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Leadership and Governance
Innovation from Investment in
Human Capital
- A Turning Point for Financial Services
Themes

Crisis in Governance
• Excessive focus on shareholder value
• Weak leadership

Transformation
• Focus on customer value
• Investment in human beings
Lessons from the UK


Two and possibly three generations of retail banking
Governance is about stakeholders
– Customers, Shareholders, Staff, Regulators

Type 1
– Pre competition (say pre 1990)
• Regulation by eyebrows
• Winners: employees, regulators,
• Losers: customers, shareholders
Type II banking in the UK



Driven by competition (HSBC etc…), and technology
– Contested takeovers
– Scale and Consolidation
– Promiscuity and churn
– Acquisition vs retention models
– Poor structures for dealing with this
– 40million mail shots
Winners
• Shareholders
• Customers (a little)
– Losers
• Staff
What does a type II bank look like?
The Operating Model of a type II bank
Savings
Mortgages
Consumer loans
Moments of Truth
Service Delivery
Customer Insight
Branch
Call centre
Contact centre
Intermediaries
The problems with type II banks

“Product pipelines” push sales
– But consumers cannot be separated into transactions

Channels manage (cut) costs
– But there are linkages between the two
• Eg driving service out of the branches
• Driving sales in call centres

Type II not
– A service proposition
– A customer focussed proposition

What would a type III bank look like?
Leadership in Retail Banking
A Model of Leadership
Vision
Capability
Leadership
Management
Vision: Can you see it?

Managers think about doing
– Reasoning from solutions back to problems
– The doing drives the thinking
– Task Cultures

Much management activity is about persuasion
– Emotional
– Rhetoric
– Highly intuitive
Capability: Can you do it?

Robustness
– Broadening your range of behaviours
– Personal growth in this

Dialogue
– The ZOUD

Maturity
– Discretionary CEO type behaviour
Customer Focussed Innovation
Focussing on the Customer
Who has been here before: loads of people
Industry relaunch
Industry Decline
1980s Cinemas 1980s – Megaplex
Fashion retail multiples:
Next/River Island
First Leisure, Rank
Hepworths, High Street Names
Chelsea Girl
1990s Grocery Retailers – Tesco*
Hotels – Travelodge
Pub venues – Wetherspoons
Fine Fare, Co-op, Sainsburys
Thf
Brent Walker, . . .
2000s Financial Retailers
TK Max & Others
Budget Airlines
Big 4 Banks
M&S
Swiss Air, BA, etc
Four Ways to Value Innovate
Raise
Well beyond industry
standard
Spectrum raising
Eliminate
New Value
Proposition
Factors no longer required
Spectrum focusing
Reduce
Create
New factors not
yet there
Spectrum widening
Hygiene factor
Spectrum lowering
Key Success Factors
Price*
Silence
Reduce
Hygiene
Bed quality
Room Furniture/
Amenities
Eliminate
24-hour
Receptionist
Room Size
Lounge Appeal
High
Architectural
Aesthetics
Eating facilities
Offering Level
Value Curve of Formule 1 in the French
Low Budget Hotel Industry
Raise
F1
2 Star
1 Star
Low
Value Innovation: The Simultaneous Pursuit
of Radically Superior Value and Low Cost
What factors should be
eliminated that our
industry takes for
granted?
What factors should be
reduced well below the
industry standard?
Costs
Cost savings from
eliminating & reducing
Value
innovation
Cost advantages
from high volume
What factors should be
raided well above the
industry standard?
What factors should be
created that the industry
has never offered?
Superior value by
raising and creating
Buyer value
But you need to continuously do it . . .
Repeating Value Innovation
Leverage the Product, Service and
Delivery platforms over time
Do this by continuously investing in
knowledge – human capital
How has Compaq stayed on top of the
Server industry?
By following its first value innovation . . .
1989:
System
pro
File & print
compatibility
Performance
Price
1992:
ProSignia
Low
High
Relative Level
Expandability
General
application
compatibility
File & print
compatibility 1992:
ProSignia
Performance
Price
Reliability
Configurability Feature
innovations
Manageability
1993:
ProLiant 1000
Elements of product or service
General
application
compatibility
Expandability
Elements of product or service
Elements of product or service
Expandability
Low
High
Relative Level
General
application
compatibility
File & print
compatibility
1993:
ProLiant
1000
Performance
Price
Reliability
Configurability
Manageability 1994:
ProLiant 1000
Rack mountable
Serviceability server
Feature
innovations
Security
Storability
Low
High
Relative Level
Transformation by Investing in People
Poaching and Under-investment in Training
- No excuses
Pay
Supply of labour
w2
w1
Demand for labour
after learning
Demand for labour
before learning
Q*
Labour
Determinants of Business Performance:
How Strategy Contributes to the Bottom Line
Assets
Liabilities
PVEA
Debt
PVGO
Equity
Value Logic:
: AGENCY - lower cost
capital due to strong
financial management
Value Logic:  SCALE: Take out cost  cross functional
working
Value Logic:  SCOPE: Add in revenue (eg cross selling)
Value Logic:  LEARNING:
Develop new businesses
Existing Big 4(5) Strategies
Cost savings:
consolidation + scale – exit definite
Inertia not branding
Ruthless HR Models
Retention
Recruitment
Reward
Type II HR model
Financial incentives
Global Inequality

Three desiderata (UN)
– Development
• Economic and Social
– including Life expectancy
– Peace
– Human Rights

Africa does much worse on these measures than
other developing countries
Africa in particular



1820-1998 Africa share of world gdp declined, much
of this since 1950
Africa from 1/3 European GDP to 1/13
Of the decline in extreme poverty 1980 –2000 (1.5bn
to 1.1bn <$1per day: none in Africa, all in China)
Participative Growth

Unaimed opulence (the market alone)
– Brazil, Oman, South Africa all have much higher gdp
than China or Sri Lanka but do much worse on
deprivation measures

Aimed non opulence
– Health and education cheap in developing countries
– China’s improvement in life expectency all came before
1979 (no improvement since then)
What do you aim at?

Kerala (India) Life expectancy 70, Indian average
56/58
– Kerala has very high levels of literacy and especially
female literacy

Sri Lanka:
– Lower infant mortality than the US
– Higher adult literacy than the US

Health and education only occurred in Europe as a
result of state intervention and only a century ago
The Heart of Darkness
Stylised facts are:
 Resource rich, labour poor
- capital intensive growth path
- relative high cost labour
 Small domestic markets & lumpy investments needed
- public sector ownership thus normal
 Rents
- these are available in natural resources
(imperfect global markets)
- these are politicized (often ‘pleasantly’)
owned
taxed
The Heart of Darkness
 Resource prices downturn
- PSBR rises (tax take falls)
- tax burden intensifies
- concentration of ownership in return
- twin deficits, no FDI
 Economic nationalism
- new nation building
- expensive
 Colonial legacy