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European Management Journal Vol. 22, No. 1, pp. 4350, 2009 2004 Elsevier Ltd. All rights reserved. Printed in Great Britain doi:10.1016/j.emj.2009.11.012 0263-2373 $30.00

Managing Product Innovation in Financial Services Firms

PATRICK VERMEULEN, Erasmus University, Rotterdam
Developing new products is of the highest importance for organizations. The nancial sector has also recognized the increasing importance of new products. However, research on the management of innovation has mainly been conducted in manufacturing industries. Based on an empirical study in the nancial services sector this paper rst describes how nancial companies organize their innovative processes and what barriers to innovation can be identied in banks and insurance companies. Next, the two main reasons for the persistence of these barriers are outlined. The paper ends with some conclusions. 2009 Elsevier Ltd. All rights reserved. Keywords: Product innovation, Financial services, Barriers, Innovation process In many European countries, however, the nancial sector has changed from a fairly closed sector, with conservative and slowly-operating companies to an extremely dynamic one. Inside these dynamically growing companies, product innovation is gradually acquiring status as a separate, identiable activity. Due to the rapidly increasing level of (international) competition there is a growing need for product innovation. Exactly how rms in this dynamic industry realize their innovative activities and what problems surface during these attempts remains an under researched area. The present research examines how nancial companies organize their product innovation processes and uncovers some of the main barriers to organizing product innovation in nancial companies. Using a longitudinal multiple case study method the paper documents the innovative activities of the main nancial players in the Dutch nancial services sector. The paper ends with a discussion about the persistence of the barriers identied and conclusions.

Developing new innovative products is critical for a rms competitive position. Product innovation has been identied as a strategic tool crucial to the economic success and survival of rms, a potential strategic weapon, a creative force, and new products are even capable of revitalizing the organization (Johne and Snelson, 1988; Utterback, 1994; Hart, 1996). Product innovation enables organizations to improve the quality of their output, revitalize mature businesses, enter new markets, react to competitive encroachment, try out new technologies that are so expensive that no single product can recoup them, and develop alternative applications for existing product categories (Dougherty, 1999). Although it has not been reported on frequently, this is also true for nancial service companies (Vermeulen and Dankbaar, in press). The nancial sector has traditionally been known for its tight institutional control and high entry barriers.
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Managing Product Innovation in Financial Services

Innovation has received a lot of attention in the last decades, especially in the 1990s. Numerous denitions have been proposed in order to capture the essence of innovation. Researchers and practitioners are far from building a consensus regarding a formal denition of innovation (for an extensive overview of denitions of innovation, see Garcia and Calantone, 2002). However, there is some agreement that an innovation usually involves something new. Various types of innovation are distinguished in the product innovation literature, e.g. product versus process innovations, administrative (new procedures, policies and organizational forms) versus technological


The main problem regarding intangibility is that people cannot feel, see or touch the product being developed, which means that people should work closely together in the development process. Because of the intangibility, it is probably more difcult to Coming up with ideas is probably not the hardest talk about the new service. Prototyping is hardly task for most people. Coming up with good ideas is possible, which makes the thing to be developed somewhat more difcult, but still a fairly easy task. highly intangible. Intensive communication is needed The process of developing these ideas into actual probetween the people involved in developing the new ducts, however, demands a lot more time and service, maybe even more than would be the case in energy. As such, product innomanufacturing. The simultanAlthough formally projects eity of production and convation should be considered a core process for strategic sumption should reect strong renewal (Tidd et al., 1997). To a needed to be evaluated in most customer and user involvement considerable extent it does not in the NSD process. Considermatter whether organizations companies, in practice this ing the fact that due to the are concerned with banking, simultaneity of production and transporting people, manufacconsumption of services a high was hardly ever done turing chairs or automobiles; degree of customer interaction the underlying process is similar in all rms. Organiis present, we assume that customers, internal (front zations constantly seek optimal ways of organizing and back ofce personnel) and external users their innovation processes. Most researchers also (intermediaries) are also involved in the development seem to agree that the innovation process does not process, as is often the case in industrial organizaunfold in a simple linear sequence of stages and subtions. stages. Instead, it proliferates into complex bundles of innovation ideas and divergent paths of activities by different organizational units (van de Ven, 1995, Research Methods p. 275). Although the underlying process is suitable for both product and service development, meaning that nancial service companies will also follow a To gain more insight in the actual organization of process of signal processing, strategic concepts, proproduct innovation processes we needed experiences duct and market development and launch (Tidd et from managers and employees in nancial service al., 1997), there are some distinctions between manucompanies. In order to obtain this information mulfacturing and services worth mentioning. tiple data collection methods were used. Four main research activities were conducted (see Table 1): Services obviously differ from physical products. panel group sessions, exploratory interviews, IT They tend to be intangible, which is possibly the only interviews and case studies. In total over 120 people feature common to all services and best differentiates were interviewed in a four-year period (19972001). services from goods (Flipo, 1987; De Brentani, 1991). Furthermore, services are produced and consumed in In the very beginning of the study a panel group of the presence of customers, they differ substantially company experts was formed. Representatives from because of personal perceptions of consumers and 10 of the largest nancial companies in The Netherservice employees providing the service and services lands participated in this group. Members of the cannot be stored (Zeithaml et al., 1985; De Brentani, group were actively involved in product develop1991). Several authors (Shostack, 1984, 1987; Easment processes in their organization, as project leadingwood, 1986; De Brentani, 1991; Thwaites, 1992; ers, business unit managers, product managers or Terrill and Middlebrooks, 1996) have argued that new product development managers. In each meetthese specic features affect the new service developing, a short presentation with some questions was ment process. However, the heterogeneity and perfollowed by a lively discussion between the partiishability of services do not appear to give rise to cipants. important differences with physical products in the realm of product development. The fact that quite An exploratory round of interviews was conducted different perceptions may come to exist of the same in 39 companies that had recently introduced a new service will obviously make it more difcult to product. The reason for involving this relatively large develop, but to some extent this also holds for the number of companies lies in the fact that both banks development of new physical products and is in fact and insurance companies were studied. Furthermore, one of the core issues in any marketing exercise. The a distinction was made between large, medium-sized fact that services cannot be stored (referred to as the and small rms. All the interviews followed a comperishability of services) obviously does not mean mon protocol: people were rst asked to tell the story that they cannot be developed in advance at the conof the development process and subsequently more ceptual level. Therefore, the focus will be on issues specic questions were asked about the problems in regarding intangibility and simultaneity. the development process.
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(new technologies, products, and services) innovations (Ettlie et al., 1984; Utterback, 1994; Garcia and Calantone, 2002). In this study, we focus exclusively on managing product innovation.


Table 1

An Overview of the Empirical Research Activities (20022007) Companies involved 10 39 Goals Research instruments

Research activity

Panel group sessions Exploratory interviews

Interviews with IT experts Case studies

10 4

To get acquainted with the sector and nancial services To obtain preliminary insights into product innovation process and forces affecting the process To explore IT related forces

5 Panel sessions with 610 people 39 interviews (tape recorder used for transcripts)

10 interviews (tape recorder used for transcripts) To obtain in-depth insight of institutional 75 interviews, observations, internal forces affecting product innovation processes documents (tape recorder used for transcripts)

In addition to these exploratory interviews in 39 companies, 10 interviews were conducted with IT experts in 10 of these companies. The reason for this was two-fold. Firstly, the data from the exploratory interviews were rather one-sided, because only marketers or product developers were interviewed. Secondly, the results from the exploratory interviews indicated that information systems have a strong impact on the development of new products. Before starting the indepth case studies, some additional insight into these information systems was needed. These interviews followed a similar protocol as mentioned above. Furthermore, the IT experts were asked to provide a detailed description of the companies information systems. In the nal stage of data collection four established nancial companies were studied. These companies were all founded more than 100 years ago, however they differed in size (number of employees and net prot) and focus (global versus local). This round of data collection consisted of eight in-depth case studies in which actual product innovation projects were studied. Two product innovation projects were selected in each of these organizations in close consultation with senior managers. Three selection criteria were used. The rst criterion was either a troublesome or smooth development process, meaning that one of the projects was developed quite easily and the other project faced serious problems during development. The main idea to select two very different projects was to nd out if there were fundamental differences in the development approach used. Internal documents were used, when available, to verify the data if serious doubts arose during the interviews. The second criterion for the choice of a project was the nature of the product. The products had to be so-called combi-products, which means that more than one product department was involved in the development process due to the multiple aspects of the product. For instance, products that combined savings and investment features or investment and life insurance features. The third criterion was the status of the project. The development process had to be nished either within the last year or had to be in progress in order for the respondents
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to be able to recall the details about the development process. The 75 interviews were conducted with people in different departments and at various hierarchical levels in the organization. Again, the same protocol was used as mentioned above. During the interviews, people were rst asked to tell the story of the project that they had been working on. Subsequently, more detailed questions were asked about the specic problems and where these originated from according to the respondent.

Empirical Findings
The empirical ndings will be discussed in two sections. The rst section describes the actual organization of product innovation processes, whereas the second section describes the most important organizational barrier that hinders product innovation.

Organizing Product Innovation Processes The exploratory study and the case studies have provided more insight into the organization of product innovation processes. The data from the case studies indicated that the way product innovation projects are organized is very similar across these organizations, although larger organizations have a more or less formalized procedure to organize product development. The majority of the companies in this study used multidisciplinary project teams to develop new products. These teams, which consist of employees from various departments, are formed after management has approved the initial idea. In some projects, for example the SureCo 2 project, the product concept was already nished before people other than marketers were involved. The members of these project teams were generally only involved part-time and remained rst and foremost representatives from their functional departments. The project leaders that were assigned to the project were people either from marketing or belonged to a project manager centre.


These project leaders were sometimes given a hard time by some of the team members, because they did not have sufcient knowledge about the content of the new product. Some team members thought project leaders needed to know everything about the product that was being developed. They were not in favour of a project leader who operated as a process manager capable of keeping possible difculties in the development process far away from the project. The product innovation process encompasses the following phases: idea generation, concept development, building, and implementation. The names of these phases might differ between companies, but all development processes come down to these four phases. These phases were conducted sequentially and partly in parallel. Integrated product development (as described in the fourth section) was not discovered in the banks and insurance companies in this study. Many banks and insurance companies did not make systematic efforts to collect new ideas. New product ideas could surface almost anywhere in the organization. The management team screened these ideas and, after approval, a project team was formed to further transform the idea into a new product. The next step in the development process is concerned with specifying the product features. These product specications are lengthy descriptions of what the product is and does. This stage is very important because the product specications are the basis for further development. After this stage, several substages are initiated in the building stage. The various team members involved continue working on the project individually, each of them with their own interpretation of the product specications. People in the various sub-stages did not communicate often, except in the formal meetings. They did not realize that other people involved in the project might have a different interpretation of the product specications. Communication in general was at a low level during most projects. Team members hardly talked to each other outside the formal meetings. In some cases, they just did not seem to realize that other team members were waiting for information that only they carried. After these parallel activities have been carried out, the development process converges in the implementation stage. Implementation involves the introduction of the product to the distribution channels and the instruction of personnel and intermediaries. Although formally projects needed to be evaluated in most companies, in practice this was hardly ever done. The banks and insurance companies in this study rarely involved customers, front ofce personnel and intermediaries in the development of the service concept. Customer interaction was basically at a low level (it should be noted that this study did not focus on business-to-business services). The marketing and product development department often came up

with ideas for new products without knowing whether customers were actually interested in these products. One often heard that the reason for this lack of customer interaction was closely related to the ability of customers to understand the complex nancial products. Even if customers were able to understand the product concepts, they did not seem to be interested in these nancial innovations. The lack of customer interaction might also be a reason for the slight involvement of front ofce personnel and intermediaries who are in close contact with customers. This means that a lot of customer information is probably unused because customer information enters the organization at the front ofce departments and through the intermediary channel. Some companies do, however, arrange special meetings with various representatives of the front ofce in order to gather ideas or ask for advice. Similarly, panel groups of intermediaries are sometimes used to test the new service concept. Nonetheless, the degree of customer interaction or customer information seems to be at a low level in the development of the service concept. Back ofce personnel were more involved in developing the service concept. However, because the marketing and product development departments conducted most of the activities before back ofce personnel joined the project team, they had little impact on the content of the service concept.

Barriers to Product Innovation The data identied four barriers to innovation in the nancial service rms: Functionally departmentalized structures; Limited use of New Product Development (NPD) tools; Conservative organizational culture; Constraining information technology. These barriers were frequently discussed with executives from the nancial sector. The overall recognition of these barriers led us to believe they do not require lengthy descriptions. They are well known to both executives and academics. Instead they are described briey and subsequently our attention will turn to two explanations for the persistence of these barriers. Functionally Departmentalized Structures The banks and insurance companies in this study were characterized by functionally departmentalized structures, meaning that labour was divided into relatively small tasks. This departmentalization resulted in tensions between various parts of the organization. In relation to the product development function, it led to tensions between the department that was responsible for product development and the departments responsible for the daily business. These departments perceived their goals as incongruEuropean Management Journal Vol. 22, No. 1, pp. 4350, February 2009


ent, either concerned with short- or long-term activities. It led to two problems: conicting priorities and battles for resources. The members of a project team were assigned only to work part-time on product development. They experienced working on a project as something additional to their daily activities, which resulted in longer product development times because team members priorities were given to these daily activities. Most team members were available only part-time, which was mainly due to a lack of human resources. Project leaders always had to battle for sufcient resources, but in most cases they lost these battles to the functional team leaders. With only scarce human resources available, many projects were seriously delayed.

Limited Use of NPD Tools The second barrier reects the limited use of NPD tools, such as project-based working and product champions. For many nancial companies projectbased working is something they are not really familiar with. Dividing work between members of different departments who had to work on a shared task proved to be troublesome. The team members Constraining Information Technology remained representatives of their functional departInformation technology was considered a major ments and as such the project bottleneck with respect to the teams could hardly be called a Paradoxically, innovative performance of team. In most project teams, banks and insurance compathere was little communication management expected nies. Three issues emerged between team members outside from the data. Firstly, there is a the formal weekly meetings. innovative behaviour of their shortage of IT personnel. Many Because most project team nancial companies have outmembers are not used to cosourced parts of their IT to employees without them operating with people from other companies or abroad, other departments, they some- setting the proper example which increased communitimes did not understand cation problems in product exactly what other team meminnovation. Secondly, the bers contributed to the team. In particular, the more necessary integration of different administrative syscomplex work of actuaries was difcult to undertems is problematic. Since banks and insurance comstand. In some cases this led to irritation between the panies started to combine their products into soteam members. called combi-products they also had to integrate the administrative systems. These systems, however, One last issue regarding the lack of project-based date from the 1970s and 1980s and are not easily working is the level of experience of team members. adapted, let alone combined with other systems. Because nancial companies do not often engage in Thirdly, the complexity of the information systems product development, most team members are new does not allow people outside the IT departments to to this type of work. Several project leaders claimed judge whether adjustments to the system are possible the team members were hard working individuals, or not. As such, many new nancial products are still but lacked experience to work effectively in a product IT-driven. Product concepts that seem promising but development team. Other skills, such as inter-funccannot be developed without major changes in the tional collaboration, are considered necessary for information systems lose some of their innovative these activities. Additional training is needed for value. people to acquire these skills. The least that could be done is experience-sharing between employees that have been working on product development and employees that are new to the task. In this way the About the Persistence of Innovation new members know more about what to expect.

conservative. Many managers in nancial companies displayed risk-avoiding behaviour. Taking risks (which is closely related to innovation) was still considered unwise. Although the banks and insurance companies are still rather conservative, they are moving towards more innovative behaviour. There is still a large group of managers who do not support the need for product innovation, but the number of people that do consider product innovation to be very important seems to be growing. This latter group, of innovation-driven people, was, not surprisingly, found mainly in the marketing departments. However, the more traditional departments that hold an unfavourable attitude towards innovation have the strongest impact on nancial services companies abilities to innovate. Overall, it became clear that product innovation was not at the top of the priority list of management and employees. Paradoxically, management expected innovative behaviour of their employees without them setting the proper example (for instance by adjusting the incentives systems).


Conservative Organizational Culture The organizational culture in the companies studied appeared to be a huge barrier for product innovation. In general, organizational cultures were considered
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For years scholars and practitioners have pointed at the problems with innovation management and as a result these problems have been described at length


Another example of the limited implementation of NPD tools can be found in the use of product champions and the availability of team members and the project leader. Product champions with formal power were hardly ever appointed to projects. Although The case studies revealed four barriers to product product champions have frequently been related to innovation in the nancial sector. Some of these studincreased new product success, or at least shorter ies also indicated that it is possible for a large, mature development times and a smoother development organization to have an occasional success in product process (as pointed out by Chakrabarti, 1974; Maiinnovation. However, the majority of the product dique, 1980; Shane, 1994), there was only one project development projects in the banks and insurance with a product champion. This product champion companies that were studied remained problematic. claimed that functional manAn incidental product innoDecisions that were made agers were not very fond of the vation success does not imply concept of a product champion that an organization is able to with formal power to develop a reach a level of sustained proin the past are todays new product. Again, this means duct innovation, which seems that these functional managers necessary for organizations to boundaries lose some of their power. remain viable in the long run Instead of product champions, lightweight project (Dougherty and Hardy, 1996; Dougherty, 1999). This leaders (cf. Clark and Fujimoto, 1991) were identied section elaborates on two issues that explain why in most cases. These project leaders, as well as the nancial organizations have not been more successteam members, were hardly ever available full-time ful in their product innovation (both incidental and for the project. In the literature it is argued that worksustained) efforts: ing on a project full-time is a key factor for success, at least for a core group of people and the project The use of NPD tools in a service environment; leader (Wheelwright and Clark, 1992). Yet, in the The constraining force of an organizational trabanks and insurance companies people were jectory. involved in projects only to a limited extent. First, the Use of NPD Tools in a Service Environment is Second, the Constraining Force of Organizational Tradiscussed. It became clear in the case study organizajectories was clearly present in the banks and tions that these organizations searched for solutions insurance companies studied. These companies seem comparable to those described in the NPD literature. to be trapped in their own historical developments. Let us assume that these solutions are able to solve Organizational trajectories could be dened as: the some of the problems mentioned. The case study evipast, present and future to be expected course of an dence clearly showed that the NPD solutions were organization when looking at its past and present implemented only to a limited extent (selective use). behaviour. In the course of an organizational traThe use of multidisciplinary teams is widely dissemijectory, individual actors have a certain amount of nated in the nancial sector. All the project teams that freedom to act, but not everything is possible due to were studied consisted of representatives from the the restrictions imposed by the history of the tramost important departments involved in the develjectory. According to Ortmann (1995) it is very difopment process. However, the members of these cult for individual organizational members to go teams mainly met each other in formal meetings once beyond the boundaries of the organizational traevery one or two weeks. There was little contact jectory. The boundaries are, to a large extent, historibetween team members outside these meetings, cally created. Decisions that were made in the past meaning that information was not widely shared at are todays boundaries. Managers in organizations an early stage (as suggested by Clark and Fujimoto, are themselves also determined by this framework 1991). Furthermore, co-locating team members was that was already present when they arrived in the found only in one organization. Even in this organicompany, meaning that destroying it will be more zation, where the most successful project (according complicated when time passes. It seems as if the to management) was organized this way, co-location organizational trajectory is institutionalized, meaning was not very common. The main reason for the that it has a high taken-for-granted character and is absence of co-location is the lack of possibilities for not questioned. Institutions have a high taken-forfunctional managers to inuence the project and theregranted degree of current practices that are refore these managers did not want projects being iso48
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in the literature (see for instance van de Ven, 1986; Dougherty, 1999). Many scholars have proposed solutions to overcome these problems (Kanter, 1984; Tidd et al., 1997; Dougherty, 1999) or have identied the main success factors (e.g. Cooper, 1983; De Brentani, 1989; Cooper and De Brentani, 1991; De Brentani, 1991; Cooper et al., 1994; Wilson et al., 1996). Yet, in practice many companies still suffer from these problems. Firms in the nancial services sector are no exception to this. The obvious question that arises from this is why these problems still persist.

lated from functional departments. Politics and power play an important role here. This was also one of the reasons why co-location was not found in the other organizations. Once projects are isolated from the rest of the organization, managers lose their inuence and it became obvious in the banks and insurance companies that they tried to avoid losing control.


enacted, which means that they acquire a rule-like status (Oliver, 1992, p. 563). Institutions guide individual actions in a specic direction due to the predened patterns of which the institution is constructed and therefore constrain and enable individual behaviour. This does not mean that it is not possible to change the course of the organizational trajectory. It is people that constructed or created the trajectory, so they must also be able to destroy it. The organizational trajectory sets the scene for the development of new products. Between the boundaries of the trajectory, NPD tools and methods are used. This means that their use is, to a large extent, limited to the boundaries of the trajectory and (project) managers can only manoeuvre between these boundaries. Managers might be seduced by moving too close to the borders of the trajectory to search for an escape. However, moving too close to either the left or right boundary of the trajectory will often lead to sanctions or conict situations. The existence of the organizational trajectory therefore has strong implications for the use of NPD tools and methods. NPD tools and methods are built up around rules on how to develop new products, almost without looking at the context in which these rules are used. The organizational trajectory imposes meta-rules on the NPD tools that both constrain and enable their use. The point is that the success of NPD tools and methods to a large extent depends on the context in which they are used and the way this context (meta-rules) enables or restricts the use of these tools and methods.

tance. The last area of change concerns information technology. The current perspectives on IT need to be adjusted because these perspectives are rather conservative. Besides changing the perspectives, it should also be considered whether it is possible to invest in new state-of-the-art information technology. This would surely increase the innovative potential of many banks and insurance companies. The shift towards a more innovative company is not an easy one. Many organizational members will nd it difcult to change. The resistance to change will be higher when drastic changes are needed. People have the tendency to stick to old certainties even when times are changing rapidly and preserving life becomes extremely difcult (Weick, 1993). Letting go of familiar tools seems to be a daunting task.

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Becoming more innovative requires alterations at the deepest levels of the organization. Many times it has been argued that large, mature organizations lack sufcient innovative capabilities and that there is a love hate relationship between the two (Burgelman and Sayles, 1986). However, large US companies such as 3M, General Electric, Johnson & Johnson and WalMart have shown that large size need not be antithetical to innovation (Block and MacMillan, 1993, p. 2). Yet, large rms often do have more difculties with the development of new products than smaller rms. The most important changes that are needed for these organizations to become more innovative are concerned with the organizational structure, the underlying values and beliefs and information technology. One of the key issues in becoming more innovative in the nancial services sector is to designate explicitly a place for product development. Furthermore, a lot of attention should be given to changes in the value system (underlying beliefs and assumptions) of the organization. Most banks and insurance companies are diffused with stability. People in these companies have to get used to a special product development function and its imporEuropean Management Journal Vol. 22, No. 1, pp. 4350, February 2009



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PATRICK VERMEULEN, Erasmus University, Rotterdam School of Management, Department of Strategic Management and Business Environment, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands. Email: p.vermeulen@fbk.eur.nl Patrick A.M. Vermeulen is Assistant Professor of Strategic Management and Business Environment at Erasmus University, Rotterdam. He researches into institutional perspectives on innovation, organising innovation processes in service rms, and balancing exploration and exploitation activities.


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