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Changes in the retail industry sector Best practice in supply chain management: the experience of the retail sector Th...

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Changes in the retail industry sector

Best practice in supply chain management: the experience of the retail sector

The retail industry sector is undergoing major changes which hit the automobile industry sector in the 1970s and 1980s. As competition is expected to intensify more and more, profit margins will become tighter and the ability for effective management through continued cost reductions is going to determine winners from losers. Integrated management through the extended supply chain is however the best way forward to effective value provision to the end consumer. The extended supply chain however may not necessarily mean structural and methodological changes but the ability to move away from conventional and rigid approaches characterised by a win/lose approach. The automobile industry has gone through four distinct eras of change, described by Lamming (1993) as the four-phase model of customer-supplier relations. The four phases of change include: The traditional model: This represents the era before 1975 where the basis of sourcing was widely spread out and based on cost and price, characterised by a complete mistrust. During this era however demand was high and competitive pressure was low. Order sizes were big and inspection was customer-based; The stress model: The era was from 1972 to 1985, price was still a determining factor, information was strictly guarded and used as a weapon (suppliers are asked to open their books), big conflicts in dealings and pressures on suppliers to comply with quality standards through the use of Statistical Quality Techniques. This model was very confrontational and based on a lose/lose approach; The resolved model: This model represents the period from 1982 onwards, relationships are more considered at the strategic level, purchasing is not just price related but also focuses on quality and delivery, data and information are exchanged at the operational level, better planning and scheduling of deliveries, quality is taken as a joint responsibility; The partnerships model: This is a model which is very much in evidence in the 1990s, clear evidence of joint collaborations and a

Mohamed Zairi

The author Mohamed Zairi is at the University of Bradford Management Centre. Abstract Notes that the retail industry sector is currently undergoing major changes resulting from factors such as increased competition and tighter profit margins. Suggests that integrated management through the extended supply chain is the most effective means to achieve good value provision to the end consumer. Looks at factors such as efficient consumer response – an initiative launched in the USA to bring together grocery distributors and their suppliers. Also considers initiatives such as quick response – a current UK practice which encourages the effective management of the supply chain. Features the practices of key operators such as Safeway. Proposes a model for effective partnerships and suggests initiatives for future success.

The author is greatly indebted to his colleagues: Alan Dunkley, Neil Grocock, Peter Jarman, Bruce McAndrew, Keith Sowley who took part in the benchmarking project and to Dr Tony Heany for allowing some of the work to be published.

European Journal of Innovation Management Volume 1 · Number 2 · 1998 · pp. 59–66 © MCB University Press · ISSN 1460-1060

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Best practice in supply chain management

European Journal of Innovation Management

Mohamed Zairi

Volume 1 · Number 2 · 1998 · 59–66

commitment towards a win-win approach. Supplier selection is based on their performance following a wide range of criteria, and there is a long term commitment to supplier development and the building of partnerships. This is for instance carried out through open access to information, the joint planning of scheduling and the management of operations, moving away from large quantities and the adoption of the just in time principle. This model does also mean that there is a sharing of technological know how and management expertise, particularly in areas which are going to lead to a win-win situation. Lean supply model: Lamming (1993) argues that the Partnership Model is however ineffective in dealing with global competition as the requirements are different and the relationship between supplier and customer is not based on senior and junior partners. Lamming comments:

in this industry, there was an overall realization that there has to be a total focus on the complete chain of value delivery to the end customer so that unnecessary costs can be squeezed out and value and effectiveness optimized. Traditionally of course, there was reliance on individual functions which has meant high costs, high inventories, duplication of efforts and unnecessary lengthening of the chain. The key purpose for launching ECR is to create a seamless chain where the key driver is the continuous flow of information and the dedicated focus is on the end consumer. The report on ECR published by The Research Department Food Marketing Institute (The Research Department Food Marketing Institute, 1993) explains the key purpose of ECR as follows: The ultimate goal of ECR is a responsive, consumer-driven system in which distributors and suppliers work together as business allies to maximize consumer satisfaction and minimize cost. Accurate information and high-quality products flow through a paperless system between manufacturing line and check-out counter with minimum degradation or interruption both within and between trading partners.

The conclusion is that competition in lean production will be global and that part of the lean supply relationship must be a readiness on the part of the supplier to provide a local service to the assembler wherever it is required in the world. A first tier supplier that provides excellent service in its home country but is unable to offer similar support to the assembler elsewhere in the world will not be a comprehensive competitor in lean supply.

The ECR strategy is clearly described in the following five guiding principles: (1) Constantly focus on providing better value to the grocery consumer: better product, better quality, better assortment, better in-stock service, better convenience with less cost throughout the total chain; (2) ECR must be driven by committed business leaders determined to achieve the choice to profit from the replacement of the old paradigms of win/lose trading relationships with win/win mutually profitable business alliances; (3) Accurate and timely information must be used to support effective marketing, production and logistic decisions. This information will flow externally between partners through EDI using UCS standards and will internally affect the most productive and efficient use of information in a computer-based system; (4) Product must flow with a maximization of value-adding processes from the end of production/packing to the consumer’s basket so as to ensure the right product is available at the right time;

The lean supply model is characterised by a global ability and a major contribution to product technology, being integrated in R&D activities, total transparency of data and information exchange, strategic involvement in synchronization of capacity and commitment to continuous improvement through the kaizen principle. The retail industry sector has undergone similar changes over the past few years; better communication between retailers and suppliers has been taking place, more exchanges in information and know how and perhaps a slightly more transparent commitment to building a win/win approach to competitiveness. The latest crusade that the retail industry has embarked on is efficient consumer response (ECR). Is it the latest fad or a major force for change?

Efficient consumer response (ECR) ECR is an initiative launched in the USA to help bring together grocery distributors and their suppliers for the benefit of the end consumer. In view of the cut throat competition 60



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(5) A common and consistent performance measurement and reward system must be used that focusses on the effectiveness of the total system (i.e. better value through reduced costs, lower inventory and better asset utilization), clearly identifies the potential rewards (i.e. increased revenue and profit), and promotes equitable sharing of these rewards.

competing for the same customer base, in similar industries and in cut throat and adverse conditions. ECR may remain an ideal for many operators in the grocery and retail industry sector. “Quick response” the current approach adopted by the bulk of this industry, has led to significant gains in competitive performance. Information technology in the form of electronic data interchange (EDI) has played a significant role in improving quality and generating benefits for all the stakeholders involved in the retail industry sector. To test the applicability of ECR in the context of the UK retail industry it is important to gloss over the current situation and look at the challenges ahead facing both suppliers and retailers alike.

On the face of it ECR looks like the ideal solution for the grocery industry and perhaps the ideal model for the creation of effective competitiveness. It does however mean radical changes and putting the above principles through thorough testing. Some of the questions that need to be addressed include the following: • Too early, too fast, too challenging? ECR requires a complete re-thinking of the way partnerships are working at the moment and some re-engineering of many of the key processes; • Can the gap from total mistrust to total partnership be closed speedily? This may not be a straightforward question to answer. As the automobile sector did indicate, to resolve the conflicts between suppliers and customers, various stages had to be established and an incremental process of dialogue, mutual understanding and clear commitment had to be created over a long period of time. Each stage does require application, perseverance and the establishing of clear goals for the following stage. This perhaps means that the grocery industry sector will have to gradually put changes in place, towards the ultimate vision of ECR; • In addition to the “hard necessities” of ECR, there are “soft” cultural issues which need to be taken into account. The ECR model may have to be customized for individual types of relationships with elements supported by individual cultural set ups; • ECR may call for complete “transparency” for total partnerships. What is the best way of dealing with issues of conflict such as brand support? Retailers may be committed to supporting brands from their best suppliers but will they also have their own aspirations for their own brands? • Complete transparency may, in addition, be hindered by the fact that suppliers work closely with different retailers, who are

The retail dimension conflict Quick response (QR) supply chain partnerships is the current practice in the UK retail industry, encouraging suppliers and retailers alike to pursue the effective management of the total supply chain, including amongst others, the following areas: • order management • inventory replenishment • physical handling and transportation • exchange of information The ultimate purpose of QR is to drive out unnecessary costs, eliminate bottlenecks, remove areas of duplications, re-engineer inefficient processes, look at best practice through the use of automation as and when necessary and create the “value links” so that the whole chain can be managed with a win/win approach. In reality however, the workability of quick response raises many questions as explained by Whiteoak (1993): It is easy to talk in general terms about the principles of partnership, but their application in practice – the “how” of using the exchange of information to achieve the benefits, is a problem for which I believe we have only found partial solutions. Despite an increasing general willingness to work together there remain many attitudes, prejudices, corporate cultures to be changed and hidden agendas to be exposed if we are to explore the full range of possibilities.

The conflict of establishing effective partnerships between retailers and manufacturers is in the nature of stocks which need to be held and managed. 61



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Supply pipeline stock: essential and directly passed on to the end consumer. Opportunity stock: special offers given by manufacturers which lead to tempting commercial benefits. Safety buffers: these are stocks which deal with errors, supplier failures and unforeseen situations. As far as establishing effective partnerships is concerned, stock types 1 and 2 can be dealt with through effective management. The safety buffer stocks however are the real challenge and present two dimensions to be taken into account: • The order size means, the higher the latter is, the higher is the multiplicity factor for errors and the worse are the implications; • The longer the lead time is, the longer it is going to take to solve possible problems and therefore the worse the implications are going to be.

that suppliers will be expected to perform better in terms of consistency, delivery reliability, quality of service in addition to cost and speed. The challenge for suppliers is going to be to manage operations with increased flexibility and better predictability in demand and better commitment to reducing lead times. This will also mean that upstream, radical changes need to be put in place through the extension of the just in time principle. The issue may be one of stocks and costs as far as retailers are concerned and perhaps a little bit more (branding) as far as suppliers are concerned. To resolve this conflict therefore, issues of who should take the risk and who owns the stock need to be mutually shared. As Whiteoak (1993) explains: It is also important, particularly for major branded product manufacturers, to maintain their franchises and to make sure that the replenishment mentality of their logisticians does not overpower the sales and marketing objectives of actually stimulating demand. The potential risk is that items with strong franchises could become treated like commodity items.

The supply dimension of the conflict Manufacturers have to take into consideration a wide variety of issues including for instance the need to resolve the conflict between individual customer orders and an aggregate production plan for all their customer base. One of the key issues for manufacturers is cost effectiveness and efficiency of the production lines. Longer runs are therefore attractive for obvious reasons. The conflict between producing to stock and producing to order is a real one. Various factors are taken into consideration for suppliers to achieve their competitive targets but also to meet the challenges thrown down by their retail customers. The likely issues which drive suppliers include for instance: • Change over costs • Non-productive down time • Economic purchase quantities • Manageable batch sizes • Line efficiency

Whether ECR is the solution for developing effective partnerships in the context of the UK grocery industry will remain a topic for discussion, at least for the forseeable future. There are, as Whiteoak argues, fundamental issues to be addressed which involve not merely radical structural changes, but perhaps a total re-think of the way the two business sets have been interfacing in the past: • Commitment to supplier development towards the vision of zero inventories and total elimination of stocks; • Complete transparency through the development of a shared replenishment plan where the customer purchase order process and the supplier sales order processing system become managed in an integrated fashion, perhaps under the same roof; • The joint exploitation of information technology through the use of EDI for instance at the strategic and operational levels; • Transfer of technology and management expertise for mutual benefits; • Joint R&D and consumer-based innovations for mutual benefits.

A win/win situation therefore is only viable if there is total transparency and commitment from a long-term perspective. There is no doubt that retailers are going to drive their suppliers harder for the complete elimination of safety stocks. The vision of zero inventories or stockless warehouses is going to be the key objective for most retailers through insisting on daily ordering and delivery with lead times of less than 24 hours. This will therefore mean 62



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Best practice retailer response (upstream logistics)

mated sortation system in fresh foods operations has been very beneficial. Some of the issues that Safeway considers to be important for effective partnerships is through: – Systems integration using EDI for the effective movement of products but also the effective management of administrative costs which are considerably high; – Sharing of information through particular areas such as demand, forecast and stock will build an integrated supply chain and push the win/win approach a long way; – Sharing of facilities such as warehouses and storage facilities; – Product categorisation by distinguishing standard products from promotions, new lines and seasonal uplifts. Through the creation of a two tier lead time system, standard products for example could be handled with shorter lead times and other categories on a slower track with better planning and forecasting.

This section looks at practices exhibited by three key operators in the retail sector, in their attempts to become more competitive through the effective development of closer partnerships: Safeway Safeway is part of the Argyll Group which has an annual turnover of over £5 billion. At 1993 figures Safeway had around 340 stores trading from a total sales area of 7 million square feet: • Safeway measures the effectiveness of its supply chain through a service goal (100 per cent on-shelf availability to its customers) and a cost goal (minimising cost of achieving service goal). The additional changes are a time measure and a measure of supplier performance. So measurement from a customer perspective looks at: – On-shelf availability – Timeliness of deliveries From a supplier perspective: – Order fulfilment – Timeliness of deliveries • Benefits from using quick response at Safeway have, so far, led to the following benefits: – 95 per cent of what is sold is delivered to Safeway stores using their own distribution network and operating on a 24 hour lead time basis; – Inventory and forecast management systems have been greatly improved for the replenishment of Safeway’s warehouses; – Better sharing of information with suppliers to enable them to become more effective; – Rolling out sales-based replenishment systems to improve stock management and reduce stocks. • EDI transfer to all suppliers to help improve the supply chain by: – Transmission of forecast orders – Advance notification of delivery shortages – Transmission of invoices – Exchange of stock and product data • Through the use of a backhaul programme, the collection of goods from suppliers reduces costs and increases flexibility • Automated technology gives flexibility and improves productivity. The use of an auto-

J Sainsbury • In 1992 sales at JS exceeded £9 billion and profit exceeded £0.6 billion. At 1993 figures JS had 458 outlets in the UK and in the USA, the Shaws chain of 73 stores. Overall, JS had around 110,000 employees at 1993 figures. • JS places a lot of emphasis on inbound logistics, since substantial costs can be incurred through damage, errors and poor quality. • For this reason, JS produced, in 1992, the primary distribution manual to help suppliers check against JS specifications. For instance there are 12 most significant factors covering aspects related to: – Vehicles – Pallet boards – Outer packaging – Documentation • Another issue of inbound logistics is repeat orders or quantity. JS developed purchase order systems to an advanced level and this is to help buyers define order quantities precisely to suppliers. The degree of accuracy achieved through this system is in the order of 98-99 per cent at the order/line level. • Out of the 1,700 suppliers or more that JS deals with, strong partnerships were built 63



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– Forecast data – Stock holding • Suppliers who are selected for EDI links are based on: – Value of business – Suppliers who can make use of the information – Suppliers who can receive it • Tesco uses the following measures in the context of supplier partnerships: Soft measures: (subjective) – Professionalism – Innovation – Perceived quality – Trust/honesty – Flexibility – League tables Hard measures: – Service/reliability – Reduced overhead – Margin enhancement

with the top 100 using an approach called the six “S”: Scale: Defines the range volume and value of the business; Setup: Defines the logistical organisation within the supplier; Systems: Defines the current level of sophistication and development plans; Structure: Defines the production/distribution network of the suppliers when overlaid on the JS network; Stock: Defines the opportunity of just in time stock control and data sharing; Service: Defines customer orientation of the supplier. • The six ‘S’ approach has enabled JS to reduce its stockholdings considerably. For those suppliers who have logistical capability to replenish with smaller quantities on shorter lead times, JS is providing them with access to forecast data and stock information.

Whether the win/win principle of effective partnerships is genuine and can be made sustainable will very much depend on the strength of conviction in the two sets of organisations concerned and the calibre of leadership that is going to drive for the fundamental changes required for establishing a model of partnerships, similar to ECR.

Tesco • Tesco’s stockturn performance has increased from 13 in 1983 to 32 in 1993, at the same time, service level has improved from 92 per cent to 98.5 per cent during the same period. Sales have gone up from £2 billion in 1982 to £7.6 billion in 1992. Through central distribution an improvement from handling 50 million cases in 1982 to 475 million cases in 1992. • Dealings with suppliers is through sales based ordering. This has many benefits including for instance: – Uses item movement data to calculate store replenishment quantities – Reduces in-store labour – Provides greater central control and consistency – Calculates lost sales • Tesco believes that “further increases in efficiency cannot be gained at the expense of suppliers”. For this reason, it is committed to the development of EDI links with its suppliers. Tesco believes that electronic trading has a lot of benefits: – It removes “dead” time – Integrates trading cycle – No surprises – “Clean” information – Responsiveness • 200 suppliers or so have access to EDI in the form of: – Demand history

Best practice supplier response (downstream logistics) Whilst retailers have recognised the need for getting closer to their suppliers and working towards a win/win approach, suppliers to the trade sector have also recognised the same need and several attempts have been made by various suppliers to develop closer relationships with their trade customers. One aspect of establishing effective working relationships with the trade is through building closer ties with the suppliers at the downstream end of the spectrum. This section is based on a benchmarking project which was facilitated by the author, involving a group of senior managers who represent companies supplying to the retail sector. The purpose of the benchmarking initiative was to identify best practice in supplier management and supplier partnerships, together with types of measurements used for developing effective partnerships. • The project involved visiting various organisations recognised for their effective sup64



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plier management programme and including: – J R Compton Ltd, specialist paper manufacturers – DRG Ltd, packaging material converters – Elida Gibbs Ltd, personal products manufacturers – Monsanto, chemicals manufacturers – Nissan, car manufacturers – TetraPak UK, packaging system manufacturers – Tesco, supermarket retailers • The project team came to the conclusion that a full partnership arrangement can be defined as follows:

(5) Management: The capability, training, experience and philosophy to survive and continuously improve both businesses (e.g. TQ companies). • The Benchmarking team came to the conclusion that in order to introduce effective supplier partnerships, a set of actions need to take place: – The creation of a board policy statement endorsing the establishment of supplier partnerships; – The formation of a multi-disciplinary team to set the “strategic vision” for the partnership, process maps, documentation, measures; – The identification of strategic partnerships, possible partners and process owners; – The initiation of most promising partnerships via joint steering group.

A continuous programme which secures for both parties measurable benefits beyond those that can be secured through independent action and which provides for sustainable growth.

• From the benchmarking expedition, the project team managed to identify that common critical elements which tend to characterise effective and successful partnerships tend to include the following: – Recognition of the opportunity to achieve benefits from working together – Commitment to a long-term working relationship – Agreement upon specific objectives for the partnership – Measurable benefits for both parties – Benefits in line with the strategic aim of long-term growth.

The way forward for effective partnerships in the retail sector It may well be that at present the concept of enhanced consumer response (ECR) is too ambitious and less likely to resolve the big divide between retailers and their suppliers. The various initiatives covered in this paper are quite likely to lead to some mutual benefits and may be able to resolve some of the conflicts. It is however quite unlikely that a radical change will take place from these initiatives. This industry needs perhaps to get tested and challenged in a similar fashion to changes which took place in the automobile industry. In order to start to close gaps in relationships fast and work towards the vision of ECR, both retailers and suppliers can work on the implementation of the following initiatives: • Co-location and the secondment of personnel to leverage knowledge and expertise; • Focus the partnership efforts on major players so that resources can be used effectively for the development of strong ties; • Go through a “triage” and multi-refinement of supplier layers to focus the partnership effort on critical links; • Define supplier partnerships at the strategic level and ensure that there is commitment and enough resources entirely dedicated for this purpose;

A proposed model for effective partnerships: The work of the benchmarking team has led to the development of the following model for effective introduction of supplier partnerships. Essentially the model can be described as having five pillars. These include the following: (1) Product/process quality: The capability of the supplier’s process to consistently meet the quality requirements of the customer; (2) Supply chain logistics: The capability of the supplier to deliver consistently the quantities required by the customer; (3) Price/cost: The factors which affect the cost to both businesses and, ultimately, the competitiveness of the customer’s final product; (4) Innovation/design: The capability of the supplier to adapt to change either on a reactive or proactive basis; 65



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References

• Encourage direct access of suppliers to customer inventories to create stable

Asmus, D. and Griffin (1993), “Harnessing the power of your suppliers”, The McKinsey Quarterly, No. 3, pp. 66-78.

schedules and monitor utilisation rates on a virtual real-time basis (Asmus and Griffin, 1993);

Aufreiter, N., Karch, N., and Smith Shi, C. (1993), “The engine of success in retailing”, The McKinsey Quarterly, No. 3, pp 101-16.

• Sharing of information particularly on sales so that replenishment can be planned

Kurt Salmon Associates, Inc. (1993), ECR – Enhancing Consumer Value in the Grocery Industry, report published by The Research Department Food Marketing Institute, January, Washington, USA.

effectively and forecasting can be more reliable; • Measuring the relationship through an upstream mode as opposed to just a down-

Lamming, R. (1993), Beyond Partnership – Strategies for Innovation and Lean Supply, The Manufacturing Practitioner Series, Prentice-Hall International (UK) Ltd, Hemel Hempstead, UK.

stream mode, through the creation of supplier councils to provide feedback and measurements on customer performance;

Whiteoak, P. (1993), “The realities of quick response in the grocery sector – a supplier viewpoint”, Institute of Grocery Distribution conference on Improving Supply Chain Effectiveness in the Grocery Trade, 11 February, Cavendish Conference Centre.

• Extended definition of “supply chain” to create a value chain, and to foster a “performance-driven culture.”(Aufreiter et al., 1993)

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Fast product innovation and creativity is driving the development strategies of most nations enjoying high economic growth. The diverse range of technological possibilities create unprecedented change bringing both product and market uncertainty and as a consequence new challenges for organisations (Iansiti, 1995). To meet such challenges organisations need to engender both a responsive and adaptable approach to market demands. For many product innovation and creativity is a strategy of fundamental importance, in sustaining development in turbulent and volatile environments. The development of fast innovative new products needs to be based on a close alignment between technology, products and markets, with a focus on achieving increased aggregate value.

An integrated approach towards product innovation in international manufacturing organisations Glenn Hardaker

The author Glenn Hardaker is a Lecturer in the School of Business at the University of Huddersfield, Huddersfield, UK.

The competitive environment and new product development (NPD)

Abstract Fast product innovation and creativity is driving the development strategies of most nations enjoying high economic growth. The diverse range of technological possibilities creates unprecedented change bringing both product and market uncertainty and as a consequence new challenges for organisations. To meet such challenges organisations need to engender both a responsive and an adaptable approach to market demands. The article provides an insight into the relationship between technological and organisational integration variables and the speed of new product development.

Competitive advantage is viewed by organisations as being directly related to various integral elements of a product which includes: product superiority, uniqueness, and competitive pricing. A study by Booz et al. (1982) identified various categories of new products, ranging from completely new products through to simple cost reductions on existing product lines, and revealed that the more innovative categories yielded a higher proportion of successes. Issues of common importance to organisations, which affect the processes of NPD and subsequent performance outcomes, include: organisational management style, attention to detail in the processes of NPD, support for product innovation by top management, organisational strategic thinking, and manufacturing facilities to support NPD (Gupta and Wilemon, 1990). These issues, identified as being of importance for product innovation success, need to build on an organisation’s existing core competencies, rather than pursuing new opportunities far from one’s skill and resource base, as a means to success (Peter and Waterman, 1982; Prahalad and Hamel, 1990). A common theme of all the issues identified as important to organisations in the development of new products is the relevance of both technological and organisational integration. Clearly integration is proposed in a broad sense, encompassing a wide range of issues, and viewed as a mechanism for enabling organisations to be both


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responsive and adaptable through improved communications. Organisations are increasingly concentrating on responsiveness and flexibility through product innovation. The rapid delivery of new products clearly requires effective communications between design, engineering, marketing and manufacture enabling organisations to be adaptable and responsive to market conditions. Takeuchi and Nonaka (1986) indicate that the approaches adopted in producing new products are frequently inadequate for many of today’s NPD challenges. To develop fast cycle capabilities organisations need to adopt an integrated approach to NPD. Close communications are clearly required between R&D, marketing, and manufacturing in enabling responsiveness and flexibility of product innovation (Gomary, 1989). Improved organisational communications, through the adoption of an integrated approach, is viewed as an enabler in sustaining NPD in markets which are often volatile and turbulent.

requirements such as faster time to market of NPD. A concurrent engineering approach, as proposed by Gerwin (1993) in Figure 1, is a method of improving the development process of NPD. Manufacturing involvement, along with marketing and R&D, from the beginning creates a solid commitment throughout the NPD processes (Gerwin, 1993). When manufacturing enters later, integration with R&D and marketing may only be partly achieved in the following NPD processes and as a consequence creates a lack of harmony and trust between functional groups. Even though early involvement by manufacturing is accepted as being important for the success of product innovation, many organisations continue to use a sequential approach to the processes of NPD. Interpersonal relationships developed through co-operation in the “front-end” of NPD facilitate the process of concurrent design and result in products producable far more frequently the first time. Adler (1995) also stressed the importance of pre-project and design phase co-ordination between the design and manufacturing function. Cooperation between functions, which includes manufacturing at an early stage of NPD, creates an environment which is more likely to deliver a product which meets market demands. A multi-functional approach at all stages of the NPD processes, whether sequential or concurrent, is enabling organisations to realise performance improvements. It is accepted that many integration mechanisms may not as yet have been identified.

Approaches towards integration for new product development (NPD) Lawrence and Lorsch (1969) defined integration in terms of achieving “unity of effort” in various organisational subsystems. The term integration therefore refers to the strategic and operational linking of functionally specialised groups while preserving their individual orientations. Numerous studies stated the three primary functional areas involved in NPD in organisations were marketing, followed by R&D, and to a lesser extent manufacturing. A recent research study by Page (1993) found percentage of time devoted to working on NPD was seen to be quite diverse between functions with 56 per cent of R&D, 29 per cent of marketing, 34 per cent of engineering and 18 per cent of manufacturing. Manufacturing represents a lack of inter-functional integration, in particular with R&D and marketing, and only limited involvement especially at the early stages of NPD (Page, 1993). Through extensive research projects into product innovation there is an apparent lack of attention given to design for manufacture in the processes of NPD (Adler, 1995; Youseff, 1995). The need to design new products with an increased involvement by manufacturing has been driven by performance

Figure 1 Changes in the new product development process Phases of the NPD process 0

1

2

3

4

R&D MKT, R&D

MFG

MKT R&D

MKT

MFG

Key MKT = Marketing R&D = Research & Development MFG = Manufacturing Source: Gerwin (1993)

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MFG



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The Japanese organisations, as suggested by Adler (1995), are renowned for excellence in product and process fit which is partly attributed to the degree of discipline with which Japanese organisations implement co-ordination mechanisms. Dong (1995) identified layered organisational structures, rather than hierarchical organisational structures, with organisational culture as an important integration mechanism. A variety of international studies, as indicated, suggests the need for an integrated approach by organisations but provide limited insight into the relationship with performance measures such as speed of NPD.

The organisations chosen were all publicly quoted companies and the boundaries of the industry sample were drawn as defined by SIC classification. The above categories chosen were based on initial judgements about the types of organisations which were likely to be involved in NPD. The selection of organisations was carried out during MayJuly 1996. In order to elicit meaningful responses from senior managers on both technological and organisational integration, an extensive questionnaire with approximately 200 variables was distributed. One hundred and seventeen manufacturing organisations successfully completed and returned the questionnaire. The research study develops further existing literature primarily on organisational and technological integration issues by authors such as Moenaert and Souder (1990), Moenaert et al., (1994) and Adler (1995). The study is also influenced by Clarke and Fujimoto (1990), Iansiti (1995) and Takauchi and Nonaka (1986), in adopting speed as a primary performance measure, and in pursuing an international approach. The study identified both technological and organisational integration variables, at an international level, which directly affect the time to market of new product development. The project is based upon the premise that the speed of NPD is a fundamental performance measure in achieving sustainable competitive advantage.

Methodology This research study, into both technological and organisational integration in manufacturing organisations, focuses on assessing the affect on the speed of NPD with the use of multivariate statistical analysis techniques. The investigation into technological and organisational integration collected data from large manufacturing organisations in Europe, North America and Japan. In selecting the sample for the investigation a number of pertinent issues had to be considered. Firstly, to judge the influence of technological and organisational integration on speed of NPD, in world class manufacturing organisations, it was essential to research manufacturing organisations in key developed countries with an established manufacturing base. Secondly, the authors decided the emphasis of the research was on the impact of technological and organisational integration in profit seeking businesses; those organisations that fell outside the criteria were excluded from the sample e.g. government bodies, etc. Thirdly, as the survey was assessing integration in relation to NPD, the sample of manufacturing organisations had to be technology driven organisations involved in developing new products. As a consequence, an international survey targeting large manufacturing organisations in Europe, North America and Japan was chosen. “Large” was defined as 5,000 employees or more, with turnover being a secondary factor considered. Three manufacturing industry sectors were chosen: electronics and electrical components, motor vehicles, and mechanical products.

International technological integration variables affecting speed of NPD The international survey collected data on an extensive range of integrated information technology equipment, including hardware, software and plant equipment in an attempt to ascertain the variables reflecting a causal relationship with speed of NPD. The technological integration variables, in Table I, indicate importance based on the length of time information technology equipment has been used within organisations. The Beta values indicate automated assembly equipment as being the variable having the most significant effect, suggesting organisations having used such equipment for a long period of time will reduce time to market of NPD. Automated assembly equipment is used extensively in manufacturing and the findings reflect expectations and previous research. Laser measuring equipment had a high level of significance, 69



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with a Beta score also reflecting a reduction in time to market of NPD. Extensive long term use of automatic and laser measuring equipment was found in the study to be an enabler of fast NPD. The findings below also reflect variables which seem to have an adverse effect on development time of new products including: databases, marketing databases, and shop floor data capture. It is suggested from the study that organisations with long term use of databases and shop floor data capture equipment frequently encounter compatibility problems, indicating the complexity of integrating such equipment. A shift towards more PC based networks, from mainframe systems, is suggested as an explanatory factor for adverse effects on speed of NPD. In addition, the study indicates that many respondents may not have fully understood the term database management system (DBMS). An adverse effect, was also picked up in organisations that made small investments over a long period resulting in a lack of compatibility between systems, as opposed to companies which made investments in compatible systems over a shorter time span. This may in part be viewed as a consequence of international computing standards classified as “open systems”. De Meyer et al. (1989) highlight the difficulty of supporting a broad technological product range and managing the production process in an integrated manner. Table II identifies issues of importance in relation to the level of use of integrated information technology by the various functions involved in NPD, in particular R&D, marketing, manufacturing and engineering. The information clearly identifies an extensive use of databases by marketing, as having the most significant effect on improving the speed of NPD, followed by the use of graphics hardware and laser measuring equipment by manufacturing. The analysis identifies the use of information technology equipment by functional staff which has a significant effect on NPD, including instances when the use of information technology equipment by functional staff appears to be having an adverse effect. The use of information technology which is found not to directly improve speed of NPD may have other performance outcomes to an organisation in terms of profitability and efficiency. For example the use of CAD equipment by R&D may be found to

Table I International technological integration variables

Variable Intercept SHOP DATA MDATA AUTOASS LASERM R2 = 0.998 F = 211.65 Key: SHOP DATA MDATA AUTOASS LASERM

Beta

Standard error

Significance

0.890932 0.853440 0.259196 –0.882440 –0.383641

0.104696 0.019020 0.010993 0.015922 0.023163 0.013610

P = 0.0116 P = 0.0033 P = 0.0026 P = 0.0286 P = 0.0019 P = 0.0087 P = 0.0047

is Shop floor Data Capture is Database Management System is Marketing Database is Automatic Assembly Equipment is Laser Measuring Equipment

Table II International technological functional integration variables

Variable Intercept ONRD GRAPHRD GRAPHMN CADRD DATAMKT ATMAN LAMMAN

Beta

Standard error

Significance

0.420323 0.487527 –0.401927 0.314222 –0.523492 0.221220 –0.156375

0.456130 0.196661 0.030582 0.043108 0.103622 0.043877 0.046202 0.053172

P = 0.0492 P = 0.0121 P = 0.0088 P = 0.0125 P = 0.0237 P = 0.0072 P = 0.0372 P = 0.0747

R2 = 0.99 F = 87.93

P = 0.0113

Key: ONRD is the level of use of On Line Process Installation by R&D GRAPHRD is the level of use of Graphics Hardware by R&D CADRD is the level of use of Computer Aided Design (CAD) by R&D DATAMKT is the level of use of Databases by Marketing ATMAN is the level of use of Automatic Testing Equipment by Manufacturing LAMMAN is the level of use of Laser Measuring Equipment by Manufacturing benefit manufacturing organisations in reducing cost of producing products, product management, and the ability to make incremental changes to product development, but the survey undertaken did not identify a direct relationship between the use of CAD by R&D in reducing time to market of NPD. Further research is needed to clarify the reasons for the findings but much can also be understood from the research undertaken by Adler (1995). Adler (1995) suggested “novelty and 70



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analysability” as important variables in designing products. In particular with high novelty and low analysability, typical of radical as opposed to incremental product development, the ability of R&D and manufacturing to achieve a product and process fit is far more complex. The reason for the findings of the study undertaken in identifying an apparent adverse effect from R&D using CAD is unclear but may be partly attributed to the need for closer liaisons with manufacturing in achieving an improved product process fit. As stated by Adler (1995) even though performance improvements are apparent from the use of CAD more research is required to unravel the causal relationship with the complex mix of technical and organisational factors in the innovation process.

and trust to be conducive to integration, which this study supports, confirming and significantly extending past research in this area by assessing its importance in relation to achieving and sustaining a competitive advantage through speed of developing new products. Moenaert and Souder’s (1990) views on organisational culture being conducive to integration provided inspiration for research into defining the importance of organisational integration issues, such as culture, for time to market of NPD. Functional specialism for R&D, manufacturing and marketing is certainly important but also inevitable according to Griffin and Hauser (1992, 1996) who feel a functional approach evolves as organisations grow, resulting in new integration mechanisms being adopted. Griffin and Hauser (1996) suggested that barriers to functional integration include inadequate personalities and organisational culture and this appears to be true for many organisations. The analysis (see Table III) clearly identifies the cultural issues of importance, which are barriers to integration for many but are also the variables which provide world class manufacturing organisations with superior NPD performance based on speed as the criteria of assessment. The findings from the analysis also indicated that a good understanding between marketing and manufacturing directly improved the speed of NPD. Understanding within the processes of NPD seemed to be far more important than, for instance, trust between marketing and manufacturing

International organisational integration variables affecting speed of NPD An extensive assessment was undertaken in the research project into a wide range of organisational integration variables which builds on previous multi-disciplinary research into NPD, by authors such as Gupta et al. (1986), Moenaert and Souder (1990), Moenaert et al. (1994), and Zirger and Maidique (1990). The results from the analysis indicate the variables of most importance for speed of NPD, are all related to organisational culture. The variables identified clearly influence time to market of developing new products. A complex mix of culture variables were found to be directly involved in improving the ability of manufacturing organisations in Europe, North America and Japan to reduce the NPD time. In the international study the variable of most significance was found to be having an open approach, as opposed to a divisional approach, between R&D and manufacturing which, it is suggested, directly reduces the development time of new products. This does not necessarily mean multifunctional teams between R&D and manufacturing but an open approach with respect to communications, the sharing of information and ideas, and the willingness to co-operate, were integral in achieving co-ordination and integration. Moenaert and Souder (1990) defined the importance of organisational climate methods which were aimed at promoting an ingrained cultural sense of coordination and integration. Moenaert and Souder (1990) suggested openness, harmony

Table III International organisational integration variables

Variable Intercept RMINT RMOPEN MMTRUST MMUND R2 = F= Key: RMINT

Beta 0.199459 –0.303276 0.260679 –0.245948 0.1567 3.5761

Standard error

Significance

0.778170 0.200252 0.215503 0.258867 0.258952

P = 0.0015 P = 0.0787 P = 0.0121 P = 0.0384 P = 0.0573 P = 0.0100

is the level of team orientation between R&D and Manufacturing RMOPEN is the level of openness between R&D and Marketing MMTRUST is the level of trust between Marketing and Manufacturing MMUND is the level of understanding between Marketing and Manufacturing 71



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function. In the study (see Table III) trust was found to have an adverse effect on developing new products. Maybe this can be partly explained through both functions indicating strong cultural differences but realising the importance and benefits to be gained from having a good understanding of each other’s constraints and capabilities. The functional barriers suggested by Gupta et al.,(1986) discussed in the context of socio-cultural differences, are certainly of fundamental importance and complement the findings in this study which indicate culture as a mechanism for functional integration which is driving faster NPD for manufacturing organisations. The findings reflect the importance of improved forms of organisational integration in enabling a responsive and flexible orientation towards fast time to market of NPD.

Figure 2 Technological and organisational integration variables

Conclusions

indicates the importance of early involvement by manufacturing, along with marketing and R&D, in the processes of NPD in enabling fast time to market of NPD.

Plant Equipment Automatic Assembly Laser Measuring Marketing Database Software

Market Orientation Fast Time to Market NPD

Design for Manufacture

Functional Specialism

Openness R&D & Manufacturing

Trusting Marketing & Manufacturing

Key First most important Second most important Third most important

The study provides an insight into the relationship between technological and organisational integration variables and the speed of NPD (see Figure 2). It is suggested long term use of automatic assembly and laser measuring equipment helps to reduce time to market. The findings suggest a recognition of the need to invest in information technology compliant with international “open systems” standards in aiding the process of fast product development. Plant equipment, such as automatic assembly, can help to attain seamless integration of technology in organisations. Long term investment enables organisations to achieve performance gains such as speed of NPD but must be done with consistent long term objectives and a view to maintaining compatibility within operations. The results of the study suggest that the shift towards international standards, which has occurred over the past five to ten years, has helped to improve overall integration and speed of NPD. Currently many large manufacturing organisations are still hindered by proprietary based systems or are still in the process of changing to an “open systems” approach. Cultural integration variables of key importance for improving speed of NPD were R&D and marketing openness, and the need to create deep understanding between marketing and manufacturing. The findings would appear to suggest the need for both a market orientation and design for manufacture to be followed simultaneously. Finally, the study

References Adler, P.S. (1995), “Interdepartmental interdependence & coordination: the case of the design/manufacturing interface”, Organization Science, Vol. 6 No. 2. Booz, Allen & Hamilton (1982), New Product Management for the 1980s, Booz Allen & Hamilton, New York Press, New York, NY. Clark, K.B. and Fujimoto, T. (1990), “The power of product integrity”, Harvard Business Review, NovemberDecember. De Meyer, A., Nakane, J., Miller, J.G. and Fellows, K. (1989), “Flexibility: the next competitive battle – the manufacturing futures survey”, Strategic Management Journal, Vol. 10. Dong, J. (1995), “Organisation structures, concurrent engineering, and computerised enterprise integration”, Concurrent Engineering: Research and Applications, Vol. 3 No. 3. Gerwin, D. (1993), “Integrating manufacturing into the strategic phases of new product development”, California Management Review, Summer. Gomory, R.E. (1989), “From the ‘ladder of science’ to the product development cycle”, Harvard Business Review, November-December. Griffin, A. and Hauser, J.R. (1992), “Patterns of communication among marketing, engineering and manufacturing – a comparison between two new product teams”, Management Science, Vol. 38 No. 3. Griffin, A. and Hauser, J.R. (1996), “Integrating R&D and marketing: a review and analysis of the literature”, Journal Product Innovation Management, Vol.13.

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Gupta, A.K. and Wilemon, D.L. (1990), “Accelerating the development of technology-based new products”, California Management Review, Winter.

Page, A.L. (1993), “Assessing new product development practices and performance: establishing crucial norms”, Journal of Product Innovation Management, Vol. 10.

Gupta, A.K., Raj, S.P. and Wilemon, D. (1986), “A model for studying R&D – marketing interface in the product innovation process”, Journal of Marketing, April.

Peter, J.T. and Waterman Jr Rtd. (1982), In Search of Excellence, Harper & Row, New York, NY. Prahalad, C.K. and Hamel, G. (1990), “The core competence of the corporation”, Harvard Business Review, May/June.

Iansiti, M. (1995), “Managing product development in turbulent environments”, California Management Review, Vol. 38 No. 1.

Takeuchi, H. and Nonaka, I. (1986), “The new new product development game”, Harvard Business Review, January-February.

Moenaert, R.K. and Souder, W.E. (1990), “An information transfer model for integrating marketing and R&D personnel in new product development projects”, Journal of Product Innovation Management, Vol. 7.

Youseff, M.A. (1995), “Design for manufacturability and time-to-market, part 1: theoretical foundations”, International Journal of Operations & Production Management, Vol. 14 No. 12.

Moenaert, R.K., Souder, W.E., De Meyer, A. and Deschoolmeester, D. (1994), “R&D-marketing integration mechanisms, communication flows and innovation success”, Journal of Product Innovation Management, Vol. 11.

Zirger, B.J. and Maidique, M.A. (1990), “A model of new product development: an empirical test”, Management Science, Vol. 36 No. 7.

73

Introduction

Empirically testing the impact of change management effectiveness on company performance

As the dramatic increases in business globalization and free trade continue to increase business competition, the importance of business innovation has become quite obvious to most managers. However, success implementing the required changes is far from assured, with many organizations reporting very disappointing results given the cost and turmoil caused by the changes. On the other hand, American business organizations have derived substantial benefits from widespread changes to the old ways of doing business. For example, the American manufacturing sector is thought to have become more productive (Howard, 1994). The erosion of our manufacturing base and the loss of initiative to Japan and Europe has been reversed. From 1982 to 1990, the productivity of US manufacturing workers increased 4.5 percent per year, a record for any period since the end of World War II (Howard, 1994). In the process of exploring the basic differences between the Japanese and American manufacturing management approaches and applying a host of new methods and techniques, many US firms have been redefining the very nature of their businesses (Patterson and Harmel, 1992). Over the past decade the main emphasis worldwide has been on improving quality. Many companies have adopted a new management and operations philosophy widely known as total quality management (TQM). The major underpinnings of TQM are a continuous effort to improve products, processes, and operations to better satisfy customer needs; employee empowerment in decision making and a team approach to identify, prioritize, and change targets for improvement; and a company-wide commitment to TQM strong enough to change what is necessary, including organization values and culture. The modern view of quality holds that it is not sufficient for product attributes to meet customer requirements; they must exceed them (Ramberg, 1994). Managers in companies which have embraced the principles of TQM know that everybody inside the company should be focused on the customer, not just the marketing department

Tor Guimaraes and Curtis Armstrong

The authors Tor Guimaraes holds the Jesse E. Owen Chair of Excellence, Tennessee Technological University, Tennessee, USA. Curtis Armstrong is based in the Decision Sciences Department, Tennessee Technological University. Abstract The literature is abundant with articles extolling the importance of change as a necessity for business survival and growth. Specifically, business change means the redesigning of business processes, the improvement of the company’s products and/or services, and organizational changes to organizational structure and/or culture deemed necessary for better performance. Despite the importance of the topic, the existing literature contains little empirical evidence. Mostly superficial analyses and personal opinions have been published in this basic area. A field test of how effectively business organizations are implementing business changes, and use IS technology to do so, was undertaken to understand the important characteristics of the business change processes involved and to empirically test the relationships among these constructs. Despite the relatively small sample size, the results provide clear evidence about the importance of effectively managing business change for business success. The items used for measuring the main constructs provide further insights into how managers should go about managing necessary business changes, including IS department support for the change process to improve business performance.

The authors are grateful to Mark Boshart, Melena Brackins and Jane Wall for their invaluable assistance with this project.


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or those in production who need to understand customer specifications (Oliver, 1990). Although there has been a significant amount of success with TQM, managers have realized that in many cases there is need for more dramatic improvements in productivity, competitiveness and profitability. This can be accomplished by major paradigm shifts which focus on value-added activities as well as other underpinnings for successfully implementing the concept of business process reengineering (BPR) (Goll and Cordovano, 1993; Teng et al., 1994). Essentially, BPR amounts to making radical changes to one or more business processes affecting the whole organization. It also requires a cross-functional effort usually involving innovative applications of technology. Reengineering is a pioneering attempt to change the way work is performed by simultaneously addressing all the aspects of work that impact performance; including the process activities, the people’s jobs and their reward system, the organization structure and the roles of process performers and managers, plus the management system and the underlying corporate culture which holds the beliefs and values that influence everyone’s behavior and expectations (Cypress, 1994). With BPR, rather than simply eliminating steps or tasks in a process, the value of the whole process itself is questioned (Gotlieb, 1993). In conformance with TQM principles, the focus of change is also market driven (Guimaraes and Bond, 1996). BPR differs from TQM in two important respects. First, while TQM is focused on continuous improvement, an incremental performance improvement approach, reengineering was founded on the premise that significant corporate performance improvement requires discontinuous improvement – breaking away from the outdated rules and fundamental assumptions that underlie operations. Second, reengineering makes a significant break with previous performance improvement approaches by requiring a high level of state-of-the-art information technology awareness among the entire reengineering team prior to, rather than after, the definition of process changes or improvements (Cypress, 1994). Some technologies (i.e. imaging systems and expert systems) can provide substantial opportunities for the redesign of business processes (Guimaraes, 1993; Guimaraes et al., 1997).

Regardless of the change methodology being employed (i.e. BPR or TQM) the factors important to innovation success or failure as defined by company business performance are many, but most authors would agree that the change process has to bear certain characteristics. Further, effective Information Systems (IS) support is a critical requirement for successfully implementing most modern business changes. While these two hypotheses are exceedingly important, the existing literature contains little empirical evidence supporting them. The literature is mostly comprised of single company descriptions or personal opinions expressed by people directly involved with the change process within individual organizations. This field test was undertaken to address the questions of how business organizations implement change along a predefined set of dimensions, how effectively they implement business changes and use IS technology to do so, and to empirically test the relationships between these constructs.

Conceptual framework and proposed hypotheses The relationships among the main variables studied here have been discussed widely in the literature. However, much of the discussion is comprised of personal opinions or is based on single company anecdotal evidence. While the conceptual framework is fairly intuitive, the constructs have been measured in specific ways, and the results are based on empirical evidence from many organizations. Figure 1 shows the major constructs addressed in this study and the three hypotheses being tested. A more detailed discussion of each construct is presented next.

Figure 1 Research model for change management Change Process Characteristics

H2 Effectiveness Implementing Business Change

IS Effectiveness in Supporting Business Activities

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H1

H3

Company Performance




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influence the company’s ability to change its products, processes, and its organizational structure and culture. Thus, we propose the hypothesis: H2: the extent to which the change process bears the desirable characteristics will be directly related to company effectiveness implementing business change.

Company performance or business success Company performance has been measured in many different ways (Gupta and Govindarajan, 1984; Steers, 1977; Venkatraman and Ramanujam, 1986). Many authors have used single items to measure company performance, such as company profitability (return on total assets) (Snow and Hrebniak, 1980). Given the wide variety of ways in which information technology may contribute to a company’s performance, and the importance of content validity for such a significant measure, we chose a multidimensional scale comprised of company image with customers, market share, revenues, profits, and overall company performance.

Using IS technology to support business change As business competitiveness increases, many business organizations have reacted to expand the value of their products and services to customers by redesigning their business processes to increase efficiency, deliver new products and services, and improve the quality of their offerings. Despite the cost and risk involved, there are several reasons for the introduction of major business changes such as when incremental process improvements have not met expectations, when there are large gaps between current and target levels of company productivity/performance, when there is major loss of market share due to customer dissatisfaction and products/services becoming commodities (Tsang, 1993). The literature abounds with articles recognizing that IS technology continues to play an increasingly critical supporting role in business changes. Concurrently, the dramatic changes to the organization and the pressing nature of many projects provide a unique opportunity for studying the impact of information systems on business organizations. Many authors have proposed the importance of a wide variety of IS technologies to support business innovation. Computer Telephony Integration has been touted as a powerful tool to improve the relationship with customers (McCarthy, 1996). The use of IS for data mining and warehousing is seen as essential for decision support (Anonymous, 1995). Friedenberg and Rice (1994) and Guimaraes et al., (1997) have proposed Expert Systems as viable implementation vehicles for business change because they are effective in capturing and distributing knowledge and knowledge processing capability across an organization. The list of IS technologies available to support the necessary business changes is endless: DSS, Group DSS, EDI, Client Server Systems, Imaging Systems, the Internet, and Intranets. Without effective IS support, the change implementation processes would be severely hindered and in many cases rendered impossible. Based on

Business change implementation The dependent variable in this case is the degree of company effectiveness in implementing business change. Initiatives such as TQM, BPR and others require a significant change to the policies and procedures used by firms. It is obvious that to take advantage of strategic opportunities and address problems, companies have to implement changes to their business processes, products, and/or to the organization itself. However, the literature contains numerous stories of company failure while implementing change. For example, in the context of BPR projects, 70 percent have been estimated to end in failure (Cafasso, 1993). Nevertheless, company ability to effectively implement changes is widely proposed as essential for organizational competitiveness. Thus, we propose the hypothesis: H1: effectiveness implementing business change is directly related to company performance. Important characteristics of the change process A survey of the literature on business change management reveals several pre-requisites for successfully implementing business change such as conformity to company objectives, employee and department participation in the change process, customer input, reasonably balancing risk taking with cost benefit analysis, monitoring progress, and communication regarding the change process. In other words, how change is implemented is an important determinant of success. Specifically, the important characteristics of the change process enumerated above are expected to 76




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the above discussion a third hypothesis is proposed: H3: IS effectiveness in supporting business activities effectiveness is directly related to effectiveness implementing business change.

ty-three percent of the respondents identified that their number of employees were 100 or less, 46 percent of the companies employed between 100 and 500 people, and the remaining companies (31 percent) had more than 500 employees. The specific distributions of the sample in terms of industry, gross revenue, and number of employees are shown in Table I. Finally, 87 percent of the sampled companies currently have a continuous and systematic process for identifying strategic opportunities and problems. Thus, despite the relatively small sample size, there is broad representation of business sectors and company size, allowing a fairly good degree of results generalizability.

Study methodology Data collection procedure This field test used a questionnaire to collect the relevant data from a convenience sample of 49 top managers from 19 organizations in the Southeast USA. While the questionnaire had a cover letter describing the purpose of the study and providing instructions for the respondents, the data was collected mostly through personal interviews with the managers. The questionnaire was developed based on a survey of the literature and it was tested for readability and content relevancy and completeness in relation to the study objectives. This testing was conducted through several meetings and phone conversations with managers and employees. These managers are known personally to the researchers and have expressed their personal opinions about their companies’ processes and activities for identifying strategic problems and opportunities, business changes, and IS support to business activities.

Variable measurement Company performance or business success is the company’s ability to achieve its objectives in terms of customer satisfaction, market share, revenue, and profits. It was determined by asking the respondents to rate the success of the company in terms of five areas: company image with its customers, market share, revenues, profits, and overall performance compared to the company’s competitors. Each item was rated on a seven-point Lickert-type scale ranging from extremely below average to extremely above average (average being the company’s main competitors). The ratings in these five areas were averaged, resulting in a single measure of each firm’s business success. Effectiveness implementing business changes represents the company’s ability to alter its business practices in the desired manner. It was measured by the respondents rating the effectiveness of the firm in changing four areas to address strategic problems and opportunities: products, processes, organization structure and organization culture. This was done using the same seven-point Likert-type scale

Sample description The companies represented in the sample range widely in terms of their industry sector and size. Fifty-five percent of the firms identified their primary business as manufacturing with the remaining companies being distributed fairly evenly across various other sectors. In terms of gross revenues, 40 percent of the firms were 50 million dollars in annual sales or less, 40 percent were between 50 million and 500 million dollars and the remaining 20 percent were above 500 million dollars. Twen-

Table I Sample distribution for industry, gross revenue and number of employees

Industries Manufacturing 55% Government 4% Communications 10% Health Care 6% Transportation 4% Banking 6% Other 15%

Gross revenue Less than $10 million $10 to $30 million $31 to $50 million $51 to $100 million $101 to $200 million $201 to $500 million $501 to $1000 million over $1 billion 77

Number of employees 15% 17% 21% 15% 4% 6% 13%

Less than 50 51 to 100 101 to 500 501 to 1000 1001 to 5000 over 5000

4% 23% 46% 10% 4% 13%




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Results

as mentioned above. The ratings for the four areas were averaged to produce a single measure for effectiveness in implementing business changes. Characteristics of the change process is defined as the degree to which companies promote “desired” change process activities. It was assessed by asking the respondents to rate the importance or focus that the company places on ten areas of change process characteristics. These consisted of: all significant changes must conform to company objectives, all affected departments participate in the change process, individual employee input is considered important, customers’ input is considered important, business partners’ input is considered important, ability to balance risk taking with cost/benefit, clearly defined measures to monitor progress, change objectives and progress are clearly communicated, responding quickly to required change, and responding effectively to required change. The same seven-point Likert-type scale was used, and the overall rating of characteristics of the change process for each firm was determined as the average of the ten areas. IS effectiveness in supporting business activities is the extent to which the company’s needs for IS technology have been met. It was measured by asking the respondents to rate this for the overall company and in four specific areas: technology leadership in the industry, knowledge of how to get the best technology, effectiveness with which technology has been used over the years, and effectiveness in using technology in comparison with main competitors. The respondents were asked to use the same seven point scale described above. The measure for IS effectiveness in supporting business activities is the average of the ratings for these five items.

Table II lists the means and standard deviations for the aggregated research variables and their respective component items. On the average, the companies in the sample are thought to be performing slightly above average in the areas of characteristics of change process, IS support, implementing business changes and business success. Similarly, average performance along the component items vary from slightly below average (change objectives and process are clearly communicated) to well above average (business success in company image with its customers). The relatively large standard deviations (mostly above 1.0) indicate significant differences in performance from company to company along the main variables and their components. Results from hypothesis one testing Hypothesis one proposes that the effectiveness implementing business change is directly related to business success. This was tested by cross-tabulating company effectiveness in implementing business change against company performance, as shown in Table III. For each cell in Table III, the number of observations and the percentage that it represents is shown. The Chi-square test indicates a significant relationship between these two constructs (Chi-square = 6.60; p < 0.01). There is one company rated above average in effectiveness implementing business change which is performing below average. The changes may have been implemented according to plan but the changes did not translate into company business performance as measured in this study. Also there are 18 companies rated below average in effectiveness implementing business change which were rated above average in terms of company performance. One may surmise that these organizations are not in highly competitive industries and/or the business environment is such that they have been able to learn by trial and error without greatly affecting their business performance. As shown in Table IV, to further empirically test this relationship, respondents were separated into two groups: those with above and those with below average effectiveness implementing business change. A t-test was performed to determine if, as an aggregate measure, companies’ business success was

Data analysis procedures The relatively small sample size requires the use of simple but robust statistical analysis techniques. Responses from each manager regarding the main constructs were classified into two groups: above and below the median to produce the cross-tabulations. Chi-square statistics for cross-tabulations were used to test the relationships between main constructs. To further understand these relationships, t-tests for each component item of a dependent variable were computed for the above/below average groups for the aggregated dependent variables. 78




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Table II Means and standard deviations of study variables

Aggregated variables and individual items

N

Mean

S.D.

Characteristics of change processes • all significant changes must conform to company objectives • all affected departments participate in the change process • individual employee input is considered important • customers’ input is considered important • business partners’ input is considered important • ability to balance risk taking with cost/benefit • clearly defined measures to monitor progress • change objectives and progress are clearly communicated • responding quickly to required change • responding effectively to required change

48 48 48 48 48 48 47 47 48 48 48

4.58 4.92 4.17 4.46 5.42 4.89 4.26 4.51 3.97 4.44 4.67

1.06 1.30 1.48 1.43 1.43 1.30 1.45 1.50 1.36 1.36 1.32

Effectiveness implementing business change • products • processes • organization structure • organization culture

48 48 48 47 48

4.4 4.8 4.7 4.2 4.0

1.0 1.0 1.1 1.4 1.4

IS support effectiveness • overall support • company’s technology leadership position in the industry • knowledge of how to get the best technology • effectiveness with which technology has been used over the years • effectiveness using technology in comparison with main competitors

46 45 45 46 46 46

4.5 4.2 4.6 4.7 4.6 4.5

1.1 1.1 1.4 1.4 1.3 1.3

Business success relative to main competitors • company image with customers • market share • revenues • profits • overall

48 48 46 44 44 47

5.31 5.56 5.26 5.20 5.00 5.40

1.04 0.89 1.23 1.33 1.55 0.99

Rating scale: 1 (extremely lower than average), 2 (very much lower), 3 (somewhat lower), 4 (average), 5 (somewhat higher than average), 6 (very much higher), and 7 (extremely higher). * Means and standard deviations rounded to the nearest decimals. Table IV T-tests for the effectiveness implementing business change and company performance relationship (Hypothesis 1)

Table III Cross tabulations of effectiveness implementing business change and company performance (Hypothesis 1)

Company performance

Effectiveness implementing business change

Below average

Above average

Below average

10 20%

18 37%

Above average

1 2%

20 41%

Aggregated variable and individual items

Effective business change above average

Company performance • company image with customers • market share • revenues • profits • overall

Chi-square = 6.60 (p = 0.01) 79

5.76 5.95 5.75 5.73 5.58 5.76

Effective business change below average p-value 5.11 5.26 4.88 4.80 4.56 5.12

0.02 0.005 0.01 0.02 0.02 0.02




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significantly different for these two groups. The results shown on Table IV demonstrate that firms with above average business change effectiveness performed significantly higher than those below average on business change effectiveness. In addition, the t-tests for each of the individual items that make up company performance show significant differences in every area: company image, market share, revenues, profit, and overall. Based on the above results, we conclude that there is strong empirical support for hypothesis one.

Table VI T-tests for the characteristics of change and effectiveness implementing change relationship (Hypothesis 2)



Results from hypothesis two testing Hypothesis two proposes that the extent to which the change process bears the desirable characteristics will be directly related to its effectiveness. This was tested in a similar manner to hypothesis one. The results in Tables V and VI provide strong support for hypothesis two. The Chi-square statistic was significant for this cross-tabulation (Chisquare = 6.60; p < 0.01). By inspection one notices that companies which were rated below average along the set of defined characteristics for the change process also tend to be below average in their effectiveness in implementing change (34 percent). The same relationship tends to hold for companies rated above average in these two constructs (33 percent). It is interesting to note that above average focus on the change process is no guarantee of effective implementing of change (22 percent). Table VI shows the results of the t-test similar to the one conducted for hypothesis one. In this case we divided the companies into two groups: those which on the average were rated above and below along the defined characteristics of change process. The results on Table VI demonstrate that firms with

Characteristics of change process

Below average

17 34%

5 10%

Above average

11 22%

16 33%

3.71 4.33 4.00 3.50 3.26

0.0001 0.0029 0.0003 0.0014 0.0028

Results from hypothesis three testing The final hypothesis (H3) states that IS support effectiveness is directly related to effectiveness implementing business change. This was again tested in a similar fashion as the first two hypotheses. Tables VII and VIII show the results of the cross-tabulations for IS support effectiveness and effectiveness in implementing business change. The Chisquare statistic was calculated and found significant (Chi-square = 4.60; p < 0.03). Two thirds of the companies that were below average in IS support effectiveness are also below average in their effectiveness implementing business changes. Few companies Table VII Cross tabulation of IS support effectiveness and effectiveness implementing business change (Hypothesis 3)

Effectiveness implementing business change Above average

4.85 5.22 5.18 4.74 4.59

above average effectiveness managing the change process, as defined in this study, tend to have a significantly higher level of effectiveness implementing business change in terms of products, processes, organizational, and cultural changes. The t-tests for each of the individual items that make up effectiveness implementing business change also support such conclusions at a more detailed level. Based on the above results, we find strong support for hypothesis two.

Table V Cross tabulation of characteristics of change process and effectiveness implementing business change (Hypothesis 2)

Below average

Desirable Desirable char. of char. of change change above below average average p-value

Effectiveness implementing business change

IS support effectiveness

Chi-square = 6.60 (p = 0.01)

Below average

Above average

Below average

18 37%

7 14%

Above average

10 20%

14 29%

Chi-square = 4.60 (p = 0.03) 80




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Table VIII T-tests for IS support effectiveness and effectiveness implementing business change relationship (Hypothesis 3)



IS support effective above average 4.8 5.1 5.0 4.5 4.7

Table IX T-tests for effectiveness implementing business change items between companies with high/low company performance

IS support effective below average p-value 3.9 4.5 4.3 3.9 3.4


Company Company performance performance above below average average p-value


0.005 0.05 0.05 0.10 0.005

4.58 4.92 4.79 4.35 4.33

3.85 4.50 4.20 3.70 3.00

group. Perhaps due to the relatively low sample size the differences are not statistically significant for effectiveness in changing products, business processes, and organization structure. Table X indicates that companies grouped as more effective in terms of business change as an aggregate measure differ significantly from companies in the low effectiveness group along every characteristic of the change process. In every case, on the average companies in high change effectiveness group rate higher than their below average counterparts. Last, Table XI shows that on the average companies in the high change effectiveness group consistently have higher ratings along IS support effectiveness items. However, probably due to the relatively small sample size, the difference between the two groups along the “effectiveness with which IS technology has been used over the years” is not statistically significant.

(7) are below average IS providers but manage to effectively (above average) implement business changes. Further, above average IS support effectiveness in 14 organizations has not resulted in effective implementation of business change in general. As shown in Table VIII, to further explore the evidence regarding this hypothesis, t-tests were performed by separating the companies into two groups: those above and those below average in IS support effectiveness. The level of effectiveness in implementing business change was found to be significantly higher for the firms with above average IS support effectiveness. The individual items that make up effectiveness in implementing business change were examined using the same t-test. Except for changes in organization structure where the groups providing IS support below and above average are different only at a significance level of 0.10, the two groups differ significantly along all other items making up the measure for effectiveness in implementing business change. These results strongly corroborate hypothesis three.

Conclusions The main objective of this study was to empirically test the relationship between a company’s ability to implement changes to its products, processes, organizational structure and culture, and the company’s business performance. Another major objective was to empirically test the relationship between previously proposed desirable characteristics of the change process used, the role that IS support plays in enabling change, and the company’s ability to implement change in the areas mentioned above. Despite the relatively small sample size, the results provide strong evidence regarding the importance of effective IS support and the characteristics of the change process if organizations are to successfully implement business changes to their

Other interesting results Table IX shows any significant differences between more/less successful companies in terms of company performance along the four business change areas. While business change as an aggregate measure is considered significantly different between the two groups, only effectiveness in implementing organization culture changes is statistically significant between the high/low performance companies. By inspection one can see that companies in the low company performance group on the average consistently show lower ratings than the companies in the higher performance 81

0.005 0.25 0.23 0.19 0.01




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products, business processes, organization structure, and organization culture to improve company performance. In general the companies participating in this study are rated only slightly above average (represented by each company’s main competitors) in terms of their effectiveness in providing IS support, having change processes with the desirable characteristics, and implementing business changes. However, there are significant inter-company differences along the main variables and their respective component items. Given the importance of effective business change implementation in these days of hyper-competitiveness, it behoves top managers to do whatever they can to improve their company’s IS effectiveness in supporting business activities and promote the desired change process activities.

To improve IS support while implementing business improvements, managers must look at company performance in terms of its IS technology leadership position in its main industry sectors, knowledge of how to get the best technology available, effective use of specific technologies, and benchmarking the use of specific technologies against the company’s main competitors or best-in-class target organizations. An important requirement to accomplish these objectives is the clear definition of the more important technologies necessary to support company main products and business processes, and technologies which will enable the structural and cultural changes considered important to improve company competitiveness. Another important requirement is management recognition that the implementation of each of the various technologies deemed important

Table X T-tests for characteristics of the change process between companies with high/low effectiveness implementing business change


Characteristics of change process • all significant changes must conform to company objectives • all affected departments participate in the change process • individual employee input is considered important • customers’ input is considered important • business partners’ input is considered important • ability to balance risk taking with cost/benefit • clearly defined measures to monitor progress • change objectives and progress are clearly communicated • responding quickly to required change • responding effectively to required change

Effective business change above average

Effective business change below average

p-value

5.11 5.27 4.55 5.03 6.00 5.33 4.85 5.10 4.62 5.03 5.27

3.75 4.36 3.57 3.58 4.52 4.26 3.36 3.63 3.00 3.52 3.73

0.0001 0.02 0.03 0.001 0.0005 0.006 0.0002 0.001 0.0001 0.0001 0.0001

Table XI T-tests for IS support effectiveness items between companies with high/low effectiveness implementing business change

Effective Effective business business change change above below average average p-value


IS support effectiveness • overall support • company’s technology leadership position in the industry • knowledge of how to get the best technology • effectiveness with which technology has been used over the years • effectiveness using technology in comparison with main competitors 82

4.88 4.50 5.15 5.00 4.85 4.88

4.04 3.79 3.95 4.15 4.31 4.00

0.01 0.03 0.004 0.04 0.17 0.03




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to the organization are dependent on specific success factors. The success factors for the various technologies have been identified and discussed elsewhere (Guimaraes et al.,1992; Guimaraes and Igbaria, 1997; Udo and Guimaraes, 1994; Yoon et al., 1997; Guimaraes et al., 1995; Yoon et al., 1995) and are considered beyond the scope of this paper. Further, top managers must ensure that their company’s change process bears the desirable characteristics studied here: all significant changes must conform to company objectives, all affected departments participate in the change process, individual employee input is considered important, customers’ input is considered important, business partners’ input is considered important, managers ability to balance risk taking with cost/benefit, the existence of clearly defined measures to monitor progress, that clearly defined measures to monitor progress exist, that change objectives and progress are clearly communicated, and that the change management team respond quickly and effectively to required change. Last, while the importance of effectively implementing changes to products, business processes, and organization structure cannot be denied, the importance of effectively implementing cultural changes seems to be a clear discriminate between low and high performance companies. This finding while unexpected should not come as a surprise given the widely discussed importance of organization culture to survival and growth in hyper competitive business environments. Perhaps effectiveness in implementing change in all the business areas studied here is ultimately dependent on changing company culture.

used a highly focused model which needs to be expanded to include other factors potentially important to effective implementation of strategic business change. Last, the results may have provided a glimpse at the great importance of companies being able to change their cultures as a major prerequisite to successfully implementing changes in other areas more directly related to company business performance.

References Anonymous (1995), “Data mining a new weapon for competitive advantage,” Software Quarterly, Vol. 2 No. 4, pp. 15-19. Cafasso, R. (1993), “Rethinking reengineering,” ComputerWorld, 15 March, pp. 102-5. Cypress, H.L. (1994), “Reengineering,” OR/MS Today, Vol. 21 No. 1, February, pp. 18-29. Friedenberg, R. and Rice, A. (1994), “Knowledge reengineering as a BPR strategy”, Working notes of the AAAI-94, Workshop on Artificial Intelligence in Business Process Reengineering, Seattle, WA, 3 August, pp. 21-6. Goll, E.O. and Cordovano, M.F. (1993), “Construction time again,” Chief Information Officer, 15 October, pp. 32-6. Gotlieb, L. (1993), “Information technology,” CMA Magazine, Vol. 67 No. 2, March, pp. 9-10. Guimaraes, T. (1993), “Exploring the determinants of imaging systems success,” 26th Hawaii International Conference on System Sciences, January. Guimaraes, T. and Bond, W. (1996), “Empirically assessing the impact of BPR on manufacturing firms”, International Journal of Operation & Production Management, Vol. 16 No. 8, pp. 5-28. Guimaraes, T. and Igbaria, M. (1997), “Client server system success: exploring the human side,” Decision Sciences, special issue. Guimaraes, T., Igbaria, M. and Lu, M. (1992), “Determinants of DSS success: an integrated model,” Decision Sciences, Vol. 23 No. 2, pp. 409-30.

Study limitations and research opportunities Based on an extensive survey of the relevant literature, this study is the first attempt at empirically testing the importance of the role IS support and desirable change process characteristics play in the implementation of necessary business changes to improve company competitiveness. While the constructs studied here are well established, much can be done for further testing and perhaps improving the measures used. It would be useful for other researchers to further explore their psychometric properties with larger sample size, and attempt to develop and test new measures. Further, this study deliberately

Guimaraes, T., Yoon, Y. and Clevenson, A. (1995), “Factors important to ES success: a field test,” Information & Management, Vol. 30, pp. 119-20. Gupta, A.K. and Govindarajan, V. (1984), “Business unit strategy, managerial characteristics, and business unit effectiveness as strategy implementation,” Academy of Management Journal, Vol. 27, pp. 2541. Howard, J.S. (1994), “Reinventing the manufacturing company,” D&B Reports, January/February, pp. 1821. McCarthy, V. (1996), “CTI lets you coddle customers at lower cost,” Datamation, Vol. 42 No. 13, pp. 46-9. Oliver, W.H. (1990), “The quality revolution,” Vital Speeches of the Day, pp. 625-8.

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Patterson, M.C. and Harmel, R.M. (1992), “The revolution occurring in US manufacturing,” Integrated Manufacturing, January/February, pp. 15-17.

Tsang, E. (1993), “Business process reengineering and why it requires business event analysis,” CASE Trends, March, pp. 8-15.

Ramberg, J.S. (1994), “TQM: thought revolution or Trojan horse?,” OR/MS Today, Vol. 2 No. 4, August, pp. 1824.

Udo, G. and Guimaraes, T. (1994), “Empirically assessing factors related to DSS benefits,” European Journal of Information Systems, Vol. 3 No. 3, pp. 218-27.

Snow, C.C. and Hrebniak, L. (1980), “Strategy, distinctive competence, and organizational performance,” Administrative Science Quarterly, Vol. 25, pp. 31735.

Venkatraman, N. and Ramanujam, V. (1986), “On the measurement of business performance in strategy research: a comparison of approaches,” Academy of Management Review, No. 11, October, pp. 801-814.

Steers, R.M. (1977), Organizational Effectiveness: A Behavioral View, Goodyear Publishing, Santa Monica, CA.

Yoon, Y., Guimaraes, T. and Clevenson, A. (1997), “Exploring ES success factors for BPR,” Journal of Engineering and Technology Management.

Teng, J.T.C., Grover, V. and Fiedler, K.D. (1994), “Business process reengineering: charting a strategic path for the information age,” California Management Review, Vol. 36 No. 3, Spring, pp. 9-31.

Yoon, Y., Guimaraes, T. and O’Neal, Q. (1995), “Exploring the factors associated with ES success,” Managing Information Systems Quarterly, Vol. 19 No.1, March, pp. 83-106.

84

Introduction

The dynamics of change innovation and risk in corporate wholesale finance

The traditional function of commercial banks has been to act as financial intermediaries between deficit and surplus sectors (Heffernan, 1996) but fundamental to this process has been the assumption that banks can intermediate at lower costs than those prevailing in direct financing arrangements (Gurley and Shaw, 1960). Developments in corporate wholesale financing over the past 20 years or so have, however, significantly undermined this “cost imperative” for large national and international companies. This has resulted in disintermediation of commercial banks by large companies and introduced a significant amount of product and management innovation in wholesale corporate finance (Gardener and Revell, 1988). Commercial banks have responded to these changes by becoming more investment bank oriented (Rabczynski, 1996). Traditional on-balance sheet services for large companies have, therefore, been largely replaced by the off-balance sheet activities of providing investment advice, making placements and the provision of standby facilities, etc. These fundamental changes in business activity have had a marked effect on the commercial banks’ principal sources of income, but perhaps, just as important, on the risks inherent in the business. Equally, these changes have had an effect on the bank’s management which has had quite marked social and economic implications going far beyond wholesale banking.

Barry Howcroft

The author Barry Howcroft is Director, Loughborough University Banking Centre. Abstract Examines the traditional function of commercial banks as financial intermediaries between deficit and surplus sectors. Fundamental to this function has been the assumption that banks can intermediate at lower costs than those prevailing with direct financing arrangements, but developments in corporate wholesale financing over the past 20 years or so have undermined this “cost imperative” for large companies. This has resulted in disintermediation of commercial banks by large companies and introduced a large degree of product innovation in wholesale corporate finance. These innovations have meant that commercial banks have become more investment bank oriented. Traditional on-balance sheet services for large companies have been largely replaced by offbalance sheet activities such as providing investment advice and making placements. These changes in business activity have had an effect on the commercial banks’ principal sources of income and the risks inherent in their business. Innovations in corporate wholesale banking have implications which go beyond the corporate wholesale market and have changed the commercial banks’ “business philosophy” and methods of management.

An historical perspective: the growth in wholesale financial intermediation Before these sort of issues and their implications for modern day banking can be discussed in detail, it is important to take an historical perspective in order to understand why there has been this shift away from wholesale financial intermediation. The biggest impetus to commercial banks’ corporate wholesale activities and, therefore, perhaps the logical starting point, was the quintupling of oil prices in 1974. This resulted in massive deficits in the current accounts of OECD and non-OPEC lesser developed countries (LDCs). An insight into the sheer magnitude of these imbalances and the enormity of the financing problem is revealed by the fact that the combined current account deficits of these two country groupings


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The dynamics of change innovation and risk in corporate finance


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increased from $2 billion in 1973 to $52 billion the following year. Subsequent hikes in the price of oil in 1978 ensured that these imbalances continued, eventually peaking in 1981 at $105 billion! The brunt of the adjustment process, however, fell on non-OPEC LDCs whose current account deficits alone totalled $85 billion during 1981. The traditional providers of international finance, namely the International Monetary Fund (IMF) and the World Bank, simply lacked the resources to finance imbalances on this scale and as a consequence the vacuum was filled by the world’s private commercial banks (United Nations, 1991). The reasons underpinning the private commercial banks’ willingness to enter these new markets are varied, but perhaps it would be unfair and probably untrue to suggest that they were simply awash with deposits and were desperate to onlend these funds (Edwards, 1984). Banks, like conventional businesses, think strategically in terms of asset growth rather than liability growth. In other words, they decided by how much they wanted to see assets grow, which markets they wanted to be in, what products they wanted to be associated with, etc, and then sought to finance their expansion plans via deposit acquisition. For about three to four years after the initial oil price hike, private commercial banks gave every indication of wanting OPEC deposits by actively competing against each other and increasing bid prices. This suggests that they had clear ideas regarding how and where these resources were going to be deployed. The new markets presented by the financing requirements of LDCs emerged at exactly the time when the banks’ traditional domestic markets, triggered by the oil crisis, were going through deep recession. As such, they presented the banks with an opportunity to enter new markets and diversify their business. The herd instinct, so strong in banks at the best of times, prevailed and almost all banks, irrespective of size and experience, were eager to take advantage of the new opportunities which the new markets presented. This “follow-me-leader” attitude was also facilitated by syndicated lending which allowed relatively small and inexperienced banks to join international syndications as participants (Kaletsky, 1985). With retrospect the obvious question to ask is: was the financing option the best management solution to non-OPEC LDC deficits?

From the perspective of industrialised countries, so-called “recycling” could not prevent economic recession, but at least it avoided a world depression by facilitating relatively high volumes of international trade at fairly buoyant prices. Within industrialised countries, financing of external deficits by the banking sector also meant that the problem became relatively short term for the other sectors in the economy. The exception, of course, was the banking sector itself which was to inherit Third World debt problems for the next 15 years or so. From both a political and economic viewpoint, however, “sacrificing” the banks in this way was probably a reasonably price to pay when viewed against the lack of alternative solutions and the distinct possibility of world depression. It is perhaps also worthwhile reflecting on the fact that governments under pressure find it politically expedient to periodically criticise or penalise the banking system and in this respect the 1970s was no exception. From the perspective of non-OPEC LDCs, they undoubtedly bore the brunt of the industrialised countries re-adjustment process despite being worse placed to afford it. From an economic perspective, however, financing the balance of payments deficits did alleviate much of the short-term hardship which otherwise would have resulted in these countries. Moreover, if the bank finance which was released into the private entrepreneurial sectors in Latin America had been used to develop their respective economies, as was the case in Korea and Taiwan, for example, they too would have possibly emerged from the crisis much stronger. In the event, much of the finance released into the LDCs’ private sectors resulted in capital flight attracted by the high rates and low risks prevailing on bank deposits in the industrialised countries. As a result, Latin American governments became virtually bankrupt, whereas a minority of private entrepreneurs became extremely wealthy. This served to further polarise the economic and social dualism which has always existed in these countries. Finally, from a political perspective, financing the deficits was extremely efficient because governments typically elected for three to five years could borrow in excess of ten years and, therefore, need not concern themselves about eventual repayment and the economic and social hardships which this might entail. 86



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Securitisation and disintermediation

USA, in particular, large markets have developed in loan-asset backed securities for car loans, mortgages and a wide range of other bank assets. The common purpose in all of these markets, however, remains the same, namely to resolve the problem of excess demand for loans at prevailing interest rates and existing levels of capitalisation relative to given levels of deposits. Although this type of securitisation involves what Gurley and Shaw (1960) refer to as “direct finance” between the capital market and the banks, it also allows the banks to supplement their deposits which have been depleted by changes in investor demand preference. To some extent, therefore, this type of securitisation can also be regarded as a form of “indirect finance” or financial intermediation. The secondary level of securitisation represents a serious challenge to commercial banking because it is exclusively concerned with direct financing and, therefore, involves the process of bank disintermediation, whereby flows through financial instruments are displaced by flows through capital markets (Kasi, 1990). Table I provides an insight into this trend over the period 1981-1996 showing that at the beginning of this period Eurocurrency syndicated lending was approximately 320 per cent greater than securities market activity, but that from 1983 onwards these positions were reversed (Bank for International Settlements, 1997). Despite the continued dominant position of capital market activity over bank lending for well over a decade, the past few years have witnessed a revival in bank syndicated lending (Garrity, 1997; Howcroft, forthcoming). To some extent, however, this revival has been secured on the back of reduced margins to high rated names and this serves to illustrate the importance for banks in linking this business to more lucrative or complicated services and also seeking higher returns through loans to smaller companies and personal customers (Garner, 1997).

The forces of change Since 1983 the OPEC surpluses, the counterpart of non-OPEC LDC deficits, have been replaced by deficits and the position which OPEC occupied through the 1970s, as the world’s surplus sector, has been taken over by Japan. This structural change in the world’s balance of payments together with changing perceptions about the riskiness of banks brought about a significant change in investor demand preferences. In contrast to OPEC investors’ risk aversion and preference for liquidity, characteristics which are generally associated with bank deposits, the profile of the emergent investors was more sophisticated with a preference for direct investment in capital market instruments. It is important, however, to recognise that many of the innovations which have liquefied or securitised the Euromarkets were also supply led in the sense that the banks themselves initiated some of the changes. Banks have responded and, in some instances, anticipated gaps in the supply and demand disequilibrium in financial markets. This gap, which is referred to in the literature as “the financial preference gap”, exists when market participants either require a new form of intermediation or would purchase new financial investments if they existed. The process of liquefaction, therefore, involves the identification of gaps or latent demand in the market and a response to the expressed requirements and desires of market participants. In this respect, it is important to remember that both the dynamics of supply and demand in the Eurocurrency markets have been responsible for innovations in financial and capital market investments (Feeney, 1987). Securitisation has generated a wide range of new products and techniques (Barker, 1991, Bray, 1984; Henderson and Scott, 1988), but for the purposes of this paper attention will be focussed on those shown in Table I, namely bonds and Euronote facilities. Even with such a limited focus, it is important to recognise that the actual process of securitisation can be discussed at two broad levels (Gardener and Revell, 1988). The first, or primary level, involves commercial banks (and financial institutions) securitising existing illiquid portfolios by repackaging the assets in an acceptable form and selling them on as securities in the open market. In the

Product innovation Apart from the changing demand preferences of investors, the growing importance of the securities markets also reflects how innovative banks have been in responding to latent demand and the requirements of market participants. The literature on innovation and new product development in financial services (Booz et al., 1982; Heany, 1983; Lovelock, 1984) uses a variety of terminologies to 87



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Table I International financial activity ($bn)

1981

1982

1983 1984 1985

1986

Securities markets instruments: Fixed rate bonds (straights) 32.1 Floating rate bonds (FRNs) 7.8

56.4 12.6

50.0 15.3

65.5 34.1

108.6 55.9

Euronote facilities inc. underwritten faculties (NIFs, RUFs, etc) 1.0

2.3

3.3

18.8

1987

1988

1989

1990 1992 1994

1996

172.6 163.6 47.8 12.0

160.0 149.9 166.5 275.3 296.1 23.5 23.4 42.1 42.8 92.7

351.0 176.4

5.3

57.2

37.3

10.6

10.3

3.0

10.2

–

–

Medium-term notes (MTNs)

–

–

–

–

–

–

–

16.3

12.2

22.1

22.6 157.0

223.9

Euro-commercial paper (ECP)

–

–

–

–

–

13.9

46.1

19.9

5.3

11.8

0.9

36.4

41.1

Total securities market

40.9

71.3

68.6 118.4 214.8

291.5 259.0

230.0 201.1 245.5 350.0 582.2

792.4

Announced Eurocurrency syndicated loans

131.5

88.2

38.1

29.8

101.8 149.0 165.2 68.7 248.6

530.0

31.3

19.0

87.9

Source: Bank of England, BIS annual reports categorise and describe product development. Crawford (1983), for example, embraces two distinct activities: old product development, which involves updating and improving existing products, and new product development, which involves a greater degree of innovational challenge. Meyer (1984) similarly categorised product development into primary and secondary innovations. Primary innovations were broadly concerned with the development of new markets and relate to instances where there is a high degree of technical originality and a commensurate change in consumer behaviour. Secondary innovations, on the other hand, are basically business or company focussed and typically involve improvements to an existing market. Bond financing has accordingly evolved from exclusive reliance on fixed rate finance in the 1960s to floating rate notes which incorporate convertibility and a variety of warranties and, in this respect, is an example of old product development or secondary innovation. The best examples of new product development or primary innovation over a relatively short period of time have, however, come from Euronotes which were first introduced onto the European markets as recently as 1978 (Bank for International Settlements, 1986). The notes themselves are basically short term bearer promissory notes issued for a set maturity, usually on a discount to yield basis, and denominated in a variety of currencies but usually in US Dollars, ECUs and Hong Kong Dollars. Face values and

maturities are similarly varied, for example, the face value of individual notes ranges from US $10,000 to US $500,000 and maturities range from seven days to up to one year, although issues of up to five years are not unusual and some medium terms notes in the USA (despite the word “medium”) have had maturities in excess of 30 years. In addition to the flexibility of the notes themselves, the success of Euronote facilities has also been due to the responsiveness of the banks in changing the issuance mechanisms to reflect the various and sometimes conflicting needs of market players. As a consequence, the Revolving Underwritten Facility (RUF) was replaced by the Note Issuance Facility (NIF) in the early 1980s. As Figure 1 shows, the RUF was a sole placing agent mechanism in which bids were made at an agreed fixed rate and the underwriting group had no opportunity to acquire notes until they were called upon to underwrite. Settlement took about ten days and this raised concerns amongst issuers that just one bank acting on their behalf, i.e. the sole agent, did not have the necessary international network to quickly get the best deal for the customer or even sell the entire issue. Moreover, as bids were at an agreed fixed price, any windfall gain emanating from higher than expected investor demand went to the sole agent rather than the issuer. Apart from the issuer’s concerns, the underwriting group was also dissatisfied because they were prohibited from bidding for 88



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by the central authorities in calculating adequate capital. The emergence and unprecedented growth in Euronote facilities, however, saw central banks effectively lagging behind market practice until 1987 when the introduction of new regulations on capital adequacy brought the underwriting of Euronotes into account when calculating reserve asset ratios (Bank of England, 1987). This re-regulation of the market was fairly unique in an era of unprecedented deregulation and had a marked effect on Euronote business (see Table I). It directly gave rise to Euro Commercial Paper (ECP) and, as Figure 3 shows, the emergence of ECPs heralded another secondary innovation and a distinctive change in wholesale activity. Under this mechanism the banks do not act as agents on behalf of investors, but rather act as dealers or principals in their own right, either holding the notes until maturity or operating a book and selling them in a secondary market. Equally significant is the fact that this business is on-balance sheet, there being no underwriting facility, with the notes typically appearing as “investments” in the bank’s balance sheet. The emergence of Euro-Medium-Term Notes (EMTNs) represents the latest secondary innovation in wholesale markets by combining some of the features of bonds and Euronotes. Like bonds, they can be underwritten, but they confer much greater flexibility than traditional bond issues. Placement through dealers, for example, represents a discrete way of testing market acceptance for new borrowers compared with traditional Eurobonds. For regular borrowers, EMTN facilities provide a quicker and cheaper way of accessing different pockets of investment demand as they allow the introduction of tailor-made instruments which can often better capture arbitrage opportunities or regulatory loopholes compared with standalone international bonds.

Figure 1 Revolving underwritten facility (RUF) Issuer

Sole Agent

Investor

Underwriting Group

the notes and, therefore, did not have an opportunity to purchase them until they were called upon to underwrite the issue. This situation usually occurred when there was low investor demand typically caused by overpricing of notes or concerns about the creditworthiness of the issuer. As a direct consequence of these concerns, the NIF shown in Figure 2 is an example of secondary innovation which replaced the sole agent mechanism with a tender panel which could incorporate as many as 100 banks competitively tendering for notes within an agreed floor and ceiling price. Any windfall gains (or at least a fair proportion) were, therefore, passed on to the issuer and because the mechanism involved a relatively large number of bidding banks, the commensurate increase in geographical spread and international networking reduced settlement time to about five days. Finally, as the tender panel usually incorporated the underwriting banks (it could also include banks who were not committed to underwrite), they were given the opportunity to bid for notes at the outset of placement. Both RUFs and NIFs represent investment rather than commercial bank activities and show the banks acting as agents on behalf of clients rather than as financial intermediaries. As such, these activities do not appear onbalance sheet, but rather appear off-balance sheet as contingent liabilities in respect of underwriting commitments. Prior to the 1980s, the contingent liabilities readily associated with commercial banking were limited to guarantees, acceptances and documentary credits, etc and these were taken into account

Risk implications of change and innovation The attraction of Euronote facilities for companies is undoubtedly the additional flexibility

Figure 2 Note issuance facility (NIF) Issuer

Tender Panel

Uncommitted Tender Panel

Investor

Figure 3 Euro Commercial paper (ECP)

Committed Underwriting Group

Issuer

89

Dealer

Investor



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they confer on corporate treasurers, combined with their relative cheapness compared with more traditional forms of bank finance. Bank borrowing is, for example, typically priced to risk around LIBOR (5.5 per cent in Figure 4), whereas Euronotes without the margin associated with financial intermediation are usually priced around LIBID plus a maximum (normally) of about 20 basis points (47⁄10 in Figure 4). (For top rated companies A1+/P1, Euronotes have been priced at sub LIBID). Similarly, Euronote investors can earn yields in excess of LIBID and, therefore, in excess of prevailing interest rates on bank deposits. For representation purposes, the hypothetical example in Figure 4 exaggerates the differences in costs and returns between Euronotes and traditional financial intermediation, but even slight differences are sufficient to attract investors and borrowers. To some extent, this reduction in costs and increase in returns is offset by a commensurate increase in risks. In essence, innovations in Euronote facilities have separated all of the various functions and roles which were undertaken by the banks in classical syndicated lending. Accordingly, credit risk, funding risk and pricing risk, etc, which were normally assumed by banks, have been “unbundled” and are now directly carried by either borrowers or investors. For example, with unwritten facilities credit risk is directly assumed by investors and funding and pricing risks by borrowers. Increased risk should also be considered against the fact that although Euronote facilities constitute direct finance, in the sense that investors invest directly into companies, there is no “relationship” between the two parties. This means that if a particular company went through a crisis, or a difficult trading period, investors would be inclined to liquidate their investments to avoid any significant capital loss. In reality, a bank too would call in the liquidator if a company’s trading position became impossible, but the important question of timing, i.e. when to liquidate the

investment or when to appoint the liquidator, would be quite different. This is because although a bank, like a private investor, is interested in ultimate return and needs to safeguard the investments of its depositors and shareholders, it is in the business of managing risk and within corporate financing, this involves creating a banker-customer relationship and, therefore, by definition taking a longer term perspective than the private investor. To some extent too, there is a social and economic responsibility placed on banks by society to support corporate customers through times of crisis, which most definitely does not apply to the private investor. Nevertheless, the success of Euronote facilities has been primarily driven by the reduced costs to borrowers and increased returns to investors rather than concerns about increased risks. As Table II shows, disintermediation has been taking place for some time in the UK and France. In the USA, which has always been regarded as a capital market system, net withdrawal of funds from the banks amounted to US $65 billion in 1990 (Llewellyn, 1994). This suggests that not only are large US companies raising large amounts of direct finance on the capital markets (amounting to US $70 billion in 1990), but that they are also engaged in actively withdrawing funds from the banking system presumably either to finance themselves or invest in capital market instruments. In Germany, which in contrast to the USA is regarded as a bank oriented system with a long tradition of close banker-customer relationships, the same trend in disintermediation, albeit on a smaller scale is taking place. This serves to emphasise that if large national and multinational companies want to compete in the world economy, they must be competitive and this means financing themselves in the most cost effective markets which are no longer necessarily traditional bank or even local domestic markets. In other words, as companies become increasingly international, their funding operations must take on an equally globalised perspective. As large national and international companies increasingly raise finance on the world’s capital markets, the amounts borrowed from banks will continue to decline and this has significant implications for bank loan portfolios. On the assumption, made in bank pricing strategy, that large companies are usually less risky than small companies, disintermediation

Figure 4 Hypothetical example of costs associated with Euronotes and conventional bank borrowing LIBID + (Cost of Money) ↓ 4.5%

MARGIN (Overheads) ↓ 0.5%

=

LIBOR + (Selling Price) ↓ 5%

SPREAD (Risk Factor) ↓ 5.5%

90



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Volume 1 · Number 2 · 1998 · 85–93

Table II Percentage of net funds raised by non-financial companies

1970 Banks Other* France UK USA Germany

90 95 45 100

10 5 55 0

1980

1990

Banks

Other*

Banks

Other*

60 80 55 95

40 20 45 5

25 20 (–65) 80

75 80 (70) 20

Notes: * Bonds, shares and short term securities, ( ) Billions of US dollars could have a tendency to reduce profitability and increase portfolio risk by increasing the incidence of small companies and businesses. To some extent, these considerations, combined with the structural changes which are taking place in most western economies, explain why banks placed greater emphasis on the volumetric targetting of small businesses and the personal sector in the 1980s. The magnitude of this change is vividly put into perspective by the fact that in 1976 personal lending accounted for approximately 10 per cent of NatWest’s loan portfolio, but by 1994 this figure had increased to 40 per cent. The commensurate emergence of the “hard-sell” in banks is not to be encouraged, especially when it is linked to management salaries and payment by performance. The overheating of UK consumer demand in the late 1980s and the ensuing economic recession and record high bank debt provisioning bears testimony to this statement. Moreover, selling bank products is quite different than selling a pair of shoes or a shirt where quality is easily ascertained. In contrast, bank products can be complicated and are not readily understood even by sophisticated corporate treasurers. Consequently, there is an element of trust and responsibilities placed on banks by their customers which are not normally present in the conventional buyer-seller interchange. In contrast to the evolution of Euronote facilities, where bank and customer needs were fairly evenly matched and where the customer benefits were readily discernible, developments in derivative and other sophisticated bank corporate products do raise the question as to whether banks have misplaced this responsibility in an endeavour to simply get new business. Many factors have affected bank performance over recent decades, in particular the erosion of the endowment element in profits, i.e. that part of a bank’s profits which are attributable to interest-free deposits. The

change in bank business, however, with its increased emphasis on small companies and personal sector lending, has arguably made commercial banks more susceptible to cyclical changes in their domestic economies. Figure 5, which examines the UK commercial bank’s return on assets compared with annual growth rates in gross domestic product suggests that over the period 1984-94 bank profitability has become more closely linked to the performance of the domestic economy. Although bank performance from 1982-1986 reveals the folly of an internationally diversified portfolio in the form of excessive lending to non-OPEC LDCs, almost intuitively there does seem to be some sense in the argument that an internationally diversified portfolio, or at least a portfolio with internationally diversified customers, can allow a bank to counteract the trend in the domestic economy. Figure 5 also reveals that UK bank profitability remained buoyant in the economic recession of the late 1970s and early 1980s. The significance of this is that it allowed the banks to continue financing fundamentally sound businesses which otherwise would have been placed into liquidation. This is in stark contrast to the recession of the late 1980s and early 1990s when bank profitability closely tracked economic performance and reduced the ability, rather than the willingness, of bank management to nurture businesses through the recession. Although there are a number of other factors, changes in the profile of the bank’s loan portfolios could be an important factor in explaining why the latest economic recession was unprecedented both in terms of its severity and speed. Another consideration, which stems from the diminished importance of large and multinational companies in commercial bank loan portfolios, is that small and medium sized enterprises assume more importance. In addition to the risk and profitability implications of this development, its importance also 91



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Volume 1 · Number 2 · 1998 · 85–93

Figure 5 Banks’ profits and the economic cycle 2.00%

8.0%

1.80%

7.0%

1.60%

6.0%

(lhs)

(rhs)

1.40%

5.0% 4.0%

1.20%

3.0%

1.00%

2.0%

0.80%

1.0%

1993

1991

1989

1987

1985

1983

1981

–3.0% 1979

–2.0%

0.00% 1977

–1.0%

0.20% 1975

0.0%

0.40%

1973

0.60%

Key RoA GDP Growth

derives from the fact that since 1990, small businesses in the UK have been consistently losing market share to larger companies in most industrial sectors (Bank of England, 1997). Viewed in a slightly different way, this means that the small business sector’s aggregate contribution to gross domestic product is similarly declining. In this respect, therefore, it could be argued that commercial bank lending is becoming less efficient as it makes a proportionately smaller contribution to overall gross domestic product. On the other hand, small businesses in the UK make a greater contribution to employment creation than large companies and this is an important counter argument in any assessment of the efficiency of commercial bank lending. Securitisation and the commensurate disintermediation and innovation associated with corporate wholesale finance has, therefore, a number of important implications which go far beyond wholesale banking. The considerations which have been discussed in the paper, combined with other forces which are bringing about unprecedented change in the banking industry, have seen not only commercial banks become more like investment banks, but investment banks become more like commercial banks. From the commercial banks’ perspective, however, there has been a strong imperative to develop what was traditionally regarded as “ancillary business” and so by definition the traditional core services have changed bringing about an equally marked change in income structure. Greater emphasis is now placed on fee rather than interest income, for example, in 1979, 28.6

per cent of commercial bank income in the UK was generated from fees, but by 1995 this had increased to 43.3 per cent (BBA, 1996) and for some commercial banks, fee income is now greater than interest income. It has been argued (Gardener and Revell, 1988) that this change in income generation increases bank risk because pricing in financial intermediation is based on the sort of cost-plus basis (shown in Figure 4) usually associated with conventional industries, whereas fee income is more susceptible to the vagaries of tendering for business. This might be the case, but it must not be forgotten that commercial banks have always found it difficult to accurately ascertain their costs and price to risk. Moreover, the change in emphasis to fee income does confer some advantages in the sense that most fees are paid up front and this represents a “timing” advantage compared with interest income. Perhaps, however, the most important advantage associated with fee income is the fact that it is tangible and readily understood. In this respect, it affords commercial banks an opportunity to introduce explicit pricing policies and hopefully resolve the “myth” of high bank charges. Finally, for large companies (and to some extent companies generally) good service is necessarily associated with a close relationship between the bank and its customer. It must not be forgotten, however, that an effective banker-customer relationship is expensive to operate and, therefore, its success is dependent upon banks extolling the very tangible advantages which banking relationships confer. This will help banks to 92



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charge appropriate fees in the knowledge that customers understand both the resource implications in providing relationship banking as well as the benefits to themselves.

Bray, M. (1984), “Developing a secondary market in loan assets”, International Financial Law Review, October, pp. 22-5. British Bankers’ Association (1996), Annual Abstract of Banking Statistics, Vol. 12, London. Crawford, M. (1983), New Product Management, Irvin, New York.

Conclusion

Editorial (1991), “Bulls buoyed by Brady bonanza”, The Banker, October, pp. 50-4.

Although there is nothing to necessarily suggest that developments in corporate wholesale banking herald the demise of commercial banking, the changes discussed in this paper do have serious implications. The paper has described and attempted an evaluation of some of these changes and in the process has contrasted the indirect financing, associated with bank financial intermediation, with the direct financing more readily associated with capital market activity. The bank’s experience in corporate wholesale markets is quite unique when compared with other industrial sectors. The product innovations discussed in the paper represent classic examples of an industrial sector responding to specific customer and market needs. The efficiency of the private placement mechanisms, both in terms of cost reduction and speed of settlement, have been vastly improved and the bank participants also get a much better deal. In contrast to most industrial sectors, however, innovation in the wholesale markets has led to bank disintermediation as large national and multinational companies have effectively created their own banking departments or increasingly used agents to raise finance direct on the world’s capital markets. In this respect, response to customer need in the form of product innovation, albeit in a specialised sector, has reduced (rather than increased) the market share of the innovators.

Edwards, S. (1984), “LDC foreign borrowing and default risk: an empirical investigation”, American Economic Review, Vol. 74 No. 4, pp. 726-34. Feeney, P. (1987), Loan Securitisation: Euronote and Eurocommercial Paper Markets, Institute of European Finance, Research Monograph No. 1. Gardener, E. and Revell, J. (1988), Securitisation: History, Forms and Risks, Institute of European Finance, Research Monograph No. 5. Garner, J. (1997), What Price Creditworthiness?, Chartered Institute of Bankers, February, pp. 39-42. Garrity, B. (1997), “Loan syndications set another volume record”, Investment Dealers Digest, Vol. 63 No. 4, pp. 16-17. Gurley, J.G. and Shaw, E.S. (1960), Money in a Theory of Finance, The Brookings Institute, Washington DC. Heany, D.F. (1983), “Degrees of product innovation”, Journal of Business Strategy, No. 3, Spring, pp. 3-14. Heffernan, S. (1996), Modern Banking in Theory and Practice, Wiley, England. Henderson, K. and Scott, J.P. (1988), Securitisation, Woodhead Faulkner, Cambridge. Howcroft, J.B. (forthcoming), “International bank syndicated lending: some practical and legal issues”, Accounting and Business Review. Kaletsky, A. (1985), The Costs of Default, Priority Press Publications, New York. Kasi, V. (1990), The Impact of Securitisation on UK Bank Corporate Lending, Institute of European Finance, Research Paper No 19. Llewellyn, D.T. (1994), Cyclical, Structural and Secular Pressures in Swedish Banking, LUBC Research Paper No 81. Lovelock, C.H. (1984), “Developing and implementing new services”, in George, W.R. and Marshall, C.E. (Eds), Developing New Services, American Marketing Association, Chicago.

References Bank for International Settlements (1986), Recent Innovations in International Banking, Basle.

Meyer, P.W. (1984), “Innovative shift: lessons for service firms from a technology leader”, in George, W.R. and Marshall, C.E. (Eds), Developing New Services, Developing New Services, American Marketing Association, Chicago.

Bank for International Settlements (1997), 67th Annual Report, Basle. Bank of England (1987), Convergence of Capital Adequacy in the UK and US, Banking Supervision Division, January, pp. 1-5. Bank of England, (1997), Quarterly Report on Small Business Statistics, Business Finance Division, July, pp. 1-40.

Rabczynski, T.M. (1996), “Investment banking: its evolution and place in the financial system”, in Gardener, E. and Molyneux, P. (Eds), Investment Banking Theory and Practice, 2nd edition, Euromoney Books, London.

Booz, Hamilton & Allen, (1982), New Product Management for the 1980s, New York.

United Nations (1991), “Transnational banks and the international debt crisis”, New York.

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