An application of the AHP to bank strategic planning: The mergers and acquisitions process

Strategic planning is one of the most complex and ill-structured tasks faced by banks. It usually requires adopting a course of action from a large set of alternatives with uncertain long-term outcomes which depend, to a large extent, on unknown and turbulent environments. In deriving these strategies bankers usually try to achieve multiple, and sometimes conflicting objectives such as profitability, growth, liquidity, and market share subject to constraints on credit and exchange risks and regulatory requirements. Moreover, specific strategies are normally determined by a board of directors whose members have different backgrounds, judgments and personal goals. This paper describes the application of the AHP methodology to the evaluation of bank Mergers and Acquisitions strategy. The model developed for this important problem was tested with the assistance of the board of directors of a billion dollar bank holding company. Although it is difficult to generalize from one experiment dealing with a single issue, there was nothing unique in the situation where the test was performed. Hence it is safe to assume that the AHP methodology can be applied to other complex and ill-defined strategic issues faced by other banking institutions. Compared with existing techniques on the one hand, and with qualitative managerial judgment on the other hand, the AHP provides a useful, simple and powerful tool for dealing with strategic planning in banking.