A strategy audit of insurance industry in USA particularly the external factors. And the steps involved in a strategy audit right from External Factors to Evaluation & Control.
Strategy Audit: Insurance Industry (USA) an example
Strategy Audit connotes with the audit of the strategy a company is following in the current environment and the changes that need to be incorporated. A strategy audit begins with the scanning of the external environment i.e. Opportunities and Threats which shape the strategy of an organization it further moves to the Internal Environment with its Strengths and Weaknesses. Post the analysis of these factors a change or status quo in strategy is propounded.
The crucial factors in the Opportunities and Threats from an External Environment with their respective impacts are natural Physical Environment, Societal Environment and Task Environment.
The insurance sector has been impacted most by the Physical environment as it presents multifarious challenges. These challenges include insurance coverage in earthquake prone areas, tsunami prone areas. In US, whether it is the asbestos and environment claims of company pertaining to the policies done prior to 1980s or the Florida lowering of exposure case in the year 2007 or the Atlantic Hurricanes are such examples. In such scenario, the insurance sector cannot venture out on its own. Here, interplay of synergistic forces between the Government and private insurance sector can level the playing field. This can be done by creating subsidized insurance policies with Government playing the role of a welfare state and contributing a part of the insurance premiums.
The societal environment when seen in the context of recession, global working of the insurance companies and fast paced technological changes such as VoIP or e-CLIQ system of a prominent insurance company certainly provide an edge to organizations.
The aspect of transparency in the functioning of an organization takes care of the Politico Legal environment. It prevents unnecessary lawsuits by the affected individuals/parties as well as the image of the organization. In one such example, an insurance company in Florida had to face lawsuits from its own employees and it was barred by law to go for further exposure levels.
Task Environment in context of Insurance sectors includes threat of new entrants, bargaining power of buyers, threat of substitute products & services, bargaining power of suppliers, rivalry among competing firms and power of other stake holders. The concerning issues here include, threat from new entrants, threat of substitute products and services, rivalry among competing firms and power of other stake holders. Insurance sector faces imminent threat from new entrants with banks, NBFCs also venturing into the insurance sector. With already a constant buyer base, it is evident that any new operator will be taking it from the existing insurance buyer base of organizations. Government regulations have also resulted into development of new products and services which can render existing products unviable. For example, Government of United States enacted Terrorism Risk Insurance Act and made sure that insurance extended to terror events is transparent and that the primary insurers did not suffer. Concentration metrics such as Herfindahl Index for insurance companies in US is quite low thereby reflecting lesser market concentration in favour of a particular insurance company. Other stakeholders in the insurance sector include Government, Clients, Employees and Unions. In US Federal Insurance Office (FIO) has broad responsibility for monitoring the insurance industry.
Summary of External Factors
A weighted score of each external factor represents in opportunities and threats highlights the areas where the organization has a sound footing and where exactly it needs to focus. (Wheelen and Hunger). An External Factor Analysis Summary (EFAS) Table is prepared to present these factors and their relative importance.
In any insurance organization, the internal factors are all the same which have bearing on its strategies. These factors include corporate structure, corporate culture, corporate resources such as marketing, finance, R&D, human resource management, IT. The relative strength of these factors varies from organization to organization, for instance, one organization may have very strong marketing presence, but might lack in R&D. Similarly, one might have sound IT but might be financially weak. Hence, different insurance companies in US can analyze their core areas of strength which strategically influence their organizational growth in the forward direction. Meanwhile, also trying to improve upon its not so strong areas, which other organization might be having as a core area.
Summary of Internal Factors
Similar, to external factors the weighted score of each internal factor is analyzed and areas of strength and weakness are observed for further incorporation in strategy of the organization. In this case, an Internal Factor Analysis Summary (IFAS) Table is prepared to analyze the significance of the internal factors.
The Strategic Factors Analysis Summary (SFAS) of an insurance company is based upon the EFAS and IFAS of the Organization. Through this analysis, key strategic areas of an organization are identified where a change in strategy can be modified or replaced for further growth of the organization.
TOWS Matrix
The TOWS Matrix is the tool used for identifying strategic alternatives based on the SWOT of the organization. By doing an analysis of external environment (threats and opportunities), as well as the internal environment (weaknesses and strengths), of an insurance company the strategic options are propounded. It is with TOWS matrix that strategic options are identified.
Implementation
The implementation of the strategies thus identified is a crucial step and like other organizations an insurance company needs to implement the identified strategy. Whether the implementation needs to be done by top-down approach, bottom – up approach or mid-level implementation or it is to be done at the front end or the back end, this may vary from one insurance company to another.
Evaluation & Control
The control and monitoring standards within an organization need to be strengthened so that the desired results can be measured. One of these techniques is benchmarking, as per this technique the performance is measured against set goals as well as a comparison is also done with similar companies in the insurance sector.
This aspect will ultimately lead towards desired outcomes as well as course correction in case of deviation from strategies.
Hence, it is of utmost importance for any successful or struggling insurance company to undertake strategic analysis. It may assist one company in further growth as well as assist another in rising from a precarious situation.