Over the last three decades, several management researchers have contrasted stable and turbulent environments Each has defined the degree of turbulence in relation to a number of environmental dimensions.
Emery and Trist (1965) suggest that a turbulent environment is characterised by a high degree of change and a high level of interconnectedness between the environment and the firm Lawrence and Lorsch (1967) define the environment in terms of the diversity and interconnectedness o f factors influencing the firm and the degree to which these factors can be perceived and predicted.
Khandwalla (1977) provides a more extensive list of dimensions, arguing that an environment is turbulent if it is dynamic, unpredictable, fluctuating and expanding Ansofif and McDonnell (1990) highlight the changeability and predictability of the environment Changeability is defined in terms of the complexity o f the environment and the novelty of the challenges faced by the firm, while predictability by the rapidity o f change and the “visibility o f the future” (ibid)
Volberda (1998), echoing these earlier writers, develops a ‘scorecard’ of turbulence based on dynamism, complexity and unpredictability. Dynamism is defined in terms o f the intensity and frequency o f change. The number and diversity of factors driving
change and the interrelatedness of such factors determine complexity. Unpredictability is assessed in terms of the availability of data concerning future developments, the degree to which current trends are identifiable and the extent to which the future can be extrapolated from past trends. Volberda suggests that all three dimensions should be considered simultaneously.
The application of Volberda’s (1998) approach to the analysis of the environment faced by the UK insurance firms in the 1990s is illuminating
As we have seen, prior to 1980, the competitive environment faced by the UK insurers was relatively stable, but during the 1980s and 1990s it became increasingly dynamic as the intensity and frequency o f change grew
With the advent of new competitors and products, new regulation and the development of new distribution methods the number and diversity of factors the insurers have to consider has grown significantly These factors have become increasingly interrelated as the distinction between product types has continued to blur, particularly in the case of long term insurance Hence, the level of complexity of the environment has increased
As we saw in our analysis o f the macro influences on the insurance industry, demand for insurance was partly determined by factors for which forecasts can be made However, the demand for long term insurance has also been shaped by a number of other factors whose effects, particularly in combination, are far less predictable. On the general insurance side, while demand has remained predictable, the level of claims
Chapter 4 - The UK Insurance Industry
was highly unpredictable, influenced as it is by single events, for instance the hurricane of 1987, the severe storms and flooding of 1990 and terrorist activity (e g.
1992, 1993 and 1996).
Prior to the 1980s the insurers were highly connected and well known to each other. Industry and internal firm information was widely shared among competitors'7 and competitive moves were well signalled and predictable. The unpredictability of the competitive environment had increased greatly by the 1990s. However, the growing rivalry between traditional firms reduced the amount of information that was shared, while new entrants often had new and different business practices and did not follow established industry norms.
The competitive environment faced by the UK insurance industry has therefore moved over the 1980s and 1990s from being one of stability, to being one o f considerable turbulence, scoring highly on all three of Volberda’s (1998) dimensions. Volberda (1998), following D’Aveni (1994), describes such intense turbulence as hypercompetition
D’Aveni (1994) defines a hypercompetitive environment as being in a market in a constant state of disequilibrium or turmoil, where competition is intense and ‘competitive advantages are not sustainable for long’. He argues that in such an environment the traditional sources of competitive advantage - cost and quality, timing and know-how, barriers to entry and deep pockets - are quickly eroded or bypassed. This description closely fits the UK insurance industry in the 1990s. As we
1 Interview w ith a group directo r o f Prudential
have seen, previous advantages based on underwriting and actuarial know-how and barriers to entry resulting from regulation and access to distribution have disappeared The advantage of deep pockets has also been curtailed as larger, deeper pocketed banks and foreign insurers have entered the market. The cost and quality of products or the speed of introduction of new variants can only provide short-term advantage before imitation occurs38.
Despite this manifestly hostile environment, some of the major UK insurers such as Prudential, General Accident and Commercial Union have increased their market share of new premium income in the long term sector over the 1990s39 (see Figure 4 10). However, for others, Legal & General, Norwich Union, Royal Insurance and GRE market share has declined (see Figure 4.10). In the general insurance sector, the market share of General Accident and Commercial Union has also increased'411 The differential performance of the firms in our sample indicates that some coped more effectively with the increasingly hypercompetitive environment than others
According to D’Aveni (1994) successful firms in hypercompetitive environments will be those that can string together temporary competitive advantages Leading firms will constantly attempt to disrupt their market by rapidly adopting new strategies and forcing their competitors to respond These firms will move on quickly as each advantage becomes unsustainable This view closely match’s Schumpeter’s (1934)
‘*A group director o f G RE, pointed out that the advantage stem m ing from new product variations lasts until the next visit o f a salesm an from a rival insurer
39 In the early 1990s troth analysts and the stock market has tended to value life insurance m ore highly than general insurance Consequently, insurers have looked to increase their life insurance activity (Cockerell and Green 1994)
" Prudential consciously reduced its general insurance activity a lte r 1990 (Interview w ith an ex. CEO, o f Prudential).
Chapter 4 - The UK Insurance Industry
concept of ‘creative destruction’ and the thinking o f the Austrian school of economics (Hayek 1949 and Jacobson 1992).
Figure 4.10 - Market Share of New Long Term Premium Income41
The Austrian school contends that firms earn profits through entrepreneurial discovery and innovative strategies. However, competitors will move to imitate new strategies and hence above average profits will be only temporary (Jacobson 1992). This dynamic view o f competition suggests that firms who attempt purely to maintain their present position will be doomed, while high performing firms will be those who can recognise and effectively exploit temporary advantages as they occur. As Jacobson (1992) suggests, lead time is more important than erecting competitive barriers. Kanter et al (1992) and Volberda (1998) make a similar point, arguing that firms must 41
41 N ew prem ium incom e has been calculated by tak in g 100% o f new yearly prem ium s and 10% o f new sin g le prem ium s. This m easure is know as A nnual Premium Equivalent and is the industry standard m easure.
be flexible in order to respond in a timely manner to the wide variety o f changes in the competitive environment.
The ability o f Prudential, General Accident and Commercial Union to respond more effectively to the hypercompetitive environment they faced suggests that they were able to exploit temporary advantages. We would expect these firms to be quicker at introducing new strategies, which would then be imitated by others. So, is there evidence to support this proposition? It is this issue that we will explore in our next chapter where we describe the results of the mapping and analysis phase of our study
Chapter 5 - Patterns o f Strategy in the UK Insurance Industry