Technical Innovation and Competitive Advantage in Retail Financial Services: A Case Study of Change and Industry Response
| DOI | http://doi.org/10.1111/j.1467-8551.1996.tb00105.x |
| Published date | 01 March 1996 |
| Date | 01 March 1996 |
| Author | Timothy Morris,Roy Westbrook |
British
Journal
of
Management,
Vol.
7,
45-61 (1996)
Technical Innovation and Competitive
Services:
and
Advantage in Retail Financial
A
Case Study
of
Change
Industry Response
Timothy Morris
and
Roy
Westbrook
London
Business
School,
Sussex Place, Regent’s Park, London NW14SA,
UK
This article presents a case study of a major technical innovation in the core activity
of
payment processing in a
UK
bank. In describing the strategic rationale
for
the change
and the process of implementation, the degree
of
consistency between the operational
and organizational dimensions
of
the new system are examined.
As
this system
is
widely
regarded as the benchmark
for
future paper processing in the industry, the factors
contributing to successful innovation are discussed and the management rather than
the technological aspects of this are emphasized. Competitor responses to the
innovation are explained by the influence
of
traditional assumptions about the basis
of
competitive advantage in banking.
Introduction
In 1989 Midland Bank’s branch back office oper-
ation was much the same as that of any other UK
bank. By November 1991, Midland had effect-
ively abolished the traditional back office and
revolutionized the operation’s largest single task
-
cheque processing. The new system, based on
eight large district service centres (DSCs), was
not only put in place
1
month ahead
of
its
tight
schedule but also within its
&50
million budget.
The technological innovations of the project made
the DSCs the first nationally integrated system of
its type in the UK, and according
to
US experts,
the world’s largest banking application
of
such
pr0cesses.l Through the dramatic quality and cost
improvements which resulted, the bank gained a
I
The project
can
perhaps
be
seen
as
an
early
and
sub-
stantial
example of business process re-engineering
(BPR), although
it
was
conceived before re-engineering
became
a
popular term,
and
it is
not
our
intention here
to
interpret the scheme
in
terms
of
the
BPR literature.
new competitive edge and opened up further
strategic opportunities, but its competitors chose
not to imitate Midland’s example.
The paper briefly reviews the organizational
literature on information technology (IT) innova-
tion. It then describes the Midland DSC project
in terms of its strategic rationale, the process of
change management and the operational conse-
quences of the new system. The final part ana-
lyses
the reasons for success and reflects on the
responses of the rest of the industry before re-
viewing what this case reveals about models of
IT change in financial services.
IT
innovation and organizational change
Models of
IT
innovation usually suggest that
change occurs through strategic decision making
in response to environmental demands and the
opportunities presented by a menu of technical
innovations (Earl,
1988;
Scott Morton, 1991).
There tends to be a built in assumption that man-
agers know enough about the environment of the
0
1996
British Academy
of
Management
46
7:
Morris
and
R.
Westbrook
organization to respond appropriately and have
the resources, time and incentive
so
to do and this
may be reinforced by research methods which
ex
post
ask actors involved in the process to recon-
struct decisions about intention, process and
outcomes.
In practice, many innovations fail to live up to
end user expectations. Hidden set up and oper-
ating costs diminish the expected benefits (Pavitt,
1991) and, because much technical change is
relatively easily imitated, it does not lead to last-
ing comparative advantage (Kay and Willman,
1993). Competitors catch up by acquiring techno-
logies off the shelf from suppliers and may even
benefit from not having to bear the costs of dev-
elopment. In mature industries such as auto-
mobile manufacture and banking the adoption of
a new generation of technologies usually leads to
new industry-wide standards of product quality
and cost which become the minimum expected by
customers and levels of process automation vary
quite marginally between firms (Hayes and Aber-
nathy, 1980; Womack
et
al.,
1990). With their large
and widely distributed customer base, retail banks
have adopted broadly similar product and process
innovations to manage core activities like money
transmission and account information services.
This enables them to provide generic products
like cash distribution or debit card transactions
through automated tellers.
Competitive pressures and technological oppor-
tunities may explain the broad dimensions of
technical innovation but a number of important
organizational issues remain. First, technical in-
novation does not on its own lead to competitive
success. The work of the Massachusetts Institute
of Technology group has concluded that IT is the
platform on which success can be built but organ-
izational factors are crucial to realizing the benefits
of automating and ‘informating’ processes (Scott
Morton, 1992; Zuboff, 1988). Hence, the reason
why the benefits offered by IT have not been more
frequently realized in banking as well as other
industries relates to organizational issues and
management failures rather than technical short-
comings
-
although practising managers contest
this claim. Second, the relationship between the
properties of IT and organization design is not
fixed. There is,
of
course, a long literature on the
extent to which technology determines organiza-
tional features and, as Willman (1986; 1993) has
pointed out, part
of
the problem of the debate is
’
simply a definitional one regarding what is en-
compassed by the term technology. However, very
large IT applications create what Clark calls
‘strong imperatives’ for aspects of work and organ-
ization (Clark, 1993, p. 13; McLoughlin and Clark,
1988). The effect is to impose a series of constraints
and opportunities on management decisions about
task design and the use of technology.
This raises the question of managerial object-
ives and specifically the role of the chief executive
(CEO). Schein (1992) observed that little is
known about this role in the innovation process
even though much of the literature on IT decision
making emphasizes the importance of senior
management commitment for success. Either
management is treated in a relatively undiffer-
entiated way, or the perspectives of specialists,
such as IT experts, are contrasted with those of
line managers. Schein’s work suggested distin-
guishing features existed between
CEOs’
basic
assumptions about IT; some saw IT as having the
potential to transform the organization including
the way tasks were performed, work was organ-
ized and indeed the basis of industry competition.
Others were more pragmatic, limiting their sights
to incremental cost saving and quality improve-
ment.
As
the latter view was more prevalent
among his (smallish) sample, Schein concluded
that the heroic change agents of various case
studies are unrepresentative: CEOs tend to re-
spond to the myriad of forces acting on them
and to see the limits and risks
of
technical inno-
vation as much as the grand opportunities, balan-
cing long and much shorter term considerations
of cost and actual benefits of automation. Rarely
do they lead innovation with a grand design of
total transformation. This paper aims to contri-
bute to this debate by exploring the role of the
CEO in initiating and leading change, but we also
emphasize the importance of taking into account
the bank’s competitive situation and the norms
of the industry regarding technical innovation,
because of the way they framed managers’
assumptions about the timing, scope and object-
ives of change.
The role of top managers links to the dynamics
of the decision-making process. One dimension of
this concerns the choice of technology and how
this was ‘sold’ within the organization; another
concerns the involvement of particular functional
groups in the decisions about the innovation.
Major IT changes tend to disrupt existing ways of
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