Two Charts That Show Behaving Like Outsiders Are Keys To Reinvention: Interactive

When a congressional hearing happens, it usually exposes certain peculiar logics of an industry. Overdraft fees, essentially fixed charges that get added on top of interest rates, exploded during the pandemic. JPMorgan Chase alone raked $1.46 billion in overdraft fee in 2020. That windfall for the large bank was such that Senator Elizabeth Warren predictably went to war.

Warren said of the way CEO Jamie Dimon talked about helping customers during the pandemic, “It’s a bunch of baloney.” 

JP Morgan is hardly alone. Bank of America, Citigroup, and Wells Fargo do the same. Together, the big four collected some $4 billion in such fees last year. What’s striking is that collectively, these banks are so willing to profit from customers’ anguish.

But here’s the bigger question. Why do big banks all think alike? Or, how strong is the pull of an industry norm in any given sector? How do innovators depart from their peers?  

The world needs innovators who rebel against industry norms—those who are determined to decarbonize, to fight injustice, to reimagine capitalism.

Birds of a Feather

At IMD’s Center For Future Readiness, we track companies’ behavior. We measure how they behave in different industries. We do not rely on interviews. We use hard data—lots of it.

We downloaded every report published in the last 10 years by the standard-bearers of business news. The Wall Street Journal. CNBC. The Financial Times. We included all the corporate press releases circulated during this period. Ten years of data were all fed into an algorithm.

In this blog, we’ve decided to make parts of this data available for you to explore. You can play with them. The graphs in this link contain several interactive charts. You can investigate the data behind our visualizations. Try it out. It works best on a desktop/laptop.

Here is the initial question we asked ourselves. “Do companies fall into behavioral clusters because of the industries they are in?” To explore this idea, we looked at how digitally obsessed companies are across sectors. After all, retailers, consumer brands, car makers, and banks are all talking about digital transformation. But to what extent can leaders relate their companies to digital technologies? And more importantly, how can business journalists and the public come to understand them?

Of course, talking is not the same as doing. To become digitally savvy, a company needs to move with speed. Or more appropriately perhaps, velocity, which measures both speed and direction. Velocity matters in business. Amazon identified high velocity as one of its leadership principles. “Many decisions and actions are reversible and do not need extensive study. We value calculated risk-taking.” With all other things being equal, a company that moves faster will innovate more. That’s because a high-velocity company can conduct more experiments within the same period of time. It learns faster than others.

Below is a graph in which we combine the measure of velocity and digital technology on a two-by-two grid. What you see is the industry average.

This result shouldn’t be surprising. The technology sector, almost by definition, is by far the most digitally oriented. The second is retail. That’s a sector been disrupted by e-commerce over the past decade. E-commence went into full force during the Covid lockdown. Media, similarly, has been threatened by Facebook, Google, Netflix, and Spotify. It is following closely in the third spot.

Perhaps more interesting is to look at is the speed of decision-making. There appears to be a correlation between a company or sector’s ability to act fast and to become digital. Finance, being regulated by the government, and subject to the scrutiny of watchdogs, tends to act slowly. No one blinked when Amazon launched one‑click checkout. The same couldn’t be said if JPMorgan were to launch a brand-new digital currency in New York State.

Inside these big banks, managers find themselves struggling against their own bureaucratic drag. Every project requires layer upon layer of permission. Project ownership is dispersed, and accountability unclear. All these factors work against fast, decisive action. Whether it is to correct past mistakes or to innovate something new, banks just don’t move quickly.

You can click this link to play with the interactive graph. It works best on a laptop/desktop.

Sectors exhibit a tendency toward herd behaviors. This is what you are seeing at a high level. Companies of the same kind look alike and then mimic each other. When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, Warren Buffet wrote, it’s the reputation of the business that remains intact.

In other words, industry dynamics are beyond what executives can personally control. They cast a long shadow. Managers thus often converge toward the industry norm.

Except there are always outliers.

Those Who Rebel

My research team decided to run a second analysis. We’ve located three of the most “future-ready” financial companies in the same 2-by-2 grid. This is based on another study where we’ve ranked companies’ future-readiness. You can read the full 2021 ranking here. The ranking measures several drivers that fuel innovation. They include the performance of a company’s core business, the diversity of its workforce and of its board members, investors’ expectations, and the speed of its product launches.

It turns out Visa and Mastercard look more like the technology sector. They are less similar to the financial sector. We also added Ant Group, China’s biggest payment provider, into the picture. What the analysis shows is that Ant Group really behaves as if it’s a technology company that just happens to be in finance.

There are many reasons why Ant, Visa, and Mastercard have become high-velocity organizations. No doubt their organizational cultures have encouraged employees to act fast. But what’s also important is how these companies organize decision-making through their governance structures. Data infrastructures that enable managers to make things happen on their own matter too.

What we see is the following. Financial companies that are most future-ready have drawn on practices from the technology sector. Yet, that’s counterintuitive for most people. I remember discussing the topic of innovation with executives from heavy industrial companies. During the discussion, participants were most eager to hear from how other peer groups are doing. The moment we wandered into observations from other sectors, executives would stonewall. “But that doesn’t apply to us,” they would say.

We all harbor biases because of our prior experiences. And because of those biases, we end up seeking confirmation of our existing beliefs. Or we discount counter-evidence. That’s why learning how to learn is the most important. Sometimes, behaving like outsiders is the key to reinvention.

Thanks for reading—and be well.

P.S., The interactive charts are also new to us. If there are functionalities that you would like to see in the future, please let us know below by joining the discussion. We are happy to increase features as the project continues to evolve.

This article has been co-authored with Angelo Boutalikakis, a Research Associate at IMD’s Center For Future Readiness