Western National Insurance.

Pesch, Michael J. ; Eide, David L. ; Moorthy, Subba 等

CASE DESCRIPTION

The primary subject matter of this case concerns the approaches used to methodically turn a financially struggling insurance company into one of the top regional insurers in the Midwest. Strategy formulation and execution in the insurance industry, aligning functional strategies to support the organization's strategy, and leadership competencies in turnaround situations are major themes. The case has a difficulty level of 3-5 and is appropriate for junior and senior-level courses, as well as a first-year graduate course. The case is designed to be taught in a ninety-minute class period, with two hours of outside preparation by students.

CASE SYNOPSIS

An insurance company is at risk of falling into a financial death spiral and brings in a new CEO to turn the company around. The CEO and his team take specific measures to bring the company back to financial health. These include mitigating risk, branding the company, solidifying agent relationships, ramping up technology, overhauling facilities, diversifying the business, and becoming an employer of choice. Growth has stalled and the company now is considering whether to change its business model from selling insurance products solely through independent agents to also selling directly to consumers via the Internet and an internal sales force.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

The case is best used to help students understand and appreciate (a) Michael Porter's competitive strategies, (b) challenges a firm faces in obtaining and sustaining competitive advantage in its industry, and (c) strategic leadership behaviors.

Porter's competitive strategies

All its life Western has followed Porter's focused-differentiation strategy. Initially, it focused on a very narrow customer group (creameries) and differentiated on the basis of superior customer responsiveness. Klouda and Henderson broadened the product and geographic niche. However, they fundamentally continued with the focus-differentiation strategy. What differs between the two is how attentive each was in the implementation of the strategy. Klouda, in his later years, seemed to become complacent. His inattention led to a crisis of survival. In contrast, Henderson shows sustained focus over a period of 8 years, using all resources in his control to regain competitive advantage by articulating and executing a coherent competitive strategy.

Obtaining and sustaining competitive advantage

The case illustrates that formulating a strategy is only part of attaining organizational success. The challenge of achieving competitive advantage lies in aligning all of a firm's activities. The case's distinctiveness is that it provides a succinct narration of the specific activities that go into achieving success in a service industry.

Strategic leadership behaviors

Leadership theories help explain how successful managers excel at understanding themselves and others, at motivating group members to excel, and at facilitating (not bossing) group members to better perform their tasks. The specific behaviors of Stu Henderson described in the case can be put to good use to help students grasp (1) what goes into being an effective leader, (2) that leadership competencies can be developed but take time, and (3) that they should start their leadership training now.

CASE OVERVIEW

Western National Insurance is a regional player in the property and casualty sector of the insurance industry. After a long period of superior performance, it entered a period of decline that culminated in being downgraded two steps at once by insurance rating firm A.M. Best. The firm brought in a new CEO Stu Henderson to arrest the decline and return Western back to financial health. The case starts by providing this background information. It then narrates in detail the various actions spearheaded by Henderson to reverse Western's decline. The case ends in the year 2009, by which time Western had regained its competitive advantage and was named for the fourth time in five years to Ward's 50 Benchmark Group of top performing property/casualty companies in the United States. Further evidence of Western's recovery was the 2009 announcement by A.M Best that it had upgraded Western to a full "A" rating, Western's third A. M. Best upgrade in eight years.

Background Section

After a short narration of the firm's long history, the section focuses on Western's decline. It provides two types of facts: the performance metrics and the reasons for decline. This helps students note that the indicators used for assessing an insurance firm's health are quite different from those of manufacturing firms (and from other types of service firms for that matter). A few short sentences direct the reader's attention to reasons for the decline--a business-level growth strategy that went awry because appropriate (and supporting) actions were not instituted in the firm's functional departments.

Turnaround Section

Section headings succinctly capture the various fronts on which Henderson acted. Thus, the case is not a chronological narration of facts. Rather, facts have been gathered into meaningful categories with appropriate section titles--Independent Agent Relationships, Reinsurance, Mitigating Risk, Entry into Commercial Lines, Tiered Commissions, Branding, Facilities, and Technology Upgrades. This helps students consider how the organization must align tactical measures and functional strategies to achieve the organization's strategic goals.

By presenting a section titled Initial Actions, the case directs students to recognize the need for immediate actions, and to see how those actions signaled to external and internal stakeholders two positive aspects of Henderson: (1) his competence and drive, and (2) how he would manage the company back to health by using his social capital with external agencies (e.g. A.M. Best and independent agents) and an internal decision-making style that includes employee participation and systematic analysis of Western's strengths and weaknesses. The case has been written so that statements of actions taken in various areas and by various departments are preceded or followed by a rationale for those actions.

Growth Strategy Section

This section lays out the pros and cons for evaluating the two main growth options. Of course, there are other options for growing the company (expansion into other lines of business, mergers and acquisitions, etc.), but the case focuses on whether or not to use technology to reach consumers directly. Both qualitative and quantitative information is included to add depth to the discussion, as well as permit a preliminary financial analysis of the direct-to-consumer model.

TEACHING PLAN

An 80-minute class using three boards will effectively bring out the case's three central issues: (1) (re)gaining competitive advantage requires not just formulating a business-level strategy but also orchestrating activities of the functional departments to help achieve that strategy (40-45 minutes); (2) challenges of sustaining competitive advantage, and of growing the business--not an easy call as both require changing a successful business model that took Henderson about six years to develop and execute (15-20 minutes); and (3) strategic leadership (15-20 minutes).

Main Board: Competitive Advantage Requires Alignment of the Activities of All Functional Departments of the Firm (40-45 Minutes)

Being the central issue, this discussion should be in the middle board. The main objective is to help students see that the many actions taken by Western over eight years had logic; they were mutually reinforcing and led to successful firm performance. A Value Chain analysis is the best way to schematically demonstrate this to students. The Value Chain model can be found in many strategy textbooks. Two with clear expositions are Fundamentals of Strategic Management by R. Parthasarthy, Cengage, (Chapter 4); and Strategic Management, by Charles Hill & Gareth Jones, Cengage, (Chapter 3).

It helps to start the class with some preliminary remarks about business strategies, competitive advantage, superior performance, their sustainability, and comparisons of manufacturing and service industries. This sets up issues and themes that students should focus on during discussion.

Follow up with Discussion Question 2. Let it be free flow. It gives the instructor a good idea of the student's level of information and understanding. Allocate about 5 minutes for this phase, and end it by saying that you would like to formally organize the discussion. Introduce the following performance logic:

* Profitability (or competitive advantage) = Margin (i.e., Price--Cost)

* Price can be increased if value is added to the product. Thus,

* Margin = Function of [Creating/enhancing product's value to customer--Cost of creating/enhancing value]

* Thus, each activity should help at creating value or at lowering the cost of creating value.

* Service industry cases are not as commonly used as manufacturing. It is, therefore, useful to spend a few minutes to see that students understand clearly what makes up an insurance company's revenue and expense statement.

* Revenues are comprised of two sources:

* Net premiums earned (in contrast to premiums written) +

* Investment income (derived from investing loss reserves, surplus, and unearned premiums)

* Expenses derive from four major categories:

* Underwriting expenses (e.g., commissions to agents) + Reinsurance expenses + Claims (or loss risk) payments + Operating expenses

* Introduce the Value Chain concept, and draw the value chain outline on the board. Moderate class discussion to get students to help fill the table. In about 25 minutes, the main board should look similar to Figure 1 (next page).

Board 2 (To Right of Main Board): Challenges of Sustaining Competitive Advantage, and of Growing the Business (15-20 Minutes)

Taking stock (5 minutes). Start this discussion segment by saying "Let us take stock of Western as of 2009 by listing its strengths." If "Resource-Based View" and the concept of distinctive competencies have been covered prior to this case discussion, then the best approach is to get students to help summarize Western's "resources and capabilities."

Exploration of options (about 15 minutes). The discussion of the independent agent model versus the direct sales channel model should indicate that neither option guarantees future success. Therefore, enumerating the advantages and disadvantages of each option should foster debate and perhaps a middle-ground strategy. Urge students to be creative and come up with scenarios where both channels can be used simultaneously without creating channel conflict.

It is important to bring out the point that Western's success was possible only because of near-perfect alignment of strategy, structure and the various activities of each and every functional department. Any one element cannot be changed without drastically affecting the other elements. Thus, while a well formulated and executed focused-differentiation strategy resulted in superior performance, it has also resulted in lowering the firm's strategic flexibility.

Board 3 (To Left of Main Board): Strategic Leadership Behaviors (About 15 Minutes)

Fundamentally, leadership is the ability to inspire and influence others to work independently and collaboratively to achieve a common end. The model chosen to expand upon depends on the textbook that the instructor uses. Most models emphasize, in one shape or form, the need for multiple competencies--especially competencies beyond technical skills. Facts given in the case about Stu Henderson's behaviors show us he has depth of industry experience, is open-minded, and is confident enough in himself to solicit and consider ideas from others.

[FIGURE 1 OMITTED]

Two models seem appropriate to bring out those characteristics: emotional intelligence model of Daniel Goleman ("What Makes a Leader," Harvard Business Review, January 2004), and the Servant Leadership concept espoused by Robert Greenleaf (http://www.greenleaf.org/).

Both emphasize that technical (cognitive) competence is necessary but not sufficient for effective leadership. Thus, according to Goleman an effective leader scores highly on:

* Self-awareness: recognizes and understands own mood, emotions, and the effects they have on others.

* Self-regulation: is able to suspend judgment--i.e., think before acting.

* Motivation: has a high passion for work, beyond money and status reasons.

* Empathy: skilled at treating others based on their emotional state.

* Social skill: proficient at managing relationships and building networks; ability to find common ground & build rapport.

(Source: Goleman, HBR 2004)

The case provides facts to easily conclude that Stu Henderson possessed high degrees of motivation and social skills--e.g., his visit to A.M. Best even before moving to Minneapolis. The remaining attributes can be presented by updating students on the Goleman and Greenleaf leadership models.

Role of the Board of Directors (Optional, About 5 minutes)

Role of boards is an important research topic. But there is a dearth of cases that address the important role boards can play in helping the CEO with her/his strategic planning responsibilities. Also, most textbooks emphasize a negative view by emphasizing that directors are needed to keep an eye on the management team. Top management cannot be trusted as it is interested in lining its pockets at the expense of shareholder interests. This is true to some degree. But governance literature also points to the facilitating or stewardship role that directors can play.

By providing some information on the boards that served during the tenures of Klouda and Henderson, Western is one of the few cases that includes the dimension of corporate governance. As the case indicates, the board's composition changed after Henderson's arrival. It is more diverse, composed of members with expertise in different fields, and experiences in politics or higher education or industry. Thus it can reasonably be concluded that Henderson does not look at the board as an entity that will just rubber-stamp his actions. Instead of looking at the board as a controlling body, Henderson is viewing it as a body whose members would help him with Western's important stakeholders. He also seems to be asking the board to emphasize their stewardship role.

STUDENT ASSIGNMENT

The case is rich in details. To make good use of classroom time, we recommend that students/teams/groups be assigned sections of the case, asked to make notes on their assigned section, and bring them to class. This will help increase student involvement, and quickly expose the whole class to all relevant case information. Thus, the majority of class time can be used for integrating the details into a coherent whole. Students will better understand the importance of aligning a firm's activities and the challenges of achieving that alignment.

Students should be warned that the operation of an insurance firm is quite different from that of a manufacturing firm, and that during discussion they will be asked to describe industry-specific technical terms. Thus, it should be told how to go about preparing their notes: as they read the case they should (a) pay attention to section headings and see that they understand what the headings' words/labels mean, (b) make a list of the specific actions described in their assigned section.

DISCUSSION QUESTIONS

1. Which competitive (or business-level) strategy (of Michael Porter) did Stu Henderson use to turn Western National around? Provide appropriate facts from the case to support your answer.

Henderson used a focused-differentiation strategy to regain Western's competitive advantage.

Focus: narrow (a) geographic (eight states in the U.S.), and (b) product (property & casualty segment) of the insurance industry.

Differentiation: (a) superior customer service--speed of response, long-term partner; (b) pricing policy--'no surcharge' during the term of the contract.

2. What actions did Henderson take as CEO to move from A.M. Best's "B+" grade in 1999 to a full "A" grade in 2009? Do not just repeat facts as given in the case. Organize them into meaningful categories.

Henderson actions fall into two categories: immediate actions and long-term actions.

* Immediate actions. These were of three types: external relations; information gathering and morale boosting.

** Strengthening external relations: met with A.M. Best official to apprise them of Western's positive aspects and to give him time to rectify the situation before further downgrades.

** Information gathering: meeting with managers and departments to take stock of Western's strengths and weaknesses.

** Morale boosting: style of talking with employees of Western; lowering their anxiety about him taking drastic actions; soliciting ideas from them and asking for their rational appraisal of Western's situation.

* Actions for long-term improvements

** Revenue enhancing: broadened product lines; expanded commercial segment; product bundling; setting premiums based on actuarial research.

** Cost reducing: enhanced IT dept; investing in state-of-the-art software programs--ERP; IWP, and agent portals.

** Quality enhancing: IT also helped in speed of response, improved security and accuracy, all of which helped achieve superior customer responsiveness.

** Building human capital: recruitment of skilled and motivated personnel; establishing meaningful recognition & reward systems; renovations to enhance the workplace environment and climate.

3. What are the strengths of Western National as of September 2009? (If the case is scheduled for discussion after the instructor has covered the resource-based view's concept of "distinctive competencies," the question can be posed as: What are the distinctive competencies of Western National as of September 2009? Take care to distinguish capabilities from resources.)

Resources--Tangible

* Company head office: bright entryway; artwork; meeting rooms; state-of-the-art training rooms.

* State-of-the-art IT equipment.

* Employees: motivated and skilled.

* Agent network.

* Product variety and bundling.

Resources--Intangible

* Company logo & motto: the relationship company.

* Reputation: customer service/orientation.

* Strong and positive relationship with independent agents.

* Positive relationship with A.M. Best and state regulators.

* Technological know how. Internally developed software: (i) agent portal for personal lines; (ii)

* IWP (Imaging & Workflow Program); (iii) adaptation and full-scale implementation of CSC's Point In ERP software.

Capabilities

* Organizational structure: decentralized; cross-functional integration.

* Decision-making style: thorough, analytical and data-driven; regular meetings e.g., employee relations committee.

* Communication style: both top-down and bottom-up.

* Human Resource Management: procedures and processes for selection, retention and reward.

* Top management leadership abilities as illustrated by Stu Henderson (CEO), Mary Manley (Senior VP, Corp Affairs & Administration) & Mike Braun (VP, Information Services): ability to (i) develop and communicate a clear vision, (ii) motivate employees through empowerment, (iii) make employees comfortable so they would provide ideas.

4. What are the two main strategic alternatives presented in the case for growing Western? Identify the pros and cons of each alternative.

The case's concluding section, clearly lays out the two options that Western's top management team was looking into.

Option 1: Status quo, using existing independent agent model.

Pro

* No need for hiring and training of in-house sales personnel.

* Thus, costs remain variable.

Con

* Divided loyalty, as agents sell products of competing firms.

* Decreased ability to exercise quality control.

* Western is legally responsible for regulatory violations of agents.

* Challenges of integrating Western's IT systems with 'myriad different' hardware and software systems of the independent agencies.

Option 2: Direct-to-consumer selling model.

Pro

* Increased control over the sales function.

* More effectively present (new) products and bundles developed by marketing dept.

* Decreased costs as no need to pay agent commissions.

* Decreased IT systems integration costs.

Con

* Hiring and training expenses.

* Increased advertising expenses.

* Inability to realize differentiation strategy because of decreased ability to convey through the Internet the unique features of Western's products/services.

5. Using the financial information provided in the case, conduct a financial analysis of the "Direct to Customer" sales model.

The case defines success as achieving $15 million in premiums 18 months after launching the "Direct to Customer" program. At that point, the project is expected to generate a profit of about $806,000 (5.4%), based on the following analysis:

* Annual Expenses for $15 million in premiums

* $1,444,000 in hardware and software depreciation (5-year amortization of initial investment, as noted in the case)

* $400,000 for software/hardware maintenance and upgrades

* $845,000 direct labor costs

* $955,000 home office support

* $200,000 claim handling costs

* $9,300,000 claim payments or reserves to pay expected claims

* $800,000 advertising and other promotion expenses

* $250,000 reinsurance costs

Total Annual Expenses: $14,194,552

$15,000,000 Annual Premiums -14,194,552 Annual Expenses/$806,000 Profit

As new sales increase, direct labor costs should not increase until premiums reach $25 million, after which an additional Level 1 employee and 1/4 Level 2 employee will be needed for every $2.5 million premium. With the infrastructure in place, expenses will decrease as a percentage of premiums as sales increase beyond $15,000,000. Western could also be expected to benefit from word of mouth advertising as satisfied customers talk to their family, friends, neighbors, and co-workers.

6. You have been asked by your boss to develop a list of competencies required of an effective leader. Develop a list using Stu Henderson as your guide.

Note: the question asks that Henderson be used as the model.

* Needs to have varied and deep experience.

* Needs to be highly motivated and driven.

* Should be high on analytical skills.

* Should seek information and data before deciding.

* Should withhold judgment until clarity is achieved.

* Lack of arrogance: solicit ideas from subordinates.

EPILOGUE

Stu Henderson and his top management team have not yet made a decision about replacing or complementing their independent agent distribution model. They continue with their existing business model, concentrating on strengthening their resources and capabilities, and growing through geographic product line expansion, and seeking opportunities for growth through mergers and acquisitions.

In January 2008 they completed their merger with Farmers Home Mutual Insurance Company. The company's December 30, 2009 press release said:

   Western ... today announced that it had completed its purchase of
   Titan Property & Casualty Insurance Company of Monee, Ill.....
   (President and CEO Stuart Henderson said) "Between the greater
   geographic diversification and the addition of Titan's book of
   business, our newly expanded group of companies is well positioned
   to increase profit and enhance stability for our mutual
   policyholders."

Western National Insurance Group, headquartered in Edina, Minn., is a super-regional property-and-casualty insurance group writing over $240 million in Direct Premium in ten states. The group now consists of four active companies (Western National Mutual Insurance Company, Western National Assurance Company, Pioneer Specialty Insurance Company, and Titan Property & Casualty Insurance Company) serving personal and commercial customers in Minnesota, Nevada, Oregon, South Dakota, Utah, Washington, and Wisconsin, as well as commercial customers in Iowa, Illinois, and North Dakota. All of the group's products are sold exclusively through professional independent agents.

The February 2008 press release announced that

   Jeffrey Couchman was hired as "Senior Vice President & General
   Manager" of the group's west coast operation ... (Couchman's) role
   will initially be focused on portfolio risk management
   (particularly property concentration of risk) and business
   development through mergers, acquisitions and affiliations.

Western's June 2008 press release announced that

Kevin J. Christy was promoted to Vice President--Chief Actuary, ... in which position he has overall management responsibility for ratemaking and policy form duties.

A September 2009 press release informs that the company

   ... had been named a recipient of the 2009 Alfred P. Sloan Award
   for Business Excellence in Workplace Flexibility. (CEO Henderson
   commented) "Finding ways to properly balance the needs of our
   customers and with those of our employees and their families is an
   ongoing goal of our company." ... The Alfred P. Sloan Awards are
   part of the When Work Works project, an ongoing initiative of the
   Families and Work Institute, the Institute for a Competitive
   Workforce (an affiliate of the U.S. Chamber of Commerce), and the
   Twiga Foundation. Through When Work Works, these partner
   organizations provide research, resources, and recognition to
   employers nationwide....

   Ellen Galinksy, president of the Families and Work Institute,
   explained: "From new forms of flexible work arrangements that
   minimize lay-offs, to creative costcutting that retains core
   medical benefits, to providing financial information and support to
   employees, these employers are braving the economic storm through
   innovative policies that prevent undue shock to their workplaces
   and their employees."

Michael J. Pesch, St. Cloud State University

David L. Eide, Western National Insurance

Subba Moorthy, St. Cloud State University