Blue Ocean Strategy in Private Banking: A new business model to win

By Marc Strauß

Private banking faces increasing pressure from various sources, resulting in consistently diminishing margins. Continuing to follow conventional strategies will not solve these problems and therefore calls for different approaches.
This is where the blue ocean strategy (BOS) approach comes into play. Developed by two INSEAD professors, this concept aims at creating an uncontested market space without competition, where new client groups are served through high-value offerings.
In this book, Dr. Marc Strauss, a former top management consultant and private banking expert, with considerable experience in strategy creation and implementation, comprehensively applies the BOS approach to the field of private banking. Through his book, Dr. Strauss offers various benefits to both academics and practitioners by:
- Conducting a complete and consistent run-through of the entire BOS formulation process
- Creating a tailored framework to evaluate and build an actionable BOS blueprint
- Developing a concrete BOS for an exemplary private bank, including the formulation of a distinct (operating) business model
- Creating a business case to describe the commercial viability of the new BOS private banking unit and the combined Entity
- Providing practitioners with "food for thought"

• Language: English
• Publisher: Books on Demand
• Release date: Feb 25, 2020
• ISBN: 9783750479685

Marc Strauß

Dr. Marc Strauss was born in Stuttgart (Germany). After studies in Business Management in Germany and the United States and graduating with diploma, MBA, and PhD, he started out his professional career in strategy consulting with focus on banking. Later on, Mr. Strauss pursued a successful career in private banking and asset management with leading international financial institutions. In addition to his dissertation on success factors within corporate (SME) banking, he published various banking-related articles in renowned journals as well as wrote several articles on strategy-related topics. His research and practical interests circle around behavioral finance as well as strategy, business model innovation, and market-entry strategies in private banking and asset management.

Book preview

My goal and motivation for writing this book was to create a new winning

perspective to Private Banking. Getting the fish into the blue ocean has been

a challenging yet fascinating journey – which could only have been completed

with the support of a few people:

First and foremost, I want to thank my wife, Dessislava Strauss, who was

constantly challenging me in finding new approaches and develop progressive

ideas off the beaten track.

Furthermore, I would like to thank two former colleagues, Andreas Hausmann

and Thomas Casanova, for their very valuable input on the script´s structure

and content.

A very special thanks goes to Boris Spirov for his excellent support in

comprehensively reviewing the script. Great job on the subtitle…

Last but no least sincere thanks to Bruce, Axl, and Ozzy for keeping me focused

throughout long hours in front of the screen.

Table of Contents

List of abbreviations

Introduction

1.1 Setting the scene

1.2 Purpose of this book

1.3 Kim & Mauborgne’s book, Blue Ocean Strategy (2015), as the basis – selective deviations and additions

1.4 Critical appreciation of blue ocean strategies

The BOS Concept – Key Analytical Tools and Strategy Formulation

2.1 Key analytical tools

2.2 Strategy formulation process

Strategic Positioning and Challenges

3.1 Business model and key factors framework

3.2 Private banking strategy canvas (as-is)

Strategic Options

4.1 The six paths framework

4.1.1 Path 1: Look across alternative industries

4.1.2 Path 2: Look across strategic groups within industries

4.1.3 Path 3: Look across the chain of buyers

4.1.4 Path 4: Look across complementary product and service offerings

4.1.5 Path 5: Look across functional or emotional appeal to buyers

4.1.6 Path 6: Look across time

4.1.7 Summary of the six paths framework and applying findings to the PB sector

4.2 Non-customer analysis: Three tiers of non-customers

4.3 The four actions framework

4.4 The Eliminate-Reduce-Raise-Create (ERRC) grid

Strategic Blueprint

5.1 Private Banking Strategy Canvas (to-be)

5.2 Strategic sequencing in the BOS model

5.2.1 Robust business model: Buyer utility map

5.2.2 Robust business model: Price corridor of the target mass

5.2.3 Robust business model: Target costing

5.2.3.1 Streamlining operations and applying cost innovations across the value chain

5.2.3.2 Partnering

5.2.3.3 Changing the pricing model of the industry

5.2.4 Adoption: Buy-in by the main stakeholders

5.3 Bringing it all together: New operational setup of the BOS private bank

5.3.1 New operating model of the BOS private bank unit

5.3.1.1 Building Block 1: Client onboarding

5.3.1.2 Building Block 2: Product development, portfolio management, and client reporting

5.3.1.3 Building Block 3: Branding and organizational structure

5.3.1.4 Building Block 4: Support and issue handling

5.3.2 Excursus: Combining Canvases – BOS and the Business Model

5.3.3 Aggregated BOI index of the new private bank

5.3.4 Consistency check of the overall strategy formulation framework

5.4 Commercial viability: Business case of a new private bank

5.4.1 Supply – What is being offered?

5.4.2 Demand – Who would buy how much?

5.4.3 Costs – At what expense?

5.4.4 Financial viability – Will it be profitable?

Conclusion and Outlook

Literature

Appendix

A. Detailed Business Model Canvas (generic)

B. Further business case elements

C. Excursus: Real-life examples in (private) banking

List of figures

Figure 1: Conventional red ocean strategy vs. blue ocean strategy

Figure 2: Value innovation

Figure 3: Blue ocean strategy canvas (generic)

Figure 4: The four actions framework (amended illustration)

Figure 5: Generic ERRC grid

Figure 6: Overview of the BOS Formulation Process (own illustration)

Figure 7: Osterwalder/Pigneur’s business model canvas

Figure 8: Business model canvas for private banking (example)

Figure 9: Structuring framework to determine BOS key industry factors

Figure 10: As-is strategy canvas for PB (industry aggregate and exemplary bank)

Figure 11: Traditional strategy assumptions and respective application in PB (amended illustration)

Figure 12: Potential new value dimensions for PB from Path 1

Figure 13: Potential new value dimensions for PB from Path 2

Figure 14: Potential new value dimensions for PB from Path 3

Figure 15: Potential new value dimensions for PB from Path 4

Figure 16: Potential new value dimensions for PB from Path 5

Figure 17: Potential new value dimensions for PB from Path 6

Figure 18: Summary of potential new value dimensions for PB

Figure 19: The three tiers of non-customers

Figure 20: Generic wealth structure and banking client segmentation (own illustration)

Figure 21: ERRC grid for new PB setup under BOS

Figure 22: To-be PB BOS canvas (industry aggregate vs. exemplary bank) including the ERRC measures

Figure 23: The BOS sequence

Figure 24: Generic buyer utility map for PB including potential utility blocks

Figure 25: Buyer utility map for PB – comparing traditional PB with the new PB BOS approach

Figure 26: Price corridor of the target mass

Figure 27: Price corridor for the new BOS PB offering (Step 1)

Figure 28: Specification of the price level within the price corridor (Step 2) (own illustration)

Figure 29: Final specifications of the price level for the new PB BOS offering (Step 2) (own illustration)

Figure 30: The BOS profit model (incl. own illustrative adjustments)

Figure 31: Overview of efficiency- and cost-focused measures within BOS target costing (own illustration)

Figure 32: Key BOS PB operating model blocks reflecting new value proposition (own illustration)

Figure 33: Direct, client-facing, visible activities vs. indirect, non-client-facing, invisible activities – all of which are value adding (own illustration)

Figure 34: Activities and services provided by either the parent bank or external providers (own illustration)

Figure 35: Combining ERRC outcomes with the Business Model Canvas to create a new PB BOS model

Figure 36: Blue ocean idea (BOI) index of the new BOS private bank

Figure 37: Bringing it all together: Framework consistency check (own illustration)

Figure 38: Elements of business case (own illustration)

Figure 39: Discretionary mandates pricing under the new PB BOS

Figure 40: Estimated market sizing for the new PB BOS unit

Figure 41: Estimated asset and revenue potential for the new PB BOS unit

Figure 42: Estimated client onboarding development and distribution for the new PB BOS unit

Figure 43: Estimated AuM and revenue from core fees for the new PB BOS unit (in currency units)

Figure 44: High-level project roadmap for PB business model adjustment under BOS (own illustration)

Figure 45: Estimated project costs for setting up the new PB BOS unit (in currency units)

Figure 46: Estimated ongoing costs for running the PB BOS unit (in currency units)

Figure 47: Consolidated business case

Figure 48: Business case new private bank – operating profit

Figure 49: Business case new private bank – profit margin

Figure 50: Business case new private bank – Assets under Mgmt. (AuM)

Figure 51: Business case new private bank – incremental operating profit

Figure 52: Business case new private bank – incremental profit per client

List of abbreviations

API . . . . . . application programming interface

AI . . . . . . artificial intelligence

AuM . . . . assets under management

BMC . . . . . business model canvas

bn . . . . . . . billions

BOI . . . . . . blue ocean idea

BOS . . . . . blue ocean strategy

BPaaS. . . . business processes as a service

bps . . . . . . basis points

BUM . . . . . buyer utility map

CHF . . . . . Swiss francs (currency)

CIR . . . . . . cost-income-ratio

CRM . . . . . customer relationship management

CtB . . . . . . change the bank

CU . . . . . . currency units

do. . . . . . . ditto

DNA . . . . . deoxyribonucleic acid

e.g. . . . . . . for example

FTE. . . . . . full-time equivalent

GBP . . . . . pound sterling (currency)

HNWI. . . . high-net-worth individuals

i.e. . . . . . . id est (that means)

IT . . . . . . . information technology

K & M . . . Kim & Mauborgne

KYC . . . . . know your customer

MiFID. . . . markets in financial instruments directive

mio. . . . . . millions

ML . . . . . . machine learning

p.a. . . . . . . per annum

PD. . . . . . . person days

PB. . . . . . . private banking

RtB . . . . . . run the bank

RM . . . . . . relationship manager

STEP . . . . sociological, technological, economic, and political change

SD. . . . . . . self-directed

SWOT. . . . strengths-weaknesses-opportunities-threats

UHNWI . . ultra high net worth individuals

USP. . . . . . unique selling point

VC . . . . . . value chain

XaaS. . . . . everything as a service

1. Introduction

1.1 Setting the scene

Traditional strategic concepts and approaches, developed and deployed over previous decades, mainly center around how to act in competitive markets. Companies focus on understanding industry structure, identifying ways to position themselves against other market players, and determining how to attain a larger share of the existing market. This implies a structuralist view of strategy, assuming that the operating environment is a given. Conventional strategy is also characterized by the traditional way of achieving organizational performance through intense competition in current markets, exploiting existing demand, making a value or cost trade-off, and aligning a company’s functional processes with its strategic choice of low-cost or differentiation. These strategies – also known as Red Ocean Strategies – while not inherently wrong, are approaches that nearly every company uses. No company can stand out unless it finds a way that provides a wide-open blue ocean ahead.

In today’s world, with global trends, such as value chain disintermediation and disruption, distributed ledger technology, generational shifts, etc., unfolding at lightning speed and challenging conventional business models across all industries, innovative and creative solutions that offer superior value for customers are more relevant than ever. With the increasing competition, traditional red oceans have become even redder (bloody), urging companies to search for blue oceans instead.

Blue oceans represent new and undiscovered markets and opportunities with novel value creation opportunities, new customer bases, and no competition. New demand is created, growth is profitable and rapid, competition is irrelevant, and the rules of the game are