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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