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Capital Exploiting

One:

different differences

strategies between

by itself

exploiting corporate and

fundamental in and an culture, define enabling to the right at the right

an Information-Based Strategy
Eric K. Clemonsl Matt E. Thatcher2 One has exploited marketing, an innovabased on

and its competitors Nigel

organizational information-based testing them customer, price. As its to drive to deliver at

structure, Rich strategy mass the the right right

use of information,

as the use of scientific product and

customization, time

Abstract: tive

Capital

approach

to targeted

customer profitability impressive performance issuer. It is sustaining investment through through Moreover, in infrastructure constantly a practice it is

analysis, to achieve as a leading credit card its advantage through and personnel, its as to and improving expertise this

credit

card

business

matures

and

as

competition increases, the company is prepared to diversify into a wide range of industries where it believes competitive efforts senior not to ventures remain that its IBS advantage. outside believe loyal approach will provide Indeed, marketing are committed banking, and that Their the they
key

known

test-and-learn. generalize industries.

and spending officers

increasingly traditional that to any

attempting strategy

information-based 1. After clients Introduction soliciting

to other

it is critical industry. not in banking

16 banks

in 1988 as consulting of their credit down now

strengths are in IBS, and credit card industry. We will seek to address in this case study:
q

or the

for a radical

transformation

the following

questions

card businesses by each, Rich

and after having been turned Fairbank and Nigel Morris Chairman / Chief

enjoy their positions as Executive and President Officer profitable rapid of Capital credit growth and One, card issuers.

/ Chief Operating most of its

Does

Capital

One

enjoy

competitive

advantage? How Why Signet relative under bankers? was competitive were / the advantage achieved? identified by by a bank than

one of the worlds As a result to retain

its ability

profitable

opportunities

accounts, Capital One was named credit card issuer of the year in 1995 by Credit Card Management [7]. Since 1992, the dollar Capital One $12.8 billion over 500% balances the highest value of loans from growth managed by to by

Capital outsider

One first exploited a small regional of consultants rather

the guidance

has increased and the customer With in the total

$1.7 billion in outstanding and bad

Is the advantage erode What Ones

sustainable?

Can other

banks

base has grown

the advantage? are some other applications strategy? Markets of Capital

[6].

of 880% between

1992 and 1996, among loan

information-based

industrys,

chargeoffs consistently among the lowest in the industry, the stocks price soared between 1991 and 1996. Nigel Morris smiles when he adds, Sometimes I pinch myself. Ive been very lucky... helping manage this fabulous company. Sometimes I think Ill working in a woolen Wales. The lessons of Capital can Ones success to in range the of wake mill up and find myself near my family in

2.1.

Newlv Vulnerable Introduction

A large number of industries istics that change the relative between large incumbents and

exhibit balance nimble

characterof power new enmarenable enjoy cost

trants. We use the term newly vulnerable kets to characterize those conditions that new entrants to threaten even where market previously those incumbents, dominant structures. The following markets: Q Ease of entry entrants conditions generate incumbents

dominant superior

banking number other

industry of other industries.

be extended in a wide

a large

share and resulting

companies

vulnerable

The company relies heavily on what it terms its h@nuztion-Based Strategy (IBS). The use of an IBS allows Capital One to develop new and

It must

be possible and attack

for

new estab-

to enter

the market

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Iished including

firms.

Potential with acquiring facilities, must

barriers restrictions

to and

entry, costs or to to

and that

instead do not

have reflect

charged their

all accounts profitability.

prices

regulatory

associated production provide attack.


q

distribution be low enough the ability

Conditions markets

such attractive

as those for

described

above

make

new

entrants

with

new entrants to attack, as

Attractive perceive attack. are between segments those favorable

to that That

attack

New

entrants

must

they suggest that some customers are being dramatically over-charged under average cost pricing strategies, and that they are in fact subsidizing Retail acquire many other higher provides can enter dominant firms market cost customers. a clear example an attractive incumbent of how a of In

it will be profitable for them to is, they must believe that there segments where with that the they difference those can charge to provide serving

market and

banking

the costs associated the prices will segments profits. to defend

new entrant a previously

market firm [3,4].

and

profitable industries,

share at the expense can distinguish between

be sufficient

Difficult

There

must

be some

those customers (i.e., love ems)

that account for their profits and those customers that repre-

obstacles that prevent iately duplicating entrants, sufficient their 2. 2. entry. Differing Pricing In many industries Customer and time thus to

incumbents from immedthe strategies of new that realize allow the new entrants from benefits

sent loss making accounts (i.e., kill yous ). In retail banking, for example, the best 20%0 of consumers may account for more than 100% of a banks profits, while the bottom 201X0may account for all the off-setting losses. uniform prices the

Costs and Uniform

Most

retail

banks

in 1988 charged for banking differences

across consumers there are enormous service differences to different presence

services

despite

of significant

in customer

between the costs of providing customers: In telecommunications, with length their local of their the distance from the home

costs service will

of

providing depend and loop office, local

costs (i.e., love em and kill you accounts). This situation provides an opportunity for competitors to target the love ems, charging them less for the provision of banking services than they are charged still targeted by their marketing current for and bank the but at prices that generate profits attacker. Such cream

customers upon thus

often

the central dedicated

opportunistic

that connects network. And

to the communications

skimming will leave the incumbent larger proportion of higher cost, kill will and cause profits the incumbents to fall. average In response,

serving a yous and

in banking,

some customers

use their credit

costs to rise the incumbent

cards largely as charge cards, paying off their balances in full each month; these customers enjoy the free float, but provide only limited revenues and even smaller profits for their issuers. And nant pricing upon prices serving
q

will be tempted to raise its prices to compensate for declining profits, resulting in even more customers becoming vulnerable to the new entrants attack. As the new entrant continues to target customers to compensate continues being overcharged continues profitable by the incumbent, prices entrant as the incumbent to acquire to raise its market

yet,

historically, have

in many continued

industries prices

domibased

players

to follow customers

a uniform

for its losses, and as the new

strategy,

charging

average costs, rather than differential that reflect the costs associated with these individual accounts:

share at the expense of the incumbent, the defender may begin to enter death spiral [3]. That is, for the defender, the worse it gets the worse it gets! on to on
[9]).

In telecommunications, state regulators largely determine prices and typically over-charge customers in cities and suburbs in order to subsidize higher cost customers in rural communities.

There is a literature and supporting theory how to perform targeted marketing and provide differential offerings (e.g., [2] and
why differential pricing is important (e.~.,

And in banking, most banks have not performed customer profitability

historically analyses,

However, that this Fairbanks

there

is very

little in

evidence

to suggest to of

was followed and Morriss

banking prior implementation

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targeted business

marketing of Signet

strategies

in the credit

card

Rich their Once

and major

Nigel the credit banking banks

acquired card consulting was

these businesses clients clients

insights of many they

by of

Bank in the late 1980s. upon and uniform Nigels pricing in the

observing

Competitors presence set the based stage strategy,

reliance for Rich

at the time. solicited to radically

of extreme

differences

among

customers impor-

the insight

developed,

information-

numerous

as consulting

and is no doubt

the most

tant reason for Capital Ones success. This strategy of mass customization represents a quantum breakthrough in marketing effectiveness and has led to tremendous banking all approach success industry to marketing. competing with [5] its against traditional

transform the credit card business by exploiting However, most banks were not their insights. interested in what became known as their information-based strategy. In fact, it was not until after the first 16 banks rejected their solicitations that they found a home at Signet Bank. By 1988, the credit ized by competition made of market had hands card industry banks the credit By was characterand

one-size-fits 3. 3.1. Capital The

among

for scale

One and Competitive Days

Advantage

share; as a result, the transition large players.

card business in the their

Early

to consolidation increasing

In the late 1980s, Rich and Nigel developed idea, or a vision, for radically transforming credit card businesses within Idea was to enable a bank, transformation acquire competitive ed, IBS). At that profitable of their advantage time, they credit market banks. through card share and

an the

The Great a radical business, develop target(or articulated to

customer base, banks fixed costs associated over a large number lower prices through In addition, engaged attractive accounts during in uniform opportunities

were able to spread the high with credit card operations of accounts, enabling economies of scale. this period pricing for banks strategies, attack. with them to

commonly creating new In addition,

by implementing marketing might have

information-based as follows:

strategies

the average

cost associated

acquiring

this vision
q

in this competitive

environment

(cost per

Not all banking able to serve Banks

customers

are equally

profit-

do not know who

who

their

most them

profitable to

accounts competitors
q

are, so these accounts could identify

are vulnerable

solicitation divided by hit rate) was quite high. This too suggests that incumbent banks were vulnerable to an opportunistic marketing strategy that improved hit rates by selectively offering lower annual interest rates to certain potential love em customers. note, while vulnerable executing competitors to these in this is

Direct solicit

marketing many

techniques,

allowing products,

banks low like

to

As Rich and Nigel market targeting appear strategies,

consumers some banking

at relatively rather than

cost, credit or

opportunistic strategies

has turned

cards, into a national, regional business.


q

a local

When

using

targeted

direct

marketing,

it will

not easy, Or, as Nigel Morris has said, Anyone can find customers who want your money! Anyone can find customers who will take it and not pay you back! The trick is to find customers who will take a lot of your money fast and pay you back slowly. It was in this competitive and Nigel attempted to Rich and Nigel banks, including environment pitch The that Great Rich Lieu.

be necessary to M different targeted offerings, in order to learn the combination of characteristics that make different products for credit desirable to customers
q

and profitable

card issuers.

Since most combinations of product offerings may be unprofitable for most-customers, it will be necessary to start with small tests, but when learning is complete larger rollouts can be made.

began to shop their idea to major New York and West Coast money

center banks and super-regionals. Although many of the major banks were willing to work with Rich and Nigel in other areas, their Great Idea was rejected by five of the top six (Citibank, Chase, Bank of America, Bank of New York, and Chemical Banking) and fourteen of the top twenty banks in the U. S.. Reactions were remarkably similar across institutions:

Nigel
create

also stresses easier


a new product

that
or

implementing
a new brand

their
that

idea to
is,

was made
improving

because

it was not necessary of a banks existing

the profitability

MasterCard or Visa portfolio had far fewer entry barriers than attempting to create a new brand.

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It cant be done! data that you need make the strategy able to the bank

its too expensive, on individual succeed is simply

and the to
q

they

enable

you

to

determine forward.

the

basis

of

consumers

profitable Then

tests going more

not avail-

running

programs, proved

more successful

and more

And it!

we dont

need

your

help;

we already

do

like the ones that initial test stage. Unfortunately, there where

in the
expenand and of 1991

is a significant is

and testing realized

Finally,

Signet

Bank,

a small

bank

looking

for

sive lag between the profits stage are earned,

the stage of initial learning

opportunities to grow, accepted The Great Mea. However, Signet wanted Rich and Nigel to come into aried the company bank not as consultants with but as salbank employees long-term

In fact, by December

chargeoffs from tions had soared chargeoffs in August notes, stock 1989 We profits

Rich and Nigels 1989 solicitato 9.5~0, more than doubling the

contracts. Surprised by the offer, Rich and Nigel agreed to come into the company as heads of credit card marketing and strategy, but only under Rich and Nigel were to be certain conditions: given real bank titles, they were to have real control within over systems, and they were to be accepted Signet as line bankers. However, unlike employees of the bank Rich and profit-sharing these conditions

of the banks total portfolio from 2.6% 1989 to 5.9~0 at the end of 1991. As Rich stock price was in free fall! over early The $20.00 in late 1991 (prices to Nigel, bank card in to zero

Signet

price plummeted from to less than $5.00 in for a split bottom of $27 million profits The fall in 7/93). hit in late 1991.

adjusted

According From

main-stream

in 1988 and $25 million for 1992 had dropped in stock price

Nigel would retain significant potential. They believed that were David necessary Hunt, to allow Executive their Vice

1989, forecast by late 1991. of bad portfolio results worse; profits Rich their equally continued the number 617 in 1991. 3.3. Late

was a result

IBS to flourish. President of Signet

real estate loans. profits actually fortunately, the at just this time.

Had the credit card dropped to zero the of course been far to produce IBS began

Bank, played a major role in the transition. Rich and Nigel also received support from Bob Freeman, then CEO of Signet. Perhaps most importantly, the firm. ideas, David to listened recognize You to Rich the think and buy-in Nigel, of within had their the vision potential

for the stock price would

and basic

Nigel, important, their

however, neither

never did from

lost for David.

faith

in

conception focus

of strategy on testing,

the bank; They doubling

and helped As he stated,

to generate

that you can make

nearly

IBS work? 3.2. Initial

Then go do it! Performance for Rich and Nigel at Signet 1988 when they entered Signet Nigel stresses that to the first infrathe out commitment

of tests conducted

335 in 1989 to

The initial period ran from October to December year entailed

The Middle 1991 began

Period a period of triumph for Rich,

1991.

a large

Nigel, and those associated with The Great Lieu, which continued spin-off of Signets credit One in 1994.

implementing through the to Capital

structure build: trade of account how to implement

building databases, management, and this very difficult out their scale. of

learning figuring

card business

strategy. test and learn

In August 1989 they rolled solicitations in significant The initial implementation

their

IBS

was

based on a test and learn methodology. test and learn consists of the following
q

In brief,

During this period (1992-1994), growth in receivables and in number of accounts soared [see Table 1], especially when compared to its competitors. At the same time, percentage chargeoffs improved and were consistently better than industry averages [see Figure 1]. Not surprisingly, the stock price of Signet Bank surged, allowing the bank to grow faster than 996 of the Fortune 1000! In fact, Signets stock appreciated January 1991 and the end of 1994. 5377. between

Running sending sample

some

test

marketing

activities

(e.g.,

out a small, yet of direct marketing which tests

carefully selected, solicitations) make money and

Determining

which ones do not; this takes some time, and most of the tests will be unprofitable. However, unprofitable tests are not unsuccessful, if

The credit card operation at Signet was doomed by its own success it could not continue as part of the bank. The credit card business came to account

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for roughly threatened nance, additions


large portion

2/3 the

of the profits stability were


banks

of the bank. the banks and relatively


Moreover,

This governew
as

The result

success of the

of Capital proprietary

One has been since

the direct

of young

information-based 1988. The technology,

when

relatively
of the

to the bank Nigel many that than began

accounting
profits.

for such a new lines freedom the of it

strategy strategy

that we have pursued leverages information

Rich

and

to envision traditional require be possible

business, was clear of action structure Freeman the credit company, 3.4.

outside they would would

banking, more within

scientific testing and a highly flexible operating infrastructure to deliver the right product, to the right customer, at the right time and at the right price. The [5] core of this and strategy that is based differ widely information upon from to exploit the a

of Signet. As a solution, Signet CEO Bob made the audacious decision to spin off card business not associated Period as a wholly with Signet. independent

realization profitability, variety

that

customers

in their

of sources

can be synthesized

The Current

The current period can be considered the time from the spin-off in 1994 through the present. During enjoy this period, considerable Capital success. in terms One has continued They have of growth to achieved in number

this customer profitability gradient. IBS represents the commitment to exploit this customer profitability gradient, and test and learn is the mechanism for doing so.
4.1.

Implementation Fairbank he and black explains Nigel

of Test and Learn that in the late banks 1980s, relied an

success as measured

Rich when

of accounts and total outstandings well as in low loan losses when competitors performance [see Figure 1]. In has been strong.

[see Table 1], as compared to its addition, stock

were

attempting strategy, or not models

to interest that were to offer

bankers upon used

in a test and learn box credit whether

scoring

to determine

Clearly, Capital One has experienced tremendous success. By any measure, Capital One has more than tripled in the past three years. [5] Capital Based One continues Strategies to to rely acquire upon Informationmarket

account to an applicant. were usually procured sealed neither meters allowing designed ably and Nigel

These black box models from a vendor, and were could paracould not profitRich credit

in the sense that the algorithms be examined nor altered. While could be updated based the models to learn thus to be tuned, which algorithms were definitely could rates. the

on experience,

profitable

share and continues to rely upon Test and Learn methodology for developing and implementing Indeed, testing continues at those strategies. Capital growth
3.5.

not be changed. be offered

These models accounts

customers at different turning

One, as demonstrated by the exponential of its R&D efforts [see table 2].

advocated

Assessment
is clear that

of Capital Capital

Ones

Strategy achieved has been in terms Consethan outperand the

It

competitive outperforming both

advantage. most share Ones and

One has The bank of margins.

scoring models off for test offerings, and developing and tuning their own models to determine which combination of product, price, and credit limit could be profitably offered to customers who could be characterized credit incubation which by a wide period, range of publicAfter and to to be possible ly available a lengthy rollout these to determine smaller and demographic it would tests were offerings tests. data.

of its competitors stock price

of market Capital since both sector.

quently, doubled forming banking 4.

has more

profitable,

its 1994 IPO, significantly the market as a whole

large profitable profitable

corresponding

How Steps towards Advantage is little Ones secret

Achieving

Competitive

There Capital

about

either or the

the source

extent

of

The structure of this process explains the initial period of extremely unprofitable operations after the introduction of test and learn. The degree of trust needed to turn off the banks credit scoring models likewise probably explains a great deal of the resistance when
IBS 4.2.

advantage

of this

that Rich and Nigel to create

encountered in their

advantage. lieves that

The entire management team bethe organizations success comes from Strategy and its reliance of IBS via Test and Learn.

they
approach.

attempted

interest

its Information-Based upon implementation

The Balance first

Transfer

Product offering discovered

The

breakthrough

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through balance customers transfer

this

process

of test

and This

learn product

was

the who

5.

Sustaining did

Competitive powerful

Advantage banks offered reject the and

transfer a lower their

product. initial from

offers credit

APR for applicants a competitors

Why Nigel?

so many Why

balances

strategic adopted their

recommendations by the banks even and before

by Rich as the basis

card. It turns out that this transfer of balances by customers ftom higher APR credit cards to a lower one provides the card issuer with an important signal. Customers that do not carry balances find no value in a lower APR and will not take the time and effort to switch cards. More importantly, the customers that the balance transfer product have which Therefore, Clearly, will they they these attract they will are cannot eventually those customers payoff APR. Morriss payoff who but slowly. a balance presently the lower meet

were they not understood


used The Great Idea?

and
of

strategies,

Unlike other examples of our newly vulnerable markets paradigm, there was no rapid change in technology suddenly or made regulatory differential discontinuity that pricing possible. A

steady decrease in cost of computing for analysis, and of costs of storage and classification for the creation of targeted well before mailing 1988. faced by banks in respondin the market include their: 2,) information skill set; and 4.) lists, and had made strateinformation-based gies possible The principal marketing pricing

care about customers

Nigel

characterization money, they

of great accounts: They borrow pay it off, and they pay it off more flamboyantly low-risk revolver People who borrow limits delinquent, line utilized, customof

problems

ing to opportunities

slowly. Or, as Rich Fairbank says, We found the elusive and more, their age plotted clearly of we hit the jackpot! approach more this than trend. and who loans against illustrates

1.) organizational structure; infrastructure; 3.) organizational organizational 5.1. Most cards. culture.

the borrowing A graph 60 days of credit

cards, tend to be riskier. percentage

of percent-

Bank Structure competitors have, or used to have, responsible department two very for credit

separate

organizations The marketing

However,

is responsible

ers who accepted the balance exhibit much more attractive profiles, as shown in Figure 2.

transfer product risk-utilization

The graph in Figure 2 can be summarized ferently by noting that marketing expenses the balance ment invested close in the in an transfer annuity. product Each represents dollar stream year, over more $1.00 simply of

diffor

for selling; it is their responsibility to maximize the number of cards issued and the total balances In contrast, there is also a credit outstanding. department, and it is their responsibility to minimize exposure to bad loan losses, by limiting who has access to cards These they two but and what groups balances poorly they are allowed. tension, nated Rich are in constant coordi-

an investexpense

results

in an annuity

of more than than by $1.50 saying

are frequently at all. an

$2.25 in the first fourth

year, close to $4.00 in the second, year, and thereafter.

or not integrated and Nigel

to $2.50 in the third

employed

integrated,

risk

Nigel summarizes the graph We found the sweet spot. 4.3. Capital credit Other Products

and Services a whole range of products to and In in

One offers consumers,

managed, approach to sales and marketing that attempted to compute the expected NPV or annuity value of each new account, providing first Signet Bank, and now Capital One, with the ability to respond appropriately to situations like that described above. 5.2. Information Infrastructure and Nigel believed that

including

offers to students

to applicants fact, presently

without previous credit history. there are over 3,000 price points

To support

its IBS, Rich

Capital Ones current offerings. Capital One has everything. On the ability to customize account acquisition, they can customize on customer segmentation, market channels, products, pricing, credit lines, and credit approval policies. On account management, they can customize on repricing and retention, credit line increases and decreases, cross-selling. collections and recoveries policies, and

they had to invest heavily in information technology. At Signet they developed what was considered at the time to be the largest Oracle database in the world. The database not only contained detailed data on customers (i.e., their demographics, purchases, activities, etc.), but also supported regressions and other analytics, and stored the results. The generation, storage and analysis of such data enabled Signet to

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identify systems

profitable continue

marketing to support

opportunities; Capital

the

by the competition take them While

is very

difficult, investment. changes

and

would

Ones market-

years of patient be clear what

ing efforts.

it may

competitors

of This is in sharp contrast with the actions competitors, some of whom have outsourced all non-branch customer contact, and do not maintain their own databases or do their own servicing. As to do planNigel has said, This is like trying
ning after youve put your planning department through This value where flexibility a guillotine! that infrastructure throughout believed be achieved provides the that critical

need to make to respond to Capital One, it is also clear how very difficult it is for most organizations to accommodate such profound change. In summary, Capital One senior management

believes that their advantage has been sustainable because it is based on a complex combination of structure, information, skills, culture, and commitment. 6. That it will Future said, Opportunities senior management and more also believes difficult that

view

is shared it is widely cannot

organization, the necessary

in organizations

that outsource their data processing. Indeed, in 1994, the year of the spin-off, Capital One was willing to incur the expense of $49 million to break its long term outsourcing contract with EDS, since it was seen as necessary achieve maximum flexibility ny [1].
5.3.

become

more

to sustain

to do so in order to for the new compa-

this advantage. As other banks begin to follow similar strategies and as competition increases it will become more difficult to maintain margins. Therefore, it will be necessary for Capital One to continue When service points. Signet to refine AT&T and had When over its offerings. all price, had Now accounts Signet over that had the same points, has over

Organizational Commitment

Skill

Set, Culture,

and

offered the same AT&T 300.

23 price

20 price AT&T

Bank would

structure not

and

information advantage

infrastructure without the skill to hire

achieve

set to exploit them and the commitment and train the right people. At their the Capital more right One, complex people. with were Above has successful implementation

300 price points, Capital One has over 4,000. Indeed, a senior officer at AT&T UCS believes that all competitors will be forced to adopt similar strategies,noting that When one of your competitors begins down this slippery slope, you have no alternative but to follow. DevelopTeam), will be adjusted

of hiring We

strategy begins with According to Nigel, for the best

compete students; banks... success

McKinsey

graduate

not competing with commercial all, we know that the key to our and will continue to be our

Scott Barton, Director of New Business ment (or the Growth Opportunities believes that ultimately, all accounts priced efficiently to reflect their risk

been

commitment to hiring and developing incredibly This talented and motivated associates. appears in the Letter to Stockholders, in the companys thoughts annual companies. In addition, the success experienced at Signet and Annual are unlikely reports of Report more for 1995 [5], and similar in the traditional banking to be seen in any form

expected return, a complex way of saying that in credit card issuing, as it is presently structured, it will become increasingly difficult to be profitable for any issuer,s However, profitable opportunities are likely to

continue as long as competitors are less able than the bank to assess the profitability of their accounts. Capital One employs retention specialists, whose job is to keep customers who call to cancel their accounts. Retention specialists are supported by screens and computer models that indicate the effects on profitability of changing a customers APR. While they are empowered to lower a customers APR down to just above the break-even level, their compensation system rewards them not only for retaining profitable accounts, possible but APR. for retaining them at the highest

Capital One requires commitment to a long term strategy of identifying and solving problems. Nigel claims that if none of your initial tests lose money, youre probably too conservative for us. If you cant figure out why they lose money and solve the problems, youre also probably not right for us; we need people with tenacity and superb problem solving skills. Nigel also notes that We truly believe that we have put in place Duplication of the strategy a better mousetrap.

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Further fact that

evidence

of increased transfer

competition product

is the

legal tise,

operating develop

entity, systems

gain and

new

industry

exper-

the balance

has come

operating

infrastruc-

under assault. According to Nigel, The balance transfer product, which we pioneered in 1991, has enjoyed such spectacular has become increasingly will wave continue to pursue opportunities, success that the market competitive. While we profitable credit balance transfer to roll out the next

ture, create their tests, allow them to incubate and then tune their models, all before profitable rollout can be attempted. team also believes that opportunities to exploit markets 7. outside the U.S.
The senior management

there similar

are enormous strategies in

we have begun

of market-tested

card innovations. (GO) Team originates that the Conclusions clear that the history of Capital One

The Growth from

Opportunities of senior

the belief

management

It appears

skill set, personnel, culture, and infrastructure of Capital One can be used in other settings, to develop and market different products in different, perhaps unrelated run, we see our destiny company, company tion-rich follows, a credit offering industries. not merely In the long as a credit card marketing

and Signet Bank provides considerable support for our theory of newly vulnerable markets. The erosion of profitability however suggests that without fundamental differences in resources, innovations like differential pricing and effective market segmentation will become strategic necessities rather than continuing as sources of If the skills competitive advantage. information-based strategies are difficult general should to acquire, and if they required sufficiently for

but as an information-based a variety [5]. industries. We card have never company.

of products in informaRich augments this as viewed Were ourselves as just an information-

are sufficiently

based marketing company. The credit card just happens to be a product which has been transformed There hence by the information are other newly other opportunities revolution. vulnerable markets, for a new entrant and like

in their applicability, then Capital One enjoy a prolonged period of profitability,

exploiting a sequence of opportunities in newly vulnerable markets in other industries. Rich believes that this, indeed, will be the long term source rather of Capital Ones competitive than its positioning in any or market segment: advantage is that around the informaorganizaaccounting and, most a adapt at full grow, we eventual on a dime. advantage, specific pro-

Capital One to use information-based strategies to target an established competitors most profitable customers. Capital One wants Capital to focus core yet to a view Peter the core team on areas where Ones

duct, industry,

strengths can provide advantage, and avoid having too focused or too restrictive of what these strengths might be. As Schnall, Vice President ment, says, We want not being too narrow nities. strategies for

Capital Ones competitive the entire company is built

tion-based strategy the people, tional structure, systems, operations, systems, importantly, machine speed. work in that While parallel infrastructure, human the resources, culture. roll to plan policies, We out for

of New Business Developto make certain that we are of future opportuof profitin information-based targeting

are building

in our view learn

can identify and those

opportunities, products their

Is our core strength test and

opportunities can turn

able new accounts or in the use of information more generally for relationship management? The GO Team is presently assessing opportunities in a wide range of industries. The company is making increasing investments in non-card targeted marketing; expenditures in 1997 are estimated to be split among balance transfer, other equal balance card products, and both and non-card substantially product products, greater with than GO and other card products expenditures roughly The team

obsolescence. This company Were built for change.

While in hindsight test and learn strategies applied to newly vulnerable markets may appear to be obvious, clearly at the time they were not. The Capital One team sums up their beliefs in the sources of their advantage:

transfer

expenditures.

Our growth is the result of opportunistic origination and account management. The strategy
was the

is, however, all too aware that unfortunately there will once again be a considerable lag between initial tests and profitable rollouts, especially in areas where they must first create a

was

the

easy
We

part.
also

Making
continue to

it work
test the

challen~e!

application of information-based other products, both financial cial, with positive results.

strategy to and non-finan-

1060-3425/98 $10.00 (c) 1998 IEEE

8.

References Anthes, off, G.H. Customer May and data mining pays The Chief InterAge of assistance Operating

Acknowledgements of Nigel Officer Morris, of Capital of New President One, and

1.

ComputerWorld, R.C. Marketing: Fall

15,1995, J. the

of Rich

2.

Blattberg, active Addressability,

Deighton, Exploiting

Fairbank,
ment,

Chairman
Director

and Chief Executive,


Business Vice President

of

Scott Barton, Business ledged.

Developof New acknowH. Jones

Sloan

Management

Re-

and of Peter Schnall, Development, The support

view,
3.

1991, pp. 5-14.

is gratefully of the Reginald

Clemens, E.K. and B.W. Weber, Segmentation, Differentiation, and Flexible Pricing: Experiences with Information Technology and Segment-Tailored Management Strategies, Information Journal Vol. of 11, Systems,

Center, Project on Information and Competitive Strategy ledged.

Industry Structure likewise is acknow-

End Notes 1. The Wharton School, University of Pennsylvania University of

No. 2, Fall 1994, pp. 9-36. 4. Clemens, Market E.K., D.C. Croson Dominance and B.W. Weber,

Underperformance: and the Advantages Journal of Management Fall, 5. 6. Capital Gartner Excellence October 7. Lucas, Credit 8. 1996. One Annual Group, in 8,1996 P.

as a Precursor of Firms Emerging Technologies of New Information Entrants, Systems,

2. College Arizona

of Business Administration,

repre3. Outstandings, or outstanding balances, sent the amount of money that a credit card issuer is

Report,

1995. Group Award Announces Winner,

owed by card holders. It is generally considered desirable to have high outstanding balances, since this represents money that cardholders have borrowed from issuers, and on which issuers are generally paid a high annual rate of interest.
4.

Gartner Technology

press release. on Credit August Cards,

In previous work, we have explored these conditions to a wider range of industries for banking as an industry, [4].

Capitalizing

and their application


5.

Card Management,

1995.

Unfortunately

there is

Steiner, T.D. and D.B. Teixeira, Technology in Banking: Creating Value and Destroying Profits, 1990. Dow Jones-Irwin, Homewood, IL,

considerable evidence to support this concern. The assessment of technology in bankhg suggests that even as it creates value for customers it increases competition and the efficiency of pricing, destroying profits for financial intermediaries [8].

9.

Tirole, tion,

J. The Theory MIT Press, 1988.

of Industrial

Organiza-

(000s)
Loans Accounts I

1992 $1,452,742 1,672 [

1993 $3,265,565 3,118 I Table

1994 $6,197,423 5,049 1: of Receivables I

1995 $9,089,278 6,149 \

1996 $12,804,000 8,565

Number

of Accounts

and Amount

for Capital

One

YEAR Number of Tests

1989 335

1990 370

1991 617 Table 2:

1992 1,130

1993 1,850

1994 4,355

1995 6,199

Number

of Tests run by Capital

One

1060-3425/98 $10.00 (c) 1998 IEEE

letitors

Figure Risk-Utilization Profiles, Illustrating

2 Balance-Transfer Product

1060-3425/98 $10.00 (c) 1998 IEEE

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