CAPITAL ONE

FINANCIAL CORPORATION
CASE ASSIGNMENT #3

Case Group S

Contents
INTRODUCTION...................................................................................................... 1
The Credit Card Industry..................................................................................... 1
Business Model................................................................................................... 1
FIRM BASED VIEW OF CAPITAL ONE.......................................................................1
Differentiation strategy...................................................................................... 1
SWOT Analysis.................................................................................................... 2
VRIN Analysis...................................................................................................... 2
CHALLENGES IN PRODUCT DEVELOPMENT............................................................2
Past Challenges.................................................................................................. 2
Future Challenges............................................................................................... 2
STRATEGICAL ELEMENTS THAT AIDED SUCCESS....................................................3
RECOMMENDATIONS.............................................................................................. 3
Microsegmentation of Subprime.........................................................................3
Online Internet Portal.......................................................................................... 3
Venture Capitalists.............................................................................................. 4
Tie up with Retail Giants..................................................................................... 4
ANNEXURES........................................................................................................... 5

INTRODUCTION
Since its spinoff from signet in 1988, Capital One had growing into the
seventh largest credit card issuer in USA. The reason for this company to
see such tremendous growth was in the use of Information Technology to
strategize and customize products. Where the rest of the playing field was
using orthodox methods to rope in customers, Capital One chose novel
and innovative methods to draw and retain customers. Uses of
Information Technology to assess the creditworthiness of a potential
customer and to customize products were the two basis around which
Capital one operated.

The Credit Card Industry

During the 1980s, customers using credit cards to make purchases
doubled from 4% to 8%, whereas by 1999 this figure stood at 14%. There
were ten major credit card issuers prior to 1988 who accounted for close
to half of the market share in general purpose credit cards. A general
credit card transaction would take place when the card holder made a
purchase at a merchant store or shop. The merchant would in turn submit
a request for payment via Visa/MasterCard to the card issuer. After
verification, the card issuer would pay the merchant through the same
route which was earlier used for payment request.

Business Model
Capital one differentiated itself from the other credit card issuers by using
Information Based Strategy (IBS) to predict credit behaviour of a customer
and to accordingly customize the products. This helped Capital One retain
and grow their customer or cardholder base and also to directly market
the products. Direct Marketing of products had several advantages, the
most notable are:
Large amount of data collected from interactions with customers.
This data supplemented by credit bureau information helped Capital
one customer care executives to respond much better to customers
with customized products
Large scale release of new products in a short time and without
large fixed costs
The benefit to customers from IBS was the flexibility in interest rates.
Cardholder could have a customized interest rates based on individual
preferences and habits, whereas all the other credit card issuers had a
fixed interest rate. Another advantage of IBS was Mass Customization of
products.

FIRM BASED VIEW OF CAPITAL ONE

Differentiation strategy
The differentiation strategy of the Capital One Financial Corporation is
majorly focused on advanced information processing capabilities. The
company has a massive portfolio of products with wide variety and
customers with different needs. In this quest, they constantly engage in
new product development which is supported by the fact that they
adopted mass customization strategy based on profiling of customers.
They also kept innovating to remain the leader as the life of the products
in Capital One portfolio were reasonably short.

SWOT Analysis
The biggest competitive advantage that Capital One has over its
counterparts is the capability in technology and information processing.
They have shown superiority in mass customization of products. This
companys culture promotes innovation which is a big plus to have in this
industry. There are ample growth opportunities in credit card and deposits
business which can be pursued through well thought out acquisitions. On
the flipside, the Capital One may feel the absence of strong partners
gradually. Also the Company should be wary of threat from substitutes
such as cash and e-wallet. A detailed SWOT analysis of the company is
attached at ANNEX I.

VRIN Analysis
The capability of the company in technology is highly valuable and it is
not so easy to imitate thus providing a sustainable competitive
advantage. Though they have developed human resources as a decent
capability who are the key in companys innovation, it may not sustain the
competitive advantage for longer time. The product customization
capability attained through mass customization strategy is a relatively
sustainable competitive advantage as it takes time for the competitor to
imitate. Also the customer service capability can be imitable over a period
of time. A detailed VRIN analysis of the company is attached at ANNEX II.

CHALLENGES IN PRODUCT DEVELOPMENT

It is essential to look at the issue that have been faced in the past and
also asses the probable issues that might come up in future to provide
solutions.

Past Challenges
In its path of continuous product development, Captial One has faced
several problems to move from a small subsidiary to one of the largest
issuer which are

History did not allow innovation: The credit cards were highly
attractive to the players when they were launched and they offered

good profits. The prevailing players had no reason to innovate and

follow a risky mass customization strategy based on an untested
technology.
Data Insufficiency and probable losses: The data available was
insufficient adequate to build models and predict customers with
risky profiles. Moreover, it warranted the use of large chunks of
internally generated data. This meant that the operations were put
on hold for a brief period which resulted in losses.
Infrastructure inadequacy:
The information processing
capability needed to be complemented by adequate infrastructure
to gain a competitive advantage. To take up infrastructure
expansion, they had to terminate existing contracts which resulted
in heavy costs. Moreover, they had to invest to bring state of the art
information processing capability live.

Future Challenges

Pace in innovation: The Company has continuously innovated to

bring new products and adopted mass customization strategy.
However, because of the short half-life of products the pace of
innovation needs to be maintained or increased. Keeping in view the
competitors and the imitability of products, keeping up the pace of
innovation is an uphill task for the company
No easy money is available: Capital One does not have easy
access to funds as they dont have a banking segment unlike some
of their competitors. They may incur significantly higher costs to
obtain funds.
Competition: The Company will face tough competition from both
competitors and substitutes. They also have to keep up with the
developments in technology to sustain the advantage in the longer
run
Growing Company Concern: It is very difficult for the company to
keep up the culture that supports innovation with increasing size of
the company. The very advantage it has over competitors will be at
risk as the company grows.

STRATEGICAL ELEMENTS THAT AIDED SUCCESS

Technology as the core: The core competency of Capital One was
technology and it was careful to choose products/offerings where
technology could be well leveraged to gain competitive advantage
Entrepreneural culture: The radical new structure introduced
supported and encouraged 'intrapreneurship' and innovation; the
recruitment was also carefully executed to ensure cross-functional
capabilities and entrepreneural attitudes
Careful market selection: Capital One managed to stick to its strategy
of delivering superior value and thus stay out of price wars, for which
the market/product selection was done with utmost care
Innovation: In terms of innovation, Capital One leveraged first mover
advantage and typically would exit a market by the time its
competitor caught up

RECOMMENDATIONS
Microsegmentation of Subprime
Capital can leverage its superior information technology to perform a
microsegmentation of the subprime creditors segment into safe and unsafe
creditors, out of which the default risk of the safe creditors would be relatively
low but are rated subprime (by credit rating agencies) due to other factors. The
returns from the segment would be higher than that of prime/super prime
creditors. Capital One has a competitive advantage over the major players in the
credit card industry in capturing this micro-segment because of their
technological superiority.

Online Internet Portal

Capital One establishing an online retail banking portal offering various financial
products would aid in the following aspects:
a) Eliminate the current issue of lack of access to funds
b) Customer acquisition will be made easy by optimization using various
tests to tract more unique visitors. Acquisition costs will be < $10 as per
Exhibit 2
c) Threat of adverse selection is eliminated because customers are coming to
the portal to perform peripheral activities like transactions, balance
enquiry etc.
d) Transparency of customization is preserved and also, data is not
infrequent

Venture Capitalists
Tying up with VCs will be a mutually beneficial option. Capital One gets to
gain more information about their target customers. They can put into use
their large scale information processing capabilities. The VCs can also

leverage the partnership when Capital One helps out their investees test
out businesses.

Tie up with Retail Giants

Big retail firms like Walmart can gain from Captial Ones superior
technology in processing the Point of Sales information to get better
consumer insights and trend analysis. In return, the POS would help
Capital One get access to more data which helps to understand their
customers better and accordingly customize their offerings. While Capital
One would be able to collect higher transaction fees, the retail stores can
do better inventory management. NexCards tie up with Amazon is a
similar example.
Note: IBS Joint Ventures may not be a good idea as it put the
transparency of customization at risk as it will require Capital One share
its expertise with the venturing company. The competitive advantage that
Capital One enjoys currently, if lost, will put the company in a very
vulnerable position.

ANNEXURES
ANNEX I

ANNEX II