Planning Process
Step 1. Strategic Mission of the Bank:
Strategic Mission is a statement of the bank's current and future expected product, market, and
geographical scope, as well as the unique competencies the bank has and will developed to achieve
a long-term sustainable competitive advantage;, and the priorities for the strategic agenda to take
advantage of identified opportunities and protect the bank from identified threats. As such, it
provides basic guiding principles and a set of expectations that condition the rest of the strategic
activities at all managerial levels.
Market segmentation. The cornerstone of strategic management and planning is the 11 segmentation
of the bank's activities into businesses and functional units in accordance 12 with characteristics and
demands of separate market segments.
Organizational structure The central question in the design of the organization is to 14 identify key
responsibilities representing the major tasks of the bank and allocate the proper levels of authorities
to facilitate the use of the necessary resources to execute the
assigned tasks.
Institutional Philosophy addresses the following issues:
1) The relationship between the bank and its primary stakeholders, i.e., customers, shareholders,
employees, and the communities in which it operates;
2) A statement of broad objectives of the bank's expected performance, primarily in terms of growth
and profitability;
22 3) A definition of basic corporate policies with regard to issues such as management 23 style,
human resource management, marketing technology, etc;
4) A statement of corporate culture and values pertaining to ethics, beliefs, and rules of
personnel and bank behavior
Step 2: Mission of the Strategic Business Units
2 Mission of the strategic business units is the expression of the business purpose, as 3 well as
standards defining the required degree of excellence to assume a position of 4 competitive leadership.
The primary information that should be contained in a statement 5 of mission is a clear definition of
the current and future business scope (product, market, 6 and geographic) and ways to compete.
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Mission should contain the criteria to assess the success in its implementation, for instance it could
be quantified as growth of profitability, increase of market share or increase in the level of customer
satisfaction and so on. Mission of every SBU has to promote to the fulfillment of the mission of the
bank.
Step 3: Formulation of Business Goals and Strategies
A business strategy is a well-coordinated set of programs aimed at securing a long-term sustainable
competitive advantage. These programs should respond to achievement of the business goals
established for the business from the bank level, to the desired changes in the mission of the business,
address the opportunities and threats revealed during the assessment of the environment. It is
important that these programs should reinforce strengths and neutralize weaknesses uncovered in the
internal analysis of bank activity.
Step 4: Formulation of Functional Strategies
Formulation of functional strategies is based on understanding what the competition is doing in terms
of developing unique capabilities, and being able to match or exceed their competencies. From a
strategic point of view, simply knowing the bank's cost base or productivity rate is not relevant unless
this is positioned in full contrast to similar factors being developed or implemented by the
competition. It is not the bank's costs that matter, but it is the bank's costs relative to its key
competitors.
Step 5: Bank Level Approval and Resource Allocation Prioritization
Once the business and functional units' strategies are coordinated they must receive 3 bank level
approval. ; Based upon this approval, the senior management team then must 4 rank order the various
strategies in order to allocate the bank's resources. (See section 5 devoted to analysis of the strategic
choice).
Step 6: Definition and Evaluation of Target Programs
After receiving prioritization and approval of the business's strategies, the next step is to define and
evaluate target programs for change or improvement. These programs must be linked to the
business objectives and strategies.
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Step 7: Definition of Functional Requirements and Costing
Once the businesses have formulated their target programs for change, they must be distributed to the
appropriate functional units for assessment of the requirements relative to the current capabilities of
the bank and costing for delivery. The key here is that the functional units are not evaluating the
merits of the program but rather its feasibility and cost with respect to the bank's current capabilities.
Step 8: Approval of Long-term Programs
Once business and functional units have defined required programs and developed detailed time and
costing tables, they are presented to senior management at the bank level for final approval and
resource allocation. These programs are broad in nature and typically cover a multi-year planning
horizon, which are understood to represent the long-term strategic objectives of the business unit.
Step 9: Definition of Action Plans and the Budget
In addition to the broad programs, there are specific action plans with duration of between six and
eighteen months. These action plans are more tactical in nature and needed for realization of
specific performance objectives. These action plans must be supported with specific budgets and
performance measures for management control.
Step 10: Definition of Functional Responsibilities and Costing
Action plans, once again, involve functional commitments translating a business strategy into an
articulation of integrated multi-functional activities. These activities must be approved by the
appropriate functional units and further translated into the annual budget.
Step 11: The Final Plan and Budget Approval
The final annual operative and functional plan is then submitted to senior management for sanctioning
and resource allocation. There are three primary categories of information, which is part of a well-
designed operative plan. The first is a narrative concerning key descriptive elements of the target
programs and action plans. The second is a budget, and the third is a definition of performance
measures for management control.
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External Environmental Analysis
Bank strategists faced with the need to understand the effects of the environment, are dealing with a
difficult problem. The notion of the environment encapsulates very many different influences, and
the difficulty is in understanding this diversity of factors in a way, which can contribute to strategic
decision making.
The attempt to adopt a ‘balance sheet’ approach, which consists of listing all conceivable
environmental influences in an attempt to identify opportunities and threats, is very dangerous. It is
relatively easy to see that a bank might have a whole range of 4 things going for it and a range going
against it: long lists can be generated for most banks. However, if external analysis consists of this
alone the limitations are significant. No overall picture emerges of what are really important
influences on the bank. What is more, there is the danger that attempts will be made to deal with
environmental influences in a piecemeal way. As the result there will be impossible to make
systematic strategic response.
The difficulty of the bank strategist are further complicated by having to make strategic decisions and
pursue strategies which it is capable of implementing and sustaining.
In banking strategic capability is crucially linked to its competitive position and its 14 ability to sustain
competitive advantage;. In some instances banks have the added burden of social and public
responsibilities. Here, strategic capability also is concerned with the extent to which the bank is able
to fulfill its expected role within acceptable financial limits and without undue overlap with products
of bank-competitors.
The external analysis attempts to diagnose the general condition of the banking industry as a whole.
It concentrates on assessing the overall economic, political, technological, and social factors that are
affecting the banking industry.
Economy:
Inflationary trends;
Economic growth, both nationally and regionally;
The performance of different industrial sectors, such as energy, transportation,
and timber;
Foreign investment trends.
Legal and Regulatory:
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Bank capital; and reserve requirements;
Adoption of deposit insurance protection;
Migration to international accounting standards;
Enforceability of security agreements.
Competition:
Relative quality and pricing of bank’s products and services;
Financial condition and stability of competitors;
Service delivery relative to competition;
Comparative advertising and marketing.
Technology and automation
Technological advances to increase volumes and lower costs;
Development of 24 hours a day service in market;
Potential of automation ; to reduce paper-intensive processes;
Comparative quality of management information systems.
Political and cultural issues
Political uncertainties and their effects on net inward investment;
Confidence in the banking system and its effect on savings deposits;
Uncertain future of state-owned enterprises;
Trends in privatization of state-owned property.
Market area
Success in identifying and meeting customer needs;
Market leader or market follower;
Bank customer profile compared to socioeconomic market characteristics;
Business and economic trends in the market area.
One of the challenges in analysing the key external factors is to obtain good sources of information.
The customer data base of the bank;
Interviews with customers about their suppliers and customers;
Western correspondent banks, especially their credit departments;
Annual reports of competitor banks;
Reports of directors and employees of the bank
Local or national banking association.
Assessment of Competitive Position
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This other one is analyses the bank’s competitive position. That is how it stands in
Relation to those other banks competing for the same customers. This may be done in a number of
ways with high performance banks concentrating on:
Strategic group analysis, which seeks to detail/map competitors in terms of similarities and
dissimilarities of the strategies they follow;
Market share analysis, which seeks to detail/map out the relative power of a bank within its market.
Strategic Group Analysis
It is useful to consider the extent to which banks differ in terms of:
Extent of product or service diversity;
Extent of geographic coverage;
Number of market segments served;
Distribution channels used;
Marketing effort/strategies;
Product or service quality;
Technology leadership/capabilities;
Operational cost position;
Pricing policy;
Size of organization.
Market Share
The extent to which one competitor has a greater market share than another is an important aspect of
the capability of that competitor. Market share is, in effect, a measure of market power and it is
important to gain an understanding of both the structure of a market and the relative power of
competitors within this structure. One way of doing this is to break down the market according to
business segments and to examine market shares within those business segments.
INTERNAL ANALYSIS
Type of strategic analysis attempts to assess the internal features of the bank, which constitutes the
other half of the overall situational analysis. It is the second part of Situational Analysis. It
concentrates on assessing the organizational structure; financial condition; products and services, and
human resources.
INTERNAL BANK PRICES (RATES) – See. Transfer Prices.
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INVENTIONS – New products, services, operations and organizational procedures which have not
been implemented in business before. See innovations.
INVESTMENT RISK – Risk of changes in market value of securities and other investment assets.
INVESTMENTS – The initial meaning of this term refers to financing of construction, modernization,
expansion and renovation deriving from Latin word "investio" – "dressing". The example of this
understanding of investments in banking is the term "investment loan". Investments loans used to
finance production expansion, modernization and technological innovations. Another meaning of this
term corresponds to supplying capital without taking the function of day-to-day management of the
given business. The terms "bank investments" and "investment bank" relate to these understanding
of investments.
IT MANAGEMENT – Information technology management includes development and
implementation of bank IT strategy to meet current and future market demands, as well as monitoring
and supporting bank current operations by IT technologies.
LENDING STANDARDS – Document translating bank Credit policy into actions and cover the
following key elements: process of financial information collection and analysis; requirements to
collateral, guarantors and coborrowers; administrative standards and rules of organization of lending;
rules for evaluation of creditworthiness; requirements for structure of documentation; regulation for
special types of lending,
LIQUID AND NON LIQUID ASSETS – High liquid assets consist of cash in hand, demand deposits,
hard currency reserves, as well as marketable short-term securities. Liquid assets additionally to the
first group contain loans that mature in 30 days. Generally speaking it is possible to consider precious
metals as liquid assets. However the market for these commodities in Ethiopia is still underdeveloped
and these assets are not really liquid. The least liquid assets are the long-term non-negotiable financial
assets (shares in closed corporations, long-term loans), than premises. Bank liquidity can be improved
by securitization of loan portfolio.
LIQUIDITY RATIOS – Limits in the form of liquidity ratios that are used to assess the bank’s ability
to meet its short-term obligations. They include ratios of assets to liabilities adjusted to their maturity
and volatility, ratio of liquid assets to assets.
LIQUIDITY RISK – Risk that bank would have deficit of cash and fail to pay out deposits and meet
obligations to other creditors, as well as its legitimate obligations to finance the borrowers. At the
same time there is a opposite threat that bank would be too liquid. This situation also undermines
profitability because the excess of non-earning assets is financed from interest-bearing liabilities.
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LOAN AUDIT – Regular review of loan portfolio by person(s) that are not directly involved in
lending.
LOAN LIQUIDITY – The degree of cash inflows before loan maturity. It is affected by the level of
interest rate and repayment schedule.
LOAN PORTFOLIO – A collection of all bank's loans.
LOAN PRICING – Procedure of calculating the overall level of compensation to ensure bank target
profitability with taking into account credit rating of the given borrower. It is a part of loan portfolio
management.
LOAN STRUCTURE – The fundamental loan structure parameters: amount; repayment schedule;
monitoring requirements; security; documentation; pricing. It recommended by the credit officer and
approved by the authorized individuals and/or committee. The main factors affect on loan structure
are the specific features of borrower’s business and its creditworthiness.
LONG-TERM ASSETS AND LIABILITIES – Assets and Liabilities with maturities longer than one
year..
MANAGEMENT INFORMATION SYSTEM (MIS) – System designed to collect, verify, process,
analyze, store, allocate and transfer data that are necessary for effective decision making within the
bank. Examples of important management information systems are: credit management information
systems; performance measurement systems; marketing information system and human resources
management information system.
MARGIN – 1). In Ethiopia traditionally margin refers to absolute difference between two numbers.
For example interest margin (interests received interests spent); 2). It is ratio. For example profit
margin is earning to revenues ratio, net interest margin (net interest income/earning assets.
MARKETING – The approach to planning of developing, distribution and promotion banking
products and services that enables for bank to achieve its goals by accounting customer demands.
MARKET NICHE – It corresponds to bank strategy of concentration on target, narrower market
segment.
MARKET RISK – Type of risk that arises due to chance of negative influence of market factors on
the value of assets, liabilities and off-balance sheet items. Sometimes the terms market risk and price
risk are used interchangeably. It takes place when two other sub-categories of price risk (foreign
currency risk and interest rate risk) are considered independently. According to that simplified
classification the only sub-category of price risk is the market risk and terms are used interchangeably.
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MARKET SEGMENTATION – The cornerstone of strategic management and planning. It is
accomplished is by dividing the bank’s larger market area into distinct segments. A market segment
is defined as a group of customers with largely similar product and service requirements that are
different from those of other customers.
MARKETING STRATEGY – Approaches developed and adopted by the bank in order to achieve its
specific goals on its target markets. They are based on the use of a set of banking services and
products, specially provided for achieving those aims. They take into consideration the difference in
profitability of various elements of this set as well as the system of their distribution and eventually
methods of bringing the banking services and products to the consumers.
MARKETING MIX – Combination of products, operations and services that have been especially
developed or adopted for particular market and bank business segment on the basis of pricing,
distribution and promotion. Particular marketing mix should be developed for every target market or
business segment.
MISSION – A statement of the bank's current and future expected product, market, and geographical
scope, as well as the unique competencies the bank has and will developed to achieve a long-term
sustainable competitive advantage, and the priorities for the strategic agenda to take advantage of
identified opportunities and protect the bank from identified threats. As such, it provides basic guiding
principles and a set of expectations that condition the rest of the strategic activities at all managerial
levels.
MONEY MARKET – Market for short-term (shorter than 1 year) financial instruments.
NET BURDEN – Difference between non-interest income and non-interest expenses.
NET INTEREST MARGIN – The key ratio to assess bank performance. It is the ratio of net interest
income to the volume of earning assets. It corresponds to traditional Ethiopian ratio profitability of
earning assets. Net interest margin adjusted for loan losses is the ratio where in nominator is net
interest income and denominator - total loans. This ratio serves as indicator of success of bank's credit
policy.
NET WORTH – Bank assets minus borrowing funds. It represent the value of bank owners'
investments adjusted for results of its operations that are represented by retained earnings or
accumulated losses.
OPERATING LEASING – Short-term lease agreement, which term is shorter than economic life of
the asset. It is simplest typical lease.
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OPERATIONS – One of the three major bank’s activities. It includes taking deposits, transactions and
settlements, cash management, accounting, information processing and implementation of IT, bank
management and administration.
OPTION – A contract that gives its owner the right to buy or sell some commodity or financial
instrument at a fixed price or before a given date.
OVERHEADS RISK – Type of functional risk arises from inconsistency between bank’s overheads
and net interest margin. In broad sense is risk of banking inefficiency.
PERFORMANCE MEASUREMENT SYSTEM – Management information system to deliver and
assess information about elements of the business for which certain managers are accountable, to
evaluate organizational units performance against business objectives., as well as to link raw data and
financial results to standard performance benchmarks. It serves to quantify strategic goals and
translate strategic plan objectives into indicators of day-to-day activity.
PERSONAL PROMOTION OF BANKING SERVICES – Marketing function which means direct
communication with bank’s customer typically large firm. It is conducted by contact person
authorized by bank and representative authorized by client.
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