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IAI Actuarial Core Principles · Business Management · Business and consumer needs, the industry value chain and competitive forces

A private insurer in India is considered stuck in the middle. It charges prices slightly above the cheapest rivals, yet its products and service are not perceived as noticeably better than those of premium competitors. Its returns are below the industry average. Which statement best reflects Porter's view and the appropriate response?

The insurer lacks a clear generic strategy. Porter argued that firms caught between cost leadership and differentiation, with no distinct advantage, earn below-average returns. The sensible response is to commit to a clear position, whether cost leadership, differentiation or a focus, and build the capabilities that support it.

  1. AIt lacks a clear generic strategy and should commit to either cost leadership, differentiation or a focus, because a blend without a distinct advantage tends to earn poor returnsCorrect
  2. BStuck in the middle is ideal, since combining low cost and differentiation always reduces risk
  3. CIt should lower prices below all rivals immediately without changing its cost base, to gain volume
  4. DIt should exit the market, since no position between cost leadership and differentiation can ever be profitable
  5. It should adopt a diversification strategy because generic strategies apply only to single-product firms

Explanation

Porter argued that a firm without a clear cost or differentiation position, or a focus, is stuck in the middle and earns below-average returns, so it should commit to one. Cutting prices without lowering costs would erode margins. Exit is not required, and generic strategies are not limited to single-product firms.

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