Harnessing Internal Resources

Education Forum: A series of articles provided by the Insurance Institute of Canada 

In the last issue of Claims Canada, Education Forum looked at how to analyze a firm’s external environment to identify risks and opportunities. In this issue, we take a closer look at the firm’s internal environment: the qualities an adjusting business can build on for success.

Although adjusting firms as a group often face similar pressures and constraints from the external environment, each firm also has its own unique attributes. Over time, differences in these attributes can be a source of sustained competitive advantage.

Strategy theorists distinguish between three levels of firm attributes: resources, capabilities and core competencies. In a competitive market, the key to coming out on top is to develop or acquire resources and capabilities that are difficult or impossible for rivals to imitate. These core competencies can allow an adjusting firm to provide more value to its stakeholders than competitors do.

Resources

Resources can be tangible or intangible. Tangible resources are things that can be seen or quantified: financial resources; organizational resources such as coordinating and reporting systems; physical resources such as office equipment; and technological resources such as claims management systems. The value of most of your firm’s tangible resources can likely be determined from the financial statements.

Intangible resources are less obvious and are harder for other organizations to analyze and imitate. They include staff strengths, innovation resources (such as ideas or techniques) and reputational resources. Intangible resources tend to be embedded within the patterns and routines of the organization. Although they are difficult to quantify, their value can be deliberately increased. For example, the larger the network of employees who have access to an innovative technique, the greater the potential value of that technique to the firm.

Capabilities

A “capability” is a task or activity a firm undertakes that involves an integrated set of the firm’s resources. Many capabilities are linked to specific functional areas, such as processing a particular kind of claim. Others may be client-specific. Capabilities tend to be rooted in the skills and knowledge of employees, and they tend to evolve over time.

Core competencies

A “core competency” is a capability that has become a source of competitive advantage – something that a firm does particularly well compared with its competitors. Core competencies are ones that meet four criteria, collectively termed the VRIO test:

• Valuable – They add value by enabling the firm to exploit opportunities or reduce threats.

• Rare – They are capabilities that few or no current competitors have.costly to Imitate – They were developed under unique circumstances or through complex social processes (such as the collective strengths of a specialist team).

• Organized to be exploited – The firm has supportive structures and systems in place to make the most of these strengths.

Value in services is measured by attributes for which clients are willing to pay – for example, specialized claims investigation skills for marine losses. Service value is relative: competitive advantage results only when a firm’s services provide more value than those of its competitors.

Core competencies also help the firm to exploit opportunities or reduce threats. For example, a core competency in technology could help an independent adjusting firm to move into an emerging field like handling identity theft claims.

The value, rarity and imitability of a competency can change over the time. Any competency can become a limitation if the firm continues to base strategy on it when it is no longer truly core. The trick is to manage current core competencies while also developing new ones.

Value chain analysis

Another tool for assessing internal strengths is value chain analysis, which can help a firm identify which activities represent net sources of value or cost. This in turn allows the firm’s management to decide which competencies the firm should develop, maintain or outsource.

A “value chain” is a sequence of business activities, each of which potentially has a cost and a value for the firm. To do a value chain analysis, you would separate out your firm’s activities – both primary activities such as field investigation and support activities such as HR – and examine each one to determine what it costs your firm and what value it generates. If the cost of an activity is greater than the value it generates, the activity is not a source of competitive advantage.

For example, larger adjusting firms may choose to outsource payroll processing because the activity incurs a net cost and is not a core competency. A specialist payroll processing supplier can perform the activity more efficiently.

Bringing it all together

Internal analysis of firm attributes and external analysis of the firm’s environment are typically combined into a SWOT analysis: a look at the firm’s strengths, weaknesses, opportunities and threats (see table). Weighing your organization’s strengths and weaknesses against the opportunities and threats in its external environment can help you and your team select appropriate strategies.

Opportunities and threats change over time as the external environment changes and evolves. A firm’s own strengths and weaknesses also change over time as the firm develops competencies. A SWOT analysis is always a snapshot of the situation at a particular point in time. It should be revisited regularly as part of your business’s ongoing strategic process. _ 

This article is based on material used in the Insurance Institute’s FCIP program, the pinnacle of learning in Canada’s p&c industry. Focusing on strategic leadership and advanced management principles, the program blends academic business theory with practical insurance application.