The Deliberate v. Emergent Strategy Debate Revisited Agent-based Models of a Banking Network as an Example of a Turbulent Environment: The Deliberate v. Emergent Strategy Debate Revisited By Duncan A. Robertson Discussed by Brandon Chen School of Banking and Finance, Australian Business School, UNSW

Banking Strategy In the past focus has been on the role of banks as intermediaries But banks also look for -Profit maximisation -Shareholder value-added -Survival in the marketplace

Strategic Dimensions for Banking Strategic groups : groups of firms that follow similar strategies with regard to one or more strategic dimensions Some generic strategic dimensions incl: -Product lines (degree of product diversification/differentiation) -Degree of vertical integration -Investment behaviour -Relative size of firm (leader/follower class), etc.

Strategic Dimensions for Banking N-dimensional strategy space The location and movement used of a firm within the space describing that firm’s strategy Position the value-generating assets sustainable competitive advantage # of customers the bank’s profit Banks and Customers in the same space

Emergent v. Deliberate Debate Deliberate strategies: intentions are fully realised Emergent strategies: a realised pattern was not expressly intended Bounded rationality: agents act in a way that is not completely rational due to the uncertainty of the future and costs of acquiring information Bottom line: managers learn along the way

Turbulence Def: The dynamic of the environment, i.e. the rate at which these configurations change over time is the other key determinant of turbulence (Charkravarthy 1997). Complex world calls for models/paradigms not relying on linearity, equilibrium and stability

Turbulence In this context, turbulence comes from changes in the links with customers Extended to include changes in the strength of interaction between banks and customers By the rapid introduction/removal of new agents from the strategy space (ease of entry and increasing returns to scale both contribute to turbulence, Charkravarthy)

ABM for banking strategy within a turbulent environment From the point of view of individual firms Two agents: banks and customers Feedback between the firm (bank) and the environment (customers) Changes in the environment: Changes in the links the bank has with its customers

ABM for banking strategy within a turbulent environment According to their strategies they adopt in the strategy space Have a set of requirements that determine his position in the strategy space Figure 1 Location of banks (B) and customers (C) in the strategy hypercube

ABM for banking strategy within a turbulent environment Customers select banks closet to them in strategy space. However, they are not purely rational: they may decide to bank with a firm not closet to them as long as this meets a min satisfaction level (bounded rationality)

Parameterisation of the Model Customers: Satisfaction level: s (associated with distance btwn customer and bank); min cut-off s*  bounded rationality of customer S are compared with S* at each time step: customers won’t switch, if S<S* (inertia) customer switch, if S≥S* (look for closest)

Parameterisation of the Model Banks: To maintain competitive advantage: maintaining relationships with the customers Assume other banks are stationary 3 strategies open to the bank: (i) Stay still; (ii) Follow the lead bank; (iii) Move to the centre of mass of its customers.

Parameterisation of the Model Turbulence: Customers are either (i) stay still (non-turbulent) (ii) random walk (turbulent)

Results 1: (control result) Strategy: Stay still (a deliberate strategy) Little effect of customers’ s*: on average the customers are likely to be distributed evenly among banks

Hardly switch (very loyal) Results II Strategy: Follow the Leader (an emergent strategy) The efficacy of such strategy depends on s* Hardly switch (very loyal) Very rational

Results III Strategy: Customer-Centric (an emergent strategy) This strategy works better in a turbulent market

Comments Management literature built on economics, sociology, psychology Quick paradigm shifts within the discipline ABM fits the description: allowing models to be altered to fit the level of abstraction required fro a different industry or a different problem Tackle one specific question without controlling for other factors (Not GE) But a good paper in illustrating how ABM can be applied in management science