SWOT Analysis -- State Farm

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Internal Environment Analysis

Jingyan Liang

Center for Leadership Studies, Northwest University

LDRS 7073: Strategic Thinking and Planning

Dr. Rowlanda Cawthon

November 10, 2020

Internal Environment Analysis

Leadership could either be an asset that helps expand a business or a weakness that keeps a business from being successful. This internal analysis considers our company's practices of leadership, culture, business structure, value chain, and financial performance to explore the organizational core competencies and existing competitive advantages (Grice, 2018).

State Farm Mutual Automobile Insurance Company (State Farm Mutual or the company) is a mutual insurance company that provides various types of insurance, banking products, and mutual funds. It is unlike any other insurance organization (Market Line, 2016). By identifying my organization’s internal environment, I applied the PRIMEFACT checklist (Parish, 2016) to interview participants to determine the five internal causes that were deemed critical for understanding the organizational dynamics.

Management

Strength

According to the vision and mission statement of State Farm (State Farm Blogspot, 2010), State Farm endeavors to sell its goods through the business strategy of differentiation ("like a good neighbor"). Toby’s office, is a State Farm independent agency located in Washington state that has an effective process to reach desired objectives by dividing clear and no cross-section departments to take on tasks to avoid passing the buck and to get positive reviews. According to the conversation with all participants, every position’s full-fledged responsibilities determine who does what and who reports to whom.

If State Farm is considered as a factory, our process is operational and efficient. We normally have one sale to ‘open the door’ to customers, [and] sell insurance to them. Then, we do not ‘close the door’ until they leave, since we have our service person to take care of them. You know, I also always ‘track’ my clients to see if they are satisfied with our service and what are their further needs on money investment and personal concerns. (T. Stevens, personal communication, October 31, 2020).

Leaders today need to build influence instead of control (David & David, 2017). Toby, a leader of one of the State Farm agencies, encourages employees to (a) discuss their innovational ideas, (b) reveal problems, (c) provide recommendations, and (d) give suggestions that created an open and flexible workplace for everyone. Regarding Toby’s leadership, Lean Miller, who was executing her primary tasks of working at the service department and making phone calls to clients, said that she was “so happy to work with Toby, because he really cares about us, and we do have a monthly goal to get the extra bonus, like keep insurance termination rates by 2%, then we’ll get one-day paid-off.” Therefore, measuring individual performance was often apparent with numbers on paper and with consistent communication to make a rating scale.

Weakness

State Farm organizational structure is rigid (J. Ittner, personal communication, October 31, 2020). Each department is responsible for only its own affairs. There are no overlapping matters, which makes the management plain but aggravates the employees' complaints. “Every time I need to settle my bill, the representative always keeps me waiting because he needs to call the appropriate department to ask for the results”, said one of client Garett (G. Garett, personal communication, October 31, 2020 ). It’s not worth to keep the consistent service to clients towards not being able to communicate directly and wasting time. Service manager Jennifer indicated that she speeded at least three hours a day on the phone to State Farm underwriting because her function did not allow direct access to information that clients requested (J. Ittner, personal communication, October 31, 2020). “I am overwhelming and annoyed”, because “I can not give direct answers to customers, and these conversations take up a lot of my work time” (J. Ittner, personal communication, October 31, 2020).

Marketing

Strength

As Kantar Media (2019) showed, State Farm dominates the market of property/casualty insurance with a market share slightly over 10%, which is almost double that of other competitors in the market. “The market for personal insurance consists of all adult individuals. All products available… are appropriate for every type of person from the moment they leave their parents’ home to the day they die,” (T. Stevens, personal communication, October 31, 2020). As Christ (Molinari, 2020) wrote in the RHAWA newspaper, the median list price for homes in Washington is $524,970, and the average wage is $51,182 this year. So this was an opportunity to gain fire insurance sales in King County this year for Toby’s office. Furthermore, creating a multi-language market platform online was intelligent and unique in Toby’s office compared to rivals. Toby’s office has a trilingual marketing manager and has adequate experience and training to expand their market and reputation. One of the people in Toby’s office said, “we posted advertisements regularly on Facebook, Instagram, Wechat and Lines, and we have a great client base who speaks different languages,” (J. Ittner, personal communication, October 31, 2020). It was wise to spend 3% of sales income to guarantee 25% earnings growth by presenting those channels.

Weakness

The marketing of the products left a lot to be desired. Even though the product is a success in terms of sale but its positioning and unique selling proposition is not clearly defined which can lead to the attacks in this segment from the competitors. Clients are shopping around to get the cheapest cost most time, “but low price is not our competitive proposition that most people can not accept it” , said Lean from State Farm sales department (L. Miller, personal communication, October 31, 2020).

Finance

Weakness

State Farm applied lofty sums for underwriting expenses, and total expenses outweigh the revenue collected. Examples of expenses include the costs of advertising, agent commissions, and employee salaries. As shown in Table 1, State Farm had a loss ratio of over 60% ((J. Ittner, personal communication, October 31, 2020), which could indicate immense underwriting discipline and risk mitigation.

Table 1

Financial Ratio Numbers of 4 Insurance Industries

Insurer	Loss Ratio	Loss Adjustment Expenses Ratio	Expense Ratio	Combined Ratio
State Farm	64.1%	16.8%	26.0%	106.9%
Geico	67.8%	10.6%	15.3%	93.7%
Allstate	57.5%	13.3%	27.7%	98.4%
Progressive	62.9%	10.6%	21.0%	94.6%

Note: This table demonstrated the four financial dimensions of a prototypical table. Adapted by Morris, P. (2018). Insurance Industry Basics: Combined Ratio. SNL Financial. (Retrieved from https://www.fool.com/investing/general/2015/02/23/insurance-industry-basics-combined-ratio.aspx).

Strength

The insurance market was saturated, and it was difficult for new organizations to enter the market to compete with State Farm (Market Line, 2016). State Farm’s long history of a good reputation enabled it to sit in the market stably. Its broad product offerings had earned customers’ loyalty and caused it to be ranked as the #1 U.S. private auto writer (State Farm Company, 2019). Allstate Corp. Executive Vice President and CFO Mario Rizzo, during a recent investor conference, said that State Farm had been "quite aggressive in reducing interest rates" and remains a "solid competitor so far" (Zawacki, 2020, p1).

Management Information System (MIS)

Strength

Over the years, State Farm has built a reliable distribution network that has reached the majority of its potential market and has securely protected every account’s information (Market Line, 2016). State Farm had updated two network platforms in a short period of two years to better include all members’ relationship and direct contact information. These network platforms also automatically generate concise icons to show every single agent’s onboarding task and performance (T. Bowers, personal communication, October 31, 2020). Scams were prevalent in State Farm through various forms. “Anything [related to] information security, State Farm is probably doing. The main goal of information security is to make sure that data and our information is safe,” (T. Stevens, personal communication, October 31, 2020). There were numerous projects to work in every area in any language, and numerous forms of protection were established to access control of the public cloud. State Farm had teams to protect the database, to establish encryption, and to perform vulnerability scans and infrastructure (Moorcraft, 2019). It spent a lot of time and resources on giving employees the ability to learn, grow, and adapt to create leadership skills and communication skills. The information technology team member of State Farm’s headquarters said, “we were constantly evolving and learning new threats and ways to mitigate the future hackers of tomorrow.” (T. Stevens, personal communication, October 31, 2020). It was astonishing to see a collaborative and user-friendly space for all members to establish a large community connection that rival firms were unable to create.

Weakness

Even State Farm has advanced informational system, it still needs more investment in new technologies. It has 19,000 agencies in the United States and Canada (T. Bowers, personal communication, October 31, 2020), and as the company is operating in numerous countries it is exposed to currency fluctuations especially given the volatile political climate in number of markets across the world. Given the scale of expansion and different geographies the company is planning to update informational system. The investment in technologies of State Farm is not at par with the vision of the company that can integrate the processes across the board (T. Bowers, personal communication, October 31, 2020).

Human Resources

Strength

State Farm employees work hard, and different benefits are offered as rewards (StateFarm.com, 2019). The rewards include the compensation for sales and agents, various investment plans for retirement, tuition aid to employees if they plan to learn beyond the office, and being part of an open-minded culture that encourages professional and personal growth. Most crucial for most people was that they were allowed to work from home (StateFarm.com, 2019), which resulted in a workforce that was not only highly skilled but also motivated to achieve more.

Weakness

However, even though State Farm had options for medical, dental, life, and other welfare bundles, not every employee is eligible for all of them. Toby’s office’s human resources manager said that employees of independent contract agents were excluded from State Farm’s flexible compensation plan for U.S. employees (L. Miller, personal communication, October 31, 2020). On the other hand, compared to other organizations in the industry, State Farm had a higher attrition rate and spent a lot more than its competitors did on training and developing its employees. State Farm had 151,000 employees in 2016, which shrunk to 59,827 in 2018 (Lucija B., 2017). The employee attrition rate was therefore 132%, which can be calculated by examining the data from StateFarm.com.

Core Competence

Strength

State Farm takes a holistic view of insurance, no matter what kind of insurance product it is. For coverage contracts, it had a certain percentage above and a detailed coverage statement. In the purchase process, State Farm considered many factors to ensure that its capabilities matched the insured property’s value. It has always had a threat of new entrants, and there are a great many competitors in the market, such as AllState, Liberty Mutual, Geico, and Farmers. Different insurance companies have different qualifying standards to issue insurance policies. For the claim process, besides offering insured coverage, State Farm focuses on what clients have at risk in terms of assets and then proposes a comprehensive insurance plan, which takes much more time than merely doing a brief survey with the client. Still, it is necessary and crucial to protect clients’ assets.

Weakness

Because there are a lot of insurance companies and distributors in the same market, the

Over the years the company has developed numerous products but those are often response to the development by other players ((T. Stevens, personal communication, October 31, 2020). “[There is] no doubt that everyone is concerned about insurance prices and products. But both of them we can not guarantee [in State Farm], ” Toby said ((T. Stevens, personal communication, October 31, 2020). State Farm does not access regular supply of innovative products thus leading to high and low swings in the sales number over period time.

Conclusion

For internal environment factors, as one of the leading companies in the insurance industry, State Farm protects its market share through a highly skilled workforce through training and development programs, entering new markets by creating advertisement platforms, and having a strong brand portfolio, which has a high level of customer satisfaction. The three things that surprised me are: Toby’s office is using multi-language market platform to gain a staggered market; loss ratio is over 60% which is not like the surface we can see; employees of independent contract agents were excluded from State Farm’s flexible compensation plan which sounds unfair to most people.

Although State Farm had numerous strengths, there were weaknesses that could not be ignored. As before mentioned, State Farm had a high attrition rate in the workforce, financial planning was not covered properly, the profitability ratio and net contribution of State Farm were below the industry average, and the organization structure was only compatible with the present business model, which limited the innovation of new products.

References

David, F. R. & David, F. R. (2017). Strategic management: A competitive advantage approach, concepts and cases (16th ed.). Essex, England: Pearson Education.

Grice, A. L. (2018). Strategic analysis and planning series V: Internal analysis. EquiManagement. Retrieved from https://equimanagement.com/articles/strategic-analysis-and-planning-series-v-internal-analysis

Market Line. (2016). State Farm mutual automobile insurance company - strategy and SWOT report. Market Reseach.com. Retrieved from https://www.marketresearch.com/MarketLine-v3883/State-Farm-Mutual-Automobile-Insurance-9889420/

Molinari, C. (2020). Top 6 markets to invest in real estate properties in Washington. Journal of RHAWA. Retrieved from https://www.rhawa.org/blog/top-6-markets-to-invest-in-real-estate-properties-in-washington

Moorcraft, B. (2019). State Farm hit by data breach. Insurance Business America. https://www.insurancebusinessmag.com/us/news/cyber/state-farm-hit-by-data-breach-174829.aspx

Morris, P. (2018). Insurance industry basics: Combined ratio. Journal of SNL Financial. https://www.fool.com/investing/general/2015/02/23/insurance-industry-basics- combined-ratio.aspx

Parish, D. (2016). Strategic Planning: Internal analysis an online course with David Parrish. EU-Eastern Partnership Culture and Creativity Programme.

State Farm.com. (2019). State Farm announces 2019 financial results. https://newsroom.statefarm.com/2019-state-farm-financial-results/

StateFarm.com. (2019). Outstanding employee benefits. https://www.statefarm.com/careers/become-an-employee/employee-benefits

World Population Review. (2020). Washington population 2020. https://worldpopulationreview.com/states/washington-population

Zawacki, T. (2020). State Farm's auto premiums slippage spans geographies. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/state-farm-s-auto-premiums-slippage-spans-geographies-57509277