Running Head: Strategic planning in AIG

Term -Paper “Strategy Analysis: American International Group” FARLEIGH DICKINSON UNIVERSITY MADS 6612.83: Strategic Management PROFESSOR: RONALD CALLISSI

Prabhdeep S Minhas Student Id: 1548155

The paper concludes by stating the fat that strategic planning/management is a complex task. and that the complexity depends on the varying organizational goals over time. it is recommended that AIG look up to a successful insurance organization such as China Life Insurance. lack of transparency between the various departments of the organization. eliminating the classification system amongst the employees and spread equality to motivate the employees.2 Strategic management Executive Summary The term paper is commissioned to examine the strategic management/planning in the American International Group. The strategies. It is important that AIG immediately addresses the intrinsic issues of the organization. the collapse of the organization mainly consisted of exploitation of the relaxation provided in the investment restraints by the government. underappreciated and unmotivated employees in the non-insurance selling departments and poor risk management system. . The following part of the paper gives an insight on the alterative/proposed strategies that should be adopted. The research draws attention to the strategies. which led to the collapse of the organization in the year 2008. and increasing the communication vertically and horizontally in order to decrease the opacity between various departments. due to which the federal government had to bail it out of debt. Looking at the problems listed above. benchmarked to China Life Insurance. The solution to the problems include the use of issue-based strategic planning. which it is benchmarked with. setting up a better risk management techniques using hedge-funds and non-derivatives. rather then focusing on long-term profits. which led to.

Introduction 2. Alternative Strategies 6. SWOT analysis 4. Conclusion and Summary 7. References . Current strategic structure 5.[STRATEGIC MANAGEMENT] 3 Table Of Contents 1. Organizational Background 3.

Because of this there are several problems. Customer Service and Human Resources. Several benefits of strategic planning include better decision making. disciplined approach to producing fundamental decisions and actions that shape and guide what an organization (or other entity) is. in an iterative loop. Sales Department. This vision thus helps to paint a future picture. increased public value and stakeholder’s value. is because it is basically an Insurance company and devotes much of its resources and focus to the Claims Department. starting from mission statement. defining objectives. financial stability. what it does.-25). strategizing. Financial Department. higher legitimacy. and why. but a very few of them are able to strategize successfully for a massive growth over the years. Very recently.4 Strategic management INTRODUCTION The sole purpose of creating a strategy is to define the organizational vision and goals on a long term. Strategic planning involves a number of steps to be followed one after the other. The company declared bankruptcy back then and was then financed by the federal government to support its survival. Every organization has a mission statement and a set of goals. The reason I chose to write the paper on the Software development department of American International Group or more commonly known as AIG. implementation and then finally evaluation. relative to which the organizational productivity and individual actions can be analyzed and compared to. “Strategic planning as a deliberative. pg.. better collaborative relations. The second reason for the topic was that AIG has been through very critical times of financial crisis. the . Marketing. which the IT development department suffers because most of the times it’s being neglected.” (Bryson. enhanced organizational effectiveness. M. during the recession period.

. the company had only focused on nothing more then selling personal insurance and was the first US organization to sell insurance in communist lands of China. Merced. ORGANIZATIONAL BACKGROUND: The organization roots to an insurance organization founded by Cornelius Vander Starr in a two room offices. and the vision he developed for the organization did not turn out to be very successful on the long run. when the global financial crisis had hit the economy.[STRATEGIC MANAGEMENT] 5 organization bailed itself out by paying out he federal government an amount of $182 billion (Protess.'s metro system” (Canavan.-2. 2013). After the management was taken over by Greenberg.. B. In the early years. “Starr handed over the baton to Greenberg in the year 1968. “AIG insured Muhammad Ali's title bouts. the foundation of the company gradually began to . 2013). July 2007). the first ostrich farm in Texas and the construction of Washington.. But the entire perspective was altered. when the management of the US’s lagging stock was handed over to Maurice Greenberg in the year 1962(Canavan. “The companies grasp on the insurance market was very strong and they held assets which had a value of more than one-trillion dollars in the early years of twenty-first century” (Hobs. from Shanghai in China in the year 1919. M. K. K. AIG shifted it’s focus to the high-margin cooperate coverage. D. The strategies adapted by Greenberg were very unconventional in nature.. and the organization went public in 1969” (AIG. The organization is fresh out of a deep downfall and needs to review its strategies and build a stronger vision for a flourishing future growth. 2013). Pg. J.. But over the years. pg-2).C. The organization took a major leap and started practicing new techniques and strategies under the management of Greenberg.

 Wide diversity in the employees.  Limited resources to other departments. has been operational in more than 130 countries globally.  Most focus on only the insurance department.      THREATS The new imposed regulations.  Brand building sponsorships. The AIG group is one of the world’s leading insurance provider and financial institution. because of the loans they were unable to pay off. the American International Group was bailed out and taken over by the Federal Reserve in the year 2008. Finally. Global leader of insurance provider.  Lower employee retention in IT dept. Bad credit history.  Particular demographics in United States. The organization has tremendously strong infrastructure and was named to be the second largest insurance .  Stepping up to financial services and asset management. Huge losses due to natural catastrophe’s. Economical crisis and recession in the global market. OPPORTUNITIES  Collaborating overseas. Unmotivated employees and lower productivity in noninsurance departments.     WEAKNESSES  Failure to abiding the state mandated investment policies. Strong network.  Expanding global collaborations.  Higher rate of Acquisitions.6 Strategic management tremble and its existence had become questionable. SWOT ANALYSIS: STRENGTHS Strong infrastructure.  Expansion in developing countries in Asia. Good client tel.  Residential market mortgage exposure.

[STRATEGIC MANAGEMENT] 7 company in the world after China Life Insurance. IT. Also. the markets in these countries are now open to new investments and the economies and developing on a rapid pace. The biggest weakness of this organization is its inability to abide by the state mandated investment acts and policies. expansion into the developing economies such as India and China can be very successful on a long-term. the organization managed to earn quite an amount of bad reputation because of their fallout in the year 2008. Immense numbers of opportunities are available to the organization because of their strong network and the successful collaborations with other companies. and relying more on short-term profits rather then the long-term sustainability. Apart from that. Despite of all the positives. Apart from these. The wide spectra of employee ethnicity and diversity are also the other strong pursuits of the organization. throughout the globe. creativity and a positive reputation. AIG has always been focusing the most of its attention and resources on just the Insurance department. Other then this. AIG has favorable demographics in the United States and United Kingdom. This is because. because they are not motivated enough. The biggest threat to any insurance company is the major financial losses that they might have to suffer due to the natural catastrophes. This leads to lower productivity of the employees in the other departments like the Human-resource. which means for having them to pay huge amounts of money to its clients. and the government . which promotes different language skills. and has been neglecting the other departments all along. marketing and customer service. there are major weakness’s the organization possesses which are responsible for holding it back. higher productivity. The organization is also very prominent on the front of sustainable collaborations with some of the largest organizations throughout the world.

2013).-4. What is still unclear to a lot of folks are the incentives and the conditions.8 Strategic management had to bail them out and take over. This meant that the government had no longer the authority to intervene and prohibit such deals. that was attached to a large and stable insurance company. Mr. trades or investments made by the AIG. Although. This kind of reputation can be problematic in the future collaborations with other companies. basically. This was a result of the inadequacy of transparency between the different departments in the organization.” (Canavan. pg. whereas the intrinsic factors of maximizing the growth and productivity were ignored. There was no oversight of the financial products division. The chairman of the Federal reserve of the United States. The deregulation took place because of a federal act called. because of the inability to shatter much spotlight on these departments. So one of the foremost reasons for the collapse was not abiding by the state mandated regulations. which led to its collapse few years ago. This was a hedge fund. The fall of AIG was caused primarily by its non-insurance divisions. which let organizations like AIG to make the huge trades or investments even if they were very risky to follow through. All the different departments worked independently and the managers were too overconfident to . because it is itself the organization’s fault to not been able develop a vision and foresee their risks being involved with the trades. Ben Bernanke stated. “AIG exploited a huge gap in the regulatory system. CURRENT STRATEGIES: The organizational strategies in case of AIG were much focused on the only factor of building more partnerships domestically and internationally. Commodity Futures Modernization Act (CFMA) of 2000. this type of ignorance cannot be blamed at the CFTC (Commodity Futures Trading Commission) or the government.. K.

Being an insurance firm. another loophole in the strategic planning was poor and irrational risk management techniques. Canavan K. and yet they never asked him to design alternatives. Furthermore. “Edward Liddy. the firm knew Gorton's models didn't account for all sources of risk. the leading insurance organization had focused majority of its concern. which led to other departments suffering its side effects. M. “By the end of 2007.” Apart from these.” (Carrick. pushed deadlines and inadequate rewards..S. and too opaque for its component businesses to be well managed as one entity. Complacency leads to failure. too unwieldy. directly affecting their productivity and output. The interdepartmental opacity further leads to these situations being unnoticed. a ranking system had been developed in the company where more rewards were provided to the employees on the top. it was very unlikely for the organization to hold a huge amount of money without holding an asset against the possible financial losses in the future. with higher bonuses going to those with better rankings. The employees in the other department had to work with the minimum available resources. resources and effort into the insurance sector.. U. who became chief executive officer of AIG in September 2008 (after the federal bailout). 2011). “AIG employees will be ranked on a scale of 1 to 4. Treasury . As mentioned earlier. “However. noted at the time that his new company was too complex.. Such factors lead to the unmotivated employees in the workplace.. (2013) mentions the fact that. R. Pleven. 2008). J. AIG had a total of $562 billion in unhedged” (Hobs. which it did. The poor risk management techniques and inadequate sources being involved represent how complacent the organization had become.[STRATEGIC MANAGEMENT] 9 tackle the organizational problems as an effective and cohesive team. L. Smith.

in order to sustain themselves in the market..10 Strategic management official Kenneth Feinberg had previously criticized AIG for its pay practices” (Lublin. Similar to China Life Insurance. but it required the urgency to establish new strategies. staffing” (Mastrodonato. P. “Issues-based strategic planning is more commonly used by organizations in a dynamic or competitive marketplace and examines specific issues facing an organization. but instead may cause instability. AIG. Private Insurance companies were not a part of the culture of ancient China.-4). And inspite of the fact that the organization managed to pay back the government the money. and not on goal-based strategic planning. was brought down to it’s knees. So. finances. organizational goals and more complex planning for the future..g. an organization which once held over one trillion dollars worth of assets in hand. pg. which had all their resources invested at resolving the regional and cultural barriers in their social system. 2010). and were more strongly opposed by the Chinese government. These kinds of strategies are not reliable for the purpose of a long-term vision. which was invested initially for bailing it out of debt.. ALTERNATIVE/PROPOSED STRTAGIES: Due to the lack of a strong vision and fundamentally inadequate strategic planning. in the current state of matters. e. Although the United States federal government prevented the bankruptcy of the company by bailing them out of the debt. it was essential to prioritize and overcome the cultural resistance to survive rather then spending organizational time and resources in increasing the sales. certain things still have to change in order to sustain the growth in the future. competition. marketing. N. J. Serena. First and foremost. . it is required that the organization focuses more on issues-based strategic planning.

whether it is between the different layers of hierarchy. organizations lose forty percent of the potential financial value of their Strategies due to poor performance and talent management of their employees” (Mankins and Steele. because the value of the derivative assets depends only on the assets they are dependent upon. 2005).-416. pg. China life has involved employees and officials from the topbottom hierarchy in the risk management teams. financial revenue and expenditure auditing and key investment auditing independently or jointly every year. The fact that all the employees. individual performance and contributions to the organization become more evident” (Bergrenn. This is beneficial to further safeguarding the thorough implementation of the regulations of the Company. The lack of transparency. strategies . Mateo.. since it was one of the major causes of the company’s initial failure. E. and working together as effective and efficient teams are more likely to drive the organizational strategies more successfully.. S. accounting and basic accounting appraisal such as economic liability auditing. Although. “With greater transparency. Rationality in the investments is a very important tactic and it is highly vital for the insurance companies to hold an asset against the investments they are about to make. (2007). and the board of directors reviews the risk assessment reports on a regular basis. or inter-departmental always leads to misalignment of the organizational goals to the individual goals of the employees. thus reducing operational risk” (Chan. as a security is not a smart choice. holding a derivative asset. (2009). Evidently in the case of China life.1 [STRATEGIC MANAGEMENT] 1 The second most important approach would be introducing a new complex form of risk management. in order to minimize the risk. irrespective of their department. “The audit department of China Life Insurance conducts various kinds of auditing. “On average. S.

The consequences were intensely fatal and lead to the collapse of the entire enterprise in the year 2008. regardless of individual performance levels and their impact on strategy execution. were the exploiting the use of lenient government policies. 2006). and the employees only in the highest bracket were rewarded. Similar is the strategy of the Chinese in the China life insurance company. it is utmost essential that the organization enforces the most suitable criteria of rewarding system for the purpose of employee motivation. Employees in AIG. but it may create a sense of inequality amongst others. lack of vertical as well as horizontal transparency between the employees and the different departments and overshadowed and unmotivated . or goals. is increasingly being recognized as a sub-optimal model” (Fitz-enz. In case of AIG. providing better incentives to the valuable employees sounds more logical theoretical. So to sum up. “Compensating employees with the same salary or pay rate. “Pay for performance is a complex issue (Pfeffer and Sutton. but let itself suffer the consequences of their own poorly executed strategies. which makes it easier for the employees to achieve these goals. The strategies.12 Strategic management are broken down into definitive components. Last but not the least. from each and every department should be treated with equality and be provided with similar incentives for motivation. where their direct sales representatives are compensated through fixed salaries. and tis demotivating them. 1997). poor and simple risk-management system. and thus successfully executing the strategy. I would say that AIG has been one of the leading insurance company of all times in the booming financial market. which according to me lead to this collapse. Although. upon which individual employees can act. they had adopted the strategy of classifying the individual into different classes on the basis of their varying performance.

the organization managed to pick itself up and pay-off the government back. improving communication to enforce better information flow between the employees amongst different departments. These strategies focus at the shortterm issues. applying issue-based strategic planning rather than goal-based strategic planning. . in order to motivate the employees. which includes making rational investments and securing the available resources through hedge funds. enforcing the most suitable rewarding system according to the need of the hour.1 [STRATEGIC MANAGEMENT] 3 employees in the non-insurance departments. the initial strategies had to be dumped in order to enforce the new ones. Strategic planning can be a tricky task and it has to be manipulated over the time according to the changing circumstances. Lastly. Followed by a better risk management system. which need to be dealt with immediately. Since. in order to eliminate the opacity in the organization. First and foremost. Thirdly. but those are the intrinsic factors.

8. pp. 2. ( 2011). Behind AIG's fall. S. M. J. DOI 10. (2007). Smith. Organizational transparency drives company performance. (2011). China Insurance Regulatory Commission. Retrieved from EBSCOhost. DOI 10. Risk Models Failed to Pass Real-World Test. N. Carrick. Financial Derivatives. (2009).14 Strategic management REFERENCES 1. AIG Story' is Greenberg's own version. (2008).. Vol. 26 No. 4. K. Mateo. 252 Issue 106. Pleven. S. Issue 2. 5. Vol 25. pC1-C4. 8p. AIG Pay Plan: Rank and Rile. Canavan. CPCU journal. 2p. the Mismanagement of Risk and the Case of AIG. USA Today. J.. Vol. 6. 255 Issue 34. Hobs. 5. (2010). ol. p1-8. Creating a market in the presence of cultural resistance: the case of life insurance in China. Chan.1007/s11186-008-9081-1. China law and practice (2010)..1108/02621710710748248. Fourth edition . Bryson. Bergrenn.. J. L. 1. (2013). 411-417. E. R. Serena. 7. Lublin. Retrieved from EBSCOhost. pA1-A16. Retrieved from EBSCOhost 3. Implementing Guidelines for Comprehensive Risk Management of Personal Insurance Companies. Wall Street Journal Eastern Edition. Strategic Planning for Public and Non-profit Organizations.

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