Most banks are still struggling to find a suitable approach to the Internet.
Though the Internet is on the agenda of most all top bank executives, only nine out of the 100 top U.S. banks provide even basic Internet-based account access, according to a NETBanker survey, and fewer offer full transaction capabilities.
Moreover, not one traditional bank is offering products that are exclusively Internet-enabled. Banks have neither explored approaches to modifying their business model to exploit the Internet nor developed an integrated Internet strategy.
The industry's response to the Internet falls into one of three categories: Pretend it doesn't exist or doesn't matter; analyze to the point of paralysis; or engage in frantic activity because "we've got to do something."
Why are bankers confused-or possibly even paralyzed-by the Internet? Because three valid assumptions combine to form a logical paradox, with no apparent solution:
The Internet can no longer be ignored by banks.
The Internet does not lend itself to traditional strategic thinking.
Net present value and/or return on investment are the appropriate criteria to assess any initiative.
Banks have tried to resolve this Internet paradox by dismissing the first or the second condition.
Discounting the first led some banks (and a very few today) to behave as though the Internet were not worth their attention. Today this seems an ostrich-like attitude
Other banks, denying the second assumption, tried to apply traditional strategy development processes to the Internet problem.
This has not succeeded.
The traditional processes were designed for environments of relatively low uncertainty, where the definition of "industry" is sufficiently clear and conventional forecasting can be applied. Also, a complete cycle-from research through option identification, analysis, design, implementation, and feedback-takes about a year or longer.
What do you do when the uncertainty is so high and the evolution so fast that six months may bring any of a million scenarios? You cannot pursue a yearlong process when in three to six months all your data are likely to be outdated.
Nor is operating in frantic mode a solution. Random initiatives are likely to deliver at best the performance of an averaged-run venture capital fund. When combined with the immensely higher cost of doing it within a bank (overhead as well as potential negative impact on the embedded base), this approach is economically unattractive.
Banks must adopt an approach that lets them use their embedded base and capabilities as leverageable assets instead of treating them as liabilities. Banks must be willing to recognize that their principles of strategy development may not apply to the Internet.
The solution lies in the replacement of the net present value/return on investment model with a resource allocation model that includes a clear emphasis on learning as a major economic justification for action.
Such a model lets the decision maker account for opportunities that are currently invisible (and therefore excluded from cash flow net present value) but likely to become accessible later.
However, rigorous financial evaluation and learning cannot come at the expense of speed. Systematic attention must be paid to ensure rapid deployment, quick feedback, and effective application of learning to the next activity loop.
The traditional model of "informed choice for timely action" must be modified in the Internet environment to a "timely action for informed choice" paradigm in which the learning framework provides the criteria for selecting initiatives.
In highly uncertain, fast-evolving environments, the feedback loop between planning and execution must be almost instantaneous. Real-time path adjustments are necessary conditions for success. This comes naturally to small organizations, where the responsibility for determining a strategy and executing it rests with one person or a very small group.
In large organizations the division of labor between planning and execution has eliminated the learning aspect of execution. This is acceptable in stable and predictable environments but potentially fatal in rapidly evolving markets such as the Internet.
Examples from the high-tech industry suggest that a solution is not impossible. Microsoft, IBM, and 3M have been able to retain or regain their ability to learn through execution.
Microsoft's approach to Internet strategy development is instructive. Despite-or perhaps because of-its failures, missteps, and changes of direction, Microsoft has become a central Internet player. If it had chosen the route of net present value maximization, Microsoft might have been relegated to dominating the large but soon to decline market of stand-alone computing.
IBM's turnaround from vendor of largely antiquated mainframes to provider of high-demand integrated network computing solutions could not have been achieved without some of widely criticized ventures such as personal computers and operating systems.
These examples point to one conclusion: In changing environments, large organizations must be willing to make mistakes and must be able to learn from them.
In fact, when large organizations are successful in restoring their ability to learn through execution, the advantages of size can be leveraged for richer experimentation and ultimately more muscular execution.
The key is in the willingness to apply Internet principles to banking as well as banking principles to the Internet. This means transforming the strategy development function and make it evolve from the age of theoretical thinking to that of experimentation.
