Resources, introspection, and insight: Occasionally firms detect crucial asymmet
ID: 365515 • Letter: R
Question
Resources, introspection, and insight: Occasionally firms detect crucial asymmetries just by reconceptualizing their non productive assets. They come to view a facility or system as a potential resource not because of new information from the market but because of a new way of thinking—a new insight. There is a reframing of the way they perceive the organization and its components.
This was the case of John Reed at Citicorp in the early 1990s. For several decades, Citi had been struggling with a global banking unit that was not only unpopular and losing ground to rivals such as Hong Kong Shanghai Bank Corp. (HSBC), but also alienating major domestic clients with poor international service. The Global Corporate Banking unit was in every respect a liability, and Reed and other managers had good reason to get rid of what was turning out to be a drain not only on reputation but also on human and financial resources. Reed, however, was not willing to give up. First, he was convinced that Citi’s extensive network with banks in over 100 countries was entirely unique—no rival could match it. The closest rival, HSBC, served fewer than 40 countries. It had taken Citi decades to establish its international banking network due to legal and political obstacles, and it would take potential rivals a long time as well. Reed knew he had an inimitable asymmetry he just might be able to turn into a resource. Second, Reed saw the trend to globalization as a long-term one, and a potential market for the network. Third, Reed believed that Citi had auxiliary talents—knowledge, contacts, and resources—that could be redirected to serve the Global Bank. Ultimately, Reed was right—he had detected an asymmetry with real potential. But as we will see, this required a great deal of ‘organizational embedding’ to become a capability.
Weakness, scarcity and problemistic search: Some asymmetries arise within and because of a context of weakness, and are detected or even created because of their tie to disadvantages or problems (Cyert and March, 1963). Disadvantages such as organizational newness, small size, inadequate capital, and a paucity of established clients can, paradoxically, drive firms into promising underserved markets and technologies of the future. The result is that firms leapfrog stronger, more established rivals
Recall that at Citicorp the international branch network at first was just an asymmetry, not a valuable resource. It could only become profitable within the context of a supportive organizational design. Specifically, the system of branches that had been set up in 100 countries over many decades did not at first appear to be a significant asset. Many branches were unprofitable, and margins were being squeezed in developed countries by competing local banks with better ties to customers and government. Meanwhile, in developing countries, market volatility and political instability were real and costly hazards. Also, local managers refused to give good service to multinationals who demanded bargain interest rates and service fees. CEO John Reed, however, realized that the international network could prove enormously valuable to MNCs with lots of cross-border business. But this value could only be achieved with a new organization design—one that leveraged the network to better serve multinationals.
At Citibank a multitude of design levers helped convert the network from an asymmetry to a capability. First, John Reed’s strong policy priorities directed that the international network be recognized by all as a potential core capability, and that markets be selected that would most value that capability. To that end he made the cross-border business of large MNC clients a top priority. This in turn determined how Citi’s international capabilities had to be developed. It became clear, for example, that structural mechanisms such as key account teams were needed to better serve each of the MNCs. High-status, influential managers were appointed to lead these teams, which were composed of members from all relevant functions, product units, and geographies. Such teams allowed Citi to integrate and adapt its international capabilities to make them especially attractive and useful to MNC clients. Reed obtained support from local managers by assessing them against their ability to serve MNC teams and clients. In fact, geographic profit centers were abolished to make sure local managers would not be penalized for doing low-margin business with MNCs. Information and planning systems were then redesigned to serve account teams by providing information for every large client on their business needs, deals, and revenues—broken down by product and by region. Moreover, a comprehensive planning system got members to commit to—and be evaluated against—specific objectives for each client. At the same time, HR training, recruitment, and job rotation programs supported global capability by stressing mobility and international experience. Reed also worked on the informal aspects of design. The corporate culture at Citi, which had been independent at the best of times, was prodded to become more collaborative to better integrate the bank network. Support for key account teams now became a top priority and a source of recognition and reputation for functional, product, and country managers alike. Informal norms evolved so that it was mandatory to reach out to people from other units, and a very good thing to help out with other people’s clients. As a result of all these changes, Citi’s Global Bank converted a multibillion dollar loss into a profit in excesses of a billion dollars, in a space of 2 years.
Matching market opportunities and asymmetry-based capabilities
The only way our firms could earn superior returns from their asymmetries and capabilities was by satisfying the needs of a viable segment of the market. Thus, our more successful firms tended to shape resources, capabilities, and configurations according to the needs of key target niches.
Citibank’s GCB unit decided to target large multinational firms that could most benefit from its international branch network. But these were exactly the kinds of clients that Citi had had a hard time serving with its old structure: local managers were used to making significant spreads on their business—spreads that the credit-worthy multinationals were unwilling to pay. Indeed, local managers resisted taking on this business unless it represented a considerable contribution to their profit centers. Typically, it did not. In choosing the MNC target market, Citi’s leaders realized that they would have to make their international branch network valuable to those clients. The only way to do this was to ensure that the branches made these clients a much higher priority than they had been. As we have seen, this required Citi to redesign its administrative structure by using empowered key account teams and specialized information and planning systems to adapt its international network and acumen to the needs of a specific niche. Indeed because Citi’s target market was so clear, the company was able to develop detailed databases on prospective clients that provided good information on who they did business with, and how profitable the business was. This enabled Citi’s representatives to home in on the best fine-grained business opportunities.
As the Citi example shows, when adapting capabilities to a market opportunity the design con- figuration again plays a central role, converting a generic potential capability into one targeted to a specific set of customers. However, notwithstanding these crucial efforts to adapt capabilities to profitable market niches, our bias is still to use initial asymmetries not market opportunities as a starting point for strategy. First the organization needs to determine how it is or can be superior to its competitors; and then it needs to find a niche that will value those differences. The competitive analysis school argues that firms must position themselves according to market factors such as competitive and supply chain challenges and customer demands (Porter, 1980, 1996). But unless this positioning satisfies a need or niche that corresponds to a firm’s unique capabilities, competitive advantage will remain elusive, no matter how attractive the niche. Rivals would simply appropriate most of the profits.
1. What is the "asymmetry" (weakness) John Reed "discovers" at Citibank? What makes it rare and inimitable?
(It's not valuable by definition as it is a weakness).
2. What is the "opportunity" in the environment to which John Reed is trying to match this resource, making it more valuable?
3. Finally, how does he make it more valuable by making combinations of resources - by embedding it (the asymmetry) in complementary resources - that match some of the eight Components of Strategy Execution in your book? In other words, tell me how some of the elements are arranged at Citibank to be complementary to the original asymmetry, thereby making it more valuable. Make sure to (1) use the categories proposed in the model in the book,(2) to link your examples from the article to these categories, and (3) to explain why or how the examples are complementary to the asymmetry .
Explanation / Answer
1)John Reed found that Citycorp's global banking unit was loosing to its rival and was becoming a liability. The global banking unit sas becoming an assymentry or weakness because of its low profits. But a fact that Citycorp had branches in more than 100 countries which required overcoming lot of political obstacles. Inspite of huge networking the company was loosing revenues because in the developed countries local banks made them squeeze their margins because locals had close ties with governmen.In developing countries there wss lot of political instability.Its closest rival HSBC was serving in only 40 countries so John Reed was confident that this assymentry was rare and inimiatble since no rival could match the strong networking which Citycorp has and hence it can be converted into strength.
2)John Reed found that banks were loosing out revenues in the local markets because of their inability to effetively serve large MNCs with cross border business since they would bargain interest rates and commission. This was indeed an opportunity because of the assymetry. Citycorp already had networking in 100 countries and hence serving these MNCs would earn them huge revenues.
3)Now since the opportunity and assymetry were identified, John decided to restructure the organisational design. The MNCs with cross border business were given core priority and teams with experienced managers were built to handle them. The profit centres were abolished so that local managers do not feel reluctant to enter into business with MNCs at low profit margins. The citycorp used its extensive network to provide valuable information to its clients thus went on to become successful.
John Reed effectively used the categories mentioned in the article to make the assymetry.
1)Building the organization with capabilities ,people and structure needed to execute the strategy. John changed the organization design by building capabilities to better serve MNC clients and organising information for them. Trained people were hired to lead the teams and they were trained even better.
2)Allocating simple resources to strategy critical activities. He assigned key account teams to handle the business of MNC and the team members were selected from different geographies and were quite influential. Additional technologies were used to organise information in a manner most helpful for the client.
3)John instituted policies and effective procedures. He made MNC core capability and their niche market and clearly identified the needs of the market. Then based on this policy procedures were designed to better reach the niche market.
4)Installing information and operation systems to better execute the startegy. The account teams were being provided information based on revenues broken geography and product wide of clients to better align with the client needs.
5)John exerted strong leadership right from the beginning to better execute the strategy. He was the game changer and beleived that the assymetry could be matched with the opportunity and changed the organizational design to make the strategy work well at all levels.
6) Corporate culture was changed to better suit the strategy. The teams at different places used to work independently. But Reed instilled informal culture which lead to more communication between teams and helping each other clients to acheive maximum customer satisfaction.
All the above are complimentary to the assymentry because the major reason for assymetry was huge networking and low profits. So to turn the huge networking into profits startegy designed by Reed had to be executed well by targeting the major clients who were initially ignored. The eight steps in the model would help in better acheiving the strategy goals and thus converting the assymetry to opportunity.
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