The process an organization uses to formulate and implement its business strategies.
Strategic Management Process
What are the three stages of the strategic management process?
1) strategic formulation (creating a plan)
2) strategic implementation (putting the plan into action)
3) strategic evaluation (monitoring the results to determine whether the plan works as envisioned)
A broad expression of an entity’s goals. It specifies the products or services the organization provides, its stakeholders and what is important to the organization.
What are the basic components of strategy formulation?
- analysis of external and internal environments
- Development of long-term strategies and organizational goals
- Determination of strategy at different organizational levels
A method of evaluating the internal and external environments by assessing the organization’s internal strengths and weaknesses and it’s external opportunities and threats
What is an SWOT analysis typically used for?
To enable executives to determine how receptive the market would be to its products and services and its competitive position within the market.
What should an organization’s goals reflect?
An understanding of its identity, customers, and purpose.
An organizational structure in which departments are defined by the operations they perform
What are the considerations when implementing strategies?
- Designing the structure of the organization
- Deciding what degree of centralization is needed to operate efficiently and to meet organizational goals
What type of structure is a diversified company more likely to use?
An organizational structure in which divisions are organized into separate profit centers.
A business-level strategy through which the company seeks cost efficiencies in all operational areas
What are the four steps of the control process? (Strategy evaluation)
- Establish standards
- create and apply measurements 3. Compare actual results to standards
- Evaluate and implement corrective actions if goals are not met
Strategy implementation steps
Create a documented roadmap of the specific processes, tasks and responsibilities necessary to disseminate the corporate strategies throughout the organization
/communicate information regarding the strategies clearly, frequently, and completely through the organization
- assign specific responsibilities, tasks, authority, and accountability throughout the organization.
- allocate adequate resources for successful implementation. Resources include staff, training, time, equipment, data, and technology
- manage variances between the goals and the mid-year results;make necessary adjustments to achieve goals
What are the categories of organizational controls used to monitor goals?
- financial (loss ratio, expense ratio, combined ratio, stock price)
- operational/process (processes to monitor workflow, production processes, customer service. Ex. Average cost of settlement, average caseload per adjuster)
- human/behavior (rules, policies, procedures)
Environment that affects all businesses.
Environment that includes an organization’s customers , competitors, suppliers, describes the environmental factors specific to the industry.
a method of evaluating the external environment in which a company operates. Involves assessing 5 forces that drive competition:
- threat of new entrants
- threat of substitute products/ services
- bargaining power of buyers
- bargaining power of suppliers
- rivalry among existing firms
Five forces model
How do insurers raise the barrier to enter the market?
- technology (cost to write large amount of business is low while new companies have to rely on people. These companies can charge lower premiums)
- establish leadership in certain distribution methods (produce relationships)
- stay statute and regulatory policy
- present of switching costs
- need for large amount of capital
How does the bargaining power of buyers drive competition?
Consumers are price sensitive when it comes to products which are undifferentiated, expensive relative to income, or a sort where the quality is not particularly important to then.
-residual markets have been created due to bargaining power. Consumers wouldn’t pay high prices of private market.
How does the bargaining power of suppliers drive competition?
Ex. Availability and pricing of reinsurance after Katrina.
Manufacturers mandating use of OEM parts.
When looking at strengths and weaknesses, which assets are examined?
- managerial experience
- available product lines
- skill levels and competences of staff
- current strategies
- customer loyalty
- growth levels
- organizational structure
- distribution channels
An analysis that identifies patterns in past data and then projects three patterns into the future. A way to analyzing opportunities and threats
What are the most prevalent types of organizational strategies?
- corporate level
- business level
Strategy level that represents the highest strategy level for a diversified organization and determines the types of businesses and potential profitability for the organization.
Strategy level that is implemented by an operation or a strategic business unit to support the corporate-level strategy, to be competitive, and to respond to changes in the external environment.
strategy that is carried out by an organization’s departments, such as marketing or underwriting.
Functional level strategy
strategy that is implemented in a department’s day-to-day business activities.Includes workflows and production processes.
Compare forward and backward integration in a vertical integration strategy.
When a company is pursuing a vertical integration strategy, it either produces its own inputs or
disposes of its own outputs. Backward integration occurs when an organization produces inputs
for processing. Forward integration occurs when an organization sells its product directly to the
What are the three generic corporate-level strategies that are available for companies in growth mode?
- single business
- vertical integration
A corporate-level strategy through which a company either produces its own inputs or disposes of its own outputs.
Vertical integration strategy
Type of integration where an organization produces inputs for processing (insurer printing forms in-house)
Type of integration where an organization sells its product directly to the customer rather than to a wholesaler (direct writer)
When could vertical integration have the opposite effect?
When there is lack of expertise or the cost of resources in different stages of the production process is high.
How can business diversification help an insurer?
Being involved in another type of business will not coincide with underwriting cycles. This will help offset losses during troughs in the cycle.
A corporate-level strategy through which a company expands its operations into areas that are similar to its existing operations. Ex. property-casualty insurer providing life and health since resources are shared (they have agents, technology, office space)
Related diversification strategy
A corporate-level strategy through which a company expands its operations into areas that have no relation to its existing operations.
Unrelated diversification strategy (conglomerate diversification)
A corporate-level strategy through which a company seeks to gain short-term profits while phasing out a product line or exiting a market
A corporate-level strategy through which a company rebuilds organizational resources to return to profitable levels
A corporate-level strategy through which a company sells off a portion of an operation, usually a division or profit center that is not performing to expectations
What is the time frame for business-level strategy?
3 to 5 years
What are the three business-level strategies?
- cost leadership
This strategy, involving eliminating costs in every aspect of the operation, enables a company to charge a lower price for its products or services.
What is a main requirement of cost leadership.
To not have diverse selection as that erodes cost leadership advantages. Cost leaders aren’t first movers in an industry
What can insurers do to cut costs?
- reducing acquisition costs by lowering commissions
- use direct writer system
- alternative distribution channels
- streamline claims adjustment
- manage litigating expense
- standard underwriting guidelines
- expert systems
A business-level strategy through which a company develops products or services that are distinct and for which customers will pay a higher price than that of the competition
Provide an example of an insurers differentiation strategy
Targeting many different markets - teachers, retired, military)
Special coverage (accident forgiveness)
A business-level strategy through which a company focuses on one group of customers and offers a low-price product or service (ex. Discounts for hardware stores)
Focused Cost Leadership Strategy
A business-level strategy through which a company focuses on one group of customers and offers unique or customized products that permit it to charge a higher price than that of the competition (niche marketing - target breweries)
Focused Differentiation Strategy
The plans for managing a particular functional area, such as finance, marketing, underwriting, actuarial
What is the time frame for functional-level strategy?
How do companies build value and competitive advantage?
Through efficiency, quality, customer responsiveness, and innovation.
These strategies involve daily business processes and workflows and are implemented at the department level to support the strategies of the functional, business, and corporate levels. (Ex. Obtain more information in claim set up process to assign claim properly and eliminate redundant communication)
What are the key strategic reasons for global expansion?
Revenue growth, financial stability, building global competitiveness.
Which objectives does expanding into foreign markets achieve?
Greater stability during economic downturn. Bad years in USA are offset by growth in emerging markets.
diversifying risk worldwide
How does global expansion increase competitiveness?
- through global expansion an insurer may achieve economies of scale and efficiencies that allow it to compete more effectively in its domestic market
- provides insurer with technology and strategic resources to quickly expand into additional foreign markets or offer additional products when their is an opportunity
- global expansion can help an insurer remain competitive in a specialty market (mining risks)
What 3 areas does an insurer have to evaluate in making a strategic decision about expansion into a global market?
1) market analysis
2) economic considerations
3) political risks
What does an insurer look at when analyzing a foreign market?
- financial requirements (capital and surplus)
- is return worth the capital?
- ease of entry and difficulty of withdrawal (includes competition)
- does insurer have a competitive advantage (product that fits well)
- distribution channels
- availability of producers
- cultural and language differences
What are economic considerations to examine when exploring entering a foreign market?
- leverage of economic stability
- monetary policies
- attitude toward foreign investors
- potential for exchange rate volatility
- gross GDP or national income
- premium tax
- is economy growing or threats to growth?
- personal income
- disposable income
- what would they have to pay employees?
What are political risks to evaluate when considering entering a foreign market?
- kidnap and ransom
- civil unrest
- acts of war
- revolution/change of government
- confiscation of business assets by foreign government (expropriation)
- nationalization of a business by the government and compensating business owners at a lower rate than the assets of the company
- better treatment for local businesses.
An arrangement in which two companies work together to achieve a common goal. Bring together two separate areas of expertise and gain a host-country participant who can access local markets and who knows local laws, regulations, and customers.
What are two examples of a strategic alliance?
- international license arrangements (one party uses another party’s distribution system or trademark)
- co-marketing/co-development agreements
A business association formed by an express or implied agreement of two or more persons (including corporations) to accomplish a particular project, such as the construction of a building.
What is the not common form of a joint venture?
A domestic company joins with a company from the county in which the operation is located.
A joint venture with governments or state-owned industry. Common in India, China, Russia
Insurers wishing to expand to India commonly enter into _____ _______ agreements because India’s law caps foreign direct investments for insurance.
A type of acquisition in which two or more business entities are combined into one.
A company owned or controlled by another company.
Which way of entering a foreign market harbors the most business, political, and economic risk?
Forming a wholly owned subsidiary. Gives the most control over operations though.
What is needed to evaluate business strategies?
- current SWOT analysis
- company’s business strategies
- explanation of the reason for the evaluation
- company’s goals and objectives that relate to the reason for the evaluation
Which steps minimize the effort required when evaluating a business strategy by focusing on the issues, strategies and desired outcomes?
1) conduct SWOT analysis of internal and external environments
2) Determine business strategies relevant to the b business issue that generated the need for the evaluation
3) Evaluate the relevant business strategies using SWOT analysis.
What elements do insurer mission statements often include?
For insurers, mission statements frequently mention financial strength, customer service, and
What is the first consideration of strategy implementation?
The first consideration and a crucial component of strategy implementation is designing the structure
of the organization.
What areas within the company would managers examine to identify organizational strengths?
Some of the areas that could be examined include managerial expertise, available product lines,
the skill levels and competencies of the staff, current strategies, customer loyalty, growth levels,
organizational structure, and distribution channels.
Explain how an insurer could successfully follow a cost leadership approach at the business level.
For a company to be successful with a cost leadership business-level strategy, it must seek to
achieve cost efficiencies in all aspects of the operation in order to charge a lower price. To successfully pursue this strategy, most products or services must be fairly standardized. An insurer
could achieve lower costs through standardizing underwriting guidelines and using technology to
automate processes and improve interaction among departments.
he XYZ Insurance Company is facing several internal and external challenges in its business operation. Because of a competitive employment market, the insurer has struggled to maintain staffing levels and is having difficulty staffing
its headquarters location. In addition to the headquarters location, XYZ has three regional offices throughout the Midwest and Northeast. Because of heavy competition in the types of insurance it writes, XYZ has lost considerable
market share in most of its territories and has experienced steadily decreasing profits. What strategies would XYZ’s management team evaluate as corporatelevel strategy for the company?
XYZ is struggling and currently operates in a decline mode. Alternatives available to corporate
management include following a harvest strategy to gain short-term profits while phasing out a
particular product line or exiting the market. If management determined that the company should
be reorganized in an effort to return to profitability, it would follow a turnaround strategy. If, however,
management decided the best approach were to sell off a portion of its business, it would folIow a
divestiture strategy. State regulators in each jurisdiction would, of course, affect the decision
that managers would make, and the alternatives available to an insurance operation would differ
from some of those available to a non-insurance operation.
Describe the three key strategic reasons why insurers pursue global expansion.
a. Revenue growth is the primary reason that insurers look to global expansion. There are few
new potential customers in mature insurance markets, such as the United States. Global markets, especially those in emerging economies, offer growth opportunities.
b. Insurers expand globally to increase financial stability. Spreading risks worldwide helps to
counter the effects of economic downturn in a particular country. Even in a worldwide recession,
the potential for growth in emerging markets can offset loss of income from declines in premiums and investment returns. Spreading risk over a diverse base also minimizes the impact of heavy losses in anyone segment of the operation.
c. Insurers also expand globally to increase their competitiveness. Global expansion may help in
achieving economies of scale and efficiencies that allow an insurer to compete more effectively
in both domestic and global markets. A global expansion strategy also provides additional technology and strategic resources. Additionally, a global strategy may allow an insurer to remain competitive in a specific specialty market, such as mining or oil exploration risks.
Compare the approaches of strategic alliance, merger, and a wholly owned subsidiary for an insurer planning to expand into a global market
Strategic alliances have the advantages of bringing together separate areas of expertise and gaining
a host-country participant, who can access local markets and who is familiar with local laws,
regulations, and customers.
The advantage to merger is the ability to combine resources and reduce overhead expenses. A merger may be more efficient than a strategic alliance, but it also may be complicated by the regulations and antitrust laws of more than one country.
Acquisition of, or formation of, a wholly owned subsidiary allows for direct ownership and control of assets. However, this approach requires more capital and presents the highest degree of business, political, and economic risk.
XYZ Insurance Company is a persona11ines insurer with headquarters in Chicago and regional offices throughout the Midwest and Northeast. XYZ’s
reputation as a strong, reliable organization has engendered loyalty among its employees, many of whom have worked for the company for ten years or more. However, because of heavy competition in the types of insurance it writes, XYZ has lost considerable market share in most of its territories and has experienced steadily decreasing profits.
XYZ believes that it is losing market share because it has not kept pace with the needs of its existing customers or the buying preferences of prospective customers. Additionally, its research indicates that locally based insurers in each of the regions in which it operates are better equipped to serve insureds because their agents more effectively interact with the local community. Despite these conditions, XYZ believes that it is positioned to
rebound, provided it deploys its resources more efficiently. A recent investment in technology has led to development of a Web site that will allow XYZ to provide quotes and accept applications online. It hopes to use the Web site’s interactive features to more effectively ascertain its customers’ needs and to test the potential appeal of new endeavors such as “green” insurance options, which it currently doesn’t offer.
a. Identify one of XYZ Insurance Company’s strengths.
b. Identify one of XYZ’s weaknesses.
c. Identify one of XYZ’s opportunities.
• Because it has regional offices in two areas of the country, XYZ’s operations are geographically
• XYZ has a reputation as a strong, reliable organization, which could benefit it in numerous
• XYZ has an experienced, loyal workforce.
• XYZ’s competitors’ agents are interacting more effectively with the local community than
XYZ’s agents are.
• XYZ is unable to keep pace with the needs of existing customers or the buying preferences
of prospective customers.
• XYZ’s resources and reputation will allow it to invest in and promote a Web site that sur~
passes those of its competitors.
• XYZ’s investment in technology will allow it to provide quotes and accept applications
• XYZ can use its research and resources to test and develop new endeavors, such as “green”