Chapter 11 Insurer Strategic Management
Alignment of these components allow an organization to create a sustainable competitive advantage?
Internal resources of organization and external factors
Define Multidivisional Structure
An organizational structure in which divisions are organized into separate profit centers. (Suitable for a diversified company)
Define Swot Analysis
A method of evaluating the internal and external environments by assessing an organization's Internal strengths and weaknesses and its external opportunities and threats
Which one of the following offers a low-risk approach to quickly entering a new market?
A strategic Alliance
What is the primary advantage of a merger?
Ability of two companies to combine resources and reduce overhead expenses, allowing the new company to be more successful than the sum of the paris to merger. Note: international mergers carrier a high degree of risk
To be successful, the differentiation business-level strategy must
Accurately determine customers' preferences to develop products perceived as distinctive
Advantage Related Diversification
Allows companies to gain economies of scope by sharing resources, such as the same distribution system or research and development facilities. EX: Leverages fixed expenses resulting in lower unit cost
The strategy formulation phase of the strategic management process involves the following?
Analyzing the external and internal environments Development of long-term strategies and organizational goals Determination strategy at different organizational levels
Insurers that offer special programs for commercial or homeowners insurance are examples of what type of business level strategy?
Differentiation Strategy
Disadvantages of Unrelated Diversification
Diminishing economies of scope, Additional cost of running divergent businesses, a loss of synergy among business
Elements of Market Analysis
Financial Requirements, Return on Capital Entry and Withdrawal Difficulty Competition or Competitive Advantage Distribution Channels
Three organizational controls that may be used to monitor goals?
Financial controls Operational or Process controls Human or Behavior controls
What elements do insurer mission statements often include?
Financial strengths, customer service and integrity
Business Level Strategy
Pertains to each business unit or product line. Supports the corporate level strategy to be competitive, and to respond to changes in the external environment. "How do we compete?" Tactical Strategy
Serious concerns including kidnapping and ransom, terrorism, civil unrest, acts of war, revolution and changes in government are examples of what type of global expansion strategic decision making factor.
Political risk
What type of risk is being assessed when consultants are brought in to provide country reports or risk assessment of a countries governmental affairs?
Political risk
What is one requirement of cost leadership strategy to avoid increased expenses and erosion of cost leadership advantages.
Products and Services must be fairly standardized, Cost leaders don't tend to be first movers in the industry
What objectives are achieved by the allowance of expansion into foreign markets?
Provides greater stability during economic downturns and diversification of risk.
The executive team of a primary insurer decides to become a third-party administrator of claims. This is an example of which type of corporate-level strategy?
Related diversification
Operational Level Strategy
Relates to departments narrowly defined day to day activities. Operational strategies include workflows and production processes or Work progress strategy
What is the primary reason that insurers look to global expansion?
Revenue growth
Strategic Reasons for Global Expansion
Revenue growth Financial stability Building global competitiveness
What type of analysis is used to determine the current sate of a company?
SWOT
Missiion and Value Statement
Serves as a focal point for the organizations management and board of directors through the strategic management process?
Approaches to Global Expansion listed
Strategic alliance-Joint Venture-Merger-Subsidiary
An approach to global market expansion that can provide low risk to entering a new market and brings together separate areas of expertise?
Strategic alliances
Bargaining Power of Suppliers
The fourth force of the Five forces model driving competition - Supplier power in the Five Forces Model is high when buyers have few choices from whom to buy, and low when their choices are many.
Determining the internal strengths and weaknesses involves consideration of what type of assets of a company?
financial, physical, human, and organizational assets
Human or Behavior Control Techniques
rules, policies, and procedures the provide operating guidelines
Five Forces Model
A method of evaluating the external environment in which a company operates. Involves assessing five forces that drive competition: threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing firms
Joint Venture Defined
A specific type of strategic alliance in which companies share ownership, responsibilities, and management of a foreign venture
Merger Defined
A type of acquisition in which two or more business entities are combined into one
Corporate level strategies associated with decline mode?
Bankruptcy Divestiture Turnaround Harvest Strategies
Functional Level Strategy
Carried out by individual departments performing specific organizational functions, such as marketing, finance, underwriting, Etc...
Three Business level strategies listed
Cost leadership, Differentiation, Focus
Advantage of Vertical Integration?
Decreased Expenses and increased efficiency
AIG sold stakes in London City Airport in 2008 and sold AIG Life of Canada in 2009 to reduce losses from unprofitable businesses. What type of corporate level strategy is being performed?
Divestiture Strategy Example
Elements of Economic Environment
Economic Stability and Monetary Policies Exchange Rate Volatility and GDP Risk to Economic Growth Laws and Regulation
Growth Mode Generic Corporate Level Strategies
Single business Vertical integration Diversification
In the insurance industry, reinsurers are a constitute a major what to primary insurers according to the five forces models?
Suppliers
Rivalry Among Existing Firms
The fifth force that drives competition is reflected in price wars, aggressive advertising campaigns, and increased emphasis on customer service.
Bargaining Powers of Buyers
The third force of the Five Forces Model - When buyers have significant power, they can increase competition within and industry and demand lower prices,
Opportunities under SWOT can be categorized as?
Those that "can" or those that "should" be pursued
Decline Mode Strategies
When a company is operating in a market where demand for products/services is declining. It can use these strategies: • Bankruptcy • Liquidation • Harvest Strategy • Turnaround Strategy • Divestiture Strategy
Trend Analysis
an analysis that identifies patterns in past losses and then projects these patterns into the future
Operations or Process Control Techniques
average case load per adjuster, production process, file turnover rates for individual adjusters
Define Vertical Integration a Corporate Level Strategy
exists when a company produces its own inputs such as insurer printing own policy (backward integration) or owns its own source of output distribution channel like direct sales unit (forward integration)
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises
Managers examine these areas when looking for organizational strength?
managerial expertise, available product lines, Skill levels and competencies of staff, current strategies, customer loyalty, Growth levels, Organizational structure, Distribution Channels
Acronym for Swot Analysis
strengths, weakness, opportunities, threats
General Environment
the wide-ranging global, economic, technological, sociocultural, demographic, political, and legal forces that affect an organization and its task environment
Under Swot Analysis Opportunities might be presented in what way?
New competitors, and increase in competition levels, economic downturns, or changes in customer preferences
Corporate Level Strategy
"What business or businesses are we in or should we be in?" Determines types and potential profitability of the businesses or activities undertaken. Long-Term Strategy for all levels
Define Mission Statement
A broad expression of entity's goals
Define Cost Leadership
A business level strategy through which a company seeks cost efficiencies in all operational areas. The focus is on the lowering Cost of Production. Does not mean you *will* charge the lowest price, but that you *have the ability*. (Flat Organization)
If a an insurer offers a wide range of specialized coverages, but offers them only to municipalities, it is following what strategy?
Focused differentiation strategy
Some combination of Efficiency, Quality, Customer Responsiveness, and innovation must be incorporated into what level strategy to pursue either cost leadership or differentiation strategy at the business level?
Functional-level Strategy
Supports the corporate level strategy and business level strategy and has a time frame of one year?
Functional-level strategy
The selling of office buildings while phasing out an unprofitable line of insurance in decline mode is what type of corporate strategy
Harvest strategy Example
What does SWOT analysis typically enable executives to determine?
How receptive the market would be to its products and services and its competitive position in the market
Soft Market
insurer competition is high, coverage is widely available, premiums & profits decrease. high combined ratio
Three basic components of strategy formulation listed:
1) Analysis of external and internal environments; 2) Development of long-term strategies and organizational strategies; 3) Determine of strategy at different organizational levels;
Identify the four steps of the strategic control process of strategy evaluation that allow management to gauge progress?
1) Establish Standards 2) Create & apply measurements 3) Compare actual results to standards 4) Evaluate and implement corrective actions if goals are not met
Define Differentiation Strategy
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)
Focused Cost Leadership Strategy
A business-level strategy through which a company focuses on one group of customers and offers a low-price product or service
Define Focused Differentiation 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
How is strategy implementation and evaluation intertwined?
A company cannot achieve its goals if its strategies are not implemented effectively, because of this there must be a way to measure the effectiveness
Subsidiary
A company that is completely controlled by another company
Strategic Alliance
A cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage on a worldwide basis
Define Turnaround Strategy
A corporate-level strategy through which a company rebuilds organizational resources to return to profitable levels
Define Harvest Strategy
A corporate-level strategy through which a company seeks to gain short-term profits while phasing out a product line or exiting a market
Define Divesture Strategy
A corporate-level strategy through which a company sells off a portion of an operation, business or division or profit center that is not performing well
Define Unrelated Diversification
Corporate-level strategy based on a multibusiness model whose goal is to increase profitability through the use of general organizational competencies to increase the performance of all the company's business units. No intention of transferring or leveraging or sharing resources.
Define Related Diversification
Corporate-level strategy that is based on the goal of establishing a business unit (division) in a new industry that is related to a company's existing business units by some form of commonality or linkage between the value-chain functions of the existing and new business units.
What is a crucial component and the first consideration of strategy implementation?
Designing the structure of the organization
An insurer is evaluating a countries average personal income, disposable income, and other demographic factors in making a strategic decision. What key area of global expansion evaluation is this?
Economic considerations
What are several ways an insurers competitiveness is increased through global expansion?
Economies of scale and efficiencies are gained that allow a company to compete better domestically. Technology and strategic resources gained allow for quick expansion into additional foreign markets. Also, expansion to remain competitive in a specialty market is desirable.
Threat of Substitute Products or Services
In the Five Forces Model is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose.
Name specific type of strategic alliance in which two existing companies collaborate to form a third, independent company?
Joint venture
A cultural and language barrier difference is considered under what key area of evaluation for global expansion?
Market analysis
What key area of evaluation for global expansion does financial and requirements, including capital and surplus, fall under?
Market analysis
Three key areas for an insurer to evaluate in making a strategic decision about expansion into a global market
Market analysis Economic Considerations Political risks
Under swot analysis opportunities might be presented in what way?
New Markets, possible acquisitions targets, reduction in competition.
This method of global expansion requires the most capital other than other methods of enter a foreign market, such as joint venture?
Operating a subsidiary in foreign country
A premium auditing department, striving to achieve a functional-level strategy, might use a pre-audit screening as what type of level strategy?
Operational-level strategy
What level strategy involves daily business processes and work flows, and is implemented at the department level?
Operational-level strategy
Define Functional Structure
Organizational structure that defines departments by what services they contribute to the organization's overall mission. (Suitable for single- business company) EX: Insurance Company
Threat of New Entrants
Part of Five Forces Model threat (risk) is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market
Identify three interdependent stages of the strategic management process?
Strategy Formulation-Creating a Plan Strategy Implementation-Putting the plan into action Strategy Evaluation-Monitoring the results to determine whether the plan works as envisioned
This approach to global expansion presents the highest degree of business, political, and economic risk?
The acquisition of, or formation of a subsidiary which allows for direct ownership and control of foreign assets.
Define Cost Leadership
The positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can so that the firm can offer the product or service at the lowest price in the industry.
Define Strategic Management Process
The process an organization uses to formulate and implement its business strategies
Task Environment
The set of forces and conditions that originate with suppliers, distributors, customers, and competitors and affect an organization's ability to obtain inputs and dispose of its outputs because they influence managers on a daily basis.
How can management use the Five Forces Model as part of analysis of its task environment?
To better understand companies position in the industry and the increased understanding will allow management to construct strategies that will assist in building a competitive advantage for the firm
Four topics that provide a basic understanding of why and how insurers engage in global expansion?
Trends in global expansion Strategic reasons for global expansion Global market considerations Approaches to global expansion
Political Risk Defined
Uncertainties faced by companies doing business in foreign countries that arise from the actions of host-country governments
A company with strong structure and control mechanisms will most likely succeed at what type of diversification?
Unrelated Diversification
