Actuarial Notes

Strategic Management Process

Study guide: Exam DISC-RM

The Strategic Management Process is the process by which an organization manages the formulation and implementation of its strategy: it sets its direction in a vision, a mission and goals, analyzes its external environment and its own resources, formulates a strategy, implements it, and evaluates the results to start the cycle again. For an insurer, the strategy it produces decides which lines, markets and customers to write and how to compete for them, and underwriting policy is one of the ways that strategy reaches daily decisions.

  • Vision: A vision describes what the organization hopes to become in the future. It looks forward and aims to inspire.
  • Mission: A mission states why the organization exists, capturing the key elements of its past and present and answering "Who are we?" It tells stakeholders why they should support the organization. Vision and mission should point the same way: a mission and a vision that emphasize different things divide the organization.
  • Goals: Goals are narrower aims that serve the vision and mission and guide employees' daily work. The most effective goals are SMART: specific, measurable, aggressive (challenging but attainable), realistic and time-bound.
  • 1. Analyze the environment: Managers scan the external environment for trends and events in the economy and in their own industry, and assess the organization's own resources. The external tools are PESTEL (political, economic, sociocultural, technological, environmental and legal factors) and industry analysis such as Porter's Five Forces. The internal tools are the value chain and VRIO, which asks whether a resource is valuable, rare, inimitable and supported by the organization. A SWOT analysis combines them: strengths and weaknesses are internal, opportunities and threats external.
  • 2. Formulate the strategy: Formulation develops specific strategies and actions. At the corporate level, corporate strategy answers what business or businesses the organization should be in and how they help each other compete, through synergy and diversification. At the business level, business strategy answers how a business competes in its industry. Porter's generic strategies frame that choice by the source of advantage (low cost or uniqueness) and the scope (broad or narrow): cost leadership, differentiation, focused cost leadership and focused differentiation, with best-cost firms offering both and firms that offer neither "stuck in the middle."
  • 3. Implement the strategy: Implementation puts the strategy into action. It includes building an organizational structure and culture that fit the strategy. In the planning, organizing, leading and controlling framework of management, formulation is planning and implementation is carried out through organizing, leading and controlling.
  • 4. Evaluate and control: Managers monitor performance to see whether the strategy is working and whether the environment has changed. What they learn feeds the next round of analysis, so the process is a cycle rather than a sequence that ends.
  • Using SWOT to generate options: SWOT suggests four kinds of strategic alternative. Strengths with opportunities (SO) asks how to use strengths to take advantage of opportunities. Strengths with threats (ST) asks how to use strengths to avoid threats. Weaknesses with opportunities (WO) asks how to use opportunities to overcome weaknesses. Weaknesses with threats (WT) asks how to minimize weaknesses and avoid threats.
  • In an insurer: The process meets insurance-specific facts at each step. The underwriting cycle is part of the external analysis, the insurer's surplus and reinsurance are part of the internal one, and the strategy is carried out through underwriting, marketing and claims (Insurer Goals and Constraints).

Vision, Mission or Goal? A regional property-casualty insurer's planning document contains four statements: (1) "To be the most trusted insurer of family farms in the Midwest." (2) "We protect the farms, homes and businesses of rural communities through local agents who know them." (3) "Grow farmowners written premium by 8% in Iowa and Nebraska by December 31 next year." (4) "Improve customer service." Classify each, and test the goals against SMART.

Answer

  • (1) Vision: It describes what the insurer hopes to become.
  • (2) Mission: It says why the insurer exists and how it serves its customers today, and it points the same way as the vision.
  • (3) A SMART goal: It is specific (farmowners, two states), measurable (8% of written premium), time-bound (a date), and plausibly aggressive but realistic.
  • (4) A weak goal: It is neither specific nor measurable nor time-bound. A SMART version would name a measure, a target and a date, such as an average claim acknowledgment time below a stated number of days by year end.

From SWOT to Strategy A mid-sized commercial lines insurer's analysis finds: strengths, a highly rated claims service and strong relationships with independent agents in construction; weaknesses, outdated policy systems and a high expense ratio; opportunities, rising demand for contractor coverage as public infrastructure spending grows; threats, new digital competitors writing small business coverage at low expense, and a softening underwriting cycle. Suggest one strategic alternative from each quadrant pairing.

Answer

  • SO: Use the agent relationships and claims reputation to grow in contractor lines, where demand is rising.
  • ST: Compete on claims service rather than price against low-cost digital entrants, and hold underwriting discipline as rates soften.
  • WO: Use the growth in contractor premium to fund replacing the policy systems.
  • WT: Withdraw from the small, commoditized accounts where the new entrants' lower expenses give them an advantage the insurer can't match.

The SO and ST options describe a focused differentiation strategy at the business level: a narrow market, won on service rather than cost. Implementing it would mean organizing underwriting and claims around construction, and evaluation would track the contractor book's growth and results against the goals set for it.

How it appears on the exam

  • DISC-RM: The strategic management section asks for the steps of the process and what happens in each, and for the difference between a vision, a mission and a goal.
  • Analysis questions pair the process with Porter's Five Forces and SWOT, asking which tool or which quadrant a described fact belongs to.
  • Case questions describe an insurer and ask which step it is in, which level of strategy a decision belongs to, or which generic strategy it is following.

Exam traps

  • Vision versus mission: The vision is where the organization wants to go, and the mission is why it exists and whom it serves now. Swapping the two is the most common error, and many real companies label them loosely.
  • Internal versus external in SWOT: Strengths and weaknesses are internal, opportunities and threats external. A soft market is a threat, not a weakness, however much it hurts results.
  • Corporate versus business level: Choosing which lines or companies to own is corporate strategy. Choosing how to win customers within one line is business strategy.
  • Implementation is a step: A strategy that is formulated but never built into structure, culture and daily decisions has not been carried out, and evaluation will show it.