Strategy Theory and Actual Strategies Being Used

¶ … Strategy Theory and Actual Strategies Being Used in Small Insurance Companies

Ask any layman on the street what they think about insurance companies and the answer will invariably be negative. Consumers, by and large, view insurance companies with disdain. It is a business that sits among other necessary, yet not always understood businesses, therefore when the economy began to slump very few people had sympathy for the struggles the small insurance business faced. While insurance is a necessary evil that survives as an industry, through seemingly impossible financial odds at times, there small companies within the field that are working hard to maintain status quo while the economy batters them without sympathy. In addition to the need for economic stagnation maintenance the small insurance office has recently been challenged by big business. Across the nation large insurance companies are flooding the market with mass advertising and lower rates. This competition threatens many of the smaller companies and they are working to develop strategies to maintain their survival and success.

Insurance companies are in a unique position. The state insurance commissioner office and the many rules and regulations that it must follow first and foremost regulate the company (Ho, 2002). In addition the insurance company must be able to pay out to its policyholders in the event of an occurrence (Ho, 2002). The occurrence can be a natural or manmade disaster but the policies have to be paid. There are many factors involved in running and regulating a small insurance company (Ho, 2002). The rates must be high enough to meet the demands of running the company itself, yet they are open to investigation any time it appears they have been raised unfairly or without good cause (Ho, 2002). A recent study by the National Association of Insurance Commissioners that was triggered by allegations that companies have raised their rates to the policyholders following the terrorist attacks in New York last year (Ho, 2002). The allegations stem from a commission report released by the Americans for Insurance Reform and allege that consumer groups have been unfairly gouged in their rates since the events of September 11(Ho, 2002). "The coalition says it wants stronger state regulations to protect people from excessive insurance rates (Ho, 2002).

In a July letter, the coalition urged state insurance commissioners to investigate how the economy affects insurance rates and whether insurers are price-gouging consumers. The group said it was particularly concerned about recent increases in homeowner and medical malpractice insurance and wants those rates frozen (Ho, 2002). " It is these and other regulatory boards and commissions that have a stake and a say so in the day-to-day operations of small insurance companies. The group said that while rates were already rising before Sept. 11, "the price increases were sped up by the terrorist attack, collapsing two years of anticipated increases into a few months (Ho, 2002)."

All of these factors combined have put an enormous strain on the insurance industry. They have been paying out to policyholders for many different incidences such as hurricanes, terrorist acts and other events. The insurance companies have reacted in what the industry calls predictable fashion with the responses they have provided. On the surface there are seemingly only a few options for them to take in the business. They can increase the rate of the premiums that the policyholders pay, or they can cancel insurance policies of those who file claims. Each of these ideas has merit but is not the only options available. Small insurance companies are faced with the additional burden of having to compete with the large companies. This can cause tremendous financial strain for the smaller insurance company, which drives them to react even more strongly. This knee jerk reaction can place the entire company future in jeopardy, especially in these economic times.

While many consumers feel that they are at the mercy of the insurance company, there are many small insurance companies that are at the mercy of many factors, including the consumer, the big companies and natural disasters. With economist predictions that the economy problems of the nation will not improve any time soon small insurance companies are scrambling to discover ways to survive.

Previous research have focused on the leadership of small companies and drawn conclusions about the leadership when it comes to the way their company is run (Becherer, 1999). In a recent study of small company presidents it was determined that the president's attitude and entrepreneurial behavior has a direct impact on the success of the business (Becherer, 1999). The firm's posture, performance, and extent of delegation authority were also scrutinized during the study. The study indicated that further studies would be useful with regard to proactively in running small business. The research was thorough and complete but it did not limit itself to the running of a small insurance company (Becherer, 1999).

Many recent models of business encourage the school of thought that the attitude of the leader and the way the leader runs the business have a major influence on whether the business succeeds or fails. This is also a true example of many insurance business models (Becherer, 1999). However, regardless of the model's projections when it comes to the insurance industry there are additional factors that influence this particular industry that do not affect other industries. This research study will compare actual strategy with theoretical strategy of a small insurance company for the purpose of survival. The proposed study will ascertain strengths and weaknesses of each scenario and then put together a suggestive plan for the operation of a small insurance company. The company in question will not be one that sells life insurance, but instead will focus on companies that sell policies other than life insurance policies. The research will be conducted through the use of a survey study. The survey will allow the research team to determine what works in theory, but not actual practice and what is working in actual practice for survival of small insurance companies especially during these difficult economic times.

This proposal will address an area that has not been fully researched in current literature. It will address by comparison the strategies that small insurance companies need to survive in current economic times. This will be accomplished through a comparative study between strategy theories and actual strategies when it comes to small insurance companies. There have been several recent large-scale disasters, including hurricanes, terrorist acts, floods and fires throughout the nation. The insurance companies have had to pay out many billions of dollars in policy protection through these disasters. The need for payout was felt especially strong in recent years because it was coupled with a sagging economy, which usually means more limited access to funding for insurance companies. This proposed study will determine the differences in actual working strategy and theory of business strategy within the small insurance company industry. It will also review which strategies may be useful in keeping the small insurance company afloat in the face of the recent large scale events that have occurred. Strategies in theory and in practice will be discussed and literature will be reviewed that touch on the peripheral aspects of the topic. This study will be unique in its scope and sequence, and will allow future decision making teams to create a proactive plan for success and survival during future events and economy struggles.

The research will be drawn from a wide range of participants and will encourage discussion about the future of the insurance industry, with a primary focus on the small insurance companies. The small companies are struggling for several reasons and this proposal is aimed at discovering not only why the struggling occurs but also some basic ideas about how the small insurance company can survive in today's economic climate as well as possible future trends. This discovery will be obtained by the comparison of actual strategy and strategy theory being applied to the small insurance company industry,

CHAPTER TWO

ABSTRACT

It seems that the natural disasters in America are increasing in frequency and number. Whether it is a hurricane bearing down on the coast, an earthquake shaking things up, or a flood wiping out thousands of square acres in farmland, disasters are a fact of life when mankind tries to live with nature. Outside of natural disasters there are also small occurrences that can be costly, including car accidents, or catastrophic illnesses. Given the many things that can occur in American daily life, insurance companies are striving to keep up without going under. Small insurance companies are being hit hard with each natural disaster that occurs and they are trying to maintain their business status while competing with the large insurance companies who offer low rates in bulk quantities.

The strategy of insurance companies in theory often differs from the actual strategy being used for various reasons.

Insurance companies usually employ an actual strategy for survival that includes raising premiums and canceling policies. Raising premiums is a tricky option because there has to be a provable and legitimate reason for its occurrence or the regulatory commissions can levy fines and penalties to the insurance companies who do it. In addition the company runs the risk of alienating their customers with the premium increases and those customers may leave and seek out coverage with the larger companies that can offer lower rates because of the bulk they sell in. The second way many small insurance companies handle the need for increased strategy in funding is to cancel policies that file claims. This option may have some merit when it comes to consumers who file multiple claims but overall a blanket cancel filer policy runs the risk of promoting a reputation of being a company that the consumer cannot count on in time of need.

The current economy is also posing problems for small insurance companies and the economy has not been projected for improvement in the immediate future according to recent expert studies. Combining natural disasters, the competition with large companies and the current state of the economy, the small insurance companies face an uphill battle to survive. This paper will offer a comparison of strategic theory to actual strategy in the small insurance company industry. The paper will explore the strategies that businesses use in their day-to-day operations, and then apply those theories to the small insurance company industry. The paper will then discuss actual strategies being used by insurance companies and how they differ and are similar from the theories. The paper will then take the two aspects and combine the more positive components to develop a suggestion plan for success when it comes to the future strategy of running a small insurance company with a measure of success.

The paper will propose a research study and will explore the methodology that will be used for the research as well as analyze and review literature that has been published about the topic. The conclusion of the paper will include several suggestions for running a small insurance company. This paper will work to provide a well-rounded education about the small insurance company industry and the changes that should be undertaken to improve the delivery of services as well as the future success of the company.

Introduction and outline

CHAPTER THREE

LITERATURE REVIEW

The insurance industry is an industry and all industries have commonalities as well as differences. One of the things that all industries must have to succeed including the small insurance company industry is strong and positive leadership. The leadership of a small insurance company is vital to the success or failure of a business. Many studies and articles have been published regarding the leadership of many industries. The strong and positive leadership of a small insurance company is important to how the company fares especially in these economic times and the times that have been predicted for the immediate future.

Literature around the world has dedicated itself to the analyzation of leadership in business (Becherer, 1999). The leadership factor is something that is discussed in theory as well as actual strategy meetings around the world (Becherer, 1999). The leadership path of any industry or company is one of the most deciding factors in whether or not the business will succeed or the business will stagnate and eventually fail. One only has to look at Enron, Chevrolet and other large companies to understand how important proper leadership is to any business. The small insurance industry is no different, except that its leadership may prove itself to be even more vital to the success of the business. This article proposes some strategy that is more than theory because it discusses through the use of a study the actual outcomes of certain business strategies (Becherer, 1999).

A recent study as to the importance and impact of leadership concluded that positive and strong leaders have companies that tend to be more successful than companies with weak or negative leadership. The study drew on several hypothetical beliefs including:

The proactivity disposition of a company president is directly related to the entrepreneurial posture of the firm he or she manages. Since proactive company presidents are more likely to scan their environment for opportunities and to take action, the performance of the organizations they manage should reflect this behavior. Crant (1995) found that proactivity was associated with the objective job performance of real estate agents." This theory and study can easily be applied to insurance agents as well. The study determined that an hands on president who is actively involved tends to promote a more active sales team. This is easier to accomplish in a small company, in the insurance industry or any other industry.

The proactivity disposition of a company president is directly related to the change in sales of the firm he or she manages (Becherer, 1999). " It is the explanation for changing CEO's when a company begins to flounder. The article discusses the reason the hands on president has a company that performs better. It also allows for the fact that there are variables that cannot be controlled or removed that may have had an impact but over all the results hold true and accurate (Becherer, 1999).

The proactivity disposition of a company president is directly related to the change in profits of the firm he or she manages (Becherer, 1999). " This is attributed to the fact or idea that a proactive individual is probably going to act in a more entrepreneurial way which in turn trickles down to those who are under him or her. This total action can result in higher sales figures for the sales reps. In strategy theory as well as actual theory this seems to be the case, "since proactive individuals are more likely to engage in entrepreneurial behavior" (Becherer, 1999).

There is a significant difference in the proactivity disposition between company presidents who have started a business vs. those who have not started a business (Becherer, 1999). " When a person inherits or is handed a business they don't seem inclined to put their heart and soul into it as much as someone who starts the company from scratch according to recent publishing. The self starter, in strategy as well as theory has proven again and again to be willing to work harder than those who have been handed their positions (Becherer, 1999). This is an important discovery when it comes to the small insurance company because individual offices are either self started, or inherited, family owned etc. These differences in working styles that are theoretically and actually different depending on how the insurance office was acquired can be an important key to its future survival strategy.

There is a significant difference among company presidents on the proactivity disposition relative to the number of businesses they have started (Becherer, 1999)."

Proactivity may be related to different types and levels of entrepreneurial or managerial behavior (Becherer, 1999)."

There is a significant difference in the proactive disposition among company presidents who started their businesses vs. those who purchased or inherited their businesses (Becherer, 1999). "

There is a significant difference in the proactive disposition between company presidents who make most of the significant day-to- day managerial decisions in their firm vs. those who share or do not make these decisions (Becherer, 1999)."

There is a significant difference in proactive disposition between company presidents who make most of the long-term strategic decisions in their firm vs. those who share or do not make these decisions (Becherer, 1999)."

Questionnaires were mailed to almost 700 businesses. Pre-sending postcards that alerted the businesses there would be a study sent to them assisted the study. When the study was sent out it included a questionnaire and a return postage paid envelope (Becherer, 1999). This was done for the purpose of reducing the number of surveys that would not be returned because of the time it would take to secure postage and an envelope. The questionnaire was sent out and there were a total of 215 responses returned that were usable. Any response that was incomplete was voided and the response rate was 31%. The value was made as pure as possible by utilizing the first 25% of respondents and the last 25%. This was done in the effort to draw a truly objective sample (Becherer, 1999).

The respondent small company presidents were 79% male. Companies had median characteristics of $3.5 million in sales, 22 employees, and were on average 15 years old. The sample was quite diverse, in that the scope of operation ranged from local to international, and sales were $10 million at only the 75th percentile (Becherer, 1999). "

The study concluded several things. One of the things the study discovered was that there was a difference in productivity of presidents who started their companies as opposed to those who had purchased theirs or inherited theirs (Becherer, 1999). This is an important factor to understand in the small insurance company study because it allows the strategists to develop strategies for each small company based on the productivity probabilities that are already determined by this study (Becherer, 1999).

Another thing that the study discovered was that the proactivity level of the presidents had a direct impact on the sales numbers of the company. This is an important factor to consider in the small insurance company industry as the sales of the company product is the single deciding factor in income for the company and as natural and other disasters occur the importance of new sales premium collection becomes even more important.

Several directions emerge for future research. The process by which proactive personality disposition impacts the entrepreneurial posture of the firm is an important question (Becherer, 1999). The leader may create an organizational structure or climate which reflects his or her personal style, and this posture may, in turn, impact the entrepreneurial posture of the firm (Becherer, 1999). In addition to intervening variables, the possibility of the existence of moderator variables in the proactivity-performance relationship should be explored. For example, environmental hostility (Covin and Slevin 1989) may moderate the proactivity-firm performance relationship. If entrepreneurial behavior is approached from a field-theoretic perspective -- that is, as a function of both personal and environmental characteristics -- objective measures of the firm's internal and external environment must be utilized (Becherer, 1999). "

Other literature published regarding the topic of small company survival with the resulting outcome being the opinion and understanding that business theories are only as successful or as good as the trials they pass. A business theory will not help a business succeed or grow until it is tried and it performs the way it was supposed to perform. According to some experts the only way to try a business theory is to use it and see if it promotes success, causes failure or waffles in the middle of the two (Lewis, 1997). "Businesses deal with theories all the time. To their misfortune, businesses have only one way to test a theory: Try it and see what happens. Sadly, the results still don't tell us much; businesses want to make money, not test theories, so they don't apply the kinds of experimental and statistical controls that lead to confidence in the results (Lewis, 1997)."

There have been several research studies on growth stages in small business. One such study measured the growth in small and medium sized businesses by identifying growth patterns and paths (Mitra, 1999). Small insurance companies, just like other small businesses across the globe help generate additional employment opportunities for future employees. The small insurance company has to perform consistently with the goals that it sets for itself and the research shows that companies performing within their targeted goal range are more apt to be successful than those that are not performing near their targeted goals and performance expectations and factors. This particular study that was published concluded that internal reasons and barriers are more apt to slow or stop a business from growing. While external factors also play a part in the success or failure of a small business, such as an insurance company, the study determined that the internal workings of the company play a larger part in the outcome of the small company. When a small company has internal troubles and obstacles that are not being dealt with it affects the entire performance of the company. This reflects itself outside the company and can cause loss of business as well as a loss of future consumers. "In an investigation into the reasons why some SMEs grow and others don't, Hay concludes that "over the long-term it is internal rather than external barriers to growth that exert the decisive influence upon SMEs' rate of growth. The key internal growth constraint is managerial capacity and the unwillingness on the part of owner-managers to incur the risks associated with growth (Mitra, 1999)."

One of the most important discoveries that came from this published study was that the barriers must be removed if a small company hopes to succeed to grow. It determined that a framework for growth must be designed and adhered to if the small company wishes to grow. This research can also be applied to the world of small insurance companies.

The factors within the analysis of the study of small business growth and success included:

Factor I: Managerial Orientation. Variables leading to long-term orientation were negatively loaded, whereas variables leading to short-term orientation are positively loaded. This factor accounts for 26% of the variance (Mitra, 1999).

Factor II: Managerial Goals. Variables denoting future-directed goals are positively loaded, whereas variables denoting immediate goals are negatively loaded. This factor explained 12% of the variance (Mitra, 1999).

Factor III: Current Business Strategy. Variables denoting higher risk-oriented strategies are positively loaded, whereas variables denoting lower risk-oriented strategies (for example subcontracting so as to avoid capital base expansion) are negatively loaded. This factor explained 10% of the variance (Mitra, 1999).

Factor IV: Human Resource Policy. This factor comprised variables pertaining to manpower policy and explained 10% of the variance (Mitra, 1999).

Factor V: Customer Orientation. Comprised of variables referring to the company's policy towards buyers, this factor explained a variance of 9% (Mitra, 1999).

Factor VI: Customer Base. Loaded with variables mainly pertaining to the number of customers, this factor explained 9% of the variance (Mitra, 1999).

Factor VII: Current Management Style. Variables relating to owner's involvement were positively loaded, whereas the variable denoting retirement was negatively loaded. The factor explained 7% of the variance (Mitra, 1999).

Factor VIII: Managerial Capacity. The two variables loaded on this factor pertained to current capability, and the factor explained 4% of the variance (Mitra, 1999).

The study conducted within these parameters concluded the importance of the management and leadership attitudes within small companies for success. This can be extrapolated to small insurance companies as well and used as a standard for the survival plan within the insurance industry.

The study tested the fit between theory and actual business practice based on the responses received. The sample participants were each in business for at least five years at the time of the survey. The results of the study dovetailed with what several other published works have decided. The leadership abilities of those in charge of companies, whether they are small or large have a large impact on the success rate of that company.

In studying the small insurance company industry there are many factors to consider. Literature has been published about many aspects pertaining to the running of and the success of small business including the insurance industry. One published article discusses the world's readiness for Web based insurance quotes as a tool for survival in the world for currently operating small insurance companies.

The article discusses the conservative and quiet world of the insurance industry and the technological boom's influence on the industry that has occurred over the last twenty years (Brandel, 1996). The study discusses the readiness of the world for insurance agents that are strictly cyber-based for their online consumers. "Pacific Specialty Insurance Co. apparently thinks so, as does the Utah division of Workmen's Auto Insurance Co. Both have signed on with InsWeb [www.insweb.com],a year-old company that intends to offer a Web-based comparative shopping service where consumers can purchase insurance and get competitive quotes online. " According to the article the insurance companies climbing on board the online insurance game have enjoyed a measure of success with their ability to provide instant online quotes for the consumer who may be shopping (Brandel, 1996). The consumer plugs in some pertinent and prompted facts and the screen comes back with a quote for the coverage of the consumer based on the facts provided. This aspect of insurance has been studied by researchers to determine the success rate and whether or not this is a positive aspect of success and business for the small insurance company (Brandel, 1996). When this concept was first introduced to the industry it was actually invented to be used as a cost cutting measure for insurance companies. The online quoting ability allowed the elimination of paid insurance agents but it was soon discovered according to studies that the consumer was not comfortable with a strictly online insurance company, and the idea and process was modified to include online quotes and answers with the ability to call and speak to a live agent. For the small insurance company however, this option might provide a viable alternative to trying to compete agent for agent with the larger companies. It is not the self run tool that many believe it to be however, and it takes an insurance company some time and resources to get it set up and going (Brandel, 1996). "It takes time for an insurer to reorganize itself, and "it's also a complicated task to allow insurers to sell insurance online" because of state regulations, said Darrell Ticehurst, president of InsWeb (Brandel, 1996). " Once it is handled however and the kinks have been worked out the system can be a money saving tool to small insurance companies according to the literature that has been published about it. " Management thinking about strategy has gone through a number of phases or eras. In the 1960s and 1970s the issue was strategic planning-- business had become tougher and the environment less predictable, and we thought the answer was to produce better strategic plans (Piercy, 1998). The results were often disappointing -- strategic planners separated from line management producing plans that were frequently ignored. The 1980s and 1990s have been dominated by the global pursuit of operational efficiency -- total quality management programmes, business process re-engineering initiatives, value engineering, focus on core competencies, and most recently the 'lean enterprise' mode of supply chain collaboration to remove stockholding and other waste throughout the supply chain (Piercy, 1998)."

One important strategic theory in the insurance business today is the market sensing theory. This allows for the sensing of the coming market and provides the company with avenues and ideas about where to take the product in the future. "The basis of competition in modem markets is simple -- it rests on offering superior value in the eyes of the customer. This is not, however, the simple and obvious truth it may seem. Different customers and different markets buy different types of value. Also, the basis of value changes or 'migrates', as customer priorities change -- last year the lap-top computer had to have more memory and a colour screen, but this year superior value is the same specifications in a lighter package. One of the biggest mistakes made in the 'total quality revolution' was the belief that customer value was easily measured and remained stable over time (Piercy, 1998). " This can translate to an insurance company with the basic foundation of understanding market sense and positioning for the market."The airline business provides a case in point. Traditional 'hub and spoke' routing approaches by large airlines are being undermined by the new 'no frills' city-to-city packages provided by companies like Southwestern in the U.S.A. And Ryan Air, Virgin Express and the new British Airway's 'Go' airline (Piercy, 1998). Flying passengers from the city where they are to the city where they want to be seems to be better value to customers than flying to a hub (convenient for the airline, not the passenger). The vastly cheaper fares on offer help too (Piercy, 1998). " This article without intending too provides some solid advice for the small insurance company. While they may not be able to compete with marketing and bulk quantity prices they can compete by offering personal services that the large companies cannot possibly take the time to provide for each of their many customers.

According to the research the future success of small and large companies alike is going to rest with the provision of new and better ways of delivering value to their customers. In the insurance industry there are so many ways to provide service to consumers that will make the small company have an advantage over the large companies that are competing with them (Piercy, 1998). "Much of the 1990s thinking about strategy has been dominated by two conflicting goals (Piercy, 1998). One school of thought urges us to focus on core competencies -- the five or six areas where our organisation can achieve world-class excellence. This approach is the basis for much of the divestment and strategic alliance strategies of recent years. By contrast, other advice is that strategic strength only comes from competitive differentiation -- doing the things that matter in the market different to competitors, or doing different things (Piercy, 1998)."

According to the research that has been published there is a new era in which many of the old rules of competition have been tossed by the wayside and in their place are new ideas that include collaboration, alliances and networking. These ideas are what small business nationwide are using in their effort to survive in the economic times that the country is currently facing. "The market-based strategy model attempts to provide managers with an operational tool for testing and re-building the fundamental business theory that drives their organisations, and for understanding that of their competitors (Piercy, 1998)."

Studies have concluded that poor strategic planning is one of the key factors to the failure of business (Vincent, 1996). Literature abounds regarding the strategic theory and the actual strategic practices of many businesses in America but there is very little exclusive to the small insurance company industry. This study will be conducted to compare the strategic theories with the actual strategies being employed by small insurance companies for the purpose of designing a strategy for survival and success in the future.

Another aspect of small insurance company success has to include the serious study of the market value of the business. This process assists not only in the selling process of businesses but also helps define the businesses measure for management and the employee benefit plan possibilities and values (Pricer, 1997)." In today's litigious society, the market value of a small business might be important for reaching an equitable settlement of damage cases." This can become an important issue in the insurance business because of the regulatory aspects of increased premium (Pricer, 1997).

CHAPTER FOUR

THE STUDY (SIGNFICANCE, METHODOLOGY AND INFORMATION)

Historically the insurance industry has remained successful regardless of the ebbs and tides of the national and world economy. In more recent years the small insurance company has had to compete with itself as an industry because of the influx of larger bargain cost companies and the Internet abilities to reach customers with those low rates. The current plight of the small insurance company can be viewed as precarious because it not only has to compete with the larger companies, and the Internet abilities of those larger companies, but it also has to compete with the current national economic slump that does not promise to let up any time soon. In addition to these factors it is important to remember that there are many natural disasters that have occurred recently and the insurance companies have to pay out the policies to their policy holders regardless of how many disasters occur and in what time frame they happen and how much they cost the insurance company each time one happens. This research will compare theoretic strategy with actual strategy and determine where the insurance companies are weak and where they are strong in that comparison. The research will allow instruction as to the success of applying actual theory to actual practice. It will also allow the understanding of whether or not the theories are applicable it the insurance company. This research will provide foundational understanding about the strategy being used in small insurance companies and compare it to theories. This is an important distinction to make because it allows the industry to work to strengthen itself in the future. It also will provide a basis for developing actual strategies in the future to run and survive for the small insurance company in this country.