IMPROVING COMPETITIVENESS of PETROLIMEX JOINT STOCK INSURANCE COMPANY

Therefore, the thesis is born to conduct analyses on PJICO’s competitiveness and suggest possible solutions to strengthen its competitiveness in order to stand and develop in Vietnamese

vietnam national university, HANOI

school of business

Do Thi Mai

IMPROVING COMPETITIVENESS of

PETROLIMEX JOINT- STOCK INSURANCE COMPANY

Major: Business Administration

Master of business administration thesis

Supervisor: Dr Tran Phuong Lan

Hanoi - 2011

vi

TABLE OF CONTENT

ACKNOWLEDGMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENT vi

LIST OF TABLES vii

LIST OF FIGURES ix

LIST OF ABRREVIATION x

INTRODUCTION 1

1 The problem 1

2 Objectives 1

3 Research Questions 1

4 Scope of work 2

5 Methodology and data sources 2

6 Significance and expected results 2

7 Limitations 3

8 Thesis Structure 3

CHAPTER 1: THEORETICAL FOUNDATIONS 4

1.1 Definition of competitiveness 4

1.2 Sources of competitiveness 5

1.3 Models to assess and analyze industrial competitive environment 6

1.4 Models to analyze firm competitiveness 14

CHAPTER 2: RESEARCH AND ANALYSIS APPLICATION OF MODELS TO ANALYZE PJICO’s COMPETITIVENESS 16

2.1 Overview of non-life insurance industry in general and in Vietnam 16

2.1.1 Non-life insurance industry in recent years 16

2.1.2 Non-life insurance industry in Vietnam 20

2.1.3 Key success factors in non-life insurance industry 25

2.1.4 Factors affecting non-life insurance enterprise’s competitiveness 27

2.2 Overview of PJICO 29

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2.2.1 Introduction of PJICO 29

2.2.2 PJICO’s business activities 33

Unit: VND billion 35

2.3 Application of models to analyze PJICO’s competitiveness 39

2.3.1 Application of PEST & Five Forces models to analyze factors affecting PJICO’s competitiveness 39

2.3.2 Application of Value Chain model to analyze and evaluate PJICO’s competitiveness 51

2.3.3 PJICO’s competitive position in comparison with its main competitors 76 CHAPTER 3: CONCLUSIONS AND RECOMMENDATIONS 80

3.1 Conclusion of PJICO’s Competitiveness 80

3.1.1 Summary from internal analysis and competitiveness comparison 80

3.1.2 Assess to the real PJICO’s strengths & weaknesses – the core compentencies 85

3.2 Solutions for PJICO to strengthen its competitiveness & to achieve its objectives 89

3.2.1 PJICO’s strategic vision and objectives 89

3.2.2 Solutions for improving PJICO’s competitiveness until 2017 90

3.3 Recommendations 106

3.3.1 Recommendations to Government 106

3.3.2 Recommendations to Association of Vietnamese Insurers 107

3.3.3 Recommendations to PJICO 108

REFERENCES 109

APPENDICES 111

LIST OF TABLES Table 1.1: Selected connotations of firm level competitiveness: 5

Table 1.2: The five forces that shape industry competition of Michael Porter 9

INTRODUCTION

1 The problem

Vietnamese non-life insurance market has been experiencing a challenging, struggling

as well as fast-developing stage Going along with this context, each and every participant in this market needs to focus more on their real competitiveness to achieve further growth and sustainability Therefore, the thesis is born to conduct analyses on PJICO’s competitiveness and suggest possible solutions to strengthen its competitiveness in order to stand and develop in Vietnamese non-life insurance market in the future

2 Objectives: The objectives of this study can be listed as follows:

 Give the overview on concept of competitiveness

 Provide some analyses on macro and industry environment of insurance market

 Conduct a thorough study on PJICO’s competitiveness

 Recommend the possible ways to improve the current competitiveness so as

to help PJICO be stable and progressive in the insurance market

3 Research Questions

 What is competitiveness?

 Method and process to analyze competitiveness of a firm?

 The way to conduct macro and industry environment analysis of insurance market?

 The way to conduct internal environment analysis of an insurance company?

 What are suggestive solutions to improve the competitiveness of PJICO to the year 2017?

4 Scope of work

In terms of theory, the thesis focuses on the concept of competitiveness, macro and industry environment analysis, and internal environment analysis of an enterprise In terms of practice, the thesis focuses on reviewing the current insurance market in Vietnam, analyzing the external and internal environment of insurance market in order

to assess the competitiveness of PJICO, and giving recommendations on possible solutions to improve its competitiveness to the year 2017

5 Methodology and data sources

This study uses the descriptive method for analysis through a specific case study of PJICO in the context of present Vietnam insurance market

The data are sourced through two ways:

 Secondary data are collected from research of books, websites, teaching notes, reports, magazines and newspaper, and other available documents

 The primary data are collected chiefly through deep interviews with PJICO’s as well as partners’ and other players’ managers and key staffs

6 Significance and expected results

By scanning the specific theory on competitiveness and analyzing the impacts of business environment of non-life insurance market, the study helps PJICO in giving suggestive solutions to improve its competitiveness to the year 2017

Therefore, this methodology, information and analysis can be applied for other companies or other insurance companies or for the PJICO itself in other stages of development

7 Limitations

This thesis is conducted in narrowed scope of insurance market and the applications to PJICO in certain period to the near future until 2017 Thus, it may not wholly express and reflect the business environment as the whole and in other periods

8 Thesis Structure: The study includes four parts as below:

 Introduction

 Chapter 1: Literature review and overview of non-life insurance market

 Chapter 2: Research and applications of models to analyze PJICO’s competitiveness

 Chapter 3: Conclusions and recommendations

CHAPTER 1: THEORETICAL FOUNDATIONS

1.1 Definition of competitiveness

Up till now, there has been no generally accepted definition of competitiveness as well as

no mutually accepted definition to explain it Competitiveness is a broad concept According to Beckley, “A firm is competitive if it can produce and services of superior quality and lower costs than its domestic and international competitors “Competitive” is synonymous with a firm’s long run profit performance and its ability to compensate its employees and provide superior returns to its owners” Normally, three competitive levels are focused: country, industry, and firm level This study is focused on firm-level competitiveness

1.2 Sources of competitiveness

Sources of competitiveness can be mentioned: Brand and reputation, Culture and system, Human resources, Technology & IT applications, Value creation, Customer satisfaction, Market share…

1.3 Models to assess and analyze competitiveness

1.3.1 PEST analysis

PEST stands for Political, Economic, Social and Technological factors However, the number of PEST analysis is unlimited Other country-specific factors can be added to perform macro environment

1.3.2 Industry analysis

Michael Porter’s five competitive forces include industry rivals, buyers, suppliers, potential entrants and substitute products The five competitive forces shall help define an industry’s structure as form the nature of competitive interaction within an industry

1.3.3 Internal analysis

According to Michael Porter, value chain indicates the whole production chain from the input to the output of final product/service by the end-user There are two kinds of activities in the value chain One kind is called supporting activities, which concerns the stream of production, where firms use its inputs, integrate and process them, then produce

or create its outputs The other kind is called primary activities, which are activities going across firms, where the outputs of one step become the inputs of the next step

Supporting activities include: firm infrastructure (finance, accounting…), human resource management, technology development, and procurement

Primary activities include: inbound logistics, production and/or operations, outbound logistics, marketing and sales, and service

A crucial analysis on the value created will help companies to identify its internal capacity or its core competencies, and then figure out the strengths and weaknesses of PJICO

1.3.4 Core competencies assess

After extracting the strengths and weaknesses of firm from value chain analysis, table of identification of sustainable competitive advantages to examine the long-term or short-term strengths and weaknesses, and then they would lead to the determination of core competencies for the company The table is as follow:

CHAPTER 2: RESEACH AND ANALYSIS APPLICATION OF MODELS TO ANALYZE PJICO’S COMPETITIVENESS

2.1 Overview of non-life insurance industry in general and in Vietnam

2.1.1 Non-life insurance industry in recent years

 Non-life growth is still weak in industrialized countries, but strong in Asia

 For non-life insurance in the world: global premiums growing, but only slowly

in the US and Western Europe

 Developing countries: significant growth in many different markets

 For South and East Asia: resilient despite the global financial crisis

 Key concerns and conclusions of world’s non-life insurance: The increase in interest rate, assets management is still existing problem of insurance industry; The recovery of insurance companies’ financial states after recession period; There are some breakthroughs in insurance industry: risk management focus, bancassurance

2.1.2 Non-life insurance industry in Vietnam

This part mentions some issues as follow:

 Ownership structure of insurance enterprises

 Non-life insurers in Vietnam

 Market share

 Premium income and growth rate

 Market premium and loss

 Non-life insurance premiums by business lines

 Merger and Acquisition: there is a trend of foreign organizations’ participation

as strategic partners into some insurance companies

 Some significant points in non-life insurance market in Vietnam

2.1.3 Success factors in non-life insurance industry

Human resources:

Underwriting skills: For high demanding services from international insurers and specific services from local insurers, the underwriting factor is of much importance Underwriting skills express the local insurers’ profession, readiness, understanding and flexibility This factor also combines the local-understanding mind and global-standard mind as it would bring the core and sustainable value for insurance business It is also the most significant part in human resources

Human resources also express in business culture, numbers of labors, qualification of labors on the whole…

Reinsurance:

The backbone of insurance activities is reinsurance activities As risk coverage is larger and larger everyday, it is impossible for a single insurance company to cover 100% of their risks They start to reinsure for the others (other insurance companies and other reinsurance companies) Reinsurance market is born and develops more and more

Sales and after sales services:

Sales and after sales services involve timely services, the documentary and procedures for the services, and services at sites They also include customer care and services, especially for the service company

Products development and Marketing:

Marketing involves brand positioning; branding and promotional regularity levels (policies, programs, resources…); and future marketing and branding focus, PR…

Premium price

In the context of highly competitive market as non-life insurance industry in Vietnam, factor of premium price is of much importance The reasonable premium price, along with best customer services can bring many contracts and clients to insurance company

Information technology support

In order to provide real-time services with good quality, insurance company needs a stable and thorough IT system This IT system will help insurance company in all activities of providing services from the beginning to the end

Relationships

This means the relationships with customers (large enterprises/corporations, local authorities…), partners (global reinsurers, insurance brokers, agents, other insurers…), and others

The relationship is also with clients: relationships show through elements such as: current clients, future clients, renewal volume, price discounting…

The relationship is also with reinsurers (both local and global): relationships show through current relations, their concern, interest, priority and loyalty with specific local insurer, mutual contacting, future relationships…

There are also relationships with local insurers, with authorities, with brokers and other partners

2.1.4 Factors affect a non-life insurance enterprise’s competitiveness

 Economic growth: Along with the economic growth, non-life insurance business will grow accordingly

 Natural disasters: Natural disasters have negative impact on non-life insurance Every year, there are always typhoons and flooding hitting Vietnam, causing lots

of damages Due to these attacks, agricultural output and reconstruction efforts were badly influenced

 Imports and exports: The extent and pattern of imports in recent years shows that manufacturers are restocking to meet export orders Rising inward shipments of steel, cotton, textile yarn and plastics suggest that inputs are being purchased to meet new export orders and capital investment purposes

 Foreign investment: foreign investment has positive effect on non-life insurance Due to recession, foreign investment was gray lately However additional capital was also registered increasingly

 Currency: The fluctuation of exchange rate also has much influenced on non-life insurance, as many of insurance contracts are at foreign currencies Insurance firms operating in Vietnam faces risk if the Vietnamese Dong (VND) encounters further devaluations The devaluation and the possibility of devaluation is a risk for government as well as companies which have lots of foreign transactions using foreign currencies, especially US Dollar

 Legal framework: Legal framework can cause positive or negative effects on life insurance due to the parallel improvement and development between the two

non- Technology: As well as legal framework, technology also causes adverse influences on non-life insurance In Vietnam now, it can be said that technology causes negative influence, since the development of technology cannot meet the requirements of insurance market

 Insurance awareness: Clearer awareness on non-life insurance goes with the increase in demand From times to times, with the developing integration of international business, the awareness on insurance is going increase also

2.2 Overview of PJICO

2.2.1 Introduction of PJICO

Fields of Business:

 Non-life insurance operation:

- Accidents and Health Care insurance

- Property Damage Insurance

- Inland transit, marine and air cargo

- Hull and P&I Insurance

- Liability Insurance

- Motor Vehicles Insurance

- Fire and Engineering Insurance

- Business Interruption Insurance

- Reinsurance

 Financial investment under the law of insurance dated 09/12/2000

 Other services: Survey, investigation, claim…

2.2.2 PJICO’s business activities

2.2.2.1 Non-life insurance products of PJICO

Since its establishment, PJICO has developed and underwritten almost types of non-life insurance, which are divided into 4 major groups:

2.2.2.3 Other activities

Beyond the insurance, reinsurance activities, PJICO also involves in other activities such

as financial investment, Car rescue and repair, car dealer…These activities bring PJICO a big benefit The income from financial investment reached VND 91.7 billion

2.3 Application of models to analyze PJICO’s competitiveness

2.3.1 Application of PEST & Five Forces models to analyze factors affecting PJICO’s

Although legal framework on insurance is paid attention, it cannot chase the development

of insurance itself Nonetheless, the legal framework is lacking of stability Sometimes one change can conflict with the others, causing confusion, misunderstanding, and also splits for others to do violence Therefore, political and legal factor is considered a threat

to insurance

b Economic factor:

(1) Some significant points of the state in the economy

(2) WTO commitments: Limitations on market access and limitations on national treatment

In conclusion, economic factor is creating opportunity to the development of insurance, as

a lot of sub-factors (high economic growth rate, foreign investment…) are representing the development and growth of the economy in general Although there are still several sub-factors preventing insurance from its own development (inflation, government spending, exchange rate…), in the future, insurance can take advantages of economic factor

c Social –cultural factor

(1) Demographic

(2) Lifestyle trend

(3) Consumer attitudes and opinions

In conclusion, social – cultural factor creates chances to the development of non-life insurance business in general and PJICO in particular

d Technology factor

The technology applications for insurance industry can be mentioned in four categories: general communications (building awareness and image, promotion…), product pricing (online applications), agent support (available product details and updates, real-time downloading forms…), and direct sales (real-time underwriting pass/fail tests)…

However, technological development and applications in Vietnam now does not meet the insurance development Lack of high-tech applications and human resources for

technology, outdated technology, lack of investment on technology… are main obstacles

to the technological development, therefore, they create threat to insurance

e Natural factor

Vietnam has various natural disasters and changeable climate It causes problems for insurance as it makes increase risk exposure among different types of insurance Thus, natural factor is an obvious threat

2.3.1.2 Industry environment analysis using Five Forces model

a Numbers of existing competitors:

There are 28 non-life insurance companies in the market In which, the three insurance

companies which are considered as main rivals of PJICO are: Bao Viet, Bao Minh, and PTI Although the PVI’s market share is high (only runs after Bao Viet), PVI is not considered as main competitor of PJICO as PVI is specialized on rude oil explorer and oil

drilling projects and its main market share, revenue and profit come from these sources

(2) Market access:

 Joint ventures as well as 100% foreign ownership are allowed and the prerequisites include: operating for at least 10 years; total assets in the preceding year of USD 2bn or above; and no serious breach of insurance or other laws committed in the previous 3 years

 Foreign insurers will be allowed to operate through wholly foreign-owned branches from 2012 (5 years after accession)

 Several foreign insurers are reportedly awaiting approvals to start up their operations

c Bargaining power of buyers

 Number of non-life insurance companies is huge compared to market and economic scale The customers have multiple choices

 Almost all types of insurance are traditional, simple and easily copied so many insurance companies sell the same products

 Switching costs of bargaining power to the customers have been lower and lower With the high power of customers in non-life insurance industry, PJICO and other companies have not only to face up with the threats of reduce price, benefit but also have

to supply much better service for customers

d Bargaining power of suppliers

Suppliers to Vietnam non-life insurance market includes 4 major kinds of providers like local and foreign reinsurers, brokers, agents, loss adjusters and some other suppliers such

as auto garage, hospitals and etc…

 For reinsurers: the bargaining power is tended to be lower

 For brokers: the power is steadily high

 For agents: the power is high especially in the fields of retail products

 For loss adjusters: the power is low

e Threat of substitutes

Vietnamese insurance companies could be threatened by in-house insurance, it is a threat when more and more large corporation, banks, financial companies have their own insurance companies Other substitutes may come from self-insurance, un-participation These substitutes reduce the profitable ability for PJICO and other companies as well Therefore, threats of substitutes are considerably high to insurers

2.3.1.3 Conclusion from Marco and Industry environment analysis to analyze

factors affecting PJICO’s competitiveness

Table xx: Conclusion of Environment analysis – Chances and Challenges

1 Economic factor Legal framework

2 Social – cultural factor Technological factor

3 Medium power of suppliers Natural factor

2.3.2 Application of Value Chain model to analyze and evaluate PJICO’s

competitiveness

2.3.2.1 Marketing and Distribution Channels

Marketing and distribution of PJICO include criteria: product development, premium, distribution channels and promotion activities

 Insurance Products Development:

PJICO has more than 80 insurance products for almost traditional types of non- life insurance PJICO has advantages in terms of retail products such as automobile insurance, motorcycle insurance, health care and personal accident insurance These are also core products of PJICO

However, there are some problems for PJICO’s product development as follows: