The 1994 Towers Perrin/American Banker survey of bank officers and directors confirmed that competition, particularly from nontraditional players, was a leading strategic concern.

To counter this threat, 75% of the responding senior bank managers planned to use one of three strategies: acquisition, renewed focus on retailing, or optimizing portfolio performance.

In subsequent discussions with clients and other industry players, we are finding that underlying these three strategies is a major shift in the way that bankers think about, organize, and manage how they serve their various markets - a shift of tectonic-plate proportions.

Traditional banking was conceptually a simple business: taking deposits from consumers, lending to businesses, and making prudent portfolio investments. Today, banks compete with everyone from Merrill Lynch to USAA to the local mortgage banker, and bankers see their business differently.

The old "monolithic" bank is evolving into four separate but interrelated business groups:

The traditional bank. It makes loans to business, and some consumers, funded by consumer deposits. Here, bankers are most at home. This is the traditional banking of the 1970s, recognizable in many banks by such organizational labels as small-business banking, middle-market lending, and consumer deposit-taking.

Consumer relationship retailing. This involves selling products and services to consumers through a variety of channels, in the context of some level of individual customer relationship. This business group within banks includes branch-based "personal banking" and private banking. This form of retailing is dominant in many nonbank retailers such as Merrill Lynch, USAA, and other affinity group marketers.

Product businesses. This includes the manufacture, distribution, and sale of products through proprietary or shared distribution channels. Banks often put mortgage, credit card, annuities, cash management, and other "vertically integrated" product businesses in this category. For a few banks that specialize in "product push" retailing, even traditional banking products belong in this group: Wells Fargo's consumer deposit business, for example.

Asset-liability management, portfolio performance optimization. This is the acquisition of assets and liabilities, and managing them to optimize financial performance given risk constraints and owners' (shareholders or investors) performance objectives. This business cluster generally includes asset management for others (trust, mutual funds, etc.), bank loan portfolio management, bank securities portfolio management, and securitization functions.

In formulating strategies for long-term competitive success, many senior bankers no longer see the bank as a traditional monolithic enterprise, but instead place their bets on one or more of these four businesses where they feel they can create sustainable market leadership and competitive advantage.

Different institutions can take the lead in specific business areas according to their unique strengths and capabilities. Community banks that focus carefully on local lending and deposit-taking can prosper forever. Champions at mass marketing financial products can beat the competition at that game. Bank South grabbed consumer retailing market share from some of its giant in-market competitors by focusing on its strategy as the "convenient" provider.

There is a downside to the emergence of this new model in the banking industry. Banks currently put themselves at competitive risk by reporting on their creation of shareholder value to Wall Street analysts. If an institution has positioned itself in the market as a traditional bank, then the efficiency ratio and a measure of return on assets and equity are basically sufficient.

But it could be dangerous to use these same measures to manage a customer retailing business, or a product distribution business. For example, if a "consumer retailing" management team's goal is high-quality relationship retailing, Nordstrom-style, but its performance is measured solely by the efficiency ratio and if management receives incentives based on expense reductions, the institution may end up destroying shareholder value.

Banking and bank managers clearly need new standard performance measures. These should be tailored to and based on critical success measures specific to the industry's different business models, as well as each institution's relative and individual strengths.

Mr. Partridge is director of Towers Perrin's financial institutions practice.

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