Market Expansion TrainingDay 1

September 12-13, 2011RBAP Conference Room, RBAP

BuildingIntramuros, Manila

Case for Expansion

Case against Expansion

Exploring Various Expansion Strategies

The Strategy ChallengeS-O Strategy

• Enter new territories in Visayas through new branches/MBOs.

S-T Strategy

• Maintain the current markets among farmers, traders, LGU employees, and microentrepreneurs by introducing better designed products. Business focus shall remain on farmers (30%), micro (20%) and SMEs (30%) totalling 80% of loans allotted to these sectors.

• Improve IT systems and credit processes to support overcome competition.

The Strategy ChallengeW-O Strategy

• Implement a total quality thrust in the bank.• Implement a centralized and integrated IT infrastructure for all

units by 2007.• Institute organizational development plan for personnel.

W-T Strategy

• Develop fee-based services and alternative financial services beyond lending such as remittances, collection services, ATM, new MF products (MF Agri/HMF), etc.

• Improve risk management and good governance towards globally acceptable best practices.

• Build-up of equity via plowback of profits. Reduce dividends.

Product Diversification• 2000: BPI became the first bancassurance firm

after it acquired the insurance companies of the Ayala Group– FGU Insurance Corporation– Universal Reinsurance Corporation– Ayala Life Assurance, Inc.– Ayala Health Care, Inc.– Ayala Plans, Inc.

• 2009: Completed sale of its 51% stake in Ayala Life to Philamlife to form the BPI-Philam Life Assurance Corporation.

Market Re-segmentation• 2000: BPI introduced its Internet bank, BPI Direct

Savings Bank• 2010: Partnered with its sister firm, Globe

Telecom, in establishing Globe BanKO, a mobile savings bank with microfinance as its main thrust.

• Followed by the launch of the BPI Family Ka-Negosyo program, a reinforced program to fit the financing requirements of micro and small entrepreneurs, signaling BPI's foray into small and micro-entrepreneurship.

• BPI “Micro deposit” ATM account...

Mergers & Acquisitions

Pro• Rapid gain of market share• Secure critical technologies• Fill-up gaps in product lines• Have faster product roll-out• Acquire talent

Con• Risk of failure due to

incompatible culture and processes

• Over-paying for acquisition• Internal dissent• Employees turn-over

Manage the acquisition process by assigning a top executive to over-see the integration process with focus on managing social and cultural fit.

Product Diversification

Pro• Used to enter new market

niche• Answer customer needs of

existing market• Protect core products and

market• Deliver top-line revenue

growth

Con• Time-consuming

preparation and change of internal processes

• Reconfigure IT support structure

• Heavy cost in initial product roll-out

• Risk of market rejection

Appoint product management unit to lead product research, design, and process improvements in coordination with other bank departments.

Customer Re-segmentation

Pro• Discover new market

segments• Support profitable market

segments• Boost investments in key

technologies and products• Expand sources of demand

from existing products

Con• Risk of poor market uptake• High cost of investment for

small markets• Complexity of managing

multiple markets and delivery channels

• High incremental cost with potentially lower incremental profits per new customer.

Market research unit and financial planning unit must carefully consider cost implications as you go to a different market niche. Impact on per unit cost or profits must be considered.

Geographic Expansion

Pro• Expand market reach• Diversify geographic risk• Enhance brand recognition• Tap new clients from the

same market segment• Increase resources (loans,

deposits)

Con• Capital intensive• Burn-out of assigned

employees• Complex management

control systems• Heavy investment in IT

infrastructure• Lax internal controls

Key executive should focus on putting together interdisciplinary team for market research, construction, IT, HR, and branch operations opening.

Market Expansion TrainingDay 2

September 12-13, 2011RBAP Conference Room, RBAP

BuildingIntramuros, Manila

Microfinance Expansion Strategies

Geographic Expansion

Pro• Expand market reach• Diversify geographic risk• Enhance brand recognition• Tap new clients from the

same market segment• Increase resources (loans,

deposits)

Con• Capital intensive• Burn-out of assigned

employees• Complex management

control systems• Heavy investment in IT

infrastructure• Lax internal controls

Key executive should focus on putting together interdisciplinary team for market research, construction, IT, HR, and branch operations opening.

Sample MBO Organization

Nightmare Scenarios without a Risk Management System

INCREASED COSTS INADEQUATE RESOURCES HIGH MAINTENANCE COST PROJECT DELAYS EMPLOYEE FRUSTRATIONS

CUSTOMER DISSATISFACTION DOWN TIME DUE TO POOR MAINTENANCE FIRE, FLOOD, THEFT, DAMAGE & DETERIORATION HIGH CUSTOMER COMPLAINTS LOSS OF REPEAT ORDERS ANOTHER CUSTOMER LOST

BAD PUBLIC IMAGE POOR QUALITY SERVICE POLICY CONFLICTS CONFLICTING PRIORITIES MANAGEMENT DISINTEREST RE - WORK LACK OF SKILLS UNPLANNED VARIATIONS MATERIAL WASTAGE

Source: AJA Registrars, 2008

18

Business Risk:

“The level of exposure to uncertainties that the enterprise must understand and effectively manage as it achieves its objectives and creates value”

An EWRM Approach Needs a Context

19

Categories of Business Risks

ENVIRONMENT

RISK

PROCESS

RISK

INFORMATION FOR

DECISION-MAKING

RISK

Sources of Uncertainty

Uncertainties affecting the viability

of our business model

Uncertainties affecting the execution of our business model

Uncertainties over the relevance

and reliability of information

that supports our

value-creation decisions

BSP Risk Framework

Internal Ratings-Based Approaches

Credit Risk Standardized Approach Foundation

IRB Advanced

IRB

Market Risk Standardized Approach Internal VaR Models

Operational Risk

Basic Indicator Approach

Standardized Approach

Advanced Measurement Approaches

Sources and Mitigation of RiskRisk Area Sources of Risk Risk Mitigating

ActivitiesCredit RiskMarket RiskOperational RiskReputational RiskFinancial RiskOther Risks

22

BUSINESS STRATEGY

WHAT WILLNOT ALLOW

USTO SUCCEED?

BARRIERS TO SUCCESS

BUSINESS RISKSCHANGES IN EXTERNAL

ENVIRONMENT

Business Risk

Source: SGV & Co., 2006

23© 2000 Arthur Andersen All rights reserved.

The Business Risk ModelTM

Environmental scan

Business model

Business portfolio

Valuation

Organization structure

Measurement (strategy)

Resource allocation

Planning

Product/service pricing

Contract commitment

Measurement (operations)

Alignment

Environment risk

Price

Liquidity

Credit

Information for decision making risk

Process risk

Operations

Interest rate

Currency

Equity

Commodity

Financial instrument

Business reporting

Environment/strategic Process/operational

Financial

Competitor Customer wants Technological innovation Sensitivity Shareholder relations Capital availability

Sovereign/political Legal Regulatory Industry Financial markets Catastrophic loss

Cash flow

Opportunity cost

Concentration

Default

Concentration

Settlement

Collateral

Customer satisfaction

Human resources

Knowledge capital

Product development

Efficiency

Capacity

Performance gap

Cycle time

Sourcing

Channel effectiveness

Partnering

Compliance

Business interruption

Product/service failure

Environmental

Health and safety

Trademark/brand erosion

Empowerment

Information processing/

technology

Integrity

Leadership

Authority/limit

Outsourcing

Performance incentives

Change readiness

Communications

Relevance

Integrity

Access

Availability

Infrastructure

Management fraud

Employee/third party fraud

Illegal acts

Unauthorized use

Source: Arthur Andersen, 2001

Greater Business Risks

Higher Expectations of Internal Audit

Increasing Expectations of the Internal Audit Function

IncreasedFlexibility

Add MoreValue

Expertise inTechnology

Business Risk /

Process Focus

Effective Change Agent

DeeperSkill Sets

Requires Internal Audit to Provide

World Class Services

TechnologyAdvancements

Globalization of Operations

Rapid Expansion

IncreasingCompetition

Speedof Change

FluctuatingMarket Demands

TechnologyAdvancements

Globalization of Operations

Rapid Expansion

IncreasingCompetition

Speedof Change

FluctuatingMarket Demands

Source: SGV & Co., 2006

Why go for Risk Management?

•Compliance with regulatory requirements Compliance with regulatory requirements

•A documented risk management system is intended to provide A documented risk management system is intended to provide the framework for consistency of approachesthe framework for consistency of approaches

•Efficiency of actions and approaches and cost savings associated Efficiency of actions and approaches and cost savings associated from preventive rather than reactive managementfrom preventive rather than reactive management

•Elimination, or at least, minimization of risk damaging to profit Elimination, or at least, minimization of risk damaging to profit and to reputation – customer complaints, penalties imposed. and to reputation – customer complaints, penalties imposed.

•Employee motivation and satisfaction - cost saving of staff Employee motivation and satisfaction - cost saving of staff “turnover“turnover

Why go for Risk Management?ENLIGHTENED MANAGEMENT FOCUSENLIGHTENED MANAGEMENT FOCUS

• Enlightened management focus is – Enlightened management focus is –

““Whatever we do, Whatever we do, WE DO FOR USWE DO FOR US and and

notnot because it is forced on us” because it is forced on us” - -then this initiative WILL be:then this initiative WILL be:

–RationalRational–EffectiveEffective–EconomicEconomic–SustainableSustainable–SensibleSensible

The SUCCESS of a Risk Management System depends on COMMITMENT from all levels

and functions of the organization especially top management.