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Key Activities In The Banking Industry: An Analysis By The Value Chain

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 KEY ACTIVITIES IN THE BANKING INDUSTRY

ANALYSIS BY THE VALUE CHAIN

Dr Eric LAMARQUE
Professor at Bordeaux Montesquieu State University

Abstract: There has been a constant evolution over the past two decades, in the
banking business portfolio, due to economic globalisation, deregulation and the advent of new
technologies. This trend continues today and is even more marked by the emergence of
production businesses, the latter being traditionally included in the value chain of banking
services. Thus, the reconfiguration would appear as the emergence of institutions dealing only
with either distribution of products. Others may specialise in back office activities such as
cheque processing or bond holding. This strategy has been developed by a large number of
operators in order to improve their competitiveness.
In order to analyse beyond these general remarks, we want understand the logical
processes and the different factors that have led to the reconfiguration of the value chain. If
this analysis tool was originally developed for heavy industry, its application to the services,
and, in particular the financial services, can prove invaluable for the study of evolution in the
banking industry. In order to do this, we revert to Porter’s original idea, that of demonstrating
at which level value is added to the product and thus identifying the origins of competitive
advantage.
The search for the origins of competitive strength in the value chain of different banking
businesses is a first step in analysing the key activities and the different possibilities for
reconfiguring the value chain. These key activities are those identified as essential for the
creation of the competitive advantage regardless of the type of business the institution offers.
Their identification will be based on a general study of the nature of competencies associated
to each type of business. The value chain and the notion of organisational competence appear
complementary.

Key Words : Banking Strategy – value chain – organisational competences

1
 Faced with their low profitability, more and more French banking institutions have

evaluated the competitive strength of their production methods, as well as their economic

performance relative to these processes.1 This operation is conveyed, amongst other methods,

by value chain analysis on the different business undertaken by these institutions [M.E. Porter

1985].

A series of surveys done by consulting cabinets [Deloitte Touche Tohmatsu 1995], or

by the institutions themselves, show the specialisation of banking activities in either

management or production, both traditionally included in the classic value chain of the

business. Thus, the reconfiguration would appear as the emergence of institutions dealing only

with either distribution of products or their elaboration. Others may specialise in back office

activities such as cheque processing or bond holding. This strategy has been developed by a

large number of operators in order to improve their competitiveness.

In order to analyse beyond these general remarks, let us try and understand the logical

processes and the different factors that have led to the reconfiguration of the value chain. If

this analysis tool was originally developed for heavy industry, its application to the services,

and, in particular the financial services, can prove invaluable for the study of evolution in the

banking industry. In order to do this, we revert to Porter’s original idea, that of demonstrating

at which level value is added to the product and thus identifying the origins of competitive

advantage.

The search for the origins of competitive strength in the value chain of different

banking businesses is a first step in analysing the key activities and the different possibilities

for reconfiguring the value chain. These key activities are those identified as essential for the

creation of the competitive advantage regardless of the type of business the institution offers.

Their identification will be based on a general study of the nature of competencies associated

1
This point is notedly drawn to attention in the work of the Commissariat Général du Plan which have served as
a basis to the work of the Senate’s finance commission « Bank : concern for your health », Alain Lambert, Les
rapports du Sénat, n°52, 1996-1997. (Senate reports n°52, 1996-1997)

2
to each type of business. The value chain and the notion of organisational competence appear

complementary. Each one offers an explanation of competitive advantage. The aim of this

paper is to fuel the discussion on the manner in which resources and competencies support the

activities in the chain - a problem which is not wholly treated by Porter [N.J. Foss 1996]. On

the level of the different businesses, the description and the understanding of the primary and

support activities, as well as the co-ordination of the chain as a whole, can be done by

analysing the nature of the competencies identified and by grouping these around the different

activities.

Given the proximity and the complementarity of the concepts used, it is necessary to

clarify these before undergoing an in-depth study of the origins of the competitiveness and the

essential activities of the chain.

1. Methodology and conceptual background

Nowadays, banks, just like any other firm, are guided by a need for competitiveness.

This implies not only vigilance over costs, but also a commitment, in conjunction with its

customers to a procedure of creating value for both parties. Resorting to the value chain and

the study of resources and associated competencies proves to be a useful means of

understanding this procedure.

1.1. Resources, organisational competencies and value chain

We will approach the creation of value and of competitive advantage via the

“organisational competencies” concept. In strategy, it comes from the theoretical “resource

based view” movement for whom it constitutes an operationalisation [D.J. Collis 1991]. This

movement defines the firm by what it is capable of doing [R.M. Grant 1991] and has been the

object of numerous developments since the mid 1980s.

3
 A distinction is made between the concept of resources and that of competencies. B.

Wernerfelt [1984, p. 132] defines resources as “tangible and intangible assets associated in a

semi-permanent way to the firm.” The examples given to illustrate this concept include:

production equipment, individual know-how, patents, capital, notoriety and brand-names [B.

Wernerfelt, 1989; R.M. Grant, 1991; J. Black, K. Boal, 1994]. These resources are more or

less complex to constitute or acquire and this determines their power of differentiation.

Notoriety is often the result of a complex assembly of components which would be difficult

for the competition to copy.

A competence is often defined as the capability to undertake a task or activity using

resources [R.M. Grant, 1991]. It designates a combination of the latter by using

organisational procedures and collective know-how [R. Amit, P.J.H. Schoemaker 1993]. The

concept of competence has therefore a dynamic dimension underlying an organisational

know-how in action.

Competitive advantage can be created from the basis of certain resources but mainly

from the interaction between them. The competencies are generally distinguished by their

ability to differentiate the firm from its competitors. Finally, certain competencies are

considered to be key elements when they are able to support several different activities in the

company [G. Hamel, C.K. Prahalad 1990, Y. Doz 1994].

Resources and competencies are entered in the value chain and various writers

studying companies in the service industry have tried to put methods into practice which

associate them to the activities of the chain [Armistead C.G., Clark G. 1993].

They act as “differentiating inductors” allowing to make the service be perceived as unique

and therefore, a bearer of value to the consumer. They also rationalise the cost structure,

origin of profit margins for the company [ J. Canals 1993]. The association of competencies

and value chain conveys a desire to harmonise two concepts that ally the common aim of

4
analysing the origins and conditions of the competitive advantage. Such a proposition must

undergo experimentation in order to measure its limits.

The difficulty resides in the identification of the competencies internal to the company,

and in the allocation of the competencies to the activities in the value chain. According to A.P.

de Man [1993] the activities should be understood as the link between competencies and the

position in terms of product/market. The competencies must be put into action at the different

stages of the value chain so as to answer market demand. If this answer is pertinent then the

company is performing well and is creating value for itself and its consumers [A.S. de

Vasconcellos, Hambrick D.C., 1989]. The methodology chosen consists in defining different

profiles of competencies for a specific business with respect to market demand.

1.2. Research methods

The research was carried out in two periods [E. Lamarque 1996]: firstly the different

banking activities were defined, then the origins of the competitiveness were investigated

using the “activities” value chain analysis.

1.2.1. Identification of different banking services

The service concept is closely linked to the “resource based view”. The key

competencies are the heart of the company’s service or services [C.K. Prahalad, G. Hamel

1990] and all development strategies have to be articulated around them [D.J. Teece et al.

1994].

A banking business can be defined as the capability to manage a supply system, that is

all the tasks involved in order to offer a particular product or service to a specific clientele.

This implies the possession, not only of the necessary competencies and resources needed to

execute the task, but also the capacity to manage the linkages between these contributions

5
from diverse origins [G. Koenig 1993]. The definition of the banking activities relies thus on

an internal analysis of the company and on the origins of its competitiveness.

However, this concept goes further. When managers define their activity, they refer to

the market (defined by the conditions of demand and consumer needs), to the industry

(defined by the conditions of supply and often technology) and to their positioning (founded

on their competencies and their positioning on the market). The banking business is defined as

the point at which supply and demand meet the intention to integrate internal and external

analysis of the company [P.F. Drucker 1994]. The supply system is required to answer market

conditions and resources and competencies in the company must be able to satisfy the

expectations and expressed needs.

In recent years, when discussing banking activities, publications by financial

institutions or speeches by management, regularly talk in terms of banking business. This

expresses a wish to clarify, out of a concern for transparency, an activity often misunderstood

by the general public. Besides, this effort highlights the concern of institutions to present a

coherent and controlled strategy and to publicise the expertise and competencies which make

up their business. Beyond this PR aspect, when looking at the structure of the big French

banks, an internal organisation by different activities is evident.

Analysis carried out on the eight biggest French banks’ annual reports has shown

different types of associate definitions to the concept of banking business2. The majority of

definitions are expressed in terms of target clientele or of families of products offered (Table

1), and revolve around commercial banks and investment banks3. Two formulations come out

of this framework. Bankers define themselves sometimes as risk managers or distributors of

financial products. Here it is a question of transversal formulations with respect to classic

2
LEXICO software was used for the treatment of textual data. The research allowed the identification of text
forms associated to the idea of different banking businesses and their frequency.
3
Two definitions are absent from the typology: asset management and corporate banking. These activities
combine elements from the commercial bank and the investment bank which could not be represented in the
figure.

6
formulations in terms of products/markets. They are founded on the essential functions in the

exercise of SBUs. Justifying their emergence constitutes the primary aim of this procedure.

Table 1 : Different Banking Activities

Commercial banking Investment banking

Retail banking Merchant banking

- Raising funds - Share capital operations
- Credit Share purchasing
- Services Risk-capital
- Financial engineering
SMEs and professional banking Advice on mergers and acquisitions
- Financing Structured financing
- Payment methods and cash management Securities issue management
- Specialised services
Financial bank
Insurance products - Stock management
- Life assurance Private management
- Health Mutual funds management
- Damage Pension funds management
Public funds management
Specialised financing -Stock market operator
- Financial leases Broker
- Operating leases Stock and derivatives broker
- Custody

In bold characters: the nine principal activities covered by this analysis.

1.2.2. Bringing forward key activities in the value chain of banking businesses

Before being able to identify the key activities and competencies, it was necessary to

adapt the value chain to the banking context. Several suggestions were brought forward.

These often remain very general as their authors attempted to cover all the banking activities

in a single formulation [J. Canals 1993]. Also, these suggestions differ greatly from Porter’s

formulation. The aim was to establish a value chain conforming to the perception of the

directors of each activity in order to clearly distinguish the different phases of creating value.

This conception work on the linkages between different banking activities, resources,

competencies and value chain was indispensable. The first part of the semi open-ended

7
interviews with the heads of department was aimed at developing the framework for the

analysis.

The resultant conceptual framework was then applied successively to several cases. In

the case of exploratory research, the case study approach is the most adapted method of data

collection. When choosing the cases to study, French banks considered to be universal were

chosen as a starting population. It has thus been possible to analyse the value chains of the

whole range of banking activities, even if some of them, in particular the merchant banking

services are less developed in this type of institution.

The first part of the investigation was a pilot study, [R. Yin 1994] with sixteen semi

open-ended interviews. They involved the heads of general management, development

management, and economic, banking and marketing studies departments. The heads of some

very specific activities were also interviewed (asset management, stock holding, specialised

financing.)

In recognition of the integrating character of the banking activities, the identification of

the competencies was done in two stages. A list of the most important consumer expectations

with respect to each activity, was drawn up following different consumer satisfaction surveys

and studies [M. Badoc 1986 ; M. Zollinger 1992]. This list was approved at the beginning of

each interview. In the second stage, the interviewed heads of departments defined the

competencies inherent to their establishment in order to satisfy the consumer expectations for

their specific service. They were also asked to think about the different competencies that

other establishments might possess. Finally they were asked to evaluate the distinctive

character of each of the identified competencies with respect to three criteria: imitability

[Dierick, I. Cool, 1989]4, substitutability and difficulty to exchange on a market [J.B. Barney,

4
The imitability criterium can be divided up into sub-criteria such as ambiguity, the interconnexion between
assets, the advantage of the asset mass. However, the interviewed heads of department were not given these
details as they were not familiar with these concepts.

8
1986]. At the end of each interview a list was drafted and later typed and returned to the

person interviewed for approval. The comings and goings were numerous before arriving at a

definitive list. This same procedure was used for each interview5.

This procedure was renewed for two more control cases, with ten supplementary

interviews. The competence profiles6 drawn up during the pilot study were completed by the

new elements from the control studies until empirical saturation was noted at the end of the

second control study. Once the definitive profiles had been approved by the interviewed heads

of department, they then placed the competencies of each profile inside the value chain.

A final phase involved a statistical analysis on the vocabulary used in all the

competence profiles. Using classical procedures of multiple correspondence analysis (MCA)

and hierarchical classification, this aimed at identifying the activities that had been defined

using similar competencies. The MCA particularly revealed the essential dimensions for the

whole group of banking activities, these dimensions representing certain activities found on

the value chain. During this last stage, extra interviews and complementary studies were

conducted for the pilot study and control cases in order to gain precision on some of the

statistical analysis results.

2. Case studies

Société Générale, Crédit Agricole and B.N.P. accepted to take part in the research7.

The above methodology allowed the adaptation of the value chain concept to the banking

context and the identification of the correspondent competencies.

5
The interviews took place with a working document as a basis on which the consumer’s expectations were
listed. The interviews lasted on average three hours and resembled business meetings in which the interviewed
people had to draw up the list of competencies. In some cases the complementary information was brought after
the interview when the definitive list was being approved.
6
This idea of competence profiles had been used as early as 1965 by I. Ansoff.

9
 2.1. Value chain of banking institutions

The propositions correspond to the two large families of banking activities:

commercial banking and the investment banking.

2.1.1. Value chain of the commercial bank

The value chain of the commercial bank (Figure 1) corresponds to the description of

retail banking activities for private investors or SMEs (financing, savings investment,

services). If we take a closer look at this schema:

 Raising funds: The aim is to find the cheapest way of raising funds for a sufficient length

of time. The capital raised is from their own funds, refinancing, savings or company and

private deposits. The latter method constitutes a privileged means of finding inexpensive

resources, but requires a means-of-payment management service. Savings investment also

implies a relationship follow-up.

 Product and service design for target markets: A distinction can be made between

products depending directly or not on raising resources. Credit fits into the first category

whereas some insurance products or relevant advice fits into the second. It is at this point

that prices are fixed and decisions are made on the “dressing” of the product (offered

alone or in a package) with regard to the adapted merchandising.

Figure 1 : The Commercial Bank Value Chain

BANK INFRASTRUCTURE
RISK MANAGEMENT
TECHNOLOGICAL DEVELOPMENT
HUMAN RESOURCES

Marketing-Sales Associated
Inbound logistics Conception of Choice of the services to the
products/services method of products and
Fund raising with respect to the distribution, of the after sales:
target market advertising, of the consumer
target market services

7
For reasons of confidentiality, we will not identify which of the three establishments was used as the pilot case.
10
 Marketing and sales: This activity leads to identifying the definitive target market in terms

of financial potential, risks, geographical situation… Marketing and conception must be in

close collaboration in order to suggest and design the best deal for the consumer.

Decisions must be taken concerning distribution methods (network of branches, direct

banking, sales team) and also in the policies for communication and image in order to

promote the products.

 Service: This is the preferred direction in banking public relations. “Service” covers

means-of-payment, back office operations linked to administrative and accounts

processing of operations, and especially the processing of incidents and risk management.

After-sales service is often considered to be the crux of the bank-consumer relationship

and is the principal cause of the break-up of this relationship.

The primary activities are very closely interlinked. Thus the branches and sales teams are

privileged sources for getting to know consumers needs, and for conceiving new products.

Price fixing also depends heavily on overheads linked to the back office, evaluation of risk

and cost of resources.

Apart from the emergence of risk management, the support activities stay within

Porter’s classic formulation. We should note that risk management concerns every level of the

chain. Whereas the classic vision incorporates the risk factor only at the sales of financial

product level (Default risk), the risk factor is now present at every level, just as much in the

design as in the follow-up or even in the administrative and data processing of consumer files.

In the same way, human risk is clearly a non-negligible factor.

11
 2.1.2. The value chain of the investment bank

In investment banking (Figure 2) we notice differences with the previous chain at

several levels. The more important ones are obvious at the conception, investment and

associated services levels.

Figure 2 – The Investment Bank Value Chain

BANK INFRASTRUCTURE
RISK MANAGEMENT
TECHNOLOGICAL DEVELOPMENT
HUMAN RESOURCES

Inbound logistics Conception of Capital investment and Position and after-

financial products and holdings for its own sales management
Fund raising services account or that of its
customers

- Conception: All the banking activities of the investment bank are not directly affected by

this function. It concerns mainly the financial products, sometimes very complex, linked

to asset management and capital operations. The difference lies in the fact that here

specialised advice is invoiced to the consumer whereas this service are free of charge in

the commercial bank.

- Capital investment and holdings for its own account or that of its customers: These

activities require specific marketing for financial products. It implies a reinforced position

on the capital markets in order to play the role of an efficient intermediary and to have the

legitimacy of a big broker.

Moreover, it is at this level that arbitration takes place over the extent of operations in which

the client is to be involved or over the direct support that is to be brought.

- Position management: This includes all the back office and after-sales operations. Position

management concerns the follow-up of finished operations, covering decisions and risks.

12
 Just as in commercial banks, this is a crucial activity for professional recognition and

consumer loyalty.

Risk management also figures here as a support activity. However, the risks (not including

risks linked to human error and technology), are of a different nature. The evaluation of a

stock option or of complex financial products implies very different risks to those involved in

credit operations.

Even if the formulations are still quite general, they correspond to the heads of

departments wish to work with tools allowing comparisons to be drawn between different

services in the establishment. Moreover, the adaptations brought to Porter’s model were the

work of the actors themselves during the preparatory phase of the conceptual framework. We

should note that it seemed pertinent, given the usage of this model, to include risk

management as a veritable support activity, even though this did not seem to be the case

during the preliminary formulations8.

From this point of view, the research procedure is in interaction with cases. The

general principle resides in the confrontation of the provisional framework and the field-study,

which in turn enriches the representation of the situation and contributes to a repeated process

going backwards and forwards between the theory and the reality.

2.2. Constitution of competence profiles and value chain.

The constitution of the competence profiles results from empirical saturation. In the

first control case, 80% of the terms used for competencies agreed with the pilot study. For the

second control study, the new input was minimal. The studies produced a profile for the nine

8
At the beginning of the interviews, Porter’s formulation was presented to the interviewees in order to proceed to
the adaptations. Risk management did not appear explicitly. By working on the competencies, it became obvious
that this activity should be added to the schema.

13
principal services mentioned in table 1. Table 2 gives the results for the private investor’s

bank9.

Table 2 : Example of a competence profile – Retail banking for private investors

Common competencies related to the private investor’s bank regardless of the product
Basic competencies
1 Physical or electronic network
2 Knowledge consumer background
3 Segmentation of market according to several perspectives: risk control, expectations, profitability comportment
: specialised know-how in view of interpreting the sector
4 Staff training programmes in public relations and reception
5 Automation of operations
6 Technological control in products and services

Distinctive competencies
7 Sufficiently decentralised network and specialised distribution channel
8 Optimal inter-knitting of the network: offer/client/channel
9 Forecasting needs
10 Chronology of events in the consumers’ lives, exhaustiveness of consumer database (Information system):
Identification of profit-making sectors
11 Product and process innovation: getting ahead of competition by several months
12 Combining services and products in order to offer a package
13 Architecture and conviviality of branches
14 Public image: serious and professional
15 Capacity to guarantee consumer commitments (contracts)
16 Cost structure of institution and knowledge of cost price

Specific competencies: fund raising

17 Capability of staff to advise consumers in the majority of situations: financial expertise

18 Capacity to make the consumers feel secure
19 Structuring product range
20 Placing and managing funds raised

Specific competencies: credit

21 Introduction of scores and quotation procedures

22 Correct invoicing of risk
23 Finding resources at best cost
24 Differentiated offer with respect to a variety of situations: flexible products, possibility to renegotiate

Specific competencies: private investor banking

25 Control of invoicing: cost knowledge

26 Automation of operations
27 Insurance and consumer help systems for means of payment, travel insurance, efficient claims management
28 Direct banking, Internet, telephone

As a whole, the terms used bring forward two categories of competencies:

9
For some bank businesses in the merchand bank, the saturation can be argued considering their lack of
development in the chosen cases. Interviews recorded late 1997 at Indosuez after being bought out by Crédit
Agricole allowed us to confirm our original study.

14
- Competencies directly perceivable by the consumer relative to the products offered, to the

security of the transactions, to the efficiency of the distribution network and to the public

relational qualities and the personal expertise…

- Internal competencies which are difficult to perceive, such as the conception of

information systems, the rationalisation of the cost structure and the capacity to evaluate

and to control risk…

On the other hand, the terms produced illustrate for the majority of cases, the concept of

competence. They are formed in terms of capability, architecture, inter-knitting, forecasting or

control. Nevertheless, the concept of resources is present throughout the distribution network,

the public image.

Table 2 presents very general terms (items 6 and 11). This is an area where one

touches on one of the difficulties of the competencies approach. Their identification can be

likened to an infinite regression. Behind a word, other competencies are sensed but are either

difficult to identify by the actors themselves or they are not willing to divulge them to an

external researcher.

The specific character is difficult to appreciate, particularly the defensible dimension of

competitive advantage. If they are in place, the specific competencies identified for a

particular banking activity, should put the institution in a favourable competitive situation.

However, none of the interviewed heads of department could really evaluate the longevity of

the advantage as this depended greatly on the way they are put together.

In a second phase, the profiles were associated to the value chain. The positioning of

competencies is sometimes difficult. Thus, some of them could be hard to position inside a

specific activity even though they concerned several activities or even the entire chain. These

competencies are considered key by the actors of the service under study. Cost structure

affects the business of retail banking for the private investor and can be felt at all levels. The

15
positioning of this competence (n° 16 in the previous diagram) in figure 3 attempts to analyse

this situation.

The description of activities in the chain in terms of competencies allows a clearer

representation of these activities. Conversely positioning the competences in the chain helps

to clarify the abstract or general definitions and to determine the essential activities for each

banking business. This positioning specially leads to locating the competencies associated to

all the services. They can be regarded as factors enabling the co-ordination and the coherence

of the whole. However, they bring out the need of interaction between the different activities

in the chain in order to be deployed.

Figure 4 : Positioning of key competencies in the value chain

Infrastructure 16

Risks 16
Technology 16 2, 5, 6, 10 5, 6, 10 5,6
16 4 4
Human Resources
16 9 16 1 8 15 13
11 3 13 16 15
12 7 14 16

Raising funds Conception Mk-Sales-D° Service

21

18, 17 18, 17 26 26 26
19 23 24 22 25 28 27

Raising funds Credit Services

Despite the difficulties that can exist in the handling of this analysis tool, such as

problems in identifying the competencies or delicate positioning in the chain, its use always

16
provokes discussion on the conditions of the company’s competitiveness, over and above any

divisions that may exist between the departments.

3. Results and discussion

The application of lexical statistics on all the competence profiles and value chains

relative to each banking activity, revealed that risk management and distribution management

come across as key activities on the chain (Table 3)10.

Table 3 : Significant results of the MCA on the competence profiles

AXE OWN % OF %
VALUE INERTIA ACCUMULATED

1 0.4542 7.04 7.04

2 0.4314 6.68 13.72
3 0.4013 6.22 19.94
4 0.3741 5.80 25.74
5 0.3292 5.10 30.84

Characteristic words
Axe 1 Axe 2 Axe 3
Positive Negative Positive Negative Positive Negative
Coordinates Coordinates Coordinates Coordinates Coordinates Coordinates
evaluation sales market invoicing address book product
risk consumer financial correct information distribution
participation risk relationship network
relationship capital claim follow-up control
manager insurance efficiency
Score

These are the two principal activities that represent the competencies that an institution must be able to master.

They convey the actors’ principal concern and the complementary studies undertaken on the cases brought

10
Using the SPAD software required some processing of the text data. The data was made up of the nine
competence profile corresponding to each service, each was introduced as a list of terms similar to those on table
2. They contained between 15 and 45 terms. These terms were then lemmatized and simplified. This consists in
reworking the text forms such as putting verb forms into the infinitive, nouns into their singular form… The
SPAD software processes the words by treating them as variables that characterise individuals or objects
(services in this case). The problem is no longer the number of interviews but in having sufficient number of
words in order to analyse the data. We retained 101 significative words for the analysis on the basis on the
frequency. The software builds a contingency table crossing the nine services and the words. Each word is thus
characterised be a profile of numbers corresponding to the number of appearances in each service description.
The AFC was constructed on the basis on this table.

17
forward competencies and resources which support these activities (table 4). What’s more is that today, the

evolution of the organisation around these very activities is being studied.

Table 4: Principal competencies associated to key activities

Activities Commercial bank Investment bank

Risk management - Quality of quotation and scoring - Quality of capital investment risk
procedures analysis
- Consumer selection methods - Security of transactions
- Securing transactions with the - Control methods for market
clientele position
Architecture of the - Optimum network intermeshing - Management relations quality
- Appropriateness of distribution (contacts)
distribution network offer/consumer/channels - Position on international financial
- Articulation of distribution markets
methods (mix relational/ - Efficiency of staff in putting
transactional) for the same together complex transactions
consumer

3.1. Risk management

The first two axes of the MCA show the predominance of the analysis of risks in all

the quoted competencies in the service profiles. Two aspects can be brought forward to

illustrate the importance of this activity: customer and transaction selection and balance sheet

management of the institutions.

- customer and transaction selection: a sensitive issue, this affects the profitability of the

institutions, particularly in the stock that they may be required to underwrite. The selection

techniques follow a purely commercial or relationship-based logic.

Business-relations selection conveys the use of scoring techniques. When considering a

decisive score, the overall grade obtained compared against the threshold will automatically

determine the refusal or acceptation of the file. This technique requires a well-researched

database in order to extract information necessary for grading.

Universal banks concentrate on behavioural or propensity scores which are prerequisites to a

more personalised procedure. As these scores rely on the evaluation on banking behaviour,

they can measure the global exposure to risk for the bank concerning a consumer. The bank

18
can then turn to a second type of selection: a relation-based selection of the consumer. Based

primarily on trust and the institution’s commitment to the consumer, the borrower is regarded

as a consumer with whom the banker enters into a procedure of mutual understanding in order

to define his needs and the risks that he may present. By building close relationships with its

customers, the bank possesses even more precise information for decision making.

- Assets and liabilities management (ALM): Along with the selection techniques, ALM

constitutes a real resource for evaluating and globally managing the institution’s positions.

It is a key element for strategic management on a temporal level and by its capability for

scenario simulation and also due to the fact that it insures the risk versus profitability

relationship. At the present time, ALM is considered by many directors as the best way of

representing the model of wealth creation in a financial institution. The components of

balance sheet management are well known: calculation of the interest-rates gap,

measurement of transformation risk, and scenario simulation… It is possible to calculate

the level of accepted risk and thus contribute to the definition of the investment and re-

financing policies in a precise situation given a specific length of time and type of rates. In

the same way, it is a permanent measure of the exposure to liquid asset risk and estimated

evolution of regulated ratios.

The competitive advantage of such an analysis tool goes beyond each component and lies

mainly in the respecting of a number of rules connected to leadership tools with a particularly

strong input from the general management in asset/liability committees bringing together sales

force personnel, financiers and management accountants. Integrating ALM into the strategic

procedures constitutes a specific competence.

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 3.2. Distribution

The use of varied distribution channels, managed in different but co-ordinated ways

increases the value produced by the bank for itself and for its consumers [C. Easingwood, C.

Storey 1996]. Axe 3 demonstrates the importance of this function. It is characterised by words

recalling the relational side of the distribution methods, this is not really surprising

considering that the cases studied are traditional generalist banking institutions.

Having different channels enables the optimisation of the balance between the value

added for a service provided on the one hand, and the production, distribution and contact

costs on the other. The consumer knows how to recognise and can appreciate quality-price

ratios corresponding to the expected level of service and the channels used.

The bank can then concentrate its competencies on the services, which from the

consumers’ point of view, offer a high level of value (advice) and on becoming more efficient,

by managing execution or production activities (transactions, transfers…) with the aim of

reducing costs.

The choice of an innovative distribution channel (Internet and “PC Banking”) has

recently been an option for differentiation which directly influence the strategic sector in

various domains. The channel particularly determines:

- Different target groups of clientele, each circuit defines the type of bank – client

relationship and the level of service provided;

- Independent competitive dynamics, each circuit can have a specific competitive field, eg.

Telephone banking;

- Cost structure, each circuit has a different impact in terms of personnel costs and sales

costs, information systems.

One should not forget that alone, a distribution channel is merely a resource for the bank. The

coherent and original putting together of an infrastructure (there where the service is

provided), an offer (combination of proposed services) constitutes the real competence. Here

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the distinction between resources (distribution channels) and competencies (coodination of

channels according the nature of relationships with consumers) is clear.

3.3. Towards a specialisation in these activities ?

Some dimensions of risk management can lead towards a specialisation, and even a

subsidiary. We can look at the elaboration and commercialisation of scores by small

specialised units close to the big producers and credit distributors. The Swiss insurance firm

Zurich and Gerling in Germany offer advice in risk management to their business clientele.

As early as 1993, many experts consider that a bank is above all else a distribution

network of mass consumer products. We are witnessing the emergence of more and more

“middle-men” coming between the consumer and the product designer. They control the

communication and distribution networks (new telephone and electronic channels) as well as

the marketing and commercial information systems that give insight into consumer behaviour.

For several years, it has been obvious in France that large-scale retailers are present on

the finance market, selling loans and in-store credit-cards, using specialised subsidiaries to

deal with production and back-office operations. More recently, network operators have been

attempting to monopolise the technologies which allow buyers to contact sellers. This proves

that the control of the distribution infrastructures can be taken away from the banks by

organisations with little or no knowledge of financial services.

During the interviews with the heads of departments, specialisation and concentration

of the distribution function or other aspects of risk management were often mentioned as a

possible line of development. This evolution reflects the move towards a new division of

work in the banking industry – into a variety of specialised units. Theoretically, a structure

specialised “by banking activity” would allow improved cost control and a differentiation by

improved customer service and professionalism.

21
 However, this evolution is not synonymous to competitive strength. As Porter

underlines, this is a result of all the activities in the chain. It is hard to split the competitive

strength of each individual activity as demonstrated above, the support resources and

competencies are often interwoven. From this point of view, their specificity would make any

attempt at concentration worthless.

Amongst the major risks, we find the loss of information on the consumer. The

decision to isolate the distribution and risk management activities into fairly independent units

and to consider their externalisation would necessarily imply rethinking the entire organisation

of the information systems. Problems incurred by the banks having adopted a structure “by

banking business”, such as accounting and systems connections are factors which risk to

dampen enthusiasm to restructure .

Conclusion

The resource theory approach combined with the value chain permits an original

analysis of competitive advantage in the banking industry. However, the analysis is limited

due to the difficulties encountered in identifying the competencies which are often intangible

and which are not exclusive to a particular activity. Nevertheless, two key activities for the

institutions stand out of the results: risk management and distribution.

Fully aware of this situation, the banks are working on their organisation and on the

conditions of creating value. The question today, is to whether these two activities could really

become paths for reconfiguration of the banking value chain as was discussed in

complementary interviews. This takes us back to the wider issue of the linkages between an

organisation’s structure and its strategy. The bank is a field of investigation to be exploited in

researching just how far one can go in reconfigurating the value chain in terms of

competencies.

22
 Finally, studying the banking institution’s performances in relationship to their

competencies and their organisation makes up a prolongation to the research in order to check

whether the competitive advantage based on these concepts can create value for their owner.

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