To prepare for this Assignment, review "State Farm Adjusts to a Changing World" on pages 17-18 of Dyer, Godfrey, Jensen, and Bryce (2020), and complete a personal version of the Strategy Tool provided on page 39-42 of the text. Be sure to consider the potential impact of the Five Forces as a tool for shaping industry competition and strategy development.

By Day 7

Submita 3- to 5-page analysis of the influence of market selection in business strategy development. Your analysis should address the following:

• What is the intensity of rivalryhigh, medium, or lowwithin theindustry? Explain your answer using the Rivalry Strategy Tool.
• What is the intensity of supplier powerhigh, medium, or lowwithin theindustry? Explain your answer using the Rivalry Strategy Tool.
• What is the importance of correctly identifying and choosing a firm's industries and markets? Justify your answer with at least one example.
• How does accounting for gaining and sustaining competitive advantage impact the success of business strategy development? Explain.

State Farm Adjusts to a Changing World

George Jacob "G. J." Mecherle founded the State Farm Mutual Automobile Insurance company in 1922. Mecherle's company targeted small-town and rural farmers as policy holders with a new value proposition: lower premiums. Insurers of the automobiles (still a relatively new innovation in the 1920s) based their policy premiums on payouts and accident claims by urban drivers. Mecherle realized that rural customers, his target, had a far different driving profile than auto owners in larger cities: They had far fewer opportunities for accidents and thefts. State Farm based its premiums on this lower incidence of risk.1 The company expanded into the life insurance market in 1929 and opened a homeowners line in 1935. By 1942 the company had become the nation's largest auto insurer, a title it still holds today.2 The Good Neighbor (taken from State Farm's famous jingle written by Barry Manilow) wrote just shy of $42 billion worth of premiums in 2016, gobbling up 18 percent of the US market.

Importantly, State Farm's $42 billion in the auto market represented 65 percent of its total Property and Casualty (P&C) revenue of almost $65 billion. The company's 65,000 employees and 19,000 agents collected over $17 billion in homeowners premiums.3 The company's auto line is almost 8 times its life insurance revenue, and 60 times its sales of health insurance products.4 State Farm is the market leader in the auto and homeowner lines of business with over 81 million US policy holders and commands just over 10 percent of the market, 40 percent greater than Berkshire Hathaway's 6 percent and more than double Allstate's 4.9 percent. For State Farm, P&C is the 800 lb. gorilla.

You might think of P&C insurance as a sleepy business with known risks and very slow growth. You'd be wrong. P&C insurers have seen, and continue to see, changes in their industry that require innovation and new business models. The rise of the "gig" economy and ridesharing companies like Uber or Lyft present one challenge. Most of these drivers carry passengers in their personal vehicles; when they pick up a rider, their car is no longer a "personal" vehicle, it becomes a "livery" or commercial-use vehicle. Personal auto policies don't cover livery uses, and drivers lose their coverage. Rideshare companies established bare-bones, low-cost policies to insure drivers, and State Farm created flexible insurance to provide better coverage. When a driver engages the App, State Farm's policy (called a rider) continues their personal coverage while their vehicle is in "livery" mode. State Farm survived, and profited from, the advent of ride sharing.

Services like Airbnb or Vacation Rental by Owner create similar problems for State Farm policy holders. When an Airbnb guest arrives, the home ceases to be a personal dwelling and becomes a "short-term rental" used to make a profit. State Farm, like most other insurers, won't cover most claims when a private dwelling gets used for most business activities. Homeowners insurance provides two types of coverage: property and liability. Coverage remains in force for most weather related property damage, but policies don't cover damage caused by short-term renters (e.g., if guests host a party at the house that ruins furniture or floors). Personal liabilitysay a guest slips on the stairs, breaks a leg, and sues the homeowner for medical costsalso falls outside most policies, leaving the renter, or host, on the hook for costs. To date, State Farm has not developed a short-term rental policy to respond to these changes.5

The rise of the gig or sharing economy signaled changes in how policy holders (customers) behave. Climate change represents another challenge for P&C insurers. Rising oceans mean that waterfront properties, and coastal cities in general, face greater risk of weather-related damage. In humid climates, rising average temperatures spawn more powerful hurricanes, tornadoes, and typhoons. In dry climates, warmer air increases the risk of brush and forest fires. The net result for State Farm: greater risk of property damage, both in the number of properties damaged and higher claim amounts. State Farm, and all property insurers, continue to struggle with how to respond. For example, in 2018 California experienced the worst fire in the state's historythe Mendocino Complex Fireand 16 other fires that caused extensive property damage and loss of life.6 For 2017 and 2018, loss claims for these wildfires exceeded $23 billion. Some insurers refuse to cover at-risk homes, while others have seen the claims rise by 20 percent.7 Strategy makers at State Farm have to decide more than just prices for coverage; they have to determine whether or not to compete in an increasingly risky homeowners market.

As described in Chapter 1, strategy involves crafting a plan to create competitive advantageand superior profitabilityin particular markets. This plan, however, is shaped by the landscape in which the firm competes. A firm's external environment provides both opportunitiesways of taking advantage of conditions in the environment to become more profitableand threatsconditions in the competitive environment that endanger the profitability of the firm.8 Successful firms have a deep understanding of their environment and constantly scan the horizon to see opportunities and threats as they emerge.9

One of the key threats a strategist must understand and cope with is the environment in which their firm operates. In this chapter you'll learn about the forces that shape that environment, from the specific industry the firm competes in to the larger, macroeconomic environment of competition. State Farm competes in what has traditionally been a very stable industry; however, changes among its customers, suppliers, competitors, potential entrants, and substitute products all combine to create turbulence in its markets. Together, all five forces define an industry's structure and shape the competitive interactionsand profitabilityof companies within that industry. Even though industries might appear to differ significantly, the principles that determine the underlying drivers of profitability are often the same. Outside forces, like a changing climate, help determine the ultimate attractiveness of industries such as homeowners insurance. This chapter will help you to recognize the major threats and opportunities that make up the competitive landscape, both the industry forces and general macroeconomic forces that drive industry attractivenessand profitability.