GMAC Insurance is an American auto insurance company, wholly owned by General Motors as a subsidiary. In 2004, it had successfully implemented its strategies and achieved satisfied performance in the insurance market which is full of strong competitors. As Martinez-jerez and Mangum (2007, pp.1) mentioned in the case study of GMAC Insurance, the successful strategy in 2004 had significantly improved the volume of business with employees and customers belongs to General Motors. Additionally, GMAC Insurance had also obtained precious customer experience and higher underwriting profits. In fact, the underwriting profits had reached a record height of 81 million dollars much higher than 52 million dollars which was expected. However, things did not go so well as expected, it only achieved a growth rate of 3% rather than the expected target of 8% in the same year (Martinez-jerez and Mangum, 2007, pp.1). It seems that GMAC Insurance has experienced some problems in its operation, or they may have encountered strong and smart rivals. Therefore, how to change their strategy to solve their problems and to fit the new competitive environment seems to be a troublesome issue. In this case, this essay will try to analysis the competitive environment of auto insurance market in American, evaluate the strategy of GMAC Insurance and put forward some possible recommendations for the future development of this company.
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GMAC Insurance was established in 2000 by General Motors as a new member of GM family. It was firstly founded to be a subsidiary of the General Motors Acceptance Corporation (GMAC), which was wholly owned by the General Motors Corporation (GM). At the beginning, GMAC had its own insurance subsidiary called the Motors Insurance Corporation (MIC) built in 1939. At the end of 20th century, in order to gain more profit in the auto insurance market of America, GMAC purchased two existing insurance companies in 1990 and 1997. The first one is National General Insurance, which primarily served affinity groups through direct channels. And then, Integon Insurance, which served the nonstandard market through the agency channel. In 2000, the Motors Insurance Corporation (MIC), National General Insurance and Integon Insurance were merged into GMAC Insurance-Personal Lines.
After the integration, it seemed that the organization had experienced huge development. Now, as a member of GM family, the organization focuses on auto insurance services. Besides, it also provides a variety of other products and services, including RV (Recreational vehicle) insurance, Home insurance and Motorcycle insurance. According to Gary Kusumi, CEO of GMAC Insurance-Personal Lines, By the year of 2004, it had become one of the nation's top five most profitable businesses writing through independent agents. Before analyzing the strategy of GMAC Insurance, it is necessary to look at the competitive environment of auto insurance market first.
As Martinez-jerez and Mangum (2007, pp.2) stated, "Insurance was, by definition, a business of risk management, and insurance companies generally sold a promise of reimbursement in the event of potential financial loss". In addition, auto insurance specifically related to paying the losses caused by vehicle accidents back to their customers. Therefore, according to the claims, auto insurance companies are generally responsible for dealing with their clients' troubles due to vehicle accidents, including unexpected liabilities, collision damages, and injuries. In 2004, A.M. Best Co. estimated the U.S. private-passenger automobile insurance market to be over $150 billion.
Furthermore, most revenue of auto insurance companies comes from the premiums obtained from their clients. In this case, the percentage of premium revenue is considered to be a common measurement which can reflects the status of different companies in this industry. Additionally, there is another measurement called "combined ratio," which means the proportion of all insurance-related expenses in premium revenues. Therefore, if the ratios were below 100%, it may mean that the company was making an underwriting profit. However, insurance companies do not only rely on its underwriting profit, Since money was collected in advance of losses, because they may invest the premiums which could be collected before losses into various industries and earn investment profits until compensations should be paid to clients so as to meet the requirements of insurance claims. In fact, even if any companies target their combined ratios at or above 100%, it does not simply mean that they are losing money. Instead, they can still get profit by earning more investment profit than their losses. (Martinez-jerez and Mangum, 2007, pp.2)
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Auto insurance companies sell their products and services in different ways. Generally, there are two main segments in the market which are commercial lines and personal lines. Personal lines, which were being focused by GMAC Insurance, face to individuals. In this segment, insurance products and services are sold through both "direct" and "agency" channels.
The competition in auto insurance market is always fierce. There are many insurance providers in the market, as a new entrant, GMAC Insurance could only hold a small market share at the beginning. As can be seen in Exhibit 1, those generalists, State Farm, Allstate and Progressive, who are offering a wider range of insurance services and products, seem to be the most powerful competitors in the market, hold 20.1%, 11.2% and 6.9% of the market share respectively. In contrast, as specialists, GEICO and GMACI, only provide their customers with auto insurance in the year of 2003. In this case, it is clear that the market position of GMAC Insurance is more likely to be at periphery rather than in the center. And, as a new entrant in auto insurance market, GMAC Insurance might be considered as a follower and participant. However, how could GMACI achieve such attractive development in 2004? In order to explain this question, in the following part, it will analysis GMAC Insurance's positional and capabilities-based advantages from external and internal context.
It is clear to GMACI's management that its connection to General Motor made it unique in the market and that means GMACI may have access to plenty of precious resources which is much more difficult for other competitors to achieve. As the CEO Kusumi stated:
"Our connection with GM and the potential for selling through dealerships has always been regarded as our Holy Grail. This has historically been a difficult distribution challenge for the industry, but with our close connection to a very experienced organization that markets to dealers, we had an edge. In addition, can you imagine all the current customers, employees, vendor employees, and others with a connection or even an affinity for GM or GM products? We could hardly ask for a better competitive advantage". (Martinez-jerez and Mangum, 2007, pp.7).
Actually, this kind of advantage can be seen as a certain positional advantage relate to status and customer relationship. Since the name of "GM" means a lot to the market and customers, the high reputation of the brand and the existing affinity group may benefit GMAC Insurance in many different ways. For example, people may not be aware of GMAC Insurance until they recognize it as a member of GM family. Thus, people who choose GMACI's products and services may have been attracted by the brand name of "GM", because they believe the quality of products related to General Motor. That is the magic of Brand value.
In fact, GMAC Insurance has tried to use this competitive advantage to promote its performance. For instance, a new product which is called GM Motor Club is now being introduced to customers on its website (GMAC Insurance, 2010). This product offers clients an exceptional set of roadside assistance benefits for both him/herself and his/her family. The benefits including: Emergency Expense Reimbursement, Towing without mileage or dollar limits and Entertainment discounts. Any clients of General Motor products are eligible to enjoy this service. Thus, GMAC Insurance may have used the precious resources of GM's clients group, which could be quite beneficial to both its business and the whole GM family. In this case, GMAC Insurance may enhance its competence in the market by using this positional advantage.
Internal context, can be defined as "its assets and the way those assets are organized" (G. Saloner, A. Shepard, & J. Podolny, 2005, pp.65). When talking about competitive advantages from internal context, it often refers to organization design and capability. Firstly, As G. Saloner, A. Shepard, & J. Podolny (2005, pp.75) stated, companies can use organization design to address the coordination and incentive problems, and an ARC (Architecture, routines and culture) model could be used in this phase. In fact, if analyzing the organization design of GMAC Insurance, the issues about architecture and culture of this company seems to be more attractive. It is shown in exhibit 2 that the organization has integrated "functional" and "divisional" structure when design its organization chart. That is, the CEO stands at the first level of the hierarchy, and then comes different sectors based on different functions in the second level. Before this level, it is a typical functional structure. However, the Pricing, Marketing and Legal sectors have their own divisions respectively. This kind of "sub-divisional structure" is based on geographical factors (by different states).
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It must be noted that the particular government policy may contributes to the adjustment on the company's structure. In fact, the regulations of auto insurance in the United States are different from state to state. Therefore, the policy of different state may be incompatible, which calls for different pricing and marketing strategy. For example, in the state of Florida, once an insurance company has developed an algorithm for determining its rates for customers, the company has to keep the rates for six months until the Florida regulators allowed it to change. In this case, the unique structure of GMAC Insurance may fit the environment better than pure functional or divisional structure, which can be seen as a competitive advantage of this company.
In addition, as a member of the GM group, GMAC Insurance may recruit experienced and talented people. Furthermore, according to Martinez-jerez and Mangum (2007, pp.5), the culture of General Motors was creative and dynamic. The employee of GMAC Insurance can enjoy a high degree of autonomy, which means they may solve problems all by themselves. As soon as they came to the company, they were impressed by the culture of GM, they may achieve a general agreement that "I am the solution." This kind of culture can be considered as GMACI's competitive advantage, since other competitors will hardly obtain it. Thus, if being used well, it may benefit the company in its future development.
In order to generate more profit, companies are always keen on achieving and sustaining its competitive advantages by using its capability. Strategic capability is defined as "the ability to perform at the level required to survive and prosper. It is underpinned by the resources and competences of the organization". (G. Johnson, K. Scholes & R. Whittington, 2008, pp.96) In fact, companies may achieve its competitive advantages if they have their unique resources and core competences, for example, as mentioned above, GMAC Insurance has got the unique brand value and culture of GM Group. These valuable resources have contributed greatly for the organization, provided GMAC Insurance wonderful competitive advantages.
Furthermore, GMAC Insurance was established by merging three existing companies which had got their own capabilities respectively. For instance, National General Insurance was primarily served affinity groups through direct channels. And, Integon Insurance was experienced in nonstandard market and did well in agency channel. In this case, GMAC Insurance can integrate these capabilities and generate more competitive advantages. As the CEO Kusumi pointed, GMACI has underpinned the pricing strategy of Winston-Salem through the whole organization so as to benefit the company from Integon's superior pricing abilities and algorithms. This kind of capability had been developed by Integon separately but now it has provided competitive advantage to the whole organization. (Martinez-jerez and Mangum, 2007, pp.5)
Market niche and propagation strategy
According to Hannan and Freeman's (1977) theories about organizational niche, the competition in a certain market may caused by limited resources, which means that there will be competition when the competitors needs more resources than the carrying capacity of the environment. Thus, in the auto insurance market of American, the competition between different companies is fierce because all the competitors want to grab as much resources and generate as much profit as they can. As a specialist, GMAC Insurance has got a narrow niche than any other generalist. Further, it has a higher organizational fitness than them. In fact, GMAC Insurance has always concentrated on its main product: auto insurance. And, as mentioned above, the connection between GMACI and GM Group has brought lots of resources to GMAC Insurance. Thus, the company may have better opportunities to establish its affinity groups by accessing to the information of GM's clients. Besides, it has created many kinds of GM-related products and discounts. For instance, it introduces special discounts on its website for people who are using other GM/GMAC products and services (GMAC Insurance, 2010). In this case, it is clear that GMAC Insurance has found a narrow niche in the insurance market which other competitors can hardly access to. However, specialists may perform well in stable environment, if the competitive environment changed too frequent and the "good" patches cannot last for long, it may lose their market to generalists.
As a new entrant in this fierce market, it is quite difficult for GMAC Insurance to compete with those first movers. Therefore, GMAC Insurance has always been a role of follower. It has pay much attention on the strategies which were used by the larger competitors, meanwhile, it continue to focus on its products of auto insurance, so as to exploit unique products to enhance and maintain its core competences. Therefore, the vice president and chief actuary, Dan Pickens said that GMACI was a medium-sized company, and it is sparing no effort to become a large company. Additionally, it will not only concentrate on nonstandard or small specialty segments, more niches should be found and held by GMACI (Martinez-jerez and Mangum, 2007, pp.6)
Potential problems and recommendations
In the process of GMACI's development, although it has obtained great success, it also has encountered some problems. Martinez-jerez and Mangum (2007, pp.5) indicated that when merging different companies into GMAC Insurance, the IT systems of those companies seemed to be incompatible. Since both systems were based on the companies' primary capabilities. What is more, compared with competitors' systems, those systems were out of date for it failed to be as flexible as the needs for new business model. For instance, if a client want to get a quote from the website, it may be quite inconvenient for the system was not a real-time system.
Additionally, although the relationship between GMACI and GM Group has always been considered as a huge benefit for GMACI, there were some certain difficulties in carrying it out. As a GMACI manager said: "GM sends us a hot list of prospects, customers who have recently bought a car, but perhaps the information is incomplete, or the format is incompatible with our systems, or it lacks the necessary timeliness." (Martinez-jerez and Mangum, 2007, pp.8) Finally, as a specialist, GMACI may lack of ability to get through the "bad" patches of unstable competitive environment.
In order to handle these problems, there may be some possible solutions as follows:
Establish a new IT system for the whole company. The IT problems seems to be essential both in the daily operation of the organization and the customer services. If possible, GMAC Insurance should develop a IT system which can integrate the strengths of the former systems developed by different companies. Besides, it is necessary for GMACI to upgrade their system so as to make full use of the benefits brought by GM Group.
Continue to capture the brand value created by General Motors. Try to leverage the customer knowledge provided by GM. And, with the information of GM's clients, it will be easier for GMACI to recognize car-buyer demographics better than other competitors. Teach the employees by using GM's culture norms like "I am the solution", thus, it may improve customer services and make it a new capability of the company, which may be a potential competitive advantage.
Innovation. Create new products and services while maintain its concentration and excellence in auto insurance products. Explore new niches in the insurance market. Enhance the ability to deal with those "bad" patches in the fluctuation of competitive environment.
From the analysis above, it is clear that GMAC Insurance has achieved great success in American auto insurance market in the past few years. As a new entrant and follower in this industry, it still has a long way to go. Its strategic vision, to provide coverage to the whole auto insurance markets and become a large company from a medium-sized company seems a bit ambitious in a short period of time. In fact, it will be a tough task for GMAC Insurance to achieve rapid development like what it had experienced in 2004 in such a competitive market. In this case, it is better for GMACI to pay attention to maintaining its core competence, like the connection with GM. In addition, it may try to develop the IT system properly, and encourage its employees to innovate new products and services.