Actuarial Notes

Levels of Strategy

Study guide: Exam DISC-RM

Levels of Strategy are the organizational levels at which strategy is set. Corporate-level strategy decides in what industry or industries the organization competes, treating it as a portfolio of businesses, and business-level strategy decides how each of those businesses competes within its own industry. Both are formulated in the strategic management process, after the analysis of the environment.

\text{Level} = \begin{cases} \text{Corporate} & \text{in which industries to compete} \\ \text{Business} & \text{how to compete in one industry} \end{cases}

\text{Generic strategy} = \text{source of advantage} \times \text{scope}

  • Symbols: The first block is the question each level answers. In the second, the source of advantage is low cost or uniqueness, and the scope is a broad market or a narrow segment, so the business level has four generic strategies.
  • Corporate level: The logic of corporate strategy is synergy, where businesses under common ownership do better together than apart, and diversification, which spreads risk and opportunity over several businesses. Its main options are:
    • Concentration, competing in a single industry through market penetration (more share of existing markets with existing products), market development (existing products in new markets) or product development (new products for existing markets).
    • Vertical integration, entering a new part of the value chain: backward into a supplier's business, or forward into a buyer's. It is attractive when suppliers or buyers have too much power (Porter's Five Forces).
    • Diversification, entering new industries: related, when the new industry has important similarities with the existing ones, or unrelated, when it has none.
    • Getting smaller, by retrenchment (reducing the size of part of the operations) or by exiting an industry.
  • Business level: Business strategy answers how a firm will compete in a particular industry. Porter's generic strategies are cost leadership, differentiation, focused cost leadership and focused differentiation; a firm that offers both low prices and features customers value follows a best-cost strategy, and one that offers neither is stuck in the middle.
  • In an insurer: An insurance group choosing which lines, companies and markets to own is making corporate-level decisions. Each underwriting company or line then sets its business-level strategy, such as competing on price in a standardized personal line or on specialized coverage and service in a niche.

Which Level, Which Strategy? An insurance group makes four decisions in one year: (1) it buys the independent agencies that sell most of its policies; (2) it sells its life insurance subsidiary to concentrate on property-casualty insurance; (3) its personal auto company cuts its expenses so it can charge less than its rivals across the whole market; (4) its commercial company starts selling its existing contractors coverage in two new states. Classify each decision by level and strategy.

Answer

  • (1) Corporate, forward vertical integration: the group moves down the value chain into the business of the agencies that sell its product.
  • (2) Corporate, getting smaller: the group exits an industry, so the decision is about which industries it competes in.
  • (3) Business, cost leadership: a broad market won on low cost.
  • (4) Corporate, concentration by market development: an existing product in new markets, while the company stays in the same industry.

Decision 4 is the subtle one. It changes where the company sells but not which industry it is in, so it is a concentration strategy rather than diversification.

Placing a Specialty Insurer on the Generic Strategy Grid A specialty insurer writes only coverage for veterinary clinics. Its premiums are higher than general commercial insurers', but its coverage forms and claims staff are built around veterinary practices. A second insurer writes small business coverage for every kind of business online, at the lowest price in the market. Which generic strategy does each follow?

Answer The veterinary insurer serves a narrow segment and competes on uniqueness, so it follows focused differentiation. The online insurer serves the broad market and competes on low cost, so it follows cost leadership. If either tried to be cheap and specialized at once without delivering both, it would risk being stuck in the middle.

How it appears on the exam

  • DISC-RM: The strategic management section asks candidates to determine strategy at different organizational levels. Questions describe an insurer's decision and ask whether it is corporate or business level, which corporate option it is (concentration, vertical integration, diversification, getting smaller), or which generic strategy a business follows.

Exam traps

  • Which industries versus how to compete: Buying or selling a business is corporate level; choosing how one business wins customers is business level, even when the decision is large.
  • New market is not new industry: Selling an existing product in new territories is market development, a concentration strategy. Diversification means entering a new industry.
  • Forward versus backward: Forward vertical integration moves toward the customer, into a buyer's business; backward integration moves toward the inputs, into a supplier's business.
  • Implementation is not a level: Formulation and implementation are steps of the strategic management process. The levels say where in the organization a strategy is set.