MarketSim
Implications of
Integrated Decisioning
In Bank Training – Invest in your best
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
2
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!!!
3
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
4
Strengths & Weaknesses
• Are you a better than average driver?
• We are blindly optimistic.
5
Strengths & Weaknesses
So, Bill Gates and Dwight Howard walk
into this bar…
∅
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Strengths & Weaknesses
• Natural versus Artificial Distribution
• Height versus Wealth versus Losses
7
Strengths & Weaknesses
• Behavioral Economics versus the
Invisible Hand
• Game Theory versus Homo
Economus
8
9
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
1.
2.
3.
4.
5.
6.
7.
8.
Work on the right problem.
Identify all criteria.
Create imaginative alternatives.
Understand the consequences.
Grapple with your tradeoffs.
Clarify your uncertainties.
Think hard about your risk tolerance.
Consider linked decisions.
From Smart Choices: by Hammond, Keeney, and Raiffa
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M. Porter’s Generic Strategies
14
Strategic Planning
15
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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Banking Strategy
Know and Commit
to your Strategy!
Know your
Customers
Know your
Numbers
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Earnings Power Formula
NIM
NII
NIM
NII
NIE
PLL
NIBT
NIE
PLL
Net Interest Margin
Non Interest Income
Non Interest Expense
Provision for Loan Losses
Net Income Before Taxes
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NIBT
So…
The financials tell the entire story…
Right?
Not Exactly!
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Financial Views
+
Advantages
Problems
Numbers based
Lagging indicator
Balances to management
and shareholders’ view of
the #s
Not really an accurate
proxy of results
Systems easily handle
Financials
Does not identify drivers
of profits
Allows a head of retail to
stay one step ahead of
accountability
We can “manage” it.
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-
How Can We Use Financial Analysis?
# of
Customers
Products
per
Customer
Product
Profitability
(risk
adjusted)
Delivery
Costs
Profits
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”
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Drivers of Success
Financials
Customer
Delivery
Playing
By Rules
Product
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Which Brings Us Back to BSI…
23
…Then Taking us to “Outcomes”
Decide what
you want to
occur
Long-run
focused
Predictable,
logical
Not just
bottom line
related
Should drive
Profitability
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What Does All This Mean?
Relative Market Share
(Cash Generation)
High
Low
Question Marks
High
Low
(Cash Usage)
Market Growth Rate
Stars
Dogs
Cash Cows
quickMBA.com
25
MarketSim
Business Plan
Instructions
In Bank Training – Invest in your best
Business Plan Preparation
What kind of bank do you
want to be?
What will the financials look
like?
27
Assignments
28
Assignment
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Assignment
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Assignment
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Retail Bank Condition Consensus
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
MarketSim Business Plan
INSTRUCTIONS
In 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 PLANNING
Using 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.
Retail Banking Strategy Planning Grid
MEDIUM
HIGH
TARGET
HOLD
Segment Attractiveness
LOW
DROP
Business Strengths
The Segments are:
JS = Just Starting
SIWC = Single Income White Collar
WP = Working Poor
PRE = Pre-retired through 65
FH = First House
RET = Retired
EA = Emerging Affluent
HIMS = High Income Make & Spend
BC = Blue Collar
MM = Money Mogul
MarketSim Business Plan
List in order those segments that are the most attractive to you and why.
Segment
Why Attractive?
1.
1.
2.
2.
3.
3.
4.
4.
List in order those segments that are the least attractive to you and why.
Segment
Why Attractive?
1.
1.
2.
2.
3.
3.
4.
4.
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MarketSim Business Plan
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.
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Management Direction Consensus
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.
What is the most important action required next year?
CONDITION
1
2
3
4
5
ACTION
Management Direction Consensus
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Hints
Strategy first
Customers second
Financials are derived from strategy
Balanced Scorecard measures follow from
strategy
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