When Change and Continuity Collide: Capitalizing on Strategic Gridlock in Financial Services

More technically, the demand curve shifts to the left and becomes relatively more horizontal (i.e., price sensitive) because of substitution.

These ideas are developed rigorously in Judd John P. , “Competition Between the Commercial Paper Market and Commercial Banks,” Economic Review, Federal Reserve Bank of San Francisco (Winter 1979), pp.39–53.

Andrews Suzanna , “Does Glass-Steagall Matter Anymore?” Institutional Investor (May 1987), p.172; Statistical Information on the Financial Services Industry (Washington, D.C.: American Bankers Association, 1987), p.7. See also “Regulatory Burdens Handicap Low-Risk Banking,” Chicago Fed Letter (January 1988).

An indication of this ability is the growth of money market deposit accounts, which grew from zero in 1982 to $600 billion in 1986. Bryan Lowell L. , Breaking Up the Bank (Homewood, IL: Dow Jones-Irwin, 1988), p.29. See also “The Recent Performance of the Commercial Banking Industry,” Federal Reserve Bank of New York Quarterly (Summer 1986), p.9.

Statistical Information on the Financial Services Industry, op. cit., p.1.

Simpson Thomas D. , “Developments in the U.S. Financial System Since the Mid-1970s,” Federal Reserve Bulletin (January 1988), p.5; Bryan , op. cit., p.43; Statistical Information on the Financial Services Industry, op. cit., p.41.

Statistical Information on the Financial Services Industry, op. cit., p.1.

Wall Larry D. , “Commercial Bank Profitability: Some Disturbing Trends,” Economic Review, Federal Reserve Bank of Atlanta (March/April 1987), pp. 24–36.

Statistical Information on the Financial Services Industry, op. cit., p.54.

Regulators are attempting to alleviate this problem by establishing risk-adjusted capital requirements. The underlying problem, however, remains. See Pavel Christine Phillis David , “Why Commercial Banks Sell Loans: An Empirical Analysis,” Economic Perspectives, Federal Reserve Bank of Chicago (May/June 1987), pp.3–13; and Baer Herbert L. Pavel Christine A. , “Does Regulation Drive Innovation?” Economic Perspectives, Federal Reserve Bank of Chicago (March/April 1988), pp.3–15.

Hanley Thomas H. , “U.S. Commercial Banking: Critical Issues for the 1990s,” Salomon Brothers, Inc. Stock Research, April 1986.

For further discussion of this point, see Bryan , op. cit., especially Chapter 3.

In group health insurance, the ASO phenomenon (in which firms purchase administrative services only or claims services only from an insurance carrier while retaining the risk) is a precisely parallel development.

“Business Finding Other Ways to Fund Risks,” Business Insurance, May 26, 1986, p.64; Arthur Anderson & Co., Insurance Industry Futures (Atlanta, GA: Life Office Management Association, 1988), pp.10–11. Growth of the captive market is analayzed in Porat M. Moshe , “Captives: Insurance Industry Cycles and the Future,” CPCU Journal (March 1987), pp.39–45.

For a full treatment of the “supply-driven” character of the property/casualty insurance industry, see Stewart Barbara D. , “Profit Cycles in Property/Liability Insurance,” in Long John D. Randall Everett D. , eds., Issues in Insurance, Vol. 1 (Malvern, PA: American Institute for Property and Liability Underwriters, 1984), pp.273–334.

For a further discussion of exit barriers in the P/C business, see Walker Peter B. , “The Game has Changed” Best's Review, Property and Casualty Edition (September and October 1984).

Wish Paul E. , “Review and Preview: Between a Rock and a Hard Place,” Best's Review, Property and Casualty Edition (January 1988), p.27.

Ibid.

For a more complete analysis of economic change in the property/casualty industry, see my article, “Surviving the New Economics of Property/Liability Insurance,” in Williams Numan A. , ed., Focus on the Future (Malvern, PA: Society of Property and Casualty Underwriters, 1987), pp.97–110.

Another way to express this point is that mortality rates have steadily improved throughout this century in the U.S., rendering charges for mortality protection too high on policies sold more than a few years ago. Demand for overpriced insurance is obviously lower than for less expensive coverage. One informed estimate is that policies sold 15–20 years ago were originally priced to provide a 10% return on investment. Actual returns on these policies have been about 25%, largely due to better-than assumed mortality. Zimmerman G. Alan Manning Carol D. , “How a Life Insurance Company Makes Money,” Insurance Investor, October 14, 1988, pp. 13–15.

Anthony David Snyder John H. “First Quarter Preview: Estimated and Actual First-Quarter Earnings, Reporting Dates, Commentary, and 1987 & 1988 Full Year Estimates for Selected Insurance Stocks,” Smith Barney Research, April 23, 1987, pp.58–59.

Best's Insurance Management Reports, July 25, 1988, p. 1; “How's Business,” LIMRA's Market Facts (October 1988), p. 16. See also “Competition Lowers Cost of Life Premiums” Insurance Times, September 27, 1988, p.30.

Anthony Snyder , “First Quarter Preview,” p.57; “Variable Plans Continue Atop Sales Charts,” National Underwriter, Life and Health/Financial Services Edition, October 9, 1987, p.4.

Financial Accounting Standards Board, “Accounting and Reporting by Insurance Enterprises for Certain Long Duration Insurance Contracts and for Realized Gains and Losses from the Sale of Investments” (FASB 97).

Anthony Snyder , op. cit. p.54.

Zimmerman G. Alan Snyder John H. , “Viewpoint—Life/Health,” Insurance Investor, May 27, 1988, p.7.

Rosen Howard L. , “On Declining Profit Margins,” National Underwriter, Life and Health/Financial Services Edition, March 16, 1987, p.14.

Statistical Information on the Financial Services Industry, p.7; Bryan , op. cit., pp.76,78; Parry Robert T. , “Major Trends in the U.S. Financial System: Implications and Issues,” Economic Review, Federal Reserve Bank of San Francisco (Spring 1987), p. 8; Davis Stanley M. , Future Perfect (Reading, MA: Addison Wesley, 1987) p.111. See also Pavel Christine , “Securitization,” Economic Perspectives, Federal Reserve Bank of Chicago (July/August 1986), pp.16–31.

For a more thorough discussion of this issue, see my article, “Strategic Gridlock Spells Opportunity,” forthcoming in The Federal Home Loan Bank Board Journal.

For a slightly different enumeration of generic strategies, see Porter Michael E. , Competitive Strategy (New York, NY: The Free Press, 1980), especially chapters 1 and 2; and Competitive Advantage (New York, NY: The Free Press, 1985), especially chapters 1, 2, 3, 4, 7, 9, 10, 11, 12.

This form of cost reduction can best be understood by accepting the number of combinations among interacting entities (departments, profit centers, etc.) as a proxy for organizational complexity. Four interacting entities have 11 combinations. An increase in the number of entities of 25% (to five) produces 19 combinations—an increase of 73%. Intuition suggests that the cost of coordinating and organization with five interacting components will be correspondingly greater than one with four. However, if five interacting entities are reduced to 4 (a decrease of 20%), the number of combinations will decrease by 42%. With this decrease should come lower coordinating costs. This leveraged decrease in the cost of coordination is what organization simplification seeks to accomplish.

For further discussion of this issue, see Porter Michael E. “From Competitive Advantage to Corporate Strategy,” Harvard Business Review (May/June 1987), pp.43–59. A cogent criticism of holding company ownership of independent operating divisions is in Mitzberg Henry , The Structuring of Organizations (Englewood Cliffs, NY: Prentice-Hall, 1979), pp.414–430. A more positive view of diversification in financial services is Mottur Allen , “Making the Decision to Diversify into Financial Services,” The Journal of Business Strategy (Summer 1987), pp. 13–20.

Conning and Company, The R Process, (Hartford, CT: Conning and Company, 1988).

Kuhn Thomas S. , The Structure of Scientific Revolutions (Chicago, IL: University of Chicago, 1962). Similar models of discontinuous change are presented in Miller Danny Friesen Peter H. , Organizations (Englewood Cliffs, NJ: Prentice-Hall, 1989); Foster Richard , Innovation (New York, NY: Summit Books, 1986); Land George Ainsworth , Grow or Die (New York, NY: John Wiley and Sons, 1986); and Tushman Michael L. Newman William H. Romanelli Elaine , “Convergence and Upheaval: Managing the Unsteady Peace of Organizational Evolution,” California Management Review (Fall 1986), pp.29–44.

Martel Leon , Mastering Change (New York, NY: Simon and Schuster, 1986), p.295.

The Hay Database is described in Gordon George L. Cummins Walter , Managing Management Climate (Lexington, MA: D.C. Heath, 1979).

Kuhn , op. cit., p.112.

Pocock J.G. A. , Politics, Language and Time (New York, NY: Athenaeum, 1973), especially chapters 1, 3, 6, 7, 8. Another interesting parallel to Kuhn is Geetz Clifford , “Ideology as a Cultural System,” in Apter David E. , ed., Ideology and Discontent (New York, NY: The Free Press, 1964) pp.47–76.

For example, see Bhide Amar , “Hustle as Strategy,” Harvard Business Review (September/October 1986), pp.59–65.

For an interesting discussion of response lags in financial services, see MacMillan Ian C. McCaffery Mary Lynn , “Strategy for Financial Services: Cashing in on Competitive Inertia,” The Journal of Business Strategy (Winter 1984), pp.58–65. For a related discussion, see Lorsch Jay W. , “Strategic Myopia: Culture as an Invisible Barrier to Change,” in Kilmann Ralph H. , eds., Gaining Control of the Corporate Culture (San Francisco, CA: Jossey-Bass, 1985), pp. 84–102.