1.1. The Importance of Technological Innovation in the Financial Sector
Innovation is “the generation, acceptance and implementation of new ideas, processes, products or services” (Kanter, 1983: 20). From an industrial point of view, innovation is “introducing a novelty in the production process, whatever its size and origin, to achieve more efficient economic objectives” (Inche, 1998: 9). Rogers (1983: 11) adds that innovation is “an idea, practice or object that is perceived as new by an individual or other unit of adoption.”
Nowadays, specific Information and Communication Technology (ICT)-based innovations are shaping a new economic scenario, characterized by rapid technological change, increased competitiveness and reduced product life cycles. Companies are discovering the great potential of ICT to improve competitiveness and profitability in business (Lafuente, 2005: 29; Fujitsu, 2009; Torrent-Sellens et al., 2010: 53; Fundación Orange, 2010: 108). The increasing use of ICT represents a major challenge to the traditional modus operandi of trade relations, directly affecting company-customer relationships. While for many years, radio, television and the telephone were the tools used to market products and services efficiently, now newer, even more efficient means of communication such as the Internet, mobile phones and interactive television have produced interesting and innovative marketing results (Chaffey, 2000: 16; Heinonen and Strandvik, 2005; Heinonen, 2006; Zaidi, 2006; Masamila et al., 2010). These communication tools simultaneously serve as self-service delivery channels such as Internet banking (Heinonen, 2006).
In this context, technological innovation refers to both actions and decisions about the market as well as to products and services that make business management easier. Sometimes two or more innovations are presented together since they have, or are perceived to have a functional relationship, by potential adopters. Because of this, the concept of “technology clusters” or innovative packages consisting of one or more closely related technology components has appeared (Rogers, 1983: 143).
In an attempt to classify the different types of innovation in business, Mellor (2007: 38-39) distinguishes three types of innovation:
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Invention Innovation: Is the application of an invention or discovery. This type of innovation tends to be vertical and radical. However, most organizations are based on image and product (e.g. trademark protection) rather than new or radical advances in technology (patent protection).
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Creative Innovation: Is used as a tool to achieve competitive advantage in the market. The initial creation of a company or its business model is a form of creativity.
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Diversity Innovation: Regarded as a horizontal phenomenon (agent-to-agent or peer-to-peer) and incremental, this innovation includes conversations among peers with different knowledge bases or from other environments to offer solutions to a problem without requiring a significant degree of invention and / or creativity. Such innovation can add value and service to customers without having to “reinvent the wheel.”
Figure 1 represents the three types of innovation described.
Figure 1. Types of innovation (source: Kanter, 1983 p. 21; Mellor, 2007, p. 36)
The formation of partnerships or strategic alliances between companies allows a degree of innovation in production, trade, or distribution. Kanter (1983: 21) adds that innovation involves creative use of original inventions as well.
But as a general rule, the most original innovations are less likely to be distributed, since products that are similar to existing ones require a lower degree of behavioural change in order to be used.
Innovation in financial institutions is of the utmost importance to meet the continuing needs of consumers and gain a competitive advantage over market rivals. But it is also an element that can be copied by others in the sector.
There are many reasons why financial institutions decide to innovate (based in Sánchez, 1997: 122-124):
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Market Forces: Financial institutions choose to innovate because they are interested in expanding the market or penetrating a new national or international market.
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Profitability Ratios: Typically, institutions innovate to improve yields and earn higher profits.
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Corporate Image: Companies innovate to create a stronger image in the market, ensuring optimal position in the consumer's mind and differentiation from the competition. In most cases a more modern, safer image emerges.
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Technical Advantage: Since financial products and services have ever-shorter life spans the continual development of new products or services is required in the maturity stage.
Broadly speaking, the banking sector is an information-intensive business in which ICTs are increasingly important in order to acquire, process and deliver information to users. This leads to general technological development, but in recent years the Internet in particular, has radically affected financial systems, overcoming geographical and time barriers.
Specifically, the Internet enables financial institutions to extend and optimize their business by improving the information and services they can offer to their customers and prospects. It is a medium that is transforming the traditional way of doing financial business. Therefore, it is necessary to know the potential of these new terms of trade, how to design an appropriate strategy for implementation in the organization and how to provide efficient, secure service that customers demand. Internet banking, coupled with the policy of diversification that some banks and savings banks follow, leads to innovations based on the World Wide Web.
Diversified growth makes perfect sense when good opportunities are available outside of existing businesses, provided that the company has the strengths needed for success. There are different types of diversification (Kotler, 2006: 52):
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Concentric Diversification: When the company develops new products that have technological or marketing synergies with existing product lines but are intended for a different consumer segment.
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Horizontal Diversification: When the company develops products that appeal to its customers and which are not technologically related to existing products.
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Diversification in Conglomerate: When the company seeks to develop new businesses that are not related to their current technology, products and markets.