A Disturbance In The Force

Change _ Start Button SM .jpgEditor's Note: Banking is different today.  Not so much in terms of what products and services are being offered but rather in how those offerings are delivered and by whom.  Of course, the banking landscape is not the only one being disrupted by new innovative companies with different views than staid incumbents on how consumer needs should be met.  Is there lessons to be learned from how these other industries are responding to the challenge?  The answer to that question is not clear cut as we discuss in our latest 270° Blog.


Ford recently fired its CEO Mark Fields but not because he was not delivering respectable bottom line results to stockholders.  To understate things a bit:  This is unusual.  This quote by Ford Chairman Bill Ford, great-grandson of Henry Ford, represents the company's attempt to explain why Fields was shown the door:  "This is a time of unprecedented change. If you look at the technology coming into our industry, the competitors coming into our industry...we really need transformational leadership."

Non-traditional competitors have permeated the automobile industry by applying new technology to deliver an optimized experience for the drive. So far, the traditional players have failed to respond in a meaningful way. Consumers and investors are drawn to these non-traditional competitors. Compare Ford's 2016 performance with Tesla's. Ford closed 2016 with an adjusted pre-tax profit of more than $10.4 billion, while Tesla continued to lose money. Yet, Tesla's market cap is $7 billion more than Ford's. 

This is not the first time Ford has been threatened by new entrants into its marketspace.  The company, founded by the legendary Henry Ford famous for his quip that consumers could have any color of vehicle they wanted "as long as it was black," nearly capsized and sank early in its history because of a tsuanmi created by the General Motors.  Why?  Because in the early 1900s GM was able to understand how consumers had changed when it came automobiles.  Henry Ford did not invent the automobile or the assemby line approach to manufacturing.  What Ford did accomplish that no one else had until he arrived on the scene was produce automobiles at a price that made them affordable to a larger percentage of the population.  

Ford did this organically; i.e., he grew his company by introducies economies of scale and then applying those to continue to expand his product offering.  By definition, this approach limited the choice consumers; e.g., concerning the color of the vehicle.  GM believed that consumers did not just want an affordable means of transportation and opted instead for a growth strategy that involved acquiring a variety of different automobile manufactures.  GM offered different styles of car for different demographic segments of the population and, yes, they came in more than just one color.  Alfred Sloan who drove this strategy at GM simply read the consumer base better than Henry Ford and by the late 1920s that ability had made Sloan's company the market leader of the space.  

The "innovation" of producing vehicles that offered different looks and colors may not seem all that radical or particular clever in hindsight.  However, at the time, it was the "killer app." But the ability of GM to understand the consumer's preferences, while no mean feat, is only half the story. Being able to "think outside the box" of trandition requires not just creativity but a different mindset.  As with the Fords of the world, making the kind of systemic changes necessary to alter the worldview of financial institutions is very difficult. That is why simply replacing a veteran of the industry with an outsider who has a track record of innovation and success in another vertical is not going to transform Ford.

Hackett will be battling a team of executives and senior managers who are from the very industry that he has been hired to change. He will need skills in leadership and organizational change to succeed and, even then, it might not be enough. Some financial institutions have attempted to drive innovation and competitive differentiation in this same way, and the results are not necessarily encouraging. Other strategies they have applied such as creating new job titles, setting up technology innovation labs, and buying FinTechs that have become irritants have not been a winning strategy either.

To successfully embrace innovation and drive digital transformation, organizations must change at an enterprise level. If employees throughout the institutions - from branch employees all the way to C-suite - operate in an environment that is structured to focus on the consumers and businesses they serve, the institutions will be much better equipped to successfully compete in a landscape where "bank" is now more a verb than noun. This top to bottom transformation must foster a culture of innovation and incorporate change in how all employees are motivated - including how bonuses and salaries are structured. This level of change, combined with innovation, will not change banks into FinTechs but will allow bankers to more successfully leverage the characteristics that give them an advantage over non-traditional competitors. 

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