Antecedents of Market Orientation in The Banking Sector During Its Digital Transformation

This is a self-archived version of an original article. This version may differ from the original in pagination and typographic details. Author(s): Title: Year: Version: Copyright: Rights: Rights url: Please cite the original version: CC BY 3.0 https://creativecommons.org/licenses/by/3.0/ Antecedents of Market Orientation in The Banking Sector During Its Digital Transformation © The Author, 2019. Published version Haapio, Hannele; Karjaluoto, Heikki; Mero, Joel Haapio, H., Karjaluoto, H., & Mero, J. (2019). Antecedents of Market Orientation in The Banking Sector During Its Digital Transformation. In A. Pucihar, M. Kljajic Borstnar, R. Bons, J. Seitz, H. Cripps, & D. Vidmar (Eds.), 32nd Bled eConference : Humanizing Technology for a Sustainable Society (pp. 289-305). University of Maribor. https://doi.org/10.18690/978-961-286-280-0.16 2019 32ND BLED ECONFERENCE HUMANIZING TECHNOLOGY FOR A SUSTAINABLE SOCIETY JUNE 16 – 19, 2019, BLED, SLOVENIA, CONFERENCE PROCEEDINGS A. Pucihar (ed. et al.) Antecedents of Market Orientation in The Banking Sector During Its Digital Transformation HANNELE HAAPIO, HEIKKI KARJALUOTO & JOEL MERO Abstract Firms are under increasing pressure to remain relevant for their customers and need to rethink how to remain market-oriented in the digital age. This is evident in the banking sector where the traditional banks are gradually being challenged by digital native competitors and growing customer demands. Consequently, this study examines what it takes to be market oriented in the banking sector at the age of increasing digitalization. Specifically, we focus on developing the theory on the antecedents of MO and examine how banks can regain market orientation under changing market conditions. Although Market Orientation (MO) has been a widely studied concept that has been applied in numerous different contexts, the role of digitalization as the transformer of MO is not well understood. The main findings of this study indicate market orientation at the digital age is manifested as the firm’s ability to offer seamless and valuable customer experience across all service channels. Realizing this ideal necessitates a low organizational structure, managerial understanding of data and technology usage, interdepartmental management of external partnerships, as well as a managerial mindset that is genuinely concerned about customer needs. Keywords: • Market Orientation • Digital Transformation • Retail Banking • Touchpoints • Banking sector • CORRESPONDENCE ADDRESS: Hannele Haapio, PhD Candidate, University of Jyväskylä, School of Business and Economics, Marketing, Jyväskylä, Finland, e-mail: [email protected]. Heikki Karjaluoto, PhD, Professor, University of Jyväskylä School of Business and Economics, Marketing, Jyväskylä, Finland, e-mail: heikki.karjaluot[email protected]. Joel Mero, PhD, Assistant Professor, LUT School of Business and Management, Marketing, Jyväskylä, Finland, e-mail: [email protected]. '2,KWWSVGRLRUJ-961--2-0.16 ,6%1-961---0 Dostopno na: http://press.um.si 290 32ND BLED ECONFERENCE HUMANIZING TECHNOLOGY FOR A SUSTAINABLE SOCIETY, CONFERENCE PROCEEDINGS 1 Introduction Digitalization and the emergence of new technologies are rapidly changing the EXVLQHVVODQGVFDSH.XPDU2YHUE\%KDUDGZDM6DPEDPXUWK\ In the banking sector, digitalization is transforming the market dynamics at three main fronts. First, digitalization has empowered customers to demand a frictionless experience across various service and communication channels whenever they want (Cao & Li, 2015; Lemon & Verhoef, 2016; Verhoef, Kannan, & Inman, 2015). Second, digitalization has led to new regulatory initiatives, such as the Revised Payment Service Directive (PSD2) and the General Data Protection Regulation (GDPR) that are challenging traditional banks’ business and operating models. Third, digitalization has made competition global, and new digital competitors (fintechs) are entering the markets with new digital solutions 5LJE\6XWKHUODQG1REOH The dominant business models in the banking sector seem to streamline banks’ operations and extend their business rather than try to meet customers’ needs (Camarero, 2007; Nätti & Lähteenmäki, 2016). However, the new market dynamics require banks to shift their focus from developing internal banking processes to creating valuable interactions with customers (Holmlund, Strandvik, & Lähteenmäki, 2017). In a similar vein, Kolar (2006) suggests that banks should move from a traditional “inward focus” to more market-oriented ways of doing business. Against this backdrop, we propose that succeeding in the new market reality requires banks to restore focus on market orientation (MO). Although MO has been a widely studied concept that has been applied in numerous different contexts since the seminal paper written by Kohli and Jaworski (1990), the role of digitalization as the transformer of MO is not well understood. The objective of the study is to examine, what it takes to be market oriented in the banking sector during the digital transformation. In particular, we follow the model by Kohli and Jaworski (1990) and examine the antecedents of MO. This study proceeds as follows. In the next section, we present the theoretical underpinnings and antecedents of MO. After that, we explain and justify the data collection and analysis methods. Finally, we present the study findings and discuss the contributions, limitations, and future research avenues. H. HDDSLR+.DUMDOXRWR- Mero: $QWHFHGHQWVRI0DUNHW2ULHQWDWLRQLQ7KH%DQNLQJ6HFWRU 'XULQJ,WV'LJLWDO7UDQVIRUPDWLRQ 291 2 Antecedents of market orientation With more than 1000 articles published since 1990, the theory of MO might be one of the most cited concepts in the field of marketing (Jaworski & Kohli, 2017). Kohli and Jaworski (1990) propose that the key elements of MO are intelligence generation, intelligence dissemination and responsiveness, whereas Narver and Slater (1990) propose that MO consists of customer orientation, competitor orientation, and inter-functional coordination. Hartline, Maxham, and McKee's (2000, p. 35) definition suggests that MO manifests itself as a firm's commitment to “put customers' interest first, but not to exclude the interests of stakeholders with the outcome to develop a long-term profitable company”. Although different approaches seem to be consistent with that of Kohli and Jaworski (1990), their approach to MO is still the broadest. That is consistent with Kolar (2006) who compared a number of definitions of MO and found that they do not represent substantial improvements to the conceptualizations by Kohli and Jaworski (1990) and Narver and Slater (1990). Thus, this study uses the antecedents of MO adopted from Kohli and Jaworski’s (1990) theory. Kohli and Jaworski (1990) propose three categories of antecedents (senior management factors, interdepartmental dynamics and organizational systems) that affect the implementation of MO (Table 1). The category of senior management factors includes the communication-action gap of top management, suggesting that the actual behavior of senior managers does not always match their words. That is consistent with Harris and Piercy (1999), who argue that the level of MO in an organization is dependent on the abilities and commitment of senior management. Other senior management factors are the risk aversion of senior management, upward mobility and the education of top management, marketing managers’ ability to win the trust of non-marketing managers and the senior management’s attitude toward change (Kohli & Jaworski, 1990). The second category of antecedents is the interdepartmental dynamics. Interdepartmental conflict may appear inherently because of different desires of various departments. That is in line with Holmlund et al. (2017) who argue that it is natural for managers to optimize the function for which they are responsible. According to Kohli and Jaworski (1990), interdepartmental conflict inhibits communication across departments, and thus, limits the dissemination of market intelligence and hinders the generation of a holistic understanding of customers’ 292 32ND BLED ECONFERENCE HUMANIZING TECHNOLOGY FOR A SUSTAINABLE SOCIETY, CONFERENCE PROCEEDINGS needs. A low level of concern for the ideas of other departments will result in ineffective processes. However, a positive effect can be achieved by interdepartmental connectedness (i.e., formal and informal contact among employees across departments), which will ensure the dissemination of market intelligence. Third group of antecedents is organizational systems. Per Kohli and Jaworski (1990), barriers, such as formalization and departmentalization, inhibit an organization’s MO. Formalization is the degree to which rules define the roles, communication, authority relations, and procedures of the organization. Departmentalization is a barrier to communication whereas centralization defines authority and participation in decision making. Long-term market-based reward system is aQRWKHURUJDQL]DWLRQDOV\VWHP:HEVWHUFODLPWKDWKRZ managers are evaluated and rewarded is one key dimension for developing a market-oriented and customer-driven organization. Additionally, one barrier is the acceptance of political behavior. Harris and Piercy (1999) argue that political and formalized behavior of senior management is linked to low levels of MO. That idea is consistent with Kohli and Jaworski (1990), who argue that political behavior represents individuals’ attempts to promote self-interests and threaten others’ interests. H. HDDSLR+.DUMDOXRWR- Mero: $QWHFHGHQWVRI0DUNHW2ULHQWDWLRQLQ7KH%DQNLQJ6HFWRU 'XULQJ,WV'LJLWDO7UDQVIRUPDWLRQ 293 Table 1: Kohli and Jaworski (1990) Antecedents of MO 3 Methodology Qualitative approach was used as the research strategy of this study. According to Maxwell (1996), qualitative research has the capacity to examine the particular context within which participants act and how the context influences their actions. A qualitative inquiry was considered the most suitable approach because our purpose was to generate in-depth understanding of the phenomenon rather than to provide evidence for causal claims. Non-directive interviews served as the primary data collection method. These involved unplanned and planned questions and allowed for in-depth exploration RIWKHLVVXHV*UD\The target group for the interviews was bank managers in three leading Nordic retail banks. Following Eisenhardt and Graebner's (2007) recommendations, we collected data from interviewees who view the phenomena from diverse perspectives, are from different hierarchical levels, and are from different functional areas. We interviewed executives and middle managers, from development units and from units with direct customer interactions. Six interviewees were selected via purposeful sampling (Patton, 2002) meaning that those banking professionals who had experience of undergoing a digital Senior management factors Communication-action gap of top management Risk aversion of top management Upward mobility and education of top management Marketing managers’ ability to win trust of nonmarketing managers Top managements’ attitude toward change Interdepartmental dynamics Interdepartmental conflict Concern for ideas of other departments Interdepartmental connectedness Organizational systems Formalization Departmentalization Centralization Market-based reward system Acceptance of political behavior  32ND BLED ECONFERENCE HUMANIZING TECHNOLOGY FOR A SUSTAINABLE SOCIETY, CONFERENCE PROCEEDINGS transformation in their organizations were selected as interviewees (Table 1). The interviews took place between mid-April and mid-0D\ Table 2: Interviewed bank managers Level and role/responsibility Name Length of interview Executive/development unit Ann 53 min Executive/leader of units with direct customer interactions Mary 56 min Middle management/development units John PLQ Middle management/ leader of units with direct customer interactions Timothy 55 min Middle management/ leader of units with direct customer interactions Claire 61 min Middle management/ leader of units with direct customer interactions Stuart PLQ The interviews were conducted partly face-to-face (four interviews) and partly over the phone (two interviews). The average length of the interviews was 55 minutes, and all the interviews were audio recorded with the permission of the interviewees. The interviews focused on the challenges that digitalization causes for banks. We did not ask about either MO or customer experience management directly, although we wanted to understand whether those are top priorities during digital transformation. During the interviews, the elements of MO entered the discussion. All study data were documented and appropriately stored in a study database. For the analysis, we followed a three-step process, which included data condensation, data display, and drawing conclusions (Miles, Huberman, & Saldaña, 2013). For data condensation, we used descriptive coding to create relevant categories, such as customer focus, organizational behavior, regulatory changes, managerial behavior, customer behavior, technology, perceived risks, etc. During the data display phase, the data were organized by using the guiding framework, and they were grouped according to the context. Finally, the findings H. HDDSLR+.DUMDOXRWR- Mero: $QWHFHGHQWVRI0DUNHW2ULHQWDWLRQLQ7KH%DQNLQJ6HFWRU 'XULQJ,WV'LJLWDO7UDQVIRUPDWLRQ 295 were reviewed and compared with the theoretical model, which led us to propose the changes that are presented in this paper. 4 Findings Findings for senior management factors are shown in figure 1, where the proposed new factors are marked with an asterisk (*). All interviewees discussed the senior management communication-action gap, which according to Kohli & Jaworski, (1990) occurs, when the actual behavior of senior managers does not match their words. Specifically, it became evident that the senior management talks a lot about customer orientation but the actual decisions are sometimes contradictory. This result mirrors the findings of Fellesson (2011), who state that, although companies may believe that they are customer oriented, their actions do not correspond to this belief. In fact, managers’ mental models direct what is considered important, what is monitored, and what is done in an organization (Holmlund et al., 2017). It seems that, there is a limited focus on customers as a starting point among retail banking executives; the focus is on developing business and renewing internal banking issues (Holmlund et al., 2017). For example executive level manager (Ann) and middle level manager (Stuart) stated: ´:HVD\WKDWZHOLVWHQWRFXVWRPHUVDQGUHDFWRQWKHLUQHHGV+RZHYHUWREHKRQHVW WKDWLVQRWZKDWZHGRZHVWLOOUHO\RQWUDGLWLRQDOFXVWRPHUVDWLVIDFWLRQPHDVXUHPHQWV 7KRVHDUHWRRVORZDQGGRQ·WUHDOO\WHOODQ\WKLQJDQ\PRUHµ$QQ ´0DQDJHUVVD\WKDWWKHFXVWRPHULVWKHPRVWLPSRUWDQWEXWKRZLPSRUWDQWLWUHDOO\ LV"'RZHKDYHRQH-WLPHGHDOVRUGRZHKDYHSHUVLVWHQWFXVWRPHUZRUN"0DQDJHUV VKRXOGXQGHUVWDQGFXVWRPHUVDQGWKDWGRHVQRWFRPHIURPRQO\VWDULQJDWILJXUHVµ 6WXDUW The banking industry is rapidly evolving, and this requires that the management’s attitude toward change is positive. Five interviewees explicitly mentioned the senior management’s attitude toward change as an important antecedent of MO during digital transformation. In line with Nätti and Lähteenmäki (2016) who find that the long period of regulation has made banking managers more risk averse, multiple interviewees of this study considered that the risk aversion is a dominant characteristic among the banking executives. Overall, our data suggested that the senior management in the banking industry is more risk 296 32ND BLED ECONFERENCE HUMANIZING TECHNOLOGY FOR A SUSTAINABLE SOCIETY, CONFERENCE PROCEEDINGS oriented than market oriented. One interviewee described the lack of customer orientation as follows: ´7KHZKROHVHFWRUKDVRQO\WDNHQDIHZVWHSVIURPWKHWLPHZKHQFXVWRPHUVFDPHZLWK WKHLU¶KDWLQKDQG·WRWKHEDQN7KDWZHKDYHQRW\HWXQGHUVWRRGZHDUHWRRDUURJDQWµ (Ann). All interviewees discussed the managerial need to understand data and technology, which naturally plays a core role in digitalization. Interestingly, all interviewees considered mobile as the prioritized customer interaction channel because it is an entrance to all services. One interviewee summarized, ´:HGRQ·WWDONDERXWPRELOHRQO\EXWPRELOHILUVW:HVD\WKDWPRELOHLVDUHPRWH contrROSDQHOIRUEDQNLQJEXVLQHVVµ0DU\ While the study data implied that the digital transformation in banking emphasizes mobile channels, the consequences do not seem to be clear. Bátiz䇲 Lazo and Wood (2003) find that there is a risk in the prevailing bank management style. They argue that senior management’s lack of understanding of new opportunities and consequences might hold back development or lead to the pursuit of inappropriate growth opportunities. As one interviewed puts it: ´:HSXWDORWRI IRFXVRQPRELOHFKDQQHOV EXW,·PQRWVXUHKRZZHOOZHUHDOO\ XQGHUVWDQGWKHFRQVHTXHQFHVµ7LPRWK\ H. HDDSLR+.DUMDOXRWR- Mero: $QWHFHGHQWVRI0DUNHW2ULHQWDWLRQLQ7KH%DQNLQJ6HFWRU 'XULQJ,WV'LJLWDO7UDQVIRUPDWLRQ 303 This study follows the structure of Kohli and Jaworski's (1990) theory of MO. Future research could compare the organizational culture and setup of, for example, fintech companies or startups to big banks. It would be interesting to understand how Kohli and Jaworski’s (1990) theory would apply in smaller and later established companies. Furthermore, more research is needed to investigate the changes that the financial sector is facing during its digital disruption (e.g., the PSD2). Another interesting possibility for future research is the balance among data, technology, and soft items. Is the balance at the right level, and does that affect the consequences of MO? This question is especially pertinent now, when customers require a seamless omnichannel experience. Overall, while these limitations do not jeopardize the integrity of the results, they do limit the conclusions that can be drawn. 6 Conclusion To summarize, this research highlights the importance of considering MO in the banking sector at the age of increasing digitalization. Building on the theory of MO (Kohli and Jaworski, 1990), this paper proposes new elements to the original MO framework by identifying five novel antecedents: managers' mental model, ability to understand data and technology, integration of touchpoints, managing partnerships and marketing doctrine. References BátizဨLazo, B., & Wood, D. (2003). Strategy, competition and diversification in European and Mexican banking. ,QWHUQDWLRQDO-RXUQDORI%DQN0DUNHWLQJ 202–KWWSVGRLRUJ Camarero, C. (2007). Relationship orientation or service quality? International Journal of %DQN0DUNHWLQJ–KWWSVGRLRUJ Cao, L., & Li, L. (2015). 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