Chapter VI: Competitive Advantage and Value Creation in the Bank

By Dr. Karim Kobeissi Lebanese University - 2013

Introduction
In the banking sector, the conditions for creating a sustainable competitive advantage are specific. Building on traditional factors such as price or innovation (products; services; sales methods) may provide a short term advantage, but the sustainability of this can not be guaranteed because such factors can be easily imitated or reproduced.

Introduction (con)
According to Zollinger (2008), the attention must be focused on the supply system (banks ressources and competencies) in place to achieve the level of cost and quality expected by the customers who are more demanding and better informed. Knowledge and assessment of the supply system become, for managers, the main task to which they must associate themselves before developing a business strategy. Beyond the description of the procedures and techniques used to offer the products or services, this assessment should focus on identifying the competencies that a bank uses to satisfy the expectations of its customers.

Introduction (con)
In this view, the bank is considered as a set of tangible and intangible resources, and its strategy is especially affected by the existing resources (not by the economic environment and the manufacturer of markets).

Section 1: Conditions of Value Creation

Analyzing the bank through its resources and competencies allow us to understand its functioning, its logic of

development, and the sources of its competitive advantage.

We can distinguish two types of organizational competencies:

1) Basic competencies.

2) Distinctive competencies.

Conditions of Value Creation (con)

Basic Competencies Consists of the competencies which the company necessarily has to possess to normally practise a business in a given sector. The "basic" nature doesnt mean " low importance" but the absence of differentiation. Distinctive Competencies Consists of the competencies which the company acquired or developed advantage. in a way to have a endurable are competitive for a These competencies distinctive

business in a given sector. If, furthermore, they are hard to imitate, they can represent a genuine entry barrier for the

competitors.

Conditions of Value Creation (con)

Zollinger underlines that the competencies act as "indicators of differentiation" allowing to perceive the service as unique and thus value carrier for the customer. They are applied in the various stages of the value chain so as to respond to the

expectations expressed by the market.

Conditions of Value Creation (con)

Sources

of

value

for

the

bank

and

its

customers,

the

organizational competencies exist in the functional activities

of the firm which are

traditionally represented by its value

chain.

Conditions of Value Creation (con)

The value chain of a firm is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. Products pass

through activities of a chain in order, and at each activity the product gains some value. Porter suggests identifying the sources of competitive

differentiation of a firm by decomposing it into significant

economical activities (primary and support).

Conditions of Value Creation (con)

Porter argues that it is only after analysing its value chain that a firm is capable of

choosing its generic strategy i.e. to choose

the competitive positioning which suits its products.

The Value Chain of a Commercial Bank

The value chain of a commercial bank consists of the following activities: Primary Activities
Fund Raising

It consists of stockholders' equities, refinancing, savings and

deposits of companies and private individuals. This last form constitutes a preferred way to gather cheap resources. The objective is to obtain the least expensive possible resources for a long period of time.

The Value Chain of a Commercial Bank (con)

The conception of products / services with respect to the target market A distinction is made between the dependent and independent products from the collection of resources. For example the

collection of deposits belongs to the first category while

insurance products and advice belongs to the second

category . At this stage, the price is determined as well as the design of products according to the sales medium and the target market.

The Value Chain of a Commercial Bank (con)

Marketing & Sales They guide the identification and targeting of the definitive segments in term of financial potential, risk, geographical location... These two activities have to present a close collaboration to design the best offers for the targeted customers. Choices will be made with regard to the

distribution channels and to the communication policy and products images.

The Value Chain of a Commercial Bank (con)

Associated Services to the Products and After Sale Sources of competitive advantages, it concerns the payment means and the back office operations resulting from the administrative processing of operations and incidents handling. The after sale service is considered within this

activity as key of the relationship bank-customer and the cause of desertion of the customers.

These primary activities are closely linked.

The Value Chain of a Commercial Bank (con)

Support Activities The supporting activities may be summarized in risk

management which is an essential occupation of the banking sector. Nowadays, the risk concerns all the activities from product design up to the administrative and IT processing) of customers files . Also the human risks are taken into account.

The Key Activities and Competencies of a Bank

All the activities of the value chain are importants; however, the study of the and banks the competencies, as considered as essential for the development of the bank, highlights the risk management concerns. Risk Management
Two aspects can be presented to illustrate the importance of this activity: The selection of customers and operations (in the case of a commercial bank). The management of companies balance sheets (case of a corporate or investment bank).

distribution

clearly

dominant

The Key Activities and Competencies of a Bank (con)

Distribution Distribution is not only a marketing tool. It is an activity of the value chain that takes on a leading strategic dimension allowing the construction of a competitive advantage. The use of various distribution channels, managed in a

differentiated but coordinated way, increases the value produced by the bank for itself and its customers.

The Key Activities and Competencies of a Bank (con)

For the bank, to have at its disposal various

channels service

of distribution, and costs of

allows it to optimize distribution

its balance between added value of the supplied production, and contact.

For the customer, according to the channels, he can easily recognize and appreciate a quality

price ratio (Q/P)coherent with the type and the

level of service expected from the function.

The Key Activities and Competencies of a Bank (con)

The information system and the brand image are two strategic resources which the bankers often qualify as key competencies for their establishments. The Information & Analysis System Banking is an information industry. All the establishments try to collect a maximum of information on their customers: their financial situations; their use of products and services... Such

an information source, updated quickly, allows a better

targeting of the offers and makes possible the anticipation of customers behaviors and needs, which will constitute a

distinctive competence.

The Key Activities and Competencies of a Bank (con)

A complete information & analysis system supposes the integration of the data relative to the risks according to the nature of products, the lifestyle and the exercised activity. Establishing relationships between these various data (needs / risks) allows the foundation of extremely detailed

customers databases providing a distinctive advantage to

the one who uses them. The most recent developments regarding information and analysis systems concern the

construction of real data warehouse and the exploitation of

these data by the data mining techniques.

The Key Activities and Competencies of a Bank (con)

The Brand Image The banking relation concerns a particular product, the money. Thus, bankers have to reflect the image of professionals who know how to use the funds which are confided to them. The image builds itself through a complex combination of several factors: the closeness (physical and electronic) to customers (private individuals and companies), the financial power and

the professionalism.

The Genuine Sources of Advantage

They are mainly related to human resources, technology and products innovation.

Human Resources
For the staff in the contact with the customers

Most of the of training programmmes focus on the reception and interview techniques. Since an increasing part of classical

operations (e.g., withdrawals, deposits) has been realized by customers themselves, it was necessary to modify the organization of the contact staffs in order to amplify their commercial activity of sale and advice. This capacity of the staff to optimize the contacts

with the customers is the objective looked for by all establishments.

The Genuine Sources of Advantage (con)

For the Entire Workforce

Another aspect of the training lies in the necessity of becoming sensitive to all risks forms. The objective is to render every employee aware of the consequences of its actions and possible

carelessness.
The Technology Improvement of the efficiencies and capacities of information systems, new channels of distribution, contribute to a higher level of quality and profitability. Technology is present today, in all the stages of

the offers process.

The Genuine Sources of Advantage (con)

Several situations illustrate this competitive dimension. For instance,

the commercial and networks teams have at their disposal a

material adapted to the diverse types of customers: simulation and

diagnosis softwares intended to adapt the offer to the different

customers profiles.

The Genuine Sources of Advantage (con)

Products Innovation Novelty in the commercial bank field are restricted because of products commoditization and absence of inventions patents. It is however possible to propose a new product or service which will allow his promoter developer to have a short time advantage and

popularity.