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Technovation 24 (2004) 773–777 Www.elsevier.com/Locate/Technovation

Technovation 24 (2004) 773–777 Www.elsevier.com/Locate/Technovation

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Technovation 24 (2004) 773–777 www.elsevier.


Amex’s strategies for launching the smart card innovation
J. Wonglimpiyarat ∗
The National Science and Technology Development Agency, The National Metal and Materials Technology Center, 114 Thailand Science Park, Paholyothin Road, Klong 1, Klong Luang, Pathumthani 12120, Thailand

Abstract The objective of this paper is to analyze Amex’s pursuit of strategies in launching the smart card innovation. The study is based on Five Forces Model in Porter, M. (1980) Competitive Strategy. The Free Press, New York, and the Core Competences Building and the Dynamic Capabilities Model in Industrial and Corporate Change 3(3) (1994) 537. The study aims to understand why Amex has to go into a new smart card product. The strategic implications of this paper is that Amex attempts to use past core competences in the travel business in order to build up its new competences — smart card-based products. However, there are problems (e.g. unsettled standardization and electronic forgery) that Amex has to overcome in order to compete with capability products.  2003 Elsevier Ltd. All rights reserved.
Keywords: Strategy; Competences; Competitive advantage; Standards; Competition

1. Introduction To survive in business today, it is vital that a firm can do some things better than its competitors. However, this axiom is difficult to implement in practise. In the card business, there are many firms exploiting technology to develop the products on offer, e.g. charge cards, credit cards, debit cards, etc., so as to gain comparative advantage over their competitors. Such efforts to build up capabilities continue with the new smart card initiatives. This new technological opportunity has prompted competition between banks and non-banks. Although smart cards have yet to reach a stage of diffusion, there are a number of organizations looking for the competitive edge possibilities and the American Express (Amex) is no exception. The purpose of this paper is to analyze the American Express’s likely competitive advantage in using smart card technology1 to service its customers. The aim is
Tel.: +1-662-564-6500; fax: +1-662-564-6501-5. E-mail address: jaruneew@mtec.or.th (J. Wonglimpiyarat). 1 Smart card technology has been acclaimed as the next revolution of the financial service industries. It refers to the enclosure of a microchip within the confines of a plastic card. Similar to a credit card, a smart card stores information on an integrated microprocessor chip and is readable by insertion into a terminal that is able to access the data electronically. The smart card’s central processing unit (CPU) has the ability to store and secure information, and thus, monetary value

also to critique some aspects of Porter’s approach and argue that having competitive advantage also requires the development of ‘Core Competences’ and ‘Dynamic Capabilities’ . The introduction of this paper gives the principal argument. Section 2 discusses the theoretical framework of Porter, Core Competences building and Dynamic Capabilities as bases for analysis and evaluation in the following section. Section 3 explains Amex in the aspect of why it has to become involved with smart cards, how it builds up competences to achieve competitive advantage and how far Amex’s actions fit the theory. Section 4 presents the problems of standardization and security arising from the development of smart card technology. The final section suggests implications and draws together the theoretical issues and case analysis.

2. Theoretical framework The purpose of this section is to outline some important aspects of Porter’s approach and criticize certain deficiencies in the Competitive Forces approach. It
can be added and used as a particular application might require. It is the future of money since its capacity goes beyond the magnetic stripe cards in use today that only hold a cardholder’s identification number and account details.

0166-4972/$ - see front matter  2003 Elsevier Ltd. All rights reserved. doi:10.1016/S0166-4972(02)00181-5


J. Wonglimpiyarat / Technovation 24 (2004) 773–777

then goes on to explain why it is more useful to adopt the approach of Core Competences and Dynamic Capabilities. 2.1. Porter’s approach Porter pioneered the ‘Five Forces’ approach and ‘Generic Strategies’ for firms. According to him, the five forces driving industry competition are: relations with suppliers; bargaining power of buyers; threats of new entrants; threats of substitute products or services; and rivalry amongst established firms. He argues that a firm’s strategy is influenced by these forces and suggests the firm find a position in an industry to defend itself against these forces or to influence them in its favor (Porter, 1980). In the real world, it is difficult to find a completely defendable position. For example, Amex is trying to find a position in smart card technology by targeting frequent air travellers but its position is vulnerable to attack from competing companies. Upon the firm’s becoming aware of these forces, Porter argues that the firm must choose from amongst a number of ‘Generic Strategies’: overall cost leadership, product differentiation and focus as a route towards competitive advantage (Porter, 1985). Mintzberg (1988) criticizes Porter’s generic strategies for being incomplete because they only focus on business strategy in the first place, while Johnson and Scholes (1993) suggest that the firm may face a problem in translating such strategies into practise. For example, even if the management of the firm makes a strategic decision to move from where it is to where it would like to be, it may be constrained by limited resources or management’s ability to do so. On the one hand, Porter’s approach seems to be static or one-dimensional in the sense that it only looks at outside forces. This is not adequate to provide strategies for a firm to gain a competitive advantage. On the other hand, from a dynamic perspective, it is necessary for the firm to build up core competences and have dynamic capabilities. 2.2. Core competences building Porter’s five forces approach (1985) implies that path dependencies are not important. Unlike Porter, Teece and Pisaro (1994) put emphasis on path dependencies as factors that can influence the way ahead. In other words, where a firm can go is also shaped by the path it has taken in the past. It appears that Pavitt agrees with Teece and Pisano in that what a firm can do in the future is constrained by what it has been able to do in the past (Pavitt, 1989; Pavitt, 1986). This is in accordance with Nelson and Winter’s view that the firm’s competence building is path dependent because it is shaped by its routines (Nelson and Winter, 1982). In the case of Amex’s stepping into the Smart card

applications field with a focus on business travellers, the viability of this new product needs to be built on its past experience in the card business, its strength of having a broad customer base of cardholders, a global brand, its reputation as a truly global company and its success as a charge card company. So, new competences are related to past experience. If the path dependencies were not important, the choice of the smart card as a new business venture would have no connection to Amex’s past activities. In fact, a link between past, successful ventures and the acquisition of new competences is likely. Miyazaki (1995) views competence building as a process of trial and error and continuous learning. Pavitt (1991) agrees that core competences can be developed by learning and the accumulation of learning will ultimately produce a specific result for each firm. This process can be regarded as a way of building up core competences which give the firm a competitive advantage in the long run (Prahalad and Hamel, 1990). Such competences building should be complementary to being proactive in response to changes since firms are dynamic entities and therefore, the ‘dynamic capabilities’ approach is necessary for the firm to carry out its new aims. 2.3. Dynamic capabilities The ‘Dynamic capabilities’ approach is viewed by Teece and Pisano (1994) as a source of competitive advantage since it underlines the importance of dynamic change and corporate learning. According to them, the term ‘dynamic’ refers to the changing environment and the term ‘capabilities’ refers to the role of strategic management in reconfiguring organisational competences in response to the changes. This approach is not static or one-dimensional as Porter’s description tends to be because it is built upon a continuous assessment of a changing environment. In the card business, it is difficult for firms to develop ‘dynamic capabilities’ successfully since the environment is complex. Fierce competition has already caused Amex to lose some of its market share to Visa and MasterCard. As for the upcoming competition in smart card technology, MasterCard International has bought a 51% interest in Mondex International and is using Mondex as a platform to develop chip-based cards (Radigan, 1997). Visa also used the Java system of Sun Microsystems as the technological base for its smart card platform (Zbar, 1997). For the multi-application operating system, Visa launched Open Platform multi-application system to match Multos (a multi-application operating system developed by Mondex). Further, Visa and MasterCard are major players competing to launch mobile commerce in the mobile telephony market. It seems that this competition is forcing Amex to step further into the smart card business and such step is already underway. If

J. Wonglimpiyarat / Technovation 24 (2004) 773–777


Amex does nothing to improve the situation, it may result in its losing further market share and lagging behind its competitors. Such a response seems to fit Porter’s approach in so far as it answers the question of why Amex has to go into a new smart card product, but Porter’s approach does not help suggest how this is to be done, or on what basis. The Dynamic Capabilities approach does go further in helping to suggest how on the basis of previous experience and in developing new competences linked to this. The activities demonstrating that Amex has dynamic capabilities to respond to changing market circumstances are further explained in the following section.

3. Analysis and evaluation of the theories applicable to Amex’s Smart card initiatives In this section, the Porter’s approach is matched to Amex’s adoption of new strategies in order to analyze the likelihood of Amex’s gaining competitive advantage from using the smart card technology to serve its customers. For the main argument of this paper, the Core Competences building and Dynamic Capabilities approach are also applied to analyze Amex’s activities to see to what extent it can explain how the company builds upon its competences and the basis of the decisions it takes to do so in order to achieve competitive advantage. 3.1. The circumstances which prompted Amex to develop the Smart card and how far this fits Porter’s approach Porter’s approach is helpful in its consideration of outside forces which cause firms to be proactive in their selection of strategies (Fig. 1). For example, in the smart card competition, MasterCard has acquired Mondex and Visa has developed Visa Cash as its electronic purse

brand for its smart card technology. This may be the outside force that has pushed Amex to acquire a global licence from Proton to deploy smart card applications. With the changing competitive landscape from physical world into virtual world, Amex saw the necessity to use the internet strategy. Amex adopted the smart card technology to improve the service quality in servicing the customers by combining the payment applications with its frequent flyer programmes. Seeing the future of smart cards in loyalty programme as the integration of the internet access and payment, Amex launched the Blue Card in 1999 with the online strategy to capture the customers making purchases over the internet.2 As a consequence of these forces, there is now global competition in smart card products particularly the threeway race between American Express, Visa and MasterCard. These are the circumstances that prompted Amex to consider the new product. At present, although Amex is the leader in Smart card technology, its leading pace is vulnerable to the unceasing developmental work of its competitors in a dynamic world. 3.2. Amex’s competences building with dynamic capabilities to achieve competitive advantage In responding to the changing market circumstances, Amex has targeted a group of frequent travellers for a particular reason, but based on past experience — the Amex card was previously targeted at business travellers, so Amex is using past experience and past market links to develop and promote its new product. On the one hand, Amex may have assumed that this was the best defensive position in the market place against competitive forces. On the other hand, it can be regarded as an attempt to match market needs with its competences

2 American Express Company Annual Report 1999, pp. 14; Credit Card Management, Vol. 12(1), April 1999, pp. 132–136.

Fig. 1.

Application of Porter’s ‘Five Forces’ approach to the case of the American Express.


J. Wonglimpiyarat / Technovation 24 (2004) 773–777

in the travel business, with an awareness that the products/services have to be developed from time to time to keep pace with the dynamic environment. The following dynamic management and technological activities suggest that the Dynamic Capabilities approach best explains Amex’s strategy. In other words, such a response shows that the firm has dynamic capabilities to exploit as Amex views smart card technology as the opportunity that could lead the firm to competitive advantage. It also confirms the commitment of Amex to develop not just general smart cards but smarter and superior smart cards. Amex has taken part in the smart card trials organized by the Association for Payment Clearing Services (APACS) in the UK to improve clearing time in using smart cards to transmit information. Amex has joined the Global Chipcard Alliance to take part in setting standards for the emerging smart card industry (Davis, 1997). The purpose of this participation is to provide customers with the value and the convenience of having multi-application, interoperable smart cards. This will help support all aspects of electronic commerce, including authentication, payment, and verification services. As the leader in airline loyalty schemes, Amex focused on the global programs — Membership rewards. Amex pursued the strategy to use its brand strength to provide the customers with special recognition by focussing on frequent flyers (Kaplan, 1995; Shaw, 1991). Amex aimed to improve its service quality in terms of speeding travellers past check-in points at airports, hotels and car rental agencies, and streamlining the entire travel expense management process. Amex has set up the Smart Card Centre of Excellence3 and has done much technological research to build up competences and cope up with this new technology. Amex aimed to launch personalised smart cards — combining electronic ticketing, telephone, retailer loyalty and credit, debit, E-purse and other applications on a single smart card. The above tasks reflect Amex’s strategy to develop technological strength. However, Amex’s ability towards competence building is based on path dependencies. In other words, if Amex had not already been involved in the card business, it would have had more difficulty in breaking into this market.

4. Problems to challenge the American Express Although Amex has dynamic capabilities as described in the previous section, its leading role in developing the smart card at present may not necessarily translate itself into achieving competitive advantage since there are challenging problems that remain to be solved. 4.1. Standardisation problem In today’s Smart card technology, the unsettled smart card standardisation has become the biggest problem in selling the technology to consumers (Smith, 1990). At present, although there is a current attempt to carry out chip migration towards the CEPS standard (Common Electronic Purse Specifications), the players in the smart card industry still compete to launch different smart card standards. The problem of standardization then poses the problem of interoperability (Damore and Caisse, 1997) (the interoperable smart card system is the key to smart card adoption on a global scale). Since computer networks for electronic funds transfer require security standards as well as communications standards for implementation and operation, Amex is probably aware that the greater the delay in overcoming the difficulties of standardizing protocols for encryption, the slower electronic commerce via internet using smart cards will be, and this may prevent its pervasive use in the future. 4.2. Security problems Fraud is one of the biggest concerns connected to smart cards. With all the information about the cardholder as well as the cash value stored in the chip, smart card users can undertake transactions from airline, hotel and car rental reservation services to payment via the internet to travel agents’ web sites by using a computer keyboard. This may attract hackers to tap in and transfer forged value on to cards. Although many smart card companies say there is no fraud risk, in fact, the risk is real once computer hackers know how to break into the chip. In some cases, computer hackers may transfer details to other pieces of plastic and cardholders may not notice anything until the arrival of their monthly statement. Work directed to solving the problem of counterfeiting is done by the Association for Payment Clearing Services (APACS). Also in Britain, plans are now underway to make cards available for electronic payments over the internet using advanced encryption technology to protect against computer fraud (Theoharides, 1997). Currently, the major technological difficulty of smart cards is the provision of security against fraud to expand card usage into internet payments. In order to achieve competitive advantage, it is necessary for Amex to solve the problem of electronic forgery as soon as possible. The reason is that timely entry into

3 The Smart Card Centre of Excellence was founded in late 1995. Its mission includes support for the successful development and implementation of smart card technologies with core American Express business units.

J. Wonglimpiyarat / Technovation 24 (2004) 773–777


the market is of importance since it now has other major competitors: Visa’s Open Platform, MasterCard/ Mondex’s Multos and Microsoft’s Windows for Smart Card. These are the major competitors who already have strong holds over large customer bases and who are ready in terms of financial resources to push their cards to achieve a critical mass of applications.

card arena without suggesting how to build up the internal competences to achieve competitive advantage. In answering how this was done, the Dynamic Capabilities approach reflects Amex’s use of its dynamic capabilities in order to create not just a Smart card but a smarter Smart card. Porter’s approach is useful but it is not a complete story and thus both approaches should be complementary. Furthermore, neither approach can predict short or long term success. References
Damore, K., Caisse, K., 1997. Vying standards could slow adoption of technology. Computer Reseller News 752, 219. Davis, S., 1997. Eight strong and growing. Telephony 232 (22), 33. Johnson, G., Scholes, K., 1993. Exploring Corporate Strategy. Prentice Hall, Cambridge. Kaplan, J.M., 1995. Smart Cards: The Global Information Passport. International Thomson Computer Press, London. Mintzberg, H., 1988. Generic strategies: toward a comprehensive framework. Advances in Strategic Management 5, 1–67. Miyazaki, K., 1995. Building Competences in the Firm. St Martin’s Press, New York. Nelson, R., Winter, S., 1982. An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge. Pavitt, K., 1986. Technology, Innovation, and Strategic Management. In: McGee, J., Thomas, H. (Eds.), Strategic Management Research, A European Perspective. John Wiley, Chichester. Pavitt, K., 1989. Strategic management in the innovating firm. In: Mansfield, R. (Ed.), Frontiers of Management. Routledge, London. Pavitt, K., 1991. Key characteristics of the large innovating firm. British Journal of Management 2, 41–50. Porter, M., 1980. Competitive Strategy. The Free Press, New York. Porter, M., 1985. Competitive Advantage. The Free Press, New York. Prahalad, C., Hamel, G., 1990. The core competence of the corporation. Harvard Business Review 68 (3), 79–91. Radigan, J., 1997. MasterCard gets smart with Mondex. US Banker 107 (1), 19. Shaw, R., 1991. How the smart card is changing retailing. Long Range Planning 24 (1), 111–114. Smith, R., 1990. Market for cards evolves slowly; standards still a problem. Computing Canada 16 (21), 70. Teece, D., Pisano, G., 1994. The dynamic capabilities of firms: an introduction. Industrial and Corporate Change 3 (3), 537–556. Theoharides, C., 1997. Smart money is on the smart card…though the race is too early to call. Bank Marketing, 13, 15 29(5) (13), 15. Zbar, J., 1997. Visa’s new smart card brew. Credit Card Management 10 (3), 80–82.
Dr. Jarunee Wonglimpiyarat is a Certified Public Accountant (CPA) and Science Policy Researcer at the National Science and Technology Development Agency, Thailand. She is the co-author of the Barclaycard Case Study in ‘Exploring Corporate Strategy’ (Europe’s best-selling strategy textbook), 6th edition of Prof. Gerry Johnson and Prof. Kevan Scholes.

5. Implications and conclusions There is a strong possibility that Amex has rigorously adopted a dynamic strategy based on core competences in the past. However, is this enough to give competitive advantage as there is a lot of competition and problems that may prevent Amex achieving this? The issue that Amex does not seem to explore is whether the business travel market is the best market or not. Amex has used past core competences in the travel business to build up its new competences, but it has not yet extended these competences to other fields. Therefore, even if Amex’s smart card is acceptable and becomes a market leader, it may only be the market leader in a relatively small market niche, i.e. the travel business. This conservatism may reflect careful planning and estimates of likely success but there may be other groups that could be potential Amex customers. Whether Amex is successful in keeping its overall market niche or not may depend on the facilities offered by other smart cards and the choices people make. If Amex does not have the facilities, it may lose market share because ultimate success is likely to be based on the services that the smart card provides and how far they fit the needs of customers. Amex strategies do reflect both approaches but these approaches need a more rigorous description to become guidelines for a company’ s choices. As at the moment, the approaches simply describe why they need to develop new strategies, but only to a certain extent how they do it or what precisely they need to do. These approaches cannot help companies to make specific decisions because they do not solve all the problems companies have. Hence while these approaches help explain the background to the circumstances and to the type of actions companies take, they cannot help companies predict likely success or failure as pointed out here. In conclusion, Porter’s approach of ‘Competitive Forces’ helps explain why Amex had to enter the Smart

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