Ansoff's Strategic Issue Management System: A Validation for Use in the Banking Industry during High Turbulent Environments
Carver, Melissa, Kipley, Dan, Business Renaissance Quarterly
The U.S. banking industry experienced significant discontinuous changes in the past few years. These 'strategic surprises' have motivated banks to employ innovative competitive strategies in order to gain a greater awareness and share of the market (Araiza, 2009). Recent turbulence in the financial industry has caused a number of banks to fail. The "Mortgage Meltdown" not only affected those banks whose principle business model was lending, but also banks that had a strong retail presence. The subsequent fallout resulted in the strong banks becoming stronger and the weak banks to fail. This paper examines the multiple dimensions of H. Igor Ansoff's Strategic Issue Management System and the applicability of use of the system relative to the industry environmental turbulence level. Based on evidence from industry journals, there is both an implicit and explicit acknowledgement of the systems acumen and it's efficacy as a whole or in part in mitigating costs associated with firms facing volatile, discontinuous, novel, and environmental dynamism.
Management that can implement a system that will respond to strategic surprises during these highly turbulent levels are those who have a higher probability of survival and success.
The first evidence of the housing downturn began to appear to the mortgage and banking industry in 2006. These 'weak signals' were precursors of the economic disaster yet to come. In 2008 the Federal Deposit Insurance Corporation ("FDIC") Chairman Sheila C. Bair, issued a statement after the collapse of lndyMac Bank, which at that time was the 3rd largest bank to fail stating, "Bank depositors should understand that their insured deposits are safe, the majority of banks in this country are safe and sound. The chance that your own bank will be taken over by the FDIC is extremely remote" (FDIC, 2008).
Statistically speaking chairman Bair was correct; from 2003 to 2008 only 1 1 banks required the FDIC intervention. However, in 2008 and 2009, 25 and 140 banks respectively required FDIC intervention. Banks such as Washington Mutual, IndyMac, Bank United, and Colonial Bank have failed and subsequently been sold by the FDIC. (FDIC, 2010)
Although reassured by the FDIC that most banks were not on the FDIC watch list many depositors feared the loss of their savings and pulled their money from their financial intuitions. The resultant 'inertial dynamics' of the falling mortgage industry and consumer panic added to the environmental turbulence and forced banks to operate in a 'reactive mode' to these discontinuous surprises.
Extant research has proven that leadership capabilities directly contribute to organizational performance. Leadership capabilities are defined as 'the ability of the general management to support the strategic behavior of a firm' (Ansoff, Antoniou, Lewis, 2004). Strategic behavior is the interrelationship of two key attributes (variables) that managers must possess; competence, which is the range of skills that a manager can can bring to the organization and motivation, which includes vision, mentality, strategic aggressiveness, and risk propensity (Ansoff, Antoniou, Lewis, 2004; Andreason & Kotier, 2003; Drucker, 1989).
Banks' management now must reevaluate the gap between leadership capabilities and the firm's strategic plan to ensure that they are able to navigate through these highly turbulent times and emerge as a strong bank and lender. Marketing strategy, primarily market penetration and market development, is the most commonly approach used in financial services to increase deposits that will subsequently increase liquidity and capital. (Okenwa, 2009) Although this strategic approach is not without merit, most firms fail to realize the importance of matching leadership capability to strategic aggressiveness in order to achieve a higher probability of any given strategy becoming successful.
Economic principles dictate that all industries are cyclic, including the banking industry, and there will undoubtedly be more downturns in the future. To ensure that management is prepared for future environmental discontinuities, a firm must install a system to manage in the most effective manner these 'surprise' issues. This research discusses the merits of installing and adhering to a robust strategic surprise system.
Background of Problem
Achieving the American dream of home ownership swept over the U.S. as many lenders created tools specifically focused to capture the subprime market. One such 'tool', the option ARM loan, would adjust to a higher interest rate in as little as 5 years. The ARM rate was 'undefined' as the market set rate could not be planned for. Buyer's single hope was that the value of their homes would continue to increase and that they would be able to refinance before the rate reset.
As the mass hysteria grew, lenders fuelled the demand of buyers and created the perception of easy ownership and quick profits, the runaway home prices began as evidenced in the housing statistics of 2006 with $1.2 trillion in subprime mortgage loan originations and the median home price in California doubling from 5yrs earlier to $576,000. Despite the inflated real estate values, the median household income was only $57,988 with an average household debt level of $116,500. The housing market was reaching critical mass and unsustainable levels (Kipley St Lewis, 2010).
The financial industry saw the "bubble pop" when the lending products reached the maturity stage in the product life cycle and then hit a sharp decline (Kipley & Lewis, 2010). The market became saturated and conditions of overcapacity caused the homes values to stagnate and return to more realistic levels. Subsequently, the economic factors of decreased home values directly affected new loans originations and the termination of the "innovative" lending products. Some products became obsolete, as well as current products changed, and new products created; the banking industry was experiencing a turbulence shift in its environment.
The Role of the FDIC
The FDIC was created in 1933 following the Great Depression by the Glass-Steagall Act to protect depositors from losses as a result of 'runs' on banks. The primary purpose of the FDIC is to provide security to depositor by insuring their funds up to a limit of $100,000 (1999) per account. Therefore, it was a complete surprise to management when high numbers of depositors began to withdraw their savings. This discontinuity did not escape the media whose national coverage added to the frenzy resulting in heightened consumer anxiety and consequently, increasing the 'run'. As a result of these actions, banks capital levels and cash reserves were reduced below the levels set by regulators forcing the FDIC to intervene and close/sell the troubled bank to a financially secure bank. This "surprise" could have been scanned and managed using a real-time management system.
In 2008, the environmental conditions of the banking industry became highly turbulent. 'High turbulence' is defined by Ansoff (1979, 1990) as the level of discontinuity, novelty, and rapidity of change. Given these conditions, extrapolating the firm's future strategy based on historical precedence is at best difficult, if not impossible. High turbulence creates conditions for 'reactive management', which are proven to be ineffective due to the rapidity and discontinuity of the environment (Kipley fr Lewis, 2009). The surprise of the economic downturn in combination with the increased turbulence level created a shift in how banks are run today.
The results of the 'creative' lending practices are evident today with more than 5 million households falling behind on payments and many of the subprime loans are now delinquent. Chapter 7 bankruptcy filings are up 43% from Dec. 2007 to Dec. 2008 averaging 4,160 per day (AACER data). Subsequently, banks now have large inventories of Real Estate Owned ("REO") properties.
Purpose of Study
Turbulence cyclicity in any global industry is a certainty. Geo-political and socio-economic events will continue to be a driver on these industries and create conditions of heightened levels of novelty, rapidity, and discontinuity of change. The 'shifts and drifts' of the environmental turbulence levels create, in its low points, the appearance of a calm, stable environment. These placid periods of stability are those that lull management into complacency and ultimately the illprepared firm for the inevitable return of the certain.
As the worst effects of the banking crisis have been mitigated, the industry is now shifting to a lower level of turbulence, and banks that received funds from the Troubled Assets Relief Program (TARP) are paying back their loans. Both Congress and the Obama administration have proposed new regulations to avoid a repeat of the conditions that created the crash in the system and as such, the financial industry is in the midst of a new set of dramatic reforms to both its banking practices and systems processes (Berg, 2009). Managers must now change how they think, they must adapt to and learn the new 'rules of the game' in order to be competitive.
What makes major change so difficult is that it's certain to be hard work with no guarantee of a positive payoff (Babbes & Zigarelli, 2006). To adapt to the heightened environmental turbulence level, the banking industry must shift their strategic aggressiveness level to match the turbulence level of its environment. Ansoff & McDonnell (1990) has empirically evidence that supports those firms whose strategic aggressiveness matches their environmental turbulence level having a higher probability of financial success. As an extension to strategic aggressiveness, the formulation and implementation of a Strategic Surprise System is an invaluable tool for management for use in times of discontinuous turbulence.
It is a certainty that the banking industry will experience heightened discontinuity in the future. Therefore, it is imperative that banking executives not only learn from their experiences gained when competing in a volatile environment, but also to formulate and implement a strategic surprise system that will mitigate the effects of a future turbulent banking industry.
Strategie Surprise Management Defined
Strategie Surprises are defined as a combination of four factors (Ansoff 6t McDonnell, 1 990; Kipley 6t Lewis, 2008)
1. The event/issue arrives suddenly, unanticipated, and management response is urgent.
2. The event/issue poses novel problems in which the firm has little or no prior experience.
3. Failure to respond to a strategic surprise is not an option; consequences of such issues imply either a major financial reversal or loss of a major opportunity.
4. The firm's existing strategic systems is either ill prepared or ill-equipped to address the issue with the requisite speed/resources to mitigate the issue.
As well, the combination of these four factors creates for the firm a major problem of 'information overload' as the firm attempts to gather as much information on the "surprise" as possible. The increased volume of information requires immediate filtering, processing, and analysis as expeditiously as possible in an effort to obtain clarity of the issue and therefore formulate an appropriate strategic response. This massive influx of discontinuous, novel, information combined with limited time and substantial consequences, will produce conditions ripe for 'bounded rationality' (Simon, 1957), in which it is difficult for management to make a clear, cognitive, or timely decision and any decision made is one of 'satisficing', the best decision made given the time, information, and possible outcome.
Pragmatically, even when the most sophisticated methods of environmental scanning are used, some issues will be missed and become strategic surprises. An example of such a surprise occurred in 2006 with the Danish Dairy Co. Aria Foods, whose products were so popular in the Middle East that 'Aria' became the generic term for butter. Sales of $1.5 million per day abruptly stopped and fell to zero as a result of a Danish cartoon depicting the Prophet Mohammed with a bomb in his turban (Arab News, 2006). Clearly Aria Foods could not have predicted what a cartoonist would draw and how that would directly affect their sales.
Management's challenge therefore is to maintain a sense of equilibrium; to develop the most effective environmental scanning system possible with the resources available, yet be resigned to the fact that not all surprises are preventable.
If the firm expects its environmental turbulence level to be discontinuous, management must implement a system that will mitigate the effects of those unpreventable surprises.
Characteristics of the strategic surprise management system include (Ansoff & McDonnell, 1990; Kipley & Lewis, 2010):
* Establishing an emergency communication network;
* Repartitioning responsibilities of top management;
* Put a strategic task force in place;
* Task force and communication networks are redesigned and trained and;
* Testing networks under non crisis conditions
Strategic Surprise and IndyMac Bank
In July of 2008, Senator Schumner of New York leaked copies of letters he sent to the FDIC, Office of Thrift Supervision and FHLB (San Francisco Branch) about the financial condition of banks, particularly IndyMac Bank stating that he "was concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers... and could face a failure if prescriptive measures are not taken quickly". His statement was regarded by the Office of Thrift Supervision, which regulated IndyMac, as "the immediate cause" of the banks failure (Bloomberg, 2008). Resultant of Senator Schumner's statement, there was an acute run on the IndyMac's deposits as depositors' feared loss of their savings.
Depositor's fears were not isolated with IndyMac Bank as similar runs were found throughout the entire banking industry and the resultant damage the letter from Schumner 'leaked' thrust IndyMac Bank into an unplanned strategic surprise management system.
IndyMac's Strategic Surprise Management System
Top management at IndyMac Bank ("1MB") had minimal time to implement their strategic surprise system because immediately after the statement from the senator was release the customers flooded the bank's 33 branches and wanted to withdrawal their money.
IndyMac's first response was to put in place an emergency communication network that was lead by the head of corporate communications. They immediately rejected Senator Schumner's charges about the bank and issued a press release in response.
IndyMac's next step was to repartition responsibilities of top management for the duration of the emergency, top management devoted their attention to control and maintain employee morale, while another group ensures that the business runs as usual. For IndyMac, the CEO had continued communication with the employees of the bank to help maintain morale, as well as encourage branches to continue business as usual to the best of their ability.
A strategic task force was activated to address the increase in branch customers. Initially senior managers from IndyMac's corporate office were deployed to the branches for damage control with customers. This group was in constant communication with each other through email and was tracking deposits and customer complaints by the hour.
Finally, a Task Force and Communication Networks was redesigned. Senior managers formulated the overall strategy which was to deploy additional resources from the corporate offices to assist with the huge spike in branch traffic, calm customer worries, and try to save deposits from leaving the branch. This decentralized task force each had to manage the customers at their location. Task members were rotated to different branches based on need, their skill, and language abilities to get assistance in the place needed most. As time elapsed the recourses were trained to do more than crowd control. They were conducting transactions for customers, reviewing their accounts, FDIC coverage and saving deposits from leaving the branches.
Although IndyMac followed the strategic surprise management system the outcome was not ideal. It ultimately caused IndyMac's core capital ratio, risk based capital ratio, and liquidity to decrease below the limit set by the Office of Thrift Supervision ("OTS") and were taken over by the FDIC. IndyMac was not prepared for the bubble to pop, their assets to dramatically lose value, or to have the run on the bank and they could not respond quickly enough to this event even with a strategic surprise management system.
Environmental Turbulence Defined
Environmental turbulence describes the types of opportunities, threats, and trends in the environment and is evaluated on a scale ranging from a nonchanging, stable environment to a highly discontinuous, surpriseful one. Ansoff & McDonnell (1990) define Environmental Turbulence is a combined measure of the discontinuity or changeability, predictability, and frequency of the shifts of the firm's environment. Each part of environmental turbulence is further described below:
* Discontinuity - is a combination of the complexity of the firm's environment and the novelty of the successive challenges that the firm encounters in the environment.
* Predictability - is similarly described by two variables: rapidity of change and the visibility of the future.
* Frequency of shifts or instability - is how often the environment shifts from one level to another.
Turbulent environments are generally characterized by significant fluctuation of customer demand and rapid shifts in product/ process technologies. Firms operating in such environments often face the critical need for increased information-processing capacity in terms of rigorous environmental scanning and identification of predicted market trends. (Abebe, 2009) Turbulence is the changeability in an environment characterized by the degree of novel challenges and the speed with which these challenges develop. The turbulence level is a combined measure of the degree of novelty of challenges and their speed relative to the response time of the firm (Kipley 6t Lewis, 2010).
On a level of 1-5, one being the lowest, Environmental Turbulence in the banking industry in normal times could be categorized at a level 3, but within the past few years that level has quickly increased to a 5. Levels 4 and 5 can be described as discontinuous and surpriseful. The future is very different from the historical past and the past successes do not guarantee future success. Level 4 is defined as discontinuous and challenges include limited visibility, partial predictability rapid change, and inability of the firm to react to that change within the time required. Level 5 is surpriseful, change at this level occurs without notice, visibility, unpredictable and extremely rapid (Kipley & Lewis, 2010). The highest turbulence level, 5 can be described as a very dynamic environment in which:
* Firms compete in a strategic business area with global competitors
* There are significant changes in the environment within a year, where at times, the products / services are significantly different within the same year, and
* The future is expected to be surpriseful and unpredictable and different from the past
2008 proved to be very unpredictable, and extremely rapid movement occurred within financial intuitions including the movement of management as other banks and private equity purchased banks. We could easily categorize this time as turbulence level 5. These levels of turbulence require strong strategic leadership.
Strategic Leadership capabilities
The competency of effective managers includes, but is not limited to, the following attributes: "problem solving skills, process identification, leadership attributes, management information, organizational structure, environmental surveillance, management system, management science" (Ansoff, 1979, 2007). These preceding attributes are evident within all levels of environmental turbulence and all managerial archetypes. However, the process to which these attributes are exercised by the managerial archetypes differs according to the level of turbulence within the environment. Due to the high turbulent environment that banks are encountering, especially in these economic times, a manager whose focus is more aligned with the entrepreneurial archetype, Ansoff refers to this manager as a "Creative Manager" mindset, is critical to the success of the organization.
The quality and effectiveness of the organization is directly attributable to those who led it (Mannoia, 1996). Most unsuccessful CEOs stumble because of one simple fatal shortcoming, its bad execution. It's as simple as that, not getting things done, being indecisive, not delivering on commitments (Babbes 6t Zigarelli, 2006).
Strategic Leadership is even more critical during times of uncertainty and turbulence. Strategic leaders are those that can think, act, and influence in ways that promote the sustainable competitive advantage of the organization. Managers must be able to create sustainability by initiating the right changes to enhance the organization's vitality. These changes help an organization endure in the midst of a dynamic environment, not changes that sap energy and cumulatively are not reflecting the development of capabilities and value. Strategic leadership is exerted when the decisions and actions of leaders have strategic implications for the organization. Strategic leadership is broad in scope, the impact is felt over long periods of time, and it often involves significant organizational change (Hughes & Beatty, 2005).
Why Banks Werenft Prepared
In 2006, many banks were crafting their "innovative" products to "enable the American dream." Such 'non traditional' mortgage products included the Option ARMS and Interest Only Mortgages (IOM) as well as limited documentation underwriting. These loans contained a much higher risk to the lenders and borrowers but both still saw great returns in them. Consumers wanted their home and the bank wanted the revenue.
At this time the secondary market was highly liquid and sustained liquidity longer than expected. Instead of the banks preparing for a possible downturn they got caught up in the increasing number of consumers who qualified for loans and continued to originate by loosening their standards to compete with each other. Guidelines were expanded and these new "innovative" products were introduced expanding home ownership to those who couldn't really afford it. (1MB, 2006) The loan value to value of the homes (LTV) was too high, in some cases 100%, creating additional risk if there was any negative change in the price of the homes.
The magnitude and rapidity of the deterioration of the housing and mortgage markets was unprecedented. Housing statistics revealed that the 4th quarter of 2007 marked the 8th quarter of the housing downturn, making it already the fourth worst housing downturn in modern times. Many predicted that before it turned around it would be the longest and deepest since the great depression. Non GSE mortgage lending was devastated by the collapse of the private secondary market caused by significantly worsening mortgage credit fundamentals and uncertainty and fear among investors about declining housing prices and future credit losses. In 2007, as a result of the housing bubble burst, delinquencies and non-performing home loans increased so rapidly (IMB, 2007) that banks could not manage the 'loan loss' volume and frantically tried to mitigate losses as well as cover existing loan losses.
'Strategic myopia' is the failure to see or accept the signals of impending change. By the time management recognized and accepted that fact that a shift had occurred, it was too late to prevent significant losses. The risk-based models that the banks designed to detect severe economic stress, failed. The failure was in part due to managerial disbelief, greed, and arrogance.
How to Prepare for Strategic Surprise
The banking industry is cyclic and as such, transitioning from a period of high turbulence, low predictability to one of lower turbulence and higher predictability. For management to prepare for the next environmental shift they must be cognizant of the nature of strategic surprises and recall the volatility of the industry turbulence. This mandates installing a strategic surprise system. Lacking a coherent strategy of response, local managers are likely to move the firm in "all directions at the same time" and create havoc (Kipley & Lewis, 2009).
Leading a firm in a turbulent environment requires the CEO to ensure all managers of the firm understand and share knowledge of the characteristics of the firm's future environment. Second, to assure the firm's organizational structure is fully capable of responding to environmental turbulence, particularly the fast pace and unpredictability of the environment, and lastly assure the firm has the tools and know-how to develop the appropriate strategy (Kipley & Lewis, 2009).
'Strategic Consistency' is achieved as a result of advanced environmental scanning, meticulous collection and evaluation of relevant data and identifying those possible future opportunities/threat events (Hilton, Mayer, Selto, 2008).
The Strategic surprise management system must be created using scenario and sensitivity analysis to ensure its aggressiveness can match any future turbulence level. It is important for firms to conduct a sensitivity analysis to forecast the effects of a likely change in each future, relevant event on investment outcomes. These forecasts must include factors that have the most potential impact on outcomes and those will receive the most attention. If one or more uncontrollable factors seem likely to cause disastrous outcomes, managers might reject the investment (Hilton, Mayer, Selto, 2008). Scenario Analysis is also necessary to forecast the effects of likely combinations of future events on investment outcomes. Commonly considered scenarios include the most likely, best case, and worst case scenarios. If the most likely case scenario is favorable and if the worst case is neither a disaster nor judged to be very likely mangers would probably improve the investment (Hilton, Mayer, Selto, 2008). Sensitivity and Scenario analysis must be included when creating the strategic surprise management system. This ensures that the firm has covered the different possible outcomes if the environmental turbulence leaves suddenly shifts or there is a strategic surprise.
Recent economic turmoil and current pressures in the market place have heightened the need for leaders to have a strategic plan. Organizations whose historical business model was based on organic growth must now strategically repositioning themselves considering the new 'rules of the game' and develop a posture of increased strategic aggressiveness, managerial capabilities, and a system to mitigate strategic surprises in an effort to remain competitive in a discontinuous environment.
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Melissa (Tessier) Carver, Azusa Pacific University
Dr. Dan Kipley, Azusa Pacific University
Melissa Carver is a project manager at One West Bank, and has previously been employed as a systems Analyst for IndyMac Bank. Her expertise includes Sharepoint Administration, Financial Reporting, Information Management, and Project Management. She holds an MBA and a BA from Azusa Pacific University.
Dan H. Kipley, Ph. D., is an Assistant Professor of Strategic Management at Azusa Pacific University in Azusa, Ca. He received his doctorate in strategic management from Alliant International University in San Diego, CA. and has published extensively in various scholarly journals in the fields of forprofit and not-for-profit strategic management'.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Ansoff's Strategic Issue Management System: A Validation for Use in the Banking Industry during High Turbulent Environments. Contributors: Carver, Melissa - Author, Kipley, Dan - Author. Journal title: Business Renaissance Quarterly. Volume: 5. Issue: 2 Publication date: Summer 2010. Page number: 59+. © Business Renaissance Institute Winter 2008. Provided by ProQuest LLC. All Rights Reserved.
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