American International Group - Research Paper Example

American International Group Executive Summary The report will aim at analyzing the American International Group, Inc. (AIG) with the purpose of evaluating its background, corporate vision and values, and its internal as well as external environments. Based on the findings of the aforesaid aspects, the report will undertake a comprehensive SWOT analysis for the company and enumerate the long term objectives of the same. Following this, the report will move on to develop the generic and grand strategies of AIG and subsequently discuss the goals and implementation, critical success factors (CSFs), and controls and evaluation of the developed strategy. Extensive literature review will be undertaken to generate views that will facilitate the materialization of this report. Company Background American International Group, Inc. (AIG) has been a prominent player in the American as well as the global financial markets since 1919. The company was established by the American businessman Cornelius Vander Starr in Shanghai, China. However, its stature was much smaller as it was an agency that dealt in insurance. The company thrived under the leadership of Starr until 1949 and expanded into the markets of Latin America, the Middle East, Europe, and of course other regions of Asia. It was in 1962 that Maurice Greenberg took the reins of AIG’s holdings in America, and “shifted its focus from personal insurance to high-margin corporate coverage and focused on selling insurance through independent brokers rather than agents to eliminate agent salaries” (Schwartz, 2010, P. 195). In the year 1968, Greenberg was named the successor of Starr. The stronghold of AIG is in the domain of directors’ and officers’ (D &O) liability insurance and at one point of time it used to be the global leader in this segment. The main areas in which the company has made substantial forays are general insurance, financial services, asset management, and life insurance retirement services (American International Group, Inc.-website-a, 2007). Figure 1: Company Structure of AIG (Source: American International Group, Inc.-website-a, 2007) This insurance behemoth is currently headquartered in New York and has approximately 400 offices in more than 130 nations (Youngman, 1999, P. 211-212). AIG carries out its diverse range of business activities that revolve around different categories of insurance, through an employee base of more than 105000 (American International Group, Inc.-website-c, 2007, P. 9). The customer base of AIG comprises different categories such as individual, institutional and commercial and the company serves them through a global property-casualty network. AIG companies are also the foremost providers of retirement services as well as life insurance. The common stock of AIG is listed simultaneously on the New York Stock Exchange (NYSE) and on its counterparts in Tokyo and Ireland (American International Group, Inc.-website-b, 2010). Corporate Vision and Values The vision statement of AIG: “To be the world’s first-choice provider of insurance and financial services. We will create unmatched value for our customers, colleagues, business partners and shareholders, as we contribute to the growth of sustainable, prosperous communities” (American International Group, Inc.-website-a, 2007). Figure 2: Values and Visions of AIG (Source: American International Group, Inc.-website-a, 2007, P. 3) The company depends on a set of fundamental values for the purpose of realizing this vision. The corporate values of AIG comprise the elements of people, customer focus, performance, integrity, respect and entrepreneurship. The company aims to develop talent among its employees and reward excellence in order to enhance employee motivation. Being a customer-oriented organization, AIG continually strives to foresee their priorities in order to surpass their expectations. The company’s performance is centered on accountability, the ability to manage risks and the delivery of its core strengths through its operations. It ensures that all its business interests as well as activities are honest, to enhance the corporate reputation. AIG has inculcated an organizational culture that is supported by respect. This in turn help the employees value each other and collaborate among themselves, and enhance the process of knowledge sharing. The company believes in seizing opportunities and innovating for as well as with its customers. For this purpose it tries to build a diverse employee base, supply chain, and clientele. The company is found to put in efforts whereby it can develop a sustainable strategy for investments. Simultaneously, it also aims at being an environmentally responsible organization (American International Group, Inc.-website-a, 2007). Organizational Analyses Internal Analysis Generalized survey of AIG and its group companies has shown certain areas on which the company regularly works to build excellence of business operations as well as competitive advantage, as it identifies these two aspects to be the most important prerequisites for an organisation that operates within the insurance sector that is subject to high risks. The company has adopted measures pertaining to corporate governance and has established a structure that supports it. The aim behind these initiatives is “to ensure the independent and effective functioning of AIG’s board of directors, foster transparency and clear communication with stakeholders, promote high ethical standards and financial reporting integrity” (American International Group, Inc.-website-a, 2007, P. 6). It has also revised its code of conduct in order to enhance the organizational culture. The company has been found to have developed as well as implemented an education program for the purpose of supporting analysis. It has internally launched a portal for providing its employees with worldwide access to communications, resources and training. Responding proactively to the environmental demands, AIG has taken initiatives to offer micro insurance to underprivileged groups. The company has taken substantial initiatives to enhance employee involvement and has benefitted from it. Owing to its global presence, one of AIG’s major areas of concern is that of diversity. It has “provided online training to increase employee awareness on the benefits of a diverse working environment” (American International Group, Inc.-website-a, 2007, P. 7). External Analysis AIG has “partnered with non-governmental organizations on financial literacy programs” (American International Group, Inc.-website-a, 2007, P. 6). In accordance with its environmental policies AIG has been campaigning for legislation for reducing emissions of greenhouse gases. In the way of setting an example for its peers, AIG has “sponsored and participated in conferences and forums on the business implications of climate change; participated in collaborative efforts to support climate change solutions; completed first greenhouse gas emissions inventory and started funding an equal number of emissions reductions; developed solutions to help clients address climate change and the challenges of operating in a carbon-constrained world” (American International Group, Inc.-website-a, 2007, P. 6). The company has also taken measures to promote entrepreneurship as well as talent, and has simultaneously “launched new supplier diversity program to improve sourcing effectiveness and encourage certified diverse suppliers to do business with AIG” (American International Group, Inc.-website-a, 2007, P. 7). AIG has also been successful in blending business with corporate social responsibilities. To justify its position as a responsible corporate citizen, AIG has been continually awarding grants to microfinance institutions and has contributed towards the enrichment of women entrepreneurs. The insurance giant has also forged partnerships with not-for-profit organizations and has associated itself with government officials in order to “develop comprehensive disaster preparedness programs” (American International Group, Inc.-website-a, 2007, P. 7). SWOT Analysis Figure 3: SWOT Analysis of AIG During the course of research, various literature reviews were referred to in order to carry out the SWOT (strengths, weaknesses, opportunities and threats) analysis of AIG. The detailed findings are appended below: Strengths: It may be observed that the strengths of the American insurance giant are quite significant mostly because of its heritage. The company is recognized globally and has a worldwide presence in 130 nations. Other factors that contribute to its strengths are its diversified and talented workforce, diversified businesses (general insurance, financial services, asset management, and life insurance retirement services), and strong CSR initiatives. Apart from these, it has also been observed that the company is committed to meet the obligations of its policyholders. AIG is not vulnerable to trivial uncertainties of the market as it maintains strong levels of capital (Insurance News Net, 2009). Weaknesses: The brand image of AIG was considerably tainted during the recent global economic crisis. As the world economy is still trying to escape from the clutches of financial meltdown, AIG has come under the scanner of the regulatory machinery. The situation can be better understood in the words of Kermitt J. Brooks and Joel Ario who had opined that “State regulators are engaged in a virtually nonstop, coordinated, comprehensive review of AIG's U.S. insurance company subsidiaries, both at the level of the individual companies and within and across the entire group of companies” (Insurance News Net, 2009). Adding to its weaknesses is the problem associated with derivative accounting. It is worth taking a note of the fact that though PricewaterhouseCoopers (PwC) – the external auditor of AIG – had “warned the company of accounting weaknesses” (Kunreuther & Useem, 2009, P. 257) in mid-2008, the latter could not take serious steps to rectify its drawbacks. It has also been pointed out by scholars such as Kunreuther and Useem (2009) that AIG has weaknesses in terms of corporate leadership. Drawing support from their works it may be mentioned here that “according to AIG employees, for example, AIGFP president Joseph Cassano led the financial-products division with scant oversight from the company chief executive, and with an autocratic hand and little tolerance for challenge on the inside” (Kunreuther & Useem, 2009, P. 256). Opportunities: In the context of the global insurance sector, it may be observed that certain opportunities prevail in varying degrees across nations. It is an important fact that the ability of insurers in terms of cross-selling financial services has not been optimally tapped. AIG may identify this as an opportunity and make foray into developing nations to make the best use of it. Additionally, it may also reinforce its bancassurance operations. Owing to technological advancements, transactions have become virtually paperless thereby making the process of documentation hassle free. With the use of e-commerce, AIG may tap the potential economies of EMEA (Europe, Middle East, and Africa) and BRIC (Brazil, Russia, India, and China) nations. There is an enhanced need for insurance consultants and hence AIG may also utilize this as an opportunity and design new avenues for client servicing as well as generating revenues. The most profitable opportunity is perhaps the high degrees of environmental awareness among individuals as well individuals that is redefining the nature of business practices. AIG has successfully recognized this and took the “opportunity to improve the environment, protect customers and reward shareholders by developing products and investing in technologies that can mitigate the risk and the effect of climate change” (American International Group, Inc.-website-d, 2007). Threats: As may be observed in Figure 3, the list of potential threats that have been identified in the context of AIG is quite long as compared to those in the other three quadrants. Most of these threats arise from elements of the external environment and are controlled by market dynamics. AIG’s annual report for 2006 says that “casualty insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses” (American International Group, Inc.-website-c, 2007, P. 15). Likewise, it may so happen that the provision for reinsurance may become unavailable and/or unaffordable. Fluctuations in prevailing rates of interest may affect the cost of deferred policy acquisitions. Material weaknesses associated with the company’s “internal control over financial reporting relating to income tax accounting could affect the accuracy or timing of future regulatory filings” (American International Group, Inc.-website-c, 2007, P. 15). Like any other insurance company AIG is also exposed to the threats of catastrophes as they might be unfavorable for its financial health as well as operations. Legal proceedings, government regulations and foreign operations are necessary evils that go hand-in-hand with insurance companies and in the case of AIG the impacts are more intense owing to the span of business. Over dependence on information technology for its business activities makes AIG immensely prone to damages and/or losses both in terms of goodwill and profits if the infrastructure collapses. Being part of a highly diversified group calls for a rather Utopian element called harmony! However, “the relationships between AIG and the Starr entities may take an extended period of time to unwind and/or resolve, and the consequences of such resolutions are uncertain” (American International Group, Inc.-website-c, 2007, P. 18). Finally, misconducts as well as errors on the part of employees may often go unnoticed and may in turn lead to financial losses. This is a potential threat for AIG owing to the fact that it houses a huge and diverse workforce across various locations. Long Term Objectives Taking cues fro the future plans of AIG, the long term objectives of the company may be identified as the following: 1. It should continue to explore initiatives pertaining to corporate governance as well as global programs that cover anti-money laundering, global privacy, anti-corruption, etc. 2. It should tracking as well as reporting standards that take care of sustainability efforts. It should also monitor risk and opportunity analyses on a regular basis. 3. It should expand the sales of micro insurance to a larger number of emerging markets and launch new lending programs as well. 4. The company should “continue to support the development of new climate change-related products and services across AIG business units” (American International Group, Inc.-website-a, 2007, P. 6). 5. It should expand employee benefits in terms of maternity as well as adoption, and should also “assess which benefits programs may be applicable for international operations, such as the wellness program” (American International Group, Inc.-website-a, 2007, P. 7). 6. It should establish objectives in order to optimize the outcomes of diversity and invest strategically to maintain its diversified workforce. It should invest in training and development programs designed for its employees. 7. It should “continue to build upon investments in organizations that promote entrepreneurship, innovation, diversity and empowerment” (American International Group, Inc.-website-a, 2007, P. 7) and also identify prospective partners as well as programs that offer innovative solutions to socio-economical challenges. 8. It should also armor itself as well as the global communities against the perils of calamities through incorporation of principles related to risk management. 9. AIG should also identify procyclical practices of financial regulation and take necessary measures (Kodres & Narain, 2009, P. 24). It should also plug the information gaps to get an accurate picture of the market dynamics. Kodres and Narain suggest that “more emphasis should be placed on collecting information that could permit construction of indicators that warn of impending problems” (Kodres & Narain, 2009, P. 25). 10. The company should improve cross-border coordination in order to achieve operational excellence. Strategy Analysis and Choice Generic Strategy Given its position in the global market, AIG may focus on a generic strategy that will enable it to differentiate its products and/or services exclusively designed for the emerging markets. It can aim at maximizing revenues through diversified activities such as cross-selling financial services and providing solutions for climate risk. The company should also concentrate on maintaining low costs in order to withstand the pressure of competition. Grand Strategy AIG may explore the initiatives pertaining to corporate governance in order to achieve operational excellence through alignment of internal resources with its corporate objectives. It should expand the sales of micro insurance to a larger number of emerging markets as these are lucrative pastures for most of the leading organisations. It will be beneficial for the company if it expands employee benefits and establishes objectives in order to optimize the outcomes of diversity as well as invest strategically to maintain its diversified workforce. However, AIG must plug the information gaps and improve cross-border coordination to ensure a prosperous future. Goals and Implementation The goal that the strategic implementation will help AIG achieve is definitely a successful materialization of its corporate vision of being the world’s most preferred insurance as well as financial services provider. Moreover it will help the company to regain its lost ground as one of the most revered insurance companies of the world. In order to successfully implement the strategy, AIG should each of its business divisions with the strategic goal and in order to do that it should inculcate a culture of intra-organizational harmony. It should promote the practices of organizational learning and knowledge sharing among its talented and diversified workforce. AIG should also take necessary measures to develop participative leadership style because autocratic leaders may have a negative impact on employee morale. Critical Success Factors The critical success factors (CSFs) that will play a major role in determining the success of the strategic implementation are: 1. Internal practices related to accounting, taxation, etc., 2. Employee readiness to accept changes, 3. Coordination between the management and the employees, 4. International legislations pertaining to insurance, 5. Country-specific regulations. Controls and Evaluation Control and evaluation taken together represent the final step of the process of strategic planning. This step is necessary for understanding the extent to which the strategy adopted by the organization is fruitful (Lewis, Goodman, Fandt & Michlitsch, 2006, P. 110). Figure 4: Evaluation Process to Identify Underlying Casual Mechanisms (Source: Davidson, 2005, P. 80) Owing to fact that AIG’s businesses are diversified both in terms of operations and locations, it is extremely necessary for the company to identify the casual mechanisms in order to improve cost efficiency. Simultaneously the employment of a balanced scorecard (BSC) will provide a holistic “framework for strategic control” (Goldman & Nieuwenhuizen, 2008, P. 25) by helping the management develop performance indicators and standards against which actual performance may be compared. References American International Group, Inc.-website-a. (2007). Company Structure. 2007 Corporate Responsibility Report. Retrieved April 6, 2010, from http://media.corporate-ir.net/media_files/irol/76/76115/AIG_CReport_0708.pdf American International Group, Inc.-website-b. (2010). About AIG. Retrieved April 6, 2010, from http://www.aigcorporate.com/aboutaig/index.html American International Group, Inc.-website-c. (2007). Putting Strategies into Action. Retrieved April 6, 2010, from http://www.ezonlinedocuments.com/aig/2007/annual/HTML1/aig_ar2006_0011.htm American International Group, Inc.-website-d. (2007). Climate Risk and Environmental Solutions. Retrieved April 6, 2010, from http://www.aig.com/aigweb/internet/en/files/2878_Climate%20Change%20Brochure_7.08_tcm20-108541.pdf Davidson, J. E. (2005). Evaluation Methodology Basics: The Nuts And Bolts of Sound Evaluation. SAGE. Goldman, G. & Nieuwenhuizen, C. (2008). Strategy: Sustaining Competitive Advantage in a Globalised Context. Juta & Co. Ltd. Insurance News Net. (July 8, 2009). AIG, NAIC Dispute Report of Weaknesses in AIG Operating Units. Retrieved April 6, 2010, from http://www.insurancenewsnet.org/html/BreakingNews/2009/0807/AIG--NAIC-Dispute-Report-of-Weaknesses-in-AIG-Operating-Units.html Kodres, L. & Narain, A. (March 2009). What Is to Be Done? Finance & Development. Retrieved April 6, 2010, from http://imf.org/external/pubs/ft/fandd/2009/03/pdf/kodres.pdf Kunreuther, H. & Useem, M. (2009). Learning from Catastrophes: Strategies for Reaction and Response. Wharton School Publishing. Lewis, S. P., Goodman, H. S., Fandt, M. P. & Michlitsch, F. J. (2006). Management: Challenges for Tomorrow's Leaders. 5th ed. Cengage Learning. Schwartz, D. (2010). The Future of Finance: How Private Equity and Venture Capital Will Shape the Global Economy. John Wiley and Sons. Youngman, I. (1999). Directors' and Officers' Liability Insurance: A Guide to International Practice. 2nd ed. Woodhead Publishing. Bibliography American International Group, Inc. (2010). March 2009 – Present: AIG’s Plans Going Forward. Retrieved April 6, 2010, from http://www.aigcorporate.com/aboutaig/march2009_present.html Shelp, R. & Ehrbar, A. (2009). Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG. 2nd ed. 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