sun life financial
TRANSCRIPT
Wang Ronghua (rw2368)
Sun Life Financial
Strategic Position, Market Structure and Entry Strategy
Sun Life Financial (SLF), a Canada-based financial service company, is planning its
strategy to enter the Chinese Insurance Company. To understand its strategy, we first
have to define SLF’s strategic position by using SWOT analysis. Second, we will
use Porter’s Five Force Framework to analyze the market structure of the Chinese
insurance industry. Based on the analysis of the company’s strategic position and the
market structure of the industry it wants to enter, we will assess the three strategies
outlined for SLF: “Minimalist” approach, “Full Speed” development and “Model
Citizen”. Finally, we will analyze how to choose the city based on different
strategies.
1. Strategic Position of SLF
SLF is a Canadian financial service company specialized in wealth management
and protection. Its mission is to help customers achieve lifetime financial security.
Its vision is to be international leader in protection and wealth management. With
this mission and vision, the company designed a strategy to enter China. To assess
different entry strategies, we first have to understand SLF’s current situation by
using the SWOT analysis to detect SLF’s strength, weakness, opportunities and
threats (See Exhibit 1).
The strength for SLF to enter China is its rich experience in the insurance industry
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and in the Chinese market, although limited. SLF started its business since 1865.
This long history has helped SLF build a strong build and good reputation. Also
because of this long history, SLF has built a very strong distribution channel.
Because of its strong position in the business, it also has the ability to customize
products and services for high net worth individuals, which is more effective in
generating profits for the company. In order to diversify its investments and
increase its international presence, it has also expanded its business into foreign
markets. As to its experience in China, it had been the largest foreign insurance
company in China in 1920. It also has a representative office in Beijing since 1992,
which provided valuable contact with the Chinese government and business people.
Moreover, SLF has already signed an agreement to partner with Everbright Group
(EBG), one of the most respected financial service companies in China.
There are also two main weakness of SLF with respect to its entry into China. First,
it lacked experience doing business in developing countries. Although it had
expanded business into South America and Asia, the majority of its revenue is still
from Canada, US and UK. The market structures in developed countries are very
different from those in developing countries. To be successful in developing
markets, SLF has to learn the distinctive feature of the markets. Second, SLF lacks
the necessary knowledge about the Chinese customer’s special needs. More
important, as in most developing markets, the lack of reliable market research firm
makes it very difficult to gain valuable knowledge about the market. 1This makes it
1 Tarun Khanna, Krishna G. Palepu and Jayant Sinha, “Strategies that Fit Emerging Markets”, Harvard Business Review (June 2005), pp. 15-29.
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very difficult to develop products and services suitable to the Chinese market.
According to current research, successful multinational companies develop
strategies for doing business in emerging market different from those they use at
home and often find novel ways of implementing them.2 SLF still lacks necessary
information to do devise suitable strategies for the Chinese Market. Another
weakness of SLF lies in its Chinese partner, EBG. Although EBG is a respected
financial company in Chinese financial industry, it has no experience in the
insurance market before building joint venture with SLF. This will make SLF’s
exploration of the Chinese market even harder.
There are also several opportunities that SLF can tap on. First, China has the second
largest economy and grows at approximately eight per cent. It also has the largest
population in the world, which can also be read as a large insurance market. It is the
fourth largest market in Asia with premium income of USD 16.8 billion in 1999.
Second, Chinese insurance industry is underdeveloped. Its penetration rate is very
low. The penetration rate of life insurance is 1.69% and general insurance 0.63%.
Third, it has reached an agreement to partner with a well-established Chinese
financial services group --- Everbright Group. EBG has a very sophisticated
management team and has high-level political relationship, which might be helpful
in the future for SLF to get the full license.
The first threat for SLF is the political risks associated with Chinese political
2 Orit Gadiesh, Philip Leung and Till Vestring, “The Battle for China’s Good-Enough Market”, Harvard Business Review, (Sept. 2007), pp. 2-11.
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regime. High level of corruption and piracy still exist. The second threat is that the
types of products and services allowed to be offered for sale is highly restricted.
Thirdly, its corporation with EBG might not be very smooth. If the relationship
goes bad, the prospect for SLF in Chinese market might be dangerous. So in this
corporation, SLF is on the disadvantageous side.
2. Market Structure of Chinese Insurance Industry/The Institutional Contexts
of Chinese Insurance Market
Besides assessing SLF’s strategic objective and its internal ability to attain it, we
also have to assess the market structure which SLF intends to enter. In this paper,
we use Porter’s Five Forces Framework to analyze the market structure of the
Chinese insurance industry. According to Porter, the five forces that shape the
attractiveness of a market include3: The threat of the entry of new competitors; the
intensity of competitive rivalry; the threat of substitute products or services; the
bargaining power of customers (buyers); the bargaining power of suppliers.
The threat of the entry of new competitors is limited. The Chinese insurance
industry is largely monopolized by the five large local players, totally accounting
for 98.26% of the market share (see Exhibit 2). The most possible new-comer is
joint venture companies between local companies and foreign companies. However,
because of the limits of license provided to these companies, the competition
produced by these companies is trivial. The monopolistic position of PICC can
3 Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard Business Review, (January, 2008), pp. 2-17.
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hardly be broken by new-comers. Therefore, the threat of new-comers will be very
limited and the market structure will continue to be oligopolistic.
The threat of substitute products or services is increasing. Here we define other
financial products and services, such as mutual funds and stocks, as the substitute
for insurance products. Because of Chinese government’s intention to develop the
Chinese financial market, its types of products and services available to individual
investors will greatly increase in recent years, which will reduce the attractiveness
of insurance products because of its relatively low returns.
The bargaining power of the buyers in Chinese insurance industry is not very
strong. This is largely due to the high concentration of the industry. Nearly 70% of
the market share is in the hand of PICC. Moreover, the switching costs for buyers
are very high. Because of the Chinese regulation, the process to transfer an
insurance account in one company to other is very tedious. Of course, we have to
pay attention to the increasing attractiveness of alternative financial products, which
might increase the bargaining power of the buyers.
By suppliers, we focused on the suppliers providing administrative and logistic
supporting for SLF’s operation in China. In these areas, Chinese market has
sufficiently developed and competition is very high. The concentration of these
industries is low and the switching costs for SLF are relatively low as well. So the
bargaining power of suppliers is relatively lower.
Based on the analysis above, the market structure of Chinese insurance industry is
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highly concentrated and competition is not very severe. However, access for foreign
firms is strictly limited, operating costs are very high and difficult to control.
Moreover, short-term economic success is almost impossible. Companies
attempting to enter the market need resolution to waiting for the uncertain
opportunity with possible loss for an extended period.
3. Assessment of the Three Strategies
Based on the internal capacity of SLF and the market structure of the Chinese
insurance company, three strategies are recommended for SLF: Minimalist, Full
Speed and Model Citizen. In this paper, we assess the three strategies along three
dimensions: costs, returns and volatility.
Minimalist approach requires the company invest only minimal amount of capital
and focusing on traditional insurance products. The main purpose of the strategy
is to maintain a presence and “shift gear” when opportunities come. If SLF
follows this strategy, it does not invest heavy capital and does not develop new
products suitable for the Chinese customers. It is difficult to compete with either
the fiver local players or the existing joint venture companies. Therefore, the
characteristic of this strategy is low cost, low returns and low volatility.
The Full Speed strategy is on the opposite of minimalist approach. This strategy
requires heavy investment in agency force and product development. The cost for
this strategy is much larger than minimalist. According to the data available, we
can observe that premium/agent declined significantly for joint venture insurance
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companies in China (See Exhibit 2). For AIA, the first foreign company obtaining
the license in 1992, its premium/agent is 35052. However, for companies
obtaining the licenses after 1996, the premium/agent went down to about 5000.
Thus, if SLF intends to achieve the target sales in Chinese market, it has to build a
large agent force due to the low premium agent ratio. On the other hand, because
of its heavy investment, the return under this strategy might be higher than the
Minimalist approach. Therefore, the characteristic of the Full Speed strategy is
high cost, medium returns and medium volatility.
The Model Citizen strategy is a more passive strategy than Minimalist in terms of
advancing SLF’s appearance in the Chinese market. Its main purpose is to build
sound governmental relationship and to gain an understanding of the Chinese
market. However, the change of getting full license is unpredictable. Therefore,
the characteristic of this strategy is low cost, low return and high volatility.
Actually, there is a fourth choice for SLF. It is the strategy of staying away. But
since SLF wants to be an international leader in the industry, it cannot ignore the
potential of the Chinese market. Moreover, it has already signed an agreement
with EBG, so this choice is impossible for SLF.
4. City Selection
City selection is fundamentally based on strategies. In this paper, we mainly discuss
the advantage and disadvantage of Shanghai, Tianjin and Guangzhou in terms of
market size, purchasing potential, market growth, operation costs, governmental
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relations and national profile (see exhibit 3).
First, as the earliest Chinese city open to the outside world, Shanghai has the most
amiable attitudes toward foreign investors. In order to build Chinese financial
center, Shanghai local government strongly support foreign companies to provide
financial services in the city, of course, including insurance services. This is the
reason why all the joint venture insurance companies began their business from the
city. Also, as the largest and richest city in China, it also has the largest market size
and purchasing power. However, as one of China’s economic center, operating costs
in the city is relatively high than in other cities. And, since there are already many
joint venture insurance companies in the city, SLF lacks “first move” advantages in
the city. Moreover, as we have seen before, because of increasing competition,
premium agent ratio in Shanghai has declined significantly in recent years and the
market has been sufficiently developed by local and joint companies. The growth
potential of the city is limited. Since the operating costs in Shanghai are high and
the market growth potential is limited, it is not suitable to develop “real” business
here. But as one of the most important cities in China, Shanghai is a good place to
develop high-level government relationships in China. Therefore, if SLF wants to
pursue the Model Citizen strategy, it should choose Shanghai. Either in Tianjin or
Guangdong, it is hard to get the same chance to contact with high-level officers in
Shanghai.
Among the three cities, Tianjin has the smallest market size and national profile.
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But it also has the least competition because of no joint venture companies has ever
operated in the city. Also, its operating costs are much lower than in Shanghai and
Guangdong. Since the market is underdeveloped, its potential is high and growth
rate is the highest among the three cities. Since its market size is limited, it is
unsuitable to pursue the Full Speed strategy there. Therefore, Tianjin is a good place
for SLF to start the Minimalist approach. It has lowest operating costs and SLF can
use its traditional products to test the local markets without incurring significant
R&D costs.
The position of Guangdong is between the two cities. Its market size is larger than
Tianjin but less than Shanghai. Although AIA already has JV companies there,
competition is much less than in Shanghai. Of course, the market growth there is
also greater than in Shanghai. Operating costs is also mediate. Therefore, it is a
good place to pursue the Full Speed strategies.
5. Alternative Strategy and City Selection
There is an agreement among JV insurance companies that short-term economic
rewards are illusionary in the Chinese market. Then why so many foreign insurance
company wants to build JV firms in China. Mainly for two reasons. First, they want
to find a partner with strong government relationship to help them get the full
licenses. Second, they want to understand the Chinese market and the customers
through its presence in the market. These are also the primary reasons for SLF’s
imperative to enter China. Then, what kind of strategy can best serve these purposes
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with the lowest costs?
The proper strategy that can serve the two purposes proposed in this paper is a mix
of the Minimalist strategy and the Model Citizen strategy. At current stage, good
government relationship and development of suitable products and services for
Chinese customers based on reliable market information is necessary for SLF’s
future success in China. Since its main purpose is to understand the market needs at
the current strategy, rather than developing the market (it is almost impossible at
present), the operating costs should be as low as possible. Tianjin is a good place to
consider for it has the lowest operation costs among the three cities. Secondly, to
build good relationship with the government, Tianjin has geographical advantages
because of its closeness to Beijing, the power center. Also, Tianjin has two famous
universities known for their business and marketing departments, providing support
for SLF to study the Chinese insurance market. The mixed strategy in Tianjin can
achieve all its main purposes at a very low cost.
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Exhibit 1: SWOT Analysis of Sun Life Financial
Strength rich experience in insurance industry; strong brand and distribution channel; ability to customize products and services for
different level of clients; experience in expanding into foreign markets; experience, although limited, in Chinese
market;
Weakness lack of experience of successful
business in developing countries where institutional infrastructures are not as good as in advanced countries;
unknowledgeable about the needs of Chinese customers and lack of reliable channels to get valuable information;
Opportunities the Chinese insurance company has great
potential; the penetration rate in China is very low,
which is good opportunity to develop the market;
Partner with a respected Chinese financial service company which has good relationship with the government and sophisticated management team.
Threats Political risks associated with doing
business in China, as happened in 1949 and 1989;
Limited products and services are allowed to provide by foreign companies;
Possible conflicts between SLF and EBG, which are very common in JV firms.
Exhibit 2: Mainly Players in Chinese Insurance Market
PICC69%
Ping An20%
China Pacific7%
New China Life1%
Tai Kang 1%
Other2%
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Exhibit 3 Premium per Agent by JV companies, 1992-1999
1992 1996 1997 1998 19990
5000
10000
15000
20000
25000
30000
35000
40000
AIA
Manulife Sinochem
China Pacific-Aetna
Allianz Dazhong
AXA-minmental
Exhibit 4 Comparative Analysis of Shanghai, Tianjin and Guangzhou
Market
Size
Purchasing
Power
Market
Growth
Operation
Costs
Governmental
SupportNational Profile
Shanghai Large Large low high high High
Tianjin Small Small High low untested low
Guangzho
uMedium Medium Medium medium untested low
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