Seeing Opportunity Where Others See None

by Victor Cheng

The two most common complaints I get from CEO’s are: 1) I’m in a commodity business, and 2) There aren’t anyopportunities to grow in my market.

I’ll argue that what the person really means when they say this is, 1) I can’t figure out how to differentiate my business enough to earn anything above commodity profitmargins (e.g., razor thin margins), 2) I don’t see any opportunities in my market to grow.

One of the double-edge sword liabilities in this economy is too much experience in one industry.

When you’re in an industry that’s being doing the same thing for 30 years and you’ve personally have not spent much time outside of your industry, it is very hard to notice new opportunities.

One of the values I often provide in my consulting work is to be not only the outsider, but the outsider who has worked across dozens of industries and routinely follows innovative companies across close to 100 industries.

My best ideas are really nothing more than taking an idea that is common in one industry and moving it to another where it’s considered radically innovative.

Here’s an example.

One of the industries I follow is the insurance. During my McKinsey days I worked in both auto insurance (on pricing &underwriting) and in re-insurance (the insurance company for insurance companies).

One of the challenges is the insurance business is mature, competitive, and some would argue a commodity business wherepeople just want the lowest price. (Does this sound familiar?)

I came across a very interesting company offering an entirely new kind of insurance…. for an very unusual kind of risk.

Now before I let you in on the big secret, lets think about this situation from an insurance company’s point of view.

The business of insurance is about taking a low probability, high loss event and smoothing out the cash flow. So the chances of your home burning down due to a fire is very low, but if it does happen for most people they lose their single largest asset.

The cash flow pattern on a situation like this is very volatile. No loss today, massive wipeout tomorrow.

So homeowners insurance was developed to smooth out the cash flow curve… pay a little every month, eliminate the riskof a financial wipeout.

Now from an insurance company’s point of view, every major risk has been covered already.

You have medical insurance, life insurance, long term disability insurance, unemployment insurance, long term care insurance, auto insurance, liability insurance, etc…

So if you’re in the “product development” group of an insurance company, you’re basically racking your brain trying to figure out what kind of new risk is occurring in society that doesn’t already have insurance policies available for it.

So, pop quiz:

Does any opportunity come to mind?

Think for a moment…. a situation where when the worst case scenario happens there is a huge financial cost for which currently there is no insurance available to cover that risk.

One last try…

Any ideas?

Give up?

No problem, here’s the latest innovation out of the insurance industry:

It’s DIVORCE Insurance.

At the point of being literal, a divorce is the dissolution of a marriage typically involving some party to the marriage losing 50% of their net worth.

Does this qualify as a major financial cost by most people’s definition? I’d say so.

Does competition exist for divorce insurance?  Nope.

There’s only one company that offers it currently and theyhave the entire market to themselves… yes they have dibson the ENTIRE U.S Divorce market.

Here’s more info on them in case you are curious http://bucks.blogs.nytimes.com/2010/08/06/divorce-insurance-yes-divorce-insurance/

So now let me point out a few things worth noting:

1) In hindsight, the opportunity seems SO OBVIOUS – duh,divorce = unexpected financial wipeout… on the order of magnitude of a major medical problem, a home fire, etc… People have insurance for the latter, but why not the former?  The dollar amounts are probably comparable.

2) I’m shocked more companies haven’t figured it out.  I mean common, everybody knows that half of marriages end indivorce. I mean 30 years ago, you probably didn’t know too many people who were divorced, these days I’ve personally have lost count.

So it’s not like this societal change has been a big secret.

(And in terms of underwriting, an insurance policy can becreated for ANY kind of risk as long as there is sufficient statistical data on how often the worst case scenario happens… so it’s not like insurance companies can’t figure out how to write such a policy profitably).

3) Many of the opportunities I see in today’s economy arejust like this divorce insurance example — hiding in plain site, totally obvious to customers, and yet totally hiddenfrom vendors.

4) I guarantee you that there are meetings taking place at major insurance carriers asking two questions:

a) Lets watch this company carefully to see how they do… and to see if there is demand for this, and

b) Why the heck didn’t we even notice this opportunity?

I mean its one thing for a CEO of a major insurance company to notice this opportunity, do the homework, and decide it’s not a good fit for them.

It’s an entirely different problem to not even NOTICE the opportunity at all. I’m pretty sure someone is kicking themselves over this… and probably giving their staff ahard time as well.

Will the divorce insurance category be a profitable one?  Idon’t know. I haven’t seen the actuarial data or the sales data to form an opinion.

BUT, my point is this is an example of a kind of a “problem” most companies do not have enough of today — being first to market, in a potentially huge sector of the industry, with no competitors, the chance for both huge margins, and rapid growth… but with clearly more work to figure out how to”crack the code” to growing in such a green field opportunity.

Will it work? Who knows.

But is this kind of “problem” better than focusing on a market segment where sales are on the decline, margins have gotten wiped out, and all the competitors basically copycateach other to the point where customers can’t tell them apart?

The latter is a definite dead end. With the former, at least you have a fighting chance and if you get it right, the upside is enormous.

So here’s my question for you.

In your 2011 Strategic Plan, do you have any “game changing” opportunity as part of your plan? Something you can experiment with, innovate with, or run a pilot program with?

If not, why not?

I’d argue that most company’s strategic plans are not really strategic at all.

Here’s the acid test.

It’s only a strategic plan if you’ve got SOMETHING in your plan that is DRAMATICALLY different than your competitors. Recently, I’ve been using the phrase “Extreme Differentiation” to characterize this point.

If you don’t, then you don’t really have a strategic plan. All you really got is a budget.

There’s nothing wrong with a budget, it’s necessary, but its not the same thing.

So which category do you fall in?

Is your 2011 plan a budget or a strategic plan?

That’s my thought of the day.

 

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