Act

As mentioned in the scenario analysis, customers are becoming more adaptable, empowered and less loyal, and the threat from new entrants in the financial services industry is looming and the cycle of innovation is speeding up. While companies turn to agile or the lean start-up methods, there is arguably a need for large incumbent companies to become more efficient and effective in their execution of strategic initiatives. We argue that banks’ ability to remain competitive in the future partly relies on their dynamic capabilities to act, a group of capabilities that mobilise efficient, effective and timely execution of both long- and short-term strategic efforts. The dynamic capabilities to act can be seen in connection to existing theories on dynamic capabilities as described by Teece et al. (1997):

Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploy internal and external competences. (p. 515)

The capabilities described by Teece et al. (1997) represent product innovation, coordination and redeployment of internal and external resources, capabilities which can be argued to be part of a category of dynamic capabilities to act. It should however be noted that in this thesis, innovation is not considered a dynamic capability in itself, but rather a result of other capabilities acting together (Hill, Brandeau, Truelove, & Lineback, 2015).

The previously mentioned legacy banking systems, along with a stringent risk-averse culture, silo structure and more, inhibit the incumbents from developing this ability. Major trends and plausible future scenarios of banking point to a situation where banks are no longer the sole provider or actor throughout the entire value chain. This entails that in some way or other, either through a platform, utility, network or another solution, banks will need to collaborate with external parties and thus, at a minimum, keep up with the pace of these third-parties.

Banks’ capabilities to effectively coordinate and redeploy internal and external competencies are necessary in the future scenarios of banking in terms of the collaborative capabilities needed in the financial services industry. As previously noted, Capron et al. (1998), Gulati (1999) and Lane and Lubatkin (1998) specifically suggest that alliance and acquisition routines are dynamic capabilities. In the distributed bank scenario, where banks become providers of third-parties’ products and services, banks’

ability to forge partnerships and collaborations will be vital. Banks will act as an orchestrator of partners.

Thus the importance of sourcing, bundling, connecting and delivering these products and services to customers will play an important role for banks competitive position. It is plausible that banks that succeed in continuously developing capabilities to choose the right partners and leverage these partnerships best will have a stronger competitive position than firms who do not develop this capability.

The disintermediated bank scenario would entail similar demands for the bank, however since the bank

57 does not own the customer relationship and thus loses control over the bundling of products to the customers, the bank becomes dependent on third-party firms for their access to customers. In this scenario, banks will also compete on their capability as partner and provider for other firms.

To collaborate with the actors that, across all the above scenarios, will come to plug into or take over parts of banks’ value chains, banks will need to enable system compatibility. If banks become infrastructure or platform providers, it might be even more substantial that their systems, processes and ways of working are adaptable, efficient and compatible with other systems, and that they continue to be. As previously discussed legacy banking systems, often thousands within just one bank, are not built according to a cohesive standard, complicating the transition of the addition of new technology, partners and even customers.

In addition to building capabilities to ensure that firms effectively can coordinate and redeploy external resources, dynamic capabilities, as described above, also entail effectiveness in coordinating and (re)deployment of internal resources. In the context of the future financial services industry, one important aspect of this capability will be banks’ ability to efficiently and effectively allocate resources and coordinate strategic efforts within the firm. As noted earlier, corporate ignorance is described by Rohrbeck and Gemünden (2011) as one of three reasons organisations may struggle with responding to external change. This ignorance can, among other things, be attributed to short-strategic planning cycles, vital information not reaching the appropriate management level and reduced management capacity and capability to process this information (Rohrbeck & Gemünden, 2011). For banks, it is central that short-term goals do not necessarily trump long short-term goals. Short strategic planning cycles may create incentives that promote inefficient resource allocation, by favouring and giving priority to projects with a short-term of certain reward, or a low-risk profile. The risk-averse culture often described in banks is one example that may emphasise this risk further. In a scenario where the banks manage the product development, it could be vital for banks to take on for example projects and product developments with different risk profiles than usual. As noted in the scenario analysis new entrants, like fintech companies will and are willing to invest capital and risk in uncertain projects that sometimes lead to products customers love.

Examples from other industries indicate that this might mean being able to stomach more risk within product development, perhaps even launching minimum-viable-products to test an idea without knowing the precise result (S. Haldrup, interview, February 28, 2017). On the other hand, if banks forgo the product and service development role in the value chain, internal resource coordination and deployment would still be an important part of their competitive position.

As highlighted in all scenarios presented above, hypercompetition, new regulations and customer expectations will likely continue to increase pressure on banks to decrease costs and employ best practices in processes. If banks adopt new technologies, such as automation and AI, they can increase efficiencies across several processes. However, if they continue to use outdated technologies or avoid investing in new

58 systems and resources, banks risk competing against companies that can accept lower margins, use technology to allocate resources more efficiently or price products more precisely.

Another element of the Teece et al.’s (1997) description of dynamic capabilities highlights the importance of timely responsiveness. In a world where ecosystems are built on partnerships and collaborations, the success and competitiveness of these ecosystems and bundles depend on meeting the needs of their customers, which as described earlier are changing and evolving faster than ever. For instance, in the distributed bank scenario, where the bank might curate the bundled offering to the customers, a part of ensuring timely responsiveness could be tied to the firm’s ability to quickly mobilise collaborations or integration of new firms and additional products to the offering. A similar dynamic could be seen in the disintermediated bank scenario where the bank could benefit from building capabilities to quickly mobilise to take advantage of new business areas or applications for their platforms.

Regarding the banking as a utility scenario, banks face less pressure to drive innovation and to be at the very forefront of developments. However, in this scenario banks role in the value chain could be greatly impacted by regulation and swift reaction and preparation for potential changes in these could be an important differentiating factor. Additionally, banking as a utility would entail that the services banks provide to other firms could become standardised and largely substitutable. Thus, this could put pressure on banks to quickly employ new technologies and practises that either reduce costs or provide new in-demand services and features.

The scenarios would all represent substantial changes to incumbents, and given that the incumbents do not know exactly how these scenarios play out, they would benefit from building capabilities that enable responsiveness throughout the organisation. As previously touched on, some estimate that more than half of the current banking processes will be automated. As we argue in our scenarios, incumbents seem to agree that the future holds changes, but how, when and where are important questions that are not known for certain. Developing the capability to make strategic decisions, access internal and external expertise, set up collaborative structures and execute projects in a quick manner will become an important part of banks’ operations. Especially, when the speed of innovation increases, competitions intensifies and customer behaviour changes. Thus, building responsiveness throughout the organisation could represent a source of temporary competitive advantage.

By promoting structures that operate across silos, like cross-functional teams, and engaging employees in projects outside of their business line the inclination to protect their own business line or silo might be decreased. Also, efforts like this could contribute to simplifying internal structures in some processes, further mitigating intertie within the bank.

The specific capabilities that comprise the category of the dynamic capabilities to act may, and likely would, vary intra-industry and across the different scenarios. However, on a group level, we argue that the capabilities to act are prerequisites for banks to remain competitive in the future, particularly to establish a series of short-term competitive advantages. Furthermore, capabilities to mobilise efficient,

59 effective and timely execution of both long- and short-term strategic efforts may also serve as important foundations for making the internal transitions and changes that banks will likely require in the near future.