Medivac A Health Insurance Company example essay topic

Introduction: A failing company is an entity whose profit rate is substantially lower than the average profit rate of its competitors. A company can lose its competitive advantage but still not fail. It may just earn average profits. Failure implies something more drastic. Failing companies typically earn low or negative profits - meaning the company is at competitive disadvantage. Companies which succeed in building a competitive advantage and sustaining the durability of their competitive advantage, can be considered as successful companies.

On the other hand, companies that fail to build and sustain durability of their competitive advantage are considered as unsuccessful companies. Competitive Advantage: A Source of Success The four factors essential for building competitive advantage are: Efficiency Innovative capability Product quality Customer responsiveness These factors are determined by the strengths and weaknesses of an organization. The strengths of an organization depend on its: Resources Capabilities Competencies Resources include financial, physical, human and organizational assets of a company. Capabilities refer to skills in organizing, coordinating and putting resources to productive use. The main source of competitive advantage is superiority in creating values for customers. This is done by lowering costs, differentiating products so that high prices can be charged, and also by combining both of these methods.

The benefits of superiority in creating values for customers include: Superior efficiency enables a company to lower its production costs Superior product / service quality allows a company to charge higher prices and lower its costs Superior customer service allows an organization to charge a higher price Superior innovation leads to higher prices in the case of product innovations, or it can lead to lower unit costs in the case of process innovations. These four generic factors are essential for building a competitive advantage. A company can achieve its competitive advantage by developing distinct and appropriate competencies that arise from resources and capabilities. Durability of competitive advantage depends on the level of barriers to imitation, capability of competitors to imitate a company's advantage and the level of turbulence in environment. FACTORS CAUSING FAILURE OF MEDIVAC Background: To answer this question I will use MEDIVAC - a health insurance company established to provide health insurance cover. The company was the second biggest in Kenya and also the second biggest to go under after the fall of International Private Healthcare in 1996.

The winding up of Medivac, barely a year and a half after that of the London-based International Private Healthcare (IP) drew attention to the problems facing the industry which include unregulated medical charges, inefficient follow-up of patients and failure of health insurers to re-insure adequately to cover bad risks. The decision to wind up the company came after the company failed to transact business as some of its large debtors had failed to pay their dues on time. The winding up of the company came at a crucial time just as the company was planning to expand its operations. Scale of entry into the market: According to research, large-scale entry into a new business is often a critical precondition of new venture success. Although in the short run, large-scale entry means significant development costs and substantial losses, in the long run, it brings greater returns than small-scale entry. The reasons for this include the ability of large-scale entrants to more rapidly realize scale economies, build brand loyalty and gain access to distribution channels, all of which increases the probability that a new venture will succeed.

Medivac favored small-scale entry which meant that the company found itself handicapped both by high costs due to a lack of scale of economies and by a lack of market presence, which limited their ability to build brand loyalties and gain access to distribution channels. Poor Implementation: Managing a new venture process raises difficult organizational issues. If the implementation is done poorly, this places a great demand on a company's cash flow and can result in the best ventures being starved of the cash they need for success. Failure to anticipate the time and costs involved in the venture process constitutes a further mistake. There are also unrealistic expectations regarding the time frame required. For example, when Medivac was established, the aim was to make it the biggest health insurance company in Kenya.

However, the company failed to put in place controls that would ensure that the company did not lose money through fraudulent claims - which would be a great source of cash flow drain from the organization. Lack of Marketing Audit: It is a good system wherein an organization reviews all its activities and gives a new direction. This tool enables the company to see beyond the four walls and become more aggressive. It enables them to see the "danger zone" or "evil of self-destruction". Many companies feel they know everything and understand the market better.

This over confidence can lead to self-destruction - they become slow to react to changing environment. Medivac should have studied the market carefully and analyzed their strengths, weaknesses, opportunities and threats. The company's strength lay in its acceptable terms by many people. They had an opportunity to take a large market share from African Air Rescue (AAR) which was their major competitor and which was proving to be very expensive for many Kenyans. The company on the other hand, faced a major threat from over bloated bills from doctors.

In fact many insurance companies in Kenya did not like handling medical claims for this simple reason - once the doctors knew the patient (s) were under any insurance cover, they would automatically charge higher fees. This meant that the insurance companies had to carefully study which clinics or hospitals their clients would receive treatment at a fee that was acceptable. Marketing Arrogance: Success brings arrogance and people tend to become more complaisant and like to live in the past. They are not willing to change. This mindset hinders the people from adopting and accepting new ideas.

Failure rate has gone up because they still insist on applying out-dated marketing techniques which are not applicable in today's environment - today the marketing profile and custom profile both have undergone change and so has the expectation of customer. Some years back, it was possible to use the same old ideas in order to attract customers. However, things have greatly changed and the companies have discovered that they have to always be on top of things. The customers are now more clever, more informed and are no longer willing to put up with companies that are not willing to meet their needs. The competition in the market has become very stiff and it is therefore advantageous for any organization to try and keep in touch with the needs and wants of their clients as well as those of potential customers.

Medivac became so specialized and inner directed that it lost sight of market realities. Although the company was operating in an almost monopolistic market it failed to see what the upcoming competitors were doing: better customer responsiveness than they had. Lack of Innovation on a continuous basis: Innovation is the key to success. Innovative company can get only success.

A proper understanding of the market will lead to continuous innovations in pricing policy. Pricing has to be innovative depending upon per capita consumption and earning power. This requires a competent marketing personnel keeping in mind that: "when things are good every person can run. When things go wrong, only marketing can run". Lack of the innovation meant that Medivac could not respond effectively to its customers. Customer responsiveness can be achieved by: Attaining superior efficiency, quality and innovation together Giving customers what they want and when they want it Having a strong customer focus attained through: Leadership Training employees to think like customers Bringing customers into the firm through superior market research Customizing the products to the unique needs of individual customer (s) Quick response to customer demands Mismanagement: Many companies in Kenya have failed mainly due to this.

The resources in the company are badly managed leading to wastage at very high levels. Medivac which was a relatively new company needed to have well streamlined operations but the expenses within the company were too great and these were compounded by the medical claims which kept growing. The company was established at a period when the country was experiencing a very hard economic time - a projected growth of 2.65% turned to a negative 0.4%. There is need for any organization to ensure that its resources within are utilized properly with minimum wastage. Strategy du Jour: When companies run into trouble, the desire for a quick fix can become overwhelming. The frequent result is a dynamic that Collins describes in "Good to Great", shifting from one strategy to another, always looking for a single stroke to quickly solve its problems.

The company should take quiet, deliberate and understanding steps instead of steps of great lurching bravado. Dysfunctional Board: Many corporate boards remain hopelessly beholden to management. The board must not always want to hear good news they have to be prepared to hear the bad too. Unfortunately many board meetings are held just to discuss how well the company is doing and what great plans and success lie ahead. The challenges must be tackled and threats must be identified and the board must be willing to support the management in its strategies to acquired the desired growth by the organization. The great companies do not make excuses, including excuses about how they did not do well because the economy was against them or prices were not good.

Dangerous Corporate Culture: It is impossible to monitor actions of every employee, no matter how many accounting and compliance controls you put in place. But either implicitly or explicitly, a company's cultural code is supposed to equip front-line employees to make the right decisions without supervision. A company must not encourage risk without accountability and no profit must be made without disclosure as this leads to conflicts of interest without safeguards and finally results to rotten deeds. Although the company failed and was finally closed down, companies can avoid this situation and they can begin with three changes that taken together will provide a better early warning system against failure: Re engineer the board: This has been applied to every corner of the corporation at one point or another - except the board. That needs to change.

Incompetence is not the problem. Boards can be full of very capable people yet be totally ineffective as a group. The problem is that directors are too nice. Boards seldom convene without the CEO, and raising troubling questions can simply seem rude - which is often the way the CEO wants it. Directors needs a forum where they can talk frankly without the CEO. Ten minutes at the end of each meeting would be a good start.

Better yet, an annual retreat where the board can assess its own performance as well as the CEO's. Collectively, the directors are supposed to serve as a company's peripheral vision. Often at least one director suspects trouble before it becomes a crisis. The trick is getting him or her to say it out loud. Medivac should have encouraged both negative and positive feedback and have the board looking for solutions instead of just looking at the good news. Turn employees into corporate governors: Regular employees, not executive, not directors, not shareholders - have most to lose when a company fails.

With their jobs, pensions, and stock option wealth on the line, it follows that they have a greater incentive than anyone to act as company watchdogs. Yet few companies tap this built-in alarm system. Too often, front-line employees smell something rotten but do not, or cannot, convey the message upward. That is why companies need a mechanism to make it happen. Whistle-blowing does not count as a mechanism. What is really needed is a survey, carefully designed and administered by an outside agency, that regularly solicits employee feedback on sensitive questions.

Medivac should have put into place a system in which the employees were free to give their opinion and to warn the management when things went wrong without fear of victimization. Banish Ebitda: Companies hit the skids for all sorts of reasons but it is one thing that ultimately kills them: they run out of cash. Yet most managers are too preoccupied with measures like Ebitda (Earnings before interest, taxes, debt and amortization) and return on assets to give cash much notice. Boards do not ask for it. Analysts do not analyze it. Corporate financial statements do not typically include a statement of cash flow, but it is a crude snapshot that excludes of balance sheet items and does not show where the cash comes from.

The solution is a detailed, easily readable cash flow report. Give it to the board. Give it to employees. Break out cash flow by division letting people track the company's blood flow themselves. Finally, no system survives for long without feedback and controls. Thus corporations must implement these themselves if they are to survive in business.

Conclusion By "failure" it does not necessarily mean bankruptcy. A dramatic fall from grace qualifies too. Failure does not occur suddenly but it occurs because of what one analyst calls "an incremental descent into poor judgement". A "success oriented" culture, mind-numbing complexity and unrealistic performance goals all mixed until the violation of standards became the standard. The factors leading to failure include: Scale of entry into the market Lack of marketing audit Lack of innovations on a continuous basis Marketing arrogance Mismanagement Dysfunctional board Dangerous corporate culture A company may survive if it is able to implement the three quick fixes namely: Reengineering the board Turning employees into corporate governors Banishing Ebitda (Earnings before interest, taxes, debt and amortization).