Geographic region – Pacific, New England, South Atlantic, Mid-West, etc.
City, County, or SMSA (size) – under 5,000, 5,000-9,999, 10,000-14,999 etc.
Age—infant, under 6, 6-11, 12-17, 18-24, 25-34, 35-49, 50-64, 65 and over.
Sex—male, female
Family size—1-2, 3-4, 5 and over.
Family life cycle—young, single; married, no children; young, married with youngest child under 6; young, married with children; older, married with no children; older single; other.
Income—Under $5,000, $5,000-$9,999, $10,000-$14,999, $15,000-$19,999, $20,000-$24,999, $25,000-$29,999, $30,000-$34,999, $35,000 and higher.
Occupation – professional and technical, sales, managerial, proprietor, clerical craftsman, retired student, other.
Education – Grade school or less, some high school, graduated high school, some college, college graduate.

Psychographic Dimensions

Others come to me for financial advice.
I talk with my friends about finances.
I will have more money next year.
I like doing business with a high-class bank.
I wish it were easier to cast checks.
I am careful about balancing my checkbook.
I want to do all my banking by phone.
I want to do all my banking by ATM.
I put some money in risky investments.
I am too busy to care about banking.
I have trouble getting cash out of state.
I am tired of being asked for ID.
I like bank people to greet me with a smile.
I like a bank to treat me as someone special.
I like a personal relationship with my banker.
I like the bank to balance my checkbook.
I am heavily into debt.
I can’t get to my balance my checkbook.
I am heavily into debt.
I can’t get to my bank when it is open.
I wish I had a lot of money.
I am tired of being treated as a number.
I like to visit with the people in my bank.
I travel on business trips often.

Information concerning activities related to the usage of the new product may also be valuable. For example, the asset management account has a discount brokerage option. Knowing the targeted users’ behavior with respect to the frequency of transactions can provide useful input into the pricing of this option.

Other questions focusing on how the proposed product may be improved or changed can be valuable inputs into design considerations and have adoption and usage implications. The specific additional information that the new product manager may wish to acquire will be a function of such things as the type of new product being considered, the market that is targeted, the type of competition that exist s in the market that is targeted, the type of competition that exists in the market, previous experience with new products in the market, and other considerations. The key point is that, during this stage of the development process, the new product manager must have the proper information to make the decision to either pass the concept on for further development, kill it, or make the necessary changes in the concept that will allow it to continue in the development process. Basic information requirements have been suggested and are summarized in Figure 4-7 as a series of question.

FIGURE 4-7 Questions to Be Answered in the Concept Evaluation Stage

What are the banker’s objectives that bear on new product/service development? ROI? Payback? Break-even?

Does the concept provide the potential for satisfying these objectives?

What are the specific strengths/weaknesses/ of the bank?

Financial strengths/weaknesses
Technical strengths/weaknesses
Personnel strengths/weaknesses
Management strengths/weaknesses
Marketing strengths/weaknesses

What are the success requirements inherent in the new product/service opportunity?

Do bank’s strengths “fit” new product/service success requirements?

What is the present state of the market?

What does the user profile look like?

Have price levels been evaluated?

How does the concept stand up in the marketplace?

Is it clearly understood?

What benefits/problems are perceived in the concept?

How does the concept compare with competitive offerings?

What is the estimated market potential for the concept?

Therefore, the best estimate as to the market potential for asset management accounts in the Memphis metro area for the next year, assuming one account per household, would be 4750 (10,500 x .45). If the new product sells for $10 per month, or $120 per year, the market potential estimate can be expressed in a dollar amount as $570,000. By placing confidence limits around this estimate (assuming 95 percent confidence), the market potential ranges from $500,000 (the worse case) to $640,000 (the best case). This figure represents the total estimated number of asset management accounts that could be sold to households in the Memphis metro area by all competing banks for the next year.

The product manager must now decide whether the potential is sufficient to warrant further development of the product. In so doing, the manager must consider what his/her bank’s share of the market would be. This can be done by using other products as indicative of share amounts. For example, this bank has traditionally controlled 30 percent of the Memphis market. Applying this figure to the potential estimate gives a figure of 1425 new asset management accounts worth $171,000. This figure now becomes the bank’s sales forecast for the new asset management account. It is the expected level of bank sales based on a stable market potential for the next year. The sales forecast, when made in this way, assumes a marketing effort consistent with the marketing effort expended on other bank products. Costs of developing and marketing this new product can now be examined and break-even levels estimated. A more fully developed example of this procedure is offered in the next chapter.

Other Vital Information

Several other types of information can be collected at this point which will make subsequent decisions concerning the development and marketing of the new product more effective and efficient. Developing a user profile is a good idea at this point. The user profile describes who the intended users are. These descriptions can be either demographic and/or psychographic and can be extremely useful in developing promotional programs to introduce the new product. Figure 4-6 shows a number of different demographic and psychographic dimensions used in developing user profiles.

Market potential may be defined in either dollar amounts or units of products. Both can provide key information to the planner. Market potential is typically considered to be the total amount (in dollars or units) of product that could be sold in a given market for a given period of time if everyone who would buy one did indeed buy one. Put another way, market potential is the limit of market demand, considering that the marketing efforts of all banks in a geographic market for a specific period of time go to infinity. Market potential estimates are closely related to the definition of a market. A market is composed of people with the ability to buy and the willingness to buy. This definition actually provides a systematic method for estimating market potential. First, estimate the number of individuals or households, or whatever demographic unit is appropriate. Then eliminate all those whose incomes would preclude them from buying and then all those who indicate no inclination to buy. The remaining figure will represent an estimated percentage of those people who have both the ability and the willingness to buy the concept—in short, the potential for that product market.

Another way of calculating market potential for a new product is to consider market potential to be a range of possible estimates. These ranges can vary from a worse-case scenario to a best-case scenario and include a most likely estimate. The value of treating marketing potential as a range instead of an exact figure is that it allows the planner to consider several different possible situations.

Market potential estimates can be calculated by taking the percentage of positive responses to a question such as:

Do you intend to buy the new asset management account within the next six months?

Yes ____________ No ____________ Don’t Know ____________

This percentage is then multiplied by the number of households that comprise the targeted market (s) for the proposed new product in the given market area. This figure tells us the total number of households intending to purchase the new asset management account within the next six months. This is our most likely estimate. By placing confidence limits around this estimate, best-case and worse-case scenarios are identified and a range of potential can be extrapolated.

Are there any features about the product you just read about that you find hard to believe?

Yes _______ No _______

If yes, what are they? (Please describe fully) ___________________________
__________________________________________________________________________________________________________________________________________

What other financial products do you think are similar to the one described?
__________________________________________________________________________________________________________________________________________

If you think there are similar products, which do you feel is better?
__________________________________________________________________________________________________________________________________________

Why? _________________________________________________________
_____________________________________________________________________

Below are a number of statements which could be used to describe the concept. Please tell us how you feel about the proposed product by indicating your feelings on each of the scales. You can do this by circling the scale position that comes close to describing your feelings.

Like very much 1: 2: 3: 4: 5: 6: 7: Dislike very much
Very willing to try the concept 1: 2: 3: 4: 5: 6: 7: Very unwilling to try the concept
Very Useful 1: 2: 3: 4: 5: 6: 7: Very Unuseful
Very Important 1: 2: 3: 4: 5: 6: 7: Very Unimportant
Very Practical 1: 2: 3: 4: 5: 6: 7: Very Impractical
Very Believable 1: 2: 3: 4: 5: 6: 7: Very Unbelievable
Very Realistic 1: 2: 3: 4: 5: 6: 7: Very Unrealistic
Very Unique 1: 2: 3: 4: 5: 6: 7: Very Commonplace
Very Interesting 1: 2: 3: 4: 5: 6: 7: Very Uninteresting

Considering the price of the proposed product, which of the following statements best describes your reaction:
It is more than I would expect to pay ______________________
It is about what I would expect to pay ______________________
It is less than I would expect to pay ______________________

Finally, if you could change any feature of the concept to make it more suitable to your financial needs, what would you do?
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Oftentimes individuals in the financial industry overlook the complicated nature of the products they deal with on a day-to-day basis. They forget that financial product users, both actual and potential, do not have the same degree of product knowledge. This gap is constantly increasing as banks and other financial institutions develop new and increasingly sophisticated products. Accordingly, it is crucial to remember the levels of knowledge that most consumers will bring to bear on a concept test. If the concept is too difficult to understand, most consumers will probably guess! In so doing they are providing the product planner with less than accurate information. Guessing produces evaluations which can both overstate and understate their true feelings for the concept. The ramifications of this situation are that the product planner is making decisions based on inaccurate information. This in turn can lead to inappropriate go or no-go decisions. Pretesting the concept so that it is clearly understandable is a step which most product planners overlook at this point.

Another way of assessing the degree of consumer understanding in a pretest situation is to give the sample of consumers an objective test after they have evaluated the concept to determine on what types of information (correct or incorrect) they made their evaluations. If there is evidence of guessing, this would indicate that the concept is not clearly understandable and needs rewriting.

Another problem that often arises has to do with subjectivity. Many new product planners fall in love with new product concepts. This is understandable but, when it clouds the analysis, it becomes detrimental. Subjectivity manifests itself in an attempt to sell the concept rather than test it. The test must be constructed objectively without any promotion on the part of the tester. Consumers must evaluate the concept for itself not for the persuasive capabilities of a new product planner who feels that the proposed product should be a winner!

Interpreting the results of a concept test can also be somewhat problematic. Unfortunately there exist no rules of thumb which say that if 88 percent of the sample like a concept this means that 43 percent of the market will actually buy the product. The new product planner will develop a feeling for acceptable ratings as s/he gathers experience. This is why it is so important to have some guidelines in the form of objectives for new product development in the bank. These objectives, established over time, can be extremely useful in making go/no-go decisions. In the absence of experience and objectives, the new product planner should look for high positive approval ratings, somewhere in the 70 to 80 percent range. Of course, high ratings do not necessarily guarantee a successful introduction, since there are a host of other factors which contribute to the success or failure of a new product.

The uniqueness of the concept and its ability to provoke interest measure what we refer to as a novelty factor.

Uniqueness of the concept is a dimension which measures to what extent targeted consumers see it as being different from products which already exist in the marketplace. Unique concepts lend themselves to more successful positioning efforts once they are introduced. In addition, perceived uniqueness moves the proposed product away from the batch of “me-too_ types of products which consumers have difficulty in differentiating. However, uniqueness can also be somewhat misleading. Just because a concept is perceived as being unique does not mean that it will be successful. Many new products have been perceived as being unique but unfortunately too unique! Products which fall too far outside consumer expectations may have built-in problems of consumer adoption.

Extent to which the concept is interesting measures a similar dimension. If consumers perceive the concept as interesting, there exists greater likelihood that they will be attracted to it. This attraction factor can be extremely useful in the introductory stages of the marketing campaign as your bank contends against competition for consumer attention.

There are a number of other dimensions that could be included in a concept test. These are offered as being typical of those that are generally used. Specific concept and target market considerations should also be included in the development of the test itself. In addition, several other considerations should be included. Figure 4-4 shows a sample concept test questionnaire.

Importance of the concept is another related dimension. Do consumers see the concept as being important to them? A low score on this dimension may not doom the concept buy may indicate the need for promotional buttressing of the fully developed product on this dimension.

Extent to which the concept is practical may provide important insight into further development. The concept should be practical, and the extent to which it is not may be indicative of the impediments consumers perceive in attempting to use it. For example, in a study of potential enhancements for a package account, consumers consistently felt that a number of the enhancements would be useful and that they liked them, but they did not feel that their use was practical. Further probing revealed that they were concerned about all the work they would have to do to take advantage of the enhancements. In this sense the enhancements were not practical.

Extent to which the concept solves a problem is perhaps one of the most important dimensions on this factor. Products should be seen by bank management as bundles of benefits which consumers use for making their lives easier. A salient aspect of this dimension is, Can the product solve a banking problem that I as a consumer have? If it does and it is clearly demonstrable that it does, consumer reaction is likely to be much stronger toward the concept.

A credibility factor might include consumer perceptions concerning the believability of the concept, that is how realistic they believe it to be.

Believability of the concept measures consumer reactions as to whether they feel that the proposed product will do what it is supposed to do. Obviously, if targeted consumers believe that the concept promises more than it can deliver, their reaction is likely to be negative.

Which of the following statements best describes your intentions to use the product on a regular basis?
I would use it frequently _______________
I would use it occasionally _______________
I would seldom use it _______________
I would never use it _______________

To what extent does the concept satisfy a financial need that you have?
Satisfies my financial needs very much _______________
Satisfies my financial needs somewhat _______________
Does not satisfy my financial needs at all _______________

Each of these criteria provides the product planner with key pieces of information concerning the potential user’s reaction to the concept. The liking, trial, and usage dimensions measure what might be considered as preference factors.

Linking the concept is a measurement of the consumer’s general affect toward the proposed product. This is an important dimension since most models of consumer adoption typically involve a liking stage which precedes the other adoption categories. Thus, without a positive affect toward the proposed product, the likelihood of further adoption is diminished.

Willingness to try the concept is another key dimension. Trial generally precedes adoption, and this willingness or intention variable is typically the best predictor of usage.

Intention to use the proposed product on a regular basis attempts to measure consumer intent to adopt the product. Adoption of the product is the end goal of the development process.

The need, usefulness, importance, practicality, and problem-solving dimensions measure what we considered to be a perceived utility factor.

The extent to which the concept satisfies a need attempts to capture a reaction that many new product planners feel is crucial to the success of new products. It will be recalled from Chapter 1 that a number of reasons for new product failure were discussed. One of these reasons was the perception that there was nothing new about the product and that it did not satisfy a consumer need. This dimension attempts to assess this key factor early in the development process.

Comprehensive Monthly Statement
An integrated monthly statement would be sent to you that lists the status of all your accounts including checking, savings, certificates of deposit (CDs), money market investments, IRAs, stocks and bonds investments, and any securities held in safekeeping for your by the bank. (Note: A detailed example of a statement was shown to the respondent.)

Service, Traditional Bankers (Order Takers)
1. Traditional personal banker would service your account
2. No one person is assigned to you. When you walk into the bank, any one of a number of personal bankers would handle your business
3. By law this person cannot give investment advice, such as stock purchase recommendations

Service, Personal Account Officer
1. A specific person would be assigned to you, and you would conduct your cash management account business through that specific officer
2. This person would know you personally and would be knowledgeable about your specific financial situation
3. By law this person cannot give investment advice, such as stock purchase recommendations

As with any type of research process, there are potential pitfalls of which the bank and the researcher must be aware. One potential pitfall is to assume that customers will purchase a product just because they say certain attributes are important. Opinions are a far cry from actual purchase decisions which place consumers at risk. This makes the interpretation of advanced concept testing of prime importance, and a trained researcher may prove to be of invaluable assistance here. Other pitfalls lie in the definition given to attributes and various levels of attributes. Having a personal account officer may mean different things to different people. Also, there may be other important attributes excluded from the testing situation, ones that may, in fact, influence subsequent purchase behavior more than those included in the test. Further, there is little way to assess customer trade-off levels relative to product attributes on subsequent product design. For example, how much would the minimum balance requirement have to be lowered for the customer to accept a $15 monthly fee versus a $10 monthly fee? These type of questions cannot be answered under this research format.

One last pitfall in interpreting results from advanced concept testing – the lack of knowledge of competitive reactions. Competitor responses can only be obtained with product introduction on a full-scale basis or in a more limited test market format. And often the product attributes can only be evaluated correctly when compared with what other similar products have to offer. While certain assumptions can be made through advanced concept tests, there is no accurate means to determine just how the product performs under actual market conditions unless the bank goes to the actual market and conducts tests. However, for many bank products this may not be important.

The reader is encouraged to refer to the appendix to Chapter 4 for a more thorough, yet introductory, treatment of concept testing. It is included here also to reinforce the importance of testing your product concept with potential customers. It is not an answer to all product design problems, but it may provide valuable insights at this stage of the framework to prevent severe market introduction errors.

Taxable Money Market Funds
1. Earnings are not exempt from federal taxes
2. Interest varies with the market
3. Optional Automatic Sweep—You can have funds from any part of your cash management account (such as income from your money market checking, savings, discount brokerage) to be automatically transferred to this account
4. Not FDIC insured

Line of Credit, Unsecured
1. No restrictions on how you use the money
2. Immediate access – you can obtain money immediately by
Special draft supplied by the bank
Just write a check for an amount that exceeds your checking account balance
3. Several different types of repayment methods such as
Monthly payments by you
Automatic deductions from your checking account
4. The dollar amount of the credit line is based upon
your needs
your financial position
5. Interest rates vary according to interest rates on Treasury Bills

Line of Credit, Secured with Home Equity
1. Identical to the unsecured line of credit except
Loan is secured with home equity

Money Market Savings ($2,500 Minimum Balance)
1. A savings account with an interest rate that is tied to money market rates
2. A maximum of six withdrawals can be made per month
3. FDIC insured

Mutual Funds
1. You can invest in a stock or bond mutual fund for the purpose of earning a return and making your investment grow
2. Mutual funds allow investors with similar goals to pool their funds under the direction of an investment manager and benefit from a diversification of investments and from professional portfolio management
3. You can receive in cash on demand the current market value of your investment
4. No commissions charged
5. No fees
6. Rates and risk are comparable to those mutual funds you get from stockbrokers
7. Types of shock and bond investments you may invest in include
a. Aggressive growth
b. Growth
c. Growth and income
d. Income
e. Municipal bonds

1 = Very Important
2 = Somewhat Important
3 = Neutral
4 = Somewhat Unimportant
5 = Very Unimportant

1. Low minimum balance 1 2 3 4 5
2. Tax-free money market fund 1 2 3 4 5
3. Line of credit, unsecured 1 2 3 4 5
4. Line of credit, secured 1 2 3 4 5
5. Comprehensive statement 1 2 3 4 5
6. Discount brokerage 1 2 3 4 5
7. Personal account officer 1 2 3 4 5

FIGURE 6-2 Alternative Attributes for an Asset Management Account

1. Minimum Balance Requirement
A. $2,500 minimum
B. $5,000 minimum
C. $10,000 minimum
D. No minimum

2. Monthly Fee
A. $18 monthly fee
B. $25 monthly fee
C. $35 monthly fee
D. No monthly fee

3. Money Market Funds
A. Taxable funds
B. Nontaxable funds
C. Not included in AMA

4. Line of Credit
A. Unsecured
B. Secured
C. Home equity
D. Not included in AMA

5. Mutual funds
A. Included in AMA
B. Not included in AMA

6. Comprehensive Monthly Statement
A. Included in AMA
B. Not included in AMA

7. Discount Brokerage
A. Included in AMA
B. Not included in AMA
C. Fee per transaction
D. No

8. Personal Account Officer
A. Included in AMA
B. Not included in AMA
C. Provided by traditional banker
D. Provided by specially traditional banker

The advanced concept test is one that occurs under rather controlled conditions since the account configurations presented to potential customers are controlled by the bank and the researcher, and the effects of customer judgments do not impact the product or the bank as with a full-market introduction. The product configurations can be manipulated among various groups of customers, and differences or similarities can be examined and analyzed. This approach of manipulating several product configurations requires more sophisticated data analysis but the process of asking potential customers their opinions about various product features remains the same. Figure 6-3 gives some key product features of an Asset Management Account along with several alternatives of each feature. This type of process is important. Time has passed since the concept test. Competition may have made certain adjustments which will affect the launch of the new product. This second concept test needs to take these developments into account.

Many bankers are finding it useful to obtain information concerning the degree to which product attributes are important to the consumer. One way to gain such assessment relative to the desirability of product attributes is by the use of a categorical rating scale. For example, in assessing the desirability of attributes of an Asset Management Account, prospective customers would be asked to rate the attributes along key dimensions such as (1) providing access to a personal financial planner (2) having a low monthly fee, (3) providing a line of credit, and a wide range of other attributes. The prospective customer would be asked to rate each attribute along a five-point scale with 1 representing Very Important and 5 representing Very Unimportant (see Figure 6-1). Obviously, these are not all the key attributes on which a bank would find customer opinions useful, but they do represent some crucial ones. Alternative attributes that could comprise a rating scale are listed in Figure 6-2. Information obtained from this type research could subsequently be used to fine tune the product which could, in turn, be tested with another group of potential customers until the bank was convinced that the AMA product as configured met with approval of its target market.

However, we realize that this method of testing is not always possible or feasible for a bank. We do believe that some form of advanced concept testing should take place even in the absence of a test market situation. The added information gained at this stage may cause significant changes to be made in the product or it may result in the product’s reverting to a prior stage for reevaluation. In our experience, it is worth the time and effort expended to structure and conduct some kind of evaluation of the product attributes, whether this evaluation is conducted in an experimental setting or under actual market conditions. The point is to take the time to test prior to commercialization. You can be assured that the market will test your product whether you intend for it to do so or not!

The issue of concept testing was addressed at some length in Chapter 4. However, the focus there was on separating the more obvious “good” product concepts from the obviously “bad” concepts. The focus of advanced concept testing, by contrast, is to examine product attribute features and capabilities by rigorous testing under controlled conditions with a representative sample of targeted consumers. At this point of the framework, we are concerned with establishing physical characteristics for new products or services that are acceptable and which consumers are likely to purchase. The objective is to convert ideas and concepts into actual products that are acceptable, provide consumer benefits, and can be delivered by the bank at their required profit level.

Referring again to Chapter 4, we see that the initial step in the concept evaluation stage is to measure customer reactions to descriptions of new products. Promising ideas have been converted into concept statements to which prospective customers are exposed. These prospective customers are asked if they would buy the product as configured and asked to state their reasons why or why not. Modifications are then made in the product concept and again tested with a similar set of prospective customers. When a product concept appears well defined in terms of customer acceptance, an actual product is development consistent with the concept. In other words, the concept takes on physical properties which the consumer can more easily evaluate.

Both of these approaches, therefore, have the primary aim of providing the bank with an answer to how the targeted market actually views the product after more complete development. There are two basic ways to do this. First, the product can be assessed under market like conditions without actually introducing the product to the market. This is what we refer to as testing under experimental conditions, an approach that has the advantage of allowing the bank to control the variables rather closely. However, this may also be viewed as a disadvantage in that unrealistic conditions may prevail in the experimental setting. Basically, potential customers would be asked to consider use of the product under controlled conditions and rate the product relative to its need-satisfying attributes. The second approach to testing involves subjecting the actual product to a market evaluation under real marketing conditions. Data are subsequently gathered from a sample of the total targeted market, then analyzed and interpreted.

Obviously, the second method of testing is much more rigorous and leads to a much clearer evaluation of the product’s attributes as they are presented. This method is, of course, much more costly, but the cost may be justified depending on the characteristics of the product and the strategic implications for the bank.

Testing a product under market-like conditions prior to the actual presentation to the market is what we refer to as advanced concept testing. By contrast, testing a product under actual prevailing marketing conditions is referred to product test marketing. The testing of a product under each scenario is a function of several characteristics and conditions. For example, some products will lend themselves more readily to advanced concept testing than others. The development of a tax seminar for upscale customers or the addition of the seminar to the offerings of an Asset Management Account would be a product more suitable for advanced concept testing. On the other hand, the introduction of ATMs or POSs would probably more readily lend itself to the product test marketing scenario. The introduction of ATMs or POSs is potentially far more risky and requires considerably more investment by the bank than the tax seminar. Hence, the cost of product failure will be significantly greater with ATMs or POSs at the full-scale commercialization stage. A go or no-go decision is absolutely essential when the cost of failure is great. The time and resources expended at the testing stage may, in fact, represent considerable savings to the bank if such efforts prevent an ill-advised introduction of a product or suggest major revisions to meet market expectations.

Selecting between mechanistic and organic structures would be relatively simple if all the performance, environmental, and technological pressures of a given bank were experienced to the same degree in all areas of the bank. Often this is not the case, and a rather diverse form of structural configuration is called for.

A common conflict situation applicable to banking arises when an organization produces a few basic products but begins to face a more uncertain environment. The technology of the production process calls for a mechanistic structure. However, the uncertainty of the environment calls for an organic structure. One solution, and by no means the only one, is to develop a series of externally oriented, organic at the same time remaining open to environmental shifts.

We believe that the new product development function, by its very nature, calls for a structural configuration that tends toward organic. We do not find many banks that have dealt with this issue. Continued reliance upon traditional, mechanistic orientations to develop new products is, in our opinion, dooming the process to failure. Figure 8-10 gives some criteria we believe essential for new product development organizations.

FIGURE 8-10 Criteria Essential for New Product Development Organizations

Creativity
Entrepreneurial ability
Decision-making ability and style
Objectivity
Dedication
Inspiration
Communication
Coordination
Morale
Flexibility for adapting to change
Authority
Responsibility
Adaptability
Integration
Delegation
Supportive climate

Mechanistic organizations generally produce low employee satisfaction and have difficulty maintaining human resources. In addition, the mechanistic configuration is ineffective for spotting small but potentially important variations in the environment. The attention of most mangers is directed toward vertical considerations. External communications within and outside the organization are sacrificed for responsiveness to top management.

In our opinion, banks have typically chosen a mechanistic configuration over the past 50 years. Banking has a history of a very stable environment, especially prior to 1980 when the first effects of industry deregulation were being felt, and in fact a mechanistic structure was entirely appropriate for a bank prior to 1980. Banks were virtually immune to dramatic shifts in goals, competitive pressures, and environmental contingencies. The focus, rightly so, was on operational efficiency. This provided banks with consistent performance and market share relative to other bank competition.

Organic Organizations

Organizations with an organic orientation tend to focus on horizontal specialization and coordination. Typically, in the absence of strict rules and procedures, managers are given broad objectives with only general guidelines about how to proceed. The organization must rely, at least in part, on the judgment and professionalism of its personnel. Management is expected to work closely with fellow managers and subordinates. There are few written documents outlining procedures, but guidance is available from all supervisory levels. In the organic orientation, successful managers are more aware of subtle changes in the needs and desires of customers and employees. Much time is devoted to external relations and communications. This configuration works because information can easily penetrate the organization and be circulated among key decision makers. Subunits can make rather small adjustments to particular markets or customers. Employees tend to view organic structures as flexible, nonbureaucratic, decentralized, and participative. As a result, turnover is generally lower and commitment to organizational goals is higher.

FIGURE 8-9 Characteristics of Mechanistic Versus Organic Organizations

Mechanistic Organic
Authority Centralized Decentralized
Rules Many; rigid Free; flexible
Departmentalization Clear-cut Ambiguous
Job definition Clear, limited scope Broad, open-ended
Coordination Formal Informal
Control Impersonal Personal
Standards Rigid Flexible
Decision making Management science Creative, innovative
techniques
Delegation Little Much
Span of control Narrow Wide
Performance criteria Specific, output oriented General, development oriented
Emphasis of performance Hours, work performed End product
Information flows By hierarchical structure Across hierarchial lines
Leadership style Autocratic Democratic/participative

The structural configurations of a bank should be consistent with the bank’s goals, environmental threats and opportunities, size, and technology. The key question that bank managers must address is: How should structure be adjusted to meet major problems and opportunities, and thereby allow the bank to accomplish its purpose?

Adoption

The final stage in the process is the actual adoption of the product. Adoption comes about after a successful trial of the new product/service. An unsuccessful trial may encourage the potential buyer to do more searching and thus result in business for your competitor. Again, this is more problematic for the banking industry than it is for many consumer goods industries whose products lend themselves to easy evaluation and trial. Regardless of the difficulty of arranging an actual trial, it is extremely important to the adoption decision. Ancillary services and personal relationships within the bank can make this adoption decision even less worrisome for the potential buyer.

There are several aspects about the adoption process that are worthy of mention. First, some people take longer to adopt a product than others, and these individual differences can keep a person in one stage of the process a relatively long time. The promotional efforts of the bank have a similar effect. For example, providing adequate information to potential buyers early on in the process can hasten progress through the awareness, interest, an evaluation stages. Insufficient promotional support targeted toward this objective will retard individual adoption.

A second factor is that the bank’s promotional plan must compensate for the nature of the new product. For example, if concept tests show the product to be lacking in relative advantage and/or compatibility, promotional efforts must provide the necessary support in this area. Failure to do so may retard progress through the awareness and interest stage of the process.

Each new product is different and will generally dictate different adoption challenges to the new product planner. Awareness of the process, couple with knowledge about the diffusion of innovations, product life cycles, and portfolio considerations discussed earlier can provide some valuable guidelines for maneuvering the new product through the difficulties of introduction.

Awareness

The first step that a potential buyer of a new product goes through is becoming aware of the new offering. There is some disagreement as to whether messages should focus on making potential customers aware of the new product itself, or features of the new product, or on just what. There is, however no argument that potential buyers must be aware of something. Several techniques are helpful; for example, advertising is particularly useful for explaining the features of the new product. So too are personal selling or cross-selling efforts of the bank. Cross selling may be particularly useful in making identified innovators aware of the new offering, thus launching the diffusion process. Direct mail can also be extremely efficient in bringing new banking products to the attention of the early adopter group.

Interest

Most buyers pass through a secondary stage where they either actively or passively seek or receive information about the new product. The interest-generating capability of the product will vary depending upon the type of new product being offered (e.g., a modification or a brand new product). In those instances where the product itself has the capacity to create interest, promotional programs should actively support the new product. For those modifications which do not have the capacity for generating great amounts of interest, the promotional campaign must do so. The amount of interest that a potential buyer has for a new product typically influences subsequent steps in the adoption process.

Evaluation

In this stage the potential buyer makes judgments about the new product. To do so, the consumer must have enough information. Bank promotions should focus on providing potential buyers with adequate amounts of information in order for them to evaluate the new offering. In come cases potential buyers will compare the new product against older products with which they have experience. For example, previous users of packaged checking accounts may use their experience with those products to evaluate a new asset management account. Obviously, when the new product is perceived as being technical and complex, the bank’s promotional efforts must focus on educating the potential buyer about it. Assuming that the buyer knows as much about the new product as does the product manager is a critical mistake. If consumers don’t have all the facts at hand, your new product may not stand up as well in the evaluation process as a competitor’s, or the consumer may be disappointed after trying the new product. The key here is to prepare the consumer for trial of the product knowing that, in some cases, the buyer may be taking a considerable risk in trying the new product. Information can help reduce that risk!

How Does the Concept Stand Up in the Marketplace?

Assessing the initial viability of a product concept involves what is known as a concept test. Concept tests, if properly conducted, can provide a great deal of useful information. However, it should be pointed out that over reliance on concept tests can be potentially dangerous. Clearly, the consumer is not exposed to an actual product but only the concept of the product. Consequently evaluations can differ.

Figure 4-2 identifies a list of criteria that are incorporated many concept tests. As you can see, the criteria cover a broad range of dimensions and in some cases may seem to measure the same thing.

FIGURE 4-2 Concept Test Criteria

Performance Criteria
Liking the concept
Willingness to try the concept
Intention to use the concept on a regular basis

Utility Criteria
Extent to which concept satisfies a need
Usefulness of the concept
Importance of the concept
Extent to which the concept is practiced
Extent to which the concept solves a problem

Credibility Criteria
Believability of the concept
Extent to which to concept is realistic

Novelty Criteria
Uniqueness of the concept
Extent to which to concept is interesting

Measurement of the criteria or dimensions is typically done using what is known as a semantic differential. This is a seven-point scale with polar or near-polar words or statements anchoring each end of the scale. Scale positions in between the polar points represent various degrees of the dimension being measured. Figure 4-3 shows what the dimensions in Figure 4-2 look like when they are put into the form of a semantic differential.

The form of a bank’s structure will vary depending upon the answers given to the issues of job definition, departmentalization, span of control, authority, and information and work flows. Generally speaking, banks with highly defined jobs, little departmentalization, low span of control, centralized authority, and little need for information will be characterized by such terms as formalized, highly structured, bureaucratic, and mechanistic. Organizations with loosely defined jobs, much departmentalization, high span of control, decentralized authority, and a great need for information will be characterized by such terms as informal, unstructured, nonbureaucratic, and organic. While there is no universally accepted way of structuring a bank, our experience with respect to the changing environment within which banks operate today suggests that banks should be moving more toward the less structured, organic form of organization rather than the highly structured, mechanistic form. Before we discuss various structures, we present issues that are crucial to organizing for new product development.

Organizational structure refers to a set of relatively fixed relationships resulting from a managerial decision process which seeks, in its most basic form, to accomplish five tasks. These are:

1. Define jobs. The work of the organization must be rather specifically defined to take advantage of specialization of labor.
2. Combine and group jobs. After jobs are defined, they are grouped together into areas of logical fit. This is referred to as departmentalization.
3. Determine appropriate unit or department size. It should be decided on the proper span of control based upon the work of the organization.
4. Delegate authority. This is the process by which authority to act is distributed on some basis throughout the organization.
5. Chart information and work flows. It must be determined how work will flow through the organization, and this should be reflected in the organization’s structure.

STEP ONE: Calculate revenue surplus or deficit at $120 annual maintenance fee with a market potential of 3000 accounts and a penetration rate of 10 percent (300 accounts).

Fixed costs = $461,340
Variable costs = $33 (300) = $9900
Total direct costs = $471,240
Revenue (maintenance fees only) = $120 (300) = $36,000
Revenue deficit = $471,240 – $36,000 = <$435,240>.

STEP TWO: Identify component products of the Asset Management Account which are additional revenue generators.

1. Zero balance checking
2. Super NOW
3. Money market account
4. Secured and unsecured lines of credit
5. Transaction fees on mutual funds, investment options, government securities, discount brokerage
6. Credit/debit card

STEP THREE: Estimate revenue flows from each of the other revenue components of the AMA. To do this, use individual bank products such as credit card history, checking account revenues, and interest income from lines of credit. Repeat this procedure for each component product which is fee based. In so doing, keep in mind specific marketing objectives of the proposed product, target market characteristics, and competition. This method can help in the determination of the pricing of the different component products. Several results can occur. First, the annual maintenance fee may have to be increased to reduce the revenue shortfall. Second, alternative fees for component products can be evaluated. These should be evaluated in terms of the marketing objectives of the total product, and the other characteristics identified earlier. Third, some component products which were originally planned as loss-leaders (consolidated statements, custody service, or bill paying services, for example) may have to become fee bearing.

STEP FOUR: When the total pricing calculations have been determined, a break-even for different penetration rates for subsequent years should be calculated. This gives the planner some idea of when the product should break even. More than likely, the product will not break even the first year. However, it should be determined when it will break even given different penetration rates.

Zero Balance Checking
Super NOW
Money Market Account
Diversified Mutual Fund
Tax-Exempt Investment Options
Government Securities
High-Growth Investment Options
Secured and Unsecured Lines of Credit
Credit/Debit Card
Consolidated Monthly or Yearly Statements
Custody Service
Free Checks
Bill Paying Services
Access to An Account Executive
Private Banking Facilities
Discount Brokerage

First National’s concept test also revealed that approximately 50 percent of the estimated users would be active traders engaging in an average of three trades per year. Market potential estimates ranged from an expected 3000 accounts, with a maintenance fee of $120, to 2500 with a maintenance fee of $360. The new product manager, based on experience with other new products, assumed that First National could expect a 10 percent penetration of the market for the first year, 15 percent the second, and then reach a maximum penetration of 18 percent the third.

The new product manager projected the following costs for developing, marketing, and servicing the AMA on a yearly basis.

Manager’s salary $ 35,000
Two account executives $ 20,000 each
Clerical staff of five (including 30 % benefits) $ 12,000 each
Brokerage costs $ 22 per account
Equipment rental (three quotrons) $ 1,320
DTC costs for trading customers $ 8 percent
Data processing:
Contract (one-time charge) $ 50,000 ($10,000/year)
Processing charge $ 6,500 per month
Software development $ 250,000 ($50,000/year)
Installation $ 11,000 ($2,200/year)
Printer $ 5,500 ($1,100/year)
CRTs (3) $ 8,100 ($1,620/year)
Controller $ 5,500 ($1,100/year)
Equipment maintenance $ 18,000
Postage expense (based on two mailings/month) $ 3 per account
Telephones:
Long distance $ 3,000
Local $ 3,000
Site preparation $ 35,000
Marketing $ 125,000

The new product manager used a five-year amortization base for certain fixed costs. All costs, with the exceptions of brokerage costs, DTC costs for trading customers, postage expense, and telephone (long distance) expenses, were considered fixed.

In a committee form of organization the ideas and perspective of a number of key bank executives can be pooled. Any new product idea resulting as an effort of their pooled judgments is more likely to win the approval of each executive who took part in its development. Committees can function very well in providing a source of fresh perspective and in keeping planners on track in pursuing and evaluating new products in light of overall bank goals and objectives.

Venture Team/Matrix Organization

The venture team is a relatively new yet rapidly growing and evolving organizational concept for managing product innovation from the initial idea generation to full-scale commercialization.

A venture team is a relatively small, multidisciplinary group, organizationally segmented from the remainder of the bank. It is composed of representatives from all key functional areas of the bank. The team operates in an entrepreneurial environment, in effect being a separate business entity. Typically the team has one goal—to develop new products and enter the market profitably. Once a new product is found and developed, it is typically turned over to another group within the bank to manage. The venture team may then be disbanded, with members returning to their respective functional areas, or they may accept a new project and continue functioning.

The venture team approach, actually a combination of the functional and product forms of organizing, is designed to avoid the new product development problems found in traditional structures—problem of bureaucracy, personnel reluctance to change, and lack of organizational authority and sanction to move a product through the process.

External Organization

Outside consultants and advertising agencies can be good sources of new product ideas. Their greatest strength—being located on the fringes of the industry—is also their greatest weakness. Outside consultants can bring new, fresh ideas and perspectives from a wide range of relationships routinely developed in the course of their business. However, they do not have adequate knowledge of the current organization’s ability to support the idea generated. The key goal in organizing for new product development should be to determine—as a result of a conscious management decision—a strategic direction that determines the scope of future bank activities.

Produce Manager Organization

In many organizations a produce manager is the executive in charge for product planning related to new as well as established products. A large bank may have several product managers who report to a senior marketing executive. The responsibilities of a product manager can be quite broad. This executive may be responsible for planning the complete marketing program for a group of products, including managing the new product development process for all products under his/her direction.

Probably the most significant problem with this approach is that a bank may saddle its product managers with great responsibility yet will not give them the corresponding authority needed to carry out their responsibility. The effectiveness of the product manager system depends largely on product managers being able to influence other executives to cooperate with their plans.

Functional Manager Organization, New Product Department

To support new product development as a full-time key organizational activity, several consumer products manufacturers have established new product departments. Based on our research, few banks have considered such a configuration, which seems to indicate new product development does not have the structure of other more traditional banking functions. Generally this department is very small, consisting of four to five people, or frequently, only one person. Typically, such a new product department is responsible for setting up new product programs and guiding new products through the development stages. When a product is ready for full-scale commercialization, the product is released to the appropriate operating department management.

If purpose is determined, then the resources of the bank can be mobilized for accomplishment. An organizational structure that facilitates performance of the required tasks must deal effectively with information flows and relationships that permit coordination of departmentalized activities. Further, managers must understand and be prepared to address the interdependence between formulating and implementing organizational purpose(s).

The final point we want to make in this brief discussion of strategy and structure is that top management must determine the direction their bank is to follow! For example, will the bank seek to develop relationship banking for upscale consumers as a prime focus with the emphasis on making available a total portfolio of services? This is a top management decision to be made after complete analysis of environmental, competitive, and market characteristics of the individual bank. Or will top management determine the strategic direction to be one of serving a broad-based market with emphasis on operational efficiency of transactions? A decision to opt for either of these directions will “brand” a bank, and bankers should make this decision in the context of establishing a distinctive competence in an area of service to their markets. Banks that develop diverse strategies such as these will develop different structures to accomplish these varied purposes. For example, the bank desiring to establish relationships with upscale customers will probably organize around key customer segments with functional areas subordinated to the responsibility for overall delivery of service. By contrast, the transaction-oriented bank may organize around operations, a system which derives from the customer service definition. Each bank can be successful with its strategy to the extent that they have perceived their markets accurately and to the extent that their structure facilitates the accomplishment of objectives.

In every industry, and banking is no exception, there are traditional ways of dividing necessary tasks by function that have developed over time depending on the extent to which people trained in these functions perpetuate organizational arrangements. However, identification of tasks and the way they are structured should be made in terms of a bank’s distinctive strategy and not by following industry convention or past practices within the individual bank. If tasks or strategies change, so too must structures.

This brings us to a topic that, in our opinion, has received too little attention in banking literature—viewing the banking organization as a system.