MarketSim Implications of

Integrated DecisioningIn Bank Training – Invest in your

best

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Topics of Discussion

Strengths & Weaknesses of Humans in Decision Making

Strategies Available to Retail Banking

Linking the Financial Accounting Principles View of the World to the Balanced Scorecard

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Strengths & Weaknesses

• Pattern #1: 1, 2, 4, 8, ?, ?

• Pattern #2: 1, 4, 7, 10, ?, ?

• We’re pretty good at finding patterns and pushing them forward

• We’re pretty good at finding patterns even when there aren’t any!

• We’re pretty good a finding causation even when there isn’t any!!!

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Strengths & Weaknesses

• I’ve done this experiment for the last 9 events and so far it has turned up heads 9 times in a row…

• Heads or Tails?

• We’re not very good at

estimating odds

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• Are you a better than average driver?

Strengths & Weaknesses

• We are blindly optimistic.

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So, Bill Gates and Dwight Howard walk into this bar…

∅

Strengths & Weaknesses

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Strengths & Weaknesses

• Natural versus Artificial Distribution

• Height versus Wealth versus Losses

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Strengths & Weaknesses

• Behavioral Economics versus the Invisible Hand

• Game Theory versus Homo Economus

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10

What is fair?

• A first player (the proposer) receives a sum of money and proposes how to divide the sum between himself and another player.

• The second player (the responder) chooses to either accept or reject this proposal.

• If the second player accepts, the money is split according to the proposal.

• If the second player rejects, neither player receives any money.

• The game is typically played only once so that reciprocation is not an issue.

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Game Theory

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Developing a Tolerance of Ambiguity

• Being able to making decisions without a full set of information

• Being able to make decisions quickly

• Being able to taking measured action without understanding how everything works

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How to Make Decisions

From Smart Choices: by Hammond, Keeney, and Raiffa

1. Work on the right problem.2. Identify all criteria.3. Create imaginative alternatives.4. Understand the consequences.5. Grapple with your tradeoffs.6. Clarify your uncertainties.7. Think hard about your risk tolerance.8. Consider linked decisions.

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M. Porter’s Generic Strategies

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Strategic Planning

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Banking Strategy

With…

Rising Customer Acquisition Costs

Burdensome Delivery Cost Issues

Top Line Revenue Growth Issues

New Entrant Competition Issues

Risk Issues

Regulatory Issues

Profit Pressure to Carry the Bank

Therefore you must...

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Know and Commit to your Strategy!

Know your Customers

Know your Numbers

Banking Strategy

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Earnings Power Formula

NIM Net Interest Margin

NII Non Interest Income

NIE Non Interest Expense

PLL Provision for Loan Losses

NIBT Net Income Before Taxes

NIM NII NIE PLL NIBT

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Not Exactly!

The financials tell the entire story…

Right?

So…

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Financial Views

Advantages

Numbers based

Balances to management and shareholders’ view of the #s

Systems easily handle Financials

Allows a head of retail to stay one step ahead of accountability

Problems

Lagging indicator

Not really an accurate proxy of results

Does not identify drivers of profits

We can “manage” it.

-+

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How Can We Use Financial Analysis?

Move GAAP out of the accounting area to the folks who generate profits

Can be computed on a single customer, a geography, or a market segment

Pushes to consider “drivers”

# of Customers

Products per

Customer

Product Profitability

(risk adjusted)

Delivery

CostsProfits

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Drivers of Success

Financials

Delivery

Playing

By RulesProduct

Customer

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Which Brings Us Back to BSI…

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…Then Taking us to “Outcomes”

Decide what you want to

occur

Long-run focused

Not just bottom line

related

Predictable, logical

Should drive Profitability

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What Does All This Mean?

Stars

Cash Cows Dogs

Question Marks

quickMBA.com

Relative Market Share(Cash Generation)

Mar

ket

Gro

wth

Rat

e(C

ash

Usa

ge

)High

Hig

hL

ow

Low

MarketSimBusiness PlanInstructions

In Bank Training – Invest in your best

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Business Plan Preparation

What kind of bank do you want to be?

What will the financials look like?

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Assignments

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Assignment

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Assignment

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Assignment

What is the overall condition of retail at the bank?

What are the retail bank’s strengths and weaknesses?

STRENGTHS WEAKNESSES

Customer

1.2.3.4.5.

1.2.3.4.5.

Product

1.2.3.

1.2.3.

Channel

1.2.3.

1.2.3.

Financials

1.2.3.

1.2.3.

Retail Bank Condition Consensus

Retail Bank Condition Consensus

INSTRUCTIONSIn your last 3 decisions you operated based on your Management Direction Consensus. It is now time to be your own retail bank (BYOB). By team, prepare a business plan that you will use to guide your next 3 years’ decisions.

STRATEGIC PLANNINGUsing the grid below, rank by attractiveness the various customer segments and your bank’s and competitor’s ability to compete. Draw conclusion based on your bank’s overall direction.

LOW MEDIUM HIGH

Retail Banking Strategy Planning Grid

Business Strengths

Seg

men

t A

ttra

ctiv

en

ess

TAR

GE

TH

OL

DD

RO

P

The Segments are:

JS = Just StartingSIWC = Single Income White CollarWP = Working PoorPRE = Pre-retired through 65FH = First HouseRET = RetiredEA = Emerging AffluentHIMS = High Income Make & SpendBC = Blue CollarMM = Money Mogul

MarketSim Business Plan

List in order those segments that are the most attractive to you and why.

Segment Why Attractive?

1.

2.

3.

4.

1.

2.

3.

4.

List in order those segments that are the least attractive to you and why.

Segment Why Attractive?

1.

2.

3.

4.

1.

2.

3.

4.

MarketSim Business Plan

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What do you think other banks in your community will be doing? If they are going after the same segment, what will make your team successful?

Prepare below a Mission Statement identifying the broad purpose of your retail business. Please include targeted customer segments, acceptable risk levels, return levels, etc.

MarketSim Business Plan

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What is the most important action required next year?

Individually, consider the direction of the bank you will be managing in MarketSim. Then as a management team, come to a mutual agreement as to the changes that need to be made. List below your consensus of the 4 or 5 actions required over the next year to preserve the bank’s strengths and/or correct its weaknesses. This list forms the basis for your decision sets.

CONDITION

1

2

3

4

5

ACTION

Management Direction Consensus

Management Direction Consensus

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Hints

Strategy first

Customers second

Financials are derived from strategy

Balanced Scorecard measures follow from strategy