Research Articles Base: Instructions On Dissertation

http://www03.ibm.com/industries/financialservices/doc/content/landing/425378103.html           CitiFinancial are also re cobbling together an integrated view of the customer but certain channels are still predominately product-centric and management control remains within business units. With interdependent processes across competencies and business units, banks are struggling with overwhelming operational complexity. Connections between different areas of the enterprise tend to be static, inflexible and sometimes manual. Without adequate integration, the cost associated with the resulting organizational complexity can sometimes rise to the point where it offsets any benefits gained from shared processes. Moving into the future, banks will get relief. Technology advances will ease the friction of enterprise reconfiguration, and financial institutions will become more comfortable operating across product lines. As collaborative capabilities expand, companies will be able to push the concept of shared processes past their initial competency-based structures to a much more granular business composition. To a large extent, technology advances are the key enablers that are making it possible for firms to operate in an on demand fashion. As IT becomes more open, integrated, virtualized and autonomic, it provides new ways of collaborating, eases business integration and reconfiguration and helps firms better manage the rising complexity of managing IT in order to achieve the state of flexibility, CitiFinancial’s IT infrastructure needs to be: -          Based on open standards — to simplify systems integration and adapt to technology changes rapidly -          Integrated — to facilitate transaction and process integration across the enterprise; allow real-time connectivity among partners, suppliers and customers; enable active data mining and decision support -          Virtualized — so that distributed computing resources are shared and managed as a single, virtual data center to increase the utilization of existing assets and lower IT costs -          Autonomic — with systems that can be managed remotely, have embedded privacy protection and security features and are capable of self-optimization, self-diagnosis and self-healing             U.S.: CitiFinancial and ANTIC Announce Expansion of Partnership   CitiFinancial and the National Training and Information Center (ANTIC) today announced the expansion of their partnership, designed to promote stable home ownership in communities around the country. Nearly a year after striking a groundbreaking agreement, CitiFinancial and ANTIC have broadened their commitment to not only meet the lending needs of individuals and communities but to promote financial education, a fundamental building block to financial stability in neighborhoods across the country. CitiFinancial and ANTIC and its network of grassroots organizations in Chicago, Central Illinois, Cincinnati, Cleveland, Des Moines, Indianapolis and Syracuse are pleased to announce that a specialized program will be developed to promote financial literacy for individuals. CitiFinancial will provide its financial education curriculum, as well as 0,000 over two years to support the program. ANTIC and its local community groups and CitiFinancial will work together to blend their resources for the common goal of developing individuals’ personal finance skills, enabling them to make sound financial decisions. “CitiFinancial is pleased its relationship with ANTIC and its community-based organizations continues to strengthen and expand,” said Harry Goff, President and CEO, CitiFinancial.       CitiFinancial and ANTIC will continue to work together to: -          Review the progress of CitiFinancial’s Real Estate Lending Initiatives and encourage the adoption of similar practices by other lenders -          Focus on a multi-stage foreclosure review process for borrowers in ANTIC and local-affiliate cities -          Develop and promote affordable mortgage product solutions for customers, especially in the communities served by ANTIC and its affiliates -          Implement a review and repair process for loans submitted by borrowers from cities served by ANTIC and its affiliates CitiFinancial continues to make enhancements to its industry-leading changes to its lending and sales practices. Most recently, CitiFinancial introduced a new mortgage product that provides a near-prime rate loan to qualified applicants through its branch network. This is in addition to the elimination of single premium credit insurance for real estate secured loans a reduction of the maximum number of points charged on real estate secured loans originated via CitiFinancial’s branch network to three from five; the implementation of Customer First – redesign of credit insurance sales practices across its branch network and a complete revamping of its broker-based operations.       An expanding customer base in transaction services contributed to growth in liability balances and assets under custody of 12 percent and 9 percent as there was continued investment spending led to significant expansion of our physical branch distribution network. Citibank’s international branch openings as well as acquisitions for has included 68 in Mexico, 36 in the Philippines, 16 in Brazil and 15 in Russia. CitiFinancial international branch openings included 78 in Mexico, 73 in India, 28 in Korea, and 23 in both Brazil and Poland.   CHAPTER THREE   Methodology – the approach   The study generally aims to identify the supply issues in the expansion of CitiFinancial. The following are the specific aims of the study:   To be able to: 1.      identify the supply chain needs of CitiFinancial in their expansion of 25 more branches in Hong Kong. 2.      determine problems in terms of costs and time duration. 3.      identify the obstacles in terms of land in expansion in Hong Kong. 4.      identify problems in human resource in the expansion of CitiFinancial in Hong Kong. 5.      identify key safety issues that the engineering department should handle. 6.      identify if integrated supply chain approach would help to make the expansion faster and less costly.   To recommend key strategies for expanding in Hong Kong, the study have to explore the problems presented by means of qualitative research. Data Collection   Interviews will be conducted to the management of CitiFinancial, specifically the department that handles the expansion project. Questions will be asked regarding plans of purchase such as supplies, equipments, how many people to be hired, the planning cycles for the expansion, and the forecasting plan and how precise it is. The interviews will be conducted personally. A tape recorder will be used during the interviews so that the recorded responses will be transcribed later for analysis and documentation.   Questions for the interviewee:   (1)               What are the major challenges for CitiFinancial’s branch expansion? (2)               What happened in the old state? (3)               How to determine the branch expansion network and its process? (4)               How to implement the branch expansion measures? (5)               What’s happened in the new state? (6)               Any improvement after branch expansion realization? (7)               How to monitor or control the process? (8)               Any feedback from the staffs after the expansion? (9)               What’s the main duty that affected the process?                                   Sample selection The research study had surveyed staff of CitiFinancial – Citigroup in Hong Kong, regardless of whether they were incorporated. Generally, the selection criteria for contacting of the banking sector were that they had to have a minimum of 100 employees, at least three branches, and at least one senior accounting manager who had some responsibility for customer accounting practices. This ensured that opportunities existed for possible chances of branch expansion practices in the organizational system. The contact persons as most of whom were financial controllers or chief financial officers were being identified and questionnaires were sent with cover letters that explained what the study was about and what the respondents were required to do. The researcher had received 85 completed questionnaires. The high response rate was due to systematic follow-up via phone calls within two weeks and one month after the mailing of the questionnaire. Regarding the highest level of CitiFinancial offices in Hong Kong, 13 were branch offices, 4 were regional offices and 18 were head offices of the remaining 26 (74 per cent) banks, 6 (17 per cent) were listed on overseas stock exchanges such as in US and the UK. Questionnaire design The emphasis of the study was on the CitiFinancial’s branch expansion process as interviews with managers from the Citigroup had provided the initial basis for the design of the survey instrument. Further guidance was gained from the branch expansion management related literature (Libby and Waterhouse, 1996; Firth, 1996) The questionnaire consisted of three sections. In the first section, the questions were designed to obtain information on the background of the corporation, such as the location of its headquarters, the level of CitiFinancial office in Hong Kong, whether the bank was listed, the number of employees, the level of income growth, income distribution, its business focus and product/service innovation. In section two, five questions were designed to capture the effects of deregulation, competition and restructuring. In section three, eight questions were designed to capture details of branch expansion practices.   The management accounting activities adopted for branch expansion of CitiFinancial were: -          allocation of costs to different customer segments -          allocation of costs to processing, product and service centres -          customer profitability analysis (data and trend) (Gilding and McManus, 2002) -          Product or service profitability analysis (data and trend) -          customer analysis associated with new product or service launches (Davila, 2000)   During the process, participants went through workshops that involve seminars, classroom discussions and actual demonstrations. These programs allowed the staff to learn more about the company’s operations, the expectations of the company from them as well as their work responsibilities. The trainings taught the staff participants the different means of dealing with customers, colleagues and other work situations that they could encounter.  The techniques for efficient customer relations and service provision were also part of the program. In addition, the program also helped the employees to get a clear vision on how exactly they could contribute to the company’s change management plans and future progress. The trainings also gave the participants the chance to comprehend how the change management project will be beneficial for them and the company. Significant developments were obtained by the CitiFinancial through its introduction of change. Its ability to develop effective developmental strategies for instance, had been developed. Through the initiation of change, the company management was able to develop a change project that directly addresses its main issues. By developing an appropriate branch expansion plan, CitiFinancial was able to gradually achieve its objectives. This development is important as this allows the company to apply cost-effective projects. The value of this development had been stressed by the contingency theory. Basically, the contingency theory stresses that there is no single way on how one can manage different organizations.   The main message relayed by the contingency theory is that organizational leaders cannot apply a single and perfect management approach to any working environment. This means that a general and overall effective management system is neither existing nor is it possible to develop one. This is mainly because each company is subjected to distinct internal and external factors that it must overcome. In order to overcome these challenging factors, an organization must then create an individualized style of management. The principles of the contingency theory support this general management concept. One, which has already been cited, is that there is no such thing as a universal means of management. Aside from this, an organization’s way of management must be adaptable to its subsystems. Most importantly, the contingency theory supports the concept that the success of the organizational system is largely dependent on it proper design based on the main activity of the organization and its type of workforce. Thus, both financial and non-financial indicators have their own strengths and limitations, in order to optimize the efficiency of performance measurement, both indicators were used as there analyzed its profit records every week as well as the number of customers and serves as the company’s financial indicators. In such branch expansion, therefore, customer analysis is distinguished from broader customer profitability analysis as the former focuses on the old and new customers that uses CitiFinancial services and such branch launches in certain region as cost allocation and profitability analysis are important expansion ways for the Citigroup to remain focus in their strategies which intend to categories their business by lines of products and customers. A model of summary scores for each factor construct or variable was used to determine the measures for branch expansion strategies as there was the use of factor score to reflect the weighting across the items as expressed by each of the respondents. Factor scores have been used by other research for the same reason (Foster and Swenson, 1997). Regression model To test CitiFinancial’s proposition, the following equation was fitted to the data: Equation 1 where Y is the performance, X is early product adoption (high scores represent higher numbers of new products introduced in or before 1997), Z is the importance of customer accounting activities (high scores represent higher importance) and S is the size of the bank (total asset value). Support for the expectation requires that the estimate of β3 is significantly different from zero. The overall explanatory power of equation (1) is examined by a test of the increment in explanatory power that is obtained by a model that includes the interaction term, over a model that excludes the term. The regression model (equation 1a) was significant (R2 =0.264, F=2.697, p < 0.05). The interaction between early product adoption and the importance of customer accounting practices (H1) was significantly positive in the expected direction (t=2.796, p < 0.01). In addition, the inclusion of the interaction term in the regression adds significantly to the explanatory power of the model, compared to the main-effects only model (R2 =0.073, F=0.810, p < 0.498)[9]. These results support our expectation that customer accounting practices interacts with early product adoption to positively influence firm performance. The results of the ANOVA indicate that these differences are due to the interaction between early product adoption and the importance of customer accounting activities. The two-way interaction term is highly significant for Panel A (F=2.303, p=0.096). Sensitivity tests The use of customer accounting might be more beneficial for newly adopted services rather than products for two reasons. First, services such as telephone banking, e-banking and electronic payments have typically been created in-house and have required large capital investments. Banks that adopt these services have sought greater customer accounting information to determine the feasibility of offering them. In contrast, products such as credit cards, insurance and investment-related products are typically smaller in scale, in that they can be tailored to particular customer segments and are amenable to outsourcing. Unlike the model for the adoption of products, the model for the adoption of services was significant at p=0.082 (Adj. R2=0.132, F=2.295) and the interaction term was significant in the expected direction (t=2.654, p=0.013).     It is important for CitiFinancial to use some of national distribution channel for an international corporation that is responsible not just for the traditional distribution functions but it is some branch of the company in that country with an exclusive agency for the territory and responsibility for marketing strategy. The distribution unit in the country-market as a wholly-owned subsidiary has to manage a strategy for growth and be judged on organizational criteria including feasibility, level of desired risk, supportability and control issues with the implementation of preexisting marketing strategies such as communication platforms and target customer selection. Indeed, it is usually impossible to separate the process of market development from the process of organizational development. It is possible, however, to identify commonalities across companies in this process of internationalization and so to describe the usual evolution of international marketing strategy. Such a framework has to begin by recognizing that different objectives for market entry may produce quite different outcomes in terms of entry mode and marketing strategy. It is better if there would adopt different entry modes for different markets and have a template that is followed in every markets as starts with market entry and a distribution channel respectively. In particular, it should be noted that effective control over marketing operations is impossible without timely and accurate market information of market participation, involving investments in local executives, distribution and marketing programs.       The retail company also has issues with its business environment. Specifically, the retail industry in Hong Kong is very active; new business entrants are continuously growing in number, leading to a more intensive competition. Furthermore, technology is also making its ways to retail store improvement. While this is advantageous, competition from major retailers that can afford high end technology serves as a significant threat. Retail stores are also following the superstore trend as more and more smaller store are merging to form larger establishments. Expanding to other locations is also a challenge as some locations require high rent payments. Finally, a complete pilot of the new design must be conducted. The pilot should examine the design’s general effect as well as the implementation procedure, while at the same time creating enthusiasm for full implementation. While these suggestions are useful, it is still upon the discretion of the company how change will be introduced. The important thing is that companies realize that risks are always present in organizational changes and that appropriate steps must be done to prevent or resolve them. Changes in the organization can be introduced in a several ways and approaches. New formal guidelines and procedures like organization chart, budgeting methods, rules and regulations can be considered as structural approaches on inducing change. On the other hand, rearrangements in work flow through new physical layouts, work methods, job descriptions and work standards are examples of technological approaches.   Some organizations stress on inducing organizational change through the people approach which includes alterations in attitudes, motivation and behavioral skills. This can be done through new training programs, selection procedures, and performance appraisal schemes. Every business is subject to factors that affect the firm’s function as a whole.  These factors are the ones attributed for the success or even the failure of a business.  In the light of this, there are certain ways or techniques that can be considered in order to emerge and continue to be competitive within the market place. The marketing concept has been defined as ‘the key to achieving organizational goals’ and the marketing concept rests on ‘market focus, customer orientation, coordinated marketing and profitability’. In a profit making business the firm obviously has to try and achieve this level of customer satisfaction as a way of staying ahead of the competition and making a profit. In this manner, the management of a certain organization should be guided by strategic management principle to be able to attain its business goal.  The management should have the ability to initiate different management technique in order to continuously create business value.  One of the important things to consider is the ability to manipulate supply chain from the external environment of the business. The supply chain is traditionally characterized as a stable system in which components and goods move smoothly from supplier to assembly customers. In addition, supply chain refers to the suppliers, distributors, wholesalers and retailers that involved in manufacturing a product and getting it to consumers (Lee & Belington, 1995).  Supply chain is also defined as a network of independent or semi-independent corporation bodies collectively accountable for procurement, developing/manufacturing and distribution scheme connected with one or more groups of related products (Janyashankar et al, 1996, Lee & Belington, 1995).   On the other hand, there is another definition for supply chain that emerges, this definition states that supply chain is regarded as a network of services and distribution options that executes the tasks of procurement of the raw materials, conversion of these raw materials into transitional and finished products and last is the distribution of the output to retailers and customers (Gamesman & Harrison, 1995) (See Appendix 1). Effective supply chain is crucial to the success of a business. One recent study shows that poor coordination among supply chain partners was wasting billion annually which really make an industry fails (Fisher, 1997). Similarly, when a supply chain does not work properly, a business must flush the channel because it cannot pinpoint where the problem is. This causes companies to lose profits and sales.                 Most of the respondents replied that the use of balanced scorecard prevent them from satisfying customer needs. They believed that although its effect is not that huge it contributes to them not being able to give excellent service. In the seventh question the respondents were asked what does technology or the lack of it do to enhance or inhibit effective process performance. Majority of the respondents believe that the technology they have helps in providing effective performance. The improper use of technology makes it difficult for the respondents to provide effective service. In the eighth question the respondents were asked what does the organization structure do to enhance or inhibit effective process performance. The respondents replied that the company constantly research and discover new methods to produce products and services that will satisfy the clients. In the ninth question the respondents were asked what do the reward structures do to enhance or inhibit effective process performance. Majority of the respondents replied that the reward systems help boost the personnel spirit thus they assist in bringing an effective process performance. In the tenth question the respondents were asked what do the measurement systems or lack of them do to enhance or inhibit process performance. The respondents replied that the measurement system helps the company in correcting their wrong practices, after correcting themselves better products and services is then rendered to clients.       Data Analysis   The questionnaire and the response of the people showed that there is a problem with the business process being used. The business process should be the one making things easier for the company but it is in way ineffective and it does not help the company in providing the best service to clients. The response of the people showed that the company has the best technology available but sometimes it is not used well and the technique of using it does not produce into creating a service that is above standards. The misuse of technology and no proper guidance in using it hampers the company to provide effective service. The response of the people showed that the company is doing everything they can to make the personnel give the necessary effort to provide clients with effective customer service. They are constantly discovering new ways to provide a service that is different from others. Moreover the response of the people showed that reward structures contribute and help in making the personnel of the company extract effort to provide products and services that will satisfy people’s needs. Reward structures if used can create a positive output to the company. It can help in creating highly reliable employees that can create products and services that can satisfy the needs of the clients. Lastly the response of the people showed that measurement systems help in making sure that the company provides excellent service. Measurement systems provide analysis of how a company provides service to its clients and through it the company can be changed for the better. The measurement systems checks which group in the company are not doing well. After determining the weak part of the company proper actions can be taken against them.         Transform branch network/ sales channels from single product/ segment distributor to multi-product/segment “Retail Store” for lending Solutions to Customers   Customers Customers with Financial Needs Solutions Provide enough loan amount for customer needs Within reasonable turnaround Payment based on customer’s preference and affordability Within customer affordability to ensure good credit performance   Retail Store High awareness in the community Convenience and flexibility Good and consistent service quality               Sales and customer centric Our Principle: Tie with Branches’ Value of CF Branches (Face 2 Face, Sales-Credit Synergy, Community Presence) And Core Competence (Solution Provider for Customers w Financial Needs)   Conceptualization The Values of the CF Branches and Core Competence 3 Major Values and 1 Core Competence What does it mean to us? What does it mean to your career development? 2007 Strategic Focus Multi-Product Organization, What’s our focus and priority Effective Communication:  What’s the benefit to staff? People Development: Clear job description and ownership Effective Feedback Channel for CF/ GAG Business Feedback and understand how you run your branch business Via Branch Visit and BM Meeting Effective Internal Communication Among branches, with CF home office or other departments (e.g. Risk, CI&C, Fraud, etc.) Avoid unnecessary argument and frustration due to misunderstanding – Improve staff morale Identify key component leading to misleading and frustration Encourage x-district experience sharing Focus on Continuous Improvement on customer service Standardize all branch process (e.g. dress code, etc.) and sales approach Form a customer quality committee for CF Identify the most frequent customer complaints Identify the best practice among branches/ sales channels Instant Feedback: Instant Survey and Mystery Shopper Study Call Monitoring Exercise Achieve overall CALM score of 78 Reasons contributing employee attrition Competitive Market Environment, looking for better opportunities Long working hour and aggressive culture for City Insufficient career development Unclear career development plan Being “left out”, inconsistent among branches create perceived “unfairness” Don’t see any job satisfaction and don’t know his value to the CF business Insufficient internal communications: Lead to tense relationship with other parties (e.g. CI, TS, among branches) CI&C: Credit training, case referral, QC TS: Back and forth and customer complaint Branch: supporting branch issue BM/ABM not cascade business direction to their team   Finally, we cannot eliminate employee attrition; most important is that we can speed up our new hire learning curve to full production Structured training roadmap to new hire HIPPO staff development plan Identify people “At Risk” and develop retention and backup plan Establish more systematic and structured People Development Process for branch network (PADS) Evaluate the branch staff with functional skill set Identify HIPPO staff to provide more career development Identify At risk staff and work on retention plan Focus on training of Core Skills to various functions Standardize the people development roadmap (especially for new hire) Branch Manager/ Assistant Branch Manager – People Management Leadership Performance Evaluation and Coaching How to create highly motivated working environment Senior Customer Relationship Officer – Multi product selling approach Sales technique (e.g. How to combine Credit and Sales skill together) Redesign the credit training and examination process Product knowledge (e.g. Credit Underwriting, Mortgage, Insurance) Staff Morale: More frequent branch visit and identify the potential frustrations working in branches With other supporting departments and CF home office Among Branches Work closely among all BMs to target “Leave on Time” Continue to understand from staff (From HR and Interview)       OVER THE PAST FEW DECADES, the banking industry has been in a constant process of geographic expansion, both within nations and across nations. At one time, nearly all customers were served by locally based institutions. In contrast, it is now much more likely that branch providing services is owned by an organization headquartered a substantial distance away, perhaps in another nation.  The role of technological progress in facilitating geographic expansion is less well understood. In any industry, there are potential diseconomies to geographic expansion in the form of agency costs associated with monitoring junior managers in a distant locale. Improvements in information processing and telecommunications may lessen these agency costs by improving the ability of senior managers located at the organization’s headquarters to monitor and communicate with staff at distant subsidiaries. In the banking industry, technologies such as ATM networks and transactional Internet websites allow banks to interact efficiently with customers over long distances. Advances in financial technologies also facilitate long-distance interfaces with customers. Greater use of quantitative methods in applied finance, such as credit scoring, may allow banks to extend credit without geographic proximity to the borrower by “hardening” their credit information (Stein 2002). Similarly, the new products of financial engineering, such as derivative contracts, may allow banks to hedge risks at low cost without respect to the distance from the counterparty. These financial innovations may allow senior managers to monitor decisions made by loan officers and managers at distant affiliate banks more easily, and evaluate and manage the contributions of individual affiliate banks to the organization’s overall returns and risk more efficiently. Efficient senior managers with substantial control may transfer best-practices techniques to junior managers at their affiliate banks, whereas inefficient senior managers with significant control may transfer worst practices to affiliates. We define “agency costs of distance” as the additional expenses or lost revenues that arise as senior managers try to monitor and control local managers from a greater distance. The general effect of these agency costs is expected to be negative, as local managers operating at greater distance have more freedom to pursue their own objectives, resulting in lower efficiency ranks.       These agency costs may also incorporate a potentially offsetting senior management effect: operating at a greater distance from very inefficient senior managers may enhance efficiency if it interferes with the transfer of worst practices. Thus, the agency costs of distance may depend on the efficiency of senior management, with more costs involved with increased distance from good senior management and less costs, or even gains in affiliate efficiency, associated with increased distance from bad senior management. Moreover, as in almost all studies of technological progress, it is difficult to deterministically link performance improvements to technological change because technology is difficult to specify, its effects are difficult to parameterize, and its adoption may in some cases be endogenous to firm and industry performance. Nonetheless, previous research suggests that banking firms are one of the best places to test for the effects of technological improvement (Hancock, Humphrey and Wilcox 1999). For example, one study found a link between the increased integration of state and regional economies and the geographic expansion of banks (Morgan, Rime, and Straphang 2003), suggesting that a more geographically integrated economy eases the management tasks of Mohacs. In contrast, studies of international banking expansion tend to find that foreign affiliates operate less efficiently than domestic banks in developed nations, particularly in the United States (e.g., Delong and Noelle, 1996, Berger, Delong, Gene, and Udall, 2000), although cross-border expansion may involve many other costs due to social, economic, and legal differences across countries.   Studies of the efficiency of individual branches of large branch banking organizations found significant dispersion, consistent with relatively weak organizational control over individual branches (e.g., 1995, Berger, Leaner, and Mingo, 1997). Finally, a study of banking offices in Texas finds that rural banking offices are more likely than urban banking offices to be locally owned; the authors conclude that the activities in which rural banks engage are more difficult to manage from a distance and hence require decision-making authority at the local level (2003). MEASURING BANK EFFICIENCY RANKS We base our analysis of bank performance on the profit efficiency concept, rather than the often-used cost efficiency concept because profits are conceptually superior to costs for evaluating overall firm performance. The economic goal of profit maximization requires that the same amount of managerial attention be paid to raising a marginal dollar of revenue as to reducing a marginal dollar of costs. As well, if there are substantial unmeasured differences in the quality of services across banks and over time–which is almost surely the case–a bank that produces higher quality services should receive higher revenues that compensate it for at least some of its extra costs of producing that higher quality. Such a bank may be measured as less cost efficient because of the extra associated costs but will appropriately be measured as more profit efficient if its customers are willing to pay more than the extra costs in exchange for the higher quality. As discussed below, we also perform all the tests using cost efficiency as a robustness check, with similar findings. There may also be concerns about the effects of geographic expansion on the supply of some types of locally oriented services, such as relationship credit for small businesses. Expansion may create large organizations with headquarters that are distant from potential relationship loan customers, and these organizations may have difficulty transmitting “soft” relationship information through their communications channels, may be focused more on serving large corporate customers, may be headquartered in very different banking environments. However, to some extent these effects may be offset by the use of credit scoring and other financial technologies that may allow banks to lend at greater distances by “hardening” the credit information. Moreover, the increase in competition resulting from the removal of branching restrictions has been linked to the weeding out of weak banks (Jayaratne and , 1998,  2003). We similarly argue that the expansion of branching in the 1920s facilitated an increase in competition. To help clarify the theoretical debate over the effects of competition on financial stability, we directly test how the growth of branching influenced bank competition and how this in turn affected bank failures. Since, there emphasizes changes in the competitive environment induced by the onset of branch banking, it is necessary to test our model using data from a period when branch banking was expanding in scope. Moreover, because there want to test how branching influences the stability of banking systems, we also need to examine a period when there were numerous failures. First, the expansion of branching should change the competitive environment. If branch banking removes weaker banks from a banking system, then states permitting branch banking should experience higher merger and voluntary liquidation rates and lower entry rates than states prohibiting it. Second, over time more competition in states permitting branch banking should result in lower profit levels. Finally, if the competitive shakeout induced by branching stabilizes banking systems by removing weak banks from the system, then in the long run failure rates should be lower in states where branch banking was expanding. The link between branching, competition, and stability ought to be present even after controlling for any benefits to stability coming from improved geographical diversification of bank portfolios. We draw on the bifurcated nature of the dual banking system that existed in the 1920s to design a statistical test to discriminate between the effects of geographical diversification and competition due to branching. The findings that although there was significant consolidation in the banking sector in states allowing widespread branch banking, profits were lower on average in these states, suggesting that branching led to increased competition rather than monopoly power. To test whether branching reduced failures, we first confirm that our data produce the usual state-level result that states allowing branching or those with more branch offices had lower failure rates. We then construct proxies for the portfolio diversification and competition channels of branching and test whether their inclusion affects this result. Our econometric evidence shows that, at least for national banks, the consolidation effects were quantitatively more important than increased portfolio diversification opportunities for banking stability during this period. These results suggest that, at the onset of the Great Depression, there were still many weak banks in states prohibiting branch banking; the real shock of the 1930s caused many of these to fail. However, in states that permitted branching, weak banks had been pruned from the system, and failures were consequently lower at the system-wide level. Thus, we resolve the paradox in the existing literature by showing that the expansion of branching improved stability at the statewide level through the competitive shakeout process without necessarily improving individual banks’ ability to diversify away risk during a large shock such as the Great Depression.     THE EFFECTS OF BRANCH BANKING ON FINANCIAL STABILITY An argument commonly articulated in the literature is that branch banking stabilizes banking systems by reducing their vulnerability to local economic shocks: branching enables banks to diversify their loans and deposits over a wider geographical area or customer base. Restrictions on branching have been linked to the instability of banking systems. Calamities (2000) argues that bank failures were more prevalent in regions of the United States without branch banking as well as in countries lacking it. Friedman and Schwartz (1963) suggest that the absence of branching in the U.S. increased the severity of the banking panics during the Great Depression. Moreover, they argue that the U.S. experience stands in contrast to Canada, which experienced banking distress during the Depression but not widespread failures and a collapse of its banking system. The notion that branch banking stabilizes banking systems by increasing diversification opportunities is in fact an argument with old roots (Sprague 1903). The proponents of branch banking used this argument to encourage state legislatures to adopt laws legalizing branch banking (Preston, 1928, South worth, 1928). It is therefore possible that the stability effects of branching are related to something besides or in addition to diversification.     Why should these competitive forces apply to the introduction of new branches and not simply to the emergence of new unit banks? First, banks with branches were more cost-effective, since some jobs at different branches could be consolidated and performed at the head office, thus reducing employment costs (Federal Reserve 1931, Vol. 2, p. 224.) Also, start-up costs were lower, and in some states, regulators required less capital for new branches than for new unit banks (South worth 1928). Second, new branches that were set up in previously restricted markets may have been more adept at realizing higher rates of return than comparable new unit banks since branches could transfer deposits out of the local market to regions where capital was in higher demand. (11) The ability to obtain a cost advantage through branching and realize higher rates of return made entry into existing local markets easier for branch banks than new unit banks. Indeed, branch banking may have been instrumental in bringing banking and banking competition to small towns. The growth in branch banking during the 1920s was facilitated by a variety of legal and technological changes. In 1922, the Comptroller ruled that national banks could, “under the law, establish agencies, teller windows, or additional offices within the city of the parent bank provided state banks were permitted to operate branches in that state (Chapman and Wethersfield, 1942, p. 97),” although these offices could not issue loans and were not full-fledged branches. Possibly seeing these offices as one step away from approval by the Comptroller of full-fledged branch banking for national banks, state banks may have responded by increasing their branching networks in order to compete with national banks. Relationships with correspondents were weakened due to amendments of the Federal Reserve Act in 1917 (which put check clearing in the hands of the Federal Reserve and required national banks to hold their entire reserve requirement at the Federal Reserve), possibly inducing banks to pursue the loss of deposits by buying banks and converting them to branches. Dramatic improvements in road networks and improvements in telephone networks likely improved the ability of managers to oversee branch networks. It should be noted that the expansion of branching (and consequently the consolidation of the banking system) in the 1920s, which was driven by the establishment of the Federal Reserve, technological changes, population growth, and economic growth, is quite different from expansion of branching in the 1980s and 1990s, which appears to have been more strongly influenced by changes in regulation (Stroh and Straphang, 2003, Krasner and Straphang, 1998). Thus, focusing on a measure of branching activity is likely to better capture the effect of branching on the banking system during the 1920s than the shifts in regulation that have played a prominent role in dealing with the expansion of branching in recent periods. There emphasizes how the expansion of branch banking within a state increases the competitive pressures on inefficient banks and can induce them to merge is consistent with recent research examining the effects of bank deregulation (Delong, Hassan, and Kirchhoff, 1998, Berger, Deserts, and Straphang, 1999, Jayaratne and Straphang, 1998, Stroh and Straphang, 2003).     However, it stands in contrast to one of the longstanding populist arguments lodged against branch banking. Opponents of branch banking have often complained that it was a form of cartelization that would result in consolidation of the industry and reduced competition, and that its growth would reduce the viability of businesses in small communities by siphoning funds to urbanized areas. Such sentiments were widely expressed in the first quarter of the 20th century when branching was spreading rapidly. While the growth of branch banking may lead to consolidation, the effects on competition are not as clear as opponents of branching suggest. In fact, the economic theory or private-interest view of regulation argues that branching restrictions are used to protect inefficient, local monopolies and restrict competition.   At some point in the life of a successful retailer, the question of expansion arises. While retailing is one of the last strongholds of the small owner-run business, current economic and market trends make it more and more difficult to remain small and successful. The economically healthy firm which has decided to expand faces many strategic decisions crucial to orderly and profitable expansion.  Once a single-unit firm has moved from start-up to success, in many cases the next step is growth.1 The growth period may be divided into two stages: “early growth’ and “later growth.’2 Early growth is characterized by testing of initial market strategy and direct contact by the owner with all major activities. Later growth, for retailers, is typically characterized by expansion to multiple sites. Successful expansion requires considerable strategic planning, not only to implement the expansion but also to improve the chances of survival once the expansion is in place.   Expansion Considerations   In order to compete in an economy dominated by large chains and franchise organizations, successful small retailers may turn to the opportunities available through expansion. “If the concept of the business and its execution is reasonably successful, the firm may choose to extend . . . into regional or, ultimately, a national area of operations.’ expansion allows one to move beyond areas of “natural dominance’ to add outlets under different names to cover diverse market segments.6 As markets increasingly vary in wants, needs, and buying power, a single way of doing business may not appeal to all market segments. While the positive benefits may justify the decision to expand, certain drawbacks must be considered, even after the decision is made. Probably one of the most frustrating changes to come with expansion is diminished contact with clients. The success of owner-operated units is often attributed to the owner’s informal information gathering from customers and the owner’s ability to respond quickly to such information. Prior to expansion, the owner has probably served as the major managerial force, but new management positions must be created when an organization expands. The owner of an expanded business must consider the cost of hiring qualified managerial personnel and must conduct the search and hiring task with future conditions in mind.       Costs   In one-unit operations, owners are used to charging all costs of operation against revenue in computing profit. This makes sense, since all operating costs are directly traceable to a single unit. With a multi-unit operation, however, common costs complicate this issue. Common costs are those incurred in behalf of all segments of the firm. These costs are only indirectly related to each unit and thus cannot be allocated among them except on some arbitrary basis. Any such allocation may well distort performance measures. Instead, the performance of each unit can be more logically evaluated based on its segment margin. As previously noted, a unit’s segment margin is measured as the difference between the direct revenue and direct expenses of that segment. Common costs are appropriately charged only against the firm’s total revenue in an overall performance analysis. It is the combined segment margins (more generally called contribution margins) for all units which contribute to covering the common costs of the business. Any segment with a positive margin then helps to cover costs which otherwise would have to be absorbed by other units, thereby reducing overall profits.           The retailer planning a move operation must consider not only those decisions necessary to initiate the expansion like for instance, location selection, financing, and staffing but also the degree of autonomy to be assigned to each store and the adequacy of the current accounting information system. Decisions about autonomy must take into account the image of the separate units, the level of day-to-day supervision available, and the extent to which buying can be integrated. Expansion will place much heavier demands on the firm’s accounting information system. In order to properly evaluate performance and to control the organization, accounting information needs will increase dramatically. A major part of the pre-expansion planning process, then, should involve an evaluation of the current system’s ability to handle the increased processing requirements. A well-conceived expansion plan will anticipate the problems likely to occur and significantly improve the chances for a smooth and successful transition to a multiple unit operation. The current bank efficiency studies recognize the difference between the cost and market penetration efficiency orientation. Two branches that service the same number of deposit accounts and customer transactions while incurring similar costs are considered equally successful in terms of cost efficiency. No information is provided as to the extent to which either of the branches underutilized its potential to generate more deposit accounts.       The primary objective of a bank branch is to penetrate its market by selling financial products to new customers while delivering services to existing customers. Market efficiency has an output maximization orientation and can be defined as the extent to which individual bank branches, given their capacity and resources available, utilize their market potential by maximizing sales. The assessment of market efficiency will also draw upon the multilevel structure of retail organizations that is, to evaluate the market efficiency of individual branches, managed by local agents, in a way that controls for location and size decisions made by central principals.   METHODOLOGY FOR ASSESSING EFFICIENCY OF BANK BRANCH NETWORKS   The assessment of the performance of a large-scale network of bank branches brings up problems not encountered in small-scale applications. These problems concern the lack of homogeneity among individual branches due to their diverse operating profiles, the development of causal input-output models for assessing market and cost efficiency, and the comparative viability of groups of branches with different operating profiles.  A methodological framework is proposed for assessing performance in large-scale bank branch networks. The discussion of the methodology is facilitated by the results obtained from an application on a set of 580 bank branches in the United Kingdom. The bank of our study has taken many initiatives to monitor the efficiency of its network and thus its management was keen to evaluate and ultimately adopt the proposed methodology. The assessment of efficiency was pursued in three interrelated phrases:   1. In the first phase the bank branches are split into homogenous clusters in order to increase the validity of the comparisons between efficient and inefficient branches. (1) Factors reflecting the differences between the environment and/or the operations of bank branches are used as criteria that form the clusters. 2. In the second phase input and output models are specified to capture efficiency from the intrinsic (cost) and extrinsic (market) perspectives. 3. The linear programming models are specified in the third phase seeking to assess branch efficiency according to the behavioral assumption made in the previous phase.   Homogeneity of the Sample Set   Despite the similarities in the operations of bank branches, it is a customary practice to distinguish branches based on their location and other idiosyncratic features. Factor analysis was used for the identification of differentiating factors and cluster analysis for the definition of homogeneous clusters of bank branches The method of principal component analysis was used to identify factors that would be used in the cluster analysis step (for the variables used in this phase and their factor loadings see the Appendix). Four factors were selected which have accounted for 88 percent of the cumulative proportion of the variance explained. Using the factor loadings of these factors, after a quarryman rotation, the predominate features of each cluster can be summarized as follows: The characteristics of the branches within each cluster are next summarized: above-average market potential and below-average branch size for the branches in cluster 1; relatively weak market potential and below-average size of accounts in cluster 2; higher average account balances in cluster 3; large branch sizes in cluster 4; high market potential enjoyed by branches in cluster 5; high competition levels and below-average market potential in cluster 6. The geographical concentration of bank branches in similar areas creates small financial markets which attract customers. Financial products and services provided by the branches of all banks are based on competitiveness. On the other hand, for differentiated products (for example, mortgages) individual branches can benefit from other branches’ customers. The inclusion of competing bank branches in the market efficiency model is made avoiding a priori assumptions on whether it would have a positive or negative impact on the outputs produced by each branch. The term “attribute” is introduced here in order to express the differential between discretionary and nondiscretionary inputs and outputs and attributes that do not have a predetermined positive or negative impact on the output produced by individual branches.         Cost efficiency is the second component of bank branch viability. The input-output set displayed in Figure 1 uses the outputs of the market efficiency model plus the total number of transactions incurred at each branch. On the input side the cost efficiency model uses the direct labor costs adjusted for regional wage variations and the total technology facilities at the disposal of individual branches. The technology factor of each branch is, however, represented as an input element not deemed to be reduced since it includes not easily transferable investments (ATMs) and also the overall trend in the banking industry is to change the technology component of the operating process. Central management should be accountable for the selection of branch location, size, product mix, and management. These issues constitute the scale size characteristics of a branch and thus the corresponding efficiency (aggregate) includes scale size effects. Local management, on the other hand, is not responsible for the scale size characteristics of their branches and thus a measure of site-specific market efficiency free of scale size effects must be obtained.     The cost efficiency results gauge lower scores from the corresponding market efficiency scores. The minimum aggregate cost efficiency has reached a value of 42.7 percent whilst the corresponding site-specific cost efficiency a minimum value of 45.13 percent. The average aggregate and site-specific cost efficiencies across the whole network were found to be 82 percent and 88 percent respectively. There are no previous studies to compare our market efficiency results and thus we only compare the cost efficiency ratings. Our cost efficiency results are close(6) to those of Berger, Leaner, and Mingo (1997) and Tokens (1993) that indicate an average level of cost efficiency below 80 percent showing some scope for cutting costs within the branch networks. These magnitudes of technical inefficiency are considerably lower from those reported by Drake and Howcroft(7) (1994) and also previous DEAD studies that were based on small data sets. The association between market and cost efficiency scores were finally examined using rank correlation coefficients. At the aggregate level the rank correlations within each cluster gave positive association between the market and cost efficiencies (cluster I = 0.40, cluster 2 = 0.23, cluster 3 = 0.35, cluster 4 = 0.62, cluster 5 = 0.60, cluster 6 = 0.28). The rank correlations for the site-specific efficiencies within each cluster were as follows (cluster 1 = 0.40, cluster 2 = 0.40, cluster 3 = 0.39, cluster 4 = 0.58, cluster 5 = 0.67, cluster 6 = 0.32). These results indicate the relatively high concordance between the ranks obtained in clusters 4 and 5 for both efficiencies while for the remaining clusters the ranks have not been very similar. The diversity between market and cost efficiency results indicate the importance of studying branch efficiency from different perspectives since it yields information regarding extrinsic and extrinsic strengths and weaknesses of each branch.     There is also the case of another 120 bank branches that were found scale market efficient but operating under DRS on cost efficiency. Increasing the size of bank branches that operate under IRS would augment the sales of their products at a rate higher than the rate of input increase. The mathematical formulation of the market efficiency model in (3) makes provision such that the nondiscretionary inputs do not affect the assessment of returns to scale. On the DRS case a proportionate increase of the activities of bank branches would lead into more than proportionate cost increases. The decision makers of the bank would like to know whether their branches have deployed the appropriate scale size (given its input mix) to penetrate their market. Returns to scale that correspond to cost efficiency have an intrinsic orientation seeking to investigate how economic is the scale size of the operation of individual branches, that is, whether the benefits from increasing the branch outputs by expanding their physical size would offset the corresponding cost increases. It is worth clarifying, however, that the output expansion under the market efficiency scenario concerns new sales of financial products while the cost efficiency scenario considers as an additional output the transactions occurring at the branch level. When conflicting results arise between the two characterizations we get the signal that possible expansion of the scale of operation of a branch will add proportionately or disproportionately to the costs of the branch. Statistical analysis has shown that there are statistically significant(10) differences between the returns to scale of each cluster on both market and cost efficiency assessments which reinforces the proposed methodology for clustering the network of branches. In cluster 1 the trade-offs between cost and market efficiency are concentrated between market efficient branches and branches with DRS on cost efficiency. For about 40 percent of the branches there is scope for increasing their scale of operation on both the market and cost side. For the fifty-two branches that exhibit DRS on cost efficiency any increase of their activities would cost disproportionately higher to the bank. Branches of cluster I have relatively smaller size accompanied by a disproportionately high number of transactions given their customer base and sales. Thus the DRS characterization is a result of the indirect services that they provide to the network of the bank and not a result of the relation between their realized sales and their size. Upon further investigation it was found that the branches of this cluster are predominantly located at city centers giving them many inter-bank transactions for bank accounts that belong to different branches. Cluster 2 (small account sizes) has revealed considerable IRS on the market efficiency assessment that shows scope for increasing the scale of operation of a number of branches. This picture is reversed, however, in cost efficiency since 60 percent of the branches operate under DRS in a manner similar to cluster 1. The importance of product mix and targeted clientele is highlighted by these contradicting results as these branches should expand their scale of operation targeting new segments of clientele away from the small-depositor accounts which prove to be uneconomical in cost terms. About 70 percent of the branches in cluster 3 operate under IRS on the market efficiency assessment that emphasizes scale expansion. Branches with accounts of large size, on the other hand, seem to have dispersed cost efficiency as only 13 out of 150 were found to be cost efficient. This phenomenon was further supported by the DRS rating that prevailed in the cost efficiency of 50 percent of the branches. This cluster contains branches with accounts of very large sizes that at the same time have a relatively low number of transactions. Furthermore, the branches are located in affluent areas that do not have passing trade or working population. These characteristics indicate that the low cost efficiency of these branches can be attributed to the cost of quality that are expected to encounter in order to meet the service quality expectations of their large-size depositors.   BRANCHES MUST PRODUCE MORE.   On one point bankers are virtually unanimous: branches will help protect the banking franchise to the extent that they sell products and services, not just collect deposits and make funds available. Put another way, banks have to push more business through existing facilities. Fading are the days of the sleepy branch office catering to the regulars running their errands, where the manager tended to administrative tasks in a back office. Today, the branch manager is chief salesman, responsible for motivating and managing the sales staff behind the teller counter and at the platform desks–not to mention near the produce section, in the case of a supermarket bank branch. Sales is the focus at branches of Centaur Bank. “We don’t want people to come into the branch just to do transactions,” says CEO Mauldin. “We’d rather do those electronically if we can.” Changing the branch from an order-taking facility to a sales office, he concedes, is not easy. We’ve got to train our people to be more knowledgeable about the various services and products,” Mauldin says, “and at the same time do the traditional things we’ve always done in a branch.” Mauldin believes outstanding customer service is preferable to aggressive selling. “We don’t want our people to be ‘stock jockeys,”‘ he insists. “We don’t want them out there just trying to make a sale for a commission–that would be a disaster.       Part of the reason branch efficiency is such a difficult equation to solve is that branches are rarely identical. This is particularly true in urban settings, where the residential and business communities can change dramatically from neighborhood to neighborhood in terms of lending needs and market potential. Some branches are big deposit gatherers from older people and other branches are big mortgage lenders and consumer lenders to young people. Branches everywhere will become more specialized, believes Labs at Firstar. “Today the branch is kind of a one stop for everything,” he says. “You want to make a deposit, you come into the branch. You want a loan, come on into the branch. You want to buy insurance or invest in a mutual fund, come on into our branch. That’s going to change. “Some branches are going to be just paying and receiving stations and some of the services traditionally offered in a branch will be offered a different way,” Labs says. “For example, many banks don’t have home mortgage lenders in the branches any more, because mortgage lending today is done in your house, in your office, in the broker’s office.” </div> Credit:ivythesis.typepad.com

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