improve personal lending products in retail banking of anz bank

NATIONAL ECONOMICS UNIVERSITYBUSINESS SCHOOL NGUYEN DOAN KHANG IMPROVE PERSONAL LENDING PRODUCTS IN RETAIL BANKING OF ANZ BANK MASTER OF BUSINESS ADMINISTRATION THESIS... HANOI - 2011NAT

NATIONAL ECONOMICS UNIVERSITY

BUSINESS SCHOOL

NGUYEN DOAN KHANG

IMPROVE PERSONAL LENDING PRODUCTS

IN RETAIL BANKING OF ANZ BANK

MASTER OF BUSINESS ADMINISTRATION THESIS

HANOI - 2011

NATIONAL ECONOMICS UNIVERSITY

BUSINESS SCHOOL

NGUYEN DOAN KHANG

IMPROVE PERSONAL LENDING PRODUCTS

IN RETAIL BANKING OF ANZ BANK

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: Dr Pham Truong Hoang

HANOI - 2011ACKNOWLEDGEMENTS

From experience I can tell that this thesis has depended on the generous support,help of many people Throughout the thesis I have able to improve the knowledgeregarding managing services of banking industry

Firstly, I would like to thank my supervisor Dr Pham Truong Hoang for hisguidance through the process of the research

My thanks are also given to my friends and teachers in Business School inhelping me during this course

Lastly, I would like to thank to my colleagues, manager in ANZ and especiallycustomers, for contributing me worthwhile feedback

TABLE OF CONTENTS

ABREVIATIONS 1

LIST OF FIGURE 2

LIST OF TABLES 3

CHAPTER 1: INTRODUCTION 7

1.1 RATIONALE 7

1.2 RESEARCH FORMULATION 8

1.3 RESEARCH OBJECTIVES 9

1.4 RESEARCH QUESTIONS 10

1.5 RESEARCH METHODOLOGY 10

1.5.1 Research process 10

1.5.2 Research data sources 11

1.5.3 Data analysis 12

1.6 RESEARCH SCOPE 13

1.7 RESEARCH STRUCTURE 13

CHAPTER 2: THEORETICAL BACKGROUND ON PERSONAL LENDING PRODUCT 14

2.1 RETAIL BANKING OF COMMERCIAL BANK 14

2.1.1 Definition of retail banking 14

2.1.2 The services of retail banking 15

2.2 PERSONAL LENDING PRODUCTS 20

2.2.1 Concept of product 20

2.2.3 Marketing mix in service 26

2.2.4 General theories about product development 30

2.3 FACTORS EFFECT DEVELOPING PERSONAL LENDING PRODUCTS 36

2.3.1 Factors of bank itself 36

2.3.2 Activity environment of bank 38

2.3.3 Factors about customers 39

CHAPTER 3: ANALYZING PERSONAL LENDING PRODUCTS IN RETAIL BANKING OF ANZ BANK 41

3.1 INTRODUCTION OF ANZ 41

3.1.1 ANZ’s strategy 41

3.1.2 ANZ’s brand 43

3.1.3 ANZ’s Core Activity Standards - summary 43

3.1.4 ANZ’s Governance 44

3.1.5 Introduction of ANZ in Vietnam 46

3.2 PERSONAL LENDING PRODUCTS IN RETAIL BANKING INDUSTRY 52

3.3 ASSESSING PERSONAL LENDING PRODUCTS IN RETAIL BANKING OF ANZ BANK 57

3.3.1 Customer and market 57

3.3.2 Analyzing personal lending activities in retail banking of ANZ bank .59

3.3.3 Assessment of customer about the service quality of personal lending activities of ANZ Vietnam 70

3.4 Summary of findings 78

CHAPTER 4: RECOMMENDATION TO IMPROVE PERSONAL LENDING PRODUCTS IN RETAIL BANKING OF ANZ BANK 80

4.1 STRATEGIC ORIENTATION OF ANZ IN DEVELOPING PERSONAL

LENDING PRODUCT 80

4.1.1 The economic – banking and financial trends 80

4.1.2 Strategic orientation of ANZ in developing personal lending products .82

4.2 RECOMMENDATION TO IMPROVE EXISTIM PRODUCTS 83

4.2.1 Diversifying and improving services/products 84

4.2.2 Developing modern distribution network 88

4.2.3 Developing human resource 91

4.3 RECOMMENDATION TO DEVELOP NEW PRODUCTS 93

4.4 CONDITIONS TO IMPLEMENT RECOMMENDATIONS 95

CONCLUSION 97

LIST OF REFERENCES 99

APPENDIX 101

ATM: Automatic Tellers Machine

GDP: Gross domestic product

JSCB: Joint Stock Commercial Bank

NPD: New Product Development

SBV: State Bank of Vietnam

SME: Small and Medium Enterprise

SOCB: State Owned Commercial Bank

SOE: State Owned Enterprise

WTO: World Trade Organization

LIST OF FIGURE

Figure 2.1: Service marketing mix ……… ………27

Figure 3.1: Organization of ANZ Vietnam ………49

Figure 3.2: Numbers of branches of some big banks in Vietnam ……… 54

Figure 3.3: Total asset of 4 large local banks, US$ billion ………55

Figure 3.4: Structure of customers of retail banking ……… 58

Figure 3.5: Structure of retail banking loans……….……… 62

Figure 3.6: Lending process at ANZ Vietnam ……… 64

Figure 3.7: Mortgage interest rate competitor matrix – as at 15th August …… 66

Figure 3.8: Customer satisfaction of service quality ……… 76

Figure 3.9: Customer’s evaluation about the success of services ……… 77

Figure 3.10: Customer’s willingness to continue to use other services of ANZ 77 Figure 3.11: Recommendation the service at ANZ to friends and relatives ….78

LIST OF TABLES

Table 1.1: Time plan ……… 11

Table 1.2: Data sources ……… 12

Table 3.1: Business result in 2010 ……… 51

Table 3.2: Products categories of some banks ……… 56

Table 3.3: Number of loans ……… 69

Table 3.4: Respondent’s evaluation for service quality ……… 71

Table 3.5: Respondent’s evaluation for service quality (Continued) ……… 73

Table 3.6: Respondent’s evaluation for service quality (Continued) ……… 74

Table 3.7: Respondent’s evaluation for interest and fees at ANZ ………… 75

EXCUTIVE SUMMARY

The thesis was conducted to study about the current situation of personal lending activities in retail banking of ANZ Vietnam; the thesis also proposed some possible solutions for developing personal lending product policies at ANZ Vietnam

The research objectives of the thesis are to study and analyze current situation ofpersonal lending product policies at ANZ Vietnam Other objectives of thesis are

to assess the quality of personal lending service at ANZ and propose solutions toimprove personal lending product at ANZ Vietnam

The research is mainly based on interviews and questionnaire with existing andpotential customers The research methodologies used in the thesis arecomparisons Real figures and documents were colleted from the annual reportand newspaper as well as report that are published in order to determine factorsthat effect the developing of personal lending activities and propose solution todevelop retail banking operations

From findings of thesis, the thesis has some following contributions:

- The thesis researches details of personal lending activities

- Finding some assessments on business operation of personal lendingactivities

- Propose some solutions to improve personal lending product

The thesis divides into four chapters as follows:

CHAPTER 1: Introduction

The first chapter is introduced main points of the study This chapter providesoverview information about Vietnam’s banking industry development, and alsopresents the the background, the questions and the objectives of this research

CHAPTER 2: Theoretical background on personal lending product

In this chapter, the thesis refers to concept, operations and personal lendingproducts of retail banking of commercial bank This chapter consists of threeparts The first part is to study retail banking and all operations of retail banking.The second part relates to personal lending products of retail banking The lastpart goes into factors affecting developing personal lending products This partwill conduct all factors that affect personal lending products

CHAPTER 3: Analyzing personal lending product in retail banking of ANZ bank

This chapter, the thesis analyzes current situation of personal lending products inretail banking of ANZ bank This chapter will outline overview about ANZglobal and ANZ Vietnam; it also summaries the current situation at ANZ retailbanking Besides, the thesis examines and assesses personal lending products inretail banking of ANZ bank Theses assessments will supply all achievements,advantages and constraints of personal lending products

CHAPTER 4: Recommendation to improve personal lending products

in retail banking of ANZ bank

In this chapter, the thesis will propose solutions to improve personal lendingproducts in retail banking of ANZ bank The chapter researches all solutionsbased on strategic orientations of ANZ retail banking and the economic –banking trends These solutions were executed based on both theoretical aspectand the assessment reality of retail banking Implementing solutions will enableretail banking to develop personal lending products

CHAPTER 1: INTRODUCTION 1.1 RATIONALE

The Vietnamese economy is now on the hot growth with GDP in 2009 of 5.32%

now growing very fast Until May, 2008 Vietnam has 36 Joint stock commercialbanks, 5 Stated – owned commercial banks, 6 Joint venture banks and 44branches of foreign commercial banks with hundreds branches nationwide andnumerous of banks and financial companies are waiting effort the license(Worldbank, 2007).Vietnam banking sector has been scaling up recently andeven, state-run banks, which are busy with equitisation continue opening morebranches, transaction offices.

However, commercial joint stock banks have still seen the strongest growth whenthey continue aggressively developing their operation networks and establishedmore new banks Additionally, many foreign banks are actively speeding up pace

of establishing branches or 100%-foreign owned subsidiaries Such a move isattracting significant attention of the public By the end of 2007, it is estimatedthat total transaction offices, branches of commercial joint stock banks nearlydoubled the figure of 2006

The possibility of the prime minister’s approval for the government proposal tohike the limit on foreign holding from 10% to 15% or even 20% would prove to

be another powerful incentive for overseas banks to anticipate fresh competition

Moreover, under WTO commitments in banking sector, Vietnam approvedoversea banks to set up their 100% foreign owned subsidiaries in the countryfrom 1 April, 2007 This is an incentive for them to speed up their businessactivities in Vietnam As of now, many foreign banks have expressed theirinterest in taking advantage of the 100% foreign –owned bank policy of Vietnam.Vietnam is becoming more and more attractive for overseas banks as it provides

a competitive base to these banks due to healthy economy and government

policies In Intellasia news, they call Vietnam a perfect market to givecompetitive ground to international banks due to the country’s fast growingeconomy, thriving financial and stock markets and initiation of governmentpolicies aimed at opening the market.

1.2 RESEARCH FORMULATION

Being a wholly foreign owned bank makes a debut for ANZ a potential to supportthe growth of its retail business ANZ is operating over 153 years in bankingexperience, ANZ believe that they has contributed a creditable success to theVietnam’s economy and committed to develop more by enhance their activity,services and especially in retail banking ANZ gained constantly “Best retail bank

2008, 2009” reward in two years

In earlier 2010, ANZ has implemented a new strategically development on retailbanking to expand its business and managerial capacity to become a top fourforeign bank in Vietnam by 2012 In this road map, ANZ focus on retail banking,consolidating operation of retail, reforming sales force, balancing lending andcapital mobilizing

In fact, ANZ has developed more consumer lending products to meet morecustomers’ needs by launching new mortgage loan, car loan, and wealth andfinancial advisory in order to approach new customers The consumer lendingsection in ANZ has achieved some significant in area of new customer, credit riskmanagement After three years, there are more than 5,000 customers gettinghome loan approval, growth rate is about 10%/year However, the consumerlending products are still poor, it seem to be so basic and simple, no nicheproducts to various segments so the actual gained is still far from target

Moreover, lending process at ANZ also face many difficulties in adapting withlocal market practical that block ANZ access deeply retail market such asassessment of borrowers’ income based on bank account only The problem ishow ANZ operation can be adjusted to adapt the practical in Vietnam

In order to improve consumer lending product, ANZ must create an appropriatepolicy which is rooted from the fundamental of ANZ bases and the emergingmarket of retail banks in Vietnam

1.3 RESEARCH OBJECTIVES

The detail objectives of the research are:

- To study and summary theoretical background on lending products ofretail banking;

- To analyze current situation of personal lending at ANZ;

- To recommend solutions to improve personal lending products in retailbanking of ANZ bank

1.4 RESEARCH QUESTIONS

The research will focus on studying factors that driving the improvement oflending products at ANZ and propose some solutions to future enhanced products

at ANZ Thus, the research will try to answer the following questions:

 How many kind of consumer lending product in Vietnam market?

 What is difference between lending product at ANZ Vietnam compared tocompetitors’ products?

 What ANZ’s product is most suitable for Vietnam market?

1.5 RESEARCH METHODOLOGY

1.5.1 Research process

The data is collected through delivering the questionnaire This questionnaireincludes 49 items General information asks about the background of respondentsand The main part of the questionnaire, which surveys about the service qualityand customer satisfaction, was designed based on the given variables andmeasured by a five-point Likert’s scale from 1 (strongly disagree) to 5 (stronglyagree)

The field research was conducted from 15 June to 8 August, 2011 excluding thetime for questionnaire preparation, testing and refining The job schedule isindicated in the below Time Plan:

Table 1.1: Time Plan

Task name

Time schedule (2011)

Consultancy for advices of

Questionnaire revision for the

second time

Conduct field survey

Data input and analysis

Writing research report

1.5.2 Research data sources

The data of thesis consists of two sources, including primary data and secondarydata The secondary data is collected from newspapers, annual reports,magazines, internet, books… The primary data is summed from interview andquestionnaire research will be conducted as followed:

- Collect data lending products and sales result at ANZ during period 2009 –

20011 and analyze Product of competitors is also screened to identify the gapbetween ANZ against the real market

- In- depth interview and customer survey:

The survey paper can be sent to borrowers in Hanoi only by email or post evenface to face interview within:

 50 people who are existing customer to rate their satisfaction

 10 people who have discharged their loan to understand why theymoved to another bank

Table 1.2: Data sources

No Methods Data Source /

Respondents

Sample Size Information collected

1 Secondary dataANZ annual reports, Guideline and models on business

documents and business plan strategy,

10 persons

Find-out their agrees & disagrees on product and service

2.2 In-depth

interviews

Managers, staff at ANZ, potential customers

10 persons

To know their perspectives and opinions on the bank’s business

1.5.3 Data analysis

The result of the interview will be developed through Statistical Package for theSocial Sciences (SPSS) program in order to bring out the objectives of thisresearch In addition, the Microsoft Excel and Microsoft Word software version

2003 was used to group items and draw charts

1.6 RESEARCH SCOPE

This research focuses on the development of the lending products in ANZ.Consumer lending is defined as a bank for individual customer Lending for SMEand corporation is excluded

The subjects of study in this research involve individual borrowers, banks andregulating authorities

1.7 RESEARCH STRUCTURE

Chapter 1: Introduction

Chapter 2: Theoretical background on personal lending products

Chapter 3: Analyzing personal lending products in retail banking of ANZ bank

Chapter 4: Recommendation to improve personal lending products in retailbanking of ANZ bank

Conclusion

CHAPTER 2: THEORETICAL BACKGROUND ON PERSONAL

LENDING PRODUCT 2.1 RETAIL BANKING OF COMMERCIAL BANK

2.1.1 Definition of retail banking

There are several definitions of retail banking ranging from very simple tocomprehensive

According to Wikipedia, the free largest encyclopedia, retail banking refers

to banking in which banking institutions execute transactions directly withconsumers, rather than corporations or other banks Services offered include:

savings and checking accounts, mortgages, personal loans, debit cards, creditcards, and so forth (Wikipedia.com, 2009)

Investopedia explains retail banking aims to be the one-stop shop for asmany financial services as possible on behalf of retail clients Some retail bankshave even made a push into investment services such as wealth management,brokerage accounts, private banking and retirement planning While some ofthese ancillary services are outsourced to third parties (often for regulatoryreasons), they often intertwine with core retail banking accounts likechecking and savings to allow for easier transfers and maintenance(Investopedia.com, 2009)

Investor Words simply defines retail banking is banking services forindividual customers (InvestorWords.com, 2009)

Investor Glossary has the most comprehensive and well-defined definition.According to Investor Glossary, retail banking is a banking service that isgeared primarily toward individual consumers Retail banking is usually madeavailable by commercial banks, as well as smaller community banks Unlikewholesale banking, retail banking focuses strictly on consumer markets Retailbanking entities provide a wide range of personal banking services, includingoffering savings and checking accounts, bill paying services, as well as debit andcredit cards Through retail banking, consumers may also obtain mortgages andpersonal loans Although retail banking is, for the most part, mass-market driven,many retail banking products may also extend to small and medium sizedbusinesses Today much of retail banking is streamlined electronically viaAutomated Teller Machines (ATMs), or through virtual retail banking known as

2.1.2 The services of retail banking

In retail banking, the services are main factors that determine business activitiesand profit of any retail banking The typical services offered in Vietnam retailbanking segment are housing loans, cards, educational loans… Generally, theservices comprise some main groups as follows:

2.1.2.1 Mobilizing capital

Mobilizing capital is a basic activity of any banks Naturally, mobilizing capitalbetween corporate bank and retail banking is the same However, mobilizingcapital has a difference in a source of mobilization Depending on the type ofbank, the bank mobilizes capital from many different sources For retail banking,retail banking mobilizes capital from free capital of individuals, households,SMEs in the economy Retail banking develops many types of mobilization withdifferent time and interest to meet many demands of customers for example: non-time account, deposits for 1 month, 2 months, 3 months, 6 months… Besides,retail banking mobilizes capital from many currencies such as USD, VND, andEUR… Mobilizing capital of retail banking displays through, banking bonds,accounts of customers, certificate of deposits The source of this mobilization issmall but stable Therefore, all retail banking focus on the number of customer toincrease capital

In the contrary, corporate banking mobilizes capital from organizations,companies in the economy The bank mobilizes through account and depositcontract of organizations and companies This mobilization is large but unstable

It depends much on some large organization and companies

In near years, mobilizing capital from individuals has sharply contributed forincreasing capital for almost banks Moreover, mobilizing capital has also added

to move capital structure Therefore, almost banks, especially retail banksconcentrate on rising capital based on diversifying and developing saving depositservices

For retail banking, saving deposits are developing both quality and quantity,consisting of basic saving deposit service such as term or non-term saving deposit

by VND, USD, EUR, gold-denominated deposit, savings for lottery…Nowadays, retail banks invest more and more technology in order to enhance andexpand many types of saving deposit services as well as high quality for itsservices

In future, Vietnamese banks have also reached and supplied many types of savingdeposits based on high technology for individuals; these products will be moreattractive, comfortable and higher benefit for customers

2.1.2.2 Lending activities

Lending activities is main basic activities for all banks and delivers larger profit

of any banks Lending activities is understood as the bank use fund mobilization

in order to lend for all sectors in the economy or invest in project of individuals,organizations or companies Lending activities supply for demands of objectives

of customers like consumers, business development, automobile purchasing…This activity brings main profit for the bank Through lending activities andsupplying services for customers, the bank gains profit from interest and fee ofservices With this profit, the bank will use to reinvest in business activities such

as technology, expand branches and services… to enhance its position in bankingmarket as well as develop business activities of bank.

For the economy, through lending activities of bank, all countries can develop theeconomy and approach many objectives in the society Besides, lending activitieshelp the government control economic development through many monetarypolicies and other policies such as securities policies, real estate policies… Thegovernment also implements many social objectives like improving livingstandard…

Generally, lending products are many types, focusing on many kinds ofcustomers and they have differentiation among banks

The same as capital mobilization, lending activities of corporate banking andretail banking have no differences However, it has a difference about the sources

of capital For corporate banking, lending activities focus on financing forprojects, working capital, business capital for organizations and companies todevelop business activities of organizations and companies as well as socialpurpose For this mobilization, the type of mobilization diversifies with manytypes of customers However, retail banking focuses on lending activities forindividuals, households, SMEs to satisfy demands of consumers Some of theselending products that supply for individuals are:

- Commercial papers mortgage loan

- Installment loan for home, home-base purchasing, home construction andrenovation

- Installment loan for automobile purchasing

- Consumption loans and consumer installment loans

- Loans for developing business activities

- Securities and value paper loans

- Loans for overseas study

For corporate banking, lending activities consists of many risk compare to retailbanking Because corporate banking often finances for many big projects orbusiness capital and it also concentrates on some of customers, especially bigcompanies or organizations For retail banking, the amount of money forfinancing projects of customers is often smaller than the amount of money fororganizations and companies Therefore, the risk of lending activities for retailbanking is smaller than corporate banking

Besides, retail banking can diversify lending activities by financing capital formany types of customers Therefore, retail banking can share risk with customers

by increasing more customers Nowadays, the bank focuses on retail banking andbecause of high risk of corporate banking; market is saturated with highcompetitiveness of many banks

Naturally, the customers of lending activities are also various, who come frommany different jobs, ages, class, position, educational level… lending productsare poor and not attractive to almost people, especially in Vietnamese banks Inportfolio, installment loan for home and automobile purchasing are moreattractive to many people, it accounts for big percentage of lending products.Besides, the consumption installment loans also are developing and these loanswill be main activities of retail banking in near future

2.1.2.3 Other services

Other services focus on supplying for individuals, households This is adifference between retail banking and corporate banking Corporate bankingconcentrates on providing services for organizations, companies but this type ofbank cannot provide services for individuals and households The characteristics

of these services are used modern technology and information technology Atpresent, many banks use high technology to satisfy increasing demands ofcustomers and these services also bring much profit for the bank These servicesconsist of services of payment, financial consultant, ATM, Post, Visa card…

In these services, card market is facing high competition of other banks Cardservice is a modern banking service for individuals and it is fierce competitivefield among banks Card portfolio includes domestic credit card, internationalcredit card, domestic debit card, ATM Some banks, which have developedtechnology supply payment card, global card that used in the world Besides,almost banks focus on researching new features for its cards, improving card asthe versatile card that help people execute many services, such as seeking moneybalance, fund transfer and payment bills…

In recent years, the Vietnamese Government has encouraged development ofnon-cash payment to reduce using cash in public The government has had manyenvironment and policies in order to enhance growth of non-cash payment,especially card products Therefore, retail banks have invested more in expandingcard produces parallel with empowering infrastructure and card alliance amongbanks

Besides services mentioned above, retail banking also provides numerous otherservices, such as remittance service (including overseas, outward, inward

remittance), Western Union… Some modern services consist of home banking;mobile and internet banking are expanding with high investment in technology

2.2 PERSONAL LENDING PRODUCTS

2.2.1 Concept of product

In the 1960's, the economist Philip Kotler changed the perception of marketing

He described what marketing is rather than what marketers do, thereby changingmarketing from a departmental specialization into a corporate wide doctrine For

Kotler, marketing was a 'social process by which individuals and groups obtain

what they need and want through creating and exchanging products and value with others'.

For him, a product is more than physical A product is anything that can beoffered to a market for attention, acquisition, or use, or something that can satisfy

a need or want Therefore, a product can be a physical good, a service, a retailstore, a person, an organisation, a place or even an idea Products are the means

to an end wherein the end is the satisfaction of customer needs or wants

Products can be classified as tangible or intangible A tangible product is anyphysical product that can be touched like a computer, automobile, etc Anintangible product is a non-physical product like an insurance policy

2.2.1.1 Product Differentiation

- Form: Many products can be differentiated in form – the size, shape, or

physical structure of a product

- Features: Most products can be offered with varying features that supplement

its basic function

- Performance quality: Most products are established at one of four

performance levels: low, average, high, or superior Performance quality is thelevel at which the product's primary characteristics operate

- Conformance quality: Buyers expect products to have a high conformance

quality, which is the degree to which all the produced units are identical and meetthe promised specifications

- Durability: A measure of the product's expected operating life under natural or

stressful conditions is a valued attribute for certain products

- Reliability: Buyers normally will pay a premium for more reliable products.

Reliability is a measure of the probability that a product will not malfunction orfail within a specified time period

- Repairability: Repairability is a measure of the ease of fixing a product when it

malfunctions or fails Ideal repairability would exist if users could fix the productthemselves with little cost in money or time

- Style: Style describes the product's look and feel to the buyer

the results before the purchase, and the patient in the psychiatrist's office cannotknow the exact outcome

To reduce uncertainty, buyers will look for evidence of quality They will drawinferences about quality from the place, people, equipment, communicationmaterial, symbols, and price that they see

- Inseparability: Services are typically produced and consumed simultaneously.This is not true of physical goods, which are manufactured, put into inventory,distributed through multiple resellers, and consumed later If a person renders theservice, then the provider is part of the service Because the client is also present

as the service is produced, provider-client interaction is a special feature ofservices marketing

- Variability: Because services depend on who provides them and when andwhere they are provided, they are highly variable Some

- Perishability: Services cannot be stored

2.2.1.3 Product levels

Kotler distinguished three components:

 need: a lack of a basic requirement;

 want: a specific requirement for products or services to match a need;

 demand: a set of wants plus the desire and ability to pay for the exchange

Customers will choose a product based on their perceived value of it Satisfaction

is the degree to which the actual use of a product matches the perceived value at

the time of the purchase A customer is satisfied only if the actual value is thesame or exceeds the perceived value Kotler defined five levels to a product:

1 Core Benefit: The fundamental need or want that consumers satisfy by

consuming the product or service

2 Generic Product: A version of the product containing only those attributes or

characteristics absolutely necessary for it to function

3 Expected Product: The set of attributes or characteristics that buyers normally

expect and agree to when they purchase a product

4 Augmented Product: Inclusion of additional features, benefits, attributes or

related services that serve to differentiate the product from its competitors

5 Potential Product: All the augmentations and transformations a product might

undergo in the future

Kotler noted that much competition takes place at the Augmented Product level

rather than at the Core Benefit level or, as Levitt put it: 'New competition is not

between what companies produce in their factories, but between what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value.'

Kotler's model provides a tool to assess how the organization and their customersview their relationship and which aspects create value

2.2.2 Personal lending products

2.2.2.1 Concept of personal lending product

A personal lending product is a type of debt Like all debt instruments, a personallending product entails the redistribution of financial assets over time, betweenthe lender and the borrower

In a personal lending product, the borrower initially receives or borrows anamount of money, called the principal, from the lender, and is obligated to payback or repay an equal amount of money to the lender at a later time Typically,the money is paid back in regular installments, or partial repayments; in an

annuity, each installment is the same amount

The personal lending product is generally provided at a cost, referred to

as interest on the debt, which provides an incentive for the lender to engage in theloan In a legal loan, each of these obligations and restrictions is enforced

by contract, which can also place the borrower under additional restrictionsknown as loan covenants Although this article focuses on monetary loans, inpractice any material object might be lent

Acting as a provider of loans is one of the principal tasks for financialinstitutions For other institutions, issuing of debt contracts such as bonds is atypical source of funding

2.2.2.2 Types of personal lending products

- Secured: A secured loan is a loan in which the borrower pledges some asset(e.g a car or property) as collateral for the loan

+ A subsidized loan is a loan that will not gain interest before you begin to pay it.

It is known to be used at multiple colleges

+ An unsubsidized loan is a loan that gains interest the day of disbursement

+ A mortgage loan is a very common type of debt instrument, used by manyindividuals to purchase housing In this arrangement, the money is used topurchase the property The financial institution, however, is given security —

a lien on the title to the house — until the mortgage is paid off in full If theborrower defaults on the loan, the bank would have the legal right to repossessthe house and sell it, to recover sums owing to it

In some instances, a loan taken out to purchase a new or used car may be secured

by the car; in much the same way as a mortgage is secured by housing Theduration of the loan period is considerably shorter — often corresponding to theuseful life of the car There are two types of auto loans, direct and indirect Adirect auto loan is where a bank gives the loan directly to a consumer An indirectauto loan is where a car dealership acts as an intermediary between the bank orfinancial institution and the consumer

A type of loan especially used in limited partnership agreements is the recoursenote

+ A stock hedge loan is a special type of securities lending whereby the stock of aborrower is hedged by the lender against loss, using options orother hedging strategies to reduce lender risk

+ A pre-settlement loan is a non-recourse debt, this is when a monetary loan isgiven based on the merit and awardable amount in a lawsuit case Only certain

types of lawsuit cases are eligible for a pre-settlement loan.[citation needed] This

is considered a secured non-recourse debt because if the case reaches a verdict infavor of the defendant the loan is forgiven

- Unsecured: Unsecured loans are monetary loans that are not secured against the

borrower's assets These may be available from financial institutions under manydifferent guises or marketing packages:

 Credit card debt

 Personal loans

 Bank overdrafts

 Credit facilities or lines of credit

 Corporate bonds (may be secured or unsecured)

2.2.3 Marketing mix in service

The service marketing mix is also known as an extended marketing mix and is anintegral part of a service blueprint design The service marketing mix consists of

7 P’s as compared to the 4 P’s of a product marketing mix Simply said, theservice marketing mix assumes the service as a product itself However it adds 3more P’s which are required for optimum service delivery

Figure 2.1: Service marketing mix

Source: Hitesh Bhasin, 2011

The product marketing mix consists of the 4 P’s which are Product, Pricing,Promotions and Placement These are discussed in my article on productmarketing mix – the 4 P’s

The extended service marketing mix places 3 further P’s which include People,Process and Physical evidence All of these factors are necessary for optimumservice delivery Let us discuss the same in further detail

2.2.3.1 Product

The product in service marketing mix is intangible in nature Like physicalproducts such as soap or a detergent, service products cannot be measured.Tourism industry or the education industry can be an excellent example At thesame time service products are heterogenous, perishable and cannot be owned.The service product thus has to be designed with care Generally service blueprinting is done to define the service product For example – a restaurant blueprint will be prepared before establishing a restaurant business This service blueprint defines exactly how the product (in this case the restaurant) is going to be

2.2.3.2 Place

Place in case of services determine where is the service product going to belocated The best place to open up a petrol pump is on the highway or in the city.

A place where there is minimum traffic is a wrong location to start a petrol pump.Similarly a software company will be better placed in a business hub with a lot ofcompanies nearby rather than being placed in a town or rural area

2.2.3.3 Promotion

Promotions have become a critical factor in the service marketing mix Servicesare easy to be duplicated and hence it is generally the brand which sets a serviceapart from its counterpart You will find a lot of banks and telecom companiespromoting themselves rigorously Why is that? It is because competition in thisservice sector is generally high and promotions are necessary to survive Thusbanks, IT companies, and dotcoms place themselves above the rest by advertising

or promotions

2.2.3.4 Price

Pricing in case of services is rather more difficult than in case of products If youwere a restaurant owner, you can price people only for the food you are serving.But then who will pay for the nice ambience you have built up for yourcustomers? Who will pay for the band you have for music? Thus these elementshave to be taken into consideration while costing Generally service pricinginvolves taking into consideration labor, material cost and overhead costs Byadding a profit mark up you get your final service pricing

2.2.3.5 People

People are one of the elements of service marketing mix People define a service.

If you have an IT company, your software engineers define you If you have arestaurant, your chef and service staff defines you If you are into banking,employees in your branch and their behavior towards customers define you Incase of service marketing, people can make or break an organization Thus manycompanies nowadays are involved into specially getting their staff trained ininterpersonal skills and customer service with a focus towards customersatisfaction In fact many companies have to undergo accreditation to show thattheir staff is better than the rest

2.2.3.6 Process

Service process is the way in which a service is delivered to the end customer.Let take the example of two very good companies – Mcdonalds and Fedex Boththe companies thrive on their quick service and the reason they can do that istheir confidence on their processes On top of it, the demand of these services issuch that they have to deliver optimally without a loss in quality Thus theprocess of a service company in delivering its product is of utmost importance It

is also a critical component in the service blueprint, wherein before establishingthe service, the company defines exactly what should be the process of theservice product reaching the end customer

2.2.3.7 Physical evidence

The last element in the service marketing mix is a very important element Assaid before, services are intangible in nature However, to create a bettercustomer experience tangible elements are also delivered with the service Take

an example of a restaurant which has only chairs and tables and good food, or a

restaurant which has ambient lighting, nice music along with good seatingarrangement and this also serves good food Which one will you prefer? The onewith the nice ambience That’s physical evidence Several times, physicalevidence is used as a differentiator in service marketing Imagine a privatehospital and a government hospital A private hospital will have plush offices andwell dressed staff Same cannot be said for a government hospital Thus physicalevidence acts as a differentiator.

2.2.4 General theories about product development

In business and engineering, new product development (NPD) is the term used todescribe the complete process of bringing a new product to market A product is

a set of benefits offered for exchange and can be tangible (that is, somethingphysical you can touch) or intangible (like a service, experience, or belief) Thereare two parallel paths involved in the NPD process: one involves the ideageneration, product design and detail engineering; the other involves marketresearch and marketing analysis Companies typically see new productdevelopment as the first stage in generating and commercializing new productswithin the overall strategic process of product life cycle management used tomaintain or grow their market share

New product development (NPD) is a key source of competitive advantage forindividual firms (Verona, 1999) Successful NPD requires firms to developroutines and practices to collaborate with suppliers, customers, and internal cross-functional employee teams

However, there are many difficulties in assessing the effectiveness ofdevelopment activities (Loch et al., 1996; Schumann, Ransley, & Prestwood

1995), aside from the difficulty of defining the concept of success in new productdevelopment itself Although studies have examined the relationship betweenproduct development processes and product success (Clark & Fujimoto, 1991;Cooper & Kleinschmidt, 1996) had difficulties in assessing success have meantthat the focus is often on process performance, as indicated by measures such aslead times, engineering hours, and late design changes Indicators of how theproduct is received in the market are often neglected in such studies.

2.2.4.1 The product development process

- Idea generation

The new-product development process starts with the search for ideas Somemarketing experts believe that the greatest opportunities and highest leveragewith new products are found by uncovering the best possible set of unmetcustomer needs or technological innovation New-product ideas can come frominteracting with various groups and from using creativity-generating techniques

- Idea screening

A company should motivate its employees to submit new ideas to an ideamanager whose name and phone number are widely circulated Ideas should bewritten down and reviewed each week by an idea committee The company thensorts the proposed ideas into three groups: promising ideas, marginal ideas, andrejects Each promising idea is researched by a committee member, who reportsback to the committee The surviving ideas then move into a full-scale screeningprocess

The purpose of screening is to drop poor ideas as early as possible The rationale

is that product-development costs rise substantially with each successivedevelopment stage Most companies require new-product ideas to be described

on a standard form that can be reviewed by a new-product committee Thedescription states the product idea, the target market, and the competition, androughly estimates market size, product price, development time and costs,manufacturing costs, and rate of return

- Concept development and testing

Attractive ideas must be refined into testable product concepts A product idea is

a possible product the company might offer to the market A product concept is

an elaborated version of the idea expressed in consumer terms

Concept testing involves presenting the product concept to target consumers andgetting their reactions The concepts can be presented symbolically or physically.The more the tested concepts resemble the final product or experience, the moredependable concept testing is

- Business analysis

After management develops the product concept, it can evaluate the proposal'sbusiness attractiveness Management needs to prepare sales, cost, and profitprojections to determine whether they satisfy company objectives If they do, theconcept can move to the development stage As new information comes in, thebusiness analysis will undergo revision and expansion

- Estimating total sales: Total estimated sales are the sum of estimated first-time

- Estimating costs and profits: Costs are estimated by the R&D, manufacturing,marketing, and finance departments.

- Customer and market testing

Customer testing: When the prototypes are ready, they must be put through

rigorous functional tests and customer tests Alpha testing is the name given totesting the product within the firm to see how it performs in differentapplications After refining the prototype further, the company moves to betatesting with customers It enlists a set of customers to use the prototype and givefeedback

Market testing: After management is satisfied with functional and psychological

performance, the product is ready to be dressed up with a brand name andpackaging, and put into a market test The new product is introduced into anauthentic setting to learn how large the market is and how consumers and dealersreact to handling, using, and repurchasing the product

- Commercialization

If the company goes ahead with commercialization, it will face its largest costs todate The company will have to contract for manufacture or build or rent a full-scale manufacturing facility Plant size will be a critical decision

Most new-product campaigns rely on a sequenced mix of market communicationtools

- When (Timing): In commercializing a new product, market-entry timing iscritical Suppose a company has almost completed the development work on its

new product and learns that a competitor is nearing the end of its developmentwork.

- Where (Geography strategy): The company must decide whether to launch thenew product in a single locality, a region, several regions, the national market, orthe international market Most will develop a planned market rollout over time

- To whom (Target market prospects): Within the rollout markets, the companymust target its initial distribution and promotion to the best prospect groups

- How (Introductory market strategy): The company must develop an action planfor introducing the new product into the rollout markets

2.2.4.2 New product development practices

Practices supportive of successful product development, whether judged byproduct or process performance, may be analyzed at a number of levels, the twomain levels being the company and the individual development project (Clark &Fujimoto, 1991; Wheelwright & Clark, 1995) Good practice has beencharacterized by team-based organization and product champions (Markham &Griffin, 1998; Wheelwright & Clark, 1995), formalized (but flexible) design anddevelopment processes (Iansiti, 1995), cross-functional integration (Cooper,1995; Dimanescu, 1992; Keller, 2001; McDonough, 2000; Tatikonda &Montoya-Weiss, 2001), and high autonomy and authority on the part of projectleaders (Clark & Fujimoto, 1991; Crawford, 1992; Jassawella & Sashittal, 2000).Strong supplier relationships, it is claimed, are linked to growth and profitability(Karlsson & Ahlstrom, 1996) There are a number of reasons for this Supplier