1. business and industrial

Jurnal UMP Social Sciences and Technology Management
Vol. 3, Issue. 1,2015
The Effects of Strategic Planning on Financial Performance
of Private Insurance Companies in Iran
Alireza Irajpour,
Department of Management, Faculty of Management and Accounting, Qazvin Branch, Islamic Azad University,
Qazvin, Iran
Nazila Heydarnejad Zabihi
Department of Management, Faculty of Management and Accounting, Qazvin Branch, Islamic Azad University,
Qazvin, Iran
Abstract
Given the increasing importance of strategic planning and the factors that affect the
success of the strategic planning process, And their impact on financial performance
prerequisite and implement the right strategy for private insurance companies to Iran, to
identify these factors and incorporate them in the planning process. The purpose of this
study, the effects of strategic planning on financial performance of private insurance
companies in Iran. Attempts have been relying on experience of administrators and experts
from insurance companies . And other sources such as books, magazines, new papers and ...
Before addressing the factors identified in the strategic planning process is crucial in order to
successfully be applied. After collecting 384 questionnaires from sample data were analyzed
by the software SPSS22 Research results show that the four factors of the strategic process,
using the tools of strategic analysis, strategic tool and focus on strategic issues affecting the
financial performance and the need for strategic planning and strategies are emphasized.
Keywords: strategic planning, financial performance, insurance companies
Introduction
Achieving an outstanding financial performance is one of the interesting issues for
companies and researchers of management field. There is not a widely accepted method
for measuring companies’ performance. However, financial and accounting results are the
ultimate goal of most of the companies (Xiang and Lee, 1=2008). Experimental evidences
show that performance is a multidimensional structure which must be measured by several
criteria.
Problem statement
In recent years, the issue of strategic planning attracted attention and the only way
for managers’ efficiency and effectiveness is being pursued in this method of planning.
Instead of being a technique, strategic planning is a type of believe and thought persuading
managers toward long-term thinking and prediction of long term horizons. In each
organization lacking such belief, there will be no appropriate field for strategic planning.
Strategic planning covers all of the organization and its operations and activities and
moves managers and officers in their activities (Mobini, Dehkordi and Salman Pour, 2006).
Today, organizations in both public and private sectors perform strategic planning as
a tools which can be used for rapidly tracing the implementation of plans. Obviously,
strategic planning is one of the important behaviors of management (Arasa and K'Obonyo,
2012).
Strategic planning is a type of process planning. The reason of being process lies in
the type and class of phenomena for which planning is performed. In treating such
phenomena, as a result of continuous change, planning must be performed such that it can
be capable of giving feedback and adaptation with new situations (Evans, 2003, 4).
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In strategic planning, the main principle is that on one hand, by utilizing external
opportunities and avoiding and reduction of effects of external threats, strategies must be
provided and on the other hand, in these strategies, our aim is not to determine the best
strategy. But, the goal is to determine the practical ones. According to Bryson, strategic
planning is an 8-stage process which is considerably more regular, organized and
collaborative compared to other processes including:
Initiation of strategic planning and achieving an agreement about its contents,
determination and recognition of rules, illustration of missions and values, evaluation of
external environment (threats and opportunities), recognition of strategic issues, providing
strategies for managing issues and an effective vision for the future. These 8 stages must be
evaluated and come to a conclusion (Behzadfar and Zamanian, 2008, 90).
Corporations are established for a limited period (Sotoudeh Tehrani, 2009) and
during life, they have financial periods at the end of which, the general assembly evaluates
the performance of the corporation. If after investigations, there is an interest, assembly
decides over its deposition or distribution between stockholders (Eskini, 2006).
Evaluation of financial and economic performance of the companies carried out
based on the report of auditor and legal inspector and according to information obtained
in the framework of approved pattern plays a pivotal role in recognition of the last status of
company’s performance and revolution of environmental situations and possibility of
evaluation of company performance in an approved framework. This issue is a basis for
formation of strategic decisions which must be announced in annual general assemblies on
behalf of owner.
Planning is the main responsibility of each manager. Before organizing, leading or
controlling, managers must determine the goal and direction of the organization by means
of planning (Stoner et.al, 2000).
Planning is the process of determining goal and selecting path, method or tool for
meeting a requirement. Basically, organizations are governed in two ways:
Strategic plans and operational planning. Strategic plans determine the general goals
of the organizations and operational plans are description or instruction of strategic plans
which are determined in daily activities (Stoner et.al, 2000).
Although there is a difference between operational plans and strategic ones, this
difference has no clear borders, since what is an operational decision for someone, this may
be strategic for another so that the difference is relative not absolute (Hoseini, 1989).
Company strategy, is a pattern of general goals, fundamental policies and plans for
achieving such goals and determines the business type of the company. Strategy can be
defined as a process linking internal resources management and external relationships with
customers, suppliers, competitors and economic, social and political environment in which
company is active (Richard, 1997). In 1931, serious national activities in insurance industry
began in Iran. In this year, law and bylaw of company registration was approved in Iran
and consequently, many foreign insurance companies such as Alliance, Eagle Star,
Yorkshire, and Royal and so on established their branches in Iran. The first private
insurance company of Iran – East (Shargh) company – was established in 1950. After that,
until 1964, seven other insurance companies including Arya, Pars, Alborz, Omid,
Sakhteman and Kar began their activities in Iran (website of central insurance).
th
With 0.09% share from global premiums, Iranian insurance industry rank 46 in the
th
world and our neighbor country – Turkey – rank 34 (website of insurance research
center).
Insurance industry is one of the complex and vital industries all around the world.
Currently, economic activities are formed in such a way that their permanence will be
seriously affected without insurance support. Insurance industry is considered as one of
the building blocks of economy of each country. Dynamism of effectiveness and
competence of this industry not only benefits the business and insurance industry, but also
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has great contributions to external environment (publications of Iran Insurance
Corporation, 1956).
Research importance
Strategic planning is a process in which executive and operational managers design
the strategic planning of the organization. The most important characteristic of the process
lies within its collective nature, since in the form of such process and team working,
believe in organizational strategy is shaped and people engaging in this process feel
belonged to it. Moreover, such process leads to facilitation of the establishment of the
organizational strategy.
Contrary to Carter and McNamara, the process of strategic planning is a
fundamental basis used mainly by organizations which are small in size and active and
previously did not have strategic planning. In the first year, this may be used without
considerable benefit in order to gain an understanding toward the way of planning.
However, in coming years, by embracing phases and activities, planning can hope for
improvement.
Strategic planning is a type of process planning. The reason for being process lies in
the type and class of phenomena for which planning is performed. In treating such
phenomena, since they are continuously changing, their planning must be performed so
that they can be capable of giving feedback and adaptation with new situations (Evans,
2003, 4). In strategic planning, the main principle is that on one hand, by utilizing external
opportunities and avoiding and reduction of effects of external threats, strategies must be
provided and on the other hand, in these strategies, our aim is not to determine the best
strategy. But, the goal is to determine the practical ones. Strategic planning is provided as
the process of official planning provided by senior managers and from top to bottom and is
substantiated based on skillful analyzes of organizational comprehensive and continuous
planning.
Since goals and targets are not achieved by sole recognition, organization must
prepare and implement a set of practical plans to make the achievement of criteria goals
possible. Organization must compensate the rare human resources, capitals and
information for each practical plan. We call such practical plans strategic actions.
Solely financial measurements in companies of industrial era expressed the sufficient
scenario of the history of the organization regarding sufficiency of contracts in long-term
and relationship with customers having lower risk for future success of the organization.
However such measurement is not effective for evaluation of companies experiencing
communication era since for future investments, they have to consider customers,
suppliers, employees, process, technology and innovation.
Altogether, strategic planning intends to improve the capacity and capability of
strategic management so that senior managers of the organization can become engaged in
the process of planning and play their efficient role. However, engagement of senior
managers in this process does not suffice and they have to take part unified and
coordinated in the process of planning, codification and implementation of strategies.
Unity, coordination and collaboration of the senior management is one of the most
significant factors in implementation of organizational strategies (Goodstein et.al, pp. 1-2).
In summary, strategic planning intends to answer the following questions for the
organization: where is it? Where it wishes to go? And how it goes?
In answering such questions, strategic planning provides a framework for
organization and personnel activities. Finally, strategic planning helps organization in
achieving a comprehensive development, suitable organization and getting a better
understanding of surrounding environment and current and future customers an
consequently, being aware of capabilities and limitations.
Research hypotheses
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Main hypothesis
- Taking and implementation of strategic planning in private insurance companies affects
various indices of financial performance.
Secondary hypothesis
1. Using strategic process in private insurance companies affects financial performance
index.
2. Concentrating on strategic issues in private insurance companies affects financial
performance index.
3. Strategic tools in private insurance companies affects financial performance index.
4. Using strategic analysis tools private insurance companies affects financial performance
index.
Conceptual model of research
Criteria for strategic planning
Taking and implementation of strategic
planning
Concentrating on strategic issues
Financial performance
Strategic tools
Using strategic analysis tools
Fig. 1: conceptual model taken from Alev M. Efendioglu, 2010
Literature review
- Hasan Zadeh Karim Abad (2001) in a research entitled “indices determining priority
of strategic planning in information systems” showed that since investing on information
systems demands a lot of financial resources and failure in such investments will result in
heavy expenses for the organization, it is necessary to perform planning for information
systems.
- Gholi Pour and Agha Zadeh, (2005) in a paper entitled “strategic planning for small
and medium organizations”, stated that strategic planning plays a vital role in success of
organizations in competition. Such type of planning which is often used on large
organizations, if provided appropriately, will lead to selection of strategies bringing
progress and eminence of the organization. To design a conceptual model for research,
nine conceptual models for large organizations and three models for small organizations
were comparatively studied. From this study, three factors were recognized as
commonalities of 12 models. Results revealed that with respect to statistical sample, there
is a significant difference between strategic planning of large and small companies and
model presented in this paper is appropriate for strategic planning of small companies
from various aspects.
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- Hanafi zadeh and Ghafouri Raeni (2007) in a research entitled “key factors of
success in strategic planning of information system of investing companies” claimed that
an investing company is an organization whose main responsibility is to provide
professional management of investment of cash provided by stockholders. In this paper,
using balanced evaluation method and methodology of key factors are studied as
methodologies for strategic planning of information systems for recognition and
determination of strategic processes of investing companies as well as key factors of
success of companies. Providing a model for determination of key factors leading to
success of strategic planning of information systems in Iranian investment companies
according to strategy of leading final price, differentiation and concentration are main
outcomes of this paper.
- Samadi and Fakher (2009) in a research entitled “marketing strategic planning and
selection of an appropriate strategic planning using AHP”, expressed that in current
commercial circumstances, more than ever, the only thing which has remained unchanged
is the change phenomenon. Then, for selection of the best strategy, questionnaires
containing 115 questions were distributed among deciding managers and results were
analyzed using AHP technique. Finally, three strategies were recognized in terms of
priority which are: product development, horizontally integrated and homogeneous
diversity.
- Kavousi (2010) in a paper entitled “role of strategic planning in human resources
development” stated that since human resources are the most valuable factor of production
and the main source of competitive advantage and key capabilities of the organization and
human factor is the strategic resource of organizations, therefore, planning of human
resources is one of the components of strategic planning. Strategic planning looks at the
future and it is through concentration on future that such concentration has a specific
contribution to the progress and development of human resources. Therefore, for this
reason, in this paper, we investigate the human resources development, strategic planning
and its role in human resources development.
- Abarghouei et.al, in a research entitled “fuzzy vision toward strategic planning in
agriculture division” studied one of the main stages of strategic planning – understanding
environmental situations. In this paper, using brainstorming, environmental factors
contributing to agriculture of Yazd province during 2007-8 were recognized. Results of
fuzzy analysis reveals that in current situations, threatening and damaging effect of
external factors and internal weaknesses are more than opportunities and strengths which
are inside or outside of the division for achieving suitable overview.
- Myers (1984) believes that none of the studies performed on the effect of financial
leverage on performance indices of the company as value making contexts, could illustrate
a scientific and strong relationship between financial leverage and performance. Therefore,
it is referred to as enigma of investment structure. Some researchers believe that leverage
has a negative impact on performance.
- Lehman and Wigand (2000) found out that in companies which are not listed in
German stock market, concentration of ownership has considerable negative effect on
company profitability while ownership of banking institutions leads to improvement in
company performance (Wolfgang, 2003).
- Kehli and Doraj (2003) in another study tried to investigate the factors affecting the
relationship between IT and performance. However, the effect of financial indices which
are the most important factors for financial investment decision makers are neglected.
- Hay et.al (2004) investigated the effect of financial performance indices on the
effectiveness of IT. However, in this work, number of studies are very limited and indices of
financial performance are not decomposed to show that in which of the fields, effect of IT
is less highlighted.
- Thompson, Strickland and Gamble (2007) believed that nature of a suitable strategy
setting is making a sufficiently strong marketing position and to make the organization
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strong enough to continue successful production operation despite of unforeseen events,
strong competition and internal problems.
- Jeremias (2008) in studying the relationship between financial leverage and
performance, emphasizes on moderating role of factor such as commercial strategy and
competition intensity among companies of the same industry. Hence, recent paper
attempts to investigate the effect of taking commercial strategy and competition intensity
in the field of business on financial leverage and company performance through providing
concepts and logical reasoning.
Research methodology
Present paper is a survey and non-experimental. In the most general classification,
method of research is library and field study both of which are used in the present paper.
Present paper is classified as applied researches and if the classification of research is based
on the nature and method, this falls within the category of descriptive and nonexperimental researches.
Statistical population and sample
Statistical population of the research includes managers and experts, representatives
and agents of private insurance companies whose number is unlimited.
Sampling in this work is performed using random clustering method and since the
statistical population is not limited, according to Morgan Table, sample volume is as much
as 384.
Data collection method
For collecting data corresponding to literature, professional books and papers, theses
and searching in internet were used. Moreover, for collecting data required for studying
the effect of strategic planning and financial performance of private insurance companies,
field study is used and data are derived using field (questionnaire) method.
Data collection tool
Data collection tool was a standard questionnaire.
Table 1: description of questionnaire items
Ref.
Items
QTY
Variable
No.
Alev M.
7
1-7
Using strategic process
1
Efendioglu,2010
Alev M.
8
8-11
Concentrating on strategic
2
Efendioglu,2010
issues
Alev M.
3
11-18
Strategic tools
3
Efendioglu,2010
Alev M.
1
11-27
Using strategic analysis tools
4
Efendioglu,2010
Statistical methods and tests
For studying the relationship between variables and hypotheses tests, appropriate
descriptive and inferential statistics are used. Data were analyzed using SPSS22 and
descriptive and inferential statistical methods. For description, classification and
summarization of data, descriptive statistics including simple tables of redundancy
distribution as well as cross tables are utilized. To evaluate the hypotheses and research
theoretical mode, inferential statistics including mean test, variance analysis and Friedman
test will be used.
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Conclusion
st
1 hypothesis: According to results, correlation, determination and moderated
factors are 0.34, 0.119 and 0.117, respectively and based on these values, it can be said that
there is a strong relationship between dependent and independent variable.
According to results, variance analysis of F statistic is 51.84 and since significance
level less than 5% is acceptable, overall validity of the model can be approved. That is,
there is a significant relationship between strategic process and financial performance of
private insurance companies.
According to results, in the regression equation, coefficient of independent variable
is 0.331 and that of dependent one is 2.466.
These findings are in agreement with Sadeghi et.al (2011), entitled effectiveness
analysis of marketing information systems on efficiency of strategic planning. Among
elements of strategic planning process, analysis of status and allocation of resources and
goal setting, and then setting goals and strategies receive the least effect from outcome of
marketing information system.
Furthermore, this is compatible with Kavousi (2010) and Lehman and Wigand
(2000).
nd
2 hypothesis: According to results, correlation, determination and moderated
factors are 0.45, 0.20 and 0.20, respectively and based on these values, it can be said that
there is a strong relationship between dependent and independent variable.According to
results, variance analysis of F statistic is 98.699 and since significance level less than 5% is
acceptable, overall validity of the model can be approved. That is, there is a linear
relationship between concentrating on strategic issues and financial performance of private
insurance companies.Based on results, in the regression equation, coefficient of
independent variable is 0.524 and that of dependent one is 1.872.These findings are in
agreement with Gholi Pour and Agha Zadeh (2005), Abarghouei et.al (2001), Thompson,
Strickland and Jeremias (2008) and Hasan Zadeh (2008) which in addition to defining
strategic planning of information systems and description of the process in a schematic
model based on scientific and research achievements, investigated the criteria contributing
to setting priorities of the development of information systems as one of the important
steps of the process of strategic planning of information systems.Furthermore, this is
compatible with Kavousi (2010) and Lehman and Wigand (2000).
rd
3 hypothesis: Results reveal that, correlation, determination and moderated
factors are 0.39, 0.15 and 0.15, respectively and based on these values, it can be said that
there is a strong relationship between dependent and independent variable.
According to results, variance analysis of F statistic is 70.70 and since significance
level less than 5% is acceptable, overall validity of the model can be approved. That is,
there is a linear relationship between strategic tools and financial performance of private
insurance companies.Based on results, in the regression equation, coefficient of
independent variable is 0.524 and that of dependent one is 1.872.
These findings are consistent with Samadi and Fakher (2009) and hanafi Zadeh and
Ghafouri (2007) which investigate the key factors leading to success of strategic planning of
information systems.Furthermore, this is compatible with Kavousi (2010) and Lehman and
Wigand (2000).
th
4 hypothesis: Results demonstrate that, correlation, determination and moderated
factors are 0.43, 0.19 and 0.19, respectively and based on these values, it can be said that
there is a strong relationship between dependent and independent variable.
According to results, variance analysis of F statistic is 91.330 and since significance
level less than 5% is acceptable, overall validity of the model can be approved. That is,
there is a linear relationship between strategic analysis tools and financial performance.
These findings are in agreement with Ali Ahmadi (2001) who investigated the
strategic planning for achieving technology by developing countries as well as findings of
Kehli and Doraj (2003) and Hay et.al (2004).
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In addition, according to results, order of effectiveness consists of using strategic
process, using analysis tools and strategic tools and concentration on strategic issues in
hand. Results of test are significant with chi-square as much as 27.693, in 99% confidence.
Suggestions
Based on the results of this research, following suggestions can be provided:
Recognition of the strategic planning: by answering the following questions:”



Step 1: to determine our position as an organization (where are we?)
Step 2: to determine our intended position in the future (where do we go?)
Step 3: to establish a strategy for achieving a goal and implement it
By recognizing key factors of strategic management, first step in implementation of
strategic planning of insurance systems; that is recognition of organization’s priorities
must be performed.
Financial strategies are aspects of organizational strategy which fall within the
financial management category and include decision over investment, financing such
investments and profit sharing policies.
Due to increasing importance of strategic planning and factors contributing to
success of the process of strategic planning, prerequisite of design and implementation of
the strategy for insurance companies is to recognize such factors and taking them into
account in the process of planning.
Analysis of the process of company business, external opportunities, internal
resources and main capabilities (often, companies apply model of industrial competition of
Michael Porter five forces for external analysis) determines the level of competition of
company, threat of alternative products and potential of entrance of new people, power of
dealing of suppliers and customers.
Design and implementation of an effective mission statement which announces key
components of it in the company: market and target customers, main products and
services, geographic zone, main technologies, commitment to survive, growth and
profitability, philosophy, personal identity and suitable reputation; component
corresponding to financial affairs of the company appear in its commitment to survive,
growth and profitability. Long-term financial goals of the company represent the
commitment of company to innovative, modern, unique, value and outstanding strategies.
Financial performance survey using balanced survey card which has become one of
the most effective management tools for implementing and monitoring the strategy and
helps alignment of strategy with expected performance and emphasizes on the importance
of setting financial goals for employees, applied environments and business units. BSC
ensures that intended strategy achieves general goals, operational actions and financial
goals and concentrates on following main aspects: financial factors, employees growth and
learning, customers satisfaction and the process of internal business.
Design of quantitative strategy goals with financial policy
Design of financial goals and criteria based on the “best in industry” criteria
including the following items: free cash flow, economic added value, evaluation
management, financial decisions and capital structure, profitability ratios, development
indices, risk evaluation and management, tax optimization.
In implementing strategic planning, application of necessary training is necessary for
managers and organizational culture and cultural situation of the environment must be
taken into consideration. In a society in which people mainly believe in destiny, using the
process of strategic planning poses problems and difficulties for the society and
organizations. Management sees the strategic planning as a tool not a goal. Therefore,
organizations must consider it as a step toward achieving their goals.
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