DISCOVERY CASE STUDY SOLUTION

CUSTOMER VALUE CREATION

GAURAV PATHAK

20.12.19

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TABLE OF CONTENT

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Discovery Limited is not only a leading global insurance provider but also a flag
bearer of shared value strategy. The company has successfully demonstrated how
the economic growth of a firm can be catalysed by its customer’s behaviour and
how that economic growth can further influence those behaviours if both the
company and the customer share a symbiotic relationship with each other. To
understand why the achievements of Discovery Limited are even more remarkable,
we must investigate the social conditions and healthcare system in South Africa
before the entry of Discovery Limited.

South Africa had a long history of apartheid policy. But in 1992, after years of
struggle, the government finally voted to end the discriminatory policies and give
equal rights to people irrespective of their colour. Nelson Mandela was voted the
President of the country in 1994 and the country witnessed a rapid growth in its
population. As with any country with a change of such magnitude, South Africa
had its own set of problems to deal with and healthcare was one of them. Post 1994,
South Africa had 5 times the disease burden as compared to USA and had epidemic
level of AIDS/HIV exposure. The country also reeled with tuberculosis, heart
diseases, high blood pressure and cancer. Although the apartheid came to an end
and every person was now equal, this wasn’t the case with South African healthcare
system. The healthcare system in South Africa was divided into Public and Private
system and the difference between the two have been summarized in Table 1.

Public System Private System

Poor quality, long wait times,
High quality – on par with western
Quality deteriorating infrastructure, low
standards
doctor/patient ratio
Covered 83% of the population
Covered 17% of the population
Demographics (81% of blacks and 63% of
(88% whites)
coloured
Received 48% of total healthcare Received 52% of total healthcare
Expenditures
expenditure expenditure
Table 1: Difference between public and private healthcare
Source: Own

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Furthermore, health insurance schemes charged premiums based on a person’s
“Risk Ratings”. This meant that elderly people and those with chronic diseases
ended up paying higher premiums and in case they required additional treatments,
had to pay the difference between standard and premium rates of expenses out of
pocket. As the structure was one in which you pay a high premium all your life and
go to a physician when required was unappealing to the young and healthy who saw
no benefit in taking an insurance and this drove the costs even higher. Adrian Gore,
the founder of Discovery saw this an opportunity to design a product that would
appeal to everyone including the young and healthy. The design of such a product
required creating a shared value model for health insurance products.

“Shared value is a corporate strategy in which companies find business

opportunities in social problems. While philanthropy and CSR focus efforts focus
on “giving back” or minimizing the harm business has on society, shared value
focuses company leaders on maximizing the competitive value of solving social
problems in new customers and markets or cost savings” (Kirchgeorg, 2019).
Adrian Gore started off his journey to create a shared value by giving people
incentives to reduce their health costs. The initial idea was to roll out a medical
savings account (MSA) which covered all the non-discretionary expenses. The high
deductible of discretionary services kept the overall premium of insurance down.
Although this plan attracted a large segment of customers towards MSA plans, this
wasn’t in line with the shared value concept as outlined. The need to beat the
imitators which has sprung left and right and to be differentiated necessitated the
full application of shared value strategy. Enter: Vitality. Vitality was Discovery
Limited’s complementary roll out which provided financial and motivational
incentives to people to improve their healthy behaviour. It provided customers with
information about health, access to wellness partners and incremental financial
benefits as customers progressed on their wellness journey. After a change in
regulatory framework, Discovery Limited redesigned its product offering in which
the price of its insurance products was same as that of its competitors, but members

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of Discovery could enrol to Vitality free of cost. Vitality members earned points
based on their healthy behaviours, in exchange of which they could receive a
financial benefit in the form of free flight tickets, upgrades, lodging or movie
tickets. This approach appealed to people who already maintained a healthy lifestyle
as now, they got a financial benefit from it. Also, people got higher number of
points if they showed commitment to healthy lifestyles such as: regular health
check-ups, going to the gym regularly or quitting smoking, learning CPR or buying
healthy foods. Next, Vitality rewarded and incentivized healthy nutrition by rolling
out Healthy Food Habits where customers got discounts on healthy food products.
The benefits of vitality increased exponentially with the level of health a customer
was at and this motivated customers to move to higher levels which required more
effort on their part. The third rollout was giving an Apple smartwatch and setting
health goals with the customers measured by the watch. If the customers
consistently failed to meet their goals, they either had to return the watch or pay for
it. This was another excellent idea as behavioural research found that people are
unwilling to give up benefits rather than to put an effort to earn them. These efforts
fulfilled the first part of shared value creation where the company solved two social
problems: providing people with affordable health insurance and promoting healthy
living among people. The second part of shared value creation concept which talks
about maximizing competitive value of the firm was achieved once the customers
embraced the healthy lifestyle. Due to healthy lifestyle, the risk of lifestyle related
diseases such as cancer, diabetes, respiratory diseases and cardiovascular diseases
went down. Behavioural risks were further reduced as people quit smoking tobacco,
lowered alcohol use and reduced inactivity. The reduction in these risks resulted in
significant cost savings for the company as it lowered people’s expenditure on
medical services. Due to these cost savings, the premiums of Discovery insurance
rose far slower than its competitors and it continued to gain market share in
insurance marketplace. The business model of Discovery Limited was in stark
contrast to the CSR strategy approach where the profits and operations of the

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company play no part in the strategy and initiatives are limited by the budget and
corporate footprint. The strategy of creating shared value adopted by discovery was
central to their profit maximization while in case of CSR, these activities have no
direct bearing on the firm’s profitability.

Discovery held 70% of wellness market share and by 2017, controlled more than
56% of open and 34% of closed scheme market in South Africa and had a total
customer base of 3.4 million members with nearly half of the members from the
growing black middle class. Let’s take a closer look at how Discovery was able to
do so and what were its competitive advantages. Discovery’s shared value model
Vitality was the engine of its rapid growth. The more customers engaged in healthy
living, the more benefits they received and the more benefits they received the more
they efforts they put in and, in the process, reduced the costs of Discovery. The
lower cost of Discovery, in turn, attracted more people and soon Discovery had a
commanding customer base. This customer base enabled the company to negotiate a
capitated or fixed monthly fee per member with its network of primary care
physicians and provide 30% lower costs of hospital services and even lower costs
for its preferred service providers. Discovery Limited had 4 distinct competitive
advantage:

 Consumer centric business model: Vitality incentivized healthy living

among the members which became the driver of its shared value model. The
model was hard to imitate as it required deep understating of consumer
behaviour and ways to integrate new customers to this concept.
 Strong relationship with existing suppliers: Discovery Limited made
exclusive contracts with supermarkets which dedicated a whole section to
Vitality Healthy Foods, with Apple to hand out an Apple watch to each of
the Vitality members and with hospitals and doctors to provide lower rates
to its members.

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 Advanced customer analytics technologies: The most distinctive feature
of Discovery was its usage of data and analytics at every stage of a feature
roll out. This approach helped Discovery to know its customers in a better
way. Discovery had the world’s largest and most comprehensive
behavioural insurance database in the world due to its investment in these
technologies.
 Continuous innovation: Discovery continuously innovated its product
offerings and ways to engage its customers. The Vitality rollout was a
killing blow to the imitators of its MSA concept. Further, the innovation in
its rollout of subsequent offerings such as devices to measure and store
driving metrics, analysis of behavioural and conditional effect on shared
value creation positioned it miles ahead of its competition.

Discovery categorized its markets into 3 segments: “primary”, where it would

be the primary insurer; “partner”, where it would enter via the JV route and
“franchise”, where a JV entry was not justifiable due to small market. Initially,
Discovery approached each market with its tested strategy but after failures in
US and Chinese markets, it focused on providing localized solutions based on
the local atmosphere and necessities. Discovery focused on similar markets
where a gap existed between the medical coverage and health care costs which
resulted in higher out of pocket payments. But in each of these markets, it rolled
out the Vitality initiative to maintain its shared value concept. After operating in
UK and Chinese markets for quite some time, Discovery concluded that each
new market followed a similar trend. Post roll out, each required about 3-5
years of investments before becoming profitable. While Discovery has been
highly successful in the UK and Chinese markets, its performance in other
markets especially in the US markets has been less than spectacular and
requires further monitoring.

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Shared value concept is not just a one-time strategy but is more of a journey.
This journey consists of 3 levels; I: reconceiving needs, products and
customers; II: redefining productivity in the value chain; III: Improving the
local business environment. Discovery has already reached level II of its shared
value creation journey. It has met social need of having an insurance and
leading a healthier life through its Vitality initiative and continues to create
opportunities for underserved or unserved customers. It has also implemented
productivity initiatives in its suppliers, logistics and resources. Through data
analysis and better data storage techniques, Discovery has been able to increase
the efficiency of its value chain. Online distribution and integration of
monitoring activities in real time, monitoring upwards of 6 million exercise
readings per day has made Discovery One a centre point for global wellness
market. It has attracted many leaders in different markets to benefit from the
Vitality program. This goes on to show that the company is on track for level III
of its value creation journey. And this journey is filled with economic and
social benefits realized along the way. To put numbers into perspective, Johns
Hopkins Medical School confirmed that Vitality members on average lived for
15 more years as compared to a regular insured member and for 33 more years
than an uninsured person and “their health care costs were 7% to 14% lower
than those of individuals covered by a Discovery scheme who were not Vitality
members. Discovery’s data showed that the frequency of exercise directly
reduced the probability of hospitalization by 7% and two extra sessions resulted
in a 13% reduction. Mortality rates also declined, dropping 9% for those with 5
or more workouts per week. Exercise also triggered other changes: a person
who first began to exercise was 16% more likely to buy healthy foods, and 23%
more likely to seek preventive care. Members with Apple Watch benefit
registered 18% lower hospital and chronic condition claims, and 20-30% better
persistency in their exercise sessions than members without the benefit” (Porter
et al, 2017). The Discovery Limited on the other hand realized a 39.59%

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 increased profit in its Health Insurance segment and its shares continuously beat
the benchmark and outperformed the South African stock market returns.

Following its success with health insurance product, Discovery ventured into
ancillary products offerings. It identified that the problem which existed in the
health insurance sector also existed in life insurance, vehicle insure and savings
sector and therefore the solutions of the former could be applied to these
markets as well. Discovery subsequently ventured into life insurance
(Discovery Life), motor insurance (Discovery Insure) and long-term savings
(Discovery Invest). Table 2 summarizes the effects of Vitality on these
offerings.

Discovery Life Discovery Insure Discovery Invest

Make people better
Make people healthier Make people better
Goal drivers and have fewer
and live longer prepared for retirement
road accidents
Members: Members: Members:
Improved driving, better
Improved health, better value Encourage longer savings,
value through improved price
through improved price and responsible financial behavior
and benefits
benefits and healthy lifestyle

Insurer: Insurer: Insurer:

Less vehicle accidents
Shared Lower claims Greater funds
Lower claims
Higher margins Longer investments
value Positive selection and lower
Higher margins
Better persistency
Positive selection and lower
lapses Lower withdrawals
lapses
Society: Society: Society:
Healthier society Strong savings culture
Nation of better drivers
Improved productivity Lower reliance on state
Less road deaths and injuries
Reduced healthcare burden Better client outcomes
Less RAF claims
Table 2: Ancillary products goals and shared value, Source: Own

Moving forward, the greatest strength of Discover Limited so far has been the
sustainability of its competitive advantages. A robust market in South Africa has
also contributed to its growth. While Vitality program and its integration with
ancillary offerings has been Discovery’s greatest strengths, the price leadership it
enjoys in South African market has almost wiped out its competitors. According to
a market inquiry, which started in 2014 and concluded in 2018, out of 22 open
medical schemes, around 70% of the market was held by just two schemes.

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Discovery Health held about 55% of beneficiaries. The inquiry stated that under
"normal competitive conditions", Discovery’s profitability would attract new
competitors. "On the contrary, we see Discovery is growing and becoming more
successful over time. This is an indication of market failure and there are no signals
that the market will self-correct," the report read "We acknowledge that much of
Discover ’s success is partly due to a highly competent management team, but we
do not think this alone explains the significant gap in profitability when compared
to its direct competitors. “Higher than necessary service fees given economies of
scale, a 'locked-in' DHMS (Discovery Health Medical Scheme) that does not source
services from any other industry stakeholder, risk selection and broker management
contribute to its profitability” (fin24.com, 2018). The report suggests that over a
course of time, regulatory authorities might step in to correct the perceived market
failure which might force Discovery to change its strategies. Discovery also
depends on values shared with its members and this dependency makes it
vulnerable to change in member preferences. If a sizeable portion of the members
perceive wellness as secondary to more pressing issues, Discovery might have to
change its strategy. Another cause of concern could be the somewhat static growth
of established business. According to the latest financial report (2018), established
businesses achieved an EBIT of 8% over the previous year instead of the 10%
target. This signals a lower customer acquisition rate and decrease in sales of the
products. Another concern for Discovery could be the hard Brexit of UK as UK is
currently is its second largest market. To maintain its leadership Discovery can
improve on following aspects:
 Market entry into neighbouring economies and into emerging markets of
Brazil, India and Russia as the healthcare system of these countries is almost
like that of the South African market and will also act as a leverage against
unforeseeable political conditions in its core markets.

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 Till now Discovery has used its databank on back end activities such as
studying customer behaviour to offer a product. It can use the same data on
front end with targeted advertising and social media marketing.
 After creating a shared value in the insurance sector, Discovery can
investigate other areas in which it can create value in a similar way.
Availability of water remains one of the prime concerns in South African
society with an outdated water supply infrastructure and wasteful
consumption the major cause. Discovery could create a model to incentivize
healthy water consumption behaviour and use the savings on repair and
modernization of water supply infrastructure.

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