The Australian superannuation industry

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Executive Summary

The Australian superannuation industry is one of the largest companies both in financial assets and members in the country.

As a result, there are a number of companies that offer these services in the market which offers a wide pool of potential clients as the pension scheme is mandatory to all Australian citizens.

Consequently, there is competition among industry players as they try to control a larger section of the market and thereby increase its profitability. For any company to survive, it has to adopt strategies which will ensure that its products sell more, at a premium and developed using the least cost.

There are a number of strategies that a company can adopt to ensure that it meets its target. The choice of strategy will depend on the market position of the company, its objective and asset base and future objectives nevertheless; expansion of the market ought to be a key issue to any superannuation company keen to weed out competition.

In order to achieve new market segments, companies ought to come up with new and innovative products while at the same time minimizing on their production costs. Thus in order to achieve this, this paper has critically analyzed the superannuation industry in Australia.

It takes into account porters theories on competitive advantage how those theories affect the day to day running of the Australian superannuation industry.

In addition, it takes a closer look at one of Australia’s leading Superannuation companies, Perpetual Limited. Perpetual limited offers a broader and more personal analysis on how the company has maintained its competitive edge against rivals.

Lastly, the paper offers recommendation which both the Australian superannuation industry and Perpetual limited ought to take account in ensuring that the industry remains lucrative and companies continue maintaining a competitive edge.

Industry Overview

The superannuation industry in Australia is a program that caters for the provision of a pension fund scheme for Australians. It’s therefore compulsory under the Australian law that all citizens be part of the program as it caters for their welfare once they retire.

Under the program, registered employers are required to submit a given percentage of employees income based on a given proportion to a given superannuation fund.

The need for the industry was given by the projected analysis that, with time, the Australian demographic map was changing drastically with more aged citizens increasing thus putting a strain on the government and national economy as it would seize to be economically feasible to support the retirement program.

Over time, the Government has come up with additional policy changes meant for ensuring the scheme is up to date with the current market and demographic changes (Pelham, 1999 40; Cartwright, 1993 55).

Key risks

As the Industry is liberalized with many players, negative practices have increased in the last decade with players engaging in unethical practices.

In addition, there isn’t a robust framework which the custodians of the scheme can effectively use to control the vast players in the industry. As a result, the industry players don’t take into account the regulations that the custodians call for.

Political and Legal

There has been a strong political will to control the superannuation industry to ensure that the interests of all stakeholders are taken care of without bias and exploitation (Conner & Prahalad, 1996 499).

Over the last number of years, the government has come up with several changes in policies through legislations.

For instance, it is expected that the government will seek to introduce key changes in the superannuation industry with the introduction of a raise of the superannuation Guarantee from the current 9 per cent to 12 percent while at the same time decrease the levy charge that is paid by the low income earners bracket. (Schoemaker, 1990 91).

In addition, the federal government introduced the Code of Ethics Act to govern the industry players. Under this Act, key players are called to observe ethics in running of the funds by ensuring that they are independent from manipulation.

In order to ensure that the scheme is run independently, a section of the stakeholders called for mandatory outsourcing which the Government rejected as it would negatively affect the industry.

Economic

According to APRA, Australians have invested over $ 1.5 trillion in superannuation assets which is almost equal to the country GDP. This can be attributed to the rapid growth of the funds due to the introduction of the SGC that resulted in high returns to the fund.

As a result many co-operations and individuals have come to rely on it and as a result, the industry is expected to increase its growth as Australia’s economy grows (Miller & Dess, 1993 565).

The superannuation funds aren’t cushioned against diverse effects of the economy and as a result, negative effects of economic growth are quickly transferred to the funds and thus the members are forced to bear losses arising out of their assets immediately (Wickham, 2005 42).

Consequently, members whose assets are exposed to such losses find themselves losing their savings.

Social and Cultural

The citizens understand that their not-for- profit superannuation trustee manages their assets with their interests in mind. In addition, the Government has put in place several checks and balances to ensure that the trustees don’t exploit their clients’ funds or embezzles them in unwarranted projects.

Porter (1980 45) notes “she draws comfort from APRA’s RSE licensing arrangements because this requires the trustees to be highly skilled and discharge their duties in a prudent manner for the benefit of members in retirement”.

Nevertheless, there has been a worry that the products being offered under the scheme were not innovative to match up to the current market trends, whereby the funds offered products that were only suitable and valuable to the monetary intermediaries and not the members who owned the funds.

Technology

The IT sector isn’t well developed to cater for the vast needs of the customers and other stakeholders of the industry for instance, despite the complex calculations involved on a day to day basis, the industry players still rely on excel based systems to run their operations.

Thus the operating systems within the Industry are generally low which has resulted in the proliferation of the industry operations hence resulting in unreliable complex situations, frequency of errors in the system and expensive maintenance procedures.

Due to such issues, it has resulted in unequal playing fields between the industry players. Large and well established firms have an upper advantage over smaller firms as they lack the investments to upgrade their systems.

Nevertheless, despite the urge of having a new and effective operating system, its implementation has been quite slow and on a piecemeal basis thus the risks faced by the older system continue to prevail in the industry.

Such risks are being experienced in key areas such as; data management, IT risk management, disaster recovery and security management. (Slack et al 2009 45)

Due to the high volume of daily transactions that occur, it has resulted in operational risks. Operational risks result due to: multiplicity of investment assets, different jurisdictions in the industry, involvedness of the products offered and the labor-intensive intervention required in running the scheme (Black & Boal, 1994 140; Chan, & Wong, 1999 571; Clancy, et al 2001)

Porter’s Five Forces

Industry Rivalry

Due to the liberalization of the Superannuation industry, there are many firms or organizations that offer the services resulting in completion between the firms to manage many client accounts.

Over the last couple of years, there has been anxiety between encouraging the establishment of a “great” fund which will result in it having a lot of political influence and one which is diverse hence ensuring competition between key players. Due to this policy, it’s expected that there will be industry rivalry between the players.

Established firms with large investment portfolios insist that their operations will result in economies of scale which will benefit the clients which is an issue other smaller firms decry as false and not based on hard facts.

Smaller firms note that it is possible for the larger firms to siphon money into projects which aren’t beneficial to its members whereby it would also be difficult for the members to ascertain their benefits as the information can’t be deciphered by ordinary members.

In addition, the members of such firms cannot have any significant influence as their political power is highly dilute (Bradmore 2005 12; Chandler, 1962 41; Chandler, 1990 63; Chandler, 1992 140)

Threat of New Entrants

Over time, there has been an increase in the number of superannuation schemes both at co-operate and individual level. This has resulted due to constant dissatisfaction of members with the services offered by some firms.

One of the greatest issues has been with the clause of member engagement and trustee accountability, an issue which hasn’t been effectively addressed. As a result, the members have resulted in transferring their account to other firms or to personally administer over their own accounts and assets.

Nevertheless, this has resulted in misappropriation of the funds as members engage in practices that contravene the real intention of the fund (Klassen & Menor 2006 56; Christopher, 1992 41; Conner, 1991 121; Cray, 2009 130; Barney, 1991 100).

Nevertheless new and emerging companies have brought significant competition in the industry and thus cannot be ignored. Established companies in the industry can be referred to as the market leaders for example the AAS Company.

The AAS is one the largest superannuation companies in Australia and thus can be referred to as a leader, under Kolters marketing theories, a market leader should strive to expand and protect its market from other rivals. As they already enjoy a wide market, they should ensure that their market niche is maintained and therefore employ a defense strategy to ensure that they don’t lose their market to rivals.

The next category of the industry players is the Market challenger, these are companies which are striving to gain a market share and consequently become a market leader (Barney, 1986 658).

Thus they offer constant competition to market leaders and other firms in the industry. Firms that are relatively new or not well established form the Market-Follower class. These class of players try to increase their market share by providing innovative products in bid to gain more customers.

Nevertheless, other smaller firms could gain a market share by avoiding the markets dominated by larger and well established firms and concentrating their energy on smaller markets or markets neglected by bigger firms (Goldratt & Cox 2006 141).

Company Analysis – Part A

This paper will analyze one of Australia’s leading superannuation companies, Perpetual limited. Given the stiff competition faced by superannuation companies in the region, Perpetual limited has adopted several strategies to ensure that it maintains and still acquires new markets.

“According to Porter, there are three generic strategies that a company can undertake to attain competitive advantage: cost leadership, differentiation, and focus” (Bradmore, 2005 141)

In order for it to survive the stiff completion, it has embraced cost leadership strategy; this is where it has introduced cost cutting measures and hence increasing its profit margins in competing products. As a result all products produced by the company should be produced at the lowest cost possible.

This strategy has allowed the company to re-invest the profits back into the company hence increasing its capital and investment base. “Companies following this strategy place emphasis on cost reduction in every activity in the value chain” (Liker 2004 59)

Another strategy used by the company is differentiation. Perpetual limited has several products that are used by its different members. Nevertheless, these products are different from each other with each product class serving a given niche of the market.

As a result, there are premium products which attract premium rates. Members who opt for the premium service are entitled to better customer care services whereby they can enjoy personalized service from the company.

Nevertheless, the company has been forced to incur extra costs in promoting such premium services through advertisements. In addition, other companies have soon copied their product differentiation thus tapping into their market niche. (Amit & Schoemaker, 1993 40).

For the company to effectively operate these two strategies, they have to focus. Focus is the mediator of the above strategies whereby Perpetual limited is focusing on areas of the market where its product meets less competition. Thus it offers specialized or customized products to its target market. (Black, 1994 140)

One of Perpetual limited’s goals is to attain a competitive advantage over its rivals which can only be achieved by the company through positioning itself as a cost/product leader. This can be seen where the company has cut its costs while at the same time coming up with products that are differentiated and fetch premium rates.

By doing so, the company has demonstrated its value for customer as the company has effectively used its resources and capabilities to achieve this. This process is known as value chain system and consists of a number of players in the company; from policy makers to marketers who sell the products. (Womack et al 2007)

Company Analysis – Part B

Due to liberalization of the superannuation industry, competition is very stiff among players of the industry, though a company may be established and control a wide section of the market, such companies cannot rule out the competition being brought forth by smaller and medium sized companies.

Due to this, Perpetual limited being a market leader has to adopt strategies to ensure that it remains in the lead and doesn’t lose out to competitors. There are a number of strategies which the company can adopt to ensure that it continues to enjoy an advantage over its competitors. (Allen, et al 2000 71)

Perpetual limited should first of all outline its current and future objectives of the company and how to achieve them. Expansion of the market should be a core objective.

Creation of new markets could be done by finding new untapped markets, creation of new products and differentiation of products between markets and costs. It also needs to protect its current market by adopting defensive strategies against competitors. (Cao et al 2008 89)

This will entail the company broadening and diversifying its products and customer services without the need of redefining the company but focusing more on competition.

As the company focuses on differentiated products, it ought to withdraw from markets that are vulnerable to competition and focus more on markets that enjoy personalized or premium products.

One of the issues that the companies face when they launch new products is the tendency of competitors to copy them and then market them as their own. It is thus vital for the company to respond to rivals by identifying their weakness and launching more superior products that are hard to imitate.

By doing so, Perpetual limited will remain a market leader as the above recommendations will ensure that competitors find it very hard to compete with the company products and policies.

In addition, when adopting the above strategies, the company will also be embarking on cost reducing measures and therefore only products that are least costly to produce will be launched to the market. As a result the profit margins of the company are bound to increase overtime; a strategy that other competitors may find difficult to implement.

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