Essay focusing on reputation as a source of sustainable competitive advantage in the insurance industry.
According to corporatefinanceinstitute.com a competitive advantage is an attribute that allows a company to outperform its competitors. Competitive advantages allow a company to achieve superior margins compared to its competitors and generates value for the company and its shareholders.A competitive advantage must be difficult, if not impossible, to duplicate. If it is easily copied or imitated, it is not considered a competitive advantage.A company has a sustainable competitive advantage when it acquires some qualities or attributes which are different from other competitors in the market and which makes it outstanding in the market. When the favourable competitive advantages last for many years, then they are known as sustainable competitive advantages.
In today’s competitive environment it is very important to have a sustainable competitive advantage to sustain. It can be measured by looking at the profits of the company with the advantage which should be Reputation according to www.google.co.zw is the observers' collective judgments of a corporation based on assessments of financial, social and environmental impacts attributed to the corporation over time more than its competitors in the market grahamwillcock.wordpress.com says that reputation, or let’s say the net effect of all one’s interactions with a brand, provides an identity that becomes a rallying point for employees and makes customers proud to be associated with a company or brand. They have a clear understanding of what a brand is about and identify with the vision and value system associated with that brand. Abraham Lincoln would call this the ’tree’. It’s the real thing and cannot be faked at least not indefinitely.
In the insurance industry in life insurance members are very happy to be associated with the Nyaradzo brand because it is known for paying claims on time and as agreed as compared to other brands where when claims arise then then will not own up by paying the claims.The brand Nyaradzo has got a lot of members joining their policies because they know that the brand is a very trusted brand. Nyaradzo is known for carrying members to their final destinations even if they will be laid to rest in rural areas. This has seen a lot of people joining this policy.It is very difficult for other players to come in the insurance sector and try to compete with Nyaradzo because it has already made a name for itself.Secondly, reputation affects image, or the way others view you – this is Abraham Lincoln’s ‘shadow’ analogy. A positive image attracts people to you – like prospective employees so you get to choose the best of the bunch, but the same may be said for attracting customers and shareholders. Image is good for share price.So a positive reputation helps a company keep its best people, attract and retain good customers, and adds value to the share price as the share takes on an intrinsic value of its own.
Another good example of reputation being a source of competitive advantage is that of E cosure, people have a lot of faith in the brand Econet that is why they are stampeding to join Eco sure. Econet is the one leading in the tele communication market. It is made up of hard working and very innovative employees and thus bringing the best products to the market.Eco sure has also been known for paying claims on time and delivering what it promised with the insureds. The financial gazette on the 12th of September reported that Eco sure had reached 1 000 000 users in two months. All this is attributed to the fact that the society has faith and trust in the Econet brand.Reputation is also a source of sustainable competitive advantage if an insurance company wants to form an alliance. The partner cannot accept to form an alliance with an insurance company which is not doing well. The relationship between Sanlam and Zimnat is there because both organisations have a good reputation. If ZIMNAT had a bad reputation, then then would not have partnered with Sanlam because no-one wants to be associated with an organisation which has a bad reputation.By partnering with Sanlam it means ZIMNAT has gone all the way to be known in the world because San lam is a good brand.
This has brought confidence to the members and more members have joined the Zimnat insurance company as a result of the partnership.The CEO of Zimnat Mustafa Schak on the source.co.zw was quoted saying their partnership with Sanlam will give them a regional appeal because Sanlam has operations in most African countries. Companies prefer insurance from a company with international back up and with Sanlam that will be our advantage. This is likely to increase our revenue as a company.This means that Sanlam has a good reputation and that ZIMNAT is riding on the good reputation of SANLAM.For reputation to be regarded as a source of sustainable advantage it should meet the following VRIO framework which has the following attributes;ValuableThe first question of the framework asks if a resource adds value by enabling a firm to exploit opportunities or defend against threats. If the answer is yes, then a resource is considered valuable. Resources are also valuable if they help organizations to increase the perceived customer value. This is done by increasing differentiation or/and decreasing the price of the product. The resources that cannot meet this condition, lead to competitive disadvantage. It is important to continually review the value of the resources because constantly changing internal or external conditions can make them less valuable or useless at all. Reputation is said to be a source of competitive advantage if it is valuable.RareResources that can only be acquired by one or very few companies are considered rare. Rare and valuable resources grant temporary competitive advantage.
On the other hand, the situation when more than few companies have the same resource or uses the capability in the similar way, leads to competitive parity. This is because firms can use identical resources to implement the same strategies and no organization can achieve superior performance.Even though competitive parity is not the desired position, a firm should not neglect the resources that are valuable but common. Losing valuable resources and capabilities would hurt an organization because they are essential for staying in the market.Costly to ImitateA resource is costly to imitate if other organizations that doesn’t have it can’t imitate, buy or substitute it at a reasonable price. Imitation can occur in two ways: by directly imitating (duplicating) the resource or providing the comparable product/service (substituting). A firm that has valuable, rare and costly to imitate resources can (but not necessarily will) achieve sustained competitive advantage. Barney has identified three reasons why resources can be hard to imitate:
- Historical conditions. Resources that were developed due to historical events or over a long period usually are costly to imitate.
- Causal ambiguity. Companies can’t identify the particular resources that are the cause of competitive advantage.
- Social Complexity. The resources and capabilities that are based on company’s culture or interpersonal relationships.
Organized to Capture ValueThe resources itself do not confer any advantage for a company if it’s not organized to capture the value from them. A firm must organize its management systems, processes, policies, organizational structure and culture to be able to fully realize the potential of its valuable, rare and costly to imitate resources and capabilities. Only then the companies can achieve sustained competitive advantage.
References:
- Rothaermel’s (2013) ‘Strategic Management’, p.91https://www.strategicmanagementinsight.com/tools/vrio.htmlhttps://grahamwillcock.wordpress.comFinancial gazette.2018
- Econet’s EcoSure reach 1-million users in two months.[Online] Available from https://www.financialgazette.co.zw[Accessed : 28 September 2018]Newsday.2017 Zimnat rides on Sanlam partnership.[Online] Available from :https://www.newsday.co.zw[Accessed : 20 September 2018https://corporatefinanceinstitute.comwww.google.co.zw grahamwillcock.wordpress.com.
