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Dilemmas in Strategic Decision making. A scenario approach applied to the future of Finance

Term Paper 2018 6 Pages

Business economics - Miscellaneous

Excerpt

Inhalt

1. Key insights
1.1. Forecasts and trends
1.2. The three axes and scenarios
1.3. Recommendations and actions

2. Learnings with regard to approach to strategy challenges

3. Appendix

4. References

1. Key insights

While the state of the banking industry in 2033 is uncertain, building a strategy on scenarios allows to draw insights, and subsequently recommend actions to players in the industry. Current development within consumer behavior, technological advancements, and regulation will determine which player in the industry will succeed.

1.1. Forecasts and trends

At first, we analyzed trends that we could identify within forecasts, including conventional wisdom as well as outlier opinions.

Technology: We have identified that researchers believe that technology and data will play a crucial role for innovative changes that are expected to happen in the market (McKinsey & Company, 2018). The combination of big data and having the computing power that is able to process that data within few seconds are the newly established basis for business models that rely on finding patterns within financial and non-financial data by making use of Artificial Intelligence. Industry experts expect financial institutions to gather more than financial data, therefore entering their customers’ daily lives and becoming an integral part of non-financial decisions. Since recommendation will be based on the individual’s behavior, the product offerings will be much more personalized (Marous, 2018a). Further technological advancements include Blockchain, cloud computing, and the use of application programming interface (API) (Patnaik, 2017).

Regulation: On the other hand we identified regulations as a key factor influencing changes in the banking industry. Regulation will decide how many new entrants the financial industry will see within the future. While tighter regulation will most likely give banks greater power, looser regulation, such as forcing banks to provide APIs to other institutions, will trigger more companies to enter the financial environment. Furthermore, the strictness of regulatory bodies will define whether large technological companies, such as Google or Amazon, will be able to enter the financial environment, therefore referred to as TechFins. With regard to this topic some researchers believe that banks will not be able to compete against TechFins in the long run, therefore advising customers to take precautions and not store all wealth in banks only (Marous, 2018b).

Customer behavior and trust: In most sources, the change within banking and the pace of this change was described to be dependent on consumers’ behavior. If, for instance, consumers are not willing to provide financial institutions with non-financial data, banks will not be able to enter the consumers’ daily lives.

1.2. The three axes and scenarios

From our insights gathered in the industry research, we built a cube with 3 axes (regulatory strictness, technological disruption, and consumer trust in banks) that would create 8 different extreme scenarios in each of the cube’s corner. Having analyzed different scenarios, we selected 4 scenarios that seemed the most interesting ones, taking some extreme assumptions into account (see Appendix A).

1.3. Recommendations and actions

One cannot foresee which scenario is going to happen in the future or eliminate uncertainties. Besides, one should not try to assess the likelihood of the respective scenarios, as this attempt is commonly biased by strong opinions. Nevertheless, one can use the scenarios to draw insights and recommendations for companies today. This can be done, firstly, due to the repeating patterns within the scenarios, and secondly, due to the fact that companies can detect early signs or milestones that lead to the respective scenarios and adapt accordingly.

For instance, scenario 1 (A cashless society) will come into place with tighter regulation, especially with the purpose of banning cash from all transactions in order to impede unlawful business. Furthermore, for consumers to use only traditional currencies through traditional banks, cryptocurrencies and FinTechs must have been ruled out, for instance, due to recurrent cyber-attacks. Accordingly, companies should be attentive to events that imply similar developments. For instance, discussions about abolishing cash in some countries, such as Sweden, are already reality today (Savage, 2017). This change however is also based on consumers’ behavior and regaining trust in banks, as a cashless society would store all wealth in banks.

On the other hand, scenario 2 (A Cryptocurrency World) and scenario 3 (Tech giants taking over) imply that regulations open up, consumers do not rely on traditional banking, and that technologies advance. A development towards use of cryptocurrencies implies that people put high emphasis on data and transaction privacy, while using tech giants for financial transactions presumes that consumers trust companies that gather lots of personal data with their financial transactions. This example highlights that the attention to detail is crucial when assessing milestones that lead up to the different scenarios.

Finally, scenario 4 (Cash only) implies that consumers loose trust in technology and the financial industry. This scenario exemplifies that ultimately the consumer will decide on the market developments, disregarding changes with respect to technologies and regulations.

Focusing on the common and repeating patterns across the scenarios allows to draw immediate and future actions from these insights. First, the scenarios challenge to think outside of the box and beyond common believes. Only that way one company will be more prepared than another company in case of an unexpected development. Furthermore, companies tend to undervalue the benefits of long-term strategies, focusing too much on the short term. Accordingly, one immediate action for companies to take includes to increase spending on the strategy department rather than the operational departments. Like that companies can already think about potential solutions to the various challenges and act faster upon certain industry events.

Furthermore, one common characteristic amongst the scenarios is that consumer behavior matters greatly. Accordingly, parties of the financial industry should put the customer into their center of action. Customers increasingly expect to be treated as individuals, thereby being offered increasingly personalized products. This presumes an ability to react quickly to new trends, therefore an agile company structure is recommended. Products are expected to work seamlessly together and fit into the customers’ daily lives. Besides, being more transparent and increasing cyber security may allow banks to regain trust of consumers.

Additionally, if regulation shows a tendency towards loosening, banks have to be able to provide added value in order to secure their customers. Once they are forced to open their APIs, it will be easier for third parties to gain part of banks’ profit margin. Besides, banks should acquire knowledge about novel regulations, for instance, from consultancies that specialize on this topic.

Finally, if consumers demand to use novel technologies, such as cryptocurrencies, banks are expected to adapt their product portfolio accordingly, even if that means that traditional products will be cannibalized. In order to achieve the integration of novel technologies, banks are recommended to attract the necessary talent and build innovation centers, or more likely, to acquire both technology and talent outside of the banking industry.

Taking the above recommended actions into account, highlights that agility and flexibility within a company is of utmost importance in order to succeed in the future. No matter which scenario will become reality, detecting early events and milestones, as well as having prepared solutions to these challenges, is crucial to being more proactive than the competitors.

2. Learnings with regard to approach to strategy challenges

Global trends, such as technological and demographic change, create an ever-changing environment. While a variety of parties, such as governments, corporates, and financial institutions, try to predict the future and adapt accordingly, it is debatable to which extent the future is foreseeable, and therefore able to be planned.

However, scenario-building does not intent to eradicate uncertainties, but rather embraces the plurality of options for the future to come. The intention is to think as broadly as possible in order to provide a wide breadth of scenarios. Here it is crucial to step aside from strong opinions and outcomes that seem certain to only holders of that opinion. Accordingly, one should be careful with jumping to conclusions, but rather lay out the possibilities and the factors that lead up to the scenario outcome.

Furthermore, corporates tend to focus more on the short term rather than the long term, thereby missing out on opportunities. Being able to identify steps that lead up to specific scenario outcomes, is likely to give those companies a competitive advantage. For instance, DS Uniphase Corporation was able to react quickly to the financial crisis, thereby reducing the damages to the company. Besides, identifying the driving factors (axes) of scenarios allows to identify the cause rather than the outcome of the distinct scenarios. The cube of different scenarios provides a structured approach to the complex task of developing a multitude of scenarios and respective strategies.

Summing up, I believe that scenario-building can be used as an effective tool despite the countless uncertainties. Companies and governments can use scenarios to plan their actions, not necessarily to predict the future. The class has changed my view with regard to scenarios in the sense that previously eliminating uncertainties and coming up with “the most likely” scenario was the ultimate goal. Opposed to that, I now believe that staying more open-minded and thinking outside of the box is more crucial in order to succeed in the future.

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Details

Pages
6
Year
2018
ISBN (eBook)
9783668932289
Language
English
Catalog Number
v463830
Grade
1.2
Tags
dilemmas strategic decision finance

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Title: Dilemmas in Strategic Decision making. A scenario approach applied to the future of Finance