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Humana, Inc. Sample Case Analysis Presentation Professor Joanne Luzietti April 11, 2008. Agenda. Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives & Recommendations Questions & Answers. Key Strategic Issues.

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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

  • Assessment of Humana’s current position and strategy.

  • Assessment of how well Humana’s 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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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: Porter’s 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 Humana’s competitors


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External Analysis: Porter’s Five Forces

  • Bargaining Power of Customers – MODERATE TO HIGH

    • Some customers may be large portion of Humana’s 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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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.

  • Humana’s 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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Strengths & Weaknesses

  • Strengths:

    • Humana’s 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 Humana’s 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 Recommendation:Keep 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