Porter’s Five Forces

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Technological Factors

There is no doubt that all of today's industries are affected by a technological change.

Advancement in technology reduces the need for local offices and staff. To grow and be visible, it is crucial for financial institutions to follow the technological change. Duvi wants to make pension savings easy and accessible for pension savers. However, Duvi is not a well-known name in the pension insurance market. Technological advances are therefore essential for them to be noticed in the market. For instance, advanced technology and excellent customer service helps pension insurers to more excellent risk management, and are crucial for the pension firms to be able to retain their market position. As Norwegians know so little about pension, it is extra important for the firms to be visible and explain their products as easy as possible. This will eventually attract customers.

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Pension is a homogenous product, so the possibilities for product differentiation are low.

Homogenous products make it easy for other firms to supply the same products. All pension products are also publicly available on the Internet, so if a pension insurer introduces a new and better product portfolio, all the other competitors will be able to copy it. This also means that the switching costs are low. Storebrand and DNB are the market leaders, saying that the existing firms have decent margins. Duvi’s business strategy is to profit from these margins by being easier, cheaper and better than the current companies in this market are.

If the market is efficient (or semi)¹¹, new entrants will be able to obtain enough capital to enter. However, in 2016 the new Solvency II regulations made it more difficult for the pension insurance firms to fulfill the requirements. If the investment of entering the market does not give a positive net present value, the entrant should not enter. This means that the costs related to the investment exceed the projected earnings. Barney (1991) argues that the capital investment is irrelevant as long as the discounted return is higher than the cost of entering. However, newly established firms can experience that it still is difficult to obtain enough capital to fulfill the requirements because of the present economies of scale and entry barriers. The Norwegian pension insurance market has high barriers to entry for newly established firms because of the existing economies of scale and entry barriers. For existing financial institutions, the entry barriers are lower since they already have experience, customers, and have financial backup.

Pressure from Substitute Products

Products and services are substitutes when an increase in the price of the one product or service leads to increased demand for the other product or service. Homogenous products are sensitive to substitutes. Although pension saving is a homogenous product it does have very few substitutes. Almost all employees are entitled to a defined-contribution scheme.

Yet, individuals have the option to save in other assets, like a house, cabin, and personal savings, which have an impact on the selection of the contribution profile. Nevertheless, since many people do not want to manage their capital themselves, the demand for pension saving insurers is high. The threat from substitutes is therefore low and is expected to stay low in the nearest future.

11 An efficient market is one where the market price reflects all available information in the market.

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Bargaining Power of Buyers

The level of bargaining power depends on the buyer’s ability to push prices down or require additional benefits from Duvi and the competitors. Pension saving is a homogenous product that is supplied by many firms. The battle of the customers is fierce, especially of the large business customers. Their bargaining power is high as they can set the firms up against each other and thereby lower the prices. Private customers are not as significant income source and therefore do not have as much power as the business customers.

One of the main challenges for the firms is the customers’ low switching costs. Advanced technology and the Internet make it easy for customers to compare prices and products, and change supplier. Finanssans explains how individuals can move their pension policies in less than 5 minutes, meaning that it is effortless to change (Rammen, 2017). Low switching costs are also affected by lower customer loyalty. Since there is less need for local offices, fewer people will feel loyal to the firms in which they use for pension savings. Duvi is not a total supplier, which makes it challenging to compete with Storebrand and DNB that offer different products additionally. This allows them to cross-sell between banking and pension products. Moreover, it is easier for customers to deal with one firm than several. Customers to firms with a broader product range have lower bargaining power than customers to firms that do not have this. Duvi's customers, therefore, have high bargaining power. Because all the companies offer the same products, there is a fierce competition of the customers.

Since pension is a homogenous product, the competition for customers is fierce. Large business customers are a significant income source that makes them compelling in negotiations compared to private customers. However, firms that supply more products than only pension saving have a more powerful position than firms that are not able to cross-sell. Therefore, the bargaining power of buyers is moderate to high.

Bargaining Power of Suppliers

Bargaining power of the suppliers is essential as it determines future costs. If the suppliers have high bargaining power, they will be able to push prices up. The natural supplier of pension insurance firms is human capital. Skilled consultants and analysts are crucial to reduce risk and increase sales. However, specialized human capital is also very attractive in the competing firms. If a firm loses essential personnel to a competitor, this firm will now have costs related to finding and training a new skilled person. This increases the bargaining

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power of the human capital. It is common that pension insurance companies have a diversified ownership structure where the investors also operate as the suppliers. In Duvi, the majority shareholder Sector Asset Management also serves in the investment committee in the company. This implies that the supplier power is higher for the employees that have more experience as they possess valuable information. Since more people take higher education that increases the competition among skilled labor, the suppliers bargaining power is moderate.

Intensity of Rivalry among Existing Competitors

The intensity of rivalry is both affected by and affects the other forces. The Norwegian pension insurance market can be interpreted as an oligopoly¹² with Storebrand and DNB as the largest firms. They had market shares of respectively 32% and 28% ultimo 2016. Even though the smaller firms have gained larger market shares, the larger firms are clear market leaders (Mørk, 2017). This can be explained by that the large firms are total suppliers, i.e., they deliver more than only pension services. Another explanation is that they all compete for the same customer base. This implies that new entrants as Duvi can easily compete for the same customers as the incumbent firms. Since the market is highly profitable, it indicates that the intensity of competition is not very high, but this might change in the future. Nonetheless, many firms are competing, so it has to be some level of rivalry.

Governmental regulations, like Solvency II, can create new requirements for capital. This can eliminate some of the competition and increase the price level. After Solvency II was introduced, firms had to operate more conservative because of uncertainty about the size of the buffer in the future. Therefore, profitability reduces when new regulations are introduced to markets. The intensity of rivalry is at a moderate level. The profitability is high for many of the firms in the market, meaning that one can expect that more newly established firms enter, as Duvi has done.

12 Oligopoly is a market structure with a limited number of firms.

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4.5 Sub-Conclusion: Why Do Duvi Enter the Norwegian