Building business strategy for military insurance corporation in the period of 2011 - 2015

LIST OF TABLES Table 2.1: Business Performance of MIC in the period of 2008-2010 Table 2.2: Social-economic developments of Vietnam in the period of 2006-2010 Table 2.3: Numbers of insur

GRIGGS UNIVERSITY

GLOBAL ADVANCED MASTER

OF BUSINESS ADMINISTRATION PROGRAM

CAPSTONE PROJECT REPORT

BUILDING BUSINESS STRATEGY FOR

MILITARY INSURANCE CORPORATION IN THE PERIOD OF

2011 – 2015

Student’s name : Le Nhu Hai

Nguyen Manh Hieu Bui Duc Nam

Nguyen Anh Tuan ( 1972 )

HA NOI 2011

On behalf of Group 8 Group Leader

Le Nhu Hai

CONTENTS

LIST OF TABLES 6

LIST OF FIGURES 6

LIST OF ABBREVIATIONS 7

INTRODUCTION 8

CHAPTER 1: THEORETICAL BACKGROUND ON BUSINESS STRATEGY AND BUILDING BUSINESS STRATEGY 10

1.1 Concept of Business strategy 10

1.1.1 Definition of Business strategy 10

1.1.2 Roles of Business Strategy to enterprises 11

1.1 3 Types of business strategies 11

1.2 Strategic Management Process 12

1.2.1 Strategic planning agreement, identification of mission and direction of the organization 13

1.2.2 Analysis of factors affecting enterprises 13

1.2.2.1 External environment analysis 13

1.2.2.2 Internal Environment Analysis 18

1.2.3 Identification of long-term objectives and build development strategy for an enterprise 20 1.2.4 Determination of action plans and implementation of strategy solutions 20

1.2.5 Strategy Evaluation: 20

1.3 Instruments to be used for strategy formulation and evaluation 22

1.3.1 External Factor Evaluation (EFE) Matrix 22

1.3.2 Internal Factor Evaluation (IFE) Matrix: 23

1.3.3 Internal-External (IE) Matrix: 24

1.3.4 SWOT Matrix: 25

1.3.5 Qualitative Strategic Planning Matrix (QSPM) 26

CHAPTER 2: BUSINESS REALITY OF MILITARY INSURANCE CORPORATION 27

2.1 Overview of Military Insurance Corporation 27

2.2 Business performance of MIC in the period of 2008-2010 29

2.3 Analysis of MIC's business environment 30

2.3.1 Analysis of macro environment of insurance firms 30

2.3.1.2 Economic factors 31

2.3.1.3 Cultural and social factors 33

2.3.1.4 Science and technology factors 33

2.3.2 Analysis of micro environment of insurance firms 34

2.3.2.1 Development reality of insurance sector in Vietnam 34

2.3.2.2 Competition in insurance sector in Vietnam 35

2.3.2.3 Competitors 37

2.3.2.4 Clients 38

2.3.2.5 Substitute products 39

2.3.3 Analysis of internal factors affecting the operation of MIC 39

2.3.3.1 Human resources 40

2.3.3.2 Financial Accounting 41

2.3.3.3 Business management system 42

2.3.3.4 Product research and development 42

2.3.3.5 Operation network and distribution channels 43

2.3.3.6 Information technology 44

2.3.3.7 Insurance revenue structure divided according to customers 45

2.3.3.8 Investment activities 46

2.3.4 Instruments used for strategy formulation and selection 47

2.3.4.1 SWOT Analysis 47

2.3.4.2 External Factor Evaluation (EFE) Matrix 50

2.3.4.3 Internal Factor Evaluation (IFE) Matrix 51

CHAPTER 3: FORMULATION, SELECTION OF BUSINESS STRATEGIES AND IMPELEMENTATION SOLUTIONS FOR MIC IN THE PERIOD OF 2011-2015 52

3.1 Identification of Strategic Goals 52

3.2 Formation of business strategies for MIC in the period of 2011-2015 53

3.2.1 Based on SWOT Matrix 53

3.2.2 Business Strategy Selection 56

3.3 Business acceleration strategies of MIC 58

3.3.1 Solutions for developing a network of insurance agents 58

3.3.2 Measures for research and development of new products 59

3.3.3 Solutions for innovation of managment struture and development of human resources 60

3.3.4 Solutions for finance 61

3.3.5 Solutions for investment operations 62

3.3.6 Solutions to the innovation of IT application 64

3.3.7 Solutions for brand development 65

3.3.8 Solutions to coporate culture building 66

3.4 Recommendations 67

CONCLUSION 72

REFERRENCE 73

LIST OF TABLES

Table 2.1: Business Performance of MIC in the period of 2008-2010

Table 2.2: Social-economic developments of Vietnam in the period of 2006-2010 Table 2.3: Numbers of insurance companies classified by types of insurance (by 31/12/2010)

Table 2.4: Scope and scale of Vietnam‟s insurance market (2006-2010)

Table 2.5: Revenues and market shares of competitors of MIC in 2009 and 2010 Table 2.6: Financial ratios of competitors of MIC in 2009 and 2010

Table 2.7: Labor structure of MIC in 2010

Table 2.8 : Insurance Revenue Structure divided according to customers

Table 2.9: Investment Profile Structure of MIC in the period of 2008-2010

Table 2.10: External Evaluation Factor Matrix of MIC

Table 2.11: Internal Evaluation Factor Matrix of MIC

LIST OF FIGURES

Figure 1.1 Strategic Management Process

Figure 1.2 Micro-environment

Figure 1.4 Internal Environment

Figure 1.5 SWOT Matrix

Figure 2.6 Organizational Structure Chart of MIC

Figure 3.7 SWOT Matrix of MIC

Figure 3.8 QSPM Matrix of MIC

LIST OF ABBREVIATIONS

Order Full name Abbreviations

1 Military Insurance Corporation MIC

INTRODUCTION

Necessity of the Research:

Vietnamese economy is now deeply integrating into the regional and the world‟s economy In face of continuously changing business environment with increasingly fierce competition, every company should find their own proper way to

be able to catch up with new trends and continuously strengthen its position in the market Along with the country‟s economic development, Military Insurance Corporation has achieved remarkable successes, contributing to the increasing development of the Vietnamese insurance market However, the newly entry of Vietnam into the World Trade Organization has certainly induced number of changes in business environment The Military Insurance Corporation cannot well develop if only based on its existing advantages and business experience accumulated from the past without applying appropriate strategies for its development With our desire to apply our knowledge and analysis tools accumulated in MBA program of Griggs in order to search for appropriate business strategies to enable MIC to firmly maintain and develop its market position, after significant research efforts, the Group 8 of Class N06 has selected the issue of

“Building business strategy for the Military Insurance Corporation for the period of

2011 -2015” as the theme for our capstone project

Research Objectives and Applicability: The project derives from the

analysis of macro, micro environment and business reality of MIC in order to search

for an appropriate business strategy for MIC to be able to firmly maintain its status

and grow continuously to become one of the Top 5 Insurance Corporations in

Vietnamese insurance market in the future

Research Methodologies:

We have applied the following research methods to conduct our capstone project: Descriptive research, data collection and compilation, analysis tools and selection models to demonstrate business reality and recommend strategy selection for MIC

Structure of the Capstone Project Report:

Besides the Introduction, Conclusion and Appendix, the Capstone Project Report is structured into three chapters:

Chapter 1 : Theoretical Background on Business Strategy and Business

Strategy Formulation

Chapter 2 : Business Reality of Military Insurance Corporation

Chapter 3 : Formulation and selection of business strategies and

implementation solutions for Military Insurance Corporation in the period of

2011-2015

CHAPTER 1: THEORETICAL BACKGROUND ON BUSINESS

STRATEGY AND BUILDING BUSINESS STRATEGY

1.1 Concept of Business strategy

1.1.1 Definition of Business strategy

The concept of strategy emerged from the ancient Greek time The term

“Strategy” derives from the military field, being developed into military science

and commanding art However, since the 60s (20th Century), the concept of strategy

has been applied into business area and the term “Business strategy” was born

There are various definitions of strategy with different points subject to different views of their authors We point out here the definition which is the most

appropriate for the research theme and scope of our capstone project: "Strategy is

the direction and scope of an organization in the long-term, which will bring competitive advantages to the organizations through the optimum arrangement of its resources in a changing environment to meet market demands and expectations

of stakeholders." (Johnson, G., Scholes, K (1999) Exploring Corporate Strategy,

5 th Edition Prentice Hall Europe)

In a traditional approach, strategy is the identification of the basic long-term goals of an organization, and the implementation of action plans to allocate

resources to achieve these goals Strategy can also be defined as "a series of

commitments and actions that a company uses to gain a competitive advantage through exploiting its core competencies in a certain market" In other words,

business strategy is a method used by enterprises to orientate its future in order to achieve and maintain its development

The nature of the business strategy is to outline the future image of business in the field of activity and the ability to exploit

Business strategies are used by three basic meanings:

+ Identify long-term objectives of the business

+ Set forth overall action programs

+ Select action plans, implementing the allocation of resources to implement those objectives

1.1.2 Roles of Business Strategy to enterprises

Planning Role

Business strategy enables company to clearly identify its business orientation and objectives for the future, guiding and directing all activities of a company in the long-term, serving as a solid basis for the implementation of operational activities, allowing managers to be aware of, consider and set the right direction for the organization in the right method at the right time

Forecasting Role

In the trend of globalization, the business environment is always changing

Therefore, the environment analysis and strategies building would help business managers to be well aware of opportunities, and threats facing them as well as of the strengths and weaknesses in their business, thereby analyzing, assessing and predicting the environmental conditions in the future to make appropriate strategies

to take advantage of opportunities, strengths and reduce threats, weaknesses to lead the business to overcome and win any challenges

Directing Role

Business strategies enable managers to use and allocate resources appropriately, to make appropriate decisions in each condition of the business environment, increase the link and cohesiveness among employees, enhance the ability to prevent and contain coming threats, thus avoiding financial risks, enhancing business and operation performance of the enterprise toward its sustainable development

1.1 3 Types of business strategies

Integrated business strategy

This strategy is outlined on the basis of external and internal environment

analysis to clearly identify the company‟s strengths, weaknesses, opportunities, challenges, thereby incorporating the following strategies:

+ To take advantage of strengths to exploit coming opportunities in business (SO)

+ To take advantage of the strengths to limit coming threats in business (ST)

+ To take advantage of opportunities to overcome the weaknesses (OW) + To minimize the weaknesses to limit the coming threats (WT)

Overall business strategy:

This strategy refers to the most important issues of long-term and vital significance to the business, including the four following groups:

+ The focused strategy which concentrates on solving a key problem, not spreading resources, focusing on the activities of vital and decisive significance to business and production

+ The strategy which is based on the comparative analysis of the business and its competitors to find out the key comparative advantage of the business that can be exploited to further develop business and production

+ The creative strategy which explores new products and services

+ The strategy which explores the possibility of the environment to find out critical factors

Other business strategies

+ Forward, backward, horizontal, vertical integration strategies

+ The strategy to penetrate and develop products and markets

+ Diversification strategies

+ Hedging strategies

1.2 Strategic Management Process

Includes all Commitments -> Decisions -> Actions that need be done by an

organization to achieve:

- Strategic Competitive Advantage

- Sustainable Competitive Advantage

- Above-average Return

1.2.1 Strategic planning agreement, identification of mission and direction of the organization

Strategic planning agreement: is the cooperation, mutual-support between

strategy-makers with those who involve in strategy implementation in order to achieve:

+ Clearer and better understanding of strategic implementers about selected strategies, leading to easier and better strategy implementation by them

+ Higher feasibility of selected strategies

Mission Identification

A mission statement explains the reason of being, the significance of establishment and existence of a company Company‟s mission is its declaration to society A mission statement of a company usually contains the content of its customers, products or services, market, technology, philosophy, interest in society, staff…The company‟s mission statement shows the overall picture of the company

It is an important basis for the proper selection of objectives and development strategies for the company

Objectives Identification: Objectives are the specification of the content of

a mission of the company, serving as instruments to successfully realize its mission statement

1.2.2 Analysis of factors affecting enterprises

1.2.2.1 External environment analysis

a The macro environment – socio, economic and political environment

The macro environment includes factors of economic environment, legal and political environment, social and cultural environment, technological environment, natural environment, global environment that have impact and influence on the survival and development of the business

* Economic environment (economic factors)

The main factors of economic environment that affect the operation of enterprises are: The growth of the economy, interest rates, exchange rates and inflation rates Economic growth or recession has great effect on businesses

Economies with high growth rates will create many opportunities for businesses to invest in expanding the operation, whereas the recession in economy will lead to reduction in consumption spending and increase of business risks The levels of interest rate will determine the demand for business products Policies on exchange rates, inflation rates also create opportunities or increase threats for enterprises

* Legal and political environment (legal and political factors)

The legal and political environment may make significant impact on businesses with the creation of significant opportunities or large threats for enterprises

This environment consists of political stability, the legal policy system and framework (e.g the investment law, labor law, laws on natural environment and resources, tax and fee policies, regulations on advertisement )

* Socio-cultural environment (social, cultural factors)

This environment includes the following factors: lifestyle, ethics, traditions, consumer attitudes, the role of women, population growth, population shifts, the marriage rate, birth rate, educational level, the creation of associations to protect consumers These factors create greater opportunities or increasing threats for businesses

* Technological environment

Technological changes alter production methods, leading to the changes in product life cycles and the creation of better and cheaper products Technology is a factor of great and direct impact on the business strategy of enterprises Hence, in the process of formulating business strategies of enterprises, it is essential to make concrete analysis and assessment on the technological factor as well as the trend of technological development to be able to set up a proper business strategy

* International environment (international factors)

At present, the trend of regionalization and globalization has been inevitable trends Therefore, the opportunities and threats from the international environment that affect businesses have become larger and more complex due to differences in cultures, societies, institutional structures, policies and economies So each

enterprise should approach and analyze this environment under the perspective of their industry Especially, the factors of free trade agreements, tariff barriers, international quality standards, antitrust, anti-dumping laws need to be analyzed carefully to take advantage of opportunities, limit threats and develop business strategies accordingly

b Micro environment (industry environment):

The factors of micro-environment include: pressure from customers (buyers),

pressure from suppliers, and the threat from potential competitors, the threat from substitute products and services, and the rivalry among existing competitors Michel Porter - a theoretical and practical strategist of the Harvard School of Business Administration has developed the model of five forces of competition to serve as the basis for strategists to analyze this environment as follows:

Potential Competitors

Suppliers

Enterprise and competitors

Competition in the industry

Customers

Bargaining Power of Suppliers

* Analysis of existing competitors:

This is the first force in the model of M Porter This force is competitors already position in the market If these competitors are weak, the businesses will have the opportunity to increase prices and may earn more profit, whereas the greater competitive pressure in the industry will lead to the increasingly fierce competition in prices among enterprises in the same industry The analysis of existing competitors require enterprises to collect and understand detailed information of their competitors to serve as the basis for analyzing their technological potential, human resource potential, financial capability, marketing system, management activities, capacity, product quality, qualifications of leadership, thereby identifying the strengths and weaknesses of their competitors From these assessments, we can set up a Competitive Profile Matrix to formulate overall assessment of competitors in comparison with the company

Order Factors Degree of

* Potential competitors: These involve the enterprises not competing with

the business now but they are able to compete if they decide to enter the industry The number of potential competitors depends greatly on the entry barrier of that industry Therefore, where potential competitors are considered, it needs to analyze all elements of entry barriers from the economies on scale, product differentiation, capital requirements, switching costs, the accessibility to distribution channels, the cost disadvantage regardless of scale, government policies and possible response actions to fully assess the threats from potential competitors

* Suppliers: This force includes suppliers providing raw materials, fuels,

equipment, labor, and transportation services It can be a pressure when they are capable of increasing input prices or reducing the quality of products and services they provide Therefore, in the formulation of business strategies, it needs to analyze and work out appropriate strategies to deal with this force

* Customers: This is the force which creates the bargaining power of buyers

A large number of buyers would create opportunities for the business, otherwise it can be viewed as a threat if strong customers require the business to reduce prices or provide products or services of better quality

* Substitute products or services: Substitute products are the other products

that can satisfy the same need of consumers To find out the threats from substitute products and limit the risks to business, the process of formulating business strategies would involve the analysis and forecast of policies, the development of science, technology, price trend and consumers pattern .in order to build proper business strategies

Besides the mentioned-above five groups of factors, the formulation of business strategies should also involve the consideration of other factors such as the systems of distributors, community and union to fully analyze the opportunities and business threats facing the enterprise to be able to develop appropriate business strategies

The analysis of the external business environment is very important for all enterprises as it helps them to identify opportunities and threats facing them in order

to set up proper business strategies accordingly To assess the extent of the impact

of the external environment on business activities, an EFE matrix can be built as follows:

EFE Matrix

Business Administration, Hanoi, 2010)

1.2.2.2 Internal Environment Analysis

The analysis of the enterprise‟s internal environment is to identify strengths, weaknesses and competitive advantages of the enterprise for the formulation of appropriate business strategies It is essential for enterprises to analyze and assess the factors of finance, materials base and infrastructure, technology, marketing, human resources, manufacturing, research and development, management activities, brand name, corporate culture in order to promote all their strengths, limit their weaknesses, thus creating competitive advantages for their businesses

* Human Resources:

This is a very important resource, being associated with the existence and development of the business Human resource management of an enterprise involves the work of recruitment, training, arrangement, appointment, rotation, and personnel policies The analysis of human resources of an enterprise is to identify the strengths and weaknesses in its human resource management to work out appropriate strategies

* Financial capacity:

- The analysis and assessment of these factors should be based on the detailed consideration of material facility, plants, equipment and machinery, raw materials, the level of modern technology that businesses are applying, and the evaluation of their financial conditions, total assets, capital, capital structure, profitability, ability to raise capital, ability to secure financing of the enterprises

of factors 0,0 † 1

Shorting of factors 1 †

4

Sum of scores for factors in the list Scoring the

factors

- The analysis and assessment of financial work of the enterprise is to review

to check whether its finance and accounting activities can meet their task requirements and maintain integrity, thereby identifying the company‟s strengths and weaknesses in this area

* Production and operation activities:

The analysis and assessment of production and operation activities of the business are conducted on the basis of analysis and assessment of production plans, plant capacity, appropriateness of scale, the efficiency of utilizing of technology line in production activities, the quality of the work force, quality of goods produced, the production cost or cost of a product unit in order to clearly identify the strengths and weaknesses of the enterprise in this area

* Marketing activities

The analysis and assessment of the marketing work is focused on analyzing and evaluating the marketing systems, plans of products and services, the sales and purchases activities, customer analysis, pricing policies as well as the effectiveness

of the marketing work in order to see clearly the real situation, the strengths and weaknesses of the enterprise in this area to develop appropriate strategies

* Management activities:

In order to be able to make accurate assessment on the enterprise‟s management activities, it requires analyzing and assessing the reality of its organizational model The enterprise‟s organizational model should meet the requirement for operations and development The establishment of models with overlapping functions is not encouraged

On the other hand, analysis and assessment should be conducted on the operation of functions from planning to implementation organization, incentive policies, human resource arrangement and utilization, control work, the development of the system for research and development activities and the application of informatics technologies in business operations…in order to review and assess the reality of management functions of the enterprise to identify its strength and weakness in this area On the other hand, thorough analysis and

assessment should be done on the competencies of the enterprise‟s leadership Good leadership would help the enterprise to develop while the lack of competencies of the enterprise‟s leadership would drive the enterprise to the verge of bankruptcy or failure

1.2.3 Identification of long-term objectives and build development strategy for an enterprise

Objectives identification is a critical opening step for any enterprises It requires enterprises to identify the mandates or objectives it will pursue in its business operation On the other hand, the business operation of enterprises should demonstrate clearly their legal and ethical values to society

The identification of mandates, objectives and business area of enterprises should be followed by the analysis and evaluation of factors affecting them to form the basis for building business strategies

1.2.4 Determination of action plans and implementation of strategy solutions

This is the process to set up mechanism, plans of resource allocation to implement solutions of selected key strategies, thereby contributing to the effective exploitation of available resources and competitive advantages of the enterprise, creating the combined strength for the enterprise to win its objectives and achieve success in business

1.2.5 Strategy Evaluation:

The strategic management process may result in far-sighted strategic decisions which bring about long-term significant outcomes, or it may also result in wrong strategic decision which brings about serious disadvantages and huge difficulties Hence, most strategies agree that strategy evaluation is critical for enterprise‟s prosperity; timely and proper evaluation can give warning to strategic management of existing or potential difficulties before the occurrence of a serious situation Strategy Evaluation is made up of the three major activities as follows:

a Review and control fundamental basis of strategy of the enterprise

b Compare actual outcomes with desirable outcomes

c Recognize and install correct activities to ensure the work progress in line

with plans Following is the illustration of strategy evaluation as a phrase of a strategic

Set up long-term goals

Set up annual targets

Internal Control

to identify major strengths and weaknesses Select

strategies

to pursue

Combine resources

Set forth policies

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Measure and evaluate performance

Sufficient and timely feedback information is the foundation for effective strategy evaluation Strategy evaluation should be based on current information

Strategy evaluation is a complicated and sharp task Over-emphasized strategy evaluation may become costly and results in reverse effect No one likes to be controlled too closely Dalton and Lawrence assert that the more strategy managers try

to control other behaviors, the looser control they have However, under-evaluation or none evaluation may lead to worse situations Strategy evaluation is essential to ensure the achievement of set goals and desirable outcomes

In many companies, strategy evaluation is simply to review any improvement

or change in their performance, asset and net worth, profit and sales as well as production capacity

It is unable to demonstrate clearly a typical strategy as the best one or to ensure its absolute feasibility However, it can be evaluated through serious mistakes Richard Rumelt proposes four criteria to be used for strategy evaluation, including: consistency, appropriateness, convenience and feasibility

Successful strategic evaluation allows the company to take the best advantage

of rising internal strengths, exploiting coming external opportunities, identifying and limiting external threats and restructuring its internal weaknesses before they become serious dangers

1.3 Instruments to be used for strategy formulation and evaluation

1.3.1 External Factor Evaluation (EFE) Matrix

External Factor Evaluation Matrix is an instrument to evaluate the impact of external environment to a company

1.3.2 Internal Factor Evaluation (IFE) Matrix:

Similar to steps and scoring methods of the EFE Matrix, IFE Matrix is an instrument to evaluate strengths, weaknesses and the importance of functional areas

Advantage: Outline the overall picture of the company inside including it

major strengths and weaknesses affecting its competitiveness

Disadvantage: The scoring and weighting significance of each factor is still

subjective

1.3.3 Internal-External (IE) Matrix:

The IE Matrix is an important strategic tool which is used to plot the company‟s strategic position in a nine-cell diagram; each cell has implications about the company‟s situation and suggestion for its optimum strategies

IFE Total Weighted Scores

Strong – 3 Average – 2 Weak – 1

1.3.4 SWOT Matrix:

SWOT Matrix is the Matrix of Strengths – Weaknesses - Opportunities –

Threats This matrix helps managers to form strategies based on a combination of strengths, weaknesses, opportunities and threats

SWOT

Matrix

Strengths – S 1………

2………

3………

………

Weaknesses – W 1………

2………

3………

………

Strategies 1………

2………

3………

………

Strategies 1………

2………

3………

………

Figure I.5: SWOT Matrix

(Source: Text book of “Strategic Management” – Associate Professor Doctor Ngo Kim Thanh, Associate Professor Doctor Le Van Tam – Publisher

of the National Economics University, Hanoi-2009, p.255)

+ S-O Strategy: To use strengths to take advantage of external opportunities + W-O Strategy: To overcome weaknesses to take advantage of external opportunities

+ S-T Strategy: To use strengths to cope with threats

+ WT Strategy: To overcome weaknesses in order to reduce the risk from the outside

1.3.5 Qualitative Strategic Planning Matrix (QSPM)

The Quantitative Strategic Planning Matrix (QSPM) is a key model to help select the optimum strategy among alternative feasible strategies worked out by the SWOT Matrix It uses the input from the EFE, IFE and SWOT Matrixes to analyze and to decide the most attractive strategy This matrix is developed through the 06 following steps:

 Step 1: Make a list of the firm‟s key external opportunities/threats and

internal strengths/weaknesses in the left column of the QSPM, taking the results of EFE and IFE Matrixes

 Step 2: Assign significance weights to each key external and internal

factors as exactly given in the EFE and IFE Matrixes

 Step 3: Identify alternative strategies that the organization should

consider implementing based on the established SWOT Matrix

 Step 4: Determine the Attractiveness Scores (AS) defined as

numerical values that indicate the relative attractiveness of each strategy in a given set of alternatives (range for AS from 1 to 4)

 Step 5: Compute the Total Attractiveness Scores (TAS) TAS are

defined as the product of multiplying the weights (Step 2) by the AS (Step 4) in each row

 Step 6: Compute the Total Attractiveness Scores (TAS) Add TAS in

each strategy column of the QSPM

The Total Actractive Score of this Matrix reveal which strategy is the most attractive in each set of alternatives

Chapter Conclusion: We have considered and studied the whole theoretical

background, concepts, and analysis basis for the formulation of business strategies

of enterprises In order to build appropriate business strategies and achieve success, we should master the theoretical base and apply it into the reality of business to set up orientation, guidelines and strategies in accordance with the objective rules to ensure the survival and development of the business.

CHAPTER 2: BUSINESS REALITY OF MILITARY INSURANCE

CORPORATION

2.1 Overview of Military Insurance Corporation

Military Insurance Corporation (MIC) was established and operated under the Ministry of Defence's guidelines stated in the Dispatch No 871/BQP on 22/01/2007 of Minister of Defence and establishment, operation license No 43/GP-BTC on 08/10/2007 of Minister of Finance MIC is the first insurance corporation established under Decree No 45/CP on 27/03/2007 of the Government with the charter capital of 300 billion dong After three years of operation, MIC could determine its status in the Vietnamese insurance market (ranked the 7th over 29 non-life insurance companies in Vietnam) On 31/05/2011, the Ministry of Finance issued the license No 43/GPĐC8/KDBH to rename the company to Military Insurance Corporation

MIC majors in:

1 Original insurance business:

- Health insurance and human accident insurance;

- Property insurance and damage insurance;

- Internal cargo transport insurance by rail, sea, river and airway;

- Vehicle insurance;

- Fire insurance;

- Hull and ship-owner liability insurance;

- General liability insurance

- Credit and financial risk insurance

- Business loss insurance

- Other non-life insurance

2 Reinsurance business:

Reinsurance for all non-life insurance

3 Capital investment

- Buying government bonds

- Buying stocks, corporate bonds

- Trading real estate

- Joining capital with other corporations

- Lending capital in accordance with credit institutions' rules

- Deposit at credit institutions

- Entrust and entrusted investment

- Other activities in accordance with regulations and law

Figure 2.1: MIC's organizational structure

Marine insuarance Board

Vehicle insuarance Board

Health Insuarance Board Reinsuarance Board

Agents Control Board

Structure of MIC

Defence Insuarance Board

Project Insuarance Board

2.2 Business performance of MIC in the period of 2008-2010.

As MIC was established on October 8th 2007 (with less than 90 days operating in 2007), its first financial year started from January 1st 2008 Therefore, analysis of business performance of MIC is made based on its accounting data in

the period of 2008-2010

Table 2.1: Business performance of MIC in the period of 2008-2010

Order Indicators Year

1 Total revenue (billion dongs) 205 421.4 515 75.6%

2 Revenue from basic insurance

6 Chartered Capital (billion dongs) 300 300 300

7 Own equity (billion dongs) 300.5 302 304.8 0.7%

8 Total assets (billion dongs) 397 686.6 1.070 84.7%

9 Earning before tax (billion dongs) 0.5 50.2 66.4

10 Earning after tax 0.5 37.4 49.3

In the period of 2008-2010, MIC‟s yearly average growth rate of revenue achieved 75.6%, particularly that of revenue from basic insurance reaching 93,9% The operational provision fund grows 137%/year on average, reflecting the development trend of MIC The year of 2008 is the first business year of MIC, hence MIC did not record any profit from business activities as it had to set aside

insurance provision in accordance with regulations of the ministry of finance while did not have the provision return of previous years We can see from the Table 2.1 that own equity of MIC grows modestly at only 0.7%/year on average, reflecting the fact that MIC has spent just a modest part of capital from its residual earnings

to supplement to its chartered capital for the enhancement of its financial capacity due to its strategy to allocate most of its earnings to its shareholders in cash MIC achieved its strongest and outstanding growth in 2009 with all main indicators growing by over 100%/year , particularly the operational provision fund increasing

by 193% In 2010, MIC witnessed a slower growth rate of revenue at 22.3%, but a high growth rate of earnings at 32.2% This fact shows that after a period of overheating growth, MIC has shifted its business development from broad to deep growth, emphasizing risk management work, limiting high-risk insurance products, developing low-risks insurance products and paying attention to effective

indicators

2.3 Analysis of MIC's business environment

2.3.1 Analysis of macro environment of insurance firms

2.3.1.1 Legal factors and development policies of the Government

The politics and society is stable due to good security The law system is much more improved The law and regulations on insurance business were adjusted

to eliminate discrimination, which would create a fair competitive environment for all insurance firms in the international market as well as encourage establishment of new international insurance firm in Vietnam In the insurance sector, the specialist law and guiding regulations directly related to insurance business is a legal environment for operation in accordance with national conditions and integration as well as the long-term goals Specifically, they include:

- Insurance business Law No 24/2000/QH10 on 9/12/2000

- Decision No 175/2003/QĐ-TTg on 29/8/2003 of the Prime Minister approving the "Strategy for developing the insurance market in Vietnam from 2003

to 2010"

- Decree No 45/2007/NĐ-CP on 27/3/2007 of the Government stating clearly implementation of some Insurance business Law

- Decree No 46/2001/NĐ-CP on 27/3/2007 of the Government on financial regulations for insurance firms and insurance brokers

+ Decree No 41/2009/NĐ-CP issued on 05/05/2009 on administrative in insurance area

+ Circular 155/2007/TT-BTC and 156/2007/TT-BTC issued on 20/12/2007 guiding to implement the Decree No 45/2007/NĐ-CP and 46/2007/NĐ-CP

Ministry of Finance is the head senior State administration agency in insurance business sector which writes law drafts, enacts regulations and provides legal guidance in order to ensure legal framework and a fair, healthy competition environment for all insurance companies The Ministry of Finance also supervises insurance firms' operation from recruitment, training to target system to monitor business operation

2.3.1.2 Economic factors

a Socio-economic developments of Vietnam in the period of 2006-2010

According to data from the General Statistics Office, Vietnam‟s economy has made positive progress, facilitating the development of the insurance market in general and of non-life insurance activity in particular

Table 2.2: Socio-economic developments of Vietnam in the period of 2006-2010

2 Export Turnover (billion USD) 39.6 48.56 62.7 51.3 71.6

3 Import Turnover (billion USD) 44.41 62.7 80.7 61.7 82.2

4 State Budget Revenue (billion

Vietnam achieved fairly high economic growth rate in the 5-year period of 2006-2010, meeting its set targets Its annual average GDP growth rate was 7.02%/year in this period Its GDP per capita increased from 730 USD in 2006 to 1.168 USD in 2010, increasing by 1.6 times, equivalent to 438 USD

Average export turnover was USD 55 billion /year in the period of

2006-2010, increasing by 2.5 times from that in the period of 2001 – 2005 and growing

by 17.2%/year Export turnover of individual goods has been increasing, the number of goods with turnover of more than USD 3 billions increased from 4 in

2006 to 8 in 2010 Import turnover of goods grew dramatically in the period of 2006-2010, particularly in the first two years after Vietnam officially joined the WTO Vietnam‟s average import turnover was USD 66.3 billion/year in this period, increasing by 2.6 times than that of the previous five year period and growing by 18%/year These economic developments are extremely favorable conditions for the development of goods insurance products

CPI increased by 11.48%/year on average in the period of 2006-2010, reaching the peak in 2008 and 2010 High inflation derives from many reasons However, the deeply rooted reason is Vietnam‟s existing low efficient economic development model, where the economic growth objective was always put at the highest priority, causing the overheating growth of the economy above its potential output

b.Demographic factors

The population of Vietnam is fairly high in the world By the end of 2010, Vietnam reached 86.93 million citizens most of who are working people and children 15-year-old labors or older working in all economic sectors are moving positively from 2006 to 2010; labors in agriculture, forestry and fishery sectors declining from 55.4% in 2006 to 48.2% in 2010, labors in industry and construction sectors increasing from 193% to 22.4%, in service sector from 25.3% to 29.4% However, just 5 million of them - accounting for 7% of population - are using life insurance The rate in developing countries is 20-25% which is very low in comparison with regional and international countries It can be seen that insurance

is very potential in Vietnam It means there are opportunities for insurance firms to

develop in the Vietnam market

In terms of non-life insurance, most of Vietnamese people drive motorbikes with civil liability insurance according to RNCOS From 2006-2010, car owners with compulsory insurance rose 7.3%/year on average while motorbike insurance rose 15% However, RNCOS also shows that motorbike insurance rate is low

compared with increasing number of motorbikes So far, about 68% of car owners and 30% of motorbike owners buy compulsory insurance Thus, in next years, insurance can grow very fast RNCOS predicted that insurance for vehicles would

go up 15% to 2015

2.3.1.3 Cultural and social factors

Vietnam is an Orient country under the influence of Confucianism whose people attach much importance to family and flesh-and-blood relations No matter where they go, Vietnam - their homeland is always on their mind Vietnamese are always ready to support others suffering from serious difficulties although the support is very little Moreover, the Vietnamese people have saving characteristics

to ensure their life in the future Meanwhile, life insurance is a solution for this problem

Nevertheless, people have little perception of and little trust in insurance Therefore, insurance firms need to propagate to raise awareness among people, and improve the service quality

2.3.1.4 Science and technology factors

In the insurance sector in general and life insurance in particular, the application of information technology have enabled insurance companies to computerize their service process, streamline their organizational structures, diversify their distributing channels and service forms, enhance customer services through high-tech supporting services

Besides, fast development of information technology has created new habit for customers More and more customers investigate information via modern media: Internet, telephone, email which provides information of insurance, investment This is an opportunity for insurance companies to fully take advantage of technology to satisfy increasing demand of customers in fierce competition

New technology has been widely applied to production and services Technology levels of some industries and areas have been upgraded In the insurance sector, modern technology has been widely used such as software for fee calculation, insurance contract management, statistics and sales Especially, electronic commerce is applied in all insurance firms during sales

2.3.2 Analysis of micro environment of insurance firms

2.3.2.1 Development reality of insurance sector in Vietnam

By 31/12/2010, there were 53 insurance firms 29 of which were non-life insurance companies, 1 reinsurance company and 11 brokers

Table 2.3: Number of Insurance Firms classified by types of insurance

business (as to 31/12/2010)

No Type of insurance

business/legal forms

1 member limited co., Ltd

2 member limited co., Ltd

According to experts, in short term, insurance in Vietnam will not be a profit sector but a new one with variety potentials The Vietnam insurance market growth rate is highest and the most stable in the region and the world The average annual growth rate in 2006-2010 was around 21%/year, in which non-life insurance business was 32.8%/year

high-Table 2.4: Size of the insurance market in Vietnam (2006-2010)

No Target 2006 2007 2008 2009 2010

1 Revenue from insurance

premium (billion dongs)

- Non-life

- Life

14,928

6,445 8,483

17,650

8,213 9,437

21,253

10,950 10,303

25,510

13,661 11,849

30,605

17,017 13,588

2 Proportion of insurance

premium/GDP (%)

1.42 1.55 1.75 2.3 1.7

3 Reinvestment into the

economy (billion dongs)

30,661 46,549 56,435 65,094 80,540

4 Insurance operational

Provisions (billion dongs)

27,707 35,685 42,214 48,641 55,136

The average ratio of insurance premium/GDP was 1.74% during the period

of 2006 to 2010 and going to increase However, that ratio is very low in comparison with that of nations in the region In Singapore and Malaysia, total insurance revenue accounts for 5 - 6% GDP and in America, Japan and England 8 - 9% GDP The average insurance fee per Japanese is 3.300 USD/year while it is 14 USD/year per Vietnamese

2.3.2.2 Competition in insurance sector in Vietnam

The Vietnam insurance market is now believed to be potential, thus, the competition becomes fiercer and fiercer especially non-life insurance The serious competition is not only among domestic insurance firms but also among international ones Competition among domestic firms seems unhealthy in terms of:

Insurance fee competition

Within recent 5 years, the fee competition in non-life insurance market was very serious Except for aviation insurance whose price is determined by the world market, all kinds of non-life insurance keeps reducing its price This is not a new method to gain market share but a useful one for many firms in Vietnam nowadays There appeared some insurance service's fee reduced 40-50% even much lower than MOF's regulation To gain market share, many firms are willing to reduce the fee without considering business efficiency This unhealthy situation started when staff not majoring in insurance is employed to pay branches, agencies a flat rate To

reach the paid target, the staff has to run after sales without risk evaluation and investigation

Commission competition

To attract clients, many insurance firms apply "commission" method to gain more contracts, especially the State firms with much higher commission in accordance with MOF's regulation Some firms increase commission through increasing wages, management expense offset commissions to clients and sales network This makes business operation expense higher, competitiveness lower and creates bad habits for the market and insurance participants

Product competition through insurance benefits offers without considering business efficiency

Currently, many companies provide services with expanded insurance scale through conditions modified, supplements enclosed with traditional services Since insurance services are quite similar and cosmopolite, to enter the market and gain market share, all firms offer more insurance benefits beside reducing fee and increasing commission regardless of business performance Some conditions are traditionally applied for a certain kind of enterprise but now are applied for many others of adjusted without thorough studies Some do not reduce the fee but offer more insurance conditions out of the profession to attract more clients For instance,

a firm insures ship launching but not ship building time regardless of risk of launching technique in Vietnam

Compensation competition

In this fierce competition, clients have power to put pressure and require insurance firms to compensate higher than the real loss or compensate for loss out

of insurance In this case, they apply the methods "commercial compensation" or

"humanitarian compensation" This increasing demands for compensation results to negative insurance This phenomenon has bad influence on insurance business but

in fact, it lives everywhere, especially in new-born companies which have not developed financial, evaluating regulations thoroughly and control timely

Administrative pressure competition

Besides the above competing methods, some insurance firms apply administrative method to put pressure on, induce and force people to buy insurance

services or cooperate with a broker in some company This method is clearly seen in student insurance Some new insurance firms support the schools, even higher than the insurance fee received to dominate the market Through this, other firms are put more pressure on by the schools that damage the student insurance image Also, it will be more difficult to persuade insurance participants to accept the fee or conditions

2.3.2.3 Competitors

Non-life insurance market share is mainly owned by big enterprises such as Bao Viet, PetroVietnam, Bao Minh, PJICO Their market share accounts for 69.89% in 2009 (Bao Viet 26.96%, PetroVietnam 20.28%, Bao Minh 13.35% and PJICO 9.31%), 66.3% in 2010 (Bao Viet 24.79%, PetroVietnam 20.44%, Bao Minh 11.83% and PJICO 9.23%) The others' accounts for 30.1% in 2009 and 33.7% in

2010

Because MIC is a new-born corporate, it recognized its competitors are at the similar level such as Post office, Aviation, Agribank, BIC, Nha Rong, AAA and Global insurance

Table 2.5: MIC's competitors' total revenue and market share

1 Military Insurance Corp 342 445 130.1% 2.49% 2.62% 105.2%