Blue Ocean Strategy in Private Banking E-Book

Marc Strauß

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 174

Veröffentlichungsjahr: 2020

Beschreibung

Private banking faces increasing pressure from various sources, resulting in consistently diminishing margins. Continuing to follow conventional strategies will not solve these problems and therefore calls for different approaches. This is where the blue ocean strategy (BOS) approach comes into play. Developed by two INSEAD professors, this concept aims at creating an uncontested market space without competition, where new client groups are served through high-value offerings. In this book, Dr. Marc Strauss, a former top management consultant and private banking expert, with considerable experience in strategy creation and implementation, comprehensively applies the BOS approach to the field of private banking. Through his book, Dr. Strauss offers various benefits to both academics and practitioners by: - Conducting a complete and consistent run-through of the entire BOS formulation process - Creating a tailored framework to evaluate and build an actionable BOS blueprint - Developing a concrete BOS for an exemplary private bank, including the formulation of a distinct (operating) business model - Creating a business case to describe the commercial viability of the new BOS private banking unit and the combined Entity - Providing practitioners with "food for thought"

Leseprobe

My goal and motivation for writing this book was to create a new winning

perspective to Private Banking. Getting the fish into the blue ocean has been

a challenging yet fascinating journey – which could only have been completed

with the support of a few people:

First and foremost, I want to thank my wife, Dessislava Strauss, who was

constantly challenging me in finding new approaches and develop progressive

ideas off the beaten track.

Furthermore, I would like to thank two former colleagues, Andreas Hausmann

and Thomas Casanova, for their very valuable input on the script´s structure

and content.

A very special thanks goes to Boris Spirov for his excellent support in

comprehensively reviewing the script. Great job on the subtitle…

Last but no least sincere thanks to Bruce, Axl, and Ozzy for keeping me focused

throughout long hours in front of the screen.

Table of Contents

List of abbreviations

Introduction

1.1 Setting the scene

1.2 Purpose of this book

1.3 Kim & Mauborgne’s book, Blue Ocean Strategy (2015), as the basis – selective deviations and additions

1.4 Critical appreciation of blue ocean strategies

The BOS Concept – Key Analytical Tools and Strategy Formulation

2.1 Key analytical tools

2.2 Strategy formulation process

Strategic Positioning and Challenges

3.1 Business model and key factors framework

3.2 Private banking strategy canvas (“as-is”)

Strategic Options

4.1 The six paths framework

4.1.1 Path 1: Look across alternative industries

4.1.2 Path 2: Look across strategic groups within industries

4.1.3 Path 3: Look across the chain of buyers

4.1.4 Path 4: Look across complementary product and service offerings

4.1.5 Path 5: Look across functional or emotional appeal to buyers

4.1.6 Path 6: Look across time

4.1.7 Summary of the six paths framework and applying findings to the PB sector

4.2 Non-customer analysis: Three tiers of non-customers

4.3 The four actions framework

4.4 The Eliminate-Reduce-Raise-Create (ERRC) grid

Strategic Blueprint

5.1 Private Banking Strategy Canvas (“to-be”)

5.2 Strategic sequencing in the BOS model

5.2.1 Robust business model: Buyer utility map

5.2.2 Robust business model: Price corridor of the target mass

5.2.3 Robust business model: Target costing

5.2.3.1 Streamlining operations and applying cost innovations across the value chain

5.2.3.2 Partnering

5.2.3.3 Changing the pricing model of the industry

5.2.4 Adoption: Buy-in by the main stakeholders

5.3 Bringing it all together: New operational setup of the BOS private bank

5.3.1 New operating model of the BOS private bank unit

5.3.1.1 Building Block 1: Client onboarding

5.3.1.2 Building Block 2: Product development, portfolio management, and client reporting

5.3.1.3 Building Block 3: Branding and organizational structure

5.3.1.4 Building Block 4: Support and issue handling

5.3.2 Excursus: Combining Canvases – BOS and the Business Model

5.3.3 Aggregated BOI index of the new private bank

5.3.4 Consistency check of the overall strategy formulation framework

5.4 Commercial viability: Business case of a new private bank

5.4.1 Supply – What is being offered?

5.4.2 Demand – Who would buy how much?

5.4.3 Costs – At what expense?

5.4.4 Financial viability – Will it be profitable?

Conclusion and Outlook

Literature

Appendix

A.

Detailed Business Model Canvas (generic)

B.

Further business case elements

C.

Excursus: Real-life examples in (private) banking

List of figures

Figure 1: Conventional red ocean strategy vs. blue ocean strategy

Figure 2: Value innovation

Figure 3: Blue ocean strategy canvas (generic)

Figure 4: The four actions framework (amended illustration)

Figure 5: Generic ERRC grid

Figure 6: Overview of the BOS Formulation Process (own illustration)

Figure 7: Osterwalder/Pigneur’s business model canvas

Figure 8: Business model canvas for private banking (example)

Figure 9: Structuring framework to determine BOS key industry factors

Figure 10: “As-is” strategy canvas for PB (industry aggregate and exemplary bank)

Figure 11: Traditional strategy assumptions and respective application in PB (amended illustration)

Figure 12: Potential new value dimensions for PB from Path 1

Figure 13: Potential new value dimensions for PB from Path 2

Figure 14: Potential new value dimensions for PB from Path 3

Figure 15: Potential new value dimensions for PB from Path 4

Figure 16: Potential new value dimensions for PB from Path 5

Figure 17: Potential new value dimensions for PB from Path 6

Figure 18: Summary of potential new value dimensions for PB

Figure 19: The three tiers of non-customers

Figure 20: Generic wealth structure and banking client segmentation (own illustration)

Figure 21: ERRC grid for new PB setup under BOS

Figure 22: “To-be” PB BOS canvas (industry aggregate vs. exemplary bank) including the ERRC measures

Figure 23: The BOS sequence

Figure 24: Generic buyer utility map for PB including potential utility blocks

Figure 25: Buyer utility map for PB – comparing traditional PB with the new PB BOS approach

Figure 26: Price corridor of the target mass

Figure 27: Price corridor for the new BOS PB offering (Step 1)

Figure 28: Specification of the price level within the price corridor (Step 2) (own illustration)

Figure 29: Final specifications of the price level for the new PB BOS offering (Step 2) (own illustration)

Figure 30: The BOS profit model (incl. own illustrative adjustments)

Figure 31: Overview of efficiency- and cost-focused measures within BOS target costing (own illustration)

Figure 32: Key BOS PB operating model blocks reflecting new value proposition (own illustration)

Figure 33: Direct, client-facing, visible activities vs. indirect, non-client-facing, invisible activities – all of which are value adding (own illustration)

Figure 34: Activities and services provided by either the parent bank or external providers (own illustration)

Figure 35: Combining ERRC outcomes with the Business Model Canvas to create a new PB BOS model

Figure 36: Blue ocean idea (BOI) index of the new BOS private bank

Figure 37: Bringing it all together: Framework consistency check (own illustration)

Figure 38: Elements of business case (own illustration)

Figure 39: Discretionary mandates pricing under the new PB BOS

Figure 40: Estimated market sizing for the new PB BOS unit

Figure 41: Estimated asset and revenue potential for the new PB BOS unit

Figure 42: Estimated client onboarding development and distribution for the new PB BOS unit

Figure 43: Estimated AuM and revenue from core fees for the new PB BOS unit (in currency units)

Figure 44: High-level project roadmap for PB business model adjustment under BOS (own illustration)

Figure 45: Estimated project costs for setting up the new PB BOS unit (in currency units)

Figure 46: Estimated ongoing costs for running the PB BOS unit (in currency units)

Figure 47: Consolidated business case

Figure 48: Business case new private bank – operating profit

Figure 49: Business case new private bank – profit margin

Figure 50: Business case new private bank – Assets under Mgmt. (AuM)

Figure 51: Business case new private bank – incremental operating profit

Figure 52: Business case new private bank – incremental profit per client

List of abbreviations

API . . . . . . application programming interface

AI . . . . . . artificial intelligence

AuM . . . . assets under management

BMC . . . . . business model canvas

bn . . . . . . . billions

BOI . . . . . . blue ocean idea

BOS . . . . . blue ocean strategy

BPaaS. . . . business processes as a service

bps . . . . . . basis points

BUM . . . . . buyer utility map

CHF . . . . . Swiss francs (currency)

CIR . . . . . . cost-income-ratio

CRM . . . . . customer relationship management

CtB . . . . . . change the bank

CU . . . . . . currency units

do. . . . . . . ditto

DNA . . . . . deoxyribonucleic acid

e.g. . . . . . . for example

FTE. . . . . . full-time equivalent

GBP . . . . . pound sterling (currency)

HNWI. . . . high-net-worth individuals

i.e. . . . . . . id est (that means)

IT . . . . . . . information technology

K & M . . . Kim & Mauborgne

KYC . . . . . know your customer

MiFID. . . . markets in financial instruments directive

mio. . . . . . millions

ML . . . . . . machine learning

p.a. . . . . . . per annum

PD. . . . . . . person days

PB. . . . . . . private banking

RtB . . . . . . run the bank

RM . . . . . . relationship manager

STEP . . . . sociological, technological, economic, and political change

SD. . . . . . . self-directed

SWOT. . . . strengths-weaknesses-opportunities-threats

UHNWI . . ultra high net worth individuals

USP. . . . . . unique selling point

VC . . . . . . value chain

XaaS. . . . . everything as a service

1. Introduction

1.1 Setting the scene

Traditional strategic concepts and approaches, developed and deployed over previous decades, mainly center around how to act in competitive markets. Companies focus on understanding industry structure, identifying ways to position themselves against other market players, and determining how to attain a larger share of the existing market. This implies a structuralist view of strategy, assuming that the operating environment is a given. Conventional strategy is also characterized by the traditional way of achieving organizational performance through intense competition in current markets, exploiting existing demand, making a value or cost trade-off, and aligning a company’s functional processes with its strategic choice of low-cost or differentiation. These strategies – also known as Red Ocean Strategies – while not inherently wrong, are approaches that nearly every company uses. No company can stand out unless it finds a way that provides a wide-open blue ocean ahead.

In today’s world, with global trends, such as value chain disintermediation and disruption, distributed ledger technology, generational shifts, etc., unfolding at lightning speed and challenging conventional business models across all industries, innovative and creative solutions that offer superior value for customers are more relevant than ever. With the increasing competition, traditional red oceans have become even redder (“bloody”), urging companies to search for blue oceans instead.

Blue oceans represent new and undiscovered markets and opportunities with novel value creation opportunities, new customer bases, and no competition. New demand is created, growth is profitable and rapid, competition is irrelevant, and the rules of the game are not set. This is the optimal solution. However, even if this best-case theoretical scenario is almost unattainable, achieving a significant part of this optimum is worth pursuing as the potential first-mover profit would still likely be relatively large.1

Blue ocean strategy (BOS) offerings use a framework for creating uncontested market space and changing the emphasis from current competition to creating innovative value and new demand, thus taking on a more reconstructionist approach. To obtain relief from being trapped in old markets, managers must focus on attracting new customers, understanding market creation, moving away from the premium versus low-cost strategy dilemma, and worrying less about segmentation.2 BOS differs from traditional strategy in several key ways as follows:

In BOS, competition is not at the center of companies’ strategic thinking. Instead, the focus is on the customers and particularly the non-customers, as well as the respective actions needed to provide them with a leap in value that renders competition irrelevant.

Industry structure is seen not as a constant but as changeable. With a fixed structure, companies typically begin strategy definition processes with conventional industry analysis (SWOT, five-forces, STEP, etc.). This leads to a zero-sum game, where one party’s success comes at the expense of another since the market size remains constant. In creating a new market space, BOS seeks to expand market boundaries to create a larger-than-zero-sum game.

Strategic creativity can be unleashed in a systematical and structured way. K & M’s research revealed common strategic patterns behind the creation of successful BOS. This enabled them to develop analytical frameworks, tools, and methods – such as the strategy canvas, the four actions framework, and the six paths framework – that support structuring formerly unstructured problems.

Figure 1 compares both strategy concepts.

Red ocean Strategy

Blue Ocean Strategy

Compete in existing market space

Create uncontested market space

Beat the competition

Make the competition irrelevant

Exploit existing demand

Create and capture new demand

Make the value-cost trade-off

Break the value-cost trade-off

Align all the firm’s activities with its strategic choice of differentiation

or

low cost

Align all the firm’s activities with the pursuit of differentiation

and

low cost

Figure 1: Conventional red ocean strategy vs. blue ocean strategy

1.2 Purpose of this book

Various literatures regarding the use of BOS in the banking industry exist, not to mention the much larger body of work covering other industries. Banking-related works include practical examples, case studies, scientific papers, framework descriptions, etc. In terms of scope, the banking industry has been covered comprehensively, with particular emphasis on the retail and commercial sectors. The core regional areas explored comprise the US, Europe, parts of South East Asia (e.g., Malaysia and Singapore), India, as well as several countries in the Middle East, and Africa. The BOS approaches described mostly focus on either specific banking products or services (e.g., treasury or securities) or underlying technologies (e.g., distributed ledger, mobile solutions).

This might raise the question of “why publish another book on BOS after numerous materials have already been written and even more are yet to come?” The answer is that private banks in developed markets currently operate in a red ocean environment and thus face major challenges; however, a tailored BOS approach to these challenges has not yet been fully explored. Thus, this book can help in closing this gap by offering the following insights and benefits:

Comprehensive theoretical application of the BOS approach (explaining and deploying all relevant original frameworks, tools, and techniques as well as developing additional overviews, frameworks, and checks)

A complete and consistent run-through of the entire strategy formulation process

Usage of an adjusted and tailored framework to evaluate and build an actionable BOS blueprint

Formulation of a concrete BOS for a sample private bank, including the creation of a distinct (operating) business model

Creation of a business case to detail commercial viability of the new BOS under explicit assumptions

Development of a generic implementation roadmap and timeline

Provision of “food for thought” for practitioners

1.3 Kim & Mauborgne’s book, Blue Ocean Strategy (2015), as the basis – selective deviations and additions

This work is based on the book “Blue Ocean Strategy” by W. Kim and R. Mauborgne, published in 2015.3 Therefore, respective quotations have been purposely refrained from for the sake of easier readability.4 Situational adjustments or deviations have been made if deemed relevant and valuable. Some examples:

Reversed the order between the original Principle 2 “Focus on the Big Picture, Not the Numbers” and Principle 1 “Reconstruct Market Boundaries.” The main reason for this swap was the opportunity to start with an overview, which is used as a structural framework for the strategy formulation process (

Chapter 2.2

of this book).

In this book, the six paths framework was not used to derive one particular BOS business model (as described in the various examples of the original book), but rather to identify and obtain the potential benefits and value dimensions, which were then used to adjust the status quo strategy canvas and develop a new BOS canvas.

Added a new section (5.3 “Bringing it all together: New operational setup of the BOS private bank”) to present a comprehensive overview of the new operating model used to implement the BOS in private banking.

Integrated the section on combined business model frameworks (BOS and the Business Model Canvas by Osterwalder/Pigneur (

Chapter 5.3.2

)).

Replaced execution (

Chapter 3

in original book) with a high-level implementation roadmap as well as a business case for a new BOS private bank (

Chapter 5.4

).

PMS (pioneer-migrator-settler matrix) was excluded since no multi-business companies were examined.

Conceptual note: Other than being stipulated by K & M as a characteristic of a red ocean environment, the global private banking market is not shrinking (albeit developed markets are facing difficulties) but growing, although at a slower pace and with different growth rates depending on the region.

5

However, as the market is exposed to several game-changing trends leading to real threats, it is very well suited for analysis using the BOS framework.

1.4 Critical appreciation of blue ocean strategies

A general criticism of the BOS concept is that only success stories have been used to explore, explain, and identify blue ocean strategies. Nintendo is said to be the only example of a company that has deliberately selected and successfully implemented a BOS.6 It is unclear how many companies have failed to implement a BOS as there is no control group.

Other factors that may influence BOS success are often ignored. This raises the question of whether these success stories can actually be attributed to the BOS approach. Moreover, the study of BOS is based on case studies regarding successful firms in retrospect, which limits its ability to be generalized.7 There is a risk that the concept is merely theoretical and difficult to implement in practice, leading to questions regarding the approach’s general feasibility.

Blue oceans are rarely purely blue; there is always some red water. In other words, BOS does not make competition entirely irrelevant.8 Thus, ignoring relevant competition may pose the threat of business failure in the short term. As long as profits can be earned in a particular market, more sellers will arrive to serve that market until it reaches a point of satiation, where all competitors gain equilibrium revenues. This implies that a blue ocean will eventually turn red.

Studies have demonstrated that the tools provided can generate good results in a retrospective analysis, but are unsuitable for creating something new.9 These studies do not identify the origin of the competitive factors that populate the strategy canvas and what determines the number of factors included. Hence, BOS can retrospectively identify examples of how firms create blue oceans, but lacks a model or framework that demonstrates the origin of those elements.

Academics also state that one of the biggest flaws of BOS is that it induces the belief that it is appropriate and creates a false sense of security.10 Thus, BOS signals “what” to do rather than defining “how” companies should structure their activities. Other sources state that BOS does not create new demand, but changes the profile of existing demand by capturing buyers from different slots.11 Put more simply, BOS draws demand from red oceans.

Key takeaways from Chapter 1:

Traditional strategy concepts lead to the same conventional industry, using the same company strategies, which leaves corporations in heavy competition facing diminishing returns over time.New concepts like BOS assist in breaking away from restrictive thinking and create new markets, providing the opportunity for outsized returns in new, uncontested markets.This book applies the BOS framework to classic private banking sector – somewhat caught in a red ocean environment – and develops a fully-fledged, actionable approach to support the creation of a new business model.The approach presented is deliberately based on a sound framework that determines both the origin of all relevant factors as well as clearly addresses both the “what” and the “how” of successful business model adaption.

1 Kreipke (2003) stated that blue oceans do not have to be entirely new (as cited in Straub, 2009, p. 5)

2 Kim & Mauborgne (March 2015)

3 Kim & Mauborgne (2015)

4 Additional Kim & Mauborgne sources are quoted, as is other relevant material.

5 See, for example, Deutsche Bank & Oliver Wyman (2019), pp. 5-6, 8

6https://www.blueoceanstrategy.com/teaching-materials/nintendo-switch. This applies to the all-time bestselling videogame console, the Nintendo Wii, as well as its successor, the Nintendo Switch, the only device to outpace the Wii in sales.

7 Burke et al. (2009)

8 Burke et al. (2009)

9 Kampa et al. (2013)

10 Kampa et al. (2013)

11 Kampa et al. (2013)

2. The BOS Concept – Key Analytical Tools and Strategy Formulation

2.1 Key analytical tools