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Bank management and strategic planning for the 1980s
Bank Management
and Strategic Planning for the 1980s
35
Bank Management and Strategic Planning for the 1980s J. Barry Mason* aud Morris L. Mayer-j-
This paper examines a number of important issues facing banking in the 7980s. The authors maintain that banking has been managing primarily by crisis, and this ‘simply cannot be the operating norm‘. The paper analyses e number of selected issues facing bank management in 7978 and the perceptions of bank managers about those issues vs their probable importance in 1985 ; furthermore, the paper examines likely operating strategies which will be required as effective responses to emerging environmental realities. Through examining the competitive realities for 7985 this paper, as have many others recently, broadens the context within which planning in banking will perhaps take place in the future.
Introduction Corporate management in the United States has faced a series of major changes during the 1970s. As observed by Philip Kotler, the noted business educator: The linear environment in the 1950-1970 period has given way to a turbulent environment which produces new strategic surprises almost monthly. Competitors launch new products, customers switch their business, ad costs skyrocket, new regulations are announced, consumer groups attack.l
Such a description accurately reflects the environments facing retail banking in the 1970s and the aggressive pursuit by management of a more sophisticated and demanding consumer.2 Among the pressing problems facing bank management are consumer activism in the area of ‘redlining’ (failure of banks to provide mortgage funds for inner-city areas), affirmative action and similar consumer oriented efforts.3 From Federal interest petition
the viewpoint of regulation, action by the Reserve Board to allow depositors to earn on their checking accounts is making the comfor savings among banks and thrift institutions
‘J. Barry Mason is the Board of Vistors Research Professor, Graduate School of Business, The University of Alabama, Alabama 35486, U.S.A. tMorris L. Mayer is a Professor at the Graduate School of Business, The University of Alabama, Alabama 35486, U.S.A.
red hot.* The negotiable order of withdrawal (NOW accounts) gives commercial banks a new competitive weapon to attract funds from thrift institutions, but the interest payments will cost banks considerable profit. Savings and loan institutions and credit unions are also expected to pursue similar opportunities.5 Meanwhile, Congress is moving to regulate the bank debit card as vigorously as it regulates the bank credit card. Debit cards are used to withdraw cash, transfer files from one account to another and to pay bills at electronic money terminals. The number of such cards is expected to double within a year as banks and other financial institutions push to penetrate new markets6 Numerous similar issues emerge as management searches for strategies which will allow them to remain more competitive in the market place. Retail banking is a dynamic sector of the economy and thus is subject to the impact of many different variables. Complacency will simply not be possible for the management of these institutions. As observed: The attitudes of organizational members toward change are crucial in the growth process. They are crucial because growth is a type of organizational change, and they are crucial because a growing organization must adjust to environmental change. In fact, it can be argued that growth depends on the organization’s ability to exploit opportunities created by environmental change.’
Management by crisis simply cannot be the operating norm. Precise numerical forecasts of future operating environments probably are not possible. We only have to recall 1974 as the year the economic forecasters ‘blew it’ in the face of the energy squeeze and the rapid acceleration in prices. 8 In the sphere of financial management where social, legal, political and technological forces all interact, it still is of value however to attempt to understand the underlying trends, pressures, and opportunities within the operating environments of the firm. Such a view can provide a framework within which the future can be c0nsidered.O Thus, the purposes of this research were to : (1) determine the perceived importance of selected issues facing bank management in 1978, (2) the perceptions of bank
36
Long Range Planning Vol. 12
August 1979 Likewise, monitoring competition and the economic forces which affect business ranked second only to governmental regulation. The changes in the basic nature of such financial institutions as savings and loans associations and credit unions reflect the increasing competition which the banking industry is starting to face.ll Until recently the various financial institutions serving consumers were meeting different needs. For example, as reported for 1977, ‘the banking industry has 43 per cent of consumer deposits compared to 39 per cent for Savings & Loan Associations and 4.7 per cent for credit unions; it holds 49 per cent of consumer loans compared to 3 per cent for Savings & Loan’s and O-3 per cent for credit unions. l2 The battle over the l/4 per cent (Regulation Q rate) differential continues to rage however and it probably will be only a short period of time before savings and loan associations will have the authority to offer customer checking accounts in all areas of the nation. Already the courts have found credit union share drafts-another type of interestearning-deposit-to be legal.
managers about key issues in 1978 vs their probable importance in 1985 (3) management perceptions of the competitive environment in 1985, and likely (4). operating strategies in response to emerging environmental realities. The issues chosen are indicative of the ones currently being discussed in the trade and academic literature about the probable future operating environments facing financial managers.lO
Findings Issues of Importance in 1978 External Issues. Macro environmental
issues, (issues external to the firm) were perceived overall as being relatively important in 1978 (between 91 and 97 per cent considering them important) as shown in Table 1. The strongest overall macro-environmental issue was understanding various governmental/regulatory impacts on banking, as specified by 76 per cent of the respondents. Such issues as negotiable orders of withdrawal and increasing activity by the federal government in other areas of financial management point to the tremendous importance of these problems. Indeed, f&n&i institutions are among the most heavily regulated institutions in the nation. Thus, logically issues of regulation would be expected to rate very high in importance. Table 1. Perceived importance
Technology also continues to be an important issue in 1978 but perhaps not as important as one would have surmized given the continuing uncertainty surrounding electronic funds transfer systems.13 Indeed, more of the
of various activity issues in 1978
Issues
Slightly important
important
-
3.0
21 .o
40.0
36.0
1 *o
8.0
35.0
31 .o
25.0
2.0
6.0
42.0
34.0
16.0
-
3.0
30.0
32.0
35.0
18.6 16.7 8.8
33.3 43,l 24.5
25.5 19.6 26.5
17.6 11.8 39.2
Not important
Very important
Extremely important
The macro environment (1)
(2)
(3) (4)
Understanding the various governmental/regulatory impacts on your business Keeping up with technological developments which affect your business Being aware of social changes which can affect your operations Monitoring your competition and the economic forces which affect your business
Personnel problems (5) (6) (7)
Improving personnel hiring practices Affirmative action Improving employee relations
4.9 8.8 1.0
Issues of management philosophy _ (8) (9)
Establishing a philosophy of management Establishing long and short run objectives
Management (10) (11) (12) (13) (14)
4.0
6.0
32.0
32.0
26.0
-
8.7
32.0
34.0
25.2
7.8 5.8
147 1.0 21.4
37.3 12.7 40.8
25.5 31.4 23.3
14.7 54.9 8.7
1.9 1.0
6.8 11.7
22.3 50.5
25.2 21.4
43.7 15.5
operational controls
Obtaining a better working capital position Improving your profitability New Product development Reducing loan losses by better management Improving advertising effectiveness
Bank Management respondents rated this issue as not important or slightly important than any of the other four macro environmental issues evaluated. Awareness of social changes affecting operations was rated the least in overall importance among the four issues to which the respondents reacted. Clearly, however, it also is an issue of substance. Personnel Issues. The key problem in 1978 was improving
employee relations, likely because of the failure of salaries to keep up with cost of living. This continuing pressure plus a move toward white collar unionization and shifts toward more sophisticated technology require continual retraining of employees. The second most important of the three personnel issues evaluated was improving personnel hiring practices. Twenty-three per cent of the respondents indicated, however, that this was an issue of little or no importance. Likewise, affirmative action no longer seems to be the pressing issue it was during the late 1960s and early 1970s. Indeed, over 25 per cent of the respondents rated it as of little or no importance today. AfIirmative action programs apparently have become part of the on-going institutional routine for most firms. Issues ofManagement Philosophy. Bank management continues to struggle with the need to establish a philosophy of management and short and long run objectives as part of a strategic planning format.14 Over 50 per cent of the respondents each rated these issues as being of major importance. Part of the reason for this importance probably relates to the continuing merger ofindependent banks into holding companies and the aggressive behavior on the part of all types of financial institutions, both of which are now requiring a degree of sophisticated management and long range planning unique to the banking industry. Indeed, many persons contend that rhe concept of marketing was not really introduced into bank management thinking until the early 1970s. The current hard sell philosophy of many banks today requires a carefully articulated management philosophy, explicit objectives as to market share and profitability, and co-ordinated promotion and pricing strategies to properly position a bank against its competitors. Management
and Strategic Planning for the 1980s
37
unemployment. During the past several years however the reverse has been true. Indeed, in December I977 consumer and mortgage debt as a percentage of disposable income was 15.7 per cent, an all time record. And in March 1978, both consumer and instalment debt increased by a record seasonally adjusted $4*lbn.15 Some persons have forecast that the demand for additional capital will exceed new capital available by approximately $500bn to $7OObn during the 1975-1985 time period.16 The need for new product development was rated the least important of all the control issues facing management in 1978. Again, this probably reflects a recognition by banks of the new product possibilities already present as a result of electronic funds transfer system, NOW accounts, and the numerous other innovations currently being absorbed by the banking industry. Finally, and not unexpectedly, improving advertising affectiveness continues to be an issue of importance. Issues of Importance in 1978 vs 1985
This portion of the research sought to determine the probable future importance of issues in the 1980s as compared to their importance in 1978. The results are shown in Table 2. Societal Values and Business Ethics. Over 75 per cent of the respondents perceived that consumer activism in banking will be more important in 1985 than today. Likewise, slightly more than 60 per cent believe that the concern of society over the ethics of bankers will be more important. Perhaps this view by bankers is least partially a reaction to the public outcry over disclosures of questionable practices by Bert Lance. Management also foresees continuing concern by society with how the decisions of bank management will affect quality of life. Quality of life considerations are tied to such practices as redlining in making mortgage loans, meeting social and societal responsibilities, and making specific funds available for minority and inner-city projects. Finally, 38 per cent foresee banks as more involved in issues of pollution control in 1985, probably through loans for meeting government specifications for clear air and water.
Controls
Overwhelmingly, the two strongest issues of management controls in 1978 were the need to improve profitability, rated as of strong importance by 86.3 per cent of the respondents, and the need to reduce loan losses by better management, rated as strongly important by approximately 69 per cent of the respondents. These issues reflect the continuing tightening of the money supply available to financial institutions, the subsequent rise in the cost of securing funds and the necessarily higher loan rates. In a period of inflation such as is facing the United States and other nations, the demand for funds is likely to be quite strong, particularly when the inflation psychology of ‘buy now because it will cost more later’ affects the economy. Traditionally, consumers have responded to inflation by increasing savings and cutting back on spending because of the recognition that inflation signals the possibility of
Government Regulation. Bank management foresees no lessening in importance of governmental regulation. Indeed, over 77 per cent foresee increasing regulation, while approximately 65 per cent also foresee an increase in paperwork related to regulation in spite of recent efforts by the federal government to curtail the frustrations of providing such information. Operating Issues. Not unexpectedly, virtually all of the respondents foresee energy resources and energy costs as a percentage of total cost becoming increasingly important by 1985. Likewise, inflation is foreseen as more of a problem in the future as is the cost of capital, which is closely aligned with the degree of inflati0n.l’ Over 83 per cent of the respondents see the technological revolution which affected banks during the 1970s as being even more important in 1985.
38
Long
Range
Table
Planning
Vol. 12
2. Management
perceptions
August
1979
of the importance
Issues
Same importance in 1985 as now
of selected
issues in 1978 vs 1985
More important Less important in 1985 than now in 1985 than now
N.A.’
Societal ethics and issues
(1) Consumer activism relative to banking (consumerism)
15.5
75.7
8.7
-
30.1
43-7
23.3
2.9
26.5
60.8
12.7
-
36.0
38.0
18.0
8.0
47.1
45.1
7.8
-
(2) Society’s rejection of profit as the (3) (4) (5)
primary motive of bankers The concern of society over ethics of bankers Banking’s involvement in pollution issues Concern of society about how decisions of bank management will affect ‘quality of life’
Governmental regulation (6)
Governmental regulation
18.6
77.5
3.9
-
(7)
Paperwork related to governmental regulation
25.5
64.7
8.8
1 .o
6.9
90.2
2.9
-
Operating issues (8)
Shortages of energy resources
(9)
9.8
88.2
2.0
-
(11) (12)
Energy costs as a percent of total costs Revolutionary technological changes affecting banking (e.g. EFT) Inflation Cost of capital
14.7 25.5 29.0
83.3 73.5 70.0
2.0 1.0 1.0
-
(13) (14) (15)
Downtown center revitalization Shopping development Housing shortage
42.2 36.3 32.4
43.1 37.3 63.7
10.8 24.5 3.9
(10)
;:; -
Only 11 per cent see downtown revitalization as being of less importance in 1985 than today. However, approximately a fourth do perceive that shopping center development will be less important. Thus, in the eyes of these respondents it appears that the peak of shopping center construction has passed and that problems with energy and cost of materials are such as to curtail construction of these huge retailing complexes. Finally, virtually none of the respondents sees a lessening of the housing shortage. Indeed, over 63 per cent foresee that the housing shortage facing the United States will be even more important in 1985. No short run solutions to these problems are foreseen.
disagreed that marketing efforts will be less effective in attracting new retail business because the public will be harder to sell. However, the realities of increasingly tough and sophisticated competition are reflected in the over 91 per cent agreement that pricing of services will be an issue of major concern in 1985. Historically, banks and other financial institutions have paid little attention to the pricing of individual bank services which may run into the hundreds. Such notions as price elasticity, mark-up, skimming and penetration pricing have been largely foreign to the vocabulary of banking. Even today many financial institutions still do not think in these terms.
Competitive Realities for 1985 Respondents were then asked to reflect on the competitive environments which will likely face bank management in 1985. Without exception, respondents perceive that savings and loans associations and credit unions will be even more aggressive competitors, as seen in Table 3. Similarly, over 57 per cent disagree that banks will be the center for all consumer financial services. Indeed, this view is probably an accurate reflection of the reality of increasing penetration of broader aspects of the consumer market by savings and loan associations and credit unions.
Slightly more than 61 per cent of the respondents agree that remote handling of money will be well advanced by 1985 and that consumers will make cash transfers without leaving their homes. Personal contact with consumers, historically has been one of the primary of financial institutions. Indeed, marketing thrusts training of tellers and similar persons in customer relations and cross-selling techniques has been one of the main stays in the retailing of financial services.
Marketing is foreseen to continue to have a very important role in 1985. Specifically, half of the respondents
Further complicating perceived competitive realities in the view of almost 68 per cent of the respondents is that electronic funds transfer systems will allow electronic ‘branches’ in all major stores. This new innovation will further lessen the personal contact with consumers and
Bank Management Table 3. Management
perceptions
of the competitive
and Strategic Planning for the 1980s
environment
of 1985
(1)
(2)
Strongly agree
Agree
(3) Neutral or no opinion
9.7
51.5
8.7
28.2
consumer financial services
6.8
346
1.9
49.5
Marketing efforts will be less effective in attracting new retail business because the public will be harder to ‘sell’
3.9
37.3
8.8
44.1
Pricing of services will become an issue of major concern
41,7
49.5
6.8
1.9
-
Saving Et Loan Associations and credit unions will be more aggressive competition
54.4
42.7
1 .O
1.9
-
Premiums will be used less as competitive tools
4.9
35.9
33.0
25.2
1.0
EPT systems will allow electronic ‘branches’ in all major stores
8,7
59.2
15.5
16.5
-
The competitive environment
(4)
(5) Strongly disagree
Disagree
(1) By 1985 remote handling of money will be well advanced. Customers will make cash transfers without leaving their homes
1.9
(2) Banks will be the center for all
(3)
(4)
(5)
(6)
(7)
Table 4. Anticipated
shifts in management
strategy in responding
to the environments
(1)
(2)
Strongly agree
Agree
12-O
52.0
14.6
Banks will become increasingly conservative in financing new ventures
7.8
5.9
of 1985
Disagree
(5) Strongly disagree
27.0
7.0
2.0
55.3
11.7
18.4
-
5.9
19.2
14.7
37.3
2.9
Banks will promote to fewer distinct market segments in 1985 than today
2.0
16.7
19.6
54.9
6.9
(5)
Bank product innovations will be more substantial than superficial in 1985
4.0
59.0
29.0
8.0
(6)
Consumers in 1985 will be offered fewer product options by banks
1.0
10.7
14.6
67.0
Overall strategy perceptions
(3) Neutral on no opinion
.
(4)
(1) The growth area for the future will be more in retail banking and less in wholesale banking
(2) Expansion of banks will be more through increasing penetration of current markets than new branches
(3)
(4)
Productivity issues (1)
(2)
(3)
To offset constantly rising costs, banks will have to invest increasing amounts of money in capital equipment to reduce labor costs
-
6.8
_
7.8
49.0
26.5
15.7
1.0
The only way to battle inflation is to increase ‘productivity
10.7
28.2
19.4
35.0
6.8
Energy shortages and higher costs will cause bank executives to push for better heating systems, construction standards, and lighting innovations on all structures they finance
17.5
64.1
6.8
10.7
1 *o
39
40
Long Range Planning Vol. 12
August 1979
will provide fewer opportunities for cross-selling unless new marketing strategies are developed to retain customer loyalty. Clearly, the importance of convenience of location as a competitive variable likely will be lessened. These ‘electronic branches’ probably will be available in most major retail institutions by 1985, according to the respondents. Management Operating Strategies for 1985 Overall Strategy Perceptions. Overall management
strategy in 1985 seems to be geared to increasing penetration of current markets instead of expansion into likely new markets through branching, as reported approximately 70 per cent of management .(see Table 4). Further, management apparently anticipates the fine tuning of market segments to a greater extent than today. Less than 20 per cent of the respondents foresee that banks will promote to fewer distinct market segments in 1985. Indeed, almost 75 per cent perceive that consumers will be offered more financial service options, while 63 per cent perceive that bank product innovations will be more substantial. Thus, one can infer that banks will be even more aggressive in pursuit of consumer dollars but that they will be doing so by expanding product lines and further penetrating existing markets instead of seeking to move into new geographically distinct markets. However, a conscious strategy of market positioning is not reflected in the responses. Indeed, by seeking to further segment markets the banks are moving toward a philosophy of being all things to all people. Productivity.
Almost 82 per cent of the respondents perceive that energy and higher costs will cause bank executives to push for new heating systems, better construction standards, and lighting innovations on all structures they finance. Likewise, the majority see increasing amounts of money as necessary for investment in capital equipment to offset labor costs. Management appears basically uncertain as to the role of productivity increases in battling inflation.
Discussion
firm. Sophisticated planning must be an increasing reality. l9 Yet, banks, as is true of other types of corporations today, are oriented to short run results, at least partly because of the need to satisfy the demands of investors for yearly increases in corporate profitability and growth. However, comprehensive long range planning simply must be factored into the management philosophy of tomorrow’s bank managers. The number of events and the amount of information available however, often serve to cloud rather than clarify key issues. Increasing sensitivity to external issues thus is an absolute must in identifying key pressure points affecting business decisions.
References (1) Kotler presents why’s, how’s, of marketing audits for firms, nonprofit organizations, (1976).
News,
p. 12, 26 March,
(2) Richard 8. Stall, Marketing
in a service industry, Atlanta Economic Review, 28, (3), 15-18. May-June (1978).
(3)
Massachusetts’ outspoken 119, 27 March, (1978).
(4)
The fed bids to unlease checking accounts, Business Week, p. 69, 24 April, (1978). Joseph S. Mascia, Coping with interest on demand deposits, The Bankers Magazine, 161 (2). 58-64, March-April (1978).
(5)
CUs win a round on share drafts, Banking, April (1978).
(6)
Why debit cards have congress worried, Business Week, p. 26,15 May (1978). Linda Fenner Zimmer, ‘Cash dispensers, automated tellers come of age, Bank Administration, LIV, 19-31, May (1978).
(7)
W. H. Starbuck, Organizational growth and development. In Organizational Growth and Development, p. 43, W. H. worth, Middlesex, England : Starbuck, ed., Harmonds Penguin Books, LTD., (1971).
(8)
Denis F. Healy, Environmental pressures and marketing in the 1970s. Long Range Planning, pp. 41-45. June (1975).
(9)
Jennifer Tanburn, The influence of retailing trends on the food industry, Long Range Planning, p. 10. June (1975).
(10)
The sample for this research was selected from membership in the Young Bankers Association of one Southeastern state in the United States. The response rate to a mailed questionnaire was 41 per cent. Generalizations from this sample to other areas of the United States are possible to some extent because national legislation governing banks and other financial institutions affect all states. Further, competitive pressures, new technology, affirmative action, energy, the state of the economy, and national and international politics affect all financial institutions to basically the same extent. State regulations are, of course, unique to each state. The characteristics of the sample were as follows: Fifty per cent of the respondents are employed by state banks and 50 per cent by national banks; one-third of the sample of 103 respondents were members of a bank holding company; 80 per cent of the respondents have been involved in banking from 1 to 10 years and 17 per cent for more than 10 years. Overall, 44 per cent of the respondents were loan officers. The persons included in the sample reflect those individuals who likely will be making most senior level management decisions by 1985.
(11)
Daniel A. Christpherson, Credit unions: moving up on the totem oole. Benkinu, LXX, (3). 42, March (1978). David S. Kidweif and Richard L. Peterson, A close look at credit unions, The Bankers Magazine, 161 (1). 71-80. JanuaryFebruary (1978).
(12)
Capitol events, Credit Union Magazine,
The roots of change to occur in the 1980s are burrowing today. The issues appear to be shortages in energy resources, increasing energy costs, technological revolution, increasing government regulation, shortages of capital, and increasingly severe competition for consumer markets. These dynamic environmental factors are occurring at a period of time when the United States is in the midst of one of the great transformations in Western civilization.‘* Clearly shifts in consumer attitudes and behavior patterns are difficult and complex to monitor. The modern management concept however requires a continuous monitoring of the various environments facing management so operating philosophies can be adjusted to an ever-changing reality. Periodic monitoring of the foreseeable future in a manner similar to that outlined in this paper can help executives respond quickly to early warning signs of eminent changes in the operating environment of the
Marketing
bank regulator,
Business Week,
LXX
(4),
86,
p. 17. May (1978).
Bank Management (13)
For further information see the following articles in The Bankers Magazine, 61 (2) March-April (1978). Steven A. Rhodes, Sharing and access in a EFT world, pp. 26-31 ; Dominic Disario, Jr., Home-line EFT terminals-a phase implementation approach, pp. 32-41 ; Dale Reistad, Where we’re going, pp. 24-25 ; Olin S. Pugh and Franklin J. Ingram, EFT and the public, pp. 42-52; Richard J. Author, EFT systems-a California report, pp. 53-58.
(14)
Norman R. Altenhoff, Putting strategic planning to work, The BankebMagazine, 161 (2) 74-79, March-April (1978).
(15)
Rising prices radicalize consumer spending, Business Week, p. 139,22 May (1978).
and Strategic Planning for the 1980s
41
(16)
Albert Bates, The super stores: emerging innovations in retailing. In Robert Robicheaux er a/., eds., Marketing: Contemporary Dimensions. p. 207, Houghton Mifflin, Boston (1977).
(17)
The controller: inflation gives him more clout with management, Business Week, pp. 84-95, 15 August (1977).
(18)
Grey Matter, 47 (1), 1, (1976).
(19)
Herbert E. Johnson, Comprehensive corporate planning for commercial banks, Bank Administration, LII, 20-25, January (1978) ; Arnold G. Danielson, Keys to successful long-range planning, Banking, XLL (4), 83-84, April (1978).
and Strategic Planning for the 1980s
35
Bank Management and Strategic Planning for the 1980s J. Barry Mason* aud Morris L. Mayer-j-
This paper examines a number of important issues facing banking in the 7980s. The authors maintain that banking has been managing primarily by crisis, and this ‘simply cannot be the operating norm‘. The paper analyses e number of selected issues facing bank management in 7978 and the perceptions of bank managers about those issues vs their probable importance in 1985 ; furthermore, the paper examines likely operating strategies which will be required as effective responses to emerging environmental realities. Through examining the competitive realities for 7985 this paper, as have many others recently, broadens the context within which planning in banking will perhaps take place in the future.
Introduction Corporate management in the United States has faced a series of major changes during the 1970s. As observed by Philip Kotler, the noted business educator: The linear environment in the 1950-1970 period has given way to a turbulent environment which produces new strategic surprises almost monthly. Competitors launch new products, customers switch their business, ad costs skyrocket, new regulations are announced, consumer groups attack.l
Such a description accurately reflects the environments facing retail banking in the 1970s and the aggressive pursuit by management of a more sophisticated and demanding consumer.2 Among the pressing problems facing bank management are consumer activism in the area of ‘redlining’ (failure of banks to provide mortgage funds for inner-city areas), affirmative action and similar consumer oriented efforts.3 From Federal interest petition
the viewpoint of regulation, action by the Reserve Board to allow depositors to earn on their checking accounts is making the comfor savings among banks and thrift institutions
‘J. Barry Mason is the Board of Vistors Research Professor, Graduate School of Business, The University of Alabama, Alabama 35486, U.S.A. tMorris L. Mayer is a Professor at the Graduate School of Business, The University of Alabama, Alabama 35486, U.S.A.
red hot.* The negotiable order of withdrawal (NOW accounts) gives commercial banks a new competitive weapon to attract funds from thrift institutions, but the interest payments will cost banks considerable profit. Savings and loan institutions and credit unions are also expected to pursue similar opportunities.5 Meanwhile, Congress is moving to regulate the bank debit card as vigorously as it regulates the bank credit card. Debit cards are used to withdraw cash, transfer files from one account to another and to pay bills at electronic money terminals. The number of such cards is expected to double within a year as banks and other financial institutions push to penetrate new markets6 Numerous similar issues emerge as management searches for strategies which will allow them to remain more competitive in the market place. Retail banking is a dynamic sector of the economy and thus is subject to the impact of many different variables. Complacency will simply not be possible for the management of these institutions. As observed: The attitudes of organizational members toward change are crucial in the growth process. They are crucial because growth is a type of organizational change, and they are crucial because a growing organization must adjust to environmental change. In fact, it can be argued that growth depends on the organization’s ability to exploit opportunities created by environmental change.’
Management by crisis simply cannot be the operating norm. Precise numerical forecasts of future operating environments probably are not possible. We only have to recall 1974 as the year the economic forecasters ‘blew it’ in the face of the energy squeeze and the rapid acceleration in prices. 8 In the sphere of financial management where social, legal, political and technological forces all interact, it still is of value however to attempt to understand the underlying trends, pressures, and opportunities within the operating environments of the firm. Such a view can provide a framework within which the future can be c0nsidered.O Thus, the purposes of this research were to : (1) determine the perceived importance of selected issues facing bank management in 1978, (2) the perceptions of bank
36
Long Range Planning Vol. 12
August 1979 Likewise, monitoring competition and the economic forces which affect business ranked second only to governmental regulation. The changes in the basic nature of such financial institutions as savings and loans associations and credit unions reflect the increasing competition which the banking industry is starting to face.ll Until recently the various financial institutions serving consumers were meeting different needs. For example, as reported for 1977, ‘the banking industry has 43 per cent of consumer deposits compared to 39 per cent for Savings & Loan Associations and 4.7 per cent for credit unions; it holds 49 per cent of consumer loans compared to 3 per cent for Savings & Loan’s and O-3 per cent for credit unions. l2 The battle over the l/4 per cent (Regulation Q rate) differential continues to rage however and it probably will be only a short period of time before savings and loan associations will have the authority to offer customer checking accounts in all areas of the nation. Already the courts have found credit union share drafts-another type of interestearning-deposit-to be legal.
managers about key issues in 1978 vs their probable importance in 1985 (3) management perceptions of the competitive environment in 1985, and likely (4). operating strategies in response to emerging environmental realities. The issues chosen are indicative of the ones currently being discussed in the trade and academic literature about the probable future operating environments facing financial managers.lO
Findings Issues of Importance in 1978 External Issues. Macro environmental
issues, (issues external to the firm) were perceived overall as being relatively important in 1978 (between 91 and 97 per cent considering them important) as shown in Table 1. The strongest overall macro-environmental issue was understanding various governmental/regulatory impacts on banking, as specified by 76 per cent of the respondents. Such issues as negotiable orders of withdrawal and increasing activity by the federal government in other areas of financial management point to the tremendous importance of these problems. Indeed, f&n&i institutions are among the most heavily regulated institutions in the nation. Thus, logically issues of regulation would be expected to rate very high in importance. Table 1. Perceived importance
Technology also continues to be an important issue in 1978 but perhaps not as important as one would have surmized given the continuing uncertainty surrounding electronic funds transfer systems.13 Indeed, more of the
of various activity issues in 1978
Issues
Slightly important
important
-
3.0
21 .o
40.0
36.0
1 *o
8.0
35.0
31 .o
25.0
2.0
6.0
42.0
34.0
16.0
-
3.0
30.0
32.0
35.0
18.6 16.7 8.8
33.3 43,l 24.5
25.5 19.6 26.5
17.6 11.8 39.2
Not important
Very important
Extremely important
The macro environment (1)
(2)
(3) (4)
Understanding the various governmental/regulatory impacts on your business Keeping up with technological developments which affect your business Being aware of social changes which can affect your operations Monitoring your competition and the economic forces which affect your business
Personnel problems (5) (6) (7)
Improving personnel hiring practices Affirmative action Improving employee relations
4.9 8.8 1.0
Issues of management philosophy _ (8) (9)
Establishing a philosophy of management Establishing long and short run objectives
Management (10) (11) (12) (13) (14)
4.0
6.0
32.0
32.0
26.0
-
8.7
32.0
34.0
25.2
7.8 5.8
147 1.0 21.4
37.3 12.7 40.8
25.5 31.4 23.3
14.7 54.9 8.7
1.9 1.0
6.8 11.7
22.3 50.5
25.2 21.4
43.7 15.5
operational controls
Obtaining a better working capital position Improving your profitability New Product development Reducing loan losses by better management Improving advertising effectiveness
Bank Management respondents rated this issue as not important or slightly important than any of the other four macro environmental issues evaluated. Awareness of social changes affecting operations was rated the least in overall importance among the four issues to which the respondents reacted. Clearly, however, it also is an issue of substance. Personnel Issues. The key problem in 1978 was improving
employee relations, likely because of the failure of salaries to keep up with cost of living. This continuing pressure plus a move toward white collar unionization and shifts toward more sophisticated technology require continual retraining of employees. The second most important of the three personnel issues evaluated was improving personnel hiring practices. Twenty-three per cent of the respondents indicated, however, that this was an issue of little or no importance. Likewise, affirmative action no longer seems to be the pressing issue it was during the late 1960s and early 1970s. Indeed, over 25 per cent of the respondents rated it as of little or no importance today. AfIirmative action programs apparently have become part of the on-going institutional routine for most firms. Issues ofManagement Philosophy. Bank management continues to struggle with the need to establish a philosophy of management and short and long run objectives as part of a strategic planning format.14 Over 50 per cent of the respondents each rated these issues as being of major importance. Part of the reason for this importance probably relates to the continuing merger ofindependent banks into holding companies and the aggressive behavior on the part of all types of financial institutions, both of which are now requiring a degree of sophisticated management and long range planning unique to the banking industry. Indeed, many persons contend that rhe concept of marketing was not really introduced into bank management thinking until the early 1970s. The current hard sell philosophy of many banks today requires a carefully articulated management philosophy, explicit objectives as to market share and profitability, and co-ordinated promotion and pricing strategies to properly position a bank against its competitors. Management
and Strategic Planning for the 1980s
37
unemployment. During the past several years however the reverse has been true. Indeed, in December I977 consumer and mortgage debt as a percentage of disposable income was 15.7 per cent, an all time record. And in March 1978, both consumer and instalment debt increased by a record seasonally adjusted $4*lbn.15 Some persons have forecast that the demand for additional capital will exceed new capital available by approximately $500bn to $7OObn during the 1975-1985 time period.16 The need for new product development was rated the least important of all the control issues facing management in 1978. Again, this probably reflects a recognition by banks of the new product possibilities already present as a result of electronic funds transfer system, NOW accounts, and the numerous other innovations currently being absorbed by the banking industry. Finally, and not unexpectedly, improving advertising affectiveness continues to be an issue of importance. Issues of Importance in 1978 vs 1985
This portion of the research sought to determine the probable future importance of issues in the 1980s as compared to their importance in 1978. The results are shown in Table 2. Societal Values and Business Ethics. Over 75 per cent of the respondents perceived that consumer activism in banking will be more important in 1985 than today. Likewise, slightly more than 60 per cent believe that the concern of society over the ethics of bankers will be more important. Perhaps this view by bankers is least partially a reaction to the public outcry over disclosures of questionable practices by Bert Lance. Management also foresees continuing concern by society with how the decisions of bank management will affect quality of life. Quality of life considerations are tied to such practices as redlining in making mortgage loans, meeting social and societal responsibilities, and making specific funds available for minority and inner-city projects. Finally, 38 per cent foresee banks as more involved in issues of pollution control in 1985, probably through loans for meeting government specifications for clear air and water.
Controls
Overwhelmingly, the two strongest issues of management controls in 1978 were the need to improve profitability, rated as of strong importance by 86.3 per cent of the respondents, and the need to reduce loan losses by better management, rated as strongly important by approximately 69 per cent of the respondents. These issues reflect the continuing tightening of the money supply available to financial institutions, the subsequent rise in the cost of securing funds and the necessarily higher loan rates. In a period of inflation such as is facing the United States and other nations, the demand for funds is likely to be quite strong, particularly when the inflation psychology of ‘buy now because it will cost more later’ affects the economy. Traditionally, consumers have responded to inflation by increasing savings and cutting back on spending because of the recognition that inflation signals the possibility of
Government Regulation. Bank management foresees no lessening in importance of governmental regulation. Indeed, over 77 per cent foresee increasing regulation, while approximately 65 per cent also foresee an increase in paperwork related to regulation in spite of recent efforts by the federal government to curtail the frustrations of providing such information. Operating Issues. Not unexpectedly, virtually all of the respondents foresee energy resources and energy costs as a percentage of total cost becoming increasingly important by 1985. Likewise, inflation is foreseen as more of a problem in the future as is the cost of capital, which is closely aligned with the degree of inflati0n.l’ Over 83 per cent of the respondents see the technological revolution which affected banks during the 1970s as being even more important in 1985.
38
Long
Range
Table
Planning
Vol. 12
2. Management
perceptions
August
1979
of the importance
Issues
Same importance in 1985 as now
of selected
issues in 1978 vs 1985
More important Less important in 1985 than now in 1985 than now
N.A.’
Societal ethics and issues
(1) Consumer activism relative to banking (consumerism)
15.5
75.7
8.7
-
30.1
43-7
23.3
2.9
26.5
60.8
12.7
-
36.0
38.0
18.0
8.0
47.1
45.1
7.8
-
(2) Society’s rejection of profit as the (3) (4) (5)
primary motive of bankers The concern of society over ethics of bankers Banking’s involvement in pollution issues Concern of society about how decisions of bank management will affect ‘quality of life’
Governmental regulation (6)
Governmental regulation
18.6
77.5
3.9
-
(7)
Paperwork related to governmental regulation
25.5
64.7
8.8
1 .o
6.9
90.2
2.9
-
Operating issues (8)
Shortages of energy resources
(9)
9.8
88.2
2.0
-
(11) (12)
Energy costs as a percent of total costs Revolutionary technological changes affecting banking (e.g. EFT) Inflation Cost of capital
14.7 25.5 29.0
83.3 73.5 70.0
2.0 1.0 1.0
-
(13) (14) (15)
Downtown center revitalization Shopping development Housing shortage
42.2 36.3 32.4
43.1 37.3 63.7
10.8 24.5 3.9
(10)
;:; -
Only 11 per cent see downtown revitalization as being of less importance in 1985 than today. However, approximately a fourth do perceive that shopping center development will be less important. Thus, in the eyes of these respondents it appears that the peak of shopping center construction has passed and that problems with energy and cost of materials are such as to curtail construction of these huge retailing complexes. Finally, virtually none of the respondents sees a lessening of the housing shortage. Indeed, over 63 per cent foresee that the housing shortage facing the United States will be even more important in 1985. No short run solutions to these problems are foreseen.
disagreed that marketing efforts will be less effective in attracting new retail business because the public will be harder to sell. However, the realities of increasingly tough and sophisticated competition are reflected in the over 91 per cent agreement that pricing of services will be an issue of major concern in 1985. Historically, banks and other financial institutions have paid little attention to the pricing of individual bank services which may run into the hundreds. Such notions as price elasticity, mark-up, skimming and penetration pricing have been largely foreign to the vocabulary of banking. Even today many financial institutions still do not think in these terms.
Competitive Realities for 1985 Respondents were then asked to reflect on the competitive environments which will likely face bank management in 1985. Without exception, respondents perceive that savings and loans associations and credit unions will be even more aggressive competitors, as seen in Table 3. Similarly, over 57 per cent disagree that banks will be the center for all consumer financial services. Indeed, this view is probably an accurate reflection of the reality of increasing penetration of broader aspects of the consumer market by savings and loan associations and credit unions.
Slightly more than 61 per cent of the respondents agree that remote handling of money will be well advanced by 1985 and that consumers will make cash transfers without leaving their homes. Personal contact with consumers, historically has been one of the primary of financial institutions. Indeed, marketing thrusts training of tellers and similar persons in customer relations and cross-selling techniques has been one of the main stays in the retailing of financial services.
Marketing is foreseen to continue to have a very important role in 1985. Specifically, half of the respondents
Further complicating perceived competitive realities in the view of almost 68 per cent of the respondents is that electronic funds transfer systems will allow electronic ‘branches’ in all major stores. This new innovation will further lessen the personal contact with consumers and
Bank Management Table 3. Management
perceptions
of the competitive
and Strategic Planning for the 1980s
environment
of 1985
(1)
(2)
Strongly agree
Agree
(3) Neutral or no opinion
9.7
51.5
8.7
28.2
consumer financial services
6.8
346
1.9
49.5
Marketing efforts will be less effective in attracting new retail business because the public will be harder to ‘sell’
3.9
37.3
8.8
44.1
Pricing of services will become an issue of major concern
41,7
49.5
6.8
1.9
-
Saving Et Loan Associations and credit unions will be more aggressive competition
54.4
42.7
1 .O
1.9
-
Premiums will be used less as competitive tools
4.9
35.9
33.0
25.2
1.0
EPT systems will allow electronic ‘branches’ in all major stores
8,7
59.2
15.5
16.5
-
The competitive environment
(4)
(5) Strongly disagree
Disagree
(1) By 1985 remote handling of money will be well advanced. Customers will make cash transfers without leaving their homes
1.9
(2) Banks will be the center for all
(3)
(4)
(5)
(6)
(7)
Table 4. Anticipated
shifts in management
strategy in responding
to the environments
(1)
(2)
Strongly agree
Agree
12-O
52.0
14.6
Banks will become increasingly conservative in financing new ventures
7.8
5.9
of 1985
Disagree
(5) Strongly disagree
27.0
7.0
2.0
55.3
11.7
18.4
-
5.9
19.2
14.7
37.3
2.9
Banks will promote to fewer distinct market segments in 1985 than today
2.0
16.7
19.6
54.9
6.9
(5)
Bank product innovations will be more substantial than superficial in 1985
4.0
59.0
29.0
8.0
(6)
Consumers in 1985 will be offered fewer product options by banks
1.0
10.7
14.6
67.0
Overall strategy perceptions
(3) Neutral on no opinion
.
(4)
(1) The growth area for the future will be more in retail banking and less in wholesale banking
(2) Expansion of banks will be more through increasing penetration of current markets than new branches
(3)
(4)
Productivity issues (1)
(2)
(3)
To offset constantly rising costs, banks will have to invest increasing amounts of money in capital equipment to reduce labor costs
-
6.8
_
7.8
49.0
26.5
15.7
1.0
The only way to battle inflation is to increase ‘productivity
10.7
28.2
19.4
35.0
6.8
Energy shortages and higher costs will cause bank executives to push for better heating systems, construction standards, and lighting innovations on all structures they finance
17.5
64.1
6.8
10.7
1 *o
39
40
Long Range Planning Vol. 12
August 1979
will provide fewer opportunities for cross-selling unless new marketing strategies are developed to retain customer loyalty. Clearly, the importance of convenience of location as a competitive variable likely will be lessened. These ‘electronic branches’ probably will be available in most major retail institutions by 1985, according to the respondents. Management Operating Strategies for 1985 Overall Strategy Perceptions. Overall management
strategy in 1985 seems to be geared to increasing penetration of current markets instead of expansion into likely new markets through branching, as reported approximately 70 per cent of management .(see Table 4). Further, management apparently anticipates the fine tuning of market segments to a greater extent than today. Less than 20 per cent of the respondents foresee that banks will promote to fewer distinct market segments in 1985. Indeed, almost 75 per cent perceive that consumers will be offered more financial service options, while 63 per cent perceive that bank product innovations will be more substantial. Thus, one can infer that banks will be even more aggressive in pursuit of consumer dollars but that they will be doing so by expanding product lines and further penetrating existing markets instead of seeking to move into new geographically distinct markets. However, a conscious strategy of market positioning is not reflected in the responses. Indeed, by seeking to further segment markets the banks are moving toward a philosophy of being all things to all people. Productivity.
Almost 82 per cent of the respondents perceive that energy and higher costs will cause bank executives to push for new heating systems, better construction standards, and lighting innovations on all structures they finance. Likewise, the majority see increasing amounts of money as necessary for investment in capital equipment to offset labor costs. Management appears basically uncertain as to the role of productivity increases in battling inflation.
Discussion
firm. Sophisticated planning must be an increasing reality. l9 Yet, banks, as is true of other types of corporations today, are oriented to short run results, at least partly because of the need to satisfy the demands of investors for yearly increases in corporate profitability and growth. However, comprehensive long range planning simply must be factored into the management philosophy of tomorrow’s bank managers. The number of events and the amount of information available however, often serve to cloud rather than clarify key issues. Increasing sensitivity to external issues thus is an absolute must in identifying key pressure points affecting business decisions.
References (1) Kotler presents why’s, how’s, of marketing audits for firms, nonprofit organizations, (1976).
News,
p. 12, 26 March,
(2) Richard 8. Stall, Marketing
in a service industry, Atlanta Economic Review, 28, (3), 15-18. May-June (1978).
(3)
Massachusetts’ outspoken 119, 27 March, (1978).
(4)
The fed bids to unlease checking accounts, Business Week, p. 69, 24 April, (1978). Joseph S. Mascia, Coping with interest on demand deposits, The Bankers Magazine, 161 (2). 58-64, March-April (1978).
(5)
CUs win a round on share drafts, Banking, April (1978).
(6)
Why debit cards have congress worried, Business Week, p. 26,15 May (1978). Linda Fenner Zimmer, ‘Cash dispensers, automated tellers come of age, Bank Administration, LIV, 19-31, May (1978).
(7)
W. H. Starbuck, Organizational growth and development. In Organizational Growth and Development, p. 43, W. H. worth, Middlesex, England : Starbuck, ed., Harmonds Penguin Books, LTD., (1971).
(8)
Denis F. Healy, Environmental pressures and marketing in the 1970s. Long Range Planning, pp. 41-45. June (1975).
(9)
Jennifer Tanburn, The influence of retailing trends on the food industry, Long Range Planning, p. 10. June (1975).
(10)
The sample for this research was selected from membership in the Young Bankers Association of one Southeastern state in the United States. The response rate to a mailed questionnaire was 41 per cent. Generalizations from this sample to other areas of the United States are possible to some extent because national legislation governing banks and other financial institutions affect all states. Further, competitive pressures, new technology, affirmative action, energy, the state of the economy, and national and international politics affect all financial institutions to basically the same extent. State regulations are, of course, unique to each state. The characteristics of the sample were as follows: Fifty per cent of the respondents are employed by state banks and 50 per cent by national banks; one-third of the sample of 103 respondents were members of a bank holding company; 80 per cent of the respondents have been involved in banking from 1 to 10 years and 17 per cent for more than 10 years. Overall, 44 per cent of the respondents were loan officers. The persons included in the sample reflect those individuals who likely will be making most senior level management decisions by 1985.
(11)
Daniel A. Christpherson, Credit unions: moving up on the totem oole. Benkinu, LXX, (3). 42, March (1978). David S. Kidweif and Richard L. Peterson, A close look at credit unions, The Bankers Magazine, 161 (1). 71-80. JanuaryFebruary (1978).
(12)
Capitol events, Credit Union Magazine,
The roots of change to occur in the 1980s are burrowing today. The issues appear to be shortages in energy resources, increasing energy costs, technological revolution, increasing government regulation, shortages of capital, and increasingly severe competition for consumer markets. These dynamic environmental factors are occurring at a period of time when the United States is in the midst of one of the great transformations in Western civilization.‘* Clearly shifts in consumer attitudes and behavior patterns are difficult and complex to monitor. The modern management concept however requires a continuous monitoring of the various environments facing management so operating philosophies can be adjusted to an ever-changing reality. Periodic monitoring of the foreseeable future in a manner similar to that outlined in this paper can help executives respond quickly to early warning signs of eminent changes in the operating environment of the
Marketing
bank regulator,
Business Week,
LXX
(4),
86,
p. 17. May (1978).
Bank Management (13)
For further information see the following articles in The Bankers Magazine, 61 (2) March-April (1978). Steven A. Rhodes, Sharing and access in a EFT world, pp. 26-31 ; Dominic Disario, Jr., Home-line EFT terminals-a phase implementation approach, pp. 32-41 ; Dale Reistad, Where we’re going, pp. 24-25 ; Olin S. Pugh and Franklin J. Ingram, EFT and the public, pp. 42-52; Richard J. Author, EFT systems-a California report, pp. 53-58.
(14)
Norman R. Altenhoff, Putting strategic planning to work, The BankebMagazine, 161 (2) 74-79, March-April (1978).
(15)
Rising prices radicalize consumer spending, Business Week, p. 139,22 May (1978).
and Strategic Planning for the 1980s
41
(16)
Albert Bates, The super stores: emerging innovations in retailing. In Robert Robicheaux er a/., eds., Marketing: Contemporary Dimensions. p. 207, Houghton Mifflin, Boston (1977).
(17)
The controller: inflation gives him more clout with management, Business Week, pp. 84-95, 15 August (1977).
(18)
Grey Matter, 47 (1), 1, (1976).
(19)
Herbert E. Johnson, Comprehensive corporate planning for commercial banks, Bank Administration, LII, 20-25, January (1978) ; Arnold G. Danielson, Keys to successful long-range planning, Banking, XLL (4), 83-84, April (1978).