A virtual network organization business management model applied to retail banking

A VIRTUAL NETWORK ORGANIZATION BUSINESS MANAGEMENT MODEL
APPLIED TO RETAIL BANKING: A GROUNDED THEORY STUDY

by

Kenrick C. Fraser, Sr.




A Dissertation Presented in Partial Fulfillment
of the Requirements for the Degree
Doctor of Management in Organizational Leadership



UNIVERSITY OF PHOENIX
December 2008




UMI Number:
3393726

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v
ABSTRACT
The challenge faced by traditional retail banks is that markets continue to shift; large
financial institutions no longer gain an advantage based on economies of scale, because
size and vertical organizational structures result in operational costs five times greater
than the costs of nontraditional banks (―The Pros and Cons,‖ 2005). The purpose of the
qualitative grounded theory study was to generate an explanatory and descriptive
grounded theory depicting the potential application of the virtual network organization
(VNO) business management model as an approach to increasing profitability ratios and
competitiveness in traditional retail banking in the mid-Atlantic and southern United
States. Participants included 20 chief executive officers, chief information officers, vice
presidents, senior and midlevel managers, operations managers, technology and business
solution architects, and business process management consultants from 10 states within
the mid-Atlantic and southern United States. Results indicated three primary implications
for the challenges faced by traditional retail banks. First, traditional retail banks in the
mid-Atlantic and southern United States could reduce operating costs, increase
managerial efficiencies, and achieve greater advantages in economies of scale and asset
allocation by adopting a VNO business management model. Second, use of the VNO
business management model may provide better opportunities for survivability and
resiliency of the retail banking infrastructure in the event of a natural or manmade
disaster. Third, use of the VNO business management model could provide opportunities
to increase basis points on financial service products and facilitate access to a broader
talent pool of knowledge capital, while allowing increased focus on the core
competencies of financial services.
iv
DEDICATION
I dedicate this dissertation to my wonderful family, especially my beloved mom,
Bernadette and sons, Kenrick Jr. and Deondre, who have been sources of encouragement
and buttresses of hope during this academic journey.
v

ACKNOWLEDGMENTS
I give thanks and praise to God for the vision and provision to accomplish this academic
feat. This doctoral journey has been long and sometimes daunting. The combination of
professional practice, family commitments, and doctoral-level requirements provided
remarkable personal growth. I owe a lifelong commitment to my esteemed and tireless
mentor, Dr. Leslie Miller, whose patience, encouragement, leadership, and camaraderie
went above the call of duty. I am equally indebted to Dr. Marilyn K. Simon and Dr.
Tathagata Dasgupta for their wholehearted participation on my dissertation committee
and ongoing review, critique, and validation for the development of this dissertation
study. Sincere thanks go to the managers and leaders for their responsiveness and time
invested to add meaning and value to this study. To my siblings, Benedict, Hermione,
Yvonne, and Kester, I will be forever grateful for the encouragement and inspiration
provided along the way. Although deceased, my dad, Raymond Fraser, believed in me
and will be proud of this accomplishment.

vi
TABLE OF CONTENTS
LIST OF FIGURES xii
CHAPTER 1: INTRODUCTION 1
Background of the Problem 3
Statement of the Problem 6
Purpose of the Study 7
Significance of the Study 8
Significance of the Study to Leadership 9
Nature of the Study 10
Appropriateness of the Research Method 11
Appropriateness of the Research Design 13
Research Questions 15
Broad Theoretical Area 19
Other Research in the Field 20

Issues, Perspectives, and Controversies 21
Definition of Terms 23
Assumptions 25
Scope 26
Limitations 27
Delimitations 28
Summary 28
CHAPTER 2: REVIEW OF THE LITERATURE 30
Title Search 31
vii
Industry and Organizational Context 32
Historical Overview 33
Awareness of the VNO Business Model 35
Governance and Management 35
Evolution of Management Paradigm 36
Scientific Management Theory 37
Bureaucratic Management Theory 38
Human Relations Movement 38
Contingency Management Theory 39
Systems Management Theory 40
Chaos Management Theory 41
Market Environment and Collaborative Commerce 41
Industry Transformation and Emergence 43
Organizational Culture and Relationships 44
Service-Oriented Architecture as an Enabler 46
Emerging Structures of Corporations: Implications for Retail Banking 48
Managing across corporate boundaries 48
Scale, scope, and speed 49
Emerging Technologies 50
The Internet as an emerging financial channel 50

Supply chain management as a technology 50
The Impact of the Internet on Banking Competition 51
The Effects of Deregulation on Retail Banking 52
viii
Population under Consideration 52
Traditional Retail Banking Organizations 53
JPMorgan Chase 53
Royal Bank of Canada Centura 53
Nontraditional Banking Organizations with VNO Characteristics 54
ING Direct 54
E*TRADE Financials 54
Nonbanking Organizations with VNO Characteristics 55
Lands‘ End, Inc. 55
Amazon.com 56
eBay.com 57
Challenges to the VNO Model 58
Conclusion 59
Summary 61
CHAPTER 3: METHOD 63
Guiding Principles 63
Appropriateness of Research Method and Design 65
Appropriateness of Research Method 65
Appropriateness of Research Design 66
Context of the Study 68
Research Questions 71
Population, Sampling, and Geographic Location 72
Sampling and Geographic Location 73
ix
Informed Consent and Confidentiality 74
Instrumentation 76

Data Collection and Analysis 77
Qualitative Analysis Software 81
ATLAS.ti Use and Application 81
Internal and External Validity 82
Internal Validity 82
External Validity 83
Data Triangulation 84
CHAPTER 4: RESULTS 86
Research Questions 86
Results and Findings 88
Pilot Study Results 88
Primary Study Results and Findings 89
Participant Demographics 89
Participants‘ Profiles 91
Data Transcription and Coding 99
Conditional Relationship Matrix Framework 99
Comparative Analysis and Data Triangulation 100
Perceptions of VNO Model Application to Retail Banking 100
Benefits of the VNO Model to Retail Banking 102
Transitioning Retail Banking to a Gateway Provider Function 104
VNO and Repositioning Retail Banking 105
x
Generation of Higher Return on Investments 106
Agility and Competitive Advantages 108
Advantages and Challenges in Key Areas of Management 109
Emergence of Central Corollaries 111
Emergent Grounded Theory 113
Summary 114
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 116
Conclusions 117

Synthesis of the Literature with Emergent Themes 121
Virtual Integration as Alternative Governance 121
Technology and Organizational Deconstruction Are Success Tenets 122
Distribution Channels, Virtualization, and Implementation 123
Managerial Practices and Customer Centricity 125
Implications 127
Significance to Retail Banking Management and Leadership 127
Implications for the Specific Problem Explored 129
Propositions and Formal Theory 130
Recommendations for Future Research 131
Research Summary 133
REFERENCES 136
APPENDIX A: LETTER OF INFORMED CONSENT 156
APPENDIX B: INVITATION TO PARTICIPANTS 157
APPENDIX C: CONDITIONAL RELATIONSHIP MATRIX 158
xi
LIST OF TABLES
Table 1 Participants by Organizational Segment 90
Table 2 Participants by Geographic Location 90
Table 3 Management and Leadership Experience of Participants 91

xii

LIST OF FIGURES
Figure 1. Interrelation of data collection, ordering, and analysis. 80

1
CHAPTER 1: INTRODUCTION
Many factors challenge the traditional model of retail banking business
management, including emerging technology, deregulation, geographic dispersal, a

lowering industry segment entry barrier, and a critical need to increase profitability and
enter new markets (Siaw & Yu, 2004). The intent for the Virtual Network Organization
(VNO) paradigm, a loosely coupled business alliance empowered by technology, was to
foster decentralized business management that empowers organizations through
horizontal integration, embracement of information, and communication technology
(Collins, 2004). The use of horizontal integration, embracement of information, and
communication technology enables businesses to increase their effectiveness in the
postmodern business environment.
The VNO management model is being adopted by many businesses seeking a
viable management model that will allow them to govern business units that are highly
dispersed in a cohesive fashion (Szebesta, 2004). Use of the VNO paradigm may allow
traditional retail banks to overcome current challenges, increase profitability, and enter
new markets. Hedley, White, Petit dit de la Roche, and Banerjea (2006) noted,
In this emerging environment, innovation will take many forms, including
advances in products and services, markets, operational processes, customer
intimacy, and new channel and diversification strategies. But innovation will not
be possible, nor will it have the desired impact, unless banks create the requisite
conditions for innovation development. (p. 52)
Successful retail banking will require a disposition that will enable additional efficiency
gains and risk reduction and motivation that current market trends could increase
2
pressures for government regulation of the financial market sector with less stringent but
comprehensive framework (Koeppl & MacGee, 2007). Koeppl‘s and MacGee‘s view
gives credence to the idea of applying the VNO business management paradigm to retail
banking. The VNO model may provide alternative approaches to harness dispersed
resources, globalization, and distributed organizational structures that is integrated with
information and communication technology, creative partnering with customers and
competitors in an innovative alliances to pursue value (Bruno-Britz, 2007).
The retail banking technology infrastructure employed legacy systems limited in
their ability to scale, representing high-cost real estate in a low-cost world, thereby

portraying a compelling business case for the organizations to adopt an integrated core
banking system with a low-cost operation platform (Catallozzi, 2007). The need to
reexamine technological alternatives indicated retail banks might need to pursue
improvements of performance, scalability, expandability, and cost efficiencies. Data from
the U.S. retail banking industry indicated the following:
Top managers and leaders will continue to have a positive, direct, and long-term
impact on how firms detect, develop, and deploy new business management
models and technologies and if these managers and leaders ignore emergent new
business management models and technologies and do not focus on the future,
they will do poorly at innovation and might be doomed to sink and take their
firms with them. (Yadav, Prabhu, & Chandy, 2007, p. 97)
Chapter 1 begins with an overview of the specific problem of interest for the
study, followed by the purpose of the study and the significance of the research. The
discussion continues with a description of the research method and design and the
3
research questions that guided the qualitative study. Chapter 1 concludes with key term
definitions, assumptions, the scope, limitations, and delimitations pertinent to the design
of the study.
Background of the Problem
Increasing marketing dynamics, including evolving business management
practices, deregulation, new market entrants, global competition, and emerging
technology, continue to influence the retail banking industry (Siaw & Yu, 2004). Results
of a 2006 survey of 30 major retail banks serving 170 million customers in 15 countries
indicated the underlying sources of revenue growth included innovation in new product,
new services, new production processes, and new organizational forms (Wisskirchen,
Vater, Wright, De Backer, & Detrick, 2006). Another underlying source of growth
included mergers and acquisitions, together with aggressive cost reduction, which could
potentially impact agility and survivability of retail banking adversely upon retention of
the current organizational structure (Bofondi & Lotti, 2006). Mason, Menor, and Roth
(2001) noted to remain profitable and survive in an evolving business environment; retail

banking must acquire an adaptive capability ―to excel simultaneously on operational
capabilities of quality, delivery, flexibility and cost in a coordinated fashion‖ (p. 273).
The achievement of adaptive capability, a central quality for global competition,
can be constrained by the traditional approach to organizational structure predominant
throughout retail banking (Mason et al., 2001). The traditional approach to organizational
structure in retail banking was fundamentally a hierarchical structure of linear chains of
command vertically integrated to govern large corporate divisions with centralized
functions and self-sufficient entities (Bhall, 2002). The traditional approach to
4
organizational structure in banking tended toward misalignment with ―the concept of
agility, which emerged as an important operational capability to thrive in a competitive
environment of continuous and unanticipated change, where the readiness to handle
variability in the environment was a strategic asset‖ (Menor, Mason, & Roth, 2001, p.
274). A continuous shift in technical and legal standards and an era in which large banks
no longer gained an advantage based on economies of scale influenced the need for an
agile organizational capability. The physical size of traditional retail bank facilities,
together with the bureaucratic structures required to operate effectively, can be a
determining factor in high operating cost, as can inefficiency and a limited degree of
flexibility (Siaw & Yu, 2004).
The dominant business management model used in retail banking dates back to
Britain more than 100 years ago, in the early 20
th
century. A rigid mode, mechanical in
character and designed to cope with simple mass-market businesses, was the dominant
business model adopted by Procter and Gamble in the 1830s, perfected by General
Motors in the 1920s, and employed by Microsoft in the 1970s (Bhall, 2002). The
traditional business model included organizational structures known for their vertical
integration in chains of command. Centralized functions were reciprocally interdependent
with their technical core, which had the potential to result in undue constraints and
contingencies that often hindered an organization‘s capacity to adapt, coordinate, and

achieve optimal performance (Thompson, 2004).
Since 2000, organizations without traditional organizational structure and
bureaucracies have been able to enter the financial industry segment with ease and
notable success (Siaw & Yu, 2004). New financial entrants using nontraditional business
5
models, such as AOL Time Warner, Microsoft, and Amazon.com, had credibility and a
strong customer base, were technologically informed, and had an increased amount of
money to spend. The new financial entrants also captured a large segment of the retail
bank branch business by exploiting direct channeling (―The Pros and Cons,‖ 2005). The
successes of the new entrants derived from their emphasis on economies of speed by
providing products and services with faster innovation and delivery
(PricewaterhouseCoopers, 2006). The adoption of a suggested business model that
allowed an increase in scale and scope of economies and provided access to a broader
pool of resources in a supply chain arrangement potentially benefited the traditional retail
banking industry. The suggested business model was a hallmark of the decentralized
electronic networked organization (Ito & Rose, 2004).
The VNO paradigm model, as a decentralized electronically networked entity, is
an emerging business management model. The VNO provides a link for dissimilar
organizations through the use of information and communication technology to share
skills, cost, and market access (Collins, 2004) and to maximize market opportunities,
increase agility, and sustain competitive advantages. Use of the emerging management
paradigm of networked organizations offers a potential alternate organizational structure
for the retail banking industry. Large banks, in an environment in which the overall
competitive landscape is volatile, no longer gain substantive advantage based on the
economies of scale leveraged in the past (Siaw & Yu, 2004). A VNO banking model may
provide key dimensions over their traditional counterparts, including ―the provision of
convenient/accurate electronic banking operations, accessibility and reliability of service
provision, good queue management, service personalization, the provision of friendly and
6
responsive customer service, and the provision of targeted customer service‖ (Ibrahim,

Joseph, & Ibeh, 2006, p. 482).
Statement of the Problem
The competitive environment for most businesses in the financial market
continues to shift. Large retail banks no longer gain an advantage based on economies of
scale because size and vertical organizational structures result in high operational costs
and hamper market agility (Collins, 2004). Traditional economies of scale, according to
Siaw and Yu (2004), will not necessarily provide large retail banks sustainable
competitive advantages in the new economic environment. The problem is most retail
banks, with costs five times greater than nontraditional banks, continue to operate using
traditional business management models.
The traditional model remains in use despite evidence indicating nontraditional
banking models demonstrate higher managerial efficiencies and reductions in operating
cost to assets by as much as 65% over a 4-year period (―The Pros and Cons,‖ 2005). The
cost-to-asset ratio, (the cost to operate a business divided by its assets) of nontraditional
banks is positive compared with the cost-to-asset ratio of traditional branch-based banks
(Weinberg, 2007). The cost-to-asset ratio for ING Direct, a non-traditional branch-based
bank, fell from 142 basis points to 49 basis points between 1999 and 2003, whereas the
average for traditional banks remained at 250 basis points (―The Pros and Cons‖). Basis
points are measures that represent the change in a financial instrument and normally used
to calculate changes in interest rates, equity indexes and the yields of many financial
products (Garland, 2005).
7
The proposed current qualitative study includes the inductive generation of a
descriptive theory depicting a potential application of the VNO management paradigm as
an advantageous model for use in retail banking. The findings of the study may help to
define a business management approach that provides retail banking managers and
leaders alternatives to enhance cost-to-asset ratios. The study may also result in
techniques to potentially decrease capital expenditure, increase marketplace agility, and
accelerate returns on investments for retail banking in the mid-Atlantic and southern
United States.

Purpose of the Study
The purpose of the qualitative grounded theory study was to generate
systematically and inductively an explanatory and descriptive hypothesis depicting the
potential application of the VNO management paradigm as a business management
approach for increasing profitability ratios and competitiveness in retail banking. The
qualitative grounded theory has a basis in the views of traditional and nontraditional
banking and non-banking managers and leaders (Creswell, 2005). The study population
included managers and leaders in Massachusetts, Ohio, New York, New Jersey, North
Carolina, Delaware, Georgia, Virginia, Connecticut, and Pennsylvania; these mid-
Atlantic and southern states have a high concentration of traditional and nontraditional
retail banking entities, as well as a significant number of organizations employing a
VNO-style management paradigm model. Managers and leaders of retail banking and
non-retail banking entities provided a variety of perspectives that enhanced the study‘s
research objectives (Frei & Rodriguez-Farrar, 2005; Garland, 2005; ―The Pros and
Cons,‖ 2005).
8
Data collection occurred through the use of semi-structured interviews with 20
managers and leaders with long-term retail business experience in selected Mid-Atlantic
and Southern states within the United States. The study targeted six participants with
experience in the traditional retail banking industry, six participants working within
nontraditional retail banks, four participants in non-banking VNO organizations, and four
participants in professional and technology services organizations. Identification of
participants for the study involved a non-probability, purposive, snowball-sampling
technique.
Significance of the Study
The results of the study may provide financial industry managers and leaders with
a different framework for building a new retail banking business model. The new retail
banking business model might empower and reposition the industry to deliver more
service and greater convenience for less cost across a larger geographic area. A VNO
retail banking business model may accommodate a growing customer base with less time

at their disposal and a strong preference to conduct branch banking activities outside of
traditional banking settings, such as customers who prefer to combine banking activities
with other kinds of personal errands (Bielski, 2005).
The implementation of a VNO paradigm model in retail banks may provide
increased convenience for customers. The increase in convenience may also result in
reduced operational costs, wider product diversity, and increased channeling and dynamic
marketing, while leveraging technology and effective supply chaining to deliver services.
A VNO banking model could also potentially separate the banker from the ownership of
extensive physical infrastructure, redefine the organizational structure of management
9
and leadership relationships, and increase opportunities for retail banking managers to
focus on a core competency in financial products and services.
A conditional relationship matrix (Appendix C) provided a framework that
ensured comprehensive coverage of the possible application and relationship of a VNO
paradigm in retail banking. The conditional relationship matrix is an instrument that
could be used to assess the circumstances within which managers and leaders interact in a
business environment or functional unit (Araujo, Easterby-Smith, and Burgoyne, 1999)
The conditional relationship matrix helped with the explanation of a possible association
between VNO attributes and methods within the processes and structures of traditional
retail banking and indicated options for restructuring the industry segment.
According to Scott (2003),
The conditional relationship contextualizes the central phenomenon and relates
structures with processes. On the other hand, conditional relationships capture the
higher level of abstraction necessary to bridge the final phase of grounded theory,
analysis, selective coding and interpretation and ultimately to a [significant]
theory generation. (p. 113)
The elements of management practices, leadership perspective, business processes,
technology availability, potential market conditions, and sociopolitical framework were
integral for contextualization of the conditional relationships in the study.
Significance of the Study to Leadership

Retail banking industry leaders require a comprehensive and contextual business
model to assist in the adoption of the best solutions and approaches for adapting to a
changing marketplace (Campbell & Frei, 2004). The results of the study may contribute
10
new insights into banking management practices and increased knowledge for current
and future generations of retail bankers, including the field of business management and
leadership in retail banking. Results including a body of knowledge on business
management practices may help in the transformation and alternate alignment of retail
banking to a dynamic marketplace, where methods and societal conditions continually
change.
Retail banking leadership and management continually seek strategies to reduce
corporate overhead, increase organizational agility, address the needs of an ever-growing
sophisticated and dispersed customer base, and realize higher profit margins with fewer
physical assets (Siaw & Yu, 2004). The knowledge generated within the study may
provide a framework for retail banking industry managers and leaders to rethink retail
banking doctrines, including the potential benefits of a flattened organizational structure,
distributed ownership of physical assets, and leveraging a vendor-provided infrastructure
indicated by the VNO model. Retail banking management and leadership may further
benefit from the contextual framework of a distributed organizational hierarchy and a
widely shared total cost of ownership, resulting in decreased operating costs, increased
agility, and greater market reach, as indicated by the VNO model (Szebesta, 2004).
Nature of the Study
The purpose of the qualitative grounded theory study was to generate
systematically and inductively an explanatory and descriptive hypothesis to describe the
potential application of the VNO management model in retail banking. Use of the VNO
management model could potentially increase profitability ratios and competitiveness in
retail banking. The qualitative grounded theory generated by the study could explain the
11
viability of adopting the VNO management paradigm as a business management
approach for retail banking.

Appropriateness of the Research Method
The fundamental methods used in research include quantitative, qualitative, and
mixed methods. Whereas the focus of quantitative research is on description and
explanation, qualitative research involves the examination of a research problem to seek
an understanding of a central phenomenon. In mixed method research design, one
segment of a research study involves the qualitative research paradigm and another
segment of the study involves the quantitative research paradigm (Creswell, 2005).
The quantitative research method may include the generation of models, theories,
and hypotheses; the collection of empirical data; and experimental control. Quantitative
research also includes the investigation of relationships between variables and is either
descriptive or experimental (Creswell, 2005; Trochim, 2001). The quantitative research
method includes relationship type research; deductive logic, numeric data, and data
collection procedures that are exacting in structure. Finally, data analyses of the
quantitative research method are primarily statistical, and the determination of value in
analysis and inference is strictly objective (Tashakkori, n.d.).
The qualitative research method is inductive as opposed to the deductive
quantitative research method. Use of the qualitative research method is suitable for
deriving meaning and comprehension of an observable subject matter, point of view, fact,
occurrence, or circumstance (Trochim, 2001). Data in the qualitative research method
consist of narratives. The data collection procedures are unstructured and data analysis
occurs through the use of various techniques for classifying and studying the tenets of the