SOURCES OF POWER AND TRANSFORMATION PROCESSES :

A FRENCH BANK FACING TECHNOLOGICAL INNOVATIONS

Philippe VERY

Philippe RIOT

Groupe ESC Lyon

Business Policy Dpt

France

PRELIMINARY REMARKS

The aim of this paper is not to illustrate either effective or ineffective management

practices. When we speak of economic sub-optimization, we do not judge the choices that

have been made, because these choices could be considered as optimal from a non-

exclusively economic point of view.

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INTRODUCTION

Power appears to be a key dimension to understanding the adaptation process. The

distribution of power inside and outside the firm has a significant impact on organizational

change. The objective of this research is to investigate how the distribution of power and

the sources of legitimacy of the dominant actors influence the choice of the adaptation

process

For this purpose, we looked at the change process implemented in a French retail bank.

During the last 20 years, the retail banking industry has been concerned with major

technological innovations linked to the development of computerization and of

telecommunication systems. We studied how these technologies have been integrated by

the bank in question and analysed the distribution of power within this company. We then

relied on existing litterature to identify the sources of power of the dominant actors and

examined whether these sources explained the choice of the adaptation process.

The conclusions of the case study were used to propose a comprehensive framework,

relating power to the choice of the adaptation process. Further research obviously will be

necessary to validate this framework.

1. FACTORS INFLUENCING THE ADAPTATION PROCESS

Environmental determinism, voluntarism and the adaptation process

Organizational Ecology assumes that organizations are characterized by relative inertia :

radical transformations of firms are initiated by environmental pressures (for instance

external technological innovations) and not by the firms themselves (Hannan and Freeman,

1977). In other words reflecting the Darwinian perspective, the environment selects

organizational forms (Boone and Van Wittelloostuijn, 1995). This deterministic conception

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has been opposed to the voluntary approach of change, recognizing the major role that

managers play in the decision-making process and in the implementation of change

(Aldrich, 1979; Child, 1972).

Weick (1979), Astley and Van de Ven (1983) argue that these two conceptions of

organizational change, each relying on unidirectional causation, are problematic and

unsatisfactory for theorists and practitioners. Hrebiniak and Joyce (1985) argue that

voluntarism and determinism are independant variables that may coexist. They suggest that

the interactions between voluntarism and environmental determinism define adaptation.

Changes result from this interaction and from the interplay of various political and

economic forces (Dahl, 1963). Adaptation is a dynamic process that is the result of the

relative strength and type of power between the organization and its environment.

Power and the adaptation process

Power suggests an imbalanced relationship between two individuals or groups who interact

(Crozier and Friedberg, 1977). Actors use their power to secure favoured ends. Power is a

resource, used when there is divergence concerning the choice of actions. Consequently,

power influences action in a way that best serves the actor, but not systematically the

organization.

According to studies on power (e.g. Dahl, 1963 ; Jacobs, 1974 ; Pfeffer and Salancik, 1978

; Pfeffer, 1981), the relative power of dominant actors inside the organization and external

stakeholders explains the prepotency of voluntarism or determinism in the adaptation

process. Therefore it is important to understand the sources of power of the main internal

and external actors to understand the change process. Different perspectives have been

proposed concerning these sources of power. For Pfeffer and Salancik (1978), the power of

an actor is based upon his control over scarce resources. For Cyert and March (1963),

Hickson and al. (1971), Crozier and Friedberg (1977), the power of an actor results from

his ability to cope with uncertainty. Pfeffer (1981) considers that these two approaches are

linked because "uncertainty coping capability can be defined as a critical resource in the

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organization" (p. 109). For instance, many authors have studied the sources of power of

technical experts (e.g. Crozier, 1971, Pfeffer, 1981, ...). Their power results from the

possession of specialized skills : they have access to specific information, and can thereby

deal with uncertainty as long as this knowledge is central to the organization and not

shared throughout the firm (Crozier, 1971). Experts benefit from a legitimate power : their

official function is to continuously cope with uncertainty.

To sum up, power relies upon the specific capability of an actor to master uncertainties.

Hrebiniak and Joyce (1985) recognize that the sources of power can change over time and

consequently affect the adaptation process; in other words, the adaptation process can be

considered as dynamic. However, according to Pichault (1995), the system of power

distribution in an organization is characterized by relative stability. In his research on

technically related organizational change, he found that, despite the introduction of new

technologies, the power system remained unchanged in the four cases studied. Miller and

Friesen (1984) showed that radical transformation of the power system, with the

emergence of new actors, is unusual. When such a redistribution occurs, the organizational

adaptation process is likely to change.

2. RESEARCH QUESTION AND METHODOLOGY

Research question

This brief review of the litterature shows that power is a key dimension to understanding

the adaptation process. The distribution of power inside and outside a firm has a significant

impact on organizational adaptation.

Dominant actors inside an organization want to keep their power intact. They need to

control the adaptation process. However most of the external factors that call for

organizational adaptation are not controlled by these dominant actors (e.g. external

technological innovation). Our research questions were built around these considerations :

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- how do the dominant actors manage the process of change in a way that preserves

(or reinforces) their power while answering to external pressures ?

- What are the effects of this management under pressure upon the process of change

itself, the types of selected changes inside the organization and the way these changes

are implemented ?

In fact, this research investigates how the distribution of power influences the adaptation

process at two levels : at a micro-level inside the organization and at the level of the whole

corporation. Indeed, when researchers deal with change, either they consider the micro-

level, seeking for the changes that have occurred, or they consider the overall process of

change at the organizational level. Our research tries to distinguish between these two

levels. Our assumption is that power distribution could affect each level differently : it

could influence the selection of specific micro-changes and also of the whole process of

change.

In this research, we do not only identify the power system, but also the sources of power of

the dominant actors. The understanding of power sources gives insights into the underlying

reasons explaining decisions. It seems for us necessary to study these sources in depth to

answer our research questions.

Methodology

We worked on a case study dealing with the adaptation process of an organization in the

context of technological evolutions. The litterature devoted to new technology integration

largely considers these external evolutions as determinants of the organizational change

that becomes necessary to achieve greater efficiency and better results. Consequently, this

situation appears to us interesting, in order to study the influence of the sources of power

on the adaptation process : new technologies sometimes appear unavoidable for the firm,

thus obliging the organization to integrate them. Thus technology should lead to change.

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We studied the case of a large French retail bank, that we will call Bank X, over a 20 year

period. This bank was concerned, and is still concerned, with major technological

innovations linked to the development of computerization and telecommunications. In the

first phase of our research in 1994 and 1995, we interviewed the six main top-managers of

the bank and examined many internal documents presenting the changes in the

organization. The interviews were intended to collect individual perceptions on industry

evolutions and organizational adaptations at Bank X. We used open questions. Each

interview, approximatively two hours long, was recorded and later trancribed onto paper.

They were then analysed. The key concepts and dimensions quoted by each manager were

identified with the relationships between concepts. The interviews were then compared. In

addition, we collected perceptions of more than two hundred middle managers of Bank X

during training sessions. Around twenty managers participated in each session. These

managers, split into subgroups of five persons, spent between three and four hours to

answer to the same questions as those asked to the top-managers. Their perceptions

allowed us to assess that the content of the top management interviews was more than

simply a "politically correct" external communication.

The objective of such empirical work was to identify organizational changes perceived as

important by the interviewees; we looked at the chronology of changes and, for each

quoted adaptation, at its nature, its localization in the organization, its perceived size and

its consequences on economic performance, employee productivity and social climate. We

also checked what had remained unchanged in the organization during these 20 years.

In the second phase of the research, we identified the dominant actors inside and outside

Bank X : they revealed to be the very top-managers of Bank X and the French State. We

then returned to the litterature to understand the sources and the amount of power of these

stakeholders and the relationships between them. We also verified whether the power

system had remained stable over the 20 year period of our study.

In the third phase of the research, we put together our findings of the previous phases to

answer the research questions and then build a comprehensive framework of change

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relative to this case study. We finally discussed the possible extensions of this framework

to other firms and in other contexts, and examined the probable evolutions of Bank X in

the future, in the light of our framework.

3. PRESENTATION OF THE CASE STUDY : BANK X AND MAJOR

TECHNOLOGICAL EVOLUTIONS IN THE RETAIL BANKING INDUSTRY

Introduction

Bank X is an old French bank, formerly state-owned, which was privatized at the end of

the 80s.The equity is split between a great diversity of shareholders (see the chapter

dealing with the power distribution at Bank X). Bank X has developped a huge network of

branches and agencies in France dedicated to retail banking.

For the past twenty years, Bank X has achieved a good level of profitability compared to

its competitors in France. But over the last few years, from an international perspective,

Bank X has achieved low returns compared to foreign competitors such as British banks.

This situation is largely due to the specificities of the French banking industry, which is

still highly regulated by the State. However, Bank X managers recognized in 1995 that

they had more and more difficulties to maintain their economic performance in France. We

will now present the reasons for these problems, because they are related to our research

subject.

The reasons explaining the decrease of profitability.

The French banking environment was highly regulated 20 years ago. At that time, banking

activities were growing and every bank could easily find ways to achieve growth and

profitability. At the beginning of the 80s, the industry reached a stage of maturity and the

State began to partly deregulate the competition. New entrants arrived : foreign banks,

insurers, hypermarket chains, financial institutions specialized in new technologies,...

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Rivalry among competitors increased, as did the bargaining power of customers and

suppliers. Customers (individuals, firms, associations,...) are also suppliers in this

industry, because they deposit funds at banks. The other type of supplier is the financial

market. Banks generally need to borrow money on this market. The cost of supply on the

financial market depends increasingly on the evaluation of the bank by international

agencies such as Standard & Poor's. This evaluation is based on several criteria , such as

the amount of equity of the bank, its level of profitability, the variability of this

profitability over time. In other words, if margins decrease, the cost of supply is likely to

increase - other things being equal -, with a consequent negative impact on margins and so

on . Figure 1 presents a simplified cost structure of retail banking.

Today Bank X faces a problem of profitability as explained by the factors detailed in the

previous paragraph. With increased competition and price wars, Bank X cannot increase its

prices very much. As the cost of supply from financial markets depends on the evaluation

of the bank, and as the international agencies have a rather negative evaluation of the

French banking system, the cost of inputs will not decrease in the future. Consequently,

one of the major challenges of Bank X today is to decrease transformation costs and/or to

develop a differentiation strategy in order to escape from this vicious circle.

INPUTSFunds

- customers- financialmarket

TRANSFORMATION COSTS

- Costs of conception of products- Commercial and marketing

costs- Back-office costs- Infrastructure costs

OUTPUTSPRICES A/ A \

^* R '^^ G

IN Jw

* »COSTS RATING

t I

Figure 1 : the cost structure of a retail bank

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As many technological evolutions have penetrated the banking industry, we will now

examine how these technologies have been integrated by Bank X, the changes that have

taken place, and their consequences on transformation costs and output prices.

Technological Innovations in the banking industry

Two major innovations have been introduced in this industry : information technology and

telecommunication technologies.

* Information Technology (I.T.)

By I.T., we consider the introduction of computer-based information systems that began to

spread rapidly throughout the banking industry in the 70s and then in the 80s. As Pichault

(1995) explains, the introduction of information technology profoundly modified pre­

existing work procedures : «each change project aims at higher productivity, either in

terms of work intensity (physical productivity) or cost reduction (productivity in value)»

(p. 457). All the cases studied by Pichault were «accompanied by an increasing control of

individual performances, which is required in order to check whether productivity has

really increased (without control, there is no means of monitoring the accomplishment of

initial objectives))) - (p. 457).

Many retail banking activities were affected. At the beginning, only administrative tasks

like data entry (cheques, transfers...) were computerized. Then computers were used to

create new products, to evaluate the risks linked to customer transactions (techniques of

scoring, risk mutualization,...), to help commercial employees when giving advice to

customers, when prospecting,...

Information technology induced changes in the distribution of tasks and in the nature of the

tasks performed by most of the employees.

I.T. evolutions are continuing. In fact, the last 20 years in the banking industry have been

20 years of continuous I.T. evolution. The French banking sector is still the first investor in

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I.T., compared to other service or industrial sectors : on average, I.T.expenses represent 10

% of banking turnover. And personnel costs constitute the largest part of that expense

(Perez, 1997).

Telecommunications

The second major technological innovation is linked to the development of

telecommunications that has given birth to home banking. Home banking comprises

different technologies affecting the delivery of banking services - Traditionaly, the

customer would go to the local branch and deal directly with the cashier or another agent.

Today, following back-office and front-office automation linked to I.T. development,

bankers face the automation of the customer interface - Automatic Teller Machines and

Smart Cards were the first step in that direction -. Now customers can meet their banker

via phone, PC or Videotex. In France, the first distant interfaces were launched in the mid

80s. Using a touch-tone telephone, the customer transmits requests and obtains information

on his accounts. Or using the national videotex platform Minitel, the customer has a screen

display of information and can make transactions with the bank. At the end of 1991, 10%

of the traffic via Minitel was devoted to home banking services.

PC - based access was then created, using connections through a modem to the public

telephone network or Minitel.

Today, some new entrants in the retail banking arena have chosen a value chain

configuration based on the concept of Direct Banking. They offer a narrow range of

products, that are delivered only by phone 1 . These new entrants are gradually penetrating

the French market, attracting customers away from the classical branch network banks.

According to Deloitte, Touche and Tohmatsu's study (1996), the average cost of direct

banking is 40% lower than the cost of network banking. Moreover, direct banking is more

' Direct banking is very different to the initial phone offer. The customer now directly negociates with an employee who is qualified to give him advice when necessary. This direct linkage allows to personnalize the relationship with the client. Initially, the operations by touch-tone phone were very limited: the customer at best listened to a recorded voice.

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commercially aggressive because its employees don't spend as much time with customers

and thus have more time to prospect potential clients.

The top-management of Bank X has already defined how to integrate these new delivery

channels. Let us look now at the changes that have occurred in their organization during

this 20 year period of intense environmental evolution.

4. THE CHANGE PROCESS : RESULTS FROM THE INTERVIEWS

Preliminary considerations

The results of the 6 interviews are presented below. We have identified substantive

modifications and unchanged characteristics in the organization. These elements will be

successively presented after some general considerations about the interviews.

We have found a great convergence in the perceptions of the 6 top-managers of Bank X -

All the interviewees are members of the directors' commitee and have other regular

meetings together. Thus, they have many opportunities to share information and they all

participate in the decision-making process. These frequent meetings certainly explain, at

least partly, the similarities between individual perceptions. Moreover, the perceptions of

middle managers, informally collected, show that, even if less information seems available

when you go down the hierarchical structure, major external stakes and internal strategic

orientations are shared by these managers. Nevertheless, the middle management does not

clearly perceive the implementation logic and does not understand the decisions coming

from above.

Consequently, as the perceptions about stakes were converging, we decided to gather the

results of the interviews into a single synthesis.

Another important preliminary consideration concerns industry evolutions. All the

interviewees acknowledged the impact of computerization and of telecommunication

technologies on their industry. However, they insisted on the fact that other evolutions

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(deregulation, demography,...) have simultaneously altered the rules of competition. This is

why the interviewees sometimes found it difficult to isolate the influence of technical

evolutions from other environmental changes.

Last but not least, the interviewees perceived an acceleration in the rate of internal changes

over the period of the study. As one interviewee claimed, paraphrasing Alice in

Wonderland : « we have to run faster and faster ... to stay in the same place !»

Let us now look at the changes that occurred at Bank X.

Main organizational changes

The synthesis of all interviews allowed us to identify 5 main changes in the organization.

Some of these changes are clearly linked.

The nature of tasks in the organization has evolved with the integration of new

technologies. For instance, yesterday, agency employees would frequently meet customers

and had some autonomy to negotiate prices and conditions of transactions. Today, they

spend more time carrying out administrative duties (recording credit transfers, checking

the balances before carrying out a transaction,...). They collect customer information which

is then transmitted to central services where the conditions of the offer are defined, thanks

to general criteria elaborated for the whole population of similar customers. Nowadays, the

agency staff is asked to present standardized offers in a way that allows the client to think

that he is benefiting from a customized service.

New specialists have been recruted like computer engineers to run the information system

or experts of new product conception. These specialists arrive with the skills required to

perform new «technical» tasks. The interviewees acknowledged that changes in the

nature and the distribution of tasks have been continuous over the past 20 years.

The formal structure itself has evolved. New entities have been created and added to

existing entities : for instance, computer services, the videotex service, the phone service,

... And the procedures of coordination have increased between entities. This evolution has

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not been radical : the initial structure was kept more or less intact, but the complexity of

management has increased with the addition of these new entities.

Flows of employees have been transferred . Back-office activities have been increasingly

centralized to collectively treat information about individual customers. Consequently,

many people have moved from back-office to front-office, in order to reinforce the

commercial strength of the bank. Moreover the diminution in the number of regional

branches has been accompanied by the creation of new functions (for instance, assistant to

the regional manager), and the remaining regional headquarters have welcomed more staff.

As one can see, changes for employees have occurred, not only on the individual level

(task content), but also on a collective level.

The control system has been reinforced. At different levels in the organization, the control

of productivity, of turnover evolution and of profitability evolution has increased as time

passed. Reporting procedures and control systems were also perceived to be increasingly

sophisticated. Interviewees explained this reinforcement of the control system by the fact

that, with the decrease of performance, the bank needed to keep a closer eye on its

economic situation.

These were the changes perceived as the most important in the evolution of the

organization during the last 20 years. These changes affected the employees, their tasks,

the structure and the control systems of Bank X. However, the interviewees agreed to

consider that some aspects of the organization had not evolved in the past and should not

evolve in the near future.

Stable characteristics of the organization

Three main elements have not changed over the period : one refers to the strategy, another

to the organizational design and the last one to human resources.

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The corporate goal of Bank X has remained unchanged : they want to be a leading

universal retail bank in France. In other words, Bank X persists in its strategy of delivering

all banking products to a large part of French customers. When interviewees describe the

strategy of Bank X, they say : « we want to sell more products to our customers ».

According to them, present strategy is built around 4 axes :

to increase the number of products sold to one customer : banking products, but also

insurances.

- to launch new products using new techniques of back-office computerization, like

techniques of scoring, even if product innovation seems to offer only temporary (short

term) advantages : competitors quickly imitate banking products.

- to develop a total quality management approach, in order to increase customer

satisfaction and to improve the public image of the bank. Such a differentiation is

difficult, but could allow to increase prices.

- to diversify the delivery systems for Bank X products. For the top-managers of Bank

X, there is greater complementarity between delivery systems rather than substitution.

Today, the bank proposes its branch network, Minitel and touch-tone telephone

access. In a near future, the bank will offer its products through a direct phone access,

with specialized employees dealing directly with clients by this telecommunication

system. Tomorrow, Bank X may well use Internet.

The second stable element is of organizational nature : the hierarchical structure has

remained unchanged over the last 20 years. This structure in fact tended to be reinforced,

with today, more hierarchical echelons than in the past. Centralization of decision is very

strong. Even if functions and tasks have evolved, the overall structure of decision-making

and control has not changed.

The third stable element deals with human resources. Technological evolutions have had

no significant impact upon the total number of employees in retail activities. Bank X used

only legal procedures of early retirement and did not replace retired employees. But even

In conclusion, Bank X tries to implement a differentiation strategy and simultaneously search for an increase in its turnover. Notice that these choices do not emphasize the reduction of transformation costs (cf. figure 1): decision-makers expect that the increase in turnover will not involve an increase in these transformation costs.

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with these measures, the number of employees remained quasi-stable during the period in

question3 .

To sum up, the first phase of the research allowed us to analyse in depth the changes at

Bank X. The results of the interviews and the complementary readings of internal

documentation are shown in Table 1 : they show that technically related organizational

adaptation occurred at Bank X, but that the strategic orientation, the hierarchical structure,

and the number of employees remained stable over time (it implies that transformation

costs remain unchanged ...). This adaptation process raises the following question : why do

some aspects of the organization change, while others remain intact?

MAIN ORGANIZATIONAL CHANGES

STABLE ORGANIZATIONAL COMPONENTS

Nature of tasks Distribution of tasks (more and more specialists) Addition of new entities to the existing structure Massive transfer of employees between structural entities Reinforcement of the control systems______________

Strategic orientation Hierarchical structure Number of employees

Table I: change and status-quo at BankX (1975-1995)

The second phase of our research tries to answer this question. As we have pointed out in

the first part of this paper, power influences the adaptation process. In this second phase,

we look at whether the power distribution at Bank X can offer a plausible explaination.

} We looked at the evolution of the number of employees in company reports, in order to validate this perception. A comparison with foreign competitors also confirmed this fact :in countries like Great Britain, big retail banks have largely reduced their workforce during the past 20 years. And they announce that they will continue ...

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5. POWER CONFIGURATION AT BANK X

The former review of the litterature shows that power is a key dimension to understanding

the adaptation process. The distribution of power inside and outside the firm has a

significant impact on organizational adaptation. To understand the distribution of power, it

is necessary to identify the sources of power of the dominant actors.

Our objective here is to analyse the potential influences of these sources of power on the

adaptation process at Bank X. We will first identify the dominant actors, then the sources

of their power. Finally, we will try to relate the sources of power with the changes and with

the stable characteristics of the organization.

Power distribution at bank X

The power system at Bank X is very concentrated. The top management of each division

(French branch network is one division) has the responsability to analyse the evolutions of

the competitive environment, of the competitors, and of the competencies required in the

future. They are also responsible for the financial and economic results of their division.

Based on their initial diagnosis, these divisional top-managers must propose strategic

alternatives for the bank development. These alternatives are then presented to the

Directors' Commitee (DC). This commitee consists of the heads of each division, the

heads of each support function, the chairman and the chief executive of Bank X. The DC

meets every month. Its functions are to initiate projects, to define strategic orientations, to

coordinate divisional development, to decide between alternatives proposed by divisions

(or to reject them), to allocate financial resources to divisions and to launch the diffusion

of strategic messages within the organization . Among the members of the DC, perceptions

and facts5 show that the general manager and the chief executive are often the actual

deciders. Accordingly, the distribution of power at Bank X is highly centralized in the

hands of essentially two persons.

4 This information comes from internal documentation.3 For instance the decision to launch a training program for middle managers is taken by the chief executive, not by the top- manager responsible for retail banking activities.

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However, interviewers noticed that a trend towards decentralization has been achieved in

past years. Twenty years ago, strategic alternatives were often elaborated personally by the

DC. Now, most of the time, they are elaborated at the divisional level before submission to

the DC. Interviewers interpreted this evolution by the increase of complexity of banking

activities. Macro-economic and competitive pressures, technological changes, have meant

that Bank X has had to redistribute tasks within the organization, with more and more

specialists dealing with specific technical problems : computer-system managers, new

product developers, videotex access experts,... As the complexity of tasks increased, the

top-managers of the bank were no longer able to understand the stakes inherent to each

function in the value chain. To rely on experts became imperative.

As we have seen before, many authors have mentioned the extent of power characterizing

technical specialists. The legitimate power of an expert is based on his specific ability to

cope with uncertainty. This finding implies that power distribution could have changed at

Bank X over the past 20 years. In such an organization where task complexity increases,

Galbraith (1973) argues that the distribution of power is modified, favouring skilled

experts. The resulting dispersion of power among experts requires more and more

coordination inside the organization. This coordination must be carried out with loosely

coupled mechanisms. Mintzberg (1979) adds that the decision making process must be

decentralized.

In fact, the analysis shows that the overall power configuration at Bank X remained

unchanged. Even if experts are irreplaceable, their power of decision is limited. They are

the only ones who can propose adaptation alternatives, but they do not formally decide

which alternative is to be implemented. Important decisions systematically need to be

agreed upon by the DC or directly by the chief executive or the chairman. The increasing

task complexity has not involved so much decentralization in the decision making process

as Mintzberg (1979) thought. It appears that the main top-managers have held onto most of

their initial power over time. For instance, 36 important themes were discussed by the DC

in 1995, of which 23 concerned retail banking activities (most of these propositions were

elaborated by experts). The structural arrangements at Bank X show that the organization

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operates as a centripetal system of influence (Mintzberg, 1983), where power is

concentrated at the head of the strong hierarchical line. Let us now examine how and why

the most powerful actors have succeeded in maintaining their dominant influence for

twenty years.

The sources of power of the dominant actors

Once the dominant actors had been identified, we relied on previous research, especially

that of Bauer and Bertin-Mourot (1987), to determine their sources of power.

It is worth pointing out that several people have successively occupied the functions of

chairman and chief executive at Bank X. In other words, our analysis of the sources of

power will not focus upon the individual characteristics of today's actors. We looked at the

overall characteristics of this population of successive top-managers, assuming that their

power relies upon their ability to cope with uncertainty (Crozier and Friedberg, 1977).

Specific competencies, unique access to information or control over scarce resources can

provide this ability. We referred to the litterature to identify where the power of top Bank

X'managers comes from.

Bauer and Bertin-Mourot (1987) have elaborated a typology of top-managers based on

their process of nomination. The «owner-president» controls the equity of the firm; the

«state-president» controls relationships with the State Government who intervenes

formally or in secret to give him the responsibility of managing the firm; the «career-

president» is nominated thanks to his past experience in management.

At Bank X, the main characteristics shared by the successive top-managers is the fact that

almost all of them can be classified as «state-presidents». These managers indeed belong to

the elite of the nation.

The French educational system is known to be very elitist (Kessler, 1986). The best

students enter the French «Grands Corps de l'Etat». Three «Grands Corps» constitue the

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path to becoming «state-presidents» in the last part of the career, after years spent in the

French administration and in the ministries. These are the : «Corps des Mines», «Corps des

Ponts» and inspection des Finances». Most of the students who enter the «Corps des

Mines» and «Corps des Ponts» come from «Ecole Polytechnique», well known as the best

French «Grande Ecole». The «Inspection des Finances» gathers the best students from the

ENA («Ecole Nationale d'Administration»). All the chairmen of Bank X during the last

twenty years came from the «Inspection des Finances» ; some chief executives too ; only

one chief executive belonged to the «Corps des Mines». Today's chairman and chief

executive of Bank X have followed the route of inspection des Finances)) and the General

Secretary (the third most important function of the bank) graduated from ENA with the

best results of his year. In other words, the top management team of Bank X belonged and

still belongs to the elitist cast of the French society.

This elitist cast of «Grands Corps)), each having its own identity and outlets, is very

present in the French economy. According to Bauer and Bertin-Mourot (1987), in 1987,

39% of the chief executives of the main 100 biggest French firms were «state-presidents» ;

this rate increases to 70% for the top 20 firms! These authors have studied the sources of

power of this elitist class. They argue that a strong constituent of their power in the French

economy resides in the social network of each «Grand Corps». Each member of a «Grand

Corps» spends time with other members during professional and informal meetings.

Breakfasts and diners are frequent between members and contribute to the socialization of

the individuals to the cast. This network is the first place where «strategic» information

flows : for instance, when a function previously occupied by an Inspector of Finance

becomes vacant, the whole cast of inspection des Finances)) hands the information round

until another qualified Inspector is interested by the function and finds the right way to be

appointed. But, as the functions to pretend to are less and less numerous when climbing the

hierarchy of the French administration, career opportunities after ten years in this

administration essentially reside in industry. A member of a «Grand Corps» thus activates

the network to find a job at the head of a big private firm. Colleagues working in such

firms search for opportunities and propose his nomination when an opening occurs. In

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most cases, this member will be chosen by the administrators of the firm, because of his

unrivalled social connections in the administration that could be helpful to preserve the

interests of the firm. Bourdieu (1989) and Crozier (1995) acknowledge this complex

linkage between the industry and the State. Bourdieu (1989) explains that the power of the

elite, the desire to maintain it over time with the inherent financial advantages, prevent the

State and the French Industry from engaging radical changes at their respective levels.

Bank X belongs to this system. The top-managers have that kind of power, relying on their

past career in the administration and the ministries. Their personal interest is to keep, or

reinforce, their position at the head of the bank (for the chief executive, to become the

chairman of Bank X, or of another big firm), or to be appointed at the head of an even

bigger company. To achieve this goal, they must act in a way that:

- preserves the social position of their «Grands Corps». This means that they must be good

civil servants for the State, because the civil service is the essence of the existence of their

cast.

- preserves their power at the head of their organization. As each «Grand Corps» tries to

keep important functions in the administration and in big companies, they have no interest

in decentralizing the decision-making process within their organization.

The most powerful actors thus have personal and collective interests that are not primarily

of economic nature ; such non-economic stakes have already been identified by Crozier

and Friedberg (1977) in previous empirical research.

It is worth pointing out that the wave of privatization implemented by the French State at

the end of the 80s was organized in such a way that foreign competitors could not take

control of the newly privatized firms. For that purpose, a «tight-knit» group of

trustworthy French shareholders was constituted for each privatized firm. These

shareholders were choosen among the fifty most important French firms, which are linked

by a complex network of cross-participations in capital. Their top-managers belong to the

elitist cast described earlier.

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This way of privatization was applied to Bank X. Consequently, the interests of the main

shareholders and of its top-managers converge. This explains why we will solely rely upon

the main internal actors for further analysis.

6. SOURCES OF POWER AND THE CHANGE PROCESS AT BANK X

This analysis of power sources and personal stakes of the main actors enables us to better

understand the adaptation process at Bank X.

As Bourdieu (1989) shows, the elite at the head of the bank will try to avoid as many

possible radical changes as possible in the organization. Thus, even if technically related

changes occurred, it is not surprising if such changes were found to be incrementally

introduced.

One could have thought that the increase of technological uncertainty, the will to reduce

transformation costs and enhance profitability, and the competitive evolutions, should have

induced changes concerning the number of employees and the hierarchical structure. We

have seen that this was not the case.

Why the number of employees remained quasi-stable

Notice that this problem is rather recent : personnel costs were not a problem when

banking activities were growing. Personnel expenses took more and more importance in

strategic analysis as competition increased in the banking sector.

When we compare Bank X's strategic decisions with those of foreign competitors, it is

surprising to see how radical changes in the staff were implemented abroad. For instance,

in Great Britain, all retail banks possessing a branch network are reducing their workforce.

Barclays has suppressed 21 000 jobs since 1991, Natwest is intended to suppress 10 000

jobs over the next five years (Senges, 1997). On the contrary, the top managers of Bank X

who were interviewed considered the cost of the workforce as fixed : they reject the

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alternative of massive staff reduction to diminish the transformation costs of the bank, and

thus to increase profitability.

The analysis of the sources of power at the head of Bank X provides explainations to this

choice. Top managers must act as good civil servants for their State. The general policy of

the French State consists in favouring economic profitability and development of French

industry, while simultaneously maintaining social peace throughout the country. Social

peace and social development were emphasized in the 80s by the socialist government, and

they are maintained today as primary objectives of the liberal governement, particularly

because of the increasing rate of unemployment in France.

As the economic results of Bank X are relatively good in the French banking system, the

top managers must try to maintain that level of profitability without creating social clashes.

As long as this strategy can be implemented and as long as economic results remain

acceptable (for people who control the main resources necessary for the survival of the

bank), they will not dramatically decrease the number of employees using collective

dismissal procedures.

Another fact reinforces this analysis. The French banking industry is still highly regulated,

compared to foreign banking industries. The French State has always considered that the

management of money is one of its tasks. Consequently, if banks accept, and follow, the

regulation directives, the State per contra nurtures the banking system (providing money,

helping banks in poor financial situation, ...). As Bank X had continuously achieved an

relatively strong competitive position for 20 years, its top-managers were constrained to be

fair-play in this sector under State control.

To sum up, whatever the external pressures, the top-managers of Bank X have initiated in

the past incremental changes inside their organization so as to maintain social peace. This

is a reason why the number of employees has remained quasi-stable.

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Why the hierarchical structure remained unchanged

For 20 years, Bank X had faced major external evolutions : the introduction of new

technologies, smooth deregulation, increased competition, arrival of new entrants in retail

banking... But also many internal evolutions, more or less related to these external factors :

the development of new skills, redefinition and redistribution of tasks, coordination

problems, adaptation of the branch network, addition of new functions to the existing

structure...

Year after year, the complexity of management increased. Today, as the interviewees said,

technological innovations represent just one of the events that affect the strategy and the

organization of Bank X. Many problems have to be simultaneously solved and the search

for solutions can only be led by experts possessing the required skills in a specific

technical field. Consequently, changes have become more and more unforseeable and

uncontrollable by top-management.

As we have seen, the decision-making process has partly changed at Bank X, but with

statu-quo concerning the power of decision of the top-management team. Most of the

experts work in new services that have been added to the structure. The hierarchical line,

inside these services and for the whole corporation, has been maintained and even

reinforced over time, as have, at the same time, the means of control of hierarchical

procedures. Coordination between experts exists, but coordination is carried out to find

operational arrangements and to facilitate the elaboration of propositions that will later be

submitted to the top-management team.

The reinforcement of the hierarchical line cannot be explained by economic stakes,

according to Galbraith (1973)'s and Mintzberg (1979)'s arguments. Consequently, it has to

be explained by other factors. We have seen that top-managers need to keep their power,

so as to maintain the social status of their «Grand Corps». In other words, they must design

the organization in a way that will allow them to explicitely control the decision-process.

Since evolutions become more and more uncontrollable, since the organization needs

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experts with a legitimate power in their field, the reinforcement of the hierarchical line

with decisions taken at the top allows the top managers to satisfy their interests while

satisfying, as much as possible, the experts. The experts indeed have a great autonomy in

their functional area. The creation of multiple parallel services legitimizes the need for

experts at the head of these services : they are acknowledged for their skills. And there are

few hierarchical relationships between these services : most experts belong to the same

hierarchical level in the organization. The task of the top-management team today consists

in arbitrating between solutions emerging from the multiple expert services working within

the corporation.

The very top-managers also rely upon two support departments which are directly related

to them in the structure : the « direction of development» and the « audit department».

The « direction of development» is in charge of collecting information on industry

evolutions and macro-economic trends. This information is communicated to the top-

managers and help them initiate new projects. With this information about macro-

economic trends, the top-managers keep a close eye on evolutions. The « direction of

development» reports to the Chief Executive.

The « audit department»is attached to the General Secretary. Its function was originally to

verify that procedures were correctly applied by every entity (commercial agency,

functional service,...) inside the organization. This role has been widened in the past years

: auditors not only look at the respect of the procedures, but they also give

recommendations of organizational improvement to the audited entities. Audit is

considered as a noble function inside the organization, whose decisions must be applied.

Most of the auditors are young professionals beginning their career in this service and

recruited from the best French high schools : Polytechnique, HEC,... The «audit

department» appears to be one of the control appliances that best serve the top-managers'

interests. This department allows them to make sure that the hierarchical line is respected

and that everybody correctly complies with the system (social peace)6 . This is why the

0 In Bank X, a manager once launched new activities with high success rate; he worked as an entrepreneur, with no consideration of the procedures and of the hierarchical line. Middle managers called him : «the free electron». It is not surprising that, even if his skills were acknowledged, he was finally fired.

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Audit Department is the major track for selecting the future upper-managers (just under

top-managers) of Bank X.

To sum up, these two departments bring to the top-managers external information (control

of macro-evolutions) and internal information (control of the respect of the hierarchical

line). Subsequently, the strong hierarchical structure has been maintained for 20 years,

because it serves the top-managers' interests7 .

Discussion about strategic choices

We have described today's strategy of Bank X - From a pure economic perspective, this

strategy can be considered as sub-optimal, especially the chosen orientations concerning

home-banking. Home-banking is considered as a new way of providing services to existing

customers. A new entity has been created to launch direct banking, by phone, with

teleoperators answering to the demands of customers. In other words, each client of Bank

X will soon have the possibility to ask for services using the delivery channel that he

desires.

The implementation choices made by Bank X are economically sub-optimal : innovation

will not allow the bank to benefit from greater efficiency. Yet Deloitte, Touche and

Tohmatsu's study (1996) has shown that the cost of direct banking is 40% lower than the

cost of branch network banking. These productivity gains will presumably not be realized

by Bank X, for two main reasons.

- Pricing policy (not yet decided in 1996) : if prices are lower with the phone delivery

system, many customers of Bank X will no longer use the branch network for their

transactions. As the costs of the network are fixed and as the volumes of sales of that

network will decrease, this pricing policy will raise problems of network turnover and of

network profitability. If part of these fixed costs are attributed to the direct banking

service, they will be reflected in the prices of products sold by this channel. In this case,

We obviously do not neglect the fact that a consistent level of centralization is necessary in this industry, considering the high risk associated with banking activities. Nonetheless this centralization could reasonably be made within the « branch network division ».

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the direct banking offer will not be price-attractive for the customer and Bank X will not

achieve all the gains in efficiency that could be attained.

- Multi-bancarization of customers : 42% of Bank X' customers have accounts in other

banks or financial institutions. If prices through direct banking are higher than those of

banks specialized in direct banking, there is a great probability that customers will leave

Bank X for other suppliers. Moreover, direct banking reinforces the dematerialization of

the relationship between the client and his banker. The client today is better informed and

has a better understanding of banking products and services. Consequently, in the future,

he will meet the banker only when he needs advice. In fact, new delivery technologies will

involve a weakening of the customer-supplier relationship. Classical strategies to maintain

close and durable relationships, as at Bank X, have to be completely redesigned.

Consequently, the strategy pursued by Bank X seems to be economically sub-optimal.

Once more, the analysis of the sources of power can explain, at least partially, the choices

made by the bank. Nowadays like yesterday, Bank X continues to develop a strategy

characterized by limited improvements and ad hoc solutions applied to localized problems.

Top managers practice the art of «muddling mrough» (Lindblom, 1959) and changes are

incremental (Quinn, 1980). The economic sub-optimization is, however, accompanied by a

socially-based optimization for the top-managers of Bank X. They indeed found adaptation

means that contribute to maintaining social peace for some unpredictable time and to

maintaining the hierarchical decision-making process. To sum up, they took decisions

concerning strategic orientations and strategic implementation that were consistent with

their own objectives.

The study of Rowe (1994) confirms the importance of social considerations in the decision

-making process. Rowe tries to link IT investments and productivity gains in the French

banking sector. He explains why the integration of some new technologies was a failure in

large French banks : the full implementation of these technologies led to a redistribution of

tasks and the creation of new functions in network agencies; top-managers were frightened

by the extent of change required in the agency organization. Thus, they engaged in minor

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changes concerning the functions. Finally, these minor changes were not sufficient to

efficiently use the technologies.

According to Rowe, the same reasons explain why the « cheque-scanning » technology

was not diffused throughout the banking sector. This technology, developped by experts in

the mid-80s, allows to computerize the transfer of cheques between banks. Rowe estimates

that 2,5 Billions FF per year could be saved with this technology. Nevertheless, around 20

000 jobs in French banks are concerned with the transfer of cheques. The implementation

of « cheque-scanning » would thereby threaten these jobs. This is why bankers have not

yet decided to use this « old » innovation. However, a manager of Bank X recognized that

this technology would be implemented in the whole banking system as soon as a first

mover introduces it in his organization.

Rowe also found that, when compared to the US banking industry, the French banking

system suffers from underequipment and from a weaker exploitation of IT potential

throughout the branch network.

7. TOWARDS A COMPREHENSIVE FRAMEWORK OF CHANGE

This case study, in our opinion, adds new perspectives to :

- the debate between determinism and voluntarism,

- the influence of power in the organizational adaptation process.

First, this case study shows that the debate between determinism and voluntarism is often

ill-defined. Technological determinism does not really exist in this case, because the

organization does not systematically exploit technically related efficiency gains. The

rhythm and the modalities of the adoption of new technologies are strongly influenced by

the socio-political stakes of the top-managers. Their legitimacy in the French system

depends widely on their ability to maintain an internal social equilibrium together with a

level of economic performance suitable for the French administration. As long as this

minimum performance is achieved, the top-managers try to introduce necessary

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technologies in a way that does not threaten this social equilibrium, even if the bank does

not benefit from all the expected efficiency improvements. The technical innovations, as

much as possible, are presented as complementary to existing technologies and not as

substitutes. Each innovation is introduced through the creation of a new structural entity

managed by technical experts, and this new entity is juxtaposed to the existing structure.

This process of adding entities side by side increases the degree of complexity of the

interactions between the different technical and social systems which make up the

organization. In fact, top-managers are unable to deal with new technological

developments, and must rely on experts who will explore how to exploit them. Top-

managers are thus unable to anticipate the consequences that this new technology

integration will have on the existing internal systems and procedures. They do not even

know what the impact will be on the social equilibrium. This is why they can only proceed

by successive arbitrations : they have not the ability to cope with technological

uncertainties, they can only arbitrate between solutions, taking into account the potential

consequences of each localized incremental change in the organization. Clearly the global

process of change in this complex system is near-impossible to control. Managing the

global process of change thus raises a paradox : to maintain their individual position and

the collective position of their « Grand Corps » in the French society, the top-managers

need to control «the uncontrollable ». In fact, their interest tends to generate uncertainty

zones within the organization (except for themselves), so that no expert can increase his

power.

These findings call for a modelization of the change process. Pichault (1995) has recently

presented a model of change where he identified four ways of managing the change

process and the consequent potential reactions of internal stakeholders :

- if the power system is concentrated, and the style of management is panoptical, the

change has more chance of reinforcing the existing structures (perpetuation principle),

- if the power system is concentrated, and the style of management is political, the change

has more chance of being incremental,

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- if the power system is dispersed through the organization, and the style of management is

panoptical, the change has more chance of creating clashes,

- if the power system is dispersed, and the style of management is political, the change has

more chance of being radically innovative.

The case of Bank X does not fit very well into this typology. The power system obviously

is concentrated in the hands of the top-managers. But the management style cannot be

defined as panoptical (desire of rationalization) or political (no rationalist illusions, but

management of internal power relations). Bank X is somewhere between the perpetuation

principle and the incrementalism principle. In this case study, it would appear that the

sources of power of the most dominant actors explain more the process of change than the

management style. Figure 2 sums up the case study findings.

French State policy

Source of legitimacy of shareholders (French State)

Source of legitimacyof decision-makers

(French State)

Figure 2 : the process of change at Bank X

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Power is concentrated at the top, where social considerations are as important as economic

ones, because of the close relationships between the State and the bank. These links rely

upon the strength of each «Grand Corps» network in French administration and in big

firms.

Figure 3 presents an attempt to elaborate a comprehensive framework, dealing with the

choice of a change process when power is concentrated at the top. In our opinion, the

adaptation process is stable over time, whatever its nature : incremental, innovative,

perperuative (cf. Pichault, 1995). Two factors can oblige the firm to engage in a new

adaptation process, indeed these factors contribute to change the system of power

distribution : the first is quoted by Miller and Friesen (1984), who found that the

emergence of new actors is not the result of a deliberate choice, but the fact that the

previous dominant actors have failed to achieve expected performance. The second has

been identified in our case-study : the sources of legitimacy of the dominant actors.

Let us think about the future of Bank X and other comparable French banks. The power of

the top-management teams who manage many banks is based on «external stakeholder

relationships)). The external stakeholder here is the State. As the french State has fewer and

fewer financial resources, he will intervene less and less to provide finance to the poor

performers in the banking industry. Moreover, deregulation will occur in the (near?)

future, as it has occurred in most other European countries. This means that the links

between the State and the banks will certainly weaken. As several banks need to increase

their amount of equity to be competitive on the international market, it is quite possible

that new investors will replace the state as major stakeholders for the banks. These

investors will logically accept to become shareholders on the condition that the economic

performance of the targeted banks quickly improves. This condition, when we compare

French banks with foreign performing banks, imposes dramatic cuts in the transformation

costs, and in particular the personnel expenses. According to this scenario, social

considerations will no longer dominate economic objectives.

This example illustrates the impact that a change in the sources of power can have on the

choice of the adaptation process. To look only at power distribution does not give insights

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into the factors contributing to the choice of a process. It also does not allow to anticipate a

change of process. But the understanding of the sources of power offers much more

information on these subjects.

Factor influencinga change of the

adaptationprocess

Source of legitimacy : French State

i op-managers of Bank X

(elitist cast)

Preserve their interests,according to their source of

legitimacy

Factor influencinga change of the

adaptationprocess

Implement an incremental process of organizational change, as long as economic performance is acceptable

Twenty years of acceptable performance : the process of changebecomes a routine for the successive top-managers

at the head of Bank X

Figure 3 : Factors influencing the choice of the adaptation process

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CONCLUSION

The objective of this research, based on a case study, was to identify how power influences

the adaptation process. Today's business world, considered as very evolutive in terms of

technologies and competition, implies that firms are engaged in a continuous change

process. This research shows that the adaptation process is most of the time quasi-constant

: firms base their organizational evolutions on perpetuative, innovative or incrementalist

principles. In fact, the adaptation process becomes a routine when changes are continuous

throughout the organization, as in the case of Bank X. In other words, change does not

exist in such a situation. The real change will consist in ...changing the change process !

One factor however can suppress this routine : the sources of legitimacy of the most

powerful actors. These sources of legitimacy have a great influence on the choice of the

adaptation process. A change in these sources would thereby contribute to enabling the

process to evolve.

This research is obviously based only on one case study. Our information about the French

banking sector seems to show that the same situation characterizes other main banks. Thus,

we think that the case of Bank X presumably does not reflect a singular configuration of

management in the French economy. However, in the future, further in-depth research will

be useful to test the framework developed in this research. Let us describe this research.

Our investigations confirm the results of Rowe (1994). Rowe underlines the difficulty to

define and measure productivity in the banking sector. He argues that it is near-impossible

to link productivity gains with IT investments, because both investments and gains are

altered by the organizational structure of the bank. Moreover, we encountered difficulties

to collect precise data on this subject, considered as strategic information by banks.

Taking into account these difficulties, future research should focus upon the clinical

analysis of some selected processes of technology integration (technologies that a priori

offer a potential for substituing capital equipment to human work). For each studied

process, the researcher would first identify the successive phases of project choice and

implementation, identify the related decision-making process in each phase, and then

examine the involvement of the top-management-team at each stage.

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