Industry Transformation

Two weeks ago, we discussed FSS 2020 and its ambitious goals of utilising the Nigeria Financial Services Industry (FSI) as the “driver and catalyst” of Nigeria’s dream of being one of the top-twenty global economies by year 2020, while turning the Lekki corridor of Lagos into an international financial centre. We also raised strategic questions about the industry-is there still scope for differentiation in the industry? Are unique competitive positions valuable or indeed possible in the industry, or is competition now solely on the basis of size and perhaps execution? We attempted to answer these and other questions last week, and my personal conclusion was that the increasing homogeneity actually creates room for firms with that intent to differentiate themselves from the rest of the industry.

Actually a few banks already appear determined to remain differentiated-GTBank for instance, with its unique branch designs and ambience, its pioneering successful Eurobond and GDR issues and continuous pursuit of innovation; Ecobank’s transition from seeking to be “the West African Bank” towards a Pan-African vision, its rapid network expansion within and outside Nigeria and its listing on several bourses across West Africa suggest clear strategic intent and intrinsic strengths that may one day prove to be of value; Diamond Bank is in the early stages of carefully creating a unique positioning as SME-friendly, creative and ideas-driven; of course the entity that will emerge out of the merger of IBTC Chartered and Stanbic will have unique strengths both of size and scale-its ability to leverage a large South African balance sheet, and competences-strong investment banking, project finance and retail financial services skills. But as at today, these institutions are not the industry leaders so the value, if any, of their emerging unique positions remain to be seen.

Actually the Nigerian FSI is a classic example of an industry in transformation in which competitive positions at the end may be very different from those at the beginning. Professors Michael E Porter and Jan W Rivkin in their Harvard Business School Technical Note on “Industry Transformation” (9-701-008) assert that “Periods of industry transformation pose great threats and major opportunities to companies. Industry leaders risk being unseated, replaced by underdogs and entrants. Conversely, periods of transformation provide the sparks that launch new companies to leadership status…”

Industry change is usually evolutionary and gradual rather than revolutionary or transformative. As Porter and Rivkin point out, because “An industry is an intricate web of relationships among companies, customers, suppliers, and providers of substitute and complementary goods. Industry structure normally changes relatively slowly. Relationships reinforce one another, and efforts to change any single thing too much meets with resistance from other parties. Power relationships and patterns of rivalry are stable…Change is incremental”. Occasionally however industries transform when “many, related elements of industry structure change simultaneously. Industry structure comes “unfrozen” and relative positions within an industry are shuffled. After the period of transformation, competitive forces may bear little resemblance to those that held sway before.”
The first stage in industry transformation is the Trigger. These can include technology changes; changes in buyer needs, wants or values; or changes in regulation. Of course the transformation of Nigeria’s banking industry is a clear example of one induced by regulation. The transformation of our telecommunications sector was also triggered by a series of regulatory actions-the principal one being the Digital Mobile Licence (DML) auctions of 2001 and subsequently the appointment of a second national operator, the end of GSM exclusivity and the dawn of unified licensing. The trigger for the transformation of football into a big-money business with a global audience was technology-satellite broadcasting and buyer values-a global lifestyle.

The Experimentation stage follows the trigger-a period when “companies engage in a trial-and-error search for a winning formula” not knowing what in the end will prove critical. If we apply this to the banking industry-players build more branches, buy ATMs and invest in cards and electronic commerce, launch new consumer finance products, new technology, expand into Africa, raise additional capital etc-without assurance that those investments will prove profitable. According to Porter and Rivkin, “Risk and lack of information characterize this stage of industry transformation” and alliances and capital are critical in minimizing the risks and shaping the outcomes.

The final stage is Convergence-when many experiments have failed, “dominant designs” (“a handful of successful ways of doing business in the transformed industry”) have emerged, a shake-out occurs and some certainty and stability in industry structure returns. And then the industry returns to normal, slow, incremental, evolutionary change. The practical problem Managers face during periods of industry transformation is what to do about strategy. Isn’t it pointless (or dangerous) adopting strategy when everything is in a state of flux? Isn’t it safer to join in every on-going industry “experiment” rather than betting on the direction of change? Or perhaps shouldn’t the firm just wait and do nothing until it is clear which designs will be dominant instead of risking capital on designs which may later prove to be failures. It is indeed these unspoken dilemmas which may have driven the standardization and homogeneity this article and the two previous ones have alluded to.

I believe the appropriate response to industry change is not less, but more strategy, even though of the tentative, flexible type. Internal strategic capabilities remain important, but the ability to view strategy in an evolutionary rather than static mindset becomes more useful. The focus shifts from current industry conditions to trends, discontinuities and changes. Scenario planning and thinking become more critical and investments in competences rather than just products become more sensible. At times like that, because no one knows for certain which products or services will win in the long run, competences which can be leveraged across product and industry boundaries may prove decisive. Such competences may provide firms the strategic flexibility required to understand emerging patterns, and to respond instinctively and proactively. The firm’s culture and internal configuration also acquire heightened importance in such contexts. In stable industries, advantages to participants from having a culture of teamwork, internal entrepreneurship and resourcefulness may be marginal, but when the industry is rapidly changing, those advantages become significant and their absence, potentially fatal.