The World Around You

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

In last issue of Claims Canada, Education Forum looked at how to identify risks to a firm’s reputation, including analyzing both external and internal factors. In this issue, we take a closer look at analysis of a firm’s external environment.

Every independent adjusting firm is different, and yet all are frequently subject to similar pressures and constraints imposed by the external environment. One of the keys to minimizing risk and maximizing business opportunity is to implement a strategy that’s appropriate for the external environment your firm is operating in.

When looking at the external environment, it can be helpful to think in terms of three levels:

• the general environment – dimensions of society that influence all industries (though in different ways)

• the industry environment – a set of factors that directly influence an industry’s profit potential and a firm’s competitive actions and responses

• the competitor environment – the collective characteristics of a firm’s direct competitors.

The general environment

For analysis purposes, the general environment can be further split into segments such as demographic, economic, political/legal, socio-cultural and technological.

The demographic segment includes the size, age structure, geographic distribution, ethnic mix, and income distribution of a population. The age structure of the Canadian population is an area of current concern for Canadian businesses – adjusting firms among them – as baby boomers move into retirement, potentially shrinking the Canadian workforce.

The economic segment includes the nature and direction of the economy in which a firm competes. As we’ve seen in the last six or seven years, this segment can be subject to significant swings with the potential to affect all businesses.

The political/legal segment includes the body of laws and regulations that govern business conduct within a jurisdiction. This segment is of particular interest to independent adjusters, whose activities are regulated by government authorities and impacted by court decisions and the general legal climate.

The socio-cultural segment (dealing with society’s attitudes and cultural values) and the technological segment (creating knowledge and developing new products, processes and materials) sometimes have a mutually reinforcing impact. For example, the rapid expansion of electronic communication technologies in recent years has altered customer expectations about levels of service and response times – a phenomenon that front-line adjusters know well.

A popular tool for looking at the general environment is a PEST analysis. This analysis uses a breakdown that is similar to the six segments described above:

• Political (similar to the political/legal segment above)

• Economic

• Social (covering both the socio-cultural and the demographic segments)

• Technological

To begin analyzing how the general environment affects your firm, you can use a simple chart like the one shown here to brainstorm and capture key PEST factors and their implications for the adjusting business.

The industry environment

For analysis at the industry level, key questions to think about include

• What does the industry look like? What are the major competitive forces? What are the trends?

• Where do the opportunities and threats lie?

• What does it take to do better than average in this industry? What are the sources of sustainable competitive advantage?

Analysis of the industry environment tends to be influenced by the work of Harvard Business School professor Michael E. Porter, who has suggested that firms operating in the same industry will be affected similarly by five key competitive forces:

1. the threat of new entrants (how easy it is for competitors to start up)

2. the bargaining power of suppliers

3. the bargaining power of buyers/clients

4. the threat of substitute products/services

5. the intensity of rivalry among competitors

For independent adjusting firms, the bargaining power of buyers (insurance companies) and the threat of substitute services (for example, the use of staff adjusters) are significant forces. As their insurer clients cycle through alternating phases of emphasizing cost containment and emphasizing loss control, the challenge for independent adjusters is to manage through these shifting forces. Assessing the strategic priorities of these clients and the strengths of their services is an important step.

Competitors and complementors

Rivalry among competitors can be intense within strategic groups – groups of firms that offer similar services to similar clients using similar strategies. In analysis of the competitor environment, a firm examines the objectives, strategies, assumptions and capabilities of each of its direct competitors. For the p&c sector, commonly used sources of information include company filings with regulators, annual statistical profiles of the industry, articles in trade publications, and information gathered informally at events and in the field.

In addition to analyzing competitors, it’s useful to look at complementors: companies that provide complementary goods and services. For example, forensic engineering firms and auto glass repair facilities are complementors for independent adjusting firms – their services complement the adjusters’ work. Understanding the objectives, strategies and capabilities of these firms is another important piece of external analysis.

Analyzing the various levels of the external environment can help an adjusting firm to identify strategic risks and opportunities. This analysis of external factors is often paired with internal analysis of firm attributes to get a complete picture of the firm’s situation. Internal analysis will be the focus of the next issue of Education Forum. 

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.