The Lexford Notebook Weekly: What is your strategy addressing?

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In November 2019 Aviva announced a long awaited corporate strategy refresh to the market, the first from the (relatively) new CEO.

The summary strategic statement was to “Simplify Aviva into a leading International Savings, Retirement and Insurance business delivering for our customers, shareholders and communities” based on three strategic priorities to “Deliver great customer outcomes”, “Excel at the fundamentals” and “Invest in sustainable growth”. [1]

In what had been a much anticipated strategy announcement, with expectations for a significant Group restructuring, the much more limited approach to focusing on the fundamentals was negatively received by many analysts and investors.

The share price fell 3.5% on the day the strategy was presented and a few months later a new Group CEO was announced.

A major criticism of this strategy was that it didn’t address what many viewed as the core strategic challenge to Aviva. The need to unlock value in a diverse financial composite model where the sum of the parts valuation was perceived to be higher than that of the combined Group.

In a Group with a number of market leading businesses the challenge for Aviva was not so much on individual business strategy but the overall corporate strategy that needed to provide the rationale for combining these businesses into one Group.

This arguably was compounded by the use of generic language providing no real strategic insight. Shouldn’t excelling at the fundamentals be the assumed level of operational capability already? Had Aviva been investing in unsustainable growth before? What outcomes were customers already receiving, merely average?

While this may have been a fault of how the strategy was communicated, it was more evidently a failure of the strategy itself.

The challenge of developing a relevant, coherent and executable strategy addressing a core defined strategic challenge is not isolated to Aviva alone. Many financial services firms struggle, often compounded by complexity for firms who have iteratively developed their businesses over time, via acquisitions or multiple product and market entry.

So, what should a good strategy be addressing?

Two classic books on strategy provide insight here.

In his book “Good Strategy / Bad Strategy” Richard Rumelt highlights the need to characterize the actual challenge a firm is facing to achieve its objective. This “diagnosis” stage importantly gets to the core of what needs to be addressed and time should be taken to get this right.

A good diagnosis according to Rumelt does more than explain a situation it also “defines a domain of action”.

What might be a complex diagnosis should then be translated into a simple and understandable statement or framework to then inform the “guiding policy” of how it should be addressed and by which “coherent actions”.

In the classic book “Good to Great” by Jim Collins, Collins argues that “all good-to-great companies began the process of finding a path to greatness by confronting the brutal facts of their current reality”. They do this by asking the right questions and supporting a culture where the truth is heard.

This then supports the development of the “Hedgehog Concept” which sets out an understanding of what the firm can be best at. This concept is based on three dimensions (what can you be best in the world at, what drives your economic engine, what are you deeply passionate about) to provide a base for developing strategy from.

Both books highlight the need to spend time upfront to understand the nature of the challenge that needs addressing and an understanding of what the firm can be best at to then inform the appropriate strategy.

Taking time to complete this analysis, to then debate, challenge and refine it will set up the next stage of strategy development.

That is not to say Aviva hadn’t completed this work and come up with the right diagnosis internally. Potentially the “keep doing what we’re doing, but better” approach could have unlocked value in the Group and driven longer term shareholder value growth.

Maybe unlocking value from the Group wasn’t actually the challenge they were looking to address.

But what was not clear in the published strategy materials was what it was they were looking to address and an understanding of what they were best at, to then consequentially inform why the strategy was the right one for the Group.

There are other firms in the financial services sector who do provide an effective communication of a strategy that appears to be informed by this approach.

Legal & General position their Group businesses to benefit from six identified external growth drivers and have divested businesses that do not meet this frame of reference.

They then operate these businesses with a mutually reinforcing business model with synergies based on strengths in areas such as risk management and asset manufacturing.

Hargreaves Lansdown set out their strategy in their 2007 IPO prospectus to take advantage of the opportunity they identified to serve customers directly rather than through IFAs with a business model that allowed them to capture more of the value chain economics.

While there are sometimes errors in how these strategies are executed, both firms have shown an ability to consistently deliver against their respective insights and in turn generate long term shareholder value.

This consistency of execution around a clear strategy is arguably fundamental to the strong “equity story” the market rewards (other good examples here include A.J Bell, St James Place, Admiral and Sabre).

For a complex, multi-divisional group like Aviva the shift to a coherent, relevant and executable corporate strategy will undoubtedly be challenging.

But by starting with a diagnostic of the challenge the strategy needs to address and an understanding of what they can be best at, should provide the basis for informing that strategy development.

Strategic Activity Update:

• The new CEO at Aviva was quick to address strategic concerns at the announcement of interim results, highlighting a geographic focus on three key markets for investment and managing others for “long term shareholder value”, the need to transform performance and the importance of financial strength. How this translates into a firmer corporate strategy and subsequent actions will be interesting to see develop.
• The financial services mutual sector continues to see change, with Police Mutual becoming part of Royal London and LV= announcing it is currently assessing “a wide range of strategic options” following the disposal of the GI business to Allianz. Whether this indicates broader sustainability challenges to the mutual model or firm specific issues will be an important analysis for the many small mutuals continuing to operate in the UK today.
• The takeover of Hastings by Rand Merchant (an existing substantial shareholder) and Sampo (a Finnish insurer with operations across Scandinavia) continued the interest in UK general insurance from overseas insurers. Allianz acquired the remaining stake in LV=’s GI business and acquired L&G’s GI operations last year. Munich Re are the largest shareholder in Admiral and Axa / Zurich are existing key market players.
• Swiss Re announced an agreement with Google owned Verily, to take a minority stake in their Coefficient Insurance business and partner on solution offerings to clients, with an initial employer stop-loss proposition for healthcare costs. The agreement is an example of a growing number of healthcare related initiatives by “big tech” firms and hints at the potential for future disruption of the health insurance market.

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[1] https://www.aviva.com/content/dam/aviva-corporate/documents/investors/pdfs/capital-markets-day/2019/capital-markets-day-2019-investors-presentation.pdf