Humana, Inc.

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Humana, Inc.

• Sample Case Analysis Presentation
• Professor Joanne Luzietti
• April 11, 2008

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Agenda

• Identification of Key Strategic Issues
• External Analysis
• Internal Analysis
• Summary SWOT
• Strategic Alternatives Recommendations
• Questions Answers

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Key Strategic Issues
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Key Strategic Issues

• Assessment of Humanas current position and
  strategy.
• Assessment of how well Humanas strategy
  positions it for value creation and above-average
  returns in the future.

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About Humana

• Mission Statement Humana is committed to
  helping employers manage their healthcare costs,
  guiding consumers to make informed health and
  benefits decisions, and giving back to the
  communities we serve.
• Key statistics
• Market cap - 10.5B
• Annual Revenue - 21.5B
• YOY Quarterly Net Income Growth 150

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External Analysis
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Industry Definition

• Humana competes in the Accident and Health
  Insurance and Medical Service Plans industry.

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External Analysis Key Environmental Factors

• Demographic factors
• Growth rate of population aged 60 will be three
  times that of total population growth by 2010.
• US citizens without health coverage has been
  fairly consistent at 15.5
• US citizens who participate in employer-sponsored
  health benefits has been fairly consistent at
  approximately 60.
• Percentage of people covered by government health
  insurance programs increased slightly in 2004 to
  27

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External Analysis Key Environmental Factors

• Sociocultural
• Increasing attention to healthy lifestyles
• Smoking trends declining
• Obesity trends increasing, especially among
  children
• Economic
• Unemployment rate fairly stable
• Healthcare costs increasing

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External Analysis Key Environmental Factors

• Political/Legal
• Lawsuits
• HIPPA Legislation
• Universal Health Coverage
• Technology use of internet
• Global increasing consumer interest in
  receiving healthcare overseas

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External Analysis Porters Five Forces

• Threat of New Entrants LOW
• Some perceived switching costs
• Limited margins Lots of competitive response
• Bargaining Power of Suppliers MODERATE
• Physicians, hospitals, etc. can create
  relationships with Humanas competitors

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External Analysis Porters Five Forces

• Bargaining Power of Customers MODERATE TO HIGH
• Some customers may be large portion of Humanas
  business
• Substitutes LOW
• Competitive Rivalry VERY HIGH
• Significant competition
• Slow industry growth
• Significant price competition

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Competitors

• Aetna
• Larger in size (measured in market cap and annual
  revenue)
• Much more limited growth
• Similar focus on technology customers
• Similar product innovations
• Less focus on government sector

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Competitors

• CIGNA
• Smaller than Aetna, but larger than Humana
• Least growth of three firms
• Similar focus on technology
• Similar product innovations
• More focus on employee work-life programs and
  Employee Assistance Programs

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Internal Analysis
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Customer

• Customer is defined as the employer who purchases
  the health plans.
• Customer benefit employers recruit and retain
  key personnel based on the quality of their
  benefit packages. They want to do this as
  cost-effectively as possible.
• Consumer is the end-user.
• Humanas market segments
• Private industry
• Government

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Key Resources

• Key tangible resources
• Strong financial resources
• Good portfolio of key products
• Strong web presence
• Key intangible resources
• Ability to innovate new products
• Strong analytical models to ensure cost control

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Core Competencies

• Ability to define market needs and create
  products to serve those needs
• Ability to use technology to simultaneously
  improve customer experience and contain costs
• Ability to identify and integrate acquisition
  targets
• Ability to implement differentiation strategy to
  avoid price wars

All are valuable, rare, costly to imitate and
nonsubstitutable.
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Value Chain Analysis

• Primary activities of value
• Operations Processes contain costs well
• Outbound logistics Internet strategy improves
  access to information by employers and consumers
• Service High responsiveness to customer needs
• Support activities of value
• Technological development Constantly improving
  internet presence
• Firm infrastructure Talented CEO, strong
  acquisition strategy

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Summary SWOT
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Strengths Weaknesses

• Strengths
• Humanas resources and core competencies are
  valuable, rare, costly to imitate and
  nonsubstitutable.
• Business model of leveraging technology to reduce
  customer costs and a focus on customer needs
  helps them respond to key market trends.
• Weaknesses
• Low margin industry.
• Most competitors have matched Humanas
  technological edge.

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Opportunities

• Growth can be expected in healthcare industry.
• Individuals covered by government plans is
  increasing.
• Proven success in acquisitions suggests
  opportunity to respond well to consolidation
  within industry.
• Opportunity to expand into more wellness
  products, as consumers are interested in these
  kinds of products.

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Risks

• Although government business carries growth
  opportunity, it has inherent risks due to
  legislation, funding changes, etc.
• Lawsuits have been an issue for Humana in the
  past, and could be again.
• Humana has paid little attention to physicians
  and hospitals they could retaliate, and have
  moderate power.
• As competition imitates their business model,
  there will increasing pressure on price, unless
  they continue to innovate.

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Strategic Alternatives and Recommendations
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Strategic Alternatives

• Continue current business model, focusing on
  technology and customers.
• Exit government sector.
• Look for opportunities to vertically integrate
  backwards.
• Use its core competency in acquisitions to
  develop new business lines.

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Strategic RecommendationKeep Up the Good Work!

• Continue current business model, focusing on
  technology and customers. Key area of growth is
  employee wellness.
• Continue focus on growth through acquisitions
• Continue to assess opportunity risk in the
  government sector
• Begin formulating responses to key trends
• Universal healthcare
• Physician shortages

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Questions Answers