XYZ Insurance Company
Content
XYZ Insurance Company
Current Situation:
XYZ Insurance Company is a reputed insurance company in the financial industry of Bangladesh. It provides insurance for housing, life insurance and pension plans as its major products/ services. The company has been run by a sole proprietor for the last four years of operation. XYZ Insurance Company has focused mainly on a narrow customer segment hence; it has remained undiversified in its product offerings. The company’s profitability is below average compared to the industry, and the phase of investment is in the growth stage headed toward a shakeout, where more investments and diversification are needed. To ensure its long term sustainability and profitability, the company needs to formulate a strategy to restructure and reposition itself in the market.
The XYZ Insurance Company has been operating in the local market by offering life insurance products only. It focuses on only one generic group, with limited services for that group. That is why it is unable to grab a large market share. As a result, its profitability is below market average for the last four years and gives it a market position in the shake-out phase. In addition to this, because of its sole proprietorship structure, it has little access to investment capital as well as little opportunity to grow. Therefore, it has mediocre investment opportunity at this current state.
XYZ Insurance Ltd. is in shakeout phase. More diversity and investments are needed as market is headed toward saturation. Growt h Embryon ic
Maturit y Shakeout
Decline
Current Investment Stage of XYZ Insurance Company
Existing Framework:
As mentioned before, the XYZ Insurance Company, as a legal entity is operated by a sole proprietor. The company only offers insurance for housing, life insurance and pension plan benefits. The company operates as a single business unit, which consists of three levels, business, functional and operational level. Since, the company is owned by a single proprietor, the owner is the head (CEO) of the organization. The business level of the company is run and the strategic and business decisions are made by the owner as well. The functional level of the company consists of Finance and Accounting, Marketing/Promotion and Sales, Audit and Control Division and the Human Resources. The functional level is run by their respective mid level managers. Under the supervision of functional level managers there are operational managers who are at the front end of the company.
The Current Hierarchy of the Organization
CEO / proprietor Finance and Accounting
Marketing and Sales / Promotion
Audit and Control
Credit and Accounts Officers
Salesmen and Mkt employees
Inspection Officers
Current Mission and Vision Statements of the XYZ Insurance Company Mission XYZ Insurance Company, a reputed insurance service provider, serves customers around the country with its quality life insurance services to ensure a better standard of living. Vision XYZ Insurance Company’s vision is to be the pioneer of insurance service providers in Bangladesh. It will be providing a wide range of services becoming a superior insurance solution for all.
With the given resources, the current state of the company clearly shows that the company is in an instable position. Therefore, to attain sustainability and profitability the company’s management has decided to restructure its strategies and reposition itself. Accordingly, the company needs to do external and internal analysis.
Industry Environment and External Analysis:
Specific analysis tools and techniques like PEST Analysis and Porter’s Five Forces will be used for the external analysis of its industry environment.
PEST Analysis
Through PEST analysis, a company gets information about the Political, Economic, Social, Technological factors that may affect its business operation. PEST analysis provides an effective framework for proper examination of the external environment of a company. The PEST factors provide a company with the relevant issues of its environment, so that it can formulate such a strategy that best suits to its environment and its opportunities.
Political Factors We all know that the political environment of Bangladesh is quite unstable most of the time, which is a threat for the organization. In Bangladesh, corruption and bureaucracy issues are very critical for any company operating their business here in this country. The XYZ Insurance Company is also facing the same problem while doing business in Bangladesh. For the political instability, companies operating in Bangladesh are exposed to higher risk, which provides the insurance companies with greater opportunity to grow.
Economic factors The economy of Bangladesh has grown 5-6% per year since 1996 despite many internal problems like political instability, poor infrastructure, corruption, and insufficient power supplies and its growth was resilient during the 2008-09 global financial crisis and recession. Inflation rate is high for the country. In
2011 it is 11.3%. The environmental factors like flood, cyclone, etc. highly affect the Bangladeshi economy, which encourages people to insure their lives and properties through products of insurance companies. The unemployment rate in Bangladesh was 5.1% in 2010. So it is clear that there is a good workforce in Bangladesh which is beneficial for the company. Since, the company’s operation is solely employee based; this greater workforce would be a useful resource for the company.
Social Factors According to the World Book Encyclopedia (2010), 88.75% of the population in Bangladesh is of Islamic religion. Muslims are forbidden from taking interest and premiums in terms of monetary benefits. The insurance companies need to strictly consider these religious factors to do the business in Bangladesh. People of this country are less aware of the idea “insurance”. Insurance companies should create awareness in people’s mind about their products and processes. By the nature, the Bangladeshi people are highly risk averse. For that reason, they are more eager to insure their lives and properties, which lead the insurance companies toward a greater growth opportunity.
Technological Factors Because of globalization, local companies are more exposed to foreign investment competition than before. Insurance companies should have such competitive advantages which help them to compete with these foreign companies and also help them to grab foreign market share. Recently, the competition of any financial company is not only limited to its substitutes. The regulation which allows other financial companies like banks, mutual funds, etc. to add insurance facilities in their product lines compels insurance companies to face a vulnerable competition. Insurance companies should seriously consider this fact, so that others cannot out-compete them from market. People are more technology oriented than before. Insurance companies should make their facilities and services available online and should have plan which help them to react to the technological change.
The PEST analysis gives an overall idea that, insurance companies operating in Bangladesh have growth opportunities. Although the insurance companies are exposed to risks, these companies have opportunities to manipulate the factors for their benefits.
Porter's Five Forces
Porter's five forces is a competitive analysis model, which helps a company to understand the nature of competition within the industry. Porter’s model provides a good, simple yet powerful, framework for developing an understanding of the competitive forces in particular industry.
Risk of New Entrants / Entry Barriers
Analysis Criteria Brand identity Economies of scale Switching costs Capital requirements Access to distribution Absolute cost advantage Industry profitability
Comments Not high Fixed cost is spread over a large volume of products Low for customers High cost due to advertise, low fixed cost N/A High, because of the access to cheaper fund Profitable
Decision Favorable Unfavorable Favorable Unfavorable N/A Unfavorable Favorable Unfavorable
Stage in industry life The industry is in maturity cycle
Overall scenario is unfavorable for new entrants. It is not favorable for a new company to enter into insurance industry. So the entry barrier for a new potential company is very high. XYZ Insurance Company should revise its business strategies in order to compete efficiently with the existing companies.
The Closeness of Substitutes
Analysis Criteria The relative price performance Switching costs Buyer propensity for substitutes
Comments Not price sensitive Low Low
Decision Favorable Favorable Favorable
Overall scenario is favorable for investment and to add more products in the product line. Since, the insurance industry is a fragmented industry; there are many substitutes in the market but none of them is in a position to define the demand and the prices. Here, consumers are not price sensitive and switching cost is low. So it is very much favorable for the company to restructure its strategies to revise its business structure and invest in the extension of its product lines.
Competitive Rivalry among Established Companies
Analysis Criteria Industry Growth Rate High Fixed Cost Product Differences Brand Identity Switching Costs Informational Complexity Concentration and balance Exit Barriers Comments Moderate Growth low fixed cost Low differentiation Low Brand loyalty Low Highly understandable Fragmented Low Decision Favorable Favorable Unfavorable Favorable Unfavorable Favorable Favorable Unfavorable
Overall scenario is intense rivalry among insurance companies. Companies operating in insurance industry have to face intense rivalry from their competitors.
Bargaining Power of Suppliers
Analysis Criteria Differentiation of inputs Switching costs Substitute products Supplier concentration relative to industry Importance of volume to the supplier Impact of inputs on cost or differentiation Threat of forward integration
Comments Standard inputs Low switching cost for industry Various kinds Extremely small Not extremely critical Low impact N/A
Decision Unfavorable Unfavorable Unfavorable Unfavorable Unfavorable Unfavorable N/A
Overall scenario is low bargaining power of suppliers which is unfavorable. Sales of the insurance industry completely depend upon clients’ demand and that has decreased the bargaining power of suppliers. The bargaining power of suppliers is a low.
Bargaining Power of Customers
Analysis Criteria Switching costs Presence of substitutes Buyer concentration Importance of volume to buyers Threat of backward integration Comments Customer switching cost is low Many Substitutes Buyer are more in number High N/A Decision Favorable Favorable Favorable Favorable N/A
Overall Scenario is high bargaining power of customers Since, insurance industry is a service provider industry, the insurance companies’ sustainability and profitability completely depends upon customers or their clients. Therefore, buyers have high bargaining power. The external analysis shows that although, the insurance industry is vulnerable for new entrants, it still has opportunity to grow for the existing companies. For the sustainability, the existing companies should
come up with their distinctive competencies. They should formulate strategies that help them to compete with other competitors.
Internal Analysis
For the internal analysis of XYZ Insurance Company, SWOT will be used for further interpretation.
SWOT
SWOT is an effective method to analyze a company’s internal capability. SWOT stands for Strength, Weakness, Opportunities and Threats of any organization. SWOT provides any company to revise its strategies, so that it can convert its weakness to its strength and utilize its opportunities to overcome threats. Strengths • Specialized in specific sectors, like, life, housing, pension plan insurance. Therefore, efficiency is high. A dedicated professional management team supported by highly trained staff who can offer sound and reliable advice on risk management through insurance. • Adequate reserves against unforeseen losses and solid reinsurance security and agreements with regular and loyal customers. Because of the small target market, close guidance of the customers is possible thus a strong relationship can be maintained. Weaknesses • • • Failure to plan for foreseeable future and long term benefit and sustainability. Less availability and access to funds, because of the organizational structure. An unevenly balanced portfolio of risks. The company’s undiversified product line makes its portfolio risky. Failure to utilize the resources and match those with the capabilities. Opportunities • Strategic alliance or collaboration with larger companies provides companies with opportunities to enlarge its business.
•
Opportunities to grow through diversification of products. According to regulation which allows financial companies to enter into related financial businesses, insurance companies can enter into other businesses by offering services like underwriting, trustee, etc.
•
Active participation in capital market gives the companies easy access to cheap fund and opportunity to compete with the large competitors.
Threats • Organizations like banks, mutual funds, multipurpose companies etc. are entering into insurance business as a part of their business diversification. Therefore, competition is growing faster and market potential is becoming saturated and low. • Mergers and acquisitions by large companies seem to be a threat for the existence of the small companies like XYZ Insurance Company. Therefore, the SWOT analysis shows that XYZ Insurance Company’s lack in efficiency to utilize its resources with its capabilities. It has large opportunity to grow if it goes for strategic alliance or goes public through capital market participation. It can overcome its threats if it revise its strategies and restructure its infrastructure.
Revised Strategy for the Company The main goal for revising the business strategy is to accelerate the growth of the company and enhance profitability for sustainability through capturing market share. For this reason, the company needs to diversify its business into both restated and unrelated business. Therefore, the company needs to extend its product line. At the same time the company needs to have a wider geographical coverage. For this expansion of the business, the company needs more expertise and resources. The funding needs for this restructure of the strategy and business operations can be obtained from capital market. The company will go public and attain capital from shareholders. Its revised strategies should be customer focused and also should be beneficiary for the shareholders and company itself.
Revised Mission and Vision
Revised Mission
The XYZ Insurance Company Ltd, a superior insurance service provider, offers best risk management services to the clients through its evenly diversified and quality insurance policies for secured future of the community and nation. Revised Vision The ultimate path leads toward an integrated insurance company focusing on promoting the confidence of both shareholders and policy holders. There is scope for crossing boundaries into neighboring countries.
Revised Situation
The company has changed its business structure and become a public limited company enlisted with Dhaka and Chittagong Stock Exchanges by issuing shares in these capital markets. In addition to this, it has changed its portfolio of risk management and added diversified and unrelated products in it. For diversification the company starts offering services along with its insurance services- Risk management services, underwriting for other companies, creating mutual and hedging funds. The company will include new services Home and Mortgage Loans Insurance Pension and Retirement Plan Education Plan Fire Insurance Health and Hospital Benefits Insurance Electronic and Electrical Insurance Credit Card Protection Insurance Bankers Blanket Insurance Automobile Insurance
The XYZ Insurance Company will be now operating as a public limited company which directs its business in various diversified sectors. Therefore, now the business is a corporation consists of corporate level, separate business unit for each diversified business area. The corporate level is run by the board of directors and senior executives. All the strategic and business decisions are taken by corporate level of the company. In the specific business unit, there are business level managers, functional level managers and operational level managers. In each specific strategic business units, functional level consists of finance
and accounting manager, marketing and sales managers, HR manager, internal audit and inspection manager. After restructure, the organization has more opportunity to grow. Now it has adequate funds to operate its business. By diversifying its business the company has reduces its exposure to risk and lead itself toward sustainability. Since, it has more opportunity to investment; it has more opportunity to grow. Though this restructure it wants to attain customers’ and shareholders’ confidence and satisfaction, ultimately high financial performance for itself. Through this restructure, it wants to see itself at maturity phase after five years.
Value Chain
The XYZ Insurance Company has primary activities and secondary activities in its operation. Unlike, the manufacturing organization it uses its services as inputs rather than raw materials. The primary activities in its value chain consist of Finance, Marketing, and Customer Service. The secondary activities consist of HR, Information System, Audit and Inspection. Through the help of the primary and support activities, a company produces its output, meaning profit. Primary Activities Finance Input Human Resources Information System Secondary Activities Figure: Value Chain Audit and Control Marketing Customer Service Output
Short Term and Long Term Strategies
Finance and Accounting Unit
Short Term
• • • • •
Try to keep the debt/equity ratio as low as possible. Increase sales and profit through economies of scale. Try to keep operations cost low. Try to maintain ROE of at least 20%. Reinvest the profit in company’s growth prospects.
Long Term • By attaining the short term strategies, ensure that the company makes profit of at least 35% each year. • Ensure company’s sustainability through financial performance.
Marketing Unit
Short Term • • • • Ensure customer retention. Ensure heavy promotion of products to attract customers. Concentrate on customer satisfaction. Keep updated with information change in the market and promote the company’s product to according to the changes in the market.
Long Term • • • Promotion process must add value to the company. Through the marketing campaign ensure that in five years company grabs a market share of 20%. Ensure that the customers always stay with the company.
Human Resources
Short Term • Use experience curve system in the organization. Hire the skilled and experienced managers of the industry. • Follow to maintain strict regulation in terms of employee behavior and conducts in the organization. • • Ensure employee benefits and rights. Ensure customer responsive culture in the organization. Hire employees who are extrovert, outspoken, lively in nature, so that customers feel free to take advice on any business relates issue. Long Term • Ensure Agency problem should not arise in the organization. Managers should always work for shareholders’ wealth maximization. • Ensure that conflicts do not arise among the managers, so that production is not affected by it.
Using the above strategies the company wants to see itself in the maturity phase in next five years. It wants to reposition itself by offering quality services at low cost. Therefore, after restructure, the X Insurance Company will be using high in efficiency, high in quality, moderate in innovation and high in customer responsiveness. Using these building blocks, the company wants to reposition itself at low cost. It believes, through its new position of low cost it would be able to deliver value and thus create demand for its services, which ultimately creates profit.
Marketing Theme
Figure: Marketing Mix
Product Partnership
Marketing Mix Price
Packaging
Promotion
People Programming
Place
•
Product - The products or services the company offers provides a full fledged diversified portfolio which targets to customers’ risk minimization and wealth maximization.
•
Price - The X Insurance Company offers low price for their services than other competitors. It follows Low Cost Strategy rather than differentiation. Therefore, its marketing theme focuses on low cost position.
•
Promotion - The Company focuses on promoting in such way that not only attract customers to its lucrative schemes but also promote their confidence on the company.
•
Place - The Company plans to serve the nationwide people. It plans to set up branches in every division in the first year. In next four years, it will increase its branches according to its operations’ and customer demand.
•
Programming - The Company’s marketing theme should also focus on their low cost programming.
•
People - The Company targets the individuals with household income of 20,000 and above and other corporate and conglomerates of the company. The services provided by the company best suits this customer group.
•
Packaging - The promotion and marketing policy should focus on the fact whether they can encourage sales of other offering at the same time while it is generating profit for one service.
•
Partnership - The marketing theme considers the facts related to partnership and alliances with other organization.
After restructure, the company should come up with a superior marketing theme over others, which help them to create and apply the core competencies to compete with others and also serves as a core competency itself. Since, the XYZ Insurance Company is operating its business in a service industry, the company need to formulate a marketing theme considering the 8 P’s of service marketing. We also need to establish a tag line. It would be: Plan Ahead for a Secured Future.
Investment Choices after Restructuring
XYZ Insurance Company Ltd. Maturity (The company is economically, legally sound. Investment choices are high. Shakeout Growt Declin e
Embryoni c
XYZ Insurance Company’s position in Industry life cycle after restructuring After restructure, the company has more access to fund, thus higher opportunity to invest. For the restructure of the strategies and the reposition of the company it will be able to establish itself in the maturity phase in next five years. At this phase of maturity, the company will have higher investment opportunity. Since, the company will be standing in the maturity phase, it is required by the society that it will be economically and legally sound; expected by the society that it will be conducting ethical practices in its corporation and will be contributing in CSR and other philanthropic activities considering
environmental factors in mind. Though the company will have more opportunity to invest at this phase, it has to consider all these factors for its long term sustainability. At this point in time, it should concentrate on formulating new competitive advantages that will lead it for further sustainability.
Value Enhancement
Internal Analysis after Restructure: The company has restructured its infrastructure and business policies. Now it is a public limited company and operates its business from several branches. Because of its business expansion from single business unit to corporation, it has more resources and capabilities to run its operations. Moreover, it has hired skilled and experienced managers of the industry, which makes its human resources more precious. Its greater exposure to fund, knowledgeable and expert human resources and diversified services, which acts as core competency for the company, lead the company toward positioning itself at low cost. Through this positioning it becomes able to create and deliver value, which leads to higher demand for its services and higher profitability.
Resources (Expert managers, funds) To create Capabilities (Expertise) Building Blocks Core Competency Efficiency (High) Quality (High) Innovation (Moderate) Customer Responsiveness (High) Figure: Flow Chart of Internal Analysis Defining Position Low Cost Demand Profit Value
Current Situation:
XYZ Insurance Company is a reputed insurance company in the financial industry of Bangladesh. It provides insurance for housing, life insurance and pension plans as its major products/ services. The company has been run by a sole proprietor for the last four years of operation. XYZ Insurance Company has focused mainly on a narrow customer segment hence; it has remained undiversified in its product offerings. The company’s profitability is below average compared to the industry, and the phase of investment is in the growth stage headed toward a shakeout, where more investments and diversification are needed. To ensure its long term sustainability and profitability, the company needs to formulate a strategy to restructure and reposition itself in the market.
The XYZ Insurance Company has been operating in the local market by offering life insurance products only. It focuses on only one generic group, with limited services for that group. That is why it is unable to grab a large market share. As a result, its profitability is below market average for the last four years and gives it a market position in the shake-out phase. In addition to this, because of its sole proprietorship structure, it has little access to investment capital as well as little opportunity to grow. Therefore, it has mediocre investment opportunity at this current state.
XYZ Insurance Ltd. is in shakeout phase. More diversity and investments are needed as market is headed toward saturation. Growt h Embryon ic
Maturit y Shakeout
Decline
Current Investment Stage of XYZ Insurance Company
Existing Framework:
As mentioned before, the XYZ Insurance Company, as a legal entity is operated by a sole proprietor. The company only offers insurance for housing, life insurance and pension plan benefits. The company operates as a single business unit, which consists of three levels, business, functional and operational level. Since, the company is owned by a single proprietor, the owner is the head (CEO) of the organization. The business level of the company is run and the strategic and business decisions are made by the owner as well. The functional level of the company consists of Finance and Accounting, Marketing/Promotion and Sales, Audit and Control Division and the Human Resources. The functional level is run by their respective mid level managers. Under the supervision of functional level managers there are operational managers who are at the front end of the company.
The Current Hierarchy of the Organization
CEO / proprietor Finance and Accounting
Marketing and Sales / Promotion
Audit and Control
Credit and Accounts Officers
Salesmen and Mkt employees
Inspection Officers
Current Mission and Vision Statements of the XYZ Insurance Company Mission XYZ Insurance Company, a reputed insurance service provider, serves customers around the country with its quality life insurance services to ensure a better standard of living. Vision XYZ Insurance Company’s vision is to be the pioneer of insurance service providers in Bangladesh. It will be providing a wide range of services becoming a superior insurance solution for all.
With the given resources, the current state of the company clearly shows that the company is in an instable position. Therefore, to attain sustainability and profitability the company’s management has decided to restructure its strategies and reposition itself. Accordingly, the company needs to do external and internal analysis.
Industry Environment and External Analysis:
Specific analysis tools and techniques like PEST Analysis and Porter’s Five Forces will be used for the external analysis of its industry environment.
PEST Analysis
Through PEST analysis, a company gets information about the Political, Economic, Social, Technological factors that may affect its business operation. PEST analysis provides an effective framework for proper examination of the external environment of a company. The PEST factors provide a company with the relevant issues of its environment, so that it can formulate such a strategy that best suits to its environment and its opportunities.
Political Factors We all know that the political environment of Bangladesh is quite unstable most of the time, which is a threat for the organization. In Bangladesh, corruption and bureaucracy issues are very critical for any company operating their business here in this country. The XYZ Insurance Company is also facing the same problem while doing business in Bangladesh. For the political instability, companies operating in Bangladesh are exposed to higher risk, which provides the insurance companies with greater opportunity to grow.
Economic factors The economy of Bangladesh has grown 5-6% per year since 1996 despite many internal problems like political instability, poor infrastructure, corruption, and insufficient power supplies and its growth was resilient during the 2008-09 global financial crisis and recession. Inflation rate is high for the country. In
2011 it is 11.3%. The environmental factors like flood, cyclone, etc. highly affect the Bangladeshi economy, which encourages people to insure their lives and properties through products of insurance companies. The unemployment rate in Bangladesh was 5.1% in 2010. So it is clear that there is a good workforce in Bangladesh which is beneficial for the company. Since, the company’s operation is solely employee based; this greater workforce would be a useful resource for the company.
Social Factors According to the World Book Encyclopedia (2010), 88.75% of the population in Bangladesh is of Islamic religion. Muslims are forbidden from taking interest and premiums in terms of monetary benefits. The insurance companies need to strictly consider these religious factors to do the business in Bangladesh. People of this country are less aware of the idea “insurance”. Insurance companies should create awareness in people’s mind about their products and processes. By the nature, the Bangladeshi people are highly risk averse. For that reason, they are more eager to insure their lives and properties, which lead the insurance companies toward a greater growth opportunity.
Technological Factors Because of globalization, local companies are more exposed to foreign investment competition than before. Insurance companies should have such competitive advantages which help them to compete with these foreign companies and also help them to grab foreign market share. Recently, the competition of any financial company is not only limited to its substitutes. The regulation which allows other financial companies like banks, mutual funds, etc. to add insurance facilities in their product lines compels insurance companies to face a vulnerable competition. Insurance companies should seriously consider this fact, so that others cannot out-compete them from market. People are more technology oriented than before. Insurance companies should make their facilities and services available online and should have plan which help them to react to the technological change.
The PEST analysis gives an overall idea that, insurance companies operating in Bangladesh have growth opportunities. Although the insurance companies are exposed to risks, these companies have opportunities to manipulate the factors for their benefits.
Porter's Five Forces
Porter's five forces is a competitive analysis model, which helps a company to understand the nature of competition within the industry. Porter’s model provides a good, simple yet powerful, framework for developing an understanding of the competitive forces in particular industry.
Risk of New Entrants / Entry Barriers
Analysis Criteria Brand identity Economies of scale Switching costs Capital requirements Access to distribution Absolute cost advantage Industry profitability
Comments Not high Fixed cost is spread over a large volume of products Low for customers High cost due to advertise, low fixed cost N/A High, because of the access to cheaper fund Profitable
Decision Favorable Unfavorable Favorable Unfavorable N/A Unfavorable Favorable Unfavorable
Stage in industry life The industry is in maturity cycle
Overall scenario is unfavorable for new entrants. It is not favorable for a new company to enter into insurance industry. So the entry barrier for a new potential company is very high. XYZ Insurance Company should revise its business strategies in order to compete efficiently with the existing companies.
The Closeness of Substitutes
Analysis Criteria The relative price performance Switching costs Buyer propensity for substitutes
Comments Not price sensitive Low Low
Decision Favorable Favorable Favorable
Overall scenario is favorable for investment and to add more products in the product line. Since, the insurance industry is a fragmented industry; there are many substitutes in the market but none of them is in a position to define the demand and the prices. Here, consumers are not price sensitive and switching cost is low. So it is very much favorable for the company to restructure its strategies to revise its business structure and invest in the extension of its product lines.
Competitive Rivalry among Established Companies
Analysis Criteria Industry Growth Rate High Fixed Cost Product Differences Brand Identity Switching Costs Informational Complexity Concentration and balance Exit Barriers Comments Moderate Growth low fixed cost Low differentiation Low Brand loyalty Low Highly understandable Fragmented Low Decision Favorable Favorable Unfavorable Favorable Unfavorable Favorable Favorable Unfavorable
Overall scenario is intense rivalry among insurance companies. Companies operating in insurance industry have to face intense rivalry from their competitors.
Bargaining Power of Suppliers
Analysis Criteria Differentiation of inputs Switching costs Substitute products Supplier concentration relative to industry Importance of volume to the supplier Impact of inputs on cost or differentiation Threat of forward integration
Comments Standard inputs Low switching cost for industry Various kinds Extremely small Not extremely critical Low impact N/A
Decision Unfavorable Unfavorable Unfavorable Unfavorable Unfavorable Unfavorable N/A
Overall scenario is low bargaining power of suppliers which is unfavorable. Sales of the insurance industry completely depend upon clients’ demand and that has decreased the bargaining power of suppliers. The bargaining power of suppliers is a low.
Bargaining Power of Customers
Analysis Criteria Switching costs Presence of substitutes Buyer concentration Importance of volume to buyers Threat of backward integration Comments Customer switching cost is low Many Substitutes Buyer are more in number High N/A Decision Favorable Favorable Favorable Favorable N/A
Overall Scenario is high bargaining power of customers Since, insurance industry is a service provider industry, the insurance companies’ sustainability and profitability completely depends upon customers or their clients. Therefore, buyers have high bargaining power. The external analysis shows that although, the insurance industry is vulnerable for new entrants, it still has opportunity to grow for the existing companies. For the sustainability, the existing companies should
come up with their distinctive competencies. They should formulate strategies that help them to compete with other competitors.
Internal Analysis
For the internal analysis of XYZ Insurance Company, SWOT will be used for further interpretation.
SWOT
SWOT is an effective method to analyze a company’s internal capability. SWOT stands for Strength, Weakness, Opportunities and Threats of any organization. SWOT provides any company to revise its strategies, so that it can convert its weakness to its strength and utilize its opportunities to overcome threats. Strengths • Specialized in specific sectors, like, life, housing, pension plan insurance. Therefore, efficiency is high. A dedicated professional management team supported by highly trained staff who can offer sound and reliable advice on risk management through insurance. • Adequate reserves against unforeseen losses and solid reinsurance security and agreements with regular and loyal customers. Because of the small target market, close guidance of the customers is possible thus a strong relationship can be maintained. Weaknesses • • • Failure to plan for foreseeable future and long term benefit and sustainability. Less availability and access to funds, because of the organizational structure. An unevenly balanced portfolio of risks. The company’s undiversified product line makes its portfolio risky. Failure to utilize the resources and match those with the capabilities. Opportunities • Strategic alliance or collaboration with larger companies provides companies with opportunities to enlarge its business.
•
Opportunities to grow through diversification of products. According to regulation which allows financial companies to enter into related financial businesses, insurance companies can enter into other businesses by offering services like underwriting, trustee, etc.
•
Active participation in capital market gives the companies easy access to cheap fund and opportunity to compete with the large competitors.
Threats • Organizations like banks, mutual funds, multipurpose companies etc. are entering into insurance business as a part of their business diversification. Therefore, competition is growing faster and market potential is becoming saturated and low. • Mergers and acquisitions by large companies seem to be a threat for the existence of the small companies like XYZ Insurance Company. Therefore, the SWOT analysis shows that XYZ Insurance Company’s lack in efficiency to utilize its resources with its capabilities. It has large opportunity to grow if it goes for strategic alliance or goes public through capital market participation. It can overcome its threats if it revise its strategies and restructure its infrastructure.
Revised Strategy for the Company The main goal for revising the business strategy is to accelerate the growth of the company and enhance profitability for sustainability through capturing market share. For this reason, the company needs to diversify its business into both restated and unrelated business. Therefore, the company needs to extend its product line. At the same time the company needs to have a wider geographical coverage. For this expansion of the business, the company needs more expertise and resources. The funding needs for this restructure of the strategy and business operations can be obtained from capital market. The company will go public and attain capital from shareholders. Its revised strategies should be customer focused and also should be beneficiary for the shareholders and company itself.
Revised Mission and Vision
Revised Mission
The XYZ Insurance Company Ltd, a superior insurance service provider, offers best risk management services to the clients through its evenly diversified and quality insurance policies for secured future of the community and nation. Revised Vision The ultimate path leads toward an integrated insurance company focusing on promoting the confidence of both shareholders and policy holders. There is scope for crossing boundaries into neighboring countries.
Revised Situation
The company has changed its business structure and become a public limited company enlisted with Dhaka and Chittagong Stock Exchanges by issuing shares in these capital markets. In addition to this, it has changed its portfolio of risk management and added diversified and unrelated products in it. For diversification the company starts offering services along with its insurance services- Risk management services, underwriting for other companies, creating mutual and hedging funds. The company will include new services Home and Mortgage Loans Insurance Pension and Retirement Plan Education Plan Fire Insurance Health and Hospital Benefits Insurance Electronic and Electrical Insurance Credit Card Protection Insurance Bankers Blanket Insurance Automobile Insurance
The XYZ Insurance Company will be now operating as a public limited company which directs its business in various diversified sectors. Therefore, now the business is a corporation consists of corporate level, separate business unit for each diversified business area. The corporate level is run by the board of directors and senior executives. All the strategic and business decisions are taken by corporate level of the company. In the specific business unit, there are business level managers, functional level managers and operational level managers. In each specific strategic business units, functional level consists of finance
and accounting manager, marketing and sales managers, HR manager, internal audit and inspection manager. After restructure, the organization has more opportunity to grow. Now it has adequate funds to operate its business. By diversifying its business the company has reduces its exposure to risk and lead itself toward sustainability. Since, it has more opportunity to investment; it has more opportunity to grow. Though this restructure it wants to attain customers’ and shareholders’ confidence and satisfaction, ultimately high financial performance for itself. Through this restructure, it wants to see itself at maturity phase after five years.
Value Chain
The XYZ Insurance Company has primary activities and secondary activities in its operation. Unlike, the manufacturing organization it uses its services as inputs rather than raw materials. The primary activities in its value chain consist of Finance, Marketing, and Customer Service. The secondary activities consist of HR, Information System, Audit and Inspection. Through the help of the primary and support activities, a company produces its output, meaning profit. Primary Activities Finance Input Human Resources Information System Secondary Activities Figure: Value Chain Audit and Control Marketing Customer Service Output
Short Term and Long Term Strategies
Finance and Accounting Unit
Short Term
• • • • •
Try to keep the debt/equity ratio as low as possible. Increase sales and profit through economies of scale. Try to keep operations cost low. Try to maintain ROE of at least 20%. Reinvest the profit in company’s growth prospects.
Long Term • By attaining the short term strategies, ensure that the company makes profit of at least 35% each year. • Ensure company’s sustainability through financial performance.
Marketing Unit
Short Term • • • • Ensure customer retention. Ensure heavy promotion of products to attract customers. Concentrate on customer satisfaction. Keep updated with information change in the market and promote the company’s product to according to the changes in the market.
Long Term • • • Promotion process must add value to the company. Through the marketing campaign ensure that in five years company grabs a market share of 20%. Ensure that the customers always stay with the company.
Human Resources
Short Term • Use experience curve system in the organization. Hire the skilled and experienced managers of the industry. • Follow to maintain strict regulation in terms of employee behavior and conducts in the organization. • • Ensure employee benefits and rights. Ensure customer responsive culture in the organization. Hire employees who are extrovert, outspoken, lively in nature, so that customers feel free to take advice on any business relates issue. Long Term • Ensure Agency problem should not arise in the organization. Managers should always work for shareholders’ wealth maximization. • Ensure that conflicts do not arise among the managers, so that production is not affected by it.
Using the above strategies the company wants to see itself in the maturity phase in next five years. It wants to reposition itself by offering quality services at low cost. Therefore, after restructure, the X Insurance Company will be using high in efficiency, high in quality, moderate in innovation and high in customer responsiveness. Using these building blocks, the company wants to reposition itself at low cost. It believes, through its new position of low cost it would be able to deliver value and thus create demand for its services, which ultimately creates profit.
Marketing Theme
Figure: Marketing Mix
Product Partnership
Marketing Mix Price
Packaging
Promotion
People Programming
Place
•
Product - The products or services the company offers provides a full fledged diversified portfolio which targets to customers’ risk minimization and wealth maximization.
•
Price - The X Insurance Company offers low price for their services than other competitors. It follows Low Cost Strategy rather than differentiation. Therefore, its marketing theme focuses on low cost position.
•
Promotion - The Company focuses on promoting in such way that not only attract customers to its lucrative schemes but also promote their confidence on the company.
•
Place - The Company plans to serve the nationwide people. It plans to set up branches in every division in the first year. In next four years, it will increase its branches according to its operations’ and customer demand.
•
Programming - The Company’s marketing theme should also focus on their low cost programming.
•
People - The Company targets the individuals with household income of 20,000 and above and other corporate and conglomerates of the company. The services provided by the company best suits this customer group.
•
Packaging - The promotion and marketing policy should focus on the fact whether they can encourage sales of other offering at the same time while it is generating profit for one service.
•
Partnership - The marketing theme considers the facts related to partnership and alliances with other organization.
After restructure, the company should come up with a superior marketing theme over others, which help them to create and apply the core competencies to compete with others and also serves as a core competency itself. Since, the XYZ Insurance Company is operating its business in a service industry, the company need to formulate a marketing theme considering the 8 P’s of service marketing. We also need to establish a tag line. It would be: Plan Ahead for a Secured Future.
Investment Choices after Restructuring
XYZ Insurance Company Ltd. Maturity (The company is economically, legally sound. Investment choices are high. Shakeout Growt Declin e
Embryoni c
XYZ Insurance Company’s position in Industry life cycle after restructuring After restructure, the company has more access to fund, thus higher opportunity to invest. For the restructure of the strategies and the reposition of the company it will be able to establish itself in the maturity phase in next five years. At this phase of maturity, the company will have higher investment opportunity. Since, the company will be standing in the maturity phase, it is required by the society that it will be economically and legally sound; expected by the society that it will be conducting ethical practices in its corporation and will be contributing in CSR and other philanthropic activities considering
environmental factors in mind. Though the company will have more opportunity to invest at this phase, it has to consider all these factors for its long term sustainability. At this point in time, it should concentrate on formulating new competitive advantages that will lead it for further sustainability.
Value Enhancement
Internal Analysis after Restructure: The company has restructured its infrastructure and business policies. Now it is a public limited company and operates its business from several branches. Because of its business expansion from single business unit to corporation, it has more resources and capabilities to run its operations. Moreover, it has hired skilled and experienced managers of the industry, which makes its human resources more precious. Its greater exposure to fund, knowledgeable and expert human resources and diversified services, which acts as core competency for the company, lead the company toward positioning itself at low cost. Through this positioning it becomes able to create and deliver value, which leads to higher demand for its services and higher profitability.
Resources (Expert managers, funds) To create Capabilities (Expertise) Building Blocks Core Competency Efficiency (High) Quality (High) Innovation (Moderate) Customer Responsiveness (High) Figure: Flow Chart of Internal Analysis Defining Position Low Cost Demand Profit Value
