How banks apply marketing expertise to develop new derivatives

ELSEVIER

0000 How Banks Apply Marketing New Derivatives

Expertise to Develop

F. Axe1 Johne and M. Panos Pavlidis

For banks operating in the fiercely competitive derivatives market, the difference between the leaders and the also-rans often boils down to their respective approaches to product innovation. To achieve market leadership in this highly volatile field, a bank must develop and continually refine the processes and the expertise necessary for identifying new areas of business and attracting and retaining customers. Although the development of derivatives is a complex, expensive process, such development efforts provide the means for satisfying existing clients as well as attracting new customers. F. Axe1 Johne and M. Panos Pavlidis examine the managerial practices of banks that are acknowledged leaders in bringing new derivatives to market ahead of their competitors. In particular, they examine how those first-mover banks apply their marketing expertise and they review the advantages those banks enjoy as a result of their success in product innovation. The banks studied fall into one of two groups: highly active innovators and less active innovators. The study reveals several significant differences between the two groups with respect to managing marketing inputs for product innovation purposes. First, compared to less active banks, the highly active innovators take a more sophisticated, market-based approach to identifying innovation opportunities. Rather than looking for innovations that ofSeer a close fit with existing products and competencies, they analyze the benefits sought by target clients and initiate innovation efSorts based on those analyses. Highly active innovators recognize the important role that internal marketing plays in encouraging functional specialists to work together for the purpose of identifying follow-on development opportunities. Internal marketing also helps to ensure that all parties understand and can support the planned innovation. The highly active innovators in this study do not take a formulaic approach to the development of new derivatives; instead, they rely on marketing expertise to identify and capitalize on business opportunities. Rather than concentrate solely on improving the core technical features of a product, the highly active innovators also recognize the importance of product augmentation innovation (to ensure the appropriate support for various market segments), process innovation (so they can reduce prices, when necessary), and market innovation (to ensure that they pursue the optimal mix of markets). Address correspondence to F. Axe.1 Johne, City University Business School, Frobisher Crescent, Barbican Centre, London, EC2Y 8HB, England. J PROD INNOV MANAG 1996;13:440-452 0 1996 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY

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0737-6782/96/$15.00 PII SO737-6782(96)00039-2

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Introduction aking early market entries with new products is important in many markets. Being a first mover is particularly important in developing new derivative products. The financial instruments called derivatives are now widely purchased by corporations. They facilitate the management of risks that were once considered unavoidable. They are contracts linked to indexes such as interest rates, foreign exchange rates, and commodity prices, whose values vary over time. Their purpose is to modify exposure to these variables in a calculated way. They offer novel ways of teasing apart and managing risks that traditionally were lumped together. Used skillfully, derivatives are no more risky than other less daunting financial assetsand activities. There are two main categories of derivative products: (1) forward-based contracts, comprising forwards, swaps and futures, and (2) option-based contracts, comprising options, caps, and floors. Being a leader in derivative product innovation has important attractions to banks. It is a means for increasing sales turnover boosted by the higher prices charged for really innovative products. It is also a means for attracting and keeping able staff who find the excitement of product innovation stimulating. Last, and potentially most important of all, it allows early information to be gathered from lead customers, which can be used to evaluate the relative merits of different business development strategies. The scope for further product innovation in derivatives is considerable. Until the late 1980s only the largest multinational companies bought them. Today

BIOGRAPHICAL

SKETCHES

,F. Axe1 w is Professor of Marketing and Director of the Innovation Research Unit at the City University Business School, London, England. He earned his Ph.D. at Strathclyde University, Scotland, with a thesis on high technology product innovation. He has published two books concerned with innovation and new product development, as well as research papers in journals such as International Journal of Research in Marketing, Journal of Product Innovation Management, European Journal of Marketing, and Intemationul Journal of Bank Marketing. M. obtained his doctorate at City University Business School, London, where he subsequently worked as a Research Associate on the project reported here. He is a specialist in bank marketing and product innovation. Currently, he runs his own company in Greece marketing to Eastern Europe. He is a member of the Chartered Institute of Marketing of the United Kingdom.

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smaller companies, pension funds, insurance companies and money managers also buy. Banks offering derivative products now vie with one another to put forward the latest variants to satisfy existing clients and also to attract new customers. As a result, derivatives markets have become fiercely competitive. The current fashion on the part of suppliers is to widen product lines. Some banks are acknowledged leaders in putting variants of new derivatives on the market ahead of others. In this study, we consider the managerial practices of such banks, focus on how marketing expertise is applied by them, and review the advantages accruing from being a highly active product innovator.

Advantages

of Leading

In commercial and investment banking, just as in the field of manufactured products, product innovation spans a range of offerings from minor product updates, through extension of product lines, through to the development of completely new product lines. A supplier can pursue product innovation proactively or reactively. When a bank pursues proactive product innovation, it will typically aim to be a leader in getting its newly developed products on to the market ahead of competitors. If it fails in this endeavor, it will be a follower-either a “fast second,” who reacts very fast after having watched how the leaders fare; or a “late follower.’ ’ Reviewing the literature on speed in product development is difficult because studies frequently fail to state explicitly whether they refer to speed aimed at (1) achieving competitive order of entry or at (2) accelerating development times. Sometimes the two activities are considered simultaneously. There is, however, no compelling reason for this. The first-to-market decision is a strategic decision, taken with reference to the anticipated actions and reactions of competitors. Accelerated development activity, on the other hand, is of undoubted potential importance to first-to-market entrants but often of even greater importance to fast second entrants. First-to-market activity is frequently undertaken in the belief that it will allow a supplier to gain competitive advantage. Analytical literature suggests that being a first mover, or at least keeping up with the first movers, is a necessary competitive activity in many fast-moving markets [12,26]. This is precisely what preliminary interviews, conducted in a number of

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banks revealed: a widely expressed aim of being first or first equal in putting new variants of derivatives on to the market. Several respondents stated that this was to “demonstrate one’s competence in this aggressive part of the banking industry.” This decision to lead is not entered into lightly, for the development of a new complex derivative can cost several millions of dollars. This sum will cover technical and legal advice; time spent educating issuers, investors, and traders; investments in computer systems, and also personnel commitments. Development can involve up to six and sometimes even more specialists working together for several months. There are important reasons why banks vie with one another to be first in putting new derivatives on to the market. In the absence of patent protection, the response lag (the time it takes for competition to respond aggressively to a new product) is critical. The lag provides a transient monopoly position which extends from the time of launch until competition from comparable products drives margins down and the product assumes a commodity status. During this interval sufficient profits must be generated by first movers to justify the risks of introducing a new product in the first place. The need to recoup development costs is important, because being a first mover frequently costs more than following [6,30]. However, whereas the potential to charge higher, premium, prices with an innovative product is a frequently quoted advantage, this type of return is by no means assured in all product markets. For example, Tufano [34] in a study of new investment products, found no evidence of premium prices being charged by first movers in the United States, chiefly because of very short lead times. The results of our own study reported here identify other advantages which repay the expense of being a first mover. Suppliers that achieve a high number of firsts within a highly volatile market must have in place processes that allow skillful identification of new areas of business, and, just as important, must reappraise regularly the ways in which business is captured and retained. Having and homing these skills provides essential inputs for successful and profitable business development.

Determinants of Business Development Success For the purpose of developing a business in turbulent markets-such as are served by derivative products-

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four main types of innovation can be called into play: process innovation, market innovation, product innovation, and product augmentation innovation, as explained in Exhibit 1. Aiming for leadership in only one or a few of the four main types of innovation is likely to result in lopsided business development. Product innovation in the form of product proliferation is undoubtedly important when competing in derivatives markets. However, the results reported below show that successful business developers safeguard their first-mover positions by engaging, simultaneously, in other types of innovation also. As far as product innovation successis concerned, a rich body of literature exists on factors which contribute to it. An overview of relevant studies is found in the literature reviews undertaken by Hart and Craig [ 171 and Griffin and Page [ 131. Although a pattern of important input factors has emerged, it is clear that there is no one right way to manage the different types of product innovation, which run from minor product improvements aimed at correcting the status quo, right through to major new product developments aimed at entering a new area of business. A fundamental problem is conflicting corporate and individual objectives. A recent review of performance factors in product innovation by Griffin and Page [13] is insightful. It shows that the aspirations of most middle level product development managers are distinctly different from those of many academic researchers and top corporate level executives. New product development managers are reported, first and foremost, as wanting to avoid (individual) product innovation failures. On the other hand, many academic researchers and also top corporate level executives-those concerned with comparing the performance of constituent businesses-show greatest interest in factors associated with continuous product innovation success,that is to say, program success.The reason for this broader interest is because even businesses with a poor overall

Exhibit 1. Innovation Development

Types for Organic Business

i. Process innovation-improving supply chain economies. ii. Market innovation-improving the mix of customers. iii. Product innovation-improving the mix of products. iv. Product augmentation innovation-improving the way products are presented and made available to customers.

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record of product innovation can occasionally produce a one-off success-quite possibly by chance. This means that the academic research practice of asking middle level managers to nominate a successful individual product innovation, which is then compared with an unsuccessful one is dangerous on methodological grounds. Unless such research is pursued and explained in carefully circumscribed competitive situations its results can be misleading. In the research reported here we deliberately sought to measure and explain successat the program level. The type of product innovation successfocused on is first-mover leadership. For the purpose of gaining insight into this activity the product strategy literature was reviewed. A widely used analytical perspective is that of Miles and Snow [24] who suggest four main types of product strategies: those of prospectors, analyzers, reactors, and defenders. Although this perspective is valuable in explaining a supplier’s strategic intent, it is less useful for explaining strategic content. In the latter respect Porter’s [29] work is useful. Porter 1291 argues that a business must determine product strategy on two main counts. First, on the basis of the coverage of the market: whether to be a wide or narrow range supplier. Second, on the basis of anticipated competitive advantage: whether to aim at low cost or differentiated output. Porter [29] stressesthat it is unwise to fall “in-between” when determining the basis of one’s product strategy, because of loss of focus.

Conceptualization A quite different approach to product strategy formulation has been advanced by de Bruicker and Summe ]8] and by Mathur [22]. These analysts argue that the content of effective product strategy relies on marrying the offer to the preferences of target market segments. What is different about this approach is that product strategy is seen as the formula for beating competitors in identified markets. The approach requires more than making best use of one’s supply capabilities. It requires buyers’ preferences to be analyzed and met as precisely as possible through optimal product positioning. Such positioning being achieved through price (facilitated by process innovation), amending core product attributes (product innovation), and support to customers (through product augmentation innovation). In particular, it being through differentiated product augmentation that an appropriate “offer” is placed on the market. Gr6nroos [14] and Storey

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and Easingwood [32] refer to this as the “augmented service offer”; Kotler [21] refers to it as the “augmented product offer.” Mathur [22] explains the different approach by suggesting that an offer is made up of three parts. First, core product attributes, which he calls the “hardware.” Second, the augmentation, which he calls “support.” Third, the price. For example, a complex banking derivative can be offered as a commodity to knowledgeable corporate customers who wish to buy on the basis of price. Yet, the same complex banking derivative can be offered, with support in the form of expert advice-for which an additional fee is normally charged-to less knowledgeable corporate customers. The core product attribute is the same in both offers, but the level of augmentation is different to suit the preferences of different target markets. The messagefor product strategy formulation based on an analysis of customer preferences is powerful. It emphasizes that offers need to be tailored. first and foremost, to meet customer preferences, and not primarily to exploit economies of scale. Even though some economies of scale may be lost using this approach, such loss is often small when modern flexible means of supply are used. The essential advantage of product strategy formulation based on an analysis of customer preferences is that market potentials are addressed explicitly. The emphasis is on what might be achieved, rather than on avoiding the operational failures feared by many middle level product development managers. The results of our investigation reported below point to a strong need to supplement product innovation with product augmentation innovation in order to capitalize fully on first-mover advantage in banking. Product augmentation innovation is important because it embraces the support given to customers to help them choose and use the core product. Kotler [21] quotes Levitt in stressing that this new form of competing “is not between what companies produce in their factories, but between what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value.” It is important to realize that product augmentation can, on occasions, involve withdrawing certain traditional forms of support and replacing these by others. This has happened in direct banking, where the convenience of 24-hour telephone contact compensates customers for lack of face-to-face service. It is of in-

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terest that the combination of product innovation and product augmentation innovation is now frequently referred to in banking managerial parlance as “offer innovation.” In the field of derivatives product innovation we came across several bankers who now routinely talk not about “product innovation,” but about ‘ ‘offer innovation,’ ’ in a deliberate effort to stress the difference between these two activities. The concept of offer innovation (comprising product innovation and product augmentation innovation) is not new. It has found powerful support in the product innovation literature in which empirical researchers have highlighted the dangers of concentrating on narrowly defined product innovation. For example, Cooper and Kleinschmidt [5] have shown that the provision of appropriate support is important in achieving product superiority in the eyes of business customers, and so have identified it as a key factor determining success.Similarly, in a study of successful consumer financial services innovation, Easingwood and Storey [lo] found that product advantage on its own is relatively unimportant in differentiating between success and failure. It is variations in the nature and level of the support which explain most of the differences. Our results show such differences to be particularly important in banking, where similar core product attributes are available from many suppliers, and buyers must be helped to choose between competing offers on more than core product attributes.

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on a regular, on-going, basis. As can be seen from Table 1 a number of banks had headquarters outside the United Kingdom. From the population of 17 active product innovators, a sample of eight agreed to cooperate in an investigation into their product innovation practicesspecifically, to find out how some active product innovators had been able to achieve more firsts to market than others. Ideally, we would have preferred a larger sample, but this was precluded because of the sensitive nature of the investigation. Several banks which were approached firmly declined to participate on the grounds of commercial confidentiality. We regard the limited size of sample as acceptable, given the highly competitive circumstances investigated. Each cooperating bank was asked to identify product innovations launched successfully in the five calendar years 1990-1994 where a first or a first equal market entry was achieved. All the innovations were line extensions. Responses were verified by checking against opinions expressed by competitor banks. All eight banks in the sample had large derivatives operations, and commensurately large R&D spends. Because each bank in the sample had broadly equal opportunities to achieve market firsts, it was decided to measure the dependent variable by counting the absolute number of first achieved, rather than the number achieved relative to bank size. Table 2 shows how the Table 1. Banks with Active Risk Management Operations in London

The Investigation Product innovation is of undoubted importance in furthering the development of derivatives business in banks. The purpose of the investigation reported in this article was to describe how active product innovators undertake the needed tasks, and particularly to discover why some banks are more successful at continuing (as opposed to one-off) product innovation than others. Of special interest is how new core product attributes are developed, how these are augmented with appropriate levels of support, and how these are then introduced as “offers” into different markets for the purpose of exploiting first-mover advantages. In 1993, 125 banks were reported as being involved in derivatives operations in London: Europe’s premier financial center [33]. In December 1994, 17 of these banks were identified by a panel of industry and academic experts as active product innovators. By active is meant that these banks engage in product innovation

Location of Head Office Bankers Trust Barclays de Zoete Wedd Group Chase Manhattan Bank N.A. Chemical Bank Citibank Credit Suisse First Boston First National Bank of Chicago Goldman Sachs International Limited JP Morgan Midland Montagu Morgan Stanley National Westminster Bank PLC Nomura Bank International Salomon Brothers International Limited Societe Generale Swiss Bank Corporation Union Bank of Switzerland

U.S.A. England U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. England U.S.A. England Japan U.S.A. France Switzerland Switzerland

Source: Telerate Bank Register [33] and Field study data. The above banks were identified by industry experts as particularly innovative terms of product innovation undertaken from a London base.

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Table 2. Product Innovation Performance of Banks in the SampIe: Number of Fits to Market Achieved January l!EWDecember 1994 Highly active product innovator hanks” CreditBank TrustBank CorporateBank NationalBank

8 I 6 6

I!!JSSactive product innovator hank.? ChaserBank SocialBank FamilyBank NominalBank

5 4 4 3

” To respect confidences the names of the banks have been disguised. Soww: Field study data.

eight cooperating banks had performed. For experimental purposes the sample was split into two groups: highly active and less active. With such a small sample it is essential to ensure that banks with similar objectives and capabilities are being compared. A number of control questions were, therefore, asked. As far as strategy is concerned, respondents in each bank were asked, from a number of different angles, whether there was emphasis on speed in product innovation in terms of being a first mover with new products. There would, clearly, be little point in comparing banks that had fundamentally different strategic objectives in this respect. Structure was examined by asking whether organizational structuring was primarily on the basis of functional inputs or whether other bases were used. Staff issues were assessed by asking whether there were long-running shortages for specialists needed for product development. Analysis of the control questions was revealing in so far as it showed remarkable similarities among the highly active and the less active product innovators. Only in the case of structure was there a clear difference between the two groups. All but one of the derivatives operations of highly active innovators were structured on a product basis; all others, including the less active innovators, were structured on a functional input basis. With this exception all banks in the sample appeared to follow what Spender [31] has referred to as the “recipe theory” for managing, whereby all or nearly all firms in an industry sector follow a broadly similar approach to competing. The situation which confronted us as researchers appeared to be neatly summarized by one industry commentator in the following way: “sometimes one bank wins, at other times another bank wins-we just

jockey for advantage.” This view of the situation was, however, unrealistic. Some banks are now achieving superior results in terms of first-mover performance. What intrigued us was why certain banks were achieving better results than others, when every bank appeared to be managing product innovation in a broadly similar fashion. What was it that the highly active product innovator banks were doing differently from the less active innovators?

The Importance of Marketing Rather than concentrating on the multitude of input factors that might facilitate the sort of product innovation success on which we were focusing, attention was concentrated on the factor which all previous research has identified as very important-marketing. We did this with some trepidation. because the control questioning had shown that overtly the emphasis placed on marketing in the highly active product innovator banks was much the same as in the less active banks. However, there appeared to be one potentially important difference. It was severally pointed out to us in preliminary interviews that while all banks are presently recruiting actively to fill vacancies for jobs containing marketing titles, certain highly innovative banks are placing much more emphasis on “doing” marketing, than on “merely putting in place persons with marketing titles.” Of all the factors associated with successin product innovation, marketing inputs have consistently been identified in empirical studies as important [4,5, 11,251. Most investigations have focused on the quantity of marketing. Researchers who have followed this tradition have focused on readily measurable inputs, such as the structure of the marketing organization, the number of persons with marketing titles, and the amounts spent on marketing activities. Although this research tradition has focused on the existence of the marketing function, it has failed to assess.in precise terms, how marketing expertise is applied. A small number of studies [1,3, IS.181 has broken with the functional input approach and has focused on the output or philosophy of marketing. Webster [35] has stressed that marketing philosophy can be simple or sophisticated. Kotler’s [21] five stages in the evolution of marketing philosophy in banks, as shown in Exhibit 2, provide useful insights into stages of sophistication. Webster [35] asserts that at the highest stage of sophistication, marketing tasks are no longer

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Exhibit 2. Stages in the Adoption Philosophy in Banks

F. A. JOHNE

of Marketing

Stage 1: Marketing is advertising, sales promotion, and publicity. Stage 2: Marketing is smiling and a friendly atmosphere. Stage 3: Marketing is innovation (mainly product hmovation). Stage 4: Marketing is positioning (product innovation and product augmentation innovation). Stage 5: Marketing is analysis, planning, implementation and control. Source: Based on Kotler [21].

the responsibility of solely marketing specialists: everyone is charged with understanding customers, as well as developing and delivering value. Businesses that have adopted a sophisticated marketing philosophy will, it is argued, ensure that the approach pervades all decision taking.

Method Product innovation decision taking involves two main operational activities: (1) initiating and (2) implementing. Initiating product innovation involves analyzing and planning for new product opportunities on the basis of understanding customer preferences, own supply capabilities, and likely competitor reactions. Implementation involves the readying of selected developments for intended markets by using appropriate control mechanisms. It is on the basis of studying external market opportunities that different forms of offer innovation can be initiated. Implementation, thereafter, involves the readying of appropriate ‘ ‘offers’ ’ so that these reach selected target segments efficiently. Both conventional “external” marketing, as well as ‘ ‘internal” marketing are involved. Internal marketing is particularly important in services, where new product variants are frequently seen by supplier staff as “just one more problem to be handled.” The difficulties associated with overcoming potential internal resistance, and how marketing can help with this problem, presents a major challenge. For example, Piercy and Morgan [28] found in a wide range of services firms that marketing to internal customers is often more important in achieving operational successthan is conventional external marketing.

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In order to measure differences in the substance (as opposed to the trappings) of marketing actions, a measuring instrument was needed to tease out differences in the application of marketing skills. The McKinsey 7Ss analytic framework popularized by Peters and Waterman [27] was applied for this purpose. This framework has been used in previous investigations by Johne and Snelson [20] and also by Dwyer and Mellor [9] to provide an overview of organizational approaches to product innovation. In previous investigations in which the framework was used to collect data, managers experienced no difficulties in relating to the span of questions. The framework, shown in Exhibit 3, is made up of seven factors, each of which influences product innovation decisions. Two of the factorsstrategy and structure-have been described as “hard” Ss; the remaining five-as “soft” or peoplerelated Ss. The seven factors in the McKinsey analytic framework were used to measure marketing inputs for the two main types of product innovation decisions. First, decisions on initiating, that is to say, on the sorts of product innovations to be pursued. Second, decisions aimed at completing, that is to say, implementing product innovations it had been decided to pursue. Hypotheses were formulated for each type of decision. They were formulated on the basis of three main literatures-marketing; strategic management and product innovation. The specific questions asked to test hypotheses are listed in Exhibit 4. Data were collected in January, February, and March Exhibit 3. The McKinsey 7 Ss Analytic Framework Applied to Product Innovation Strategy:

The product innovation strategy and its relation to corporate strategy. Structure: The organizational framework of product innovation management. The specialists’ knowledge and decision Skills: methods applied to product innovation tasks. The quantity and quality of functional speStaff: cialists involved in product innovation. Systems: The nature of the coordination and control mechanisms for product innovation. Shared values: Organization members’ beliefs about the value of product innovation in promoting corporate objectives. Top management support for product innoStyle: vation. Source: Based on Peters and Waterman [27]. J

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Exhibit 4. &ales Used for Assessing Marketing Inputs for Initiating and Implementing Product Innovation Respondents were asked to indicate their level of agreement with the following statements using a 5-point Likert scale (5 = strongly agree: 1 = strongly disagree). STRATEGY Initiation,

Implementation:

STRUCTURE Initiation:

Implementation:

SKILLS Initiation:

Implementation:

STAFF Initiation:

Implementation:

SYSTEMS Initiation:

Our NPD strategy is formulated more on exploiting market opportunities than building on existing resource strengths. We aim, whenever possible, to reshape markets in our favor, rather than try to beat competitors head-on with variants of existing products. Our marketing inputs are organizationally structured on a market opportunity basis rather than on a product basis. Marketing specialists play an important role in monitoring the progress of new product developments right through to launch. Detailed information is collected and analyzed on our customers, markets and competitors for the purpose of deciding which sorts of new products to develop. This detailed information is used to market specific new product developments internally throughout the NPD process. We have sufficient in-house marketing expertise without having to rely extensively on outsiders to identify NPD opportunities. Inside the bank it is de rigueur for those with proven marketing skills to be involved throughout the NPD process right through to launch.

(standardization) We follow an essentially standardized way for collecting and analyzing customer, market, and competitor information. Implementation: We follow an essentially standardized way for monitoring marketing inputs into the NPD development process right through to launch. SYSTEMS (formalization) Initiation: Our NPD proposals require marketing inputs to be detailed in writing. implementation: Our NPD process requires marketing inputs to be formally signed-off at specific points right through to launch.

Exhibit

4. Continued

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SHARED VALUES Initiation: Marketing considerations are given at least equal consideration to other specialist inputs when deliberating on which sorts of new product developments are to be pursued. Implementation: Marketing considerations are given at least equal consideration to other specialist inputs throughout the product development process right through to launch, STYLE Initiation:

Implementation:

Top management insists marketing inputs are given extensive consideration when deciding which sorts of new product developments are to be pursued. Top management insists that marketing inputs are explicitly considered throughout the product development process right through to launch

Source: Field study.

1995 by personal face-to-face interviews with senior managers of derivatives operations-managers with titles such as head of treasury division or head of derivatives operations. The same questions were subsequently administered in a follow-up meeting with a different member of each bank who was intimately involved with the development of derivatives. Respondents were asked to indicate agreement or disagreement on Spoint Likert scales. Whereas quantitative responses were sought, great importance was attached to interaction during the questioning process. In particular, respondents were asked, in a gentle probing fashion, to amplify and justify scores. In many instances this served as an essential check on the veracity of replies. Whenever differences of two points or more were scored within the same bank, respondents were contacted on the telephone, after completion of the second interview, to confirm scores. In each such case a reconciliation was achieved on the basis of further amplification.

Findings An overview of the results for each hypothesis is provided in Table 3. The table was compiled on the basis of an analysis of the average of scores obtained in each bank-there being two respondents in each. A commentary on the findings is provided now. with discus-

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Table 3. Tests of Hypotheses for Marketing

Strategy Initiation Implementation Structure Initiation Implementation Skills Initiation Implementation Staff Initiation Implementation Systems-Standardization Initiation Implementation Systems-Formalization Initiation Implementation Shared values Initiation Implementation Style Initiation Implementation

Inputs

Highly Active Innovator Banks n=4 Mean Score

Less Active Innovator Banks Mean Score

ttest”

pb

4.25 4.25

3.25 3.30

2.86 3.28

0.012 0.004

3.25 4.00

3.00 3.25

1.00 3.00

NS 0.006

4.25 4.25

3.75 3.50

1.42 1.97

NS 0.024

4.25 4.50

3.00 3.25

2.01 3.18

0.023 0.005

4.50 4.00

3.50 3.00

2.45 2.45

0.015 0.015

4.50 4.00

3.00 2.15

3.00 5.00

0.006 0.000

4.50 4.15

3.25 3.00

3.18 2.78

0.005 0.010

4.00 4.25

2.15 3.25

2.61 2.86

0.016 0.012

n=4

a T-tests were used in order to identify statistically significant differences between the sample means scored. Within the confines of the experiment (5-point Likert scales were used) the f-statistic has to exceed 1.94--the t-value for 6 degrees of freedom at the .05 level of significance (one-tailed test). b This statistic indicates how confident we can be that the result did not occur by chance. For the first value-O.012-we can be 98.8% certain that the difference between the means has not occurred by pure chance. Source: Field study data.

sion of the managerial implications being delayed until later. Hypotheses are commented on in the order for which greatest variance was found between means. Shared Values

It was hypothesized that highly active innovators place at least as much emphasis on marketing than on other functional inputs, whereas less active innovators place less emphasis on marketing for (1) initiating and (2) implementing. The rationale for these hypotheses rests on the findings of empirical studies of product innovation research, such as Cooper and de Brentani [4], who have identified marketing as a key input which provides direction to other functional inputs.

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Found. Highly active innovators do, indeed, place at least as much emphasis on marketing as they do on other functional inputs. Further, that they place significantly more emphasis on marketing than do less active innovators. The difference in this respect was particularly marked in the case of implementation activities. Less active innovators frequently place heaviest emphasis on getting technical features right before selling operations are started in earnest. Highly active innovators, on the other hand, accept that while technology is important, it is on its own insufficient for sustaining competitive success. Systems

It was hypothesized that the marketing inputs of highly active innovators are (1) more standardized and (2) more formalized than in less active innovators. The rationale for these hypotheses is grounded in the many normative marketing and strategy texts that extol the virtues of formal and systematic procedures. An example is Kotler’s [21] highest stage in the adoption of marketing in banks, to which reference has been made earlier. Found. The administrative procedures of highly active innovators are significantly more standardized, as well as more formalized, than are those of the less active innovators. Highly active innovators take great care to ensure that marketing information reaches those involved in a systematic way. For example, initiators (in the form of account officers) are routinely asked in highly active innovator banks to make suggestions for possible new derivatives in writing and under set headings. However, the difference between the highly active and the less active innovators is most marked as far as implementation activities are concerned. Highly active innovators go to great lengths to ensure that developments are properly explained to the dealers and traders who are charged with selling these later. In some less active innovators, newly developed derivatives were routinely passed from technical experts to sales without full supporting documentation. Style

It was hypothesized that in highly active innovators the chief executive takes it upon him/herself to ensure that market opportunities are considered comprehensively for (1) initiating and (2) implementing product innovation, more so than in less active innovators.

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Support for these hypotheses comes from the normative strategy literature [ 16,271. Found. In highly active innovators the heads of the treasury divisions or of derivatives desks do, indeed, take active steps to reinforce the notion that marketrelated considerations are the foundation of the business operation in general, and of product innovation in particular. Strategy

It was hypothesized that in highly active innovators market opportunities dominate the product development thrust, whereas in less active innovators greatest attention is paid to utilizing existing assets. Further, that in the highly active innovators, more emphasis is placed on reshaping markets rather than on competing head-on as far as implementation is concerned. The rationale for this set of hypotheses rests on the normative assertions contained in practically oriented marketing writings [7,23]. These authors stress that marketing opportunities, not primarily production facilities, should be the driving force in determining the types of product innovation undertaken. Found. Market considerations receive more attention in highly active product innovators than they do in less active innovator banks. It should be noted, however, that several respondents had problems with our expressions ‘ ‘reshaping markets’ ’ and ‘ ‘competing head-on,” despite the fact that during pilot interviews these terms appeared to be well understood.

stqff

It was hypothesized that highly active innovators have more in-house marketing expertise than less active innovators and that their marketing staff is involved more extensively throughout the product development process than is the case in less active innovators. The rationale for these hypotheses rests on the work by Cooper and de Brentani [4] and Barabba and Zaltman [2], who have stressed the importance of specialist marketing inputs in services product innovation. Fouud. These hypotheses were only weakly supported. In recent months many banks in Britain have undertaken strenuous steps to increase their in-house marketing staffs and to see that this new-found expertise is applied to important operational tasks such as product innovation.

Skills

It was hypothesized that (1) in highly active innovators more market-related information is collected and analyzed than in less active innovators. and (2) highly active innovators use this information more skillfully for “internal” marketing purposes than do less active innovators. The rational for these hypotheses is the normative marketing and internal marketing literatures [24,28]. Found. Not supported by the findings for initiation. We suspect that in large part this result reflects an imperfectly formulated question. The question concerning data collection for initiation would have benefited by asking precisely what categories of information are collected. Although this was considered at the pilot stage, it was rejected for the main study because it would have made the interview schedule too forbidding in appearance. As a compromise. a crude form of content analysis was undertaken to arrive at scores. However, as far as implementation is concerned, it is important to note that highly active innovators do engage in significantly more “internal *’ marketing than do less active innovators.

Structure

It was hypothesized that (1) highly active innovators structure marketing inputs for product innovation on a market opportunity basis, whereas less active innovators structure on the basis of functional specialization and that (2) marketing specialists play a key role in monitoring the progress of new products right through to launch. These hypotheses were developed from the normative assertions of the previously quoted authors. The advantage of a market based structure is that the scope for identifying potential opportunities is widened by concentrating on “offer development”comprising appropriate combinations of product innovation and product positioning innovation in particular. Found. Not supported by the findings for initiation. Marketing inputs are now structured in the banks investigated on a centralized functional or on a product basis. No bank has moved on to a dedicated market management structure. We did, however, find important differences in the way marketing inputs are organized for product innovation. All but one of the highly active innovators were found to organize marketing inputs on a product basis, whereas all of the less active

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innovators continue to organize marketing on a centralized functional basis. However, as far as implementation activities are concerned, our hypothesis was supported: in highly active innovators marketing specialists do play a significantly more active role in monitoring product development progress than in less active innovators.

Managerial

Implications

It is important to reiterate that the study considered only banks that are active product innovators. The sample was split into two. One group-the highly active innovators-on average had developed seven first-to-market derivatives each. The second groupthe less active innovators-had on average developed four each in the period 1990-1994. Important differences were discovered between the two groups in respect of managing marketing inputs for product innovation purposes. These differences are now discussed for (1) initiation activities and (2) implementation activities. As far as initiation activities are concerned, that is to say, those leading up to the decision to enter fullscale development, there is strong evidence that highly active innovators adopt a more sophisticated marketbased approach to identifying opportunities than do the less innovative banks. There is strong evidence that initiation strategies are pursued in them on the basis of analyzing benefits sought by target clients. Barabba and Zaltman [2] have put the issue well by stressing that companies which do this “listen first to the voice of the market” and only thereafter “to the voice of the company. ” We found that the less active innovators pursue a predominantly asset-basedstrategic approach to initiating. They consider asset capabilities first and market opportunities second. Typically, in less active innovators, the emphasis is on new technology, with the initiation of new derivatives often being firmly in the hands of the “rocket scientists,” as their highly qualified technical experts are affectionately known. Far less emphasis is placed on analyzing and skillfully interpreting emerging customer needs. Not surprisingly, product development in less active innovators is, at worst, seen as an internal problem involving predominantly core product attributes, rather than as an opportunity to expand the whole business operation. We turn now to implementation activities. These are

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activities undertaken during the development stage right through to launch. Here we see particularly pronounced differences between highly active and less active innovators. Indeed, all the hypotheses concerning implementation activities were confirmed, which was not the case for all initiation activities. Differences for implementation activities were also more significant, statistically, than for initiation activities. Highly active and less active innovators are differentiated clearly by the way marketing implementation activities are undertaken. These differences are important in respect of developing first-to-market derivatives, as well as for developing follow-on offers. Both are critical activities for staying ahead in the competitive banking game. In highly active innovators, follow-on product development is encouraged through emphasis on the “softer” Ss. Highly active innovators put particular emphasis on shared values, systems,style, and staffall of which facilitate bonding between those involved in external and internal marketing tasks. Whereas external market analysis is of particular importance during initiation activities, internal marketing aims to encourage functional specialists to work together for the purpose of identifying alternative potential new offers. During implementation activities, internal marketing is used to ensure that what is planned is well understood and ‘ ‘bought-into’ ’ by all concerned. Not surprisingly, there is widespread acceptancein highly active innovator banks, that unless human aspects are managed skillfully, the development of new derivatives can easily mn ahead of internal operating systems, support and control capacity. Highly active innovator banks do not attempt to work to a set formula in developing new derivatives. Much rather, they encourage commitment to business development in general, and product and other supporting types of innovation in particular. Their managerial practices are of interest because they rely on marketing expertise to identify opportunities and to act on these. Their practices provide pointers for how product innovation is likely to be managed in more and more banks in the future. It is of particular interest that in highly active innovator banks, the necessary marketing expertise is not provided solely by marketing personnel. It is only in recent years that commercial and investment banks have established formal marketing departments. When this has occurred, it has been primarily for the purpose of overseeing promotional spends. It is not surprising, therefore, that in most banks-be they highly active innovators or less

BANKS.

MARKETING.

AND

DERIVATIVES

active innovators-marketing initiatives continue to be taken by persons not holding formal marketing titles. The practices of highly active product innovator banks illustrate a newer, broader, approach to business development in general, and to product innovation in particular. Scoring a high number of firsts to market is important in them. But this aim is only one feature of their aggressive approach to competing. Product innovation is certainly taken very seriously within them. But, whereas due emphasis is placed on getting core product attributes right, this task is regarded as necessary, but in itself not sufficient for achieving and retaining competitive advantage in different markets. Equal attention is given to other forms of innovation. Emphasis is placed particularly on product augmentation innovation, to ensure market segments are supported and interacted with in the most appropriate way. Emphasis is also placed on process innovation, so that prices can be pared when this becomes necessary. Constant attention is given to market innovation to ensure that an optimal mix of markets is being attacked. Market innovation-the selection of customer segments-is seen as particularly important in highly active product innovator banks. In them greater emphasis is placed on exploiting competitive advantages in markets, than is placed on exploiting advances in core product features. Adopting such a wider approach to competing focuses attention on being first to market in selected markets, rather than achieving one-off successes with a new product variant in one not well understood market. Effective product innovator banks distinguish themselves by achieving firsts to markets, rather than achieving firsts to market. Certainly, the practices of highly active product innovator banks illustrate a market-based approach to innovation. Whereas none of the highly active product innovator banks can be described as having fully reached Kotler’s 1211 fifth stage in the adoption of marketing, some are now making rapid strides in that direction.

Conclusions Because of the small sample size, the results reported here must be regarded as indicative rather than as definitive. The practices of the highly active innovators show important changes taking place in the approach to and execution of product innovation in banks. Per-

haps the most important indicator is that in future personnel involved in identifying new product opportunities will have to concern themselves more with developing offers than concentrating narrowly on making improvements to core technical features. Indeed, in highly active innovators we identified strenuous efforts to widen product innovation management to include what is now specifically referred to by managers in some of these banks as “offer innovation.” It is in the area of offer innovation that personnel with specialist marketing knowledge have much to contribute. Careful positioning of new offers, following skillful segmentation is a key contribution. In this area of marketing activity, there is much further work to be done in identifying ways in which the same new derivatives can be better positioned in markets having different preferences. However, it remains an open question whether it will be marketing specialists who take the lead in making this contribution. For, until marketing specialists are in a position to understand both customers’ precise needs, as well as the technical intricacies of complex products, such as derivatives, it will be technical specialists who continue to take the most important decisions. There is nothing unusual about this. It is a phenomenon in evidence also in high technology manufacturing firms. In such firms there is also an urgent need for applying marketing expertise better, but for the time being, it is technical specialists who continue to “call the shots” as far as product innovation decisions are concerned [ 19,361. It is not surprising, therefore, that even in highly active innovator banks the drivers of product change at present are not persons with marketing job titles, but senior managers heading derivatives operations. Such persons, and their nominees, act in accord with the motto “marketing is too important to be left solely to marketing persons.” Accepting that marketing inputs can be provided by other functional specialists, a question arises concerning the future for marketing specialists in banks. Even though we have allowed ourselves some speculative thoughts on how marketing’s contributing to product innovation is likely to evolve, the changing role of marketing specialists must be left for later investigation. Suffice it to say at this stage that marketing expertise is important for effective product innovation-or, better. for effective “offer innovation.’ ’ In recent years many banks have recruited additional or quite new marketing staff. The results of the exploratory study reported here provide insights into the type of marketing expertise that is likely to work in

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banks desirous of improving their competitive performance. The once conservative world of banking now provides examples of quite advanced marketing practices. It remains to be seen how highly active product innovator banks will continue to mobilize their growing marketing expertise for the purpose of staying ahead in the product innovation game. In the most effective banks, quality of marketing expertise is likely to triumph over quantity. Our investigation has made a start in showing how the required quality can be recognized and measured.

The authors wish to thank two anonymous reviewers, and especially the Editor, for insightful and helpful suggestions for strengthening the analysis and also the presentation of this article.

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