3 What Drives Performance?
We classify drivers of performance into three broad classes: (i)strategy,(ii)execution of strategy, and (iii)the environment. Within each category we give details of the various factors that affect performance and provide supporting evidence that these factors do indeed drive performance.
3.1 Strategy
What should a bank do? The articulation of a strategy is a key driver for success and especially so in dynamic, competitive environments such as that in the financial services industry; see, e.g., Boyd (1991) and Capon, Farley, and Hulbert (1994) for empirical evidence on thestrategic success hypothesis. In the context of banking institutions, the selection of a strategy primarily involves the decision on how the global banking organization should restructure into the components of the “disaggregated” bank. Here are some of the strategic choices:
1.Product mix: Should the bank be a product originator and if so, which portfolio of products should it support? In the United Kingdom, for instance, the Royal Bank of Scotland set up Direct Line as a completely
autonomous enterprise to concentrate on consumer automobile insurance. Countrywide Pasadena in the U.S. focuses on a single product: mortgages. Bank of Montreal in Canada has set up a separate, non-branch-based organization called Mbanx that to some extent competes against its branch-based operation. It is worth noting that choosing a product mix not only defines the strategy of the institution in providing services, it is also a strategic decision in the context of risk management. Specification of a product mix is equivalent to a choice of the financial risks that the institution plans to manage.