank managers . I'm MBA student and I'm really disappointed by my problem .

  • Tobias Pommerening on 11/3/2010

    Could you explain your problem in a little more detail?
    If you want to understand the company's performance, its current strategy and how it will have to shape strategy to cope with the new banking landscape, my book will definitely help you.

    Best,

    Tobias

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