Competitive Advantage in the Service Industry

366 Pages·2014·8.15 MB·English

by  Helene Norlin

Företagsekonomiska institutionen
Department of Business Studies
Competitive Advantage
in the Service Industry
The Importance of Strategic
Congruence, Integrated Control and
Coherent Organisational Structure
– A Longitudinal Case Study of an
Insurance Company
Susanna Poth
Dissertation presented at Uppsala University to be publicly examined in Hörsal 2,
Ekonomikum, Uppsala universitet, Uppsala, Monday, 3 March 2014 at 13:15 for the degree
of Doctor of Philosophy. The examination will be conducted in English. Faculty examiner:
Professor Johnny Lind (Stockholm School of Economics, Department of Accounting).
Abstract
Poth, S. 2014. Competitive Advantage in the Service Industry. The Importance of Strategic
Congruence, Integrated Control and Coherent Organisational Structure – A Longitudinal Case
Study of an Insurance Company. Doctoral thesis / Företagsekonomiska institutionen, Uppsala
universitet 166. 350 pp. Uppsala: Uppsala universitet.
Competitive advantage has received considerable attention. Few studies have however chosen
a holistic approach taking multiple aspects and organisational levels into consideration. This
research has the goal of filling parts of this void. The aim is to deepen the understanding of
competitive advantage in the service industry by analysing how alignment of strategy, control
and organisation structure on multiple organisational levels impacts competitive advantage of
a service company over a long period of time.
Based on the idea of multiple factors and the importance of connecting different levels with
each other, including production level, a framework for the service industry is developed based
on the ideas of Nilsson and Rapp (2005). The framework is used to analyse the rich data gathered
in a longitudinal case study of an insurance group embracing the environmental changes and
the choices taken as well as the resulting competitive position.
According to the analysis, the Insurance Group is not ensuring an overall coordination
of its activities, although there is a fit among some dimensions. The level of misalignment
increased over the time, as a result of changes in the environment and less than consistent
management decisions. Although the Insurance Group has been profitable and increased
its market share since its foundation, the competitive advantage, measured as performance
compared to market average, decreased. The declining performance combined with the
increasing level of misalignment supports the assumed importance of reaching a consistent
positioning among strategy, control and organisational structure. It can therefore be presumed
that strategic congruence, integrated control and coherent organisational structure influence
competitive advantage. However, due to the semi-protected insurance market the effects are
weaker than they probably would have been in a more competitive and unpredictable market.
The Insurance Group inherited valuable and unique resources at its foundation. Their apparent
stable value ensures the Insurance Group a competitive advantage, although no activities are
undertaken to strengthen or even to maintain them. It can therefore be concluded that an
integrated approach of competitive advantage where both positioning framework and valuable
resources are used as complementarities seems to be beneficial when competitive advantage is
studied.
Keywords: Strategy, Control, Competitive Advantage, Financial Service Industry, Insurance
Industry
Susanna Poth, Department of Business Studies, Box 513, Uppsala University, SE-75120
Uppsala, Sweden.
© Susanna Poth 2014
ISSN 1103-8454
urn:nbn:se:uu:diva-212810 (http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-212810)
Acknowledgements
Without the support of multiple persons this study would have never started
nor finished. Firstly, I would like to mention Professor Birger Rapp. Without
his whole-hearted belief in my ability to conduct a study like this parallel to
my profession this whole project would have never started. I will always
remain grateful and remember this support. He introduced me to his
successor Professor Fredrik Nilsson who guided me forward within the
academic world. He was supported in this guidance by Professor Nils-Göran
Olve and Assistant Professor Gunilla Myreteg. I would like to thank all of
you for the valuable advice you have given me. I hope you feel content with
the end-result, and I hope that this co-operation will continue in one form or
another in the future as well. Without the discussions and the feedback I
received from the professors and fellow doctoral students during seminars in
Linköping, in Uppsala and during the MIT meetings, the choices and the
conclusions taken within this research would not have been as clear as they
are. I would here especially like to mention the detailed feedback I received
from Associate Professor Torkel Strömsten and the valuable support of the
fellow researchers connected to the research programme “Strategy, Control
and Competitive Advantage” - Petter Ahlström, Annette Anjou, Jolanta
Drott, Carl Hökfelt, Erik Jansson, Niclas Schiller and Klas Sundberg.
When I first presented my research idea to the CEO of the Insurance
Group, he immediately supported the idea and granted me access to top
management and all the material I might request. Only during the research
project did I understand what a great support this was for the data collection
and evaluation and what kind of trust he gave me when he told his Board of
Directors that he thinks that this idea is “gar nicht so schlecht” (not so bad at
all). I was only told after the meeting that this formulation is equal to very
good in Bavaria! I am very grateful for the time that was made available for
me by all the interviewed persons. I hope that the study and its conclusions
will give some insights supporting the continuous competitive advantage of
the Insurance Group in the future.
Finally, I am very grateful for the support I received from my family. My
parents always offered me a special home feeling and care during my visits
in Sweden. Beyond picking me up from different stations and airports I
enjoyed their companion during nice dinners and rounds of coffee with
mom’s home-baked cake! Thanks for this support and the overall trust you
have shown me over the years.
The person who is most happy about my closing this project is probably
my husband. He has taken up numerous hobbies during these years and
thereby ensured that I would not have too bad a conscience for the weekends
I spent reading, analysing and writing. He has been renovating old Faema
espresso machines and planned and programmed the smart home installation
of our house in Sweden. Both these projects are worth a PhD! Most of all,
however, I am grateful for the interruptions when I was lovingly persuaded
to enjoy a walk in the sun with him and Debbie on Sunday afternoons. He
always knew when this project was getting too much alongside my normal
work and was the first one to support the research-break of more than a year
that I needed when I got my first assignment as a member of a board of
directors. Thanks for knowing me this well, respecting my wish to deepen
my knowledge and sharing your wisdom and joy with me through good and
bad days! You are the best thing that ever happened to me.
I would also like to thank the foundations of Jan Wallander, Tom
Hedelius and Tore Browaldh and the Swedish Research School of
Management and Information Technology for their financial support.

Munich, Germany

December 2013

Susanna Poth
Contents

1 Introduction ................................................................................ 15
1.1 Strategic Congruence, Integrated Control and Coherent
Organisational Structure ........................................................................ 17
1.2 The Industry Studied .................................................................... 19
1.2.1 The Service Industry ................................................................. 20
1.2.2 The Insurance Industry ............................................................. 21
1.3 Research Questions ....................................................................... 21
1.4 Contribution of the Study ............................................................. 22
1.5 Outline of the Thesis ..................................................................... 24
2 Method Used in the Study ......................................................... 26
2.1 Study Preparation ......................................................................... 27
2.1.1 Iterative Framework Based Study ............................................. 27
2.1.2 Literature Review of Existing Theories .................................... 29
2.1.3 Selection of Case Company ...................................................... 29
2.1.4 Time Span of the Study ............................................................ 31
2.1.5 Degree of Involvement / Interference with the Case Object .... 32
2.2 Data Collection .............................................................................. 35
2.2.1 Collection of Retrospective Data .............................................. 36
2.2.2 In Depth Interviews with Key Informants ................................ 37
2.2.3 Document Review ..................................................................... 39
2.3 Data Analysis ................................................................................. 40
2.3.1 Data Reduction and Display ..................................................... 41
2.3.2 Conclusion Drawing and Verification ...................................... 42
2.4 Research Quality ........................................................................... 43
2.4.1 Reliability .................................................................................. 43
2.4.2 Construct Validity ..................................................................... 44
2.4.3 Internal Validity ........................................................................ 45
2.4.4 External Validity ....................................................................... 46
3 Theory ......................................................................................... 48
3.1 Service ............................................................................................ 49
3.1.1 Insurance Offerings and their Characteristics ........................... 50
3.1.2 Insurance Service Production ................................................... 52
3.2 Contingency Theory and the Concept of Fit ............................... 54
3.3 Competitive Advantage ................................................................ 55
3.3.1 Market Position Perspective ..................................................... 56
3.3.2 Resource-based Perspective ...................................................... 58
3.3.3 Integrated Approach to Competitive Advantage ...................... 58
3.4 Tentative Model for Competitive Advantage ............................. 60
3.4.1 Strategic Congruence ................................................................ 61
3.4.2 Integrated Control ..................................................................... 62
3.4.3 Conclusions concerning the Model ........................................... 62
3.5 Environmental Effects .................................................................. 64
3.5.1 Hierarchical Levels of Environment and their Conception ...... 65
3.5.2 Attributes of Environmental Uncertainty ................................. 66
3.5.3 Environment Effects in this Study ............................................ 66
3.6 Strategic Congruence in the Service Industry ............................ 67
3.6.1 Corporate Strategy .................................................................... 68
3.6.2 Business Strategy in the Service Industry ................................. 70
3.6.3 Production Level Strategy in the Service Industry ................... 74
3.6.4 Strategic Congruence – Interdependencies between the Strategic
Levels ........................................................................................ 77
3.7 Integrated Control in the Service Industry ................................ 79
3.7.1 Management Control in the Service Industry ........................... 81
3.7.2 Production Control in the Service Industry .............................. 85
3.7.3 Integrated Control in the Service Industry ................................ 90
3.8 Coherent Organisational Structure in the Service Industry ..... 92
3.8.1 Company Level Organisation ................................................... 92
3.8.2 Workgroup Organisation .......................................................... 96
3.8.3 Coherent Organisational Structure ............................................ 99
3.9 Framework for Competitive Advantage in the Service Industry
....................................................................................................... 100
3.9.1 Framework Based on Low Environmental Uncertainty ......... 101
3.9.2 Framework Based on High Environmental Uncertainty ......... 103
3.9.3 Misaligned Positions ............................................................... 105
3.9.4 Intermediate Position .............................................................. 107
3.10 Measurement of Competitive Advantage ............................... 108
3.11 Summary of the Theory Chapter ............................................ 109
4 Case Study of an Insurance Group ......................................... 111
4.1 The Environment – Insurance Industry in Germany .............. 112
4.1.1 Regulation of the German Insurance Market .......................... 112
4.1.2 The German Insurance Market and its Development 1995 –
2010 ........................................................................................ 114
4.1.3 Development of the Insurance Lines 1995 - 2010 .................. 117
4.1.4 Actors in the Insurance Industry ............................................. 123
4.1.5 Summary of the Development of the German Insurance Industry
................................................................................................ 129
4.2 The Insurance Corporation ........................................................ 131
4.2.1 Background Information about the Insurance Group ............. 131
4.2.2 The Insurance Group’s Interpretation of the German Insurance
Market ..................................................................................... 133
4.2.3 Position in the German Insurance Market .............................. 134
4.2.4 Corporate Strategy .................................................................. 141
4.2.5 Control on the Corporate Level .............................................. 150
4.2.6 Group Organisational Structure .............................................. 156
4.2.7 Summary of the Insurance Group Level ................................. 166
4.3 The Life Insurance Line ............................................................. 166
4.3.1 The Insurance Group’s Interpretation of the Life Insurance
Market ..................................................................................... 168
4.3.2 Position in the Life Insurance Market ..................................... 169
4.3.3 Strategy of the Life Insurance Line ........................................ 177
4.3.4 Control in the Life Insurance Line .......................................... 181
4.3.5 Organisational Structure of the Life Insurance Line .............. 186
4.3.6 Summary of the Life Insurance Line ...................................... 190
4.4 The Health Insurance Line ......................................................... 191
4.4.1 The Insurance Group’s Interpretation of the Health Insurance
Market ..................................................................................... 194
4.4.2 Position in the Health Insurance Market ................................. 195
4.4.3 Strategy of the Health Insurance Line .................................... 202
4.4.4 Control in the Health Insurance Line ...................................... 207
4.4.5 Organisational Structure of the Health Insurance Line .......... 211
4.4.6 Summary of the Health Insurance Line .................................. 214
4.5 The Non-Life Insurance Line ..................................................... 215
4.5.1 The Insurance Group’s Interpretation of the Non-Life Insurance
Market ..................................................................................... 216
4.5.2 Position in the Non-Life Insurance Market ............................ 217
4.5.3 Strategy of the Non-Life Insurance Line ................................ 227
4.5.4 Control in the Non-Life Insurance Line ................................. 232
4.5.5 Organisational Structure of the Non-Life Insurance Line ...... 237
4.5.6 Summary of the Non-Life Insurance Line .............................. 242
5 Analysis ..................................................................................... 243
5.1 Developments in the German Insurance Industry ................... 243
5.2 Strategic Congruence .................................................................. 245
5.2.1 Valuable Resources of the Insurance Group ........................... 245
5.2.2 Alignment of the Strategies on the Corporate, Insurance Line
and Service Production Levels ............................................... 248
5.2.3 Strategic Framework ............................................................... 252
5.2.4 Conclusion Strategic Congruence ........................................... 254
5.3 Integrated Control ...................................................................... 255
5.3.1 Alignment of the Insurance Group Control System ............... 255
5.3.2 Alignment of the Insurance Group Control Process ............... 257
5.3.3 Alignment of the Insurance Group Production Control .......... 258
5.3.4 Conclusion Integrated Control System ................................... 260
5.4 Coherent Organisational Structure ........................................... 261
5.4.1 Organisational Structure ......................................................... 262
5.4.2 Work Organisation .................................................................. 264
5.4.3 Conclusion Coherent Organisational Structure ...................... 266
5.5 Summary of Strategic Congruence, Integrated Control and
Coherent Organisational Structure ..................................................... 267
5.6 Performance ................................................................................. 271
5.7 Summary of the Analysis ............................................................ 273
6 Conclusions and Implications ................................................. 275
6.1 Conclusions from the Research Case ........................................ 275
6.2 Conclusion based on the Research Programme ....................... 280
6.3 Business Implications .................................................................. 281
6.4 Further Research ........................................................................ 282
References ........................................................................................ 284
Appendix A: Interview Guide ....................................................... 318
Appendix B: Time-Line Used to Identify Critical Events During
the Interviews .................................................................................. 329
Appendix C: Interviewees .............................................................. 330
Appendix D: List of Document types ............................................ 350
List of Figures
Figure 1.1: The structure of the thesis ................................................................... 25
Figure 2.1: Elements of the research method ........................................................ 27
Figure 2.2: The iterative research design .............................................................. 28
Figure 3.1: Structure of the theory chapter ............................................................ 48
Figure 3.2: Service production functions at an insurer .......................................... 53
Figure 3.3: Porter’s five forces and generic strategies .......................................... 57
Figure 3.4: Integrated model of competitive advantage used in this study ........... 59
Figure 3.5: Dimensions and relationships of the model developed by Nilsson
and Rapp ............................................................................................. 61
Figure 3.6: Dimensions and relationships of interest in the framework
for competitive advantage within service industry ............................. 64
Figure 3.7: The three strategic levels and their interaction with the environment 68
Figure 3.8: The service process model expanded with information management 77
Figure 3.9: The relationship between business strategy and service
production typology ............................................................................ 79
Figure 3.10: Control system package ...................................................................... 80
Figure 3.11: Alignment of the control aspects on management and
production control level ...................................................................... 91
Figure 3.12: Alignment of the organisational structure aspects .............................. 99
Figure 3.13: Strategic congruence, integrated control and coherent
organisational structure based on a low environmental uncertainty . 102
Figure 3.14: Strategic congruence, integrated control and coherent
organisational structure based on a high environmental uncertainty 105
Figure 4.1: The structure of the case study material .......................................... 111
Figure 4.2: Development of employees and the premium income per
employee in the German insurance industry .................................... 113
Figure 4.3: Premium income development in Germany .................................... 114
Figure 4.4: Development of profit after tax as percentage of premium
income for the different insurance lines in Germany ........................ 115
Figure 4.5: Development of underwriting results for the different insurance
lines in Germany ............................................................................... 116
Figure 4.6: Interest income on investment (German average life insurance) ...... 117
Figure 4.7: New life insurance contracts split by type of insurance .................. 118
Figure 4.8: Life insurance premium from new business divided between
single and regular payment ............................................................... 119
Figure 4.9: Part of German population with a full cover private health
insurance ........................................................................................... 120
Figure 4.10: Insured persons and premium income per health insurance type ..... 121
Figure 4.11: Share of premium income of the non-life insurance classes ............ 122
Figure 4.12: Loss ratio and combined ratio of the non-life insurance classes ..... 122
Figure 4.13: Model for the analysis of the actors in the insurance market .......... 123
Figure 4.14: Active insurance companies by insurance line in Germany ............ 124
Figure 4.15: Market share of the ten largest insurers in Germany per insurance
line ................................................................................................... 125
Figure 4.16: The demographic development / Increase in disposable income
and cost of living index in Germany ................................................. 127
Figure 4.17: Written premium and total costs for claims and indemnification
and the growth rate of the Insurance Group ..................................... 134
Figure 4.18: Written premium and profit contribution per insurance lines
of the Insurer ..................................................................................... 135
Figure 4.19: The insurer’s underwriting results and profit before taxes ............... 136
Figure 4.20: Retail customer satisfaction rate development within
German Insurance Market and the Insurance Group ........................ 137
Figure 4.21: Sales partner satisfaction rates development .................................... 138
Figure 4.22: Functions and their intended level of centralisation within
the Insurance Group .......................................................................... 156
Figure 4.23: Boards and commissions coordinating the business of
the Insurance Group .......................................................................... 158
Figure 4.24: Productivity per employee based on premium per employee
in the Insurance Group ...................................................................... 164
Figure 4.25: The German life insurance entities within the Insurance Group ...... 167
Figure 4.26: Share of annual premium of the life insurers belonging
to the Insurance Group ...................................................................... 167
Figure 4.27: Life Insurance premium and market share development .................. 169
Figure 4.28: Life Insurance premium growth ....................................................... 170
Figure 4.29: Share of single payment within new business premium on
German market and Insurance Group ............................................... 171
Figure 4.30: Comparison of life insurance administration and acquisition
cost with the average German life insurance market ........................ 171
Figure 4.31: Comparison of the cost ratio of all life insurers within
the Insurance Group .......................................................................... 172
Figure 4.32: Comparison of the lapse rate and the interest on investments
with the average German life insurance market ............................... 173
Figure 4.33: Comparison of the underwriting profitability between
the life insurance companies within the Insurance Group ................ 173
Figure 4.34: Life insurance customer satisfaction rate development .................... 174
Figure 4.35: The health insurance entities within the Insurance Group ................ 192
Figure 4.36: Share of annual premium and insured persons of the health
insurers belonging to the Insurance Group ....................................... 192
Figure 4.37: Number of insured persons, by insurance company and
insurance coverage ............................................................................ 193