Abstract
D.Ing.
It is said that the development of innovative new products is set to become the
economic battleground of the twenty-first century. Specifically, the innovative
identification, development and subsequent marketing of financial products
designed in order to allow organisations to manage their financial risk profiles will
assume increased importance as volatility within the global business environment
and capital markets increases. The discipline responsible for the development of
such financial products, financial engineering, will increase in importance as
financial services organisations compete to be the first to satisfy the needs of the
market.
The ultimate aim of financial engineering, as with any product development
process, must be to develop the required product in an optimal manner at a
minimised economic life-cycle cost to the organisation. Simultaneously, if
correctly applied, the process of financial engineering can be a significant source
of competitive advantage to the financial services organisation in an industry
characterised by intense competitive pressures and exponentially increasing
complexity and volatility. The financial services organisation which is able to
successfully combine these two elements will have the capability to position itself
as a leader in the identification and development of innovative financial products,
a capability critical for success within the financial services industry.
The science of engineering has within it a special subset devoted to the
optimisation of the process of product development. This discipline, known as
system engineering, has been extremely effective in the enhancement of product
development processes within a traditional manufacturing environment. Tangible
benefits of the application of system engineering include a reduced product
development cycle, increased product adherence to client specifications, and a
reduction in the economic life-cycle cost of the product.
Within this thesis the author suggests that the optimal development of financial
products in an increasingly competitive environment requires a two-pronged
approach. In the first instance the financial services organisation must choose to
develop the product which best promotes the medium to long-term strategic aims of the organisation. This is the concept of strategic fit. In the second instance the
financial services organisation must have the capability to develop this product
more effectively, and more efficiently, than its competitors.
As an implementation mechanism the author develops a Financial Product
Development Model based on system engineering principles chosen for their
applicability to the process of financial product development. Simultaneously, the
author develops a Competitive Strategy Framework, a collection of five strategic
elements designed to ensure that the financial product development decision
displays a measure of correlation to the strategic aims of the organisation. This
Competitive Strategy Framework is implemented within the Financial Product
Development Model via the use of a Strategic Circuit Breaker, a concept
developed by the author and based on the concept of trading circuit breakers as
used on the world's major stock exchanges.
The aim of the Financial Product Development Model proposed within this thesis
is to enhance the process of financial engineering and in so doing provide the
financial services organisation with a means of improving its strategic
competitiveness within the financial markets.
The proposed Financial Product Development Model is validated via the practical
application of the model. The results of this validation indicate that significant
benefits may be obtained by correctly implementing the model. In addition the
author conducts a limited scope industry survey designed to determine the opinion
of financial services professionals to the major concepts underlying the model.
The favourable results of this survey indicate that (1) the proposed model is
practical and applicable within the financial services industry, and (2) the financial
services industry in general is unaware of the importance of the process of product
development and the manner in which system engineering can be used to enhance
this process. By implication the financial services organisation that is able to
differentiate its financial product development process from its competitors stands
to achieve a significant competitive advantage.