MBA 5006: Cigna’s Business Strategy (May 19, 2024)

Introduction

 

Renowned economist and author Michael Porter once said, “The essence of strategy is in the activities – choosing to perform the activities differently or to perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing slogan that will not withstand competition” (1996, p. 64). In this comprehensive business analysis, I will delve into Cigna’s business strategy, including the level of diversification and the geographic and vertical scope. I will also analyze Cigna’s business model, corporate strategy, overall corporate structure, management systems, and, most importantly, the strategic fit between the business and corporate strategies. This strategic fit, a pivotal factor in Cigna's success, is exemplified by its strategic acquisitions of EQUICOR in 1990 and Healthsource, Inc. in 1997, which significantly contributed to its current position in the health insurance market. These acquisitions were strategically aligned with Cigna's business model and corporate strategy, demonstrating a clear strategic fit.

Generic Business Strategies for Cigna

Today, Cigna stands as a major health insurance company, serving over 187 million individuals across 30 countries. Yet, its path to this eminence began over two centuries ago. In 1792, the Insurance Company of North America (INA) was established, a pioneering event as it was the first insurance company for marines in the United States (The Cigna Group-b, 2024). This spirit of expansion persisted, culminating in the birth of the Connecticut General Life Insurance Company in 1865 (The Cigna Group-b, 2024). The company's foray into the health insurance market in 1919 marked a significant turning point. By 1946, INA had spread its wings globally, operating in Europe, Asia, Africa, and Central and South America. This global reach and influence were further solidified in 1982 when Connecticut General Life Insurance Company and INA merged to form Cigna. Since then, Cigna has continued its upward trajectory, strategically acquiring companies such as EQUICOR in 1990 and Healthsource, Inc. in 1997, significantly contributing to its current position in the health insurance market (The Cigna Group-b, 2024).

Cigna sold its life insurance company to Lincoln National in 1998, its property insurance branch to ACE Limited in 1999, and the financial and retirement business to Prudential Financial, Inc. in 2004. Cigna joined CMC Life Insurance Company Limited to launch the first comprehensive health benefit in China; in 2010, Cigna acquired Vanbreda International, becoming the international insurance leader for people living abroad. In 2011, operations were opened in Singapore. In 2012, Cigna acquired Healthspring and expanded into Medicare plans (The Cigna Group-b, 2024). More recently, Cigna joined Express Scripts, which added a mail-order pharmacy and pharmacy benefits manager (PBM) to its offerings. Cigna reported a 25 percent increase in Express Scripts to mail-order pharmacy memberships, totaling 122.8 million customers as of the first quarter of 2024 (The Cigna Group-a., 2024). Cigna reported a solid first quarter of 2024, with Cigna’s total revenue at  $57.3 billion (The Cigna Group–a., 2024). pharmacy customers to 122.8 million, (Cigna ranks thirty among the Fortune Global Top 100 Companies List as of 2022 (Park et al., 2024). Cigna’s joint ventures, acquisitions, and selective offerings continue to make it a leader in its industry.

Business Strategy

A business strategy is a company's decisions and actions that it implements to become a strong competitor in its industry. Business-level strategies focus on a single or limited product market (Capella, n.d.). To create an effective business strategy, leaders must ask, “Who are the customer segments we will serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy them?” (Rothaermel, 2021, p. 195). Additionally, companies must ensure that they meet these consumer needs to create a competitive advantage and carve out a unique place in the market. There are two generic business strategies that any organization can use to position itself in the market: cost leadership and differentiation (Rothaermel, 2021). Additionally, companies may choose to target select segments and use a focused cost or focused differentiation strategy (Porter, 1996). Cost leadership is a strategy where costs are kept lower to provide lower prices to consumers.  When a company follows a differentiation strategy, it maintains costs comparable to those of its competitors; however, it provides the consumer with product features or additional offerings that its competition does not match. Companies can differentiate with additional features, customer service, or complements (Rothaermel, 2021). A focused cost strategy involves offering lower costs to only a select target group rather than the entire industry. Focused differentiation focuses on target markets where specific product differentiations are offered (Capella, n.d.). A company that follows a focused differentiation strategy tries to provide products with additional features or perceived customer value to specific target groups (Rothaermel, 2021). Companies may pursue a combination of cost leadership and differentiation called a blue ocean strategy. In the case of Cigna, its blue ocean strategy involves strategic decisions to lower costs while raising its perceived value by deciding which aspects can be eliminated or reduced to lower than industry standards and which aspects can rise above industry standards to create value innovation. This strategy has been a key driver of Cigna's success in the health insurance industry.

Cigna’s Blue Ocean Strategy

Cigna uses cost and differentiation to pursue a blue ocean strategy. Cigna uses a focused cost strategy for specific target groups and plans. For example, Cigna has lower plan premium pricing than some competitors for its Affordable Care Act (ACA) plans, and Cigna also offers lower deductibles than some on its Silver ACA plans (Kissel, 2024). For 2024, Cigna started offering plans in each market with zero premiums, including additional coverage for vision, dental, and hearing benefits.  However, Cigna’s focused differentiation strategy is unmatched with its robust variety of benefits. Cigna includes additional offerings at low or no cost to consumers, such as specific Cigna Medicare plans, which may include transportation, over-the-counter benefits, grocery benefits, mail-order discounts, ride share, acupuncture, health club memberships, dental, vision, or hearing coverage (Cigna, 2024). For 2024, Cigna’s Medicare plans provide incentives through a Cigna Healthy Today card. Once specific health or volunteering objectives are completed, Cigna will load benefits onto the member’s card, which can be used for health supplies, food, and utilities (Cigna Healthcare Expands..., 2023).

Employers can also personalize their company plans to meet the needs of their business and can choose multiple-tier options to offer their employees. For value-based care plans, employers can offer incentives to employees to meet specific healthcare goals (Wooldridge, 2023).  Because Cigna uses cost and differentiation, they pursue a blue ocean strategy. Cigna’s focus on affordability, customization options, and added complements creates value innovation.  Cigna’s consideration of its member's needs and ability to deliver offerings that satisfy these needs also increase perceived value as it indicates to consumers that Cigna cares about their well-being. These strategic decisions and actions make Cigna a leader in the health insurance market and able to successfully implement a blue ocean strategy.

Business Model

A business model is a company’s strategy for generating profits. A company’s business model identifies the products offered, defines the company’s target market, identifies what channels the company will use to reach those consumers, and notes any potential expenses (Kopp, 2024). Although more commonly associated with digital streaming services and computer products, Cigna’s business model is like other subscription-based models. Companies using a subscription-based business model charge members a certain amount for an agreed-upon time in hopes of creating long-standing brand loyalty (Kopp, 2024). Cigna’s customers (or agencies or employers) pay a monthly premium for coverage through Cigna, regardless of whether the customer uses the plan benefits. If the premium is not paid, then the coverage is termed. Cigna offers different products that cater to consumers at different stages of their lives, so the company could potentially build lifelong relationships with its consumers. Cigna’s core products are health, dental, prescription, and life insurance. Cigna also has its Express Scripts mail-order pharmacy and the Accredo specialty pharmacy, which its members and employees are encouraged to use. Depending on the plan, some members receive a discount through a mail-order savings program.

 Target Markets

Cigna has several target markets. One target market is corporations or business owners who need health insurance plans for their employees. Another target market is uninsured individuals who need health insurance coverage through the ACA. Lastly, Cigna markets to consumers who are age 65 and over and who need a Medicare health or prescription drug plan. Cigna generates revenue by charging its members a monthly premium for their insurance plan. For ACA plans, the member is the primary payer of the premium unless low-income factors are additionally covered. For employer-paid plans, sometimes the plans are fully funded by the employer. However, many employ cost-sharing where the member’s portion is deducted from their paycheck, and the employer pays the remainder of the premium (Plemons, 2024). The member pays a monthly premium for Medicare plans. However, the Centers for Medicare and Medicaid Services (CMS) agency pays Cigna a fixed monthly amount to manage the Medicare plans (West, 2020). CMS's pay depends on geographic and health factors (West, 2020). Cigna uses traditional marketing channels such as television and print ads in targeted regions and has a significant social media presence on Twitter, LinkedIn, Facebook, and Instagram.

Value Proposition and Profit Proposition

No business strategy can be successful without a consumer value proposition and profit proposition. A company’s value proposition attracts consumers, and the profit proposition is how the company generates revenue (Kim & Mauborgne, 2009). According to the company, “Cigna is an advocate for better health through every stage of life, guiding customers through the health care system and empowering them with the information and insight they need to make the best choices for improving their health and vitality” (The Cigna Group, 2023). Cigna’s value proposition is to provide affordable insurance with a perceived high value to consumers and offer a variety of benefits that encourage and make it easier for consumers to manage their health and well-being. Cigna’s profit proposition is to provide affordable insurance to its consumers for less than the claims paid out. For Cigna, offering incentives to its members to manage their health helps lower costs. Many conditions can be prevented with a healthy diet and exercise. Generally, treating conditions when detected early with medications costs less than paying for more expensive interventions later. Per the Centers for Disease Control (CDC), heart disease in the United States costs 321 billion dollars annually (2021). If Cigna can improve the health of its members by adding attractive extras like gym memberships and grocery benefits, it can potentially lower costs for the plan and members. Medicare also factors in health indicators and condition management when submitting a monthly payment for companies that manage its Medicare Advantage and stand-alone prescription plans. Medicare will pay Cigna more if specific health initiatives are met, such as scheduling an annual wellness check-up and prescription compliance.

Corporate Strategy

Corporate strategy is the decision-making and actions needed to align the company with its mission and vision statements and meet its overall goals. Michael Porter explains, “Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts (1987, p. 43). Cigna’s corporate strategy is driven by its mission, vision, and values, as well as delivering value to its shareholders, which Cigna does through vertical integration and geographic expansion. Since the company began, Cigna has expanded beyond its initial offering of health insurance policies to include global health insurance, mail-order pharmacy services, specialty pharmacy benefits, pharmacy benefits manager (PBM) ownership, and a medical benefits manager, EviCore. As part of the corporate strategy, leadership selects what markets the organization should compete in and sets the boundaries along three dimensions: vertical integration, diversification, and geographic scope (Rothaermel, 2021). Cigna uses vertical integration, product diversification, and geographic scope to grow its business.

Vertical Integration

Vertical integration has five general stages along the industry value chain:

Stage 1: Raw Materials

Stage 2: Intermediate Goods and Components

Stage 3: Final Assembly and Manufacturing

Stage 4: Marketing and Sales

Stage 5: After-Sales Service and Support (Rothaermel, 2021). 

Some companies may participate in all or only a few stages along the value chain. Companies that manufacture goods like E&J Gallo Winery are generally fully vertically integrated, which achieves a lower cost through economies of scale (Rothaermel, 2021). Although Cigna does not produce physical goods, it travels forward and backward along the value chain. The industry value chain for Cigna is:

Stage 1: Design

Stage 2: Contracting

Stage 3: Marketing and Sales

            Stage 4: After-Sales and Support

In the first stage, Cigna will design its drug formularies and plans for each market, considering specific consumer needs or regulations. The second stage is to create a network of hospitals, physicians, pharmacies, and other necessary partnerships. The third stage is to market the plans in each intended area and enroll members in the plans. Lastly, the company must support customers, providers, pharmacies, and other relationship components that make the plan function properly. Customers require assistance understanding their benefits or disputing a copay, physicians may need assistance getting medications covered for their patients and medical benefit information, and pharmacies may need help with claim rejections and processing questions. Cigna uses backward and forward vertical integration to move along the different stages of the industry value chain. When the occasion arises where decisions need to be made, the company may return to one of the previous stages to re-evaluate. For example, while supporting members who have enrolled in the plans, it is not uncommon for drug companies to release new medications that Cigna decides to add to the plan formularies, or pharmacies and hospitals may change their contracting or leave the network, which could involve returning to stage 2 to negotiating contracts with new health suppliers. Sometimes, the company may advance along the value chain.

Product Diversification and Geographic Scope

Product diversification refers to a company's range of products, whereas geographic diversification refers to where the company will sell its products (Rothaermel,2021). Cigna has three strategic business units (SBUs): The Cigna Group, Cigna Healthcare, and Evernorth Health Services. The Cigna Group is a health company that employs over 70,000 employees in operations in over 30 countries. Cigna Healthcare offers United States Commercial plans, U.S. Government plans, and International Health businesses (The Cigna Group, 2023, para. 3). Evernorth Health Services assists customers and clients in finding solutions and includes Express Scripts Pharmacy, Accredo, eviCore, MDLIVE and other benefits solutions (The Cigna Group, 2023). Cigna’s products are primarily offered in the United States; however, it does offer some international plans for individuals, families, and employers. The Cigna group had 57.2 billion in revenue in the first quarter. Evernorth had 45.2 billion, and Cigna Healthcare had 13.3 revenue (Wilson, 2024). Richard Rumelt identified four main types of corporate diversification: single business, dominant business, related diversification, and unrelated diversification (Rothaermel, 2021). Since none of Cigna’s products exceed 70% or more, its diversification type is classified as related diversification. Geographically, Cigna Healthcare offers medical plans in 14 United States and Medicare Advantage and dental plans in all 50 states. Cigna has a global plan that offers worldwide coverage. For example, Cigna Healthcare Europe has over 180 million members (Cigna Global, 2024). The company also provides medical claim assistance through EviCore and pharmacy claim assistance through its pharmacy benefit manager (PBM) Express Scripts. Before owning its own PBM, Cigna would pay an external claim processor for each claim processed by its company. Cigna often uses relationships and acquisitions to offer more value and company savings.

Corporate Structure and Management Systems

An organizational structure determines which jobs are performed by which teams. It also determines which departments report to other departments along the company hierarchy and defines the appropriate mode of communication. When pursuing a blue ocean strategy like Cigna, companies need to be structured in a way that allows innovation while also controlling costs (Rothaermel, 2021). The main components of an organizational structure are specialization, formalization, centralization, and hierarchy (Rothaermel,2021). Specialization is the extent to which employees will perform various tasks, not only a few specialized tasks. Formalization is the degree to which specific rules and regulations direct employees or if there is more leeway allowing for innovation. Centralization refers to who is empowered to make decisions. Hierarchy establishes who manages specific departments or individuals (Rothaermel, 2021). Companies need an efficient structure to establish a competitive advantage and a successful strategy. However, a structure without a sound management system will not lack effectiveness as a management system.

Cigna is a multidivisional structure (or M-form) with SBUs that operate independently and have their own profit-and-loss responsibility. Each SBU has its own hierarchy and organizational structure (Rothaermel, 2021). Cigna has three SBUs that operate under Cigna Corporation: Evernorth, Cigna Healthcare, and the Cigna Group. David Cordani is the President, CEO, and Chair of the Board of the Cigna Corporation. Cigna has eleven board members: Chuck Borg (President of the U.S. Government business),  Everett Neville (Executive VP), David Braier (Chief Health Officer), Noelle Eder (Executive VP and Global Chief), Cindy Ryan (Executive VP and Chief HR Officer), Mike Triplett (President of U.S. Commercial), Brian Evanko (Chief Financial Officer), Jason Sadler (President of International Markets), Nicole Jones (Executive VP and General Counsel), and Paul Sanford (Executive VP of Operations) (Databahn, 2024). The CEO, David Cordani, reports to this board and monitors the activities of and allocates funds to the SBUs. Cigna centralizes decision-making at the top of the organizational hierarchy to support its related diversification strategy. Per Rothaermel, “Doing so allows a high level of integration. It also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for related diversification”(2021, p. 406). Each SBU has its communication hierarchy and decision-making with a president, vice president, and managers. However, they can make decisions based on the company's needs that align with the overall organizational strategy.   

Strategic Fit

Strategic fit refers to how well components interact and work together to accomplish a goal. An analysis of the strategic fit between a company’s business strategy and corporate strategy will indicate how well they work together. When a strategic fit is absent, the company may not effectively reach its goals, and it will need to identify where there is misalignment that requires adjustment. Cigna’s business strategy is a blue ocean strategy of cost leadership and product differentiation. Cigna’s corporate strategy is one of vertical and geographical diversification. Cigna’s business strategy of providing affordable insurance products with extras aligns with Cigna’s long-term corporate goals of creating value and improving the health of its clients. With both strategies combined, Cigna’s product differentiation and diversification strategies enable the company to expand its reach and increase stakeholder value.

Conclusion

The analysis of Cigna’s business strategy, business model, corporate strategy, corporate structure, management systems, and strategic fit sheds light on why the company thrives in the healthcare industry. Cigna is a global corporation with a multidivisional structure of Cigna Corporation and three primary SBUs. It offers a range of diversified product options to many different target markets. Cigna’s blue ocean strategy of cost leadership and product differentiation allows the SBU to expand into different geographic areas, which is also made possible by a similar corporate strategy for expansion. The company continues to grow due to the alignment of its business and corporate strategy

 

References

 

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