Conseco - Industry Structure - Case Study Example

Company Analysis Contents Introduction 3 Industry Structure 3 Regulations of the market 6 Global Pressures 7 Cost Structure 7 Ethical Issues 8 Economies of scale 9 Business cycle 9 Conclusion 10 References 11 Introduction The company selected for the analysis is Conseco, Inc. The CNO financial group was incorporated in 1979 and began to start its operation in 1982. The CNO financial group changed the name to Conseco, Inc and became a public sector company. The company is engaged in providing service to more than 4 million people who belong to the middle income category of America. The subsidiaries of the company provide life insurances, annuity and other products related to health insurance. The independent agents and the direct advertisements to the customers are used to distribute the products of the organization. The company acquired the Lincoln Income Life Insurance Company in 1986. The company purchased the GreenTree Financial in 1998 which was the largest financier for mobile homes. The objective of the company was to diversify into the financial services (Company Briefs, 2003). In the later part of the same year, the company purchased Colonial Penn, a life insurance company. The company got included in the Chapter 11 reorganization in 2001. GreenTree financial services were divested in the reorganization process and the company under consideration is now solely focusing on the insurance industry (Conseco, 2012). Industry Structure The production of economic goods as well as services within an economy is known as the industry. An industry can be classified into three sectors namely primary, secondary and tertiary. One can also classify industries on the basis of size, raw materials and the ownership of the business. Primary industries involve direct extraction of the resources from the Earth while the secondary industries involves in the processing products delivered by the primary industries. The last type of industry is mainly involved in the provision of services. The firms dealing with the management, investment decisions as well as lending of money processes operates in the financial industry. The financial institutions can actually make money as their business. They are not engaged in selling physical products but offer financial services and fiscal expertise. The markets where no participants have the potential to have the market power selling a homogeneous product are regarded as competitive market. The number of the firms as well as size distribution of the firms within an industry is referred by the term “industry structure”. There may be ‘n’ number of firms. If there are large firms present in an industry there is lack of coordination among them. Therefore, the degree of competition rises with the presence of large number of firms within the industry. The size distribution of the firms is important from the business as well as the public point of view. If the size of the participating firms is small compared with the size of the industry, then the industry is said to be fragmented and otherwise consolidated (Jain, 2002). A form of market where the industry is dominated by small number of sellers is called oligopoly. Each oligopolist is aware of the market conditions as few sellers are present in the market. The decision of one firm can influence or are influenced by other firms. The responses of the participants of the market are taken into account in the strategic planning process by the oligopolists (Mang, 2011, p. 1). Competition in oligopolistic market can give rise to different outcomes. An oligopoly can maximize its profits by producing at the level where marginal revenue equals marginal costs (Krčílková, n.d, p. 10). Monopolistic competition along with oligopoly constitutes the structure of imperfect competition. Firms that are imperfectly competitive offer many products. All wealth that fulfills the wants of consumers constitutes the wealth of a nation. Therefore, the aim behind expanding wealth is broadening the choices of the consumers is terms of quality, quantity and variety. Economists are involved in researches on the idea of free market with socially optimal allocation. The notion of competition constitutes the central part of economic theory. Controversies exist among the policy makers on the way competition contributes in the process of development. One can witness contrasting thoughts about the meaning of competition in the economic history. Among the different forms of competition, perfect competition has been able to find a place as the standard model of analysis. During the time of Adam Smith, the concept of competition was popular and viewed as independent rivalry among people. Some of the views suggest competition as a tool that will eliminate profits in the long run. But perfect competition and monopoly rules the real market conditions. Therefore, conditions imposed by imperfect competition and asymmetric information calls for inefficient competitive equilibria (Cook, 2001, p. 4). The word “competitive” means ‘not monopolies’. A market structure that fails to satisfy the postulations of perfect competition is regarded as the market of imperfect competition. This type of market does not operate under the guidelines of perfect competition. In this type of market structure a firm has the potential to impact upon the prices (Kitchener, 2001, p. 3). In spite of the products being close substitutes, they can be differentiated and advertising and branding plays a major role in this type of market structure. The products are offered at administered prices. The price changes are costly and slower. The prime prediction of the theory of monopolistic competition is that firms will produce at the level where marginal cost equals marginal revenue in the short run. However, in the long run, the firms will operate at zero profit levels and the demand curve will be tangential to the average total cost curve. The chosen company, i.e., Conseco, Inc, operates in the monopolistic competitive market. Many participants are present in the market who offer non-homogeneous products. The cost of insurance and the available benefits are different for different players. Therefore, none of the market participants have the potential to enjoy the market power. Advertisement and brand promotion are important features of this kind of market because using these tools the companies can drive consumers to their favor which strengthens their consumer base. Regulations of the market The insurance market is under the regulation of National Association of Insurance Commissioners. Protection of the consumers is the objective behind the regulation of the insurance market. It effectively protects the rights of the consumers and ensures that the promises made by the companies are kept by the agencies. The regulation is structured around several functions. The key functions include licensing of the company, licensing of the producer, regulation of the products, market conduct, regulation of finance and services to the consumers. The company needs to get the license before getting into the activity of selling the services or the offered products. All the companies are subjected to regulation in the state of domicile and also in other states where they are likely to offer their products. Those who fail to meet the rules of the regulation are subjected to suspension of their licenses. The insurance agents and the brokers are also required to get their licenses and abide by the rules and regulations of the state which governs their activities. The insurance policies must comply with the laws of the state and ensure that the policies do not have coverage large gaps that might misunderstood by the consumers. The NAIC maintains the largest financial database of the world and the financial regulation acts as the shield for the consumers of U.S. The market regulations aim to ensure fair and reasonable prices for the insurances, products as well as the practices of trade to protect consumers. In order to improve the relation between the states and the market, the regulators tend to ensure sustained protections of the consumers at the level of the state (National Assurance of Insurance Commissioners, n.d., p. 2). The financial sector is covered by EPA (United Nations Environmental Protection Agency). Global Pressures The financial market is under constant global pressures. A certain event on any part of the world can affect the operations of the market. A risk is always associated with the financial markets and this risk intensifies due to a sudden unanticipated event in the global world. In the financial market, the role of the investors is very crucial and their decisions seem to regulate the market. The financial market may also play poorly if the management of the participant firms fair poorly. It is difficult to judge the management capability and so poor decisions may lead to unexpected and not so good performance of the sector. Uncertainties can get accrued to this type of market and certain economic problem in a certain part of the world can shed its effects on the entire globe and the recent crisis has proved that even the financial market of the United States is not immune from the economic dangers. Unforeseen events like financial, macroeconomic or political crisis can cause disruption or turbulence in the market which give rise to market uncertainty. There can be a spillover effect because of panic buying or selling in the market. This may also act as disincentive to trade until the long term benefits are recognized in the market. Stress on the market points to inconsistency of data or even contradiction in data causing uncertainty to take effect. Microeconomic events can also be held responsible for market uncertainty. A sudden restriction imposed by law may result in suspension of activity of a particular type of asset or may give rise to speculative activity (Standard encyclopedia of philosophy, 2008). Cost Structure Fixed costs are the costs that a company will still have to incur even if the company is not operating. Variable costs are the costs that a company incurs in the production process. Fixed and the variable costs combine to form the total cost of a firm. The variable costs can also be defined as the sum of the variable costs over all the units produced. The fixed cost for the company is the annual fee of the licenses while the variable costs are the costs on advertisements and product promotion. Ethical Issues The principles of social justice and natural justice must be embodied in the code of ethics. Proper dignity should be provided to the respected clients with whom the company has signed deals. The dignity of employees and other members should also be the focus of the company. The company should involve itself in the task where it will provide protection to the people including children and young men who access the services of the company. The company must not take any step that can harm the people physically, mentally or emotionally. Appropriate standards should be maintained through high professionals and ensure the integrity of the company. The company should ensure that it operates with the principle of perfect information and sole selection criteria must be maintained for all positions. Factors such as age, gender, religion and culture should not be taken into account while providing the services. The terminology of social justice can be unknown to some and so background information can be provided to the candidates which will ensure the process of selection is fair and equitable for all (Multidimensional Development Association). An ethical issue is regarded as a problem that is identifiable, a situation or opportunity. The ethical issues require a person to choose an action that may be evaluated as right or wrong among several actions. Such a choice often takes the monetary profit into account rather than the appropriate conduct that is considered by the person. The ethical issues accrued in the financial sector affects everyone. The people are of the opinion that the financial sector involves more unethical issues than other forms of business. Some of the ethical issues for the considered company are self-interest hampering the interests of the customers, people suffer from the stunted development in moral, demand of the company conflicts the professional duty (Federwisch, 2006). Economies of scale The cost advantages that a business can enjoy by expanding their scale of production is known as the economies of scale. It is one of the key advantages for a business in the growth process. Specialization in workforce is one such economies of scale where the company under consideration can split the process of production into several steps like analysis, determination of cost of cost of insurance and the sales into separate tasks. Another form of economies of scale is marketing economies of scale. Marketing is the most important part for the companies operating in this sector. Conseco, Inc can diversify the budget on advertising and the marketing over the output. Conseco, Inc being a large firm, can access to credit at a reasonable or favourable rate of interest in contrast with the smaller firms operating in the same industry. Business cycle The four phases of business cycle are prosperity, recession, recovery and depression. The demand shoots up in the phase of prosperity. The opening up of trade possibilities and rise in the productive capabilities will show took off situation for the company if they are able to use the situation in their favor. Reduction in the levels of demand is one of the significant effects of recession (Schumpeter, 1939, p. 6). Trade possibilities are likely to be affected. Exports will fall significantly and the difference between forecasted and observed revenues will grow. However as recovery is the next phase in business cycle, the situation arising from situation is partly compensated. Investments will slowly begin to come in the company but a lot depends on the performance of the company in the phase of recession. If the company is on the verge of closing down then it will not be able to attract the investors. The company is subjected to business cycles (Rebelo, 2005, p. 10). In the phase of prosperity as demand rises, the company will be able to sell their products effectively as people will have a lot of money to spend. The next phase is a situation of concern for the company as demand will take the steep declining curve and the operation of the company will be at stake. In the next phase, the company will begin to recover from the previous phase slowly although it would take sufficient time for the management to pace the company where they it to be. Conclusion The ratings for the company are negative as provided by Fitch. The rating is negative for the company along with its subsidiaries. This widens the notching between the ratings in debt and the ratings of Insurer Financial Strength of the insurance subsidiaries. The financial flexibility of the company decreased. Three reasons that can be accounted for are high financial leverage, large amounts of debt maturities and reduced cushion in its secured bank. Fitch has continued to provide negative ratings keeping the current investment situation in consideration. The statutory capital of the company will be pressured by the impairments in the deteriorating market. The outlook of the company or the performance of the company will depend on the initiatives taken by the management to improve the financial profile. Fitch also expects sustained progress for the company in its operating business line (Reuters, 2009). References Company Briefs. (2003). The New York Times. Retrieved from http://www.nytimes.com/keyword/conseco/5. Conseco. (2012). CNO Financial Group. Retrieved from http://www.conseco.com/. Cook, P., (2001). Competition and its Regulation: Key Issues. Retrieved from http://www.competition-regulation.org.uk/publications/working_papers/wp2.pdf. Federwisch, A. (2006). Ethical Issues in the Financial Services Industry. Retrieved from http://www.scu.edu/ethics/practicing/focusareas/business/financial-services.html. Fitch Downgrades Conseco’s Ratings Due to Increased Financial Pressure; Outlook Negative. (2009). Reuters. Retrieved from http://www.reuters.com/article/2009/01/05/idUS215422+05-Jan-2009+BW20090105. Jain, K. V. (2002). Note on Industry Structure. Retrieved from http://info.umuc.edu/mba/public/AMBA607/IndustryStructure.html. Krčílková, M. (n.d). Perfect competition II. Monopolistic competition. Retrieved From: http://pef.czu.cz/~krcilkova/lecture7.pdf. Levy, H. (2001). Monopoly and Competition. Retrieved from http://socserv2.mcmaster.ca/econ/ugcm/3ll3/levy/monopoly.pdf. Mang, C. (2011). Oligopoly. Retrieved from http://faculty.nipissingu.ca/colinm/ECON2106/Lectures/Oligopoly.pdf. Multidimensional Development Association. Code of Ethics and Conduct. Retrieved from http://www.mdainc.org.au/?page_id=42. National Assurance of Insurance Commissioners. (n.d). State Insurance Regulation. Retrieved from http://www.naic.org/documents/consumer_state_reg_brief.pdf. Rebelo, S. (2005). Real Business Cycle Models: Past, Present, and Future. Retrieved from http://www.kellogg.northwestern.edu/faculty/rebelo/htm/rbc.pdf. Schumpeter, J. A. (1939). BUSINESS CYCLES. A Theoretical, Historical and Statistical Analysis of the Capitalist Process. Retrieved from http://docenti.lett.unisi.it/files/115/17/2/1/BusinessCycles_Fels.pdf. Standard encyclopedia of philosophy. (2008). Certainty. Retrieved from http://plato.stanford.edu/entries/certainty/. United Nations Environmental Protection Agency. (n.d.). Financial Sector. Retrieved from http://www.epa.gov/osem/financial/index.html. Read More