DOI 10.1007/s10726-008-9112-3
Using a Multi-Criteria Group Decision Making
Approach to Select Merged Strategies for Commercial
Banks
Tien-Chin Wang · Ying-Ling Lin
Published online: 12 June 2008
© Springer Science+Business Media B.V. 2008
Abstract This investigation develops an analytic hierarchy framework to help banks choose development strategies according to six main criteria comprising 41 attri-butes, namely management performance, staff rights and interests, customer orien-tation, financial analysis, government policy and risk management. Questionnaires are administered to compare the priorities of different criteria and the ratings of fea-sible developmental strategies amongst decision makers and respondents including bank superintendents (Department of Finance), economists, shareholders, customers, executives and staff of the Bank of Kaohsiung, Taiwan. Additionally, the analytic hier-archy process and consistent fuzzy preference relation are used to improve consistency and effectiveness in decision making. The analytical results reveal that risk manage-ment and customer orientation are the most important considerations for the Bank of Kaohsiung in the development of a strategy selection. Furthermore, the staff select the best futuristic policy on “focusing on core business competitiveness to become a specialized and stable bank,” whereas the other five groups choose the strategy of “merging with other finance organizations to become an existing bank.”
Keywords Finance merge· Financial holding company · Multi-criteria decision making· Consistent fuzzy preference relation · Analytic hierarchy process (AHP)
T.-C. Wang (
B
)Department of Information Management, I-Shou University, 1, Section 1, Hsueh-Cheng Road, Ta-Hsu Hsiang, Kaohsiung County, Taiwan, R.O.C.
e-mail: [email protected]; [email protected] Y.-L. Lin
Department of Information Engineering, I-Shou University, 1, Section 1, Hsueh-Cheng Road, Ta-Hsu Hsiang, Kaohsiung County, Taiwan, R.O.C.
1 Introduction
Soon after the Taiwanese government lifted a ban off the establishment of banks in 1992, many new banks began operations. In 2001, the government responded to the excessive number of banks in the market by opening up applications for the establishment of financial holding companies. However, various forms of competitive pressure, such as retaining new customers, providing new financial services and hold-ing available businesses, resulted from the entry of the Asian Financial Crisis and WTO (Morgan et al. 1995). The rapid development of new banks created an unprecedented managerial and competitive crisis.
Numerous enterprises have encountered problems of instable economies, fierce competitions, reduced budgets and diverse customer requirements during the past decade (Min et al. 1996). Owing to a small organizational scale and an insufficient financial liberalization, financial product innovations and varieties have failed to reach expectations. By using mergers to increase operational scales, 14 financial holding companies have formed from among the 47 domestic banks and 31 credit cooperatives that had previously existed. The Ministry of Finance is encouraging these companies to further merge to reduce the number of banks and improve national competition. Therefore, either the financial holding companies or the domestic banks will face reorganization or merger pressure.
The strategy of merging financial organizations is closely linked to organizational performance, government policies, shareholder rights and customer satisfaction. It is crucial for financial organizations to choose their merging strategy carefully. Factors that require consideration include various internal, external, qualitative and quantita-tive attributes, indicating that the selection problem is an analytical hierarchy issue. A well-known method of effectively dealing with this problem is the Analytic Hierarchy Process (AHP) initiated bySaaty(1980). The AHP methodology involves separating a complex decision issue into elemental problems to establish a hierarchical model. In a typical decision hierarchy, the goal occupies the highest level, assessment criteria share the same interim level and the feasible alternatives are situated on the lowest level. When the decision problem is divided into smaller constituent parts in a hier-archy, pairwise comparisons of the relative importance of elements are conducted in each level to establish a set of priorities. Although AHP is widely utilized in diverse fields, inconsistency always occurs with increasing hierarchies of criteria or alterna-tives. To alleviate this dilemma,Herrera-Viedma et al.(2004) presented the consistent fuzzy preference relations for facilitating the decision making process, enhancing its effectiveness and accuracy. This study utilizes this method as the basis for the selection of merging financial organizations.
Financial organizations (mainly banks) face more government restrictions than enterprises. Many studies have examined financial organizations, but few have dealt with the strategy of merge selection under a new financial environment. Numerous factors influence the selection of financial developmental policies, including the con-centration on improving operation performances, customer satisfaction (Gerson 1993), government policies, shareholder rights, risk management and so on. In this investiga-tion, the influences derive from the consultation of an investigation by several experts, including bank superintendents (Department of Finance), economists, shareholders,
customers, executives and staff. The main objectives of this investigation are: (1) to examine what factors should be encompassed in evaluating and investigating the importance weightings of influential factors when selecting organizational merges in new financial environments; (2) to establish a decision making model for selecting merged finance policies; and (3) to explore the differences between various assessment groups by using finance merging strategies.
The following section briefly outlines the connections between financial environ-ments, government economies and financial policies. Section2then discusses alter-native strategies for financial merging and operating environments. Next, methods of analytic hierarchy process and consistent fuzzy preference relation are presented in Sect.3. Subsequently, Sect.4proposes a policy selection model based on these two analytical approaches. Finally, discussions and conclusions are given in Sect.5.
2 Operating Environment and Merged Strategy of Financial Organization
2.1 Financial Holding Company and Operational Environment
The Taiwanese government passed the Financial Holding Company Law to compen-sate for the weakness of the Financial Organization Merging Law, limiting mergers of organizations that share similar characteristics to reduce the number of financial orga-nizations and enhance national competition by establishing financial holding compa-nies. Financial holding systems differ from country to country. However, the Taiwanese system is identical to those in the United States and Japan. Subsidiary and holding companies are independent, and holding companies merely take charge of planning and investment without participating in actual operations (Huang 2002) (see Fig.1).
Following a recent period of rapid economic development and population growth, Taiwan currently has 47 domestic banks and 31 credit cooperatives (Banking Bureau 2006). The total output value of the financial service industry rose from 9.43% to 11.57% during this decade. To keep up with international financial trends and the domestic economic environment, the Taiwanese government has dedicated itself to pursuing a second stage of financial innovations as well as enhancing overall financial service industry competition (Banking Bureau 2006). Additionally, it has also sup-ported the establishment of the Financial Organization Merging Law and the Financial Company Holding Law, providing a legal structure for the merger of heterogeneous or homogenous financial organizations. Tax incentives along with benefits of scale and increased competition when facing an increasingly internationalized environment are the drivers of financial organization integrations.
Given government encouragement of integrations and mergers of financial organi-zations to extend their basis and scale of operations, 14 financial holding companies were established in Taiwan. The future plan is to establish one or two large and com-petitive leaders to reduce the number of financial organizations. Both the general banks and large finance holding companies face reorganization and merging pressure. The New Basel II protocol has been established in 2006, represents a rigorous test for financial organizations.
Financial Holding Company
Futures Company Securities Company
Insurance Company
Credit card Company Bills Finance Company
Investment Trust Bank
Industrial Bank Commercial Bank Investment Service Non Financial Organization Foreign Financial Organization Financial Organization
Fig. 1 The framework of financial holding systems in Taiwan
2.2 Financial Organization Merged Strategies
Asian banks primarily focus on dealing with the problems of general debility, giv-ing little consideration to future operatgiv-ing directions and developmental policies. Whether they aim to merge with other organizations or maintain their existing situation, selecting a merging strategy is crucial for financial organizations. Generally, finance merging may bring advantages to improvements on the financial structure and promotion of operating performances for organizations. Meanwhile, official reports (Peristiani 1996) demonstrate that the policy of bank mergers has failed to reach expectations for improvements on the financial structure, and has even increased risk. Moreover, the top 100 banks in the U.S.A. in 2001 were also small and professional. Obviously, “merging” is not the only operating method and developmental direction for financial organizations.
Various alternative merging policies exist for financial organizations, namely, (i) merging with other financial organizations to become an existing bank, (ii) merging with other financial organizations to become a merged bank, and (iii) focusing on core business competition to become a specialized and stable bank (Bank of Kaohsiung workers union 2006). These alternatives are described as follows:
(i) Merging with other financial organizations to become an existing bank:
Financial merging possesses the advantages of creating a suitable environment for operating and improving national competition, expanding organizational scale and giv-ing access to favourable tax treatment. It can be performed through cross-operation and reorganization. According to previous experiences, return on equity decreases with increasing capital stock. Bank mergers must have the following characteristics (Huang 2005):
• The capital of party pursuing the merger must be more than twice the size of the party being merged.
• Abundance in capital.
• Ratio of receivables on demand should be below 3.57%.
(ii) Merging with other financial organizations to become a merged bank:
Financial mergers that generally bring improvements in stock price fail to consider that not all existing customers will remain with the new bank post merger. Further-more, the merged bank will lose its independent operating rights. The features required for a bank to be merged with another bank are as follows (Huang 2005):
• High profitability. • Superior operating ability.
• Bank of international settlement ratio exceeding 7%.
(iii) Focusing on core business competition to become a specialized and stable bank: Both existing and merged banks change their organizational framework via financial mergers. Importantly, such mergers influence the rights of employees and customers. Focusing on core business competition and becoming a specialized and stable bank can reduce charges for customers and employees.
3 Research Methodology
This study is based on the methodologies of analytical hierarchy process and consistent fuzzy preference relations. These methodologies are described below:
3.1 Analytical Hierarchy Process
The method of analytical hierarchy process (AHP) can cope with qualitative and quan-titative information. It is widely used in various disciplines.Yu et al.(2005) presented an assessment model based on AHP for evaluating 3G licenses. Moreover,Salmeron and Herrero(2005) used AHP to assess the key influences on the success of executive information systems, whileNgai(2003) evaluated web advertisements based on the AHP. Furthermore,Wei et al.(2005) employed AHP to select the enterprise resource system. Generally, AHP involves three main steps: (1) establishing analytical hierar-chies for evaluating criteria, (2) weighting the importance of the evaluated criteria, and (3) obtaining an overall performance crisp value of each alternative criteria (Choi and Hartley 1996). Typically, AHP is based on pairwise comparisons of attributes or alternatives, and inconsistency occurs when given an increase in the number of hier-archies involved. The method of consistent fuzzy preference relations is proposed to
reduce the judgement time and avoid the need for consistency checks in the analytical hierarchy process.
3.2 Consistent Fuzzy Preference Relations
Herrera-Viedma et al.(2004) proposed the consistent fuzzy preference relations in accordance to two preference relations, namely multiplicative preference relation and fuzzy preference relation (Chiclana et al. 1998,2001,2002;Herrera et al. 2001;Wang and Chen 2005a,b,2007).
(1) Multiplicative preference relation. Experts express their preferences toward a set of alternatives as X by a preference relation matrix A ⊂ X × X, A = ai j,
ai j ∈19, 9, where ai j is the ratio of the preference degree of alternative xi over xj.
As ai j = 1 indicates indifference between xiand xj, ai j = 9 indicates xiis extremely
preferable to xj. A is assumed as a multiplicative reciprocal, that is
ai j· aj i = 1 (1)
(2) Fuzzy preference relation. Experts’ preferences over a set of alternatives as X is denoted by a positive preference relation matrix P ⊂ X × X with membership function:µp : X × X → [0, 1], where µp(xi, xj) = pi j indicates the ratio of the
preference intensity of alternative xi to that of xj. If pi j = 12 implies indifference
between xi and xj(xi ∼ xj), pi j = 2 indicates xi is absolutely preferred to xj, pi j = 0 indicates xj is absolutely preferred to xi, and pi j > 12 indicates that xi is
preferred to xj(xi > xj). P is assumed additive reciprocal, given by
pi j+ pj i = 1. (2)
InHerrera-Viedma et al.(2004) gave a characterization of the consistency property defined by the additive transitivity property of a fuzzy preference relation pk = (pi jk):
pki j+ pkjl+ plik = 3
2, ∀i, j, l, ∈ {1, . . . , n}. (3) Using this characterization method, the procedure to construct a consistent fuzzy preference relation ˆP= ( ˆpi j) from a non-consistent fuzzy preference relation p = (pi j),
which requires only n− 1 preference values {p12, p23, . . . , p(n−1)n}, is the following: ˆpi j = ⎧ ⎨ ⎩ pi j if i ≤ j ≤ i + 1, pi(i + 1)+ p(i + 1)(i + 2)+ . . . + p( j − 1) j− j− (i + 1)2 if j > i + 1, 1− ˆpj i if j < i. (4)
When the matrix ˆP has entries not in the interval[0, 1], but in an interval [−a, 1+a],
being a=min
ˆpi j; ˆpi j ∈ ˆP, then a transformation function preserving
such a transformation function is f(x) = 1x+ 2a+ a . The consistent fuzzy preference rela-tion ˜P is obtained as ˜P= f ( ˆP). For more details, the reader should consultChiclana et al.(2007).
3.3 Determining the Priority Weights of Decision-Making Groups and Constructing a Weighted Fuzzy Preference Relation Matrix
The influences of various decision-making groups on merged strategy selection have different degree; and not all of them can be assigned equal important. Therefore, this study constructs a weighted fuzzy preference relation matrix such as
R× W = U (5) ⎡ ⎢ ⎢ ⎢ ⎣ r11 r12 . . . r1n r21 r22 . . . r2n ... ... ... ... rm1rm2. . . rmn ⎤ ⎥ ⎥ ⎥ ⎦× ⎡ ⎢ ⎢ ⎢ ⎣ w1 W2 ... Wn ⎤ ⎥ ⎥ ⎥ ⎦= ⎡ ⎢ ⎢ ⎢ ⎣ u1 u2 ... un ⎤ ⎥ ⎥ ⎥ ⎦ (6)
where rmndenotes the preference intensity toward considered candidate m are assessed
by the decision-making group n;wnindicates the priority weight of decision-making
group n. A preferred value unis obtained by multiplying the priority weights of groups
by the ratings of candidates.
4 Merged Strategy Selection Under Multi-Criteria Decision Making
4.1 Evaluated Criteria and Evaluation Model Framework
For daily reinforcements of customer orientation, a growing number of companies select customer satisfaction as their main performance indicator. The main satisfac-tion criteria consist of (1) personnel quality, (2) product quality, (3) bank image, (4) service quality, and (5) accessibility (Mihelis 2001).Luo(2003) applied employees, assets, and equity to assess bank profitability. Bad debits impact bank achievements. Moreover, the subjective judgements of creditors may generate incorrect risk mea-surements (Chen et al. 2003).
Thomson (1991) demonstrated the inevitability of bank failure as a function of multiple variables, including management quality and earning performance. A close relationship exists between risk and profitability management. Risk-taking is fun-damental to future profitability. That is, present risks may become future realities. Therefore, banks must manage these risks to survive (Emel et al. 2003).
Synthesizing the literature review and the results of expert consultation, the ques-tionnaire was based on AHP and conducted by the Bank of Kaohsiung. This investi-gation first divides the main goal into six categories, namely operating performance, staffs rights, customers service, financial composition of bank, government policy and
ment. “Customer service” and “financial composition” also receive a high weight-ing in merge strategy selection. Notably, none of the groups surveyed took “staff rights” seriously.
2. All survey groups, except for the staffs of banks, strongly agreed that “merging with other financial organizations to become an existing bank” is the best merge strategy for banks, while the staffs of banks favoured “focus on core business competitiveness to become a specialized and stable bank”.
The multi-criteria decision making model for choosing merged strategy presented here demonstrates its applicability to the evaluation process. The proposed strategy also reveals the concerns and preferences of most stakeholders of banks. The results of this investigation provide a valuable reference for bank administrators.
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