BU Strategic Plan Basics
CONFIDENTIAL
Training materials
8 June 2001
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
Jim Ayala – PHO
Melissa Gil – PHO
Regina Manzano – PHO
Suresh Mustapha – PHO
Steve Shaw – HKO
Shelly Yeh – PHO
Choon-Gin Tan – SIO
DESCRIPTION OF MATERIALS
This document was developed as a training presentation for the newly appointed Business Unit CEOs of an Asian Family-owned conglomerate.
The purpose of this document is to guide new CEOs through the basic elements of developing a BU-level strategic plan.
This presentation is complemented by a companion document the “BU Strategic Plan Template Book” which provides completeness and consistency of BU strategic plan submissions. These templates are not intended to replace or constrain BU strategic thinking and should be adapted to reflect a particular BU’s sectoral context as required
WHAT IS A BU STRATEGY?
A strong business concept that drives an integrated set of actions that creates value by:
Creating products/services whose value exceeds the cost of providing them
Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services
RATIONALE FOR PROPOSED DEFINITION
A strong business concept that drives an integrated set of actions that creates value by:
Creating products/services whose value exceeds the cost of providing them
Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services
1. Recognize dual role of creating and capturing value in all elements of business system
2. Forces choices
6. Competitive
7. Externally oriented, customer driven
4. Recognizes importance of cost as competitive tool
5. Considers tradeoffs between benefit provided to customers and costs they incur
3. Gives consideration to all elements of the business system
COMMON ELEMENTS OF REAL-LIFE STRATEGIES
Vision
Where?
Strong business concept consisting of
How to compete?
Integrated set of actions
Developed high quality standards and excellent operational procedures
Focus on developing critical mass of stores and establishing market dominance
McDonald’s experienced phenomenal success in globalization due to:
Successfully screening franchisees and a dedication to intense initial and ongoing training
Consistent delivery of high-quality food and service around the world
Huge economies of scale and powerful supplier leverage
Capitalized on “American” appeal of McDonald’s
Success in tailoring assortment mix to meet local needs
“We want to be the world’s best quick-service restaurant experience”
"We will offer identical excellent quality across the world"
Targeting a broad set of the urban population, increasingly offering a bundled product (., meals) at a low price in major cities around the world
McDONALD’S EXAMPLE
BU STRATEGY REVIEW INTERACTIONS
Highly interactive debate driven by fact-based understanding of environment and internal capabilities
How do you expect Competitor A to react?
How sustainable is your business model? Can it be easily duplicated?
How robust are your contingency plans?
How quickly can you shift your business emphasis to capture industry opportunities?
BU-CEO
BU STRATEGIC PLAN DEVELOPMENT
Industry dynamics and implications
Environmental and internal assessment
Competitive assessment
Internal assessment
What are the major changes in industry dynamics and resulting opportunities and risks?
What are your competitive strengths and weaknesses?
How does your current business emphasis fit with industry opportunity and competitive landscape?
Strategy articulation
Strategic definition and implications
Strategic initiatives
Financial projections
What strategy will your BU pursue over the next 3 years?
What will be the impact of major strategic initiatives?
What are the expected financial returns of your strategy?
+
+
+
+
Risk/contingen-cies & strategic alternatives
What strategic alternatives have you considered?
+
INDUSTRY DYNAMICS AND IMPLICATIONS
Economics of demand
By segment
Substitutes, ability to differentiate
Volatility, cyclicality
Economics of supply
Producer concentration and diversity
Import competition
Capacity utilization
Entry/exit barriers
Cost structure (fixed and variable)
Industry chain economics
Customer and supplier bargaining power
What are the major changes in industry dynamics and the resulting
opportunities and risks?
How is industry structure changing with respect to demand, supply, and industry chain economics? What are the resulting opportunities and risks?
What is the expected competitor conduct? What are the resulting opportunities and risks?
What are the present and future external factors that could present new opportunities and risks?
Major industry competitor moves
Marketing initiatives
Industry capacity changes
M&As, divestitures
Vertical integration/disaggregation
Alliances and partnerships
Cost control and efficiency improvements
Impact and likelihood of major industry discontinuities
Changes in regulation/government policy
Technological breakthroughs
Key question
Sub-questions
Issues to be considered*
* May or may not be applicable to all BUs
What industry are you competing in? What are the various segments in the industry?
Industry definition
Industry segmentation
Definition
Sizing
SEGMENT ANALYSIS
ILLUSTRATIVE
Industry
boundaries
Segments
Industry segments
Relatively distinct sub-groupings within the industry
Market is relatively similar within the segment but different across segments
Different industry dynamics may vary in importance in different segments
STRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL
Producers
Industry
S
Technology breakthroughs
Changes in government policy/regulations
Domestic
International
Economics of demand
Availability of substitutes
Differentiability of products
Rate of growth
Volatility/cyclicality
Economics of supply
Concentration of producers
Import competition
Diversity of producers
Fixed/variable cost structure
Capacity utilization
Entry/exit barriers
Industry chain economics
Bargaining power of input suppliers
Bargaining power of customers
Marketing
Pricing
Volume
Advertising/promotion
New products/R&D
Distribution
Capacity change
Expansion/contraction
Entry/exit
Acquisition/merger/ divestiture
Vertical integration
Forward/backward integration
Vertical joint ventures
Long-term contracts
Internal efficiency
Cost control
Logistics
Process R&D
Organization effectiveness
Finance
Profitability
Value creation
Technological progress
Employment objectives
External
shocks
Feedback
tructure
C
onduct
P
erformance
1. Determinants of supplier power
Differentiation of inputs
Switching costs of suppliers and firms in the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to threat of backward integration by firms in the industry
2. Determinants of barriers to entry
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary, low-cost product design
Government policy
Expected retaliation
5. Rivalry determinants
Industry growth
Fixed (or storage) cost/value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
3. Determinants of buying power
Bargaining leverage
Buyer concentration vs. firm concentration
Buyer volume
Buyer switching costs relative to firm switching costs
Buyer information
Ability to backward integrate
Substitute products
Pull-through
4. Determinants of substitution threat
Relative price performance of substitutes
Switching costs
Buyer propensity to substitute
2. New entrants
3. Buyers
4. Substitutes
Intensity of rivalry
1. Suppliers
Price sensitivity
Price/total purchases
Product differences
Brand Identity
Impact on quality perception
Buyer profits
Decision makers' incentives
5. Industry competitors
"FORCES AT WORK" FRAMEWORK
SWOT ANALYSIS
Opportunities/Threats
How are demand and supply expected to evolve?
How do you expect the industry chain economics to evolve?
What are the potential major industry discontinuities?
What competitor actions do you expect?
YOUR BU
CONVERT OPPORTUNITIES
BUILD ON STRENGTHS
NEUTRALIZE THREATS
ADDRESS
WEAK-NESSES
Strengths/
Weaknesses
What are your BU’s assets/competencies that solidify your competitive position?
What are your BU’s assets/competencies that weaken your competitive position?
Can be used as a thought starter for competitive analysis and internal assessment
Surfaces potential opportunities/threats arising from factors external to the BU
SCP APPLIED TO LEXMARK
Rapidly changing technology, ., birth of portable, handheld, wireless computers
Rapidly changing customer preferences
Possibility of a paperless society given increasing environmental concern and rise of the internet
Economics of demand
Inkjet printers replacing laser in non-network environment
High price sensitivity; minimal opportunity for major product differentiation
Growth of laser and inkjet printer markets stable but dependent on PC sales and degree of replacement
Economics of supply
HP holds lion’s share of printer market
Industry capacity exceeds market demand
Presence of counterfeit and recycled product supply especially in consumables
High exit barriers due to asset intensity
Industry chain economics
Bargaining power of suppliers low
Bargaining power of distributors high
Little integration (forward or backward)
Marketing
Manufacturers competing mainly on price
Retail dominant distribution channel
Aggressive development and release of new products
Moves to increase brand awareness via marketing campaigns
Creative financing packages
Internal efficiency
Relentless drive to low cost manufacturing
Continuous efforts to create more specialized features and/or functions
Others
Entry of PC and peripherals players
Clamp down on counterfeit and recycled consumables suppliers
Finance
Price competition on printer hardware drives margins down and forces players to rely on profits from consumable products (good margins) and high volume capture on hardware
S
External
shocks
Feedback
tructure
C
onduct
P
erformance
RESULTING OPPORTUNITIES AND RISKS FOR LEXMARK
Opportunities
Risks
Become the first mover in printers for portable, handheld, wireless computer market
Grow demand base via use of creative, non-traditional channels and alternative financing/payment methods
Grow demand for consumables via programs to increase printing usage
Be the supplier of printers for PC/peripheral players hoping to the expand into printer market
Expand leadership in corporate’ institutional accounts
Increasing demand for customization may increase costs and erode margins
Any decline in PC sales may significantly bring down revenues
Market share may be eroded as competition intensifies
Branding/marketing push from established players
Pricing push from low-cost manufacturers
Margins at risk if printing usage declines with push for paperless society
NOT EXHAUSTIVE
COMPETITIVE ASSESSMENT
Privileged assets that create competitive advantage, . physical assets, location/”space”, distribution/sales network
Distinctive skills/competencies that create competitive advantage, . innovation, talent development
What are your competitive strengths and weaknesses?
What are the capabilities required to succeed in this industry?
How do you compare against these necessary capabilities?
Strengths and weaknesses of your competitive position vs. necessary capabilities
Benchmark performance against the industry’s relevant key performance indicators (KPIs), with margin and market share as the required minimum
Key question
Sub-questions
Issues to be considered
* KPIs are a handful of levers that drive the value of the industry/business
CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF
COMPETITIVE ADVANTAGE (1/2)
Physical asset
Location/"space"
Distribution/sales network
Brand/reputation
Patent
Relationship with "license" allocator
BHP’s low-cost mines
Telecomm/media company with rights radio spectrum
Avon’s representatives
Coca-Cola
Pharmaceutical company with a "wonder drug”
"Favored nation" status with a key minister in liberalizing economy
Innovation
Cross-functional coordination
Market positioning
Cost/efficiency management
Talent development
3M with new products
McDonald’s with QSC&V
J&J with branded consumer health products
Emerson Electric’s Best Cost Producer program
P&G brand management program
Privileged assets
Distinctive competencies
Necessary capabilities in order to succeed in the industry
Example
CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE BY SEGMENT (2/2)
Step 1: Ensure that these are the capabilities required to succeed in the industry. Use this list as a thought starter, add and delete as you see appropriate
BU Overall
Segments
A
B
C
Step 2: Assess your overall position relative to the capabilities required to succeed in the industry. Also, determine if these capabilities are relevant to the segments you serve
Physical asset
Location/"space"
Distribution/sales network
Brand/reputation
Patent
Relationship with "license" allocator
Innovation
Cross-functional coordination
Market positioning
Cost/efficiency management
Talent development
Privileged assets
Distinctive competencies
Necessary capabilities in order to succeed in the industry
ILLUSTRATIVE
Extremely relevant
Somewhat relevant
Irrelevant
COMPETITOR CAPABILITY COMPARISON
BU Overall
Competitors
A
B
C
Step 3: Compare the strengths and weaknesses of your competitive position vs. the necessary skills
Physical asset
Location/"space"
Distribution/sales network
Brand/reputation
Patent
Relationship with "license" allocator
Innovation
Cross-functional coordination
Market positioning
Cost/efficiency management
Talent development
Privileged assets
Distinctive competencies
Necessary capabilities in order to succeed in the industry
ILLUSTRATIVE
CAPABILITY PLATFORM APPLIED TO LEXMARK
Necessary capabili-ties in order to succeed in the industry
Privileged assets
Distinctive competen-cies
Distribution/sales network
Brand/reputation
Innovation
Cross-functional coordination
Market positioning
Cost/efficiency management
Laser
Inkjet
(Sales network)
(Distribution)
(Reputation)
(Brand)
Segments
Extremely relevant
Somewhat relevant
Irrelevant
COMPETITOR CAPABILITY COMPARISON APPLIED TO LEXMARK
Necessary capabilities in order to succeed in the industry
Privileged assets
Distinctive competencies
Distribution/sales network
Brand/reputation
Innovation
Cost/efficiency management
Lexmark
HP
Epson
Formed own account teams; customer relationships inherited from IBM
Well-established retail distribution/ dealer network
Known for quality specialized products and network software
Best-known brand
Known for product quality
Quick to market with new technologies
Awarded leader in implementa-tion of necessary product features
Leader in print quality
Cross-functional coordination delivers superior product design and customer service
Market positioning
Cross-functional coordination
Ownership of technology allows low-cost, in-house manufacture of critical components
BENCHMARK PERFORMANCE AGAINST RELEVANT INDUSTRY KPIs
KPIs (examples)
Financial indicators
Margin
Net income
ROCE
Operating indicators
Advertising effectiveness
Utilization rate
Strategic indicators
Market share
Percent of revenue from new products
Working capital trend
External indicators
Market prices of raw materials
BU
Competitor A
Competitor B
Competitor C
BENCHMARKING APPLIED TO LEXMARK
KPIs
Financial indicators
Operating income
Margins
ROCE
Operating indicators
Distribution reach
Cycle time
Strategic indicators
Market share
Brand awareness
Lexmark
HP
Epson
Strong
Medium
Weak
* Includes other information equipment (. scanners, projectors)
$457 million
12%
29%
$1,573 million*
9%*
11%*
$583 million*
6%*
N/A*
12%
47%
17%
INTERNAL ASSESSMENT
Relevant BU segments (based on customer, product, geography, distribution channel)
Operating contribution estimates for each segment
How does your current business emphasis fit with the industry opportunities and the competitive landscape?
Which segments of the business are providing the highest returns?*
What have been the performance trends along major BU KPIs?
KPI performance trends over the last 3-5 years, . return on capital employed (ROCE)**, operating income, margins, capital employed
Assessment of underlying trend drivers
Expected evolution
Key question
Sub-questions
Issues to be considered
Which intangible assets could be near-term sources of value?
Identification of in-house intellectual property, talent, networks, brand/image
Conversion into sources of value
* Based on latest available, 1-2 year historical financial statements
** ROCE = Operating income x (1-tax rate)
All interest bearing debt (short and long) + minority interest + stockholders’ equity
SEGMENT ANALYSIS
Revenue
Gross profit
Operating profit
Assets employed
People employed
Operating profit margin
Gross profit margin
ROCE
Step 1: Identify the relevant segments
Step 2: Provide a segment analysis based on the following minimum financial metrics: revenue, gross profit and margin, operating profit and margin
Step 3: To the extent assets and people can be disaggregated by segment, deployment of assets against returns can be analyzed
%
PhP
% of total
Segment 1
PhP
% of total
Segment 2
PhP
% of total
Segment 3
PhP
% of total
Segment 4
PhP
% of total
Total
%
%
%
%
Segment 1
Segment 2
Segment 3
Segment 4
Total
SEGMENT ANALYSIS APPLIED TO LEXMARK
Printers and suppliers
Other office imaging
Keyboards and other
Rest of world
Europe
US
Product
Percent
Geography
Percent of total revenues, 1995
100% = USD 3,807 million
100%=
$2494 m
100%=$895 m
11
41
48
6
48
46
100%=
$3021 m
100%=
$1024 m
14
35
51
8
46
46
100%=
$3452 m
100%=
$1031 m
14
28
58
40
60
100%=
$3807 m
100%=
$1164 m
9
23
68
32
67
1
Gross profit
Rev
1992
Gross profit
Rev
1993
Gross profit
Rev
1994
Gross profit
Rev
1995
0
TREND ANALYSIS – RETURN ON CAPITAL EMPLOYED (ROCE)
The ROCE tree can be disaggregated to show the other relevant KPIs of a BU
ROCE
Percent
Operating income x (1 - tax rate)
PhP million
Capital employed
PhP million
÷
Revenue
PhP million
Operating margin
Percent
x
(1 - tax rate)
Percent
x
Market share
Percent
Industry sales
PhP million
x
ILLUSTRATIVE
TREND ANALYSIS – CASH
The cash flow tree can be disaggregated to show the other relevant KPIs of a BU
Cash flow generated
PhP million
Operating cash flow
PhP million
Investing cash flow
PhP million
+
Net income
PhP million
Non-cash expenses
PhP million
+
Change in working capital
PhP million
+
Financing cash flow
PhP million
+
NOT EXHAUSTIVE
TREND ANALYSIS APPLIED TO LEXMARK
ROCE
Percent
Operating income x (1 - tax rate)
USD M
Capital employed
USD M
÷
Revenue
USD M
Operating margin
Percent
x
(1 - tax rate)
Percent
x
Market share
Percent
Industry sales
USD M
x
NOT EXHAUSTIVE
INTANGIBLE ASSET CHECKLIST
Intangible assets
Ways to extract near-term value
Talent
Highly motivated and competent workforce leveraging specific skill sets to
Generate growth
Improve/increase company intangibles
Intellectual property
Patents generating licensing fees
Understanding of customer behavior
Risk management
Software
Network
Interconnected webs of parties
Non-exclusive
Additional member lowers costs, increases benefits
Brand/image
Inherent image or brand built upon excellent service and product offerings
Lower search costs for customers
INTANGIBLE ASSET ASSESSMENT APPLIED TO LEXMARK
Technology for products
Networking software
Intangible assets
Ways to extract near-term value
Customize to suit industry segments currently not served
Develop related products that may use networking software in-house or via partnership
Sales force engineers
Develop the best product to suit identified customer needs
Talent
Relationship with suppliers
Good working relationship allows better capture of production efficiencies that improve product cycle time and cost efficiency
Network
Intellectual
property
NOT EXHAUSTIVE
STRATEGY ARTICULATION
Where are you going to compete along these dimensions and why:
Target market
Distribution channels
Product (breadth and depth)
Geographic scope
Target customer definition
Benefits that you will offer the customers
Product pricing
Position against competition vis-à-vis the benefits provided and the price charged
Delivery and communication of customer value proposition (value delivery system)
Competitive advantage in delivering these benefits to the customer
Where to compete?
What is your customer value proposition for the different segments you are going to serve?
What is your business model?
What strategy will your BU pursue over the next 3 years?
Key question
Sub-questions
Issues to be considered
Industry attractiveness and implication review
Alignment of chosen strategy and environmental realities
How does your chosen strategy exploit the industry opportunities and address the industry/competitive threats?
WHERE TO COMPETE?
Customers
Channels
Products
Geographic markets
Target customers and segments
Which customers are you trying to target or attract?
Which are you willing to serve, but will not spend resources to attract?
Which would you prefer not to serve?
How does the entity reach its target customers
Which distribution channels will you use?
What customer segments can they reach?
Geographical scope of business activities
Geographic limits to the business?
Local, regional, multi-local, national, international, or global player?
If local, which localities?
Quality and breadth of the product line
Breadth of the product line?
Quality of the product line?
Product bundles or a series of unrelated products?
WHERE TO COMPETE?
LEXMARK EXAMPLE
Staged expansion: national, then international
Fortune 1000 companies in banking, insurance, retail/pharmacy industries for laser printers
Have unique network printing needs
Large printer users
Value (not price) oriented segments
Consumer mass market for inkjet printers
Used broadest range of channels for customer freedom
Traditional retail channels (., dealer network, value-added resellers, about 5,000 retail outlets)
Own account marketing teams to sell direct to customers
Laser printers
Color inkjet printers
Associated consumable supplies
MarkVision complete printer management system
Customers
Channels
Products
Geographic markets
VALUE PROPOSITION
A company’s specific promise to its target customers of the benefits it will provide at an explicit price
It answer the following questions:
Who is your target customer?
What are the explicit benefits you provide to your customer?
What perceived value do you provide to the customer better than competition?
How much value do your customers attach to the benefits you provide?
LEXMARK'S VALUE PROPOSITION FOR LASER PRINTERS
“We will serve the fast-growing segments of the network printer market with high quality, technologically-advanced products targeted to customer needs at a moderately higher price than undifferentiated laser printers”.
TAILOR VALUE PROPOSITION TO VARIOUS CUSTOMER SEGMENTS
Flash memory allowing instantaneous printing and updating of forms in multiple locations
Duplex printing – ability to print on both sides of paper
Paper trays to handle three or more sizes of paper and forms
Technical service support to help with systems design and product problems
Targeted to segment needs
High quality
Technologically advanced
Competitive price
Slight premium
Banking
Price
Benefits
Why choose Lexmark?
Slight premium
Pharmacy
Ability to print prescription labels without jamming (due to spacing of rollers)
Technical service support to help with system design and product problems
LEXMARK EXAMPLE
Segment
BUSINESS MODEL
Understand
value
desires
Select
target
Choose the value
Value proposition
Design
product/
process
Procure,
manu-
facture
Distri-
bute
Provide the value
Service
Price
Define
benefits/ price
Sales
message
Communicate the value
Business model:
Integrated set of actions to provide and communicate the value proposition to customers
Segmentation
Value
proposition
Adver-
tising
Promo-
tional/PR
Value delivery system (VDS)
Each BU must address these 2 issues to define their business model
Illustration of how the value proposition will be provided and communicated
Identification of existing strengths that can be leveraged and required capabilities that need to be built to be distinctive in chosen value delivery system
1
2
LEXMARK LINKED VALUE PROPOSITION TO
CHANGES IN BUSINESS SYSTEM
Product
Design
Process
Procurement
Manu-facturing
Distribution
Marketing & Sales
After-Sale
Service
Provide the Value
Communicate the Value
Highly-customized to customer segments
12 month design cycle
Fully cross-functional
Limited to specific target segments
In-house control of critical technologies
Outsourced only non-critical components
Utilized preferred suppliers
Kept high value added processes in-house
Improved flexibility and reduced product cycle time
Minimized changes in production for new products
Multiple channels
Small channel sales force
Provided incentives to retailers via higher margins
Partnerships with key manufacturers for “private label” brands
Large sales force targeted at end users in specific industries
Sophisticated order fulfillment system
Monthly customer index ranking per sales team
Retraining to allow more end-user sales approach
Dedicated technical people per industry sales group
Rapid customer response (<3 hrs)
Multiple channels . phone, internet, etc.
LexExpress overnight exchange if repair cannot be done
Strengths to leverage
Capabilities to build
Relationships of the account teams with end-users
R&D talent
Relationships with suppliers
Production know-how
Relationships inherited from IBM
Brand strength
Better systems to allow an even smoother flow of information
STRATEGIC INITIATIVES
Financial impact from each strategic initiative
Expected financial outlay for each initiative
How much value will be created from each strategic initiative?
Resources required
Availability of resources in the organization
Plan for filling resource gaps
What resources will each strategic initiative require?
What will be the impact of major strategic initiatives?
Key question
Sub-questions
Issues to be considered
Possible strategic initiatives list
What major strategic initiatives are required to successfully implement your selected business model?
Sources of value from each strategic initiative (., EBIT, capital employed)
What are the sources of value created from each strategic initiative?
STRATEGIC INITIATIVES: SOURCES OF VALUE
ILLUSTRATIVE
Initiatives (examples)
1. Capture greater market share
Volume increase
EBIT impact via
Price increase
Cost reduction
Other
Invest-ment
Capital employed impact via
Divest-ment
Capital efficiency*
Other
ü
2. Cost reduction (., effective channel management)
3. Obtain higher prices
4. Create new market demand
5. Form strategic alliances/ partnerships
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
* . improved working capital employment, increased asset utilization, changes to asset ownership
Sub- initiatives
STRATEGIC INITIATIVES: VALUE QUANTIFICATION
ILLUSTRATIVE
Estimate of total ongoing operating income and capital employed impact from successful implementation of strategic initiatives
Operating income ongoing impact 2001-2004
PhP millions
Capital employed ongoing impact 2001-2004
PhP billions
Present operating income
Volume increase
Price increase
Cost reduction benefit
Additional costs
Total ongoing operating income
Present capital employed
Improved capital efficiency
Divestments
Acquisitions
Total ongoing capital employed
one-time operating income impact =
one-time costs =
+
+
+
–
=
–
–
+
=
STRATEGIC INITIATIVES: RESOURCING REQUIREMENTS
Initiatives
Sub-initiatives
People/skills
Resource requirements
Funding
Ex-Com involvement
1. Capture greater market share
2. Cost reduction
3. Achieve higher prices
4. Create new market demand
5. Form strategic alliances/partner-ships
ILLUSTRATIVE
FINANCIAL PROJECTIONS
Key question
Sub-questions
Issues to be considered
Income statement forecast
Cash flow forecast
What are the key assumptions?
What is your projected net income growth in the next few years?
What is your expected cash generation ability over the medium term?
What is your expected capital productivity?
What are the expected financial returns of your strategy?
Balance sheet forecast
ROCE computation
Profit and loss (. revenue, cost, margin)
Balance sheet
Corporate center directives
Corporate center assumptions
FINANCIAL PROJECTIONS (1/4)
ILLUSTRATIVE
Business unit assumptions
Revenues
•
Market size
•
Market share
•
Price
Costs
•
Input costs
•
Production costs
•
Other costs
(
. SG&A)
Margins
•
Gross margin
•
Operating
margin
Capital
•
Planned
investments/
divestments
•
Changes in
working capital
Year 1
KEY FORECAST ASSUMPTIONS
Year 2
Year 3
Growth rate
Corporate center assumptions
Year 1
Year 2
Year 3
Key economic
indicators
•
GDP
growth
•
Consumer
price index
•
Exchange rate
(
PhP
/
USD
)
•
91-day T-bill
rate
Corporate tax
rate
FINANCIAL PROJECTIONS (2/4)
ILLUSTRATIVE
Historical
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expenses
Taxes
Net profit
1999
FORECASTED INCOME STATEMENT
2000
In
PhP
million
Budget
2001
Forecast
2001
2002
2003
2004
CAGR
1999-2004
Growth analysis
Sales (%)
Gross profit (%)
Operating profit (%)
Net profit (%)
Margin analysis
Gross margin (%)
Operating margin (%)
Net margin (%)
*
Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives
on the revenues and costs should be established clearly with additional attachments if required
FINANCIAL PROJECTIONS (3/4)
ILLUSTRATIVE
Operating profit
Depreciation and amortization
Other non-cash operating
expenses
Net operating cash flow
Increase/(decrease) in working
capital
Other operating cash flow
Total operating cash flow
FORECASTED CASH FLOW STATEMENT
Historical
1999
2000
Budget
2001
Forecast
2001
2002
2003
2004
CAGR
1999-2004
*
Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives
on the fixed and working capital investments should be established clearly with additional attachments if required
Capital expenditure
Other investing cash flow items
Total investing cash flow
Increase/(decrease) in debt
Dividends
Other financing cash flow
Total financing cash flow
In
PhP
million
FINANCIAL PROJECTIONS (4/4)
Cash
Accounts receivables
Inventories
Other current assets
Total current assets
Net fixed assets
Other assets
Total assets
Accounts payable
Other current liabilities
Total current liabilities
Short-term loans
Long-term loans
Other interest-bearing obligations
Other liabilities
Total liabilities
Minority interest
Total stockholders’ equity
Capital employed
ROCE
Total liabilities and
stockholders’ equity
ILLUSTRATIVE
FORECASTED BALANCE SHEET
Historical
1999
2000
Budget
2001
Forecast
2001
2002
2003
2004
CAGR
1999-2004
In
PhP
million
Ratio analysis
Working capital turnover
Debt-equity ratio
RISK/CONTINGENCIES AND STRATEGIC ALTERNATIVES
Key question
Sub-questions
Issues to be considered
What are the associated risks to your chosen strategy?
Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chosen strategy?
Beyond the 3-year time frame, what breakthrough strategic options may be possible?
chosen strategy?
What strategic alternatives have you considered?
Identification of significant potential risks and plans to mitigate
Where to compete?
Value proposition
Business model
Alignment with external realities
“Out-of-the-box” ideas
2. New entrants
3. Buyers
4. Substitutes
Intensity of rivalry
1. Suppliers
5. Industry competitors
STRATEGIC ALTERNATIVES
Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chose strategy?
DEFINITION OF RISKS
Definition
Risk of loss due to changes in industry and competitive environment, as well as shifts in customer preferences
Business risk
Risk due to changes in regulatory environment (. deregulation)
Regulatory risk
Risk due to major changes in technology
Technology risk
Risk of failures due to business processes and operations or people’s behavior, either intentional (. fraud) or unintentional (. errors)
Integrity risk
Risk of loss due to changes in the political, social, or economic environments
Macroeconomic risk
Lexmark faced a situation similar to many of our clients today, where technology changes and changes in customer demand were causing massive changes to the structure of their industry.
Also, the capacity in this industry exceeds demand which increases pressure on performance.
This is a useful framework to work through whenever you do a strategy problem at business unit level. It doesn't take long and forces you to think about why the industry is structured that way, why conduct occurs in that manner, and why your client performs as it does.
