CAPITAL ONE FINANCIAL CORPORATION

Case Analysis Report

New Product Development

Submitted to
Professor Ganesh Prabhu

Submitted by
Group P
Deepika
Gyanendra Singh
Prateek Monga
Pawan Jyotidas Ramteke

(1311083)
(1311160)
(1311242)
(1311394)

Introduction:
Capital One Financial Corporation is the 7th largest credit card company in the United States. It
achieved this phenomenal growth by adopting an Information Based Strategy (IBS) for mass
customization when the rest of the players in the industry saw no need for such technology based
approach. It not only increased its market share but the customer base itself. Capital Ones recorded
every transaction and analysed the data for customer profiling. It helped them to customize their
product offering to suit particular customer needs.
Success Factors:
The shift from a standard flat interest rate for all customers, to customized rates and products for
each customer was possible from studying credit behaviour of the customers.

Customer

Capita
l One

Credit
purchase

Shop

Increased
sales

CC Issuer

Fee as %
of
purchase

Less write-offs from accurate prediction of credit worthiness

Gains from customised product offering
VALUE CHAIN

Capital One developed the capability to turn the business into a scientific laboratory where decisions
about product design, marketing, channels of communication, credit lines, customer selection,
collection policies and cross-selling decisions could be taken after systematic tests using number of
experiments.
Everyone in the organization could submit ideas for new tests on consumer acquisition and
retention. This made the company flexible, innovative and entrepreneurial. About 200 business
analysts test the feasibility of such ideas and lead to profitable product generation. The IT system
formulates the testing needed to complete the implementation. The recruitment of top talent was
done to get bright and motivated people to thrive in dynamic environment.

All Based on IT platform

PRODUCT DEVELOPMENT

How sustainable is Capital Ones advantage?

Capital Ones sustainability is determined upon their diligence to staying true to their
entrepreneurial structure, information technology, customer service capabilities, and their focus on
recruiting top talent. These four attributes separate them from their competitors based on their
industry leading standards and technology that gave them a leg up.

Model Followed By Capital One

Capital One has followed a strategy to provide its product to 2 completely different target segments
in a way which resonates with the needs of that segment.
1. Prime and Super prime customers A customized product on the basis of different
preferences and habits of the consumer(Some extra features over core features)
2. Subprime customers A product which serves the core purpose of credit card only. Truly a
basic offering. They tap this segment because most of the major banks dont provide
products to this segment.
Apart from these, Capital One always try to roll out new and innovative product offerings which are
based on the hidden/ unsatisfied needs of consumers.
The pictorial representation of this model can be:
All other banks
give credit card

Yes

Give cards by
Capital One

No

Don't give cards

by Capital One

Major percentage of the

customers lie here

Test 1

Applicants
Yes

No other bank
gives credit card

Test 2
No

Yes

Non-Applicants

Major percentage of
Don't give cards
by Capital One the customers lie here

Ignored

Test 3
No

Give cards by
Capital One

Yes

Give cards by
Capital One

No

Don't give cards

by Capital One

Test 4

Major percentage of
the customers lie here

Major percentage of
the customers lie here

By such an extensive levels of testing they sift out risky customers very efficiently without any
chance of failing. Also this model helps Capital One to reach out a wide range of customers all the
way from sub-prime to super-prime category.
And Capital One has specialized this type of testing by doing it again and again. Some kind of
Learning Effect in work here.

Problems Faced with its Information Based and Mass Customization Strategy
The new to market Information Based Strategy and a new product model (mass customization) of
Capital One faced various issues. Some of the major issues are:

1. Resistance to switch to a new model The IBS model was received with negative reactions
by almost every other bank. The reason for such a reaction being that the banks were
already very profitable with their current operations and hence they did not see the need to
change/ switch to something new. Also, the issue of loss of reputation in the industry was a
concern to them.
2. Difficulties in Building the Model from Public Data Capital One quickly realized that
building the creditworthiness and risk profiles from the publicly available data was erred and
inadequate. To solve this problem it had to supplement such data with large volumes of
internally generated data on the transactions of the cardholders.
3. Unavoidable Short Term Losses - To obtain the above unbiased private data, Capital One
had to temporarily shut down its credit filters which translated into short term losses.
4. Legacy IT Infrastructure Capital One paid EDS $49 Million to terminate its contract. They
preferred to have technological independence via in-house IT infrastructure development
over cost control as the new system would demand for a more scalable and robust IT
system.

Potential Future Problems with New Product Development

To carry on its differentiation strategy and stay a step ahead of competition Capital One would face
the following issues in the future.
1. Short Half Life of Products Capital One had to continuously innovate to come off with new
products in the market to maintain its differentiation strategy and mass customization. This
would also ensure it staying ahead of competition. It also needed to track changes in the
behaviour of the customers due to the short life of its products because the behaviour
changes once they learned to game the system.
2. Access to Cheap Funds - Unlike other competitor issuer banks Capital One did not have a
retail banking arm. Hence the interest costs incurred by Capital One are more than its
competition.
3. Advent of new Competition and the Internet Apart from facing competition from credit
card companies Capital One also faces a growing competition from smart cards, debit cards,
e-wallets, etc. The internet opened up opportunities but at the same time brought new form
of competition. Hence, Capital One needs to innovate and adapt to the changing
circumstances to remain ahead.
4. Loss of Entrepreneurial Structure Having evolved from a small subsidiary to the 7th largest
issuer, Capital One had become big in size. Its entrepreneurial structure is one of its key
building blocks which needs to be preserved even when the company is growing at a very
high rate.

Recommendations
1. Focus on Online domain
Out of the 3 opportunities being discussed by Mr Fairbank in the case our recommendation
is to definitely venture into 2 of them and take precaution while venturing into the 3rd one.
a) Portal Since the present customers of Capital One are internet friendly as is evident
from the fact that most of its customers are visiting the website with a frequency of
once per week to browse their account for small details. Capital One should leverage
this existing and continuously evolving user base to provide some innovative products
for the online domain.

2.

3.

4.

5.

b) Venture Capital As Mr. Fairbank himself is innovation oriented and so is the

organization, supporting start-ups which work towards innovative solutions is in direct
alignment with companys interests and values. Also, this funding of such startup may
reap benefits in future for Capital One
c) IBS joint ventures Creating JVs with technology companies and helping them in
developing their Information Business Strategy might be risky since you are actually
teaching the area of your expertise to outsider. This can be used by rival companies to
sabotage your sustained competitive advantage. So, unless there is a very clear
agreement between you and your partner company regarding the privacy of Capital
Ones confidential processes and algorithm, company should not go ahead with this idea
Leverage your capabilities in diverse segment in the credit card industry and into other
industries
Since competition in present industry is rising, Capital One should reach out to other
avenues in different geographic markets or in different sectors altogether. They should look
at different ways to implement their core strategies in industries that may be behind the
curve technologically. As has been shown, Capital One can easily become a major player in
any market even after having no experience in that market. The relevance of information
based micro-segmentation is there in many different sectors like Telecom, and so on. This
will help in increasing the effectiveness of their capabilities and also help in creating a
sustainable competitive advantage in other industries also.
Retail banking with online presence
4 out of the top 5 credit card companies (Exhibit 7) have presence in the retail banking
which gives them access to cheap source of funds. So the company may go for some brickand-mortar branches and roll out an extensive online retail banking service. The company
already has the necessary IT expertise for this with its 24 million online users, increasing at 7
million per year. These customers would be interested in online banking and lesser efforts
may be required to market its offering.
Partner with a big retail chain
Capital One can tie up with a big retail chain (like WalMart or K-mart) and utilize their PointOf-Sales purchase data to generate trends and offer customized promotional schemes to
shoppers.
Data Analytics for other businesses
The superior information processing technologies can be used to provide analytics services
to various businesses which can pay for the information. These businesses should not be the
competitors for Capital One. This may include its credit rating service or customer profiling
service or credit worthiness check.