May 31, 2014 by Insurance Institute of Canada
In the last issue of Claims Canada, Education Forum looked at how to analyze a firm’s internal environment: the qualities an adjusting business can build on for success. In this issue, we consider how a firm aligns and builds on these qualities.
Lining up the pieces
In the last article, we looked at how firms develop bundles of tangible and intangible resources, including (among others) organizational resources such as planning and reporting systems; technological resources such as claims management systems; human resources; and innovation resources. Firms can integrate these resources to develop capabilities and competencies rooted in the skills and knowledge of their staff.
How do firms integrate their resources? One way to think of this is to see any organization – from a small, locally-focused independent adjusting firm to a large national one – as a system made up of multiple components that need to work together to transform inputs into outputs. The “inputs” include aspects of the firm’s internal and external environment – its tangible and intangible resources, the political and technological environments it operates in, and so on. The “outputs” are determined by the firm’s strategy and include the services, revenues and other effects generated by the firm. The system that transforms the inputs into outputs includes the firm’s people, structures, processes and operations.
When all these components are aligned, each reinforces and leverages the others, supporting the execution of strategy. This tight integration of components can form a source of advantage that competitors find hard to imitate.
On the other hand, when the components are not fully aligned, strategy can be difficult to execute. For example, if an adjusting firm’s strategy involves distinguishing itself through personalized claims service, yet compensation for telephone adjusters is based primarily on the volume of calls they handle per hour, staff will be motivated to emphasize speed over service – the compensation structure will be out of alignment and will undermine rather than support the strategy.
But what should the strategy be in the first place?
Making strategic choices
Choosing a business strategy can be described in terms of making three choices:
• Which customers (or clients) to serve. To help with this choice, market segmentation can be used to cluster similar clients into identifiable groups, such as by type of insurance business or geographical location. In the adjusting field, a specialist equine adjusting firm would be an example of business segmentation – serving the market segment of specialist insurers who in turn serve horse owners, breeders and trainers. A small local adjusting firm would be an example of geographical segmentation – focusing on a specific local market.
• Which needs to meet. A firm must identify the needs of customers in the target group. Customer needs can be divided into two broad categories: low cost with acceptable features, or special features (“differentiation”) at an acceptable cost.
• How to meet those needs. Firms must continuously improve their products or services in order to meet their target customers’ needs over time. For example, an adjusting firm can implement new field technology to better capture and manage information gathered in investigating claims.
Meeting clients’ needs
Establishing strong relationships with customers or clients makes it easier to identify and meet their needs. Harvard Business School professor Michael E. Porter further breaks down the ways to meet customer needs this way:
• Cost leadership – meeting customers’ needs for low cost with acceptable features. To do this, an adjusting firm would need to sell standardized claims services to typical insurers and focus intently on keeping the costs of all activities as low as possible.
• Differentiation – meeting customers’ needs for special features at an acceptable cost. To pursue differentiation, a firm needs to offer services that clients perceive as uniquely valuable and worth paying extra for. Developing core competencies in investigating cyber-risk claims could be an example.
• Focused cost leadership – similar to cost leadership, but instead of selling to all of the industry’s typical customers, the firm focuses on a particular segment of the market (such as insurers of trucking fleets) and seeks to serve that segment more cost-effectively than its competitors.
• Focused differentiation – similar to differentiation but focusing on a narrower segment of the market (such as specialist insurers of art) when identifying which features are valuable.
• Integrated cost leadership and differentiation – pursuing low cost and differentiation at the same time. To do this successfully, firms need to be competent in a larger number of primary and support activities than for any of the other strategies.
Each type of strategy can offer a competitive advantage in the face of industry forces, and each can involve risks and challenges. The choice of strategy depends on an adjusting firm’s strengths and on the opportunities and threats it faces.
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.