1. Humana, Inc. Sample Case Analysis Presentation Professor Joanne Luzietti April 11, 2008

2. Agenda Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives & Recommendations Questions & Answers

3. Key Strategic Issues

4. Assessment of Humana’s current position and strategy. Assessment of how well Humana’s strategy positions it for value creation and above-average returns in the future.

5. About Humana Mission Statement: “Humana is committed to helping employers manage their healthcare costs, guiding consumers to make informed health and benefits decisions, and giving back to the communities we serve.” Key statistics: –Market cap - $10.5B –Annual Revenue - $21.5B –YOY Quarterly Net Income Growth – 150%

6. External Analysis

7. Industry Definition Humana competes in the Accident and Health Insurance and Medical Service Plans industry.

8. External Analysis: Key Environmental Factors Demographic factors: –Growth rate of population aged 60+ will be three times that of total population growth by 2010. –US citizens without health coverage has been fairly consistent at 15.5% –US citizens who participate in employer- sponsored health benefits has been fairly consistent at approximately 60%. –Percentage of people covered by government health insurance programs increased slightly in 2004 to 27%

9. External Analysis: Key Environmental Factors Sociocultural: –Increasing attention to healthy lifestyles –Smoking trends declining –Obesity trends increasing, especially among children Economic: –Unemployment rate fairly stable –Healthcare costs increasing

10. External Analysis: Key Environmental Factors Political/Legal –Lawsuits –HIPPA Legislation –Universal Health Coverage Technology – use of internet Global – increasing consumer interest in receiving healthcare overseas

11. External Analysis: Porter’s Five Forces Threat of New Entrants – LOW –Some perceived switching costs –Limited margins Lots of competitive response Bargaining Power of Suppliers – MODERATE –Physicians, hospitals, etc. can create relationships with Humana’s competitors

12. External Analysis: Porter’s Five Forces Bargaining Power of Customers – MODERATE TO HIGH –Some customers may be large portion of Humana’s business Substitutes – LOW Competitive Rivalry – VERY HIGH –Significant competition –Slow industry growth –Significant price competition

13. Competitors Aetna: –Larger in size (measured in market cap and annual revenue) –Much more limited growth –Similar focus on technology & customers –Similar product innovations –Less focus on government sector

14. Competitors CIGNA: –Smaller than Aetna, but larger than Humana –Least growth of three firms –Similar focus on technology –Similar product innovations –More focus on employee work-life programs and Employee Assistance Programs

15. Internal Analysis

16. Customer Customer is defined as the employer who purchases the health plans. Customer benefit – employers recruit and retain key personnel based on the quality of their benefit packages. They want to do this as cost-effectively as possible. Consumer is the end-user. Humana’s market segments: –Private industry –Government

17. Key Resources Key tangible resources: –Strong financial resources –Good portfolio of key products –Strong web presence Key intangible resources: –Ability to innovate new products –Strong analytical models to ensure cost control

18. Core Competencies Ability to define market needs and create products to serve those needs Ability to use technology to simultaneously improve customer experience and contain costs Ability to identify and integrate acquisition targets Ability to implement differentiation strategy to avoid price wars All are valuable, rare, costly to imitate and nonsubstitutable.

19. Value Chain Analysis Primary activities of value: –Operations: Processes contain costs well –Outbound logistics: Internet strategy improves access to information by employers and consumers –Service: High responsiveness to customer needs Support activities of value: –Technological development: Constantly improving internet presence –Firm infrastructure: Talented CEO, strong acquisition strategy

20. Summary SWOT

21. Strengths & Weaknesses Strengths: –Humana’s resources and core competencies are valuable, rare, costly to imitate and nonsubstitutable. –Business model of leveraging technology to reduce customer costs and a focus on customer needs helps them respond to key market trends. Weaknesses –Low margin industry. –Most competitors have matched Humana’s technological edge.

22. Opportunities Growth can be expected in healthcare industry. Individuals covered by government plans is increasing. Proven success in acquisitions suggests opportunity to respond well to consolidation within industry. Opportunity to expand into more wellness products, as consumers are interested in these kinds of products.

23. Risks Although government business carries growth opportunity, it has inherent risks due to legislation, funding changes, etc. Lawsuits have been an issue for Humana in the past, and could be again. Humana has paid little attention to physicians and hospitals – they could retaliate, and have moderate power. As competition imitates their business model, there will increasing pressure on price, unless they continue to innovate.

24. Strategic Alternatives and Recommendations

25. Strategic Alternatives Continue current business model, focusing on technology and customers. Exit government sector. Look for opportunities to vertically integrate backwards. Use its core competency in acquisitions to develop new business lines.

26. Strategic Recommendation: Keep Up the Good Work! Continue current business model, focusing on technology and customers. Key area of growth is employee wellness. Continue focus on growth through acquisitions Continue to assess opportunity & risk in the government sector Begin formulating responses to key trends: –Universal healthcare –Physician shortages

27. Questions & Answers