Regulation changes and their impact on business models in the insurance industry

TABLE OF CONTENTS

Content

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

CHAPTER 1: INTRODUCTION TO THE RESEARCH PROBLEM
1.1) Introduction
1.2) Problem Statement
1.3) Nature of Study
1.4) Research Questions and Hypotheses
1.5) Research Objectives
1.6) Purpose of the Study
1.7) Theoretical Base
1.8) Operational Definitions
1.9) Assumptions
1.10) Limitations
1.11) Scope and Delimitations
1.12) Significance of the Study
1.13) Research Approach and Overview
1.14) Summary and Transition

CHAPTER 2: LITERATURE REVIEW
2.1) Introduction
2.2) Business Models
2.2.1) Social Requirement of Business Models
2.2.2) Innovation and Technology
2.2.3) Business Model Frameworks and Functions
2.2.4) Changing Business Models
2.2.5) Contingency Factors and Interdependencies
2.2.6) Business Model and Value Creation
2.3) Regulation
2.3.1) Regulation and the Financial Crisis
2.3.2) Increased Scrutiny
2.3.3) Open-Ended Regulation
2.3.4) Regulation and Small Business
2.3.5) Treating Customers Fairly
2.3.6) Treating Customers Fairly and Value Creation
2.3.7) Treating Customers Fairly and Ethics
2.3.8) Engagement of Companies in TCF
2.4) Operational Efficiency
2.4.1) Competition and Operational Efficiency
2.4.2) Relationship between Business Models and Operational Efficiency
2.4.3) Points of Operational Efficiency
2.4.4) Operational Efficiency Factors
2.5) Summary

CHAPTER 3: RESEARCH QUESTIONS AND HYPOTHESES

CHAPTER 4: RESEARCH METHODOLOGY
4.1) Methodology
4.2) Unit of Analysis
4.3) Population
4.4) Sampling
4.5) Research Instrument
4.6) Data Collection and Analysis
4.7) Limitations
4.8) Conclusion

CHAPTER 5: RESULTS
5.1) Brief Review of the Methodology
5.2) Data Review
5.3) Likert Scale Testing
5.4) Restatement of the Research Questions and Hypotheses
5.5) Reliability and Validity
5.6) Demographic Statistics
5.6.1) Gender
5.6.2) Age
5.6.3) Length of Employment
5.6.4) Company Role
5.7) RQ 1: To What Extent have Regulations Affected Operational Efficiency?
5.8) RQ 2: To What Extent have Regulations Affected Business Models?
5.9) RQ 3: To What Extent have Regulations Affected how Customers are Treated?
5.10) H1: Underwriting Managers have Achieved High Rates of Operational Efficiency
5.11) Significant Inferential Statistics
5.12) H2: Regulations have Affected Business Models and how Customers are Treated
5.13) Conclusion

CHAPTER 6: DISCUSSION OF RESULTS
6.1) Restatement of the Research Questions and Hypotheses
6.2) Demographic Statistics
6.3) RQ 1: To What Extent have Regulations Affected Operational Efficiency?
6.4) RQ 2: To What Extent have Regulations Affected Business Models?
6.7) RQ3: To What Extent have Regulations Affected how Customers are Treated?
6.6) H1: Underwriting Managers have Achieved High Rates of Operational Efficiency
6.8) H2: Regulations have Affected Business Model and how Customers are Treated
6.9) Conclusion

CHAPTER 7: CONCLUSION
7.1) Principal Findings
7.2) Implication for Management
7.3) Limitations of Research
7.4) Suggestions for Future Research

References

APPENDICES

APPENDIX A: Consent Form

APPENDIX B: Questionnaire

LIST OF FIGURES

Figure 1: Schematic Representation of the Overlap between the Core Subject Matter

Figure 2: Research Approach and Chapters in the Study

Figure 3: Conceptual Framework

Figure 4: Division of Gender within the Sample

Figure 5: Division of Age within the Sample

Figure 6: Length of Employment within the Organisation

Figure 7: Employee Company Roles within the Sample

Figure 9: Company Role Perceptions of Revenue Increases due to Operational Efficiency

Figure 10: Company Role Perceptions on Expenses Increase due to Operational Efficiency

Figure 11: Gender Influence on Management Awareness of Subordinate Activity

Figure 12: Awareness of Management of Subordinate Activities during the Workday

Figure 13: Age Representation of Regulations Alter how the Company does Business

Figure 14: Regulations Alter how the Company does Business

Figure 15: Company Role on How Regulations Affect Business

Figure 16: Gender Representation of Technological Savviness of the Company

Figure 17: Technological Savviness of the Company as a Whole

Figure 18: Regulations Affect how Customers are Treated

Figure 19: Length of Employment Representation of Automation with any Processes

Figure 20: Automation with any Processes

Figure 21: Automation Operational 24/7 for Consistency and Continuity

Figure 22: Length of Employment Automation Operational 24/7 for Consistency and Continuity

Figure 23: Company Loses Profit Due to More Time Consuming Business Processes

Figure 24: Length of Employment Company Loses Profit Due to More Time Consuming Business Processes

Figure 25: Company has Plans to Increase Technology Innovations

Figure 26: Company Role Perceptions of Work Flow Effectiveness

Figure 27: Company Using its Resources Effectively

LIST OF TABLES

Table 1: Functions and Purposes of Business Models

Table 2: TCF Outcomes

Table 3: Length of Employment Perceptions of Revenue Increases

Table 4: Company Role in Perception of Revenue Increases as a Result of Operational Efficiency

Table 5: Company Role Perception of Expenses Increase in Relation to Operational Efficiency

Table 6: Technological Savviness of the Company as a Whole

Table 7: Age Representation of Work Flow within the Company

Table 8: Company Role Perception of Effectiveness of Work Flow

CHAPTER 1: INTRODUCTION TO THE RESEARCH PROBLEM

This chapter opens the study, providing basic information regarding the topic. This involves an introduction to the broad topic, which narrows in scope to the specific topic. Following this, the problem statement is established. Next, the nature of the study is discussed. This information leads to the research questions and hypotheses. Following this, the research objectives are identified. Therefore, the purpose of the study can be defined. This will lead to the theoretical basis for conducting the study. Following this information, operational definitions are provided, followed by assumptions, limitations, scope and delimitations, and the significance of the study. The chapter concludes with a short summary.

1.1) Introduction

Business model regulations are changing as technology and innovation advances. Regulatory changes have been made in order to improve the “safety and soundness of the global financial system through a range of regulatory changes aimed primarily at large banks” (EY Global, 2015). However, there are other companies within the financial services industry that have been affected by business model regulations, such as within the insurance industry. For example, the insurance industry is governed by insurance regulatory law, which has been developed through individual states and statutory law (Van III, 2011). As a result, the business models utilised by the insurance industry are governed by insurance regulatory laws. Regulations inhibit operational efficiency through inconsistency. That is, business models must be aligned with the applicable regulations. For instance, manufactured capital regulations can inhibit operational efficiency if the facilities, equipment, and other infrastructural components are not productive (Iirc & International Integrated Reporting Council, 2013).

In 2010, the Federal Insurance Office was established, but was not designed to take over state regulations. Rather, the purpose was to implement new requirements within the insurance industry (PWC, 2010). The office analyses different aspects of insurance regulation, such as “systemic risk, capital standards, consumer protection, national uniformity of insurance regulation, regulation of companies and affiliates on a consolidated basis, international coordination of insurance regulation, international coordination of insurance regulation, costs and benefits of federal regulation of insurance, feasibility of regulating only certain lines of business at the federal level, regulatory arbitrage, impact of regulatory changes in foreign jurisdictions on potential federal regulation, and federal resolution authority” (PWC, 2010, p. 2). Complying with this new requirement may be time consuming and may hinder productivity and profitability.

1.2) Problem Statement

The problem of business model regulation was selected in order to improve existing models and achieve enhanced operational efficiency. This is crucial to creating profitability for individual companies within the financial services industry. Since operational efficiency typically revolves around cost reductions within this industry, it is important to see how business model regulation affects the actions needed to create operational efficiency within the company.

Figure 1: Schematic Representation of the Overlap between the Core Subject Matter

Abbildung in dieser Leseprobe nicht enthalten

1.3) Nature of Study

This study was conducted through a quantitative descriptive research design and correlational research design. This means that the study was based on the description of the results, excluding any influence from the researcher. However, this type of study cannot definitively prove or disprove a hypothesis because the study is correlational in nature. That is, this specific study deviated from the traditional descriptive research method in that it does prove or disprove the hypotheses. As a result, through the combination of the methods used (descriptive and correlative), the researcher was able to address different aspects of the study. This study, in particular, aimed to determine the strength of the causation of the dependent variables by the independent variable.

1.4) Research Questions and Hypotheses

The research questions in this study were causal and included:

1. To what extent have regulations affected operational efficiency?
2. To what extent have regulations affected business models?
3. To what extent have regulations affected how customers are treated?

Based on this information, the researcher hypothesised:

1. According to current employees, underwriting managers have achieved high rates of operational efficiency.
2. According to current employees, regulations have affected business models and how customers are treated.

The null hypotheses were:

1. According to current employees, underwriting managers have not achieved high rates of operational efficiency.
2. According to current employees, regulations have not affected business models and how customers are treated.

1.5) Research Objectives

The problem is relevant in two respects. For instance, companies must achieve operational efficiency to remain profitable, which is a major goal for many companies. At the same time, the company must be sure that the business model meets the needs of its customers, as well as follows the regulations set forth by the government and other regulatory agencies. Therefore, regulations are designed to meet a variety of needs, including international challenges that exist in the global marketplace (De Cagna, 2010). Furthermore, regulations assist in establishing stability and reducing risk, yet are known to affect operational efficiency (Chortareas, Girardone, & Ventouri, 2012a; Jalilian, Kirkpatrick, & Parker, 2007; Zhao, Casu, & Ferrari, 2010).

1.6) Purpose of the Study

Business models can be defined as “a statement, a description, a representation, an architecture, a conceptual tool or model, a structural template, a method, a framework, a pattern, and a set” (C. Zott, Amit, & Massa, 2011, p. 1022). At the same time, there have been controversies relating to regulations, with the AIG case being one example. In this case, “the company was enthusiastic about the move since the increased regulatory scrutiny helped to restore trust in a brand that had been utterly debased” (The Economist, 2014). Yet, some companies, such as MetLife, are not as enthusiastic about the increased regulations. It has also been found that “insurance has maintained a convenient conceit about the ethics that underpin the industry believing that it was the ‘nasty bankers’ who had been indulging in dodgy and near-criminal acts. As the previous year has shown us, insurance is by no means immune to poor ethical practices and the dark paths of finance that greed leads some executives down” (Blanc, 2014).

The study is needed from both a business and an academic standpoint. Therefore, this study will determine how regulation changes have affected business models in the insurance industry, how customers are treated fairly within the insurance industry, and how operational efficiency is achieved despite regulation changes within the insurance industry.

1.7) Theoretical Base

It has been hypothesised that regulations have been excessive and badly written (The Economist, 2013). Therefore, in many ways, regulation has not been effective. It is concluded that when the law, including regulations, and market do not meet their obligations, culture and ethics can influence the results (Awrey, Blair, & Kershaw, 2013). As a result, it can be concluded that business model regulations must be culturally acceptable and ethical , simultaneously. Thus, innovation is crucial for economic growth, competition, profitability, and long-term continuity.

1.8) Operational Definitions

Based on the research questions, the units of analysis are operational efficiency, how customers are treated, and regulations. The independent variable is the one that causes the reaction. Thus, the focal point was to determine whether or not regulations c ause the dependent variables. This allowed the research questions to be answered most effectively.

1.9) Assumptions

It is assumed that participants responded honestly and completely. It is assumed that the references obtained are accurate and up-to-date. It is assumed that the information used in determining the results of the study are accurate. It is also assumed that the methodology is the most effective one possible in respect to the research problem.

1.10) Limitations

The researcher has no control over the participants’ responses. Furthermore, the researcher has no control over the number of responses obtained. The researcher has no control over how participants interpret the questions provided on the questionnaire. Therefore, the researcher has no control over the perception of the participants to the questions or how they choose to respond. Finally, since the study involves financial services particularly insurance, it is not possible to tangibly measure where costs have increased.

1.11) Scope and Delimitations

Businesses will benefit from the study because they will be able to achieve operational efficiency. Through the information obtained from the study, businesses will have the opportunity to adjust their business models to meet regulatory expectations and customer expectations. The study is theoretically needed because it will help future operations. This means that the study will provide the opportunity for businesses to modify existing models to ones that will most effectively increase operational efficiency, yet follow the existing regulations.

1.12) Significance of the Study

The South African short-term insurance industry has been inundated with many competitors attempting to obtain a space for which there is limited market share. Faced with an increase of invasive legislature, the entire industry is devoting a substantial amount of time in advancing this new regulatory regime. Amidst the competitive onslaught and regulatory arbitrage, the underwriting management agencies (hereafter referred to as UMA’s) are continuously looking for new ways to grow their businesses against the backdrop of a limited distribution channel and an expensive business model.

Thus, business models have different contexts. Therefore, every company operates according to some logic, even if the logic is not described as a business model, leading to immense innovation. This suggests that successful business models that meet the expectations of financial innovation include four components: “customer value proposition, profit formula, key resources, and key processes.” As a result, these are the “building blocks” of a business (Breiby & Wanberg, 2011; Casadesus-Masanell & Ricart, 2010; Gejler, 2013; Ricart & Casadesus-Masanell, 2011; Sanchez & Ricart, 2010b; Zott et al., 2011).

1.13) Research Approach and Overview

The research approach began with a review of business regulations, business models, operational efficiency, and customer treatment. This was done in order to ascertain the ways that operational efficiency is achieved and how regulations affect business models and how customers are treated. This allowed the study to be conducted in order to determine how underwriting managers were affected by business regulations and the impact of resultant regulations on operational efficiency and how customers are treated. This allowed the data to be analysed and explored effectively. This can be explained in a more comprehensive way through Figure 2, below.

Figure 2: Research Approach and Chapters in the Study

Abbildung in dieser Leseprobe nicht enthalten

1.14) Summary and Transition

It has been established that business model regulations are changing as technology and innovation advances, emphasising the need for regulatory changes. These regulatory changes have affected the insurance industry as well. As a result, the business models utilised by the insurance industry are governed by insurance regulatory laws. Complying with this new requirement may be time consuming and may hinder productivity and profitability. Regulation increases costs and impacts competition, causing efficiency to decr ease. However, it is also known that business models develop the strategy and logic of the firm, such as operations and value creation for stakeholders (Baden-Fuller, MacMillan, Demil, & Lecocq, 2010). Thus, innovation is crucial for economic growth, competition, profitability, and long-term continuity.

Businesses will benefit from the study because they will be able to achieve operational efficiency. Through the information obtained from the study, businesses will have the opportunity to adjust their business models to meet regulatory expectations and customer expectations. The study is theoretically needed because it will help future operations. This means that the study will provide the opportunity for businesses to modify existing models to ones that will most effectively increase operational efficiency, yet follow the existing regulations.

With this information, the literature review is introduced, which is important because it addresses operational efficiency, TCF, regulations, and business models in greater detail.

CHAPTER 2: LITERATURE REVIEW

2.1) Introduction

The most effective business model includes partners, activities, resources, value proposition, customer relationships, supplier and distribution channels, and customer segments. Furthermore, as is well known, customers must be treated fairly in order to cr eate customer loyalty. However, business models are also affected by regulations. Significantly, global banks have little choice but to conform to current economic conditions and regulation changes (EY Global, 2015). These regulation changes can affect how customers are treated as well as operational efficiency. Regulation changes affect how customers are treated through providing new standards that affect customer/business relationships. In most cases, these standards are beneficial to the customer and serve to protect their rights. As a result, the business model is typically altered to adapt to the new regulations, including new ways to analyse company efficiency, a holistic emphasis on how business is conducted, is conceptualised through the conduction of business activities; and provides an explanation regarding how value is created and captured (Zott et al., 2011).

It is noted that regulatory changes have been made in the banking industry to improve the safety and soundness of the global financial system (EY Global, 2015). However, the results of these changes have not been made apparent in terms of regulation evolution. Regardless of whether or not a company is for-profit or not-for-profit, it needs to be operationally efficient. Therefore, regulations can inhibit operational efficiency, which can reduce profit or hinder the achievement of established business goals. For example, a stringent reason for the implementation of regulation changes was due to the failure of financial institutions to utilise policies that would stabilise the financial system (Levine, 2012). Since the global financial system was destabilised through the use of these policies, profit was reduced because debts could not be repaid, resulting in increased defaults. Furthermore, risk increased, particularly in terms of the provision of credit. When risk increases, there is an increased difficulty in meeting established business goals.

As the financial services industry changes, so do the regulations. In a study conducted by Littauer (2011), within the financial services industry, operational efficiency can be associated with cost reductions. This requires companies to focus on their core strengths (Littauer, 2011). The same is true for the insurance part of the industry. If companies do not focus on their core strengths, operational efficiency will decrease. Regulatory changes can affect operational efficiency. Therefore, it is important to determine how efficient companies are in relation to current regulatory requirements. This requires the understanding of the new business rules in place that form the ability of companies to compete within the global marketplace, leading to business model modification for all companies. The model applies to numerous aspects of the business, such as business processes, use of human capital, customers, distribution channels, strategies, infrastructure, purchasing, organisational structures, innovation, and R&D (Blakemore, 2006; George & Bock, 2011).

The financial market has been influenced by financial deregulation and re-regulation. It is noted that these two processes have been occurring in developed and develop ing countries. The goal of de-regulation has been to “lower firms’ regulatory costs and foster competition” (Zhao et al., 2010, p. 246). This has been commonly referred to as positive competition, which has led to monopolisation. This suggests that de-regulation and the competition that ensues should “translate into incentives for managers to improve efficiency and performance” (Zhao et al., 2010, p. 246). In contrast, the goal of re-regulation has been to “foster stability and minimize excessive risk taking” (Zhao et al., 2010, p. 246). Re-regulation increases costs and impacts competition, causing efficiency to decrease. Furthermore, there have been controversies regarding “the relevance of corporate governance” in relation to regulation efforts (Zhao et al., 2010, p. 246).

In a study conducted by Jalilian, Kirkpatrick, and Parker (2007), it was found that regulation may interfere with operational efficiency (Jalilian et al., 2007). That is, whenever regulation is implemented business efficiency is affected. Jillian et al. (2007) further highlight that regulatory burden ultimately affects the economic performance of the underlying entity (Jalilian et al., 2007). Chortareas, Girardone, and Ventouri (2012) provide further evidence that regulatory policies such as private sector monitoring and restricting bank activities can result in higher inefficiency levels.

Microeconomic theory suggests that “deregulation should positively affect the efficiency and productivity of an industry as it reduces the regulatory cost imposed on market participants. In addition, increased competition fostered by deregulation should induce firms to minimize costs to maintain market shares and profitability” (Zhao et al., 2010, p. 247). However, this is only theory. In reality, there have been no definitive studies or evidence that shows that “regulatory changes in the late 1990s have affected the structure, conduct and performance relationship in the financial sector” (Zhao et al., 2010, p. 247). As such, it was expected that these changes would increase incentives for efficiency.

As such, the literature review is divided into three sections:

1) Business model regulation,
2) Treating customers fairly, and
3) Operational efficiency.

These divisions are important because they help determine how effective a company is at meeting both customer expectations and internal objectives.

2.2) Business Models

Business model has many different definitions. For instance, at the base level, a business model may be:

- A reflection of a firm’s strategic choice(Shafer, Smith, & Linder, 2005),
- Is a conceptualization of transactional links between a firm and exchange partners (Zott & Amit, 2008) and governance of transactions (Amit & Zott, 2001) designed to create value (Chesbrough, 2007).
- Unification of the finer aspects of strategy (Hedman & Kalling, 2003),
- A definition of the organisation’s logic (Linder & Cantrell, 2000) and mind-sets (Linder & Cantrell, 2007).
- Inclusive of a contingency model (Mansfield & Fourie, 2004) associated with an interrelated set of decision variables (Morris, Schindehutte, & Allen, 2005)
- Along a value constellation (Schweizer, 2005) to identify the “who, what, when, why, how, and how much” elements (Mitchell & Coles, 2003, p. 16).

However, the term ‘business model’ is an old concept. Furthermore, most of the time, it is undefined. Despite this, interest in business models has grown during the past decade, which may be explained by the “impact of globalization, deregulation, and advances in Information and Communication Technologies (ICTs)” (Sanchez & Ricart, 2010b, p. 2) Thus, it is argued by many scholars and practitioners that current and future competitiveness can be explained by innovations and structural changes to business models (IBM Global Business Service, 2008; Sanchez & Ricart, 2010b).

2.2.1) Social Requirement of Business Models

According to Awrey, Blair, and Kershaw (2013), the social costs of market failure cannot be effectively contained through conventional approaches. Therefore, it is concluded that when the law, including regulations, and market do not meet their obligations, culture and ethics can influence the results. In fact, it may be possible to utilise the power of law and markets in order to develop a space within which culture and ethics (or through a combination of culture and ethics) “can play a meaningful role in constraining socially undesirable behaviour within the financial services industry” (Awrey et al., 2013, p. 1). As a result, it can be concluded that business model regulations must be culturally acceptable and ethical, simultaneously. Furthermore, studies show that further research is needed to determine profitability can be achieved while generating social value when utilising business models in low-income markets (Hart & Prahalad, 2008; Sanchez & Ricart, 2010b). However, it is also known that business models develop the strategy and logic of the firm, such as operations and value creation for stakeholders ( Baden-Fuller & Morgan, 2010).

2.2.2) Innovation and Technology

This can be further amplified through the consideration of the Islamic banking system. For instance, if the Islamic banking system is compared to conventional banking system, few differences are found in business orientations. However, it is noted that while the Islamic banking system is least cost effective, it has “higher intermediation ratio, higher asset quality and are better capitalized” (Beck, Demirgüç-Kunt, & Merrouche, 2013, p. 433). It is noted that “conventional insurance involves the elements of uncertainty, gambling, and interest, all of which are unacceptable under Islamic law. There existed anxiety among Muslims regarding the inconsistency of conventional banking and insurance in compliance with Islamic laws,” resulting in the establishment of the takafol market (Swartz & Coetzer, 2010, p. 33). However, there were also concerns that the market only catered to Muslims. In reality, the market includes non-Muslim clients. Despite this inclusion, the misconception stands and functions primarily within the Muslim world, which utilises the same cultural beliefs across all citizens. As a result, stock performance of Islamic banks is better. The difference in functioning (Islamic banking system versus Western banking system) has developed due to concerns related to the functioning of Western banks after the global financial crisis. Thus, there are numerous advantages of Sharia-compliant financial products. These include “the mismatch of short-term, on-sight demandable deposit contracts with long- term uncertain loan contracts is mitigated with equity and risk-sharing elements” and “very attractive for those that require financial services that align with religious beliefs, causing an increase in importance in global banking assets” (Beck et al., 2013, p. 433). Despite the benefits of Islamic banking, it is further noted that business models focus on a variety of innovations, not just technology.

Chesbrough (2007) opines that a strong business model is more beneficial than technology or new ideas because business models are based on value creation and value capture (Chesbrough, 2007). Bos-Brouwers (2010) further emphasised that “sustainable innovation has become the focal point to deliver evidence for the commitments of companies to the triple p bottom line” (Bos-Brouwers, 2010, p. 418). Thus, innovation is crucial for economic growth, competition, profitability, and long-term continuity. In addition, Bos-Brouwers (2010) emulated, “sustainable innovation can be defined as the renewal or improvement of products, services and process that not only delivers an improved economic performance, but also an enhanced environmental and social performance, in both short and long term. Its long-term focus, integrated value creation and transformative nature set sustainable innovations apart from conventional innovation” (p. 431). Further, corporate sustainability is important for improving eco-efficiency and increasing value creation. Therefore, many companies have “formulated sustainable innovation goals, such as targets for cost reduction, energy use and innovative output” (Bos-Brouwers, 2010, p. 428).

2.2.3) Business Model Frameworks and Functions

Overall, business models are designed to help interested parties understand how a company operates. Business models are not only considered in context, but are considered as conceptual frameworks. In fact, conceptually, a business model is designed to describe parts of a business and the operation processes and relationships between them (Chesbrough, 2007). Ultimately, this leads to the analysis of the logic being utilised by the business for value creation, both for customers and for stakeholders. However, this is done through different functions. The following table (Table 1) shows the functions of business models.

Table 1: Functions and Purposes of Business Models

Abbildung in dieser Leseprobe nicht enthalten

Source: Chesbrough (2007, p. 13)

Based on these functions, business models are based on different types of frameworks.

1) Framework 1 – Involves an undifferentiated business model. This means that there is no distinct business model utilised within the company. Significantly, this type of company “competes on price and availability, and serves customers who buy on those criteria” (Chesbrough, 2007, p. 13).
2) Framework 2 – Involves some differentiation in the business model. This business model allows participating companies to target specific customers. However, companies within this classification “may lack the resources and staying power to invest in the supporting innovations to sustain its differentiated position” (Chesbrough, 2007, p. 14).
3) Framework 3 – Segmented business model. The third type of business model is segmented. Within this model, it is possible to compete in different segments, simultaneously. This results in serving more of the market, causing more profit to be extracted from the market. In fact, different niches can be addressed in this way. For instance, price sensitivity dictates volume bases for high volume, low cost production. In addressing individual niches, the distribution channel presence is stronger. This causes the business model to be more distinctive and profitable, further creating product and technology roadmaps designed to assist the company in meeting future goals (Chesbrough, 2007).
4) Framework 4 – Thee business model is externally aware. In other words, the companies participating in this model open themselves to different external ideas and technologies aimed at improving the business. As a result, there are more resources available to these company (Chesbrough, 2007).
5) Framework 5 – Involves the integration of innovation and the business model into one process. This means that the business model has a key integrative role within the company. For instance, suppliers and customers are able to access the company’s innovation process. Therefore, suppliers and customers are able to provide roadmaps to the company, allowing the company to meet the needs of its customers more effectively (Chesbrough, 2007).
6) Framework 6 - the company and suppliers to work together and become partners. In this case, there is integration of the business models of suppliers into the company’s planning process. This allows the company to integrate “its business model into the business model of its key customers” (Chesbrough, 2007, p. 15).

Finally, the integration of business models and the establishment of a value chain are caused by companies being able to establish an innovation platform of technology. As a result, other companies are invited to invest resources, which further increases the value of the platform, yet does not require additional investment from the platform-maker ( Chesbrough, 2007). It is also noted that many business models are based on different theories, including the “industrial organization theory, the resource-based view, dynamic capabilities, and game theory” (Casadesus-Masanell & Ricart, 2010, p. 195). Importantly, it is found that “advances in ICT and the demands of socially motivated enterprises constitute important sources of recent business model innovations” (Casadesus-Masanell & Ricart, 2010, p. 195).

Despite this, business models have different contexts. In Business Model Generation, Osterwalder and Pigneur (2010) argue that a business model has nine separate dimensions: value propositions, key activities, partner network, key resources, cost structure, client relationships, client segments, distribution segments and revenue flows (Osterwalder, Pigneur, Smith, & Movement, 2010). It must be further mentioned that every company operates according to some logic, even if the logic is not described as a busin ess model. This has led to financial innovation within the real estate industry (Gejler, 2013). Furthermore, Gejler (2013) noted that successful business models that meet the expectations of financial innovation included four components: customer value proposition, profit formula, key resources, and key processes. As a result, these are the “building blocks” of a business (Gejler, 2013). Since the real estate industry is closely related to the banking and insurance industry, it is likely that similar models would be effective.

When considering different theories, such as “virtual markets, Schumpeterian innovation, value chain analysis, the resource-based view of the firm, dynamic capabilities, transaction cost economics and strategic networks” (Casadesus-Masanell & Ricart, 2010, p. 197), it is obvious that each individual element does contribute to business models (Amit & Zott, 2001; Sanchez & Ricart, 2010). However, no one element is able to determine the exact method of creating an effective business model. It is agreed by most; however, that value creation is, perhaps, the most important driver for the development of the business model. According to a number of studies (e.g., Amit & Zott, 2001; Sanchez & Ricart, 2010b) “the business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities” (Casadesus-Masanell & Ricart, 2010, p. 197). Through this explanation, different business processes are considered, including the exchange of goods or information and the necessary resources and capabilities to conduct the exchange, the different parties within the exchange, how the parties are linked together (such as employee and client), business operation processes and how the parties interact, and information inflows and outflows (Amit & Zott, 2001; Casadesus- Masanell & Ricart, 2010). Therefore, it can be assumed that business models encompass all different parts of the company, allowing it to operate in one functional process. For instance, goods and resources are under the control of the company, distributor, or suppliers. These three different groups have to work together within the business model to provide value creation for the stakeholders. Furthermore, it is commonly believed that through the creation of business models, different elements must be considered, such as the architecture of the company and the sources of value creation (Amit & Zott, 2001; Casadesus-Masanell & Ricart, 2010).

It is believed that technological innovations are crucial to the business model and allows the company to create value in this way (Chesbrough & Rosenbloom, 2002; Luoma, 2014). However, it is also found that technological innovations are not enough to help the company succeed. This requires that innovation “be translated to a value proposition and other functions of a business model” (Luoma, 2014, p. 18). Based on this information, a business model must first “articulate the value proposition” (Chesbrough & Rosenbloom, 2002; Luoma, 2014). This proves that the company can bring value to customers based on technological innovations. Second, it is necessary that the business model must “identify a market segment and specify the revenue generation mechanism(s) for the firm” (Chesbrough & Rosenbloom, 2002; Luoma, 2014). Third, it is required that the value chain is structured and defined adequately within the company. This is done in order to provide for the creation and distribution of the value to customers. As a result, it is possible to “determine the complementary assets needed to support the firm’s position in this chain” ( Chesbrough & Rosenbloom, 2002; Luoma, 2014). Fourth, the company will be able to determine the financial resources needed to provide the value. For instance, this includes the costs of production, manufacturing, and distribution. Fifth, the company must provide links between suppliers and customers, which can define “the position of the firm within the value network” ( Chesbrough & Rosenbloom, 2002; Luoma, 2014). Finally, the functions of the business model require that the competitive strategy be developed, showing how competitive advantage will be obtained ( Chesbrough & Rosenbloom, 2002; Luoma, 2014).

It is also discovered that it is important to understand “the existing business model as a starting point of business model development” in order to develop ways to establish the company (Johnson, Christensen, & Kagermann, 2008; Luoma, 2014). The goal of this type of model involves the resolution of a problem and the ability to meet the needs of the customer. In this case, “customer value proposition refers to the value creation, whereas profit formula, key resources and key processes define the value delivery” (Luoma, 2014, p. 18). Thus, according to this model, “(1) customer value proposition includes the target customer, job to be done and offering that satisfies the job to be done. (2) Profit formula defines how the company creates value for itself. It is the blueprint of the financial aspects of the business model, including revenue model, cost structure, margin model and resource velocity. (3) Key resources include resources required to deliver the customer value proposition, such as people, technology, equipment, channels and partnerships. Finally, (4) key processes together with key resources define how the value is delivered. They include processes as well as rules, metrics and norms” (Luoma, 2014, p. 18).

Since it is possible to link value proposition and market segment, value creation is developed. Furthermore, it is possible to link revenue generation, customer segment identification, and financial representation to create value capture. Finally, it is possible to link the definition of the value chain with the “position in the value network to define the value delivery, forming the operational model of a company” (Luoma, 2014, p. 20).

There are further similarities between the functions developed by Chesbrough and Rosenbloom (2002) and Osterwalder (2004). In fact, the difference is the addition of competitive strategy (Chesbrough & Rosenbloom, 2002; Osterwalder, 2004). In these two models, value proposition and customer segment are related. However, Osterwalder (2004) considers revenue generation to be independent from customer segment, rather defining the financial pillar (Osterwalder, 2004). Thus, revenue streams and cost structure are grouped together to develop profit. Furthermore, the value chain function is defined within the company, not the partners ( Chesbrough & Rosenbloom, 2002). This provides the provision for the infrastructure elements described through value delivery (Luoma, 2014; Osterwalder, 2004). Thus, categorisation of the elements can occur in different ways and no model is wrong (Chesbrough & Rosenbloom, 2002; Osterwalder, 2004). Furthermore, each model can be seen as developing the other and enhancing the capabilities of existing models. In fact, business model frameworks are often considered to be an example of a promising business model mapping concept (Chesbrough, 2010; Osterwalder, 2004).

It is noted that the business environment refers to both external and internal components. While the “external business environment assesses the market and competitive landscape, including potential customers and their preferences as well as competition and other external factors, the internal environment takes into account the environment inside the company where the business model takes its place” (Luoma, 2014, p. 88). Furthermore, the business environment is condensed into the concepts of strategy, organisational structure, and organisational culture. Thus, strategy is based on the external environment, as well as the company’s position, “serving as a link between the external and internal business environments” (Luoma, 2014, p. 88). The goal of this link is to show the strategy of the company, as well as the application of the business model, allowing the direction of the business to be developed. Thus, the business model has an imperative role in outlining what the business is anticipated to achieve. In contrast, “organizational structure and culture are important in addressing the internal environment of the company and its personnel, affecting the applicability business model in the organization” (Luoma, 2014, p. 89).

Within a contextual business model framework, value proposition is seen as the foundation that is assessed after considering the business landscape, especially strategic issues (Luoma, 2014). The core elements required to achieve the value proposition are customer segments, customer relationships, channels, and key partners (Casadesus-Masanell & Ricart, 2010; Luoma, 2014; Osterwalder, 2004; Osterwalder et al., 2010). These components are regarded as essential for value creation. Finally, according to Luoma (2014), “revenue streams and cost structure elements form the bottom line, concretizing the monetary results of the business model” (Luoma, 2014, p. 89).

The key resources and activities relate to other elements of the business model. This allows the core business activities to be developed. Thus, the business model shows the core logic of the business. The business model framework simplifies different business models depending on the context in which it operates. Casadesus-Masanell and Ricart (2010) opine that a business model is a reflection of the firms strategy, whereas, according to Louma (2014), “the notion of strategy and business model of being different level tools is still supported” (p. 90). In study performed by Luoma (2014), “the additions of strategy and organizational structure and culture are not part of the business model per se but important parts of the context where the business model is to be applied. Finally, the contextual business model framework is aimed to promote understanding of the interrelatedness of these concepts and the fact that a business model cannot be designed without acknowledging the business environment” (p. 90).

2.2.4) Changing Business Models

Business models are continuously evolving the consideration of e-Business is one such of business evolution. It is noted that research is focused on market exploitation of e-Business technologies. This has caused business model debates to become topical where the acceleration in e-Business has prompted the transformation of existing business models or the establishment of new business models aimed at exploiting the opportunities created through technological innovations (Pateli & Giaglis, 2004). The most significant impact of e- Business is that business configurations have multiplied, increasing the complexity and difficulties faced by managers. Thus, e-Business has created increased choices, which has made the “design and implementation of business models a rather complex and difficult task” (Pateli & Giaglis, 2004, p. 302).

2.2.5) Contingency Factors and Interdependencies

As a result, contingency factors exist between isolated and interactive business models. Significantly, isolated business models leverage current resources and capabilities through existing opportunities to widen their entrance into new markets. Interactive business models combine, integrate, and leverage internal resources with the capabilities to create new opportunities and innovation, which is important when entering low-income markets (Sanchez & Ricart, 2010b). It is noted that three common concepts related to business success are business models, strategy, and tactic. As previously discussed, a business model refers to how the firm operates and creates value for its stakeholders. Strategy refers to the choice made by the business about what business model will be used for competition within the global marketplace. Tactic refers to “the residual choices open to a firm by virtue of the business model it chooses to employ” (Casadesus-Masanell & Ricart, 2010, p. 202).

Several studies agree that business models have several interdependencies that can be analysed (Jalilian et al., 2007; Zhao et al., 2010). This allows the opportunity for interested parties to examine the level of value creation. In fact, it is suggested that the most successful company is the one that has “taken advantage of these structural changes to innovate in their business models,” which has allowed for the ability to compete in different ways (Casadesus-Masanell & Ricart, 2010, p. 195). Thus, the business model impact on the ecosystem (commonly defined as being a socioeconomic community) can be analysed to develop a specific venture. Furthermore, business models are dynamic, which analyse choices and consequences of activities over time and determines the relationships within the ecosystem and can result in virtuous cycles. This is especially critical in low-income markets due to uncertainty of the markets. Specifically, within low-income markets, it is difficult to understand the cause and effect on these relationships and value creation impact. Thus, this opportunity allows the company to increase its efficiency, as the company “refines and extends its own skills, capabilities and resource” (Sanchez & Ricart, 2010b, p. 149).

2.2.6) Business Model and Value Creation

It has been established that business models are crucial to value creation for the company’s stakeholders. Thus, value creation is accomplished through one of two different approaches: static or transformational. The static approach is designed to be “a blueprint for the coherence between core business model components,” whereas the transformational approach is designed to be used “as a tool to address change and innovation in the organization, or in the model itself” (Demil & Lecocq, 2010, p. 227). The accumulation of resources over the course of a company’s lifetime causes continuous and unique reactions, which allow the company to differentiate from others within its sector. Thus, business models are commonly designed to create sustainability (Demil & Lecocq, 2010). As a result, business performance is a critical part of the business model and the resultant value creation.

In the framework identified by Demil and Lecocq (2010), “the business model’s ongoing dynamics come from the interactions between and within the core model components. Interactions between components will follow choices to develop a new value proposition, to create new combinations of resources or to make changes in the organizational system, and the impacts such adaptations will have on the other components and their subsidiary elements” (Demil & Lecocq, 2010, p. 234). Interactions that exist within the core model components can cause other components to change. As a result, value proposition can change in these situations (Demil & Lecocq, 2010).

2.3) Regulation

2.3.1) Regulation and the Financial Crisis

Financial regulation is crucial because it details the design, implementation, and reform of financial policies. However, when weaknesses occur within financial regulation governance, incidents can occur, such as the global financial crisis of 2008 (Levine, 2012). The global financial crisis occurred due to ineffective financial policies that caused financial market destabilisation. However, significantly, it was seen that those responsible for the financial policies knew that the market was becoming increasingly fragile due to the policies and “had ample time and power to adjust their policies under relatively calm conditions” (Levine, 2012, p. 39). It was noted that financial policies were not in the best interest of the public. In retrospect, the ineffective financial policies were only a partial cause of the financial crisis. Other more expansive causes occurred due to ineffective governance, which “encouraged financial markets to take excessive risk and divert society’s savings toward socially unproductive ends” (Levine, 2012, p. 40).

Levin’s (2012) research shows that AIG had a high rating through the SEC, which led to increases in banks purchasing protection from the company. However, the banks were stil l making unsafe investments and providing risky credit to underqualified borrowers (Levine, 2012). Since AIG sold credit default swaps (hereafter CDS) protection, the company boomed as sales increased. Yet, banks used this protection to “reduce capital and invest in more lucrative, albeit more risky, assets” (Levine, 2012, p. 46). In fact, although AIG became aware of the risks and varying concerns tied to the banking system due to CDS, sales continued. Furthermore, the Fed began voicing concerns regarding fraud in lending situations, yet did nothing to stop it, allowing companies like AIG to continue making sales. Therefore, the instability of the banking system caused AIG to become increasingly fragile (Levine, 2012).

2.3.2) Increased Scrutiny

According to Ferren (2012), an effective mechanism for resolving troubling elements of Payment Protection Insurance (PPI) market practice was increased scrutiny from the competition authorities (Ferran, 2012). Therefore, one effective regulatory method may be greater scrutiny of business operations. However, this has not been entirely successful. In fact, in 2005, the mis-selling of PPI was made an early thematic priority by the FSA. It was noted that self-regulation had not stopped the problem through initial inquiries by the FSA. As a result, the FSA commanded the industry to improve, but there were ongoing concerns about the “lack of information to customers, inadequate suitability checks, and poor training, systems and controls” (Ferran, 2012, p. 255).

2.3.3) Open-Ended Regulation

However, open-ended regulation has gained momentum most recently. In fact, the New Institutional legal endogeneity model notes that “businesses commercially-rooted constructions of what is entailed in compliance with ambiguous legal norms tend to gradually infiltrate the state’s legal and administrative systems” (Gilad, 2014). This was headed by the Treating Customer Fairly (TCF) initiative and begun due to “recurring scandals of customer abuse by financial firms” (Gilad, 2014, p. 135). Within this initiative, managers need to assume responsibility and treat customers fairly. Furthermore, the initiative addressed several issues, such as “employees remuneration and the design of financial products” (Gilad, 2014, p. 135).

Originally, this initiative was not taken seriously. However, in time, more elaborate structures were introduced by companies regarding customer treatment monitoring. There were little changes made to processes and practices. As such, customer feedback was considered in commercial businesses, especially through enhancing customer satisfaction, loyalty, and advocacy. Thus, according to the FSA, companies need to show that the structures make a difference for customers and that objective fair treatment cannot be measured through feedback and satisfaction indicators. This caused many companies to include components that assessed “customers understanding of their financial transactions” (Gilad, 2014). Thus, prior to complying with the TCF, companies engaged in opportunistic behaviour (Klein, Crawford, & Alchian, 1978). In fact, “business relationships are often structured in highly complex ways not represented by simple vertical integration” (Klein et al., 1978, p. 298).

It can be further argued that regulations have an impact on performance. Naceur and Omran (2011), for instance, suggest that “corruption increases the cost efficiency and net margins while an improvement in law and order variable decreases the cost efficiency without affecting performance” (Naceur & Omran, 2011, p. 2).

2.3.4) Regulation and Small Business

There are significant differences between small and large business in relation to business regulations. For many countries, small businesses are vital to the economy and social well- being. However, in some countries, such as Australia, the needs of small businesses are not considered in context to regulatory needs, simply because business regulations are geared towards large companies. Accordingly, Sharp (1999) asserts that the “the cost of regulatory compliance takes up a larger proportion of small business revenue compared to large business.” He further opines that “the implementation of regulation causes some unintended and unexpected difficulties that negatively impact on the performance of businesses especially small medium enterprises” (Sharp, 1999, p. 124).

Therefore, the burden of regulation compliance is immense for small businesses. In fact, in Australia, the existing business regulations have been redesigned to focus on “enhancing their efficiency and contribution to the local economy” (Heenetigala, Armstrong, & Clarke, 2011, p. 43). This is an important consideration, especially when small businesses are commonly focused on earning a profit rather than following regulations. As a result, it may be more beneficial for other countries to follow Australia’s example and find ways to utilise existing regulations to assist small businesses to become efficient, allowing them to contribute to the economy and follow the regulations put forth by different agencies.

Part of the issue with small business’ regulatory compliance relates to the amount of red tape that must be navigated through. Since small businesses have fewer than 50 employees in most cases, there may not be enough people in order to take the time to maintain compliance. Another significant issue associated with small business compliance with regulations relates to the cost of compliance. Since the costs are typically the same for small and medium/large businesses, there is commonly not a vast amount of money available within the company to pay for regulatory compliance.

Heenetigala et al.’s (2011) research indicates that “the purpose of regulation of corporate governance is to reduce risk and maintain order and confidence in the corporate capital market and to safeguard the investments of shareholders” ( p. 45). However, in countries like Australia, governance can be internal, causing a company to be exempt from following governmental regulations. At the same time, it was also found that “compliance with corporate regulations for small businesses was in many cases left to accountants due to the difficulties encountered” (Heenetigala et al., 2011, p. 49). Thus, for many small businesses, the compliance time period was too short, suggesting that compliance may be more likely to occur if small businesses had more time to reach compliance, provided it does not impede on the ability to earn profit.

2.3.5) Treating Customers Fairly

According to the FSB, the Treating Customers Fairly (hereafter TCF) regulation ensures that regulated financial institutions meet specific fairness outcomes. TCF forces these companies to consider their customers at different levels of the company-customer relationship, including product design, marketing, point-of-sale, and after-sale. Thus, companies are required to prove that customers are treated fairly (FSB, 2011b). Globally, financial protection is crucial to consumers. Therefore, Akinbami’s (2011) study was designed to focus on the different ways that consumer protection was initiated in the UK, particularly after the financial crisis. The study was conducted through the analysis of literature on behavioural economics and psychology, allowing for the critical analysis of the UK’s supervision of financial firms. Ultimately, it was found that “non-interventionist approaches to consumer protection, which are based on the traditional theories of the law and economics movement, have failed. As a result, there is now a shift in thinking towards more interventionist approaches” (Akinbami, 2011, p. 134). However, value proposition is also important to positive customer treatment.

2.3.6) Treating Customers Fairly and Value Creation

Amit and Zott (2001) found that value can be created through new ways of enabling transactions. Thus, the developed business model established that value creation can be attributed to four inter-dependent factors: “efficiency, complementarities, lock-in, and novelty” (Amit & Zott, 2001; Chesbrough, 2010). The study was conducted through the analysis of different theories in relation to their effect on value creation. The authors concluded that the value creation potential of e-businesses cannot be explained through any one entrepreneurship or strategic management theory. In fact, “a business model depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities,” (Amit & Zott, 2001, p. 493; Casadesus-Masanell & Ricart, 2010) suggesting that the business model is rooted in innovation and is a source of value creation.

2.3.7) Treating Customers Fairly and Ethics

The basis for treating customers fairly is ethical in nature and to protect the customer (Edwards, 2006). According to Edward (2006), it is noted that no one approach can be utilised within the financial services sector, due to the size and diversity of the market. Thus, a checklist approach to TCF would not be appropriate since ‘fairness’ is classified as being flexible (Edwards, 2006). Rather, a principle approach to TCF is more appropriate because it allows senior members of management to determine what ‘fairness’ means in terms of the individual company. This allows the company to determine where ‘fairness’ is not being accomplished (Briault, 2005; Edwards, 2006). There are difficulties, however, that occur when the FSA attempts to explain what TCF means. Thus, some argue that TCF is focused on cultural change. Therefore, the FSA has labelled TCF as being an ethical framework for financial services. As a result, FSA has accepted numerous complexities that are involved in cultural changes. FSA may assist those companies that wish to adopt these changes, which may spark a wider debate regarding “an ethical approach to financial services” (Edwards, 2006, p. 242).

2.3.8) Engagement of Companies in TCF

The TCF measure is gaining momentum in businesses across the globe. This measure “aims to stimulate the self-regulatory capacity of the regulated population to advance socially desirable goals – in this particular case, fair treatment for customers” (Georgosouli, 2011, p. 405) Therefore, companies must engage in “self-evaluation, design, and management of their operations and internal governance and controls” in order to ensure customers are treated fairly and consumer protection exists (Georgosouli, 2011, p. 411). Ultimately, “TCF is an outcomes-based regulatory and supervisory approach designed to ensure that specific, clearly articulated fairness outcomes for financial services consumers are delivered by regulated financial firms” (27four Investment Managers, 2014). In fact 27four Investment Managers (2014) has a different approach to TCF. For instance, the company focuses on leadership, strategy, decision-making, governance and control, performance management, and rewards. This is done by the Board and management working together to provide direction for the company, as well as ensuring that TCF behaviours and outcomes are delivered efficiently. Furthermore, TCF aims are not only considered to be solely relating to company vision and values. TCF aims are “built into the company’s strategic and business plans” (27four Investment Managers, 2014). The goal of the decision-making protocols and governance structures were to ensure that all decisions reflected the TCF strategy. Furthermore, the policies in place are “designed to cater for TCF considerations and include TCF measurement systems and identification of TCF risks” (27four Investment Managers, 2014, p. 2). This allows performance management to occur, especially through the proper training of employees and management of TCF initiatives and deliverables. Finally, the rewards are designed to avoid conflicts of interest (27four Investment Managers, 2014). The company’s TCF outcomes are shown in Table 2.

Table 2: TCF Outcomes

Abbildung in dieser Leseprobe nicht enthalten

Source: 27four Investment Managers (2014, pp. 3–8)

2.4) Operational Efficiency

Operational efficiency is crucial to firm performance. In fact, according Baik, Chae, Choi, and Farber (2013), it was found that there is a positive association between “efficiency change measures based on frontier analysis” and “current and future profitability changes.” This is significant because operational efficiency could be measured even when the fundamental signals and changes in asset turnover were controlled. As a result of the study conducted by Baik et al (2013), it was found that companies that improve efficiency will have “higher profitability changes in the current and future years” (Baik, Chae, Choi, & Farber, 2013, p. 1017). A study performed by Baik et al. (2013) found that companies that improve efficiency will have “higher profitability changes in the current and future years” (Baik et al., 2013, p. 1017). However, operational efficiency comes in various ways. Islamic banking, for example, does not permit interest charges. This is because this system finds that “only goods and services are allowed to carry a price” (Beck et al., 2013, p. 433). However, Islamic banking is heavily reliant upon profit and loss, including risk-sharing “on both the liability and asset side and posits that all transactions have to be backed by a real economic transaction that involves a tangible asset” (Beck et al., 2013, p. 433).

[...]