Geico
Current status
Value Chain
Marketing
Operations & Service
Five Forces
Buyers
New Entrants
Intensity of Rivalry
Competitive Advantage
Data, service
Size
Stability, reach
Brand
Macroenvironment
Political
Social
Technological
Key assumptions
Build Brand
Invest in Technology
GEICO began life in 1936 as the Government Employees Insurance Company (GEICO) but is better-known by its acronym. The company has always focused on the auto insurance industry. Today, GEICO is a wholly-owned subsidiary of Berkshire Hathaway. The original business model was to focus on government employees, but soon the company opened up to a broader audience (GEICO, 2015).
Industry Value Chain
The value chain consists of five elements of a business from which a company can derive competitive advantage: inbound logistics, operations, outbound logistics, marketing & sales, and service (MindTools.com, 2015). Inbound and outbound logistics are not usually a major part of the service value chain, though in GEICO's case the company only sells over the Internet, which is a key point of differentiation and lowers operating cases (Aho, 2014). The key elements for GEICO are operations, marketing and service. Marketing is a means by which new customers are attracted. There is very little, in terms of the insurance product, that GEICO can do to differentiate itself, but it can differentiate in terms of marketing, and the company has been successful at just that. The company's advertisements have given it a strong brand, and attracted many new customers. The company spent $935 million in advertising in 2013, three times the average in the industry, and passed Allstate to become the industry #2, with a premium income increase of 11.2%, much higher than anyone else in the industry (Aho, 2014).
Within the insurance industry, operations are another critical element of the value chain. Margins can be quite slim, because of the intense competition in the industry, so containing costs is particularly important. Actuarial work is also important, because payouts are one of the major cost drivers -- premiums need to be both competitive and aligned with payouts. Lastly, service is another critical factor. Generally, there is not much to differentiate between insurance companies on service, but service is considered by customers to be very important in their retention (Joseph, Stone & Anderson, 2003) until something happens. Customers place special emphasis on the service that they receive in a time of crisis, rather than the service they receive during normal times.
Five Forces
Profit in any industry is derived from the bargaining power a company has, and the different influencers of bargaining power. The insurance industry does not really have any suppliers -- aside from labor and computers. Capital is supplied, in GEICO's case, by parent company Berkshire Hathaway, but mostly it comes from the buildup of capital since its inception. The bargaining power of buyers in the industry is moderate. On one hand, the insurance industry is highly competitive, which allows buyers to have low switching costs and a high propensity to switch. On the other hand, this is balanced by the fact that buyers have very low information, and insurance companies can take advantage of information asymmetry in order to increase their profits.
There are no credible threats of substitutes for auto insurance. You either have it, or you do not. The laws with respect to that will vary from state to state. There is some threat of new entrants. Joseph (2003) notes that many financial institutions have a desire to enter the insurance business, something that increases risk for existing players. Furthermore, there are other insurance companies who could choose to enter auto, and there are foreign players who could seek access to the U.S. market.
The most important factor among the five forces is the intensity of rivalry between firms in this industry. There is a lot of money on the table, and many companies seeking to win share. Because product and service are poorly-differentiated, and because switching costs are low, the competition for customers is intense. This manifests in competition on the basis of price, but also in intensive marketing. GEICO spends more on marketing than its rivals, but it is by no means the only company in the industry that spends hundreds of millions of dollars per year on marketing (Aho, 2014).
The strongest competitive force is the intensity of rivalry, for reasons noted above. The intensity of rivalry basically counters the information asymmetry, so that in an industry where profit potential should be massive, most firms have very slim margins. The weakest competitive force is the bargaining...
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