Practice of strategic planning in German retail banks
by Oliver Recklies
This article first appeared in: Ekonomika i Organizacja Przedsiebiorstwa (Economics and Organization of Enterprise), number: 3 (686), pages: 39-46
In general banks undertake two different steps in order to analyse the external environment and to assess organisational capabilities: Regular benchmarking activities during the business year represent one step. In case of major performance dropping the management will start certain measures (e.g. a new planning process) in order to improve the organisational situation. Benchmarking also serves as a strategy assessment tool for banks. Hence it will be discussed in chapter 2.4. Another step is the annual strategy conference. Due to the organisational restrictions (see also chapter 2.1) most banks have to pool their strategic planning capacities on the preparation and execution of one strategic planning summit, the annual strategy conference.
This conference will often take place in the form of a 2- or 3-day workshop were the board of directors, some selected senior managers and a moderator discuss the past development as well as those measures, which are required to achieve the desired corporate future. In general the selection of senior managers considers the importance of their business units for the entire organisation. It is also recommended to consider that in small banks managers’ theoretical knowledge about strategic management might be marginal, causing to various understandings about “strategy”. Therefore senior managers might also be chosen for the reason of their expected contributions to the workshop or their skills related to strategic management. The role of the moderator is often administered by an external person; in most cases by an external consultant. In particular larger banks have their regular consultants; in that cases these consultants moderate the conference. Since the consultant is familiar with the formal as well as the informal structures of the bank, he might be able to balance different approaches (e.g. discussion styles) during the conference. In most cases of conference preparation all business unit managers of the bank are called to explain their current status compared to the desired strategic direction, to describe gaps and to develop ideas for future corporate development. The quality and the scope of this preparation heavy depend on existing skills of the organisers. In some cases “strategy tools” like SWOT and Porters 5 Forces are used to analyse the situation and to identify gaps.
Internal analysis. Conference organisers are requested not only to collect relevant soft and hard data, but also to support some senior managers in terms of methodology (e.g. how to structure an analysis). Since many senior managers have been working for the bank for 10 years and longer, they know nearly every detail of their business unit; building a good fundament for internal analysis. Hence it is crucial to identify the most important information and data as well as to avoid getting lost in details. Considering the excellent knowledge about the organisation from an inside perspective it can be argued that the internal analysis of strengths and weaknesses of the bank can be done successfully very often. Organisers have to give guidance, structure and methodological support. They have also to ensure that all existing problems and challenges are disclosed. Negative impacts like professionally blinkered have to be avoided.
External analysis. Due to some typical attributes the external analysis might cause some problems for these banks. Lack of human capacities (compare chapter 2.1) in general and the long job tenure of managers in particular are the reasons sometimes. Often opportunities and threads by traditional competitors are identified very well. Opposite to this, the impact of general environmental changes (e.g. technological trends, and release of entry barriers) often remains undetected. In general, reasons can be found in lack of time to observe those trends, lack of interest to focus on those changes or lack of analytical skills. In most cases the board of directors or the organisers establish the following three workarounds or formal processes to close this gap: (a) They assigning themselves to the tasks of external analysis. In particular this solution can often be found in small banks. (b) The external analysis is assigned to the marketing department. In some cases the marketing department is responsible to observe “the market”. This might include observations of competitors, their products and service offerings, collection and comparison of macro-economical data as well as observations of general industry trends. (c) The external analysis is assigned to the directors’ secretariat office or their personal assistants. In some banks a formal separation between “more marketing related observations” and “more industry related observations” can be found. The “more marketing related observations” include typical information like competitors, their products and service offerings, and their applied marketing strategies and techniques. These observations are done by the marketing department. Opposite to this “more industry related observations” include general industry trends, macro-economical data, legal environment, strategies and tactics of major players within the entire industry. These observations are done by the directors’ secretariat office or the personal assistants. In summary it can be argued that the possible range of tasks, which is assigned to a certain department, reaches from simple product observation to an entire external analysis. In all three cases the external analysis is not done by a senior line manager.
Due to the external development of the joint strategy for the financial network by its federal association, the retail banks focus more on financial aspects within its search for strategic alternatives. Due to this joint strategy the bank management also has to make sure to meet certain key financial ratios. Hence the management often follows a “to do the things right” approach. In order to forecast financial results in general and profits in particular, scenario planning technique is one major instrument for the development of strategic options. In the core of scenario planning two different aspects can be found: a modelling of business activities and a modelling of the money and capital market interest rates.
Scenario planning of business activities.As most other companies a bank forecasts the product and service sales for the next years. Attributes are volume and quantities for capital orientated products (e.g. personal loans, house financing, and deposits) as well as for provision orientated products (e.g. insurance contracts, credit cards). Correlations between certain products are considered by the calculation of cross-selling-ratios. In order to develop different scenarios with a time frame of up to 5 years the bank considers four major factors: volume of expiring businesses (in particular in terms of loan and deposit business); the expected proportion of those expiring businesses, which can be extended by an endorsement with the customer; the expected growth rate for business activities (that is required to protect or to increase the market share as well as to meet the profit requirements) and last but not least the expected cross-selling ratios as well as substitution effects between certain products. Other figures (proportion of extended business, growth ratio, and cross-selling) are the determinants for the scenario planning. On the fundament of a statistical analysis the management decides for three different types of scenarios: A “real case scenario”, a very optimistic version and a worst case version. The latter one often considers a low ratio of extended contracts as well as a low or even negative growth rate. In the next step of the strategy finding the “business activity scenarios” will be connected with appropriate interest rate scenarios.
Scenario planning for money and capital market interest rates. Interest rates for customer products, term transformations between deposits and loans as well as the ratios between fixed interest rates products and variable interest rates products influence the net income from interest directly. Hence banks analyse interest rate changes very exactly. In order to forecast as well as to analyse the impact from those changes banks are used to define three to six different interest rate scenarios. This scenario planning includes very likely scenarios (e.g. a shift of long term interest rates of 0,50 %) and worst case scenarios (e.g. an overnight shift of all interest rates of 2,00 %). In particular the latter ones are designed to fulfil regulatory requirements from risk management issues.
Combination of both types. After the definition of those scenarios the various business activity scenarios and the interest rate scenarios are connected. In this step correlations between changes in interest rates and business activities (e.g. expected volume for specific deposits) will be considered. Due to the large number of theoretically possible combinations it is not helpful to connect all business activity scenarios with all interest rate scenarios. The management team will connect only those scenarios that seem to be appropriate. Taking both type of scenarios together some banks also run a sensitivity analysis to identify most critical measures and business activities. In terms of strategy finding the step of connecting scenarios enables the management to run the following activities:
· Analyse whether the strategic objective can be achieved with the currently planned business activity and under certain interest rate scenarios
· Forecast and analyse the impact of external factors (e.g. interest rate changes, expected competitor activities, shift in customer demands) to its business planning including profits
· Test the ability to generate profits against a worst case scenario
· Decide for a specific “interest rate and business” scenario in order to identify those risks which will not be accepted by the management and identify specific measures to reduce these risks
· Search for the best strategic alternatives (e.g. development of a new product segment)
In particular the last activity represents the interface for operational planning in most banks. To ensure the financial stability of the organisation and to check the profit situation of a certain strategy as well as to fulfil the legal requirements in terms of risk management, scenario planning represent the major planning tool for banks.
 Note: Most banks consider that this concept might cause some problems for the implementation stage, since not all senior managers were involved in the discussions and therefore might not support the planed strategy. To avoid this effect most managers have got the opportunity to present their ideas during the preparation stage.
 Note: This attribute meets the recommendation by Mintzberg, MINTZBERG (2000, page 266) argues that “while hard data may inform the intellect, it is largely soft data that generates wisdom.”
 Note: In that case a distinction between secretary and personal assistant has to be understood. In general the secretary is responsible for standard office tasks (e.g. schedule management, writing letters). Opposite to this the personal assistant is responsible for planning topics and analytical issues. In most cases he or she is a young academic. For directors’ secretariat office see page 10.
 Note: This attribute meets a definition by Schoemaker. SCHOEMAKER (1995, page 25) explains scenario planning as “a disciplined method for imaging possible futures that companies have applied to a great range of issues”.
 Note: Due to the existing contracts with the customers the volume of expiring business can clearly be identified. Contracts which are cancelled by the customer prior to maturity represent a minor exception.
 Note: In this factor competitors’ activities will be considered.
 Note: Term transformation (e.g. short term deposits into medium term loans) is one of three basic functions of a bank. The others are risk transformation and transformation of sizes (e.g. collecting small deposits and selling a large loan).
 Note: Those measures might include the use of financial instruments (e.g. derivates).
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Status: 01. Juli 2015