We talked to 20 insurance executives and asked them about enterprise risk management (ERM) and strategy, but didn’t define ERM or strategy. We found that most responded to our questions with suggestions of how ERM teams could become more successful by interacting with planning and budgeting colleagues.
But there’s more to strategy than planning and budgeting. One of the most helpful definitions of strategy we found is from John Lewis Gaddis in Grand Strategy (2018):
Strategy is “the alignment of potentially unlimited aspirations and necessarily limited capabilities.”
That definition includes planning and budgeting, or what we would call the implementation stage of strategy. But there are three other stages of strategy that precede implementation:
Let’s take these step by step.
Step 1: Identifying a strategic need
Management will usually recognize a strategic need when a strategy is no longer working as well as it had previously. For example, sales could have slipped, profit margins declined, customer satisfaction dipped or closing and/or renewal rates declined. The strategic need then is to correct the existing strategy or create a new one altogether.
A strategic need can also be related to a new opportunity. This is the primary strategic driver of entrepreneurs and entrepreneurial organizations. Usually insurers’ strategic needs are opportunities that are some sort of extension of their existing business, but this isn’t a requirement. These strategic imperatives are usually linked very closely to potential changing customer needs and/or new means of meeting existing customer needs.
Businesses and investors may also believe they have a strategic need to get better returns from resources that haven’t been fully tapped into. These could be people with particular skills, computer systems that could handle much more than the business of the company or capital that is not required to support the current or foreseeable business. Usually this situation will lead to a search for new opportunities or for business combinations.
Step 2: Strategy formation
Once a strategic need has been identified, an insurer will then devote resources to forming a strategic proposal, which is a potential path for satisfying the strategic need with its available resources. Going back to the Gaddis definition of strategy above, in the process of strategy formation, an insurer may find that it needs to adjust either its objectives or capabilities. The proposed strategy may only fulfill some of the identified strategic needs, and it may also require that the insurer expand its capabilities to make the strategy proposal work.
Step 3: Strategy selection
At any point in time, an insurer may have choices among a number of strategic proposals. An important step in the strategy process is selecting which strategies to pursue. Insurers with accurate mission and vision statements will often use those as a primary hurdle and the corporate goals as the secondary hurdle. If, after meeting the requirements of both, there are more strategic proposals than the insurer feels confident implementing at one time, additional criteria must be developed and applied to select the proposals that will be implemented.
Step 4: Strategy implementation
Now, finally, comes the planning and budgeting process, which is the most visible and well known part of insurers’ strategy process. Planning will include assigning responsibility for the implementation, allocating resources and setting specific objectives for implementation and eventually for performance.
Planning and budgeting often has at least two phases. In the first phase, a long-term strategic plan is articulated. It may be accompanied by detailed projections and descriptions of the activities that are expected to support the strategic objectives and decisions over the long-term planning period.
The second phase is the construction of detailed plans and budgets for the coming year. This step will usually include decisions regarding specific changes to staffing, major systems development projects and other resource allocations. Detailed financial projections are usually developed in this step as well.
Each of these steps is important and the strategic CRO can contribute something that will improve either the process, the outcome or both. By taking these four steps, insurers will be well on their way to aligning unlimited aspirations with necessarily limited capabilities and the strategic CRO can be an integral part of these processes.
Next in the series: We’ll discuss the roles different ERM programs play in strategy.