How european banks ensure they are oriented towards innovation. A multi-case study. The role of an innovation orientation as a competitive advantage for highly regulated industries (i.E. Banking) facing challenging market conditions

Resumen

Innovation management is increasingly more present in the business discourse for all kind of fields of activity. However, academic literature has generally focused in technological and product innovations with limited coverage of innovation in service sectors like banking. With this in mind, this study has focused on innovation in the retail banking in Europe in the current times (primary research conducted between 2018 and 2019), when this industry was facing an increasingly competitive landscape with the entrance of new players (such as Challenger Banks) characterized by its agility to implement new services and adapt to new market trends. Competing effectively in such a competitive landscape could be done by process and/or product/service innovations, or through defining and filling new opportunity spaces. However, those innovations alone are insufficient to create long-term survival or a sustainable competitive advantage, since it may limit innovations to narrow categories. Instead, there must be a collective set of understandings and beliefs, pervasively accepted throughout the firm and likely to occur at all levels and functions, that facilitates continual innovation to ensure long-term competitive advantage. This broader construct corresponds to the so-called innovation orientation framework. An innovation orientation perspective that could lead to the integration of innovation into all areas of the firm (Banks in the case of this research) to better create a long term sustainable competitive advantage. The innovation orientation theory has emerged within the literature in the last 40 years particularly within the development of other strategic orientations, although this area of research is still developing and has so far been under researched. Moreover, research has not yet settled on one widely accepted definition of innovation orientation and instead much of the empirical investigations either do not define innovation orientation or utilize a range of definitions without selecting a firm single definition on which to frame the study. Therefore, for the purpose of this research, it was deemed relevant to come with a definition of the innovation orientation concept to be used in this research. The researcher, after conducting a literature review came with the following definition for innovation orientation, which is aligned with the most relevant literature: innovation-based strategic orientation, where orientation is used to describe the overall dominant approach that represents an organization’s competitive posture and strategic focus. Innovation orientation is seen, as a multiple construct; with a focus on driving innovation-based practices and values throughout the organization primarily through four core aspects considered as antecedents: culture, flexibility in structures, capital and knowledge capabilities and understanding environmental dynamics with the aim of driving positive organizational performance generated by the innovation orientation outcomes. After the concept of innovation orientation was set up, it was then considered relevant to come with a framework for such concept to be used as a base during the primary research. However, a minority of research on innovation orientation, to date, has consisted on developing a framework or model of innovation orientation, that could be applied to explore innovation orientation in practice and through empirical study. The researcher, based on Norris and Ciesielska (2018) conclusions on innovation orientation literature review, considered Siguaw et al.’s (2006) framework as the most appropriate as a starting point to frame innovation orientation. Always based on Norris and Ciesielska (2018) research, (i) Siguaw et al.’s (2006) innovation orientation framework is considered a reference and an good basis in research in order to frame innovation orientation, and that (ii) Siguaw et al. (2006) did move the study of innovation orientation forward in the seminal work that provided a conceptual framework for study and integration of innovation research and gave the rise of interest and publication by researchers into innovation orientation. Since there has been further research on the topic after Siguaw et al. (2006) article was first published, that framework has been reviewed and updated with recent research conclusions on the topic. Moreover, since the focus of the research was the banking industry, a literature review on innovation orientation for the service industry as a whole, and for the banking industry in particular was conducted in order to customize the innovation orientation framework to the banking industry. Purpose and research question The main goal of this study was to understand how European Banks are ensuring they are oriented towards innovation in the long run gaining a competitive advantage by doing so. The analysis of the innovation orientation framework applied to/or used by the banking industry, and to a lesser extent in Europe, has never been conducted previously. In fact, there is limited research conducted on innovation as a whole in the banking industry, and even at a lesser extent, regarding innovation orientation framework applied to such industry. Therefore, this research is the very first conducted to assess on how European Banks are applying the Updated Innovation Orientation Framework in order to gain long term competitive advantages. To reach that goal, the research question was set up as: How are European Banks ensuring they are oriented towards innovation? By answering this question, the researcher has been able to find the required knowledge structure that make Banks to adopt an innovation orientation; identified organizational competencies Banks have developed or implemented to ensure a successful innovation orientation; as well as to determine what type of innovation outcomes Banks are focusing on; how Banks measure the impact of innovation orientation on corporate performance; and what environmental turbulences and pitfalls Banks consider as affecting the whole innovation orientation process. Methodology and research design A multi-case exploratory study approach -based on Yin (2018) classification- was used to gain an understanding of how European Banks ensure they are oriented towards innovation. In order to enrich the analysis, other comparable units of analysis were also included in the multi case study: Large Corporations in industries that share common attributes to Banks (regulated industries, industries facing market changes, and service-related industries) and Challenger Banks. The conducted research required for richness of data and attention to context in order to study organizations (i.e. Banks). Based on this need of a broad source of data, it was assessed as the most appropriate research design to be used a mixed sequential model design -based on Rocco et al. (2003) classification-, which allows integrating, in the same study, quantitative and qualitative methodologies, with the purpose of having a better understanding about the object of study. Following the above-mentioned research design, the study started with in-depth interviews (qualitative research)- with academic experts (7 interviews) in innovation, large Corporations (10), and Challenger Banks (16). The insights from those interviews were used to validate/complement the Updated Innovation Orientation Framework. From there, in-depth interviews were performed with senior and middle management representatives from 16 European Banks (46) and one leading innovative banks from US (2) and another from Asia (1). The two latter were included to have a reference point to identify innovative European Banks (the so-called Pioneer Banks). Those in-depth interviews were followed with on-line interviews with peers of the Banks representatives interviewees (quantitative research) to validate the qualitative research evidences (total of 72 on-line valid questionnaires). Research evidences and discussion From the evidencies gathered during the primary research phase, the researcher was able to conclude the following relating to how European Banks are ensuring they are oriented towards innovation. Following the Upadated Innovation Orientation framework structure, and starting by the knowledge structure, European Banks overall have a strategic direction leading to innovation but they seem to be facing some challenges to really implement or develop some features and mechanisms to ensure strategy related to innovation components are deployed: the cultural change required to be more agile and flexible to adapt to new market conditions; the willingness to accept moderate risks; and a leadership that can cope with those required changes. Moreover, Banks still need to get full commitment to innovation orientation from the top management and the Board of Directors. Following with the knowledge structure, European Banks have in place a learning philosophy but currently mainly oriented to gather knowledge – with specific focus on customer experinces, competition and technology trends-, though missing the potential to transform such knowledge into new business opportunities. Furthermore, European Banks are still lacking the implementation of formal systems and processes to gather and disseminate all that knowledge across the organization. Regarding the last component of the knowledge structure, European Banks despite considering trans functional acclimation as a vital component to ensure innovation takes place, there is still room for improvement in this specific area, mainly in eliminating siloes which prevent from interdepartmental collaboration. The advisable practice would be the implementation of a knowledge management system. Getting into the organizational competencies required to be oriented towards innovation, European Banks were clearly allocating budget to innovation, which due to cost constraints are being wisely assigned. On the workforce, European Banks seemed to be considering the importance of the dedicated human resources to the innovation process. As such they are starting to define talent pools of natural innovators and mapping required skills for the future to identify gaps with existing workforce in order to cover those gaps. A key component within the organizational competencies highlighted by European Banks was the willingness to deploy new technologies, although as a means to follow up with market trends and be able to cope with competition rather than on a proactive manner. What really strikes European Banks is the fact they need to deal with legacy systems that are not as flexible as one would like; leadership might not have the technical abilities to accompany the technological transformation process and that the organization is not fast enough to implement such IT related required implementations and updates. Still related to the organizational competencies, European Banks have implemented a set of procedures devoted to stimulating and sustaining innovation-directed individual employee actions, and corporate values within the corporate culture that are aiming to ensure innovation in the long run. However, for some institutions there is still a long way to go. Likewise, there is still room for improvement for most of European Banks accepting risk related to letting employees innovate and being more autonomous. Moreover, Banks still need to make some adjustments to the organization structure, leadership style, and culture to engage the organization to stimulate and sustain innovation. On the innovation outcomes, European Banks are using all forms of innovation (incremental and radical), with a more predominant form one in between the those two initial forms suggested by the innovation orientation framework. This in-between form has been called transformational form of innovation. Due to the changes the financial industry is facing and the increasingly competition in the industry, European Banks recognize they need to focus on all types of innovation to quickly adapt to new market conditions and cope with new entrants in the industry (i.e. Challenger Banks). Despite European Banks state they want fast innovations, they face some major internal challenges to get up to speed, namely their organizations’ internal procedures limiting innovation speed. One major relevant change European Banks are experiencing is the shift in their innovation collaboration style. They are moving from an internal driven preserver model to a new pattern, the innovation ecosystems or open innovation. This is due to the need of Banks to become more agile in the innovation process that they may not reach due to some internal limiting factors as previously mentioned. European Banks do not have a strong position on the impact of the level of form and type of innovation on the institution’s performance but do have on innovation speed. They consider the faster innovation is introduced, the better the performance will be. The latter considered to be a consequence of market pressure and being aware internal “legacy” culture prevents from being as fast as the market is expecting. Regarding environmental factors that could limit innovation orientation, European Banks are well aware there are factors that could moderate / accelerate innovation but Banks do not seem to have a common view on what factors are moderating and what accelerating (i.e. regulation is seen by some as a moderating factor whereas others consider it as an accelerating one). This might be a consequence of different attitudes towards external factors/risk aversion and internal corporate culture. All in all, European Banks consider innovation orientation could be a competitive advantage in the long run since this approach may help Banks to cope with relevant changes in the marketplace. Banks are also aware of the innovation orientation pitfalls, which are mainly related to the frustration that not getting innovation done could cause on those teams pushing for innovation. In conclusion, after the analysis of all evidences, most European Banks had implemented/were in the process to implement almost all the components of the Updated Innovation Orientation framework and they consider an innovation orientation perspective could lead to the integration of innovation into all areas of the Bank and create a long term sustainable competitive advantage. However there are three components of the framework that still need further development: (i) trans functional acclimation; (ii) further innovation culture development (risk acceptance, flexibility, agility, silo less structure, more employee autonomy, and implementing innovation related reward systems); and (iii) assessing/tracking innovation orientation on Bank’s performance. Coupled with those developments, Banks should consider implementing systematic tools related to some of those components: learning/knowledge management systems; innovation portfolio management; and innovation KPIs dashboards. In order to capture potential differentiation attributes between the so-called Pioneer Banks (more advanced in terms of the degree of implementation of the innovation orientation framework) and the rest of the Banks, the researcher sub segmented the European Banks into two groups. Once evidences analyzed, Pioneer Banks, when compared to the rest of the Banks, seem to have greater top-level support, higher investment in technology and talent, have less challenges with cultural issues, and are more skilled at measuring results related to innovation. Moreover, they have formalized a series of tools aiming at rationalizing the Bank’s innovation orientation: learning management systems, knowledge management systems, business intelligence processes, innovation projects portfolio management, and innovation related KPIs dashboards. From the analysis of evidences from interviewing Challenger Banks and when compared those with European Banks, the former seem to embody the core principles of innovation that drive competitive advantage to the traditional Banks. Challenger embrace risk-taking and failure, while rewarding success. They are agile and can pivot immediately to meet market demand and are focused on customer needs. Because they are usually small, they can think big. But because they are small, scalability can be a challenge. Last, from the evidences gathered after interviewing a sample of Large Corporations when confronted to Banks, the former are more willing to challenge their mission, vision and values on a regular basis in order to untap potential innovation outcomes. Most of them have undertaken significant cultural and organizational changes to ensure the whole organization is oriented towards innovation. They seem to prize agility, flexibility, diversity, fail fast/learn fast attitude, silo-less organizations and cross-departmental collaboration, and they have also developed ecosystems to promote innovation. Managerial recommendations The Updated Innovation Orientation Framework, initially conceptualized by Siguaw et al. (2006), and updated by this researcher, could be a helpful tool for Bank’s managers to (a) assess to what extent their organizations are fully oriented towards innovation, (b) and identify gaps and potential areas for improvement in views to ensure they are truly oriented towards innovation. From the sample of Banks assessed, the researcher has identified the current gaps of mainstream European Banks when compared to the Updated Innovation Orientation Framework, to the so called Pioneer Banks and to the rest of Units of Analysis (mainly Challenger Banks and Leading Large Corporations). The researcher would assume some other Banks (and at a larger extent, companies in the tacit service industry) may also present some of those gaps too. The following catalogue could be a starting point of features to check by any given Bank (or tacit service company) in order to ensure they are oriented towards innovation. Those features are: • Strategy and leadership: (i) Leadership needs to be trained in innovation and new technologies, be supportive to innovation and lead change; (ii) Board of directors need to be committed and supportive to the innovation orientation process; (iii) Banks should not fear to challenge their mission, vision and values in order to identify potential innovation outcomes • Learning/Functional Acclimation: (i) Banks should put in place formal systems and tools to gather and disseminate knowledge; (ii) Banks should use market intelligence to generate innovation; (iii) setting up scouting networks could be an option to generate insights for innovation • Organizational Competencies: (i) dedicating resources to innovation is critical but need to be allocated wisely; (ii) Banks should put in place all the measures available to avoid siloes and set up a flexible and flatter organizations; (iii) Banks need to be more open to embrace new technologies and ensure they are implemented fast despite their legacy systems; (iv) Banks should further leverage on employees capabilities to innovate; (v) Banks should consider implementing reward systems to encourage innovation from employees; (vi) Banks should be more willing to assume controlled risks by a fail an learn attitude and being more flexible • Innovation Outcomes: (i) Banks need to define the type of innovation they want to implement; (ii) Banks should strongly consider collaboration with third parties in the innovation generation process; and (iii) make sure orchestrate internally the innovation initiatives • Banks performance: (i) Banks should consider setting up an Innovation Management Plan and Dashboard, which should include the goals to be achieved through innovation, the innovation related projects portfolio, required resources to be allocated, deliverables and KPIs to be followed (both objective and subjective) If those features are not yet implemented, those organizations may consider implementing them in order to ensure they are oriented towards innovation in the long run and consequently gain some competitive advantage. Furthermore, managers should be fully aware that innovation orientation has also some pitfalls that should be considered while implementing such framework. The main one is that this process is a cost intensive one that could be seen as generating too much change for the sake of change. It may also have an impact on the workforce due to its potential intensity such as burn out, job stress, and dissatisfaction. And last, managers should also implement effective mechanism to anticipate the potential effects of environmental turbulences in the innovation orientation of the Bank, such as market and technology turbulences, macro-economic events (i.e. Covid-19), regulation changes, and industry consolidation processes.