Identification of DMCs

Recall that the identification process involved assessing case episodes and determining where (1) managers created, extended, and modified resources, (2) where managerial search, selection and configuration, and coordination of resources and capabilities (AO) was involved, (3) where this included managers “sensing” and “seizing” opportunities and managing threats (TD), and also whether the capacity exhibited (4) technical (TF) and (5) evolutionary fitness (EF).

The multi-case study yielded 18 episodes, or incidents. There were 16 specific case episodes where DMCs were manifest. The episodes are represented in Table 4.6. In the table, the first column shows the SME from the case study. (The four-digit descriptor was a part of the original open and axial coding process as discussed in section 4.2, and in Appendix C.) The second column refers to each specific case episode (labeled 1A through 18R). The remaining columns show where each of the first-order constructs was present (or, as in case episodes 6F and 7G, where DMC was not present).

The following illustration is from the multi-case study and shows where DMC was first identified. In case episode 2B, referred to as the “Aggregator Model,” the manager of the insurer reconfigured resources, which involved creating a new resource and extending the resource base of the manager’s agency (and other agencies too). The process involved AO, TD, and the capability achieved EF. The discussion of this

episode in the following sections provides an illustration of how DMCs were identified, classified, and assessed in terms of competitive advantage.

Table 4.6 DMC—Identification

Case Study Case Study Episodes First-Order Constructs

DMC AO TD TF EF

4.3.1 Illustration of Identification of DMCs

The Principal (manager) of the insurance agency headed a trade association called the agent’s resource committee, described as the major “think-tank” in the insurance business. The association represents 1,600 businesses at the local level, and is also the largest single component of the national insurance association. It is comprised of approximately 25 individuals, none of whom can volunteer for the role because they are handpicked based on their ability to identify visionary needs. The manager stressed that the ideas of the committee members are valued and there is an attempt made to resist what is wrong with an idea, and assume if someone in the group advanced one that it must have basic merit. Instead of “rolling boulders in the pathway,” they seek creative ways to develop them, analogous to an appreciative inquiry approach (Kinni, 2003).

One of those ideas regarding the “hard market” that started in the 1990s involved

“the realization that smaller member [insurance] agencies, made up of five or six individuals, doing $200,000 to $300,000 in revenue, were losing market share due to the evolution of the markets” and that there were waves of consolidations with “the little guys getting squished out.” The manager thought about ways in which this could be avoided. The solution came from a sub-committee headed by “two of us” in which the manager had the idea that involved creating “an aggregator, that allows these smaller guys to band together, [and] consolidate their volume.” The aggregator would “attract large carriers like Traveler’s or CNA or Chubb who may demand $1.5 million per month,” in volume, because “maybe these smaller insurers are in smaller communities that don’t allow for that volume, and therefore couldn’t access these carriers.” The aggregator would therefore enable them to capture revenues heretofore unavailable.

The strategic planning used to develop the aggregator involved a critical assessment of what went wrong with other aggregators. The manager researched them carefully and noted they all began to fail at some point. Primarily this was due to how they were designed with respect to the incentive structure regarding remuneration of members. For example, the commissions were structured in a way that led smaller carriers to place the riskier insurance inside the aggregator, and place less risky coverage outside the aggregator in order to attain higher revenues. The result was a viscous cycle, which led to higher loss ratios, the loss of revenue streams, and the subsequent waning of interest from larger carriers to participate. The members therefore experienced erosion of resources and declining profits. The manager described this in terms of the “adverse selection” effect.

The manager’s research provided a blueprint for a new and innovative model. A committee of seven unpaid volunteers was assembled and charged with strategic planning in the areas of marketing, finance, HR, accounting, and governance. Unique approaches to commission structures that included higher commissions to member firms when a predetermined sales target was hit, and funding the aggregator through a limited public offering that raised a million dollars, were put in place to avoid “adverse selection.”

The aggregator was subsequently up and running prior to the estimated seven-month time frame established, it has achieved and surpassed original pro-forma financial estimates, and has continued to grow and attract new members. For example, the

aggregator generated $1 million in net income in the fiscal year ending in 2010, and was generating more than $35 million in business on an annual basis. As of 2011, there were more than 600 agencies participating, across six states, with additional member agencies being added at a rate of 8 to 10 per month. The Principal of the insurance agency has since been asked to act as a consultant to the insurance industry in developing the aggregator model across other regions.

In episode 2B, DMCs were identified using the first-order constructs. In the specific example, the manager reconfigured the resource base—purposefully extending and modifying it—creating a totally new resource. The process involved AO, and the requisite managerial search, selection and configuration, and coordination activities, which were critical in bringing the new resource online (e.g., selecting and coordinating the proper resources in terms of marketing and HR).

The development and utilization of the aggregator involved “sensing” and “seizing”

opportunities and managing threats. The manager saw the waves of consolidations during the “hard market” and sensed and then seized the opportunity to develop a new resource, and subsequently managed the economic threats in helping smaller carriers band together, in a purposeful way that was designed to overcome the critical failures of the other aggregator models.

The aggregator capability that was developed is technically fit. It “makes a living”

as a functional entity in the markets it serves (e.g., with 600 member agencies across six states), performing effectively from a cost-benefit perspective (e.g., it has achieved accounting and economic profits), and it is therefore more valuable than an operational or “ordinary” capacity, and it is also an evolutionary and dynamic one—because the old model was completely transformed into something new, in order to survive and grow in difficult markets.