This paper examines the relationship between strategic planning and bank performance, arguing that banks with formal strategic plans consistently outperform those without. It surveys major industry trends — including disintermediation, rising transaction volumes, shifting customer expectations, and deregulation — that have transformed the competitive landscape over recent decades. The paper distinguishes between the strategic needs of small, medium, and large banks, emphasizing that smaller institutions face narrower margins for error and must therefore plan more deliberately. It identifies four key strategic focus areas for smaller banks and outlines the fundamental components that any bank's strategic plan should address, from market focus and personnel development to transaction cost management and promotion.
Strategic planning improves bank performance. There is a clear positive correlation between a bank's quality and quantity of strategic planning and its economic performance (Hopkins). The purpose of this paper is to demonstrate the link between quality strategic planning and performance, but more importantly to suggest why strategic planning produces benefits in banks' bottom lines.
Banks have been more affected by economic changes than most other industries over the past 20 years. All the major business trends appear to have influenced how banks compete for customers and amongst themselves. These major trends include:
Disintermediation due to the Internet and other services taking on some of banks' traditional functions, such as check-writing, bill settlement, cash management, and money transfers. This trend started relatively early in the PC and Internet era but has accelerated in recent years as many non-bank institutions have taken on banking functions — from airlines and Walmart issuing credit cards to money transfers through PayPal or Western Union.
A significant increase in the number of banking transactions, countered by a dramatic decrease in the cost per transaction. This has resulted in lower transaction fees and has forced banks to improve back-office operations or perish.
Shifting customer expectations, which reduce reliance on brick-and-mortar branches and increase demands for ease of use. This is not always driven by Internet or financial software adoption. Customers may expect to top up their wallets at ATM machines, make deposits at local supermarkets, or pay bills online.
Increased competition for customer savings and loans. Whereas customer choices in the past were limited by geography, personal relationships with bankers, or the difficulty of doing business out-of-state, individuals are now free to shop nationwide — or even worldwide — for the most attractive rates on their savings.
Added to these technology and consumer changes has been a host of legal changes that 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 significant among these was the repeal of the Glass-Steagall Act, which had created a "Chinese Wall" between banks and investment houses. Until its repeal, banks could not easily compete for stocks, bonds, and mutual fund business.
Large companies have the luxury of resources and ongoing 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, and 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 firsthand experience.
At the same time, small banks often lack strategic bandwidth and skills. The CEO of a small bank is doing everything from meeting key customers to training new employees, which means strategic planning can be pushed to the back burner too often.
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 staff needed 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 largest 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 enjoy outsized advantages over their big-city counterparts when it comes to finding and retaining customers. They have a closer appreciation of customers' businesses and assets, and can therefore make better-informed lending decisions.
Medium-sized banks tend to be less profitable and secure than banks at either end of the scale. Lacking the specific expertise or well-defined niches of small banks, they compete with larger banks for business that is rapidly becoming commoditized. Research on G7 countries has found robust evidence that both large and smaller banks outperform those in the middle (Scholtens).
This paper focuses primarily on small banks' need for and exercise of strategic planning. Very large banks typically embark on elaborate strategic planning exercises, while planning may be quite variable among smaller institutions.
"Four niche and cost-focused strategic priorities for smaller banks"
"Market focus, people, assets, costs, and promotion"
The preponderance of evidence indicates that banks which employ strategic planning are more profitable than those that do not. In addition, extraneous influences, increasing competition, and lower barriers to entry have changed the banking world so much that, without a strategic plan, a bank risks being pushed aside. The option of maintaining the old, people-intensive, high-cost methods is no longer available.
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