Prudential Plc is a United Kingdom (UK) based international retail financial services group focusing on the pre and post retirement market providing products such as insurance, unit trusts and bonds, annuities, pension plans, mutual funds, investment advisory services (Prudential Plc website,2010). It was founded on 30 May 1848 in London (Prudential Plc History Timeline, 2008). The company has significant operations in the United States of America (USA), UK and Asia with approximately 21 million customers, policy holders and unit holders, employing over 27 thousand people managing funds to the extent of £249 billion across the globe (Prudential Plc website, 2010). Prudential is a public limited company listed on the London Stock Exchange as well as the FTSE 100 index. Four main business units comprise the Prudential group: Prudential Corporation Asia, Jackson National Life Insurance Company in the USA, Prudential UK and Europe and M&G Investments (Prudential Plc website,2010). These units are supported by central strategies such as those for cash and capital management, leadership development, succession planning and reputation management. Until 2006 the group operated through three segments: banking; long term business; and broker-dealer and fund management. In 2007 it divested its banking segment. In 2008, the company generated approximately $35 million, an increase of 3.4 percent as compared to the previous year but reported an overall net loss of approximately $718 million (Datamonitor, 2009).However, the group has continued to reinforce the fact they have retained a robust and resilient capital position in the industry despite the economically challenging environment (Prudential Plc website, 2010).
The PESTEL analysis below looks at the macro-environment in which Prudential is operating and tries to identify forces having the greatest impact on the company and its performance.
With effect from 2012, European Commision's Solvency II project is expected to change capital requirements for all sectors of the insurance industry in the European Union. It will require insurance companies to set aside more or less capital depending on the risks they face (Financial Services Authority, 2010).
The Banking crisis and economic downturn in 2008/9 have put the financial activities and balance sheets of insurance companies under close scrutiny. It has also resulted in concerns amongst investors and led to loss of confidence in insurers. This is being manifested in the form of sudden falls in share prices of insurance companies, including Prudential (The Guardian, 2008).
A deceleration for 2008-2013 has been forecasted in the performance of the global life insurance market. This will have a direct effect on the overall performance of the company (Datamonitor, November 2009).
The global retail savings and investments market has also seen a decline in 2008 and hardly any improvement in 2009 as a result of the economic difficulties the industry is facing (Datamonitor, December 2009).
As a result of the current market volatility, interest rates have fallen to their lowest level for over 3 hundred years. Nevertheless, Prudential has set its annual bonus rates at 3 percent for most with-profit bonds and personal pension policies and 2 percent for annuity customers, thereby suggesting its strong capital position to help it tide through the difficult economic times ahead (Prudential Plc News Release, 2009).
Ageing population in the two most developing nations, USA and the UK is leading to a higher demand for pension and retirement products (Datamonitor, 2008). Since Prudential's products and marketing range are mainly targeted at those aged over 45, this change in demographics is very crucial to the company's overall growth (Datamonitor, 2005). It is therefore essential for Prudential to support the ageing population by providing products that meet the customers changing needs.
There is a distinct loss of confidence amongst consumers to opt for financial services as a result of mis-selling of some products in the UK, complexity in the financial services environment and poor performance of equity markets (Prudential Plc website, 2010).
Research reveals that there is an estimated savings gap of £27 billion per year in the UK. Furthermore, the government has estimated that approximately 10 million people in the UK are not saving enough and 3 million people are not saving at all despite having the ability to do so (Wyman, O. & Co., 2001).
The importance of digital/internet marketing in today's competitive environment can hardly be over-emphasised. The Internet accounts for 8 percent of global advertising spend and is growing rapidly (The Economist, 2009). Recent studies show that the financial services industry is lagging behind in digital marketing as compared to other industries (Marketing Charts, 2008). Given the challenges now faced within financial services, it is crucial for companies to rethink and adjust the way they acquire new customers and retain existing ones. Increased use of digital marketing can help financial institutions to develop better relationships with customers (Marketing Charts, 2008).
International Agreements such as the Rio Earth Summit in 1992, Kyoto Protocol in 1997, Johannesburg Summit in 2002, have led to nations taking action towards ensuring sustainable development across the globe. Keeping in line with these policies, Prudential are committed towards reducing their environmental impact including reduction in the carbon footprint of the group, its suppliers business operations and creating bottom line savings through the implementation of cost effective energy efficiency measures (Prudential Plc Corporate Responsibility Report, 2008).
Prudential is one of 38 companies from the financial services sector to endorse the ClimateWise principles, launched in 2007. The principles have been developed by leading global insurers, reinsurers, brokers and asset managers to promote action on climate change. They will enable companies and organisations throughout the world to build climate change into their business operations (Prudential Plc Corporate Responsibility Report, 2008).
In the UK, from April 2010, earnings over £150 thousand will be subject to a new tax rate of 50 percent and the corresponding tax rate for dividends will be 42.5 percent (HM Treasury, 2009).This will have a negative impact on company's UK market as it will encourage higher earners who could have invested in the company's financial products and services to leave the country (Prudential International, 2009).
In the UK, also from April 2010, anyone with an income over £100 thousand (after certain adjustments for pension contributions, Gift Aid etc) will lose personal allowance at the rate of £1 allowance lost for every £2 excess income (HM Treasury , 2009). This will have a negative impact on the company's UK market as buyers might be encouraged to invest in off-shore bonds and policies instead (Prudential International, 2009).
Porter's Five Forces Analysis of the Financial Services Industry
Threat of Substitute Products and Services
There are few close substitutes to financial services and products and the threat is determined as weak. Investment in gold, jewellery, antiques and other collectibles might be considered as substitutes for investment in mutual funds, equities and other forms of savings. Investment in property is also seen as alternate to investment in pension schemes to provide income and capital for old-age, consequently leading to a rapid growth in the 'buy-to-let' market (Ennew et al, 2007).
Level of Competition
There is considerable competition within the financial services industry despite having few close substitutes. Most companies in this industry operate on a large scale with wide geographical coverage and strong buying power, thereby fostering strong rivalry between the 'players' (Datamonitor, 2007). Competition has been fuelled by the liberalisation of financial markets and reduced barriers between different institutional types. Bancassurance and diversification of specialised insurance companies into banking are typical examples of this. Companies in the industry try to maintain their competitive edge by diversifying and offering a wide range of financial services and products to its target audience (Ennew and Waite, 2007). For example, Prudential ventured into the online banking industry through its online bank 'Egg' through which it offered a range of traditional banking products at very competitive terms and conditions. However, this venture was sold to Citibank in 2007 (Prudential Plc website, 2010).
Threat of New Entrants
The threat of new entrants is low. This can be attributed to high entry barriers caused by strong brand identity for Prudential, its product differentiation, customer loyalty and moreover, high switching costs. Moreover to be able to enter the market and be successful, new entrants would need highly specialised knowledge and expertise along with huge financial resources to compete with an established brands in the industry (Dess, Lumpkin, Eisner , 2008 ). There are some government regulations in place by bodies such as the Financial Services Authority (FSA) in the UK which limit the entry of other financial firms into the market (Datamonitor, November 2009). Moreover, the likelihood of new entrants in the industry has been reduced with the current global economic situation causing reduction in consumers' confidence in the industry, increased merger and acquisitions amongst key players and government 'bail-outs' for large institutions (Datamonitor, December 2009).
Bargaining Power of Buyers
Is moderate for individual consumers as there are many in number and the impact of losing one customer is low. However, buying power is higher for corporate clients as they usually pay huge premiums and loosing high-margin clients will have a negative impact on the company's revenues. There are plenty of alternatives in the industry but the switching cost is relatively high for consumers as changing 'players' will involve surrendering or ending a policy before it matures which will have cost and tax implications for them. Existence of price comparison websites and financial services consultants boost buyer power as they empower buyers to 'shop-around' for the best deal available due to the importance of the product offered. With the economic downturn, buyers' disposable incomes have also been reduced. This has an indirect impact on their buyer behaviour as they may choose not to invest in financial services as they might not come across as necessities (Datamonitor, November 2009).
Bargaining Power of Suppliers
Overall bargaining power of suppliers is strong. This is because companies operating in this market require a reliable and secure ICT infrastructure to help conduct vital back-office and client-facing functions such as online equity trading and online banking. Studies conducted by Datamonitor (2009) indicate that complex hardware and software requirements by major players in the industry lead to few suppliers which can offer suitable solutions to them, and these tend to be large organisations such as IBM or Microsoft. This consequently strengthens the bargaining position of suppliers such as IT consultants, hardware and software suppliers and internet service providers. Moreover, large firms tend to be committed to one supplier, thereby imposing high switching costs on themselves. Additionally, large firms with extensive branches face high staffing costs because of the need for skilled employees (Datamonitor, December 2009).
Strong Market Position in Asia, Europe and the U.S. - the three most attractive savings markets in the world provide a competitive edge to the company. This helps the company to retain existing and attract new customers (Datamonitor, November 2009).
The group has always endeavoured to continuously improve its brand value by contextualising and localising its marketing strategies. With the big demographic shift, the group's focus on brand value is expected to help capturing a huge share in the global retirement and asset management markets (Prudential Plc website, 2010)
The company has a strong financial position thereby standing it in good stead in the current economic downturn and tight capital markets across the globe (Datamonitor, November 2009 ).
High operating costs pose a risk of reducing profit margins for the company which would directly affect its competitiveness as compared to its rivals (Ebsco Host , 2009).
Overall group performance is being affected by its exposure to the sub-prime mortgage sector through its subsidiary Jackson National Life in USA due to predicted high losses in the coming financial year (Ebsco Host, 2009).
Expansion in the Asian market could help to increase the group's revenues and overall profits. This is because the group has high brand recognition and a strong customer base of 7 million added to booming economic activity leading to higher personal wealth , greater disposable incomes and a growing demand for protection and savings products (Ebsco Host, 2008).
With the aging of the baby- boomer generation there is huge increase in demand for pension and retirement products. Studies reveal that the market for retirement products is already the largest driver of growth in financial services (Ebsco Host, 2009). This change could benefit the life and pension business of the Prudential.
The anticipated growth (9.9 percent compounded annual growth rate for 2006-2012) of the global asset management industry will help to strengthen the company's market position (Ebsco Host, 2009).
Cost savings would increase the company's profitability (Ebsco Host, 2009).
Existence of namesakes worldwide, the closest one being Prudential Financial Inc, confuses consumers and can result in loss of business. This is aggravated by the increasing popularity of the internet wherein it has become difficult to differentiate between the company and its namesakes (Ebsco Host, 2008).
Studies reveal an increasing number of insurance frauds in the industry. With Prudential's large scale of operation, this could lead to increase in claim losses and operation margins .This could force the group to pass insurance fraud costs to policy holders or opt for lower reinsurance cover, thereby causing an adverse affect to profitability (Ebsco Host, 2008).
Value - Chain Analysis
Value-chain analysis is a useful tool to determine how an organisation creates its competitive edge over its rival firms (Dess et al, 2008).
Primary Value Chain Activities:
Prudential's inbound logistics policy is to work in partnership with suppliers who operate with policies and procedures consistent with the standards set out in the Group Code of Business Conduct (the Code), and to help them reduce their impact on the environment. This enables the group to maximise their beneficial social impact and minimise environmental impact. In its dealings with suppliers , the company endeavours to maintain the highest possible standards of integrity in business relationships. All subsidiaries are encouraged to use only those suppliers who operate with values and standards equivalent to the Group. The company has a strict policy to agree terms of payment when orders for goods and services are placed and pay in accordance with those terms (Prudential Plc Annual Report, 2008).
As Dess et al (2008) postulate, creation of environmentally friendly manufacturing processes is also one way of achieving competitive advantage, Prudential Plc are no stranger to this. The group actively endeavours to reduce its environmental footprints directly and indirectly. Examples include activities such as introduction of Energy performance certificates , achieving ISO 14001 certification, publishing sustainable development framework to encourage sustainable practices across the industry (Prudential Plc Corporate Responsibility Report, 2008).
The company uses Single Customer View architecture to enable it to store in one place, information on different products and account data relating to any customer. This provides one point of contact for customers ensuring faster responses to queries and quicker problem resolution. The architecture has helped the company to consolidate its call centres as it helps to provide staff with an overview of all customers and their value to the company resulting in cost savings (Beckett, 2005).
Marketing and Sales
The Prudential built its reputation by providing financial advice and products to customers through an army of door-to-door salesmen. However, since 2002 'the man from the Pru' image has been replaced by automated channels and intermediaries because the direct selling method was not suitable for the company anymore. The new image has 'Retirement has more potential with Prudential' as its tagline. The company now uses print, online, direct response, radio and television advertising as well as sponsorship of client interest programmes (Marketing Week, 2007; Phang, L, 2008).
The group continues to maintain high standards of customer service ensuring that they receive fair, transparent financial products through a variety of trusted channels. Prudential endeavours to meet the rapidly changing needs of its target audience. The company has tracking systems in place to regularly monitor customer satisfaction. Examples of good customer service include achieving the 2008 award for highest customer satisfaction in the financial services industry in North America; surveys reveal that 88 percent of Prudential UK customers feel they are treated fairly; conducting agency training and leadership development to promote a deeper understanding of customers' financial goals (Prudential Plc Corporate Responsibility Report, 2008).
Support Value Chain Activities:
Prudential encourages all its subsidiaries to develop collaborative 'win-win' relationships with its suppliers and contractors to ensure the quality and profitability of its products and services (Prudential Plc Corporate Responsibility Report, 2008).
The importance of technology can hardly be undermined for the group. Prudential has always been at the forefront to develop and install automated systems to aid in its administrative functions. The company has created its own customer information system, 'Single View ' to enable it to manage the quality of its data. This new system also helps the company to cater to online marketing and customer management
Human Resource Management (HRM)
The company's HR strategy focuses on five key elements: getting the right people into the business; building and rewarding performance; growing a strong talent pipeline; developing credible successors and; developing an organisation that works. The group has also launched a group-wide Momentum Programme to attract a wide diversity of applicants (Prudential Plc Corporate Responsibility Report, 2008).
Prudential has an effective planning system in place to help it to attain overall goals. This is backed by the ability of its top management to anticipate and respond to key environmental trends and events such as the demographic shift in global population. Through its sustainable development initiatives, the company has maintained excellent relationships with its diverse stakeholder groups. There is an effective IT division which helps to integrate the company's value creating activities (Prudential Plc Corporate Responsibility Report, 2008).
Prudential Plc's several strengths and opportunities are helping the company not only to survive but also grow in this global economic downturn following the banking industry crisis. The retail financial services industry is undergoing a fundamental transformation as one of the biggest demographic waves in history transitions out of the workforce and into active retirement. Over the coming years, this global retirement opportunity will be a significant driver of further growth for Prudential. However, the group need to be wary of its high operating costs in order to maximise the profitability of its products and services.