With today's staggering costs of opening new facilities it becomes increasingly more important to do your homework prior to stepping in. As a marketing professional having the correct tools to help evaluate instead of using intuition or your gut becomes extremely important.
Depending on your Senior Management, some marketing professionals are not even looked at to help in the selection until after the acquisition has been completed and you are asked to promote the name change or the breaking of ground.
Here is a simple tool that should be looked at first to determine market concentration of institutions and if your organization has a fighting chance. Forget for now client concentration, financial wealth of the area, the progression of the community, and we will focus on one aspect of all of the tools that should be used.
(HHI) or the Herfindahl-Hirschman Index, is a commonly accepted measure of market concentration. This is used to first determine how competitive the playing arena is and if your franchise can have a fighting chance.
This index if used properly will tell you a lot about the competitive environment. Who are the players? What are their individual market shares? And does your operation have a chance to succeed?
There are a few pieces of information you will need in the calculation. Gather all of the competitors, Commercial Banks, Savings Banks, and Credit Union's, obtain the current deposit balances for the area you are looking at. Sheshunoff provides quarterly data on market share, you may need to dig a little deeper to find additional deposit information about credit unions.
Remember, deposit information within Sheshunoff is from FDIC deposit numbers which do include public funds. If an institution concentrates on these types of deposits, or for some reason looses or exits the market you could see large fluctuations in their market share from year to year, or even quarter to quarter. Always note this in any recommendation when referring to these numbers.
So how does one calculate the competitiveness of the market with this information? Once you have gathered it all the calculations are simple.
First to find the market share of each is a straight forward calculation. Add all of the deposit amounts together from each of the competitors. Make sure you are only looking at the primary area or a branch of a larger institution. From this total take the individual locations total and divide it by the whole. $50,000,000 / $165,000,000 = .3030 X 100 = 30.30%. Do this for each branch.
Remember because Credit Union and Bank data are not together you can't just use the market share data found in the Sheshunoff reports.
The next calculation is made by squaring the market share of each firm competing and then summing the resulting numbers. For example: A market consisting of four institutions with shares of 30%, 30%, 20% and 20% percent, 30 X 30 = 900 or the square root of 30. Do this for each then add them together. the HHI is 2600 (900 + 900 + 400 + 400 = 2600).
The HHI takes into account the relative size and distribution of the institutions in a market and approaches zero when a market consists of a large number of institutions of relatively equal size. The HHI increases both as the number of institutions in the market decreases and as the disparity in size between those institutions increase.
Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 points are considered to be concentrated. Transactions that increase the HHI by more than 100 points in concentrated markets presumptively raise antitrust concerns under the Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission.
The example above is a saturated area, however this is not common. Most areas you will find a multitude of companies bringing the index down.
This is but one simple method to determine if your organization can find a way in the competitive arena of the market. Other considerations you should take in account are the competitors themselves. Have you worked against them in the past? How strong is your brand? Is there wiggle room in the community for another institution, and most important what are the factors that will differentiate you from your competitors.
Because you will be poaching or extracting clients from other institutions what will it take to break even or to make a profit. Take all these components and more in consideration before your institution takes that first step.
As the marketing professional in your organization you must flex your analytical muscle and learn the methodologies to help your organization make well informed analytical decisions.
If you have additional questions about this topic or others please feel free to e-mail me or send me a comment.
No comments:
Post a Comment