Term Paper on "Importance of Strategic Planning in the Bank's Performance"

/>Increased competition for customer savings and customer loans. Whereas customer choices in the past were limited by geography, personal relationships with bankers, or the difficulty of doing business out-of-state, now individuals are free to shop nationwide, or even worldwide, for the most attractive rates for their savings.

Added to these technology and consumer changes has been a host of legal changes, which have reduced barriers to entry in the banking business, and opened new opportunities for banks to securitize, sell off risks, and seek additional assets.

Most important of these laws was the Glass-Steagall Act, which created a "Chinese Wall" between banks and investment houses. Until its repeal, banks could not easily compete for stocks, bonds and mutual fund business.

Strategic planning is more important for smaller business

Large companies have the luxury of resources and on-going business. Small businesses have fewer strategic 'degrees of freedom.' That is, wrong strategic decisions can deplete a small company's resources faster than in a large company -- there is simply less room for error (Ibrahim).

Strategic planning should also be easier for small businesses. With fewer layers of bureaucracy, small business leaders should be closer to the customer and the service they are delivering. Thus strategic planning in a small company is grounded in inductive experience.

Small banks lack strategic bandwidth and skills. The CEO of a small bank is doing everything from meeting key customers to training new employees -- thus strategic planning can be pushed to the back-burner too often in a small company.

Banks Large and Small Need Strategic Planning

The largest and the smallest banks have the greatest opportunities for profitability. Small banks are able to exploit niches that large banks, with their bureaucratic structures and high overheads, would not be able to touch. Large banks, on the other hand, have access to a global set of assets and liabilities, and can balance risk by spreading across a number of business areas.

Large banks can afford the staffs to understand and build competence in each of their chosen business sectors -- from hedging and derivatives to in-house mutual funds and securitization. The very large banks have substantial investment banking businesses, which can tend to obscure mediocre results in retail banking sectors.

Small banks can develop expertise in specific areas as well -- but they are forced to choose a defensible area and stick to it. Banks in small communities, for example, enjoy outsized advantages as compared to their big-city brethren in finding and keeping customers. They have a closer appreciation of customers' businesses and assets, and can make better-informed decisions.

What about medium-sized banks? They tend to be less profitable and secure than banks on either end of the scale. Lacking the specific expertise or small niches of small banks, they compete with the larger banks for businesses which are rapidly becoming commoditized.

This report focuses primarily on small banks' need for and exercise of strategic planning. Very large banks embark on elaborate strategic planning exercises, while planning may be quite variable amongst smaller banks.

Where can strategic planning aid a bank's performance?

There are four key areas that a smaller bank should focus on when formulating their strategic plans:

Find lines of business in which you can exploit a niche that would be difficult for larger banks to compete. This can be based upon the following types of specialization (as examples):

Focus on an ethnic group, such as the Chinese community in Fresno, or the Polish community in Chicago.

Focus on specific trades, such as the rag trade in New York or Los Angeles, or venture capital firms in Boston

Focus on small enclaves with wealthy customers, such as Los Alamos, New Mexico or Pebble Beach (Carmel), California

Focus on specific needs in larger markets, such as auction art in Santa Fe or New York.

Work on transactions costs in order to be very efficient. This is a particularly helpful strategy for a new bank which can take advantage of new software and communication tools, and which does not have a heavy investment in bricks and mortar. The opportunities to outsource key back-office functions can help to reduce overall costs while offering new services to customers. New tools to lower transaction costs are available to small banks, which are more nimble and able to adopt these technologies (and lack the inertia and sunk investment of larger competitors).

Consider non-traditional bank venues in order to increase customer convenience. As ATM's take on more functions, "mini-banks" can be created in stores, companies, and other venues where people congregate. This can be supplemented by lightly-staffed "full service" banking operations in convenient locations. Just as Walgreen's chose convenience as its mantra, banks can do the same.

Pick customer needs and focus on them, particularly in larger markets where niche strategies are especially important. If small commercial customers have special needs or can be wooed by service, a small bank can develop the strategies and delivery systems to insure that those customers are better-treated than elsewhere. Some banks choose to follow their demographics and specialize in student loans (in university towns) or bonus financing (in hedge fund centers).

Strategic planning forces banks to think about what they do best, and when to say "no" to new initiatives. As noted above, the old model of the small retail bank has changed beyond recognition. There are no natural monopolies left in banking: even a bank in a very small town must have services, interest rates and security equal to surrounding areas, or they can lose business.

What banks need to include in their strategic planning

Banks at their base live on the margin between their costs and their earnings. The simplest way to plan for a bank is to insure that costs stay low and earnings stay high. In the classical banking world, it was enough to bring in low-cost retail depositors, and lend out at higher rates. Banking was easy -- golf every Wednesday afternoon.

Now the prerequisites are tougher. Consumers no longer focus on passbook interest accounts for long periods of time. As personal savings rates decline, normal non-retirement savings accounts don't offer the ready liquid deposits and low reserve requirements that they used to.

Small banks must therefore ask themselves: where is the money coming from -- and at what cost? And where is the money going -- and at what revenue?

There is no one "right" strategy, but it must be cohesive. If a bank in a medium-sized community decides that it will specialize in small- to medium-sized businesses for commercial banking, then it needs to understand those businesses well. If that bank is in a retail-dominated economy, they need to understand how to value inventory, supply financing, accounts receivable and shrinkage. That same bank needs to be able to judge whether a retailer is running his/her business well, and be able to step in and help if things are not going well. The banker needs to build commercial banking expertise within his staff, and study retailer's work patterns: how they pay bills, how they receive cash, and how their working capital ebbs and flows.

The fundamental components of a bank's strategic plan need to include the following:

Market focus: Is the market defensible? Does the bank have, or can it develop, significant niche market expertise? Is the market as defined large enough to sustain the bank? Is the risk in that market worth the potential profit opportunity?

People in the bank: If the bank is choosing commercial customers as its focus, do the bank officers and tellers… READ MORE