Managing identity-challenging technology: a framework. A multiple case study on DLT in the financial services industry. By Maxime Lubbers.
Two-thirds of organizations say that innovation is crucial to survival. However, less than a third say they are actually successfully innovating to drive growth and increase revenue (Trapp, 2017). Especially established organizations suffer from existing organizational structures when dealing with innovation (Chang et al., 2012; Tripsas & Gavetti, 2000). Besides the structure of the firm, the nature of the firm also influences its ability to innovate and adapt to change. For example, financial firms, that are risk-averse in nature, experience more difficulty than start-ups while innovating. It is even mentioned that renewing banks is a mission impossible (Betlem, 2018). Does this mean that it is impossible for banks and other financial institutions to innovate? No. However, as technology changes the way we do things, incumbents often focus too much on understanding the novel technology while neglecting the impact it has on the organization itself (Cámison & Villar-López, 2014).
Understanding the impact of innovation on identity challenges
Organizations should question how innovations affect the mission and core business of the firm. Are financial firms, as we know them, still relevant in the future? How should and could they re-establish products and services to innovate and remain relevant in their changing ecosystem? When an innovation is also impacting the mission of a firm and thus challenging the organization’s identity, managing the innovation becomes more complex (Tripsas, 2009). Different types of innovation require distinct types of management and organizational capabilities (Verganti, 2008). Understanding whether an innovation is identity challenging or not is therefore crucial (Tripsas, 2009). Innovation is by its nature about novelty and change, while identity is rooted in stability and endurance. This implies a fundamental tension is created.
How could organizations manage the tension created by an identity challenging technology?
An example of an identity challenging technology is distributed ledger technology (DLT). DLT has the potential to disrupt the mission and core business of (financial) firms, as we know them. Existing firms can largely benefit from novel and identity challenging technologies. Unfortunately, the established capabilities of the firms often negatively influence the ability of the firm to respond to a technological change (Ulrich & Smallwood, 2004). In addition, even though it is known for radical innovations to create new dominant designs in which a new set of core capabilities are needed (Chang et al., 2012) its relation to organizational identity is left out. To be able to contribute to existing literature and to support managers in transforming their organizations the following question structured my graduate research: “How can established organizations successfully manage the implementation of identity challenging technology?”
The research question has directed this study towards the development of a grounded framework (see figure 1) that scholars and managers can use to increase their ability to cope with identity challenging technologies. In addition, two key factors that positively influence the ability of a firm to successfully go through the phases of the grounded framework are identified (see figure 2). This novel perspective towards capability development, positively influences the way organizations develop and adapt them to manage an identity challenging technology. If a firm does not incorporate the impact of the identity-challenging characteristic of the technology this can be problematic and result in costly and ineffective innovation practices. The findings of this study emphasize that established firms must do more than grasp novel technologies: they need to reconsider the context in which their firm is operating and developing capabilities.
Figure 1. Grounded framework “Successful management of Identity Challenging Technology”
Two identified key factors
As mentioned, I found two key factors that influence a firm’s ability to successfully walk through the five phases identified in the grounded framework: strategic alignment and absorptive capacity. Absorptive capacity is the firm’s ability to recognize the value of new information, integrate it, and apply to commercial ends. A crucial aspect of absorptive capacity is the firm’s ability to transform its structure, systems and behavior. Strategic innovation alignment indicates that both strategic and executive levels within the organization understand and support each other on the identity-challenging aspect of the innovation. Unfortunately, due to the risk-averse nature of financial firms, most of them did not have the capability to understand the identity challenging aspect that is required to scope the impact of DLT properly. To support managers in understanding where their company is at and how they can successfully manage DLT the two key factors are visualized in the matrix visible in figure 2. The different cases made visible in the matrix are independent organizations in the financial services industry that participated in my research. I placed them in the matrix based on multiple in-depth interviews that I analyzed.
Figure 2. Strategic innovation alignment and absorptive capacity matrix.
Enabling & developing organizational capabilities
Beyond the two key factors that are required for firms to successfully manage DLT, it should be stressed that the different phases require specific organizational capabilities. If a firm invests in an innovation lab, but moves existing hires into a novel context, it should be questioned whether these employees understand why they are moved there. The same accounts for innovating within core business processes. It has shown that the more autonomous an innovation lab is, the more productive the innovation practices and their implementations become. Considering phase 4, it becomes clear that firms need to understand whether DLT is a fitting technological enabler for their business problems. By solely developing DLT related capabilities a business problem will not come to the surface and will thus not be solved.
If firms do not reconsider their organizational design, including governance structure and systems, it is impossible to develop a strategy and capabilities that facilitate the firm in innovating and remaining relevant in the (near) future. If an established firm can create a new context in which it facilitates its business and creates its customer value it becomes possible to compete with fintechs. They might even include them into their ecosystem. A new context facilitates new ways of thinking; doing and innovating which at the same time provides a fruitful perspective on capability development.
Personal note on DLT in the financial services industry
As the financial services industry is by nature risk-averse and highly regulated it is not the easiest sector to experiment with emerging technologies. Let alone implementing them. However, as customers are getting used to seamless, mobile and individually optimized services, financial firms need to act and innovate. Innovation is essential for survival as fin-techs and other financial start-ups are offering extremely competitive services. Solely focusing on emerging and identity challenging technology such as DLT is however a major pitfall. Many firms focus on understanding the ins and outs of novel and trendy technologies, however forgetting that the technology should be used as a means to an end. Technology is not an end, it is a means that could optimize multiple administrative and business processes.
Firms should wary that they focus on the business problems they need to solve for their customers.
Keeping up to date with technological trends is important, understanding what business problems are present is however key. Without a thorough understanding of the source of the problem, no technology will support a financial firm in creating that smooth and seamless experience the customer is already expecting.
- Betlem, R. (2018). Bestaande Bank Vernieuwen is Mission Impossible. Retrieved June 6, 64 2018. From: https://fd.nl/beurs/1257047/bestaande-bank-vernieuwen-is-missionimpossible.
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- Trapp, R. (2017). Why Business Leaders Continue to Struggle with Innovation. Retrieved June 3, 2018. From: https://www.forbes.com/sites/rogertrapp/2017/04/10/why business-leaders-continue-to-struggle-with-innovation/#4a153f3842de.
- Tripsas, M., & Gavetti, G. (2000). Capabilities, cognition, and inertia: Evidence from digital imaging. Strategic management journal, 1147-1161.
- Tripsas, M. (2013). Exploring the interaction between organizational identity and organizational design in technological transitions. Working paper.
- Ulrich, D., & Smallwood, N. (2004). Capitalizing on capabilities. Harvard business review, 119-128.
- Verganti, R. (2008). Design, meanings, and radical innovation: A metamodel and a research agenda. Journal of product innovation management, 25(5), 436-456.
Bio Maxime Lubbers
Maxime is an ambitious and driven graduate from the University of Amsterdam. She successfully pursued two master degrees in Entrepreneurship and Digital Business. She aims to be the connection between business and technology as it allows her to solve problems by combining her passion and growing knowledge of technology with her other passion for people. For her final graduate internship, she researched which organizational capabilities established financial firms need to be ready to successfully manage Distributed Ledger Technology (DLT). If you are interested in following Maxime you can find here on LinkedIn