CONFIDENTIAL

BU Strategic Plan Basics

Jim Ayala – PHO

Melissa Gil – PHO
Regina Manzano – PHO
Suresh Mustapha – PHO
Steve Shaw – HKO
Shelly Yeh – PHO
Choon-Gin Tan – SIO

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.
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

1
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

2
RATIONALE FOR PROPOSED DEFINITION
5. Considers tradeoffs
3. Gives consideration between benefit
to all elements of provided to customers
the business system and costs they incur
2. Forces choices

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

4. Recognizes
importance
1. Recognize dual 6. Competitive 7. Externally oriented, of cost as
role of creating and customer driven competitive
capturing value in tool
all elements of
business system

3
COMMON ELEMENTS OF REAL-LIFE STRATEGIES McDONALD’S EXAMPLE

Vision • “We want to be the world’s best quick-service restaurant experience”

Strong business
concept • "We will offer identical excellent quality across the world"
consisting of

• Targeting a broad set of the urban population, increasingly offering a

Where?
bundled product (i.e., meals) at a low price in major cities around the world

• Developed high quality standards and excellent operational

How to procedures
compete? • 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
Integrated and ongoing training
set of actions – 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
4
BU STRATEGY REVIEW INTERACTIONS

How robust
are your How do you
contingency expect
How quickly can Competitor A
plans? How sustainable
you shift your to react? is your business
business
model? Can it be
emphasis to
easily duplicated?
capture industry
opportunities?
Highly interactive
debate driven by
fact-based
understanding of
environment and
internal capabilities

BU-CEO

5
BU STRATEGIC PLAN DEVELOPMENT
Environmental and internal assessment Strategic definition and implications

Industry • What are the major • What strategy will your BU

changes in industry Strategy pursue over the next 3 years?
dynamics and
dynamics and resulting articulation
implications
opportunities and risks?

+ +
• What are your competitive • What will be the impact of
Competitive strengths and Strategic major strategic initiatives?
assessment weaknesses? initiatives

+ +

• How does your current • What are the expected

Internal business emphasis fit with Financial financial returns of your
assessment industry opportunity and projections strategy?
competitive landscape?

Risk/contingen- • What strategic alternatives

cies & strategic have you considered?
alternatives

6
INDUSTRY DYNAMICS AND IMPLICATIONS
Key question Sub-questions
What industry are you
competing in? What are the
various segments in the
industry?
How is industry structure
changing with respect to
demand, supply, and industry
chain economics? What are the
resulting opportunities and
risks?
What are the
major changes
in industry
dynamics and
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?
* May or may not be applicable to all BUs
Issues to be considered*
• Industry definition
• Industry segmentation
– Definition
– Sizing
• 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
• 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
7
SEGMENT ANALYSIS ILLUSTRATIVE

Industry segments

Industry
boundaries
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

8
STRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL

Industry Producers

External
shocks S tructure C onduct P erformance

Feedback
• Technology Economics of demand Marketing Finance
breakthroughs • Availability of substitutes • Pricing • Profitability
• Changes in • Differentiability of products • Volume • Value creation
government • Rate of growth • Advertising/promotion Technological progress
policy/regulations • Volatility/cyclicality • New products/R&D Employment objectives
– Domestic Economics of supply • Distribution
– International • Concentration of producers Capacity change
• Import competition • Expansion/contraction
• Diversity of producers • Entry/exit
• Fixed/variable cost structure • Acquisition/merger/ divestiture
• Capacity utilization Vertical integration
• Entry/exit barriers • Forward/backward integration
Industry chain economics • Vertical joint ventures
• Bargaining power of input • Long-term contracts
suppliers Internal efficiency
• Bargaining power of • Cost control
customers • Logistics
• Process R&D
• Organization effectiveness
9
"FORCES AT WORK" FRAMEWORK

1. Determinants of supplier power 2. Determinants of barriers to entry

• Differentiation of inputs • Economies of scale
• Switching costs of suppliers and firms in the • Proprietary product differences
industry • Brand identity
• Presence of substitute inputs • Switching costs
• Supplier concentration • Capital requirements
• Importance of volume to supplier • Access to distribution
• Cost relative to total purchases in the industry 2. New entrants • Absolute cost advantages
• Impact of inputs on cost or differentiation – Proprietary learning curve
• Threat of forward integration relative to threat – Access to necessary inputs
of backward integration by firms in the industry – Proprietary, low-cost product design
5. Industry competitors • Government policy
• Expected retaliation
1. Suppliers
3. Buyers
Intensity of rivalry
3. Determinants of buying power
5. Rivalry determinants • Bargaining leverage
• Industry growth – Buyer concentration vs. firm
• Fixed (or storage) cost/value added concentration
• Intermittent overcapacity 4. Substitutes – Buyer volume
• Product differences – Buyer switching costs relative to firm
• Brand identity switching costs
• Switching costs 4. Determinants of – Buyer information
• Concentration and balance substitution threat – Ability to backward integrate
• Informational complexity • Relative price performance of – Substitute products
• Diversity of competitors substitutes – Pull-through
• Corporate stakes • Switching costs • Price sensitivity
• Exit barriers • Buyer propensity to substitute – Price/total purchases
– Product differences
– Brand Identity
– Impact on quality perception
– Buyer profits
– Decision makers' incentives
10
SWOT ANALYSIS

Opportunities/Threats

• How are demand and

NEUTRALIZE
supply expected to
THREATS
evolve?
• How do you expect the
industry chain
economics to evolve?
• What are the potential
major industry
BUILD ON CONVERT discontinuities?
STRENGTHS YOUR OPPORTUNITIES • What competitor
BU
Strengths/ actions do you expect?
Weaknesses

• What are your BU’s

assets/competencies Surfaces potential
ADDRESS
that solidify your opportunities/threats
WEAK-
competitive position? arising from factors
NESSES
• What are your BU’s external to the BU
assets/competencies
that weaken your
competitive position?

Can be used as a thought

starter for competitive
analysis and internal
assessment
11
SCP APPLIED TO LEXMARK

External
shocks S tructure C onduct P erformance

Feedback
• Rapidly Economics of demand Marketing Finance
changing • Inkjet printers replacing laser in • Manufacturers competing • Price competition on
technology, non-network environment mainly on price printer hardware drives
e.g., birth of • High price sensitivity; minimal • Retail dominant distribution margins down and
portable, opportunity for major product channel forces players to rely on
handheld, differentiation • Aggressive development profits from consumable
wireless • Growth of laser and inkjet printer and release of new products (good
computers markets stable but dependent on products margins) and high
• Rapidly PC sales and degree of • Moves to increase brand volume capture on
changing replacement awareness via marketing hardware
customer Economics of supply campaigns
preferences • HP holds lion’s share of printer • Creative financing
• Possibility of a market packages
paperless • Industry capacity exceeds market Internal efficiency
society given demand • Relentless drive to low cost
increasing • Presence of counterfeit and manufacturing
environmental recycled product supply • Continuous efforts to create
concern and especially in consumables more specialized features
rise of the • High exit barriers due to asset and/or functions
internet intensity Others
Industry chain economics • Entry of PC and peripherals
• Bargaining power of suppliers low players
• Bargaining power of distributors • Clamp down on counterfeit
high and recycled consumables
• Little integration (forward or suppliers
backward)
12
RESULTING OPPORTUNITIES AND RISKS FOR LEXMARK
Opportunities
• 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
NOT EXHAUSTIVE
Risks
• 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
13
COMPETITIVE ASSESSMENT

Key question Sub-questions Issues to be considered

What are the • Privileged assets that create competitive

capabilities advantage, e.g. physical assets,
required to location/”space”, distribution/sales network
succeed in this • Distinctive skills/competencies that create
industry? competitive advantage, e.g. innovation,
talent development
What are your
competitive
strengths and
weaknesses?

How do you • Strengths and weaknesses of your

compare against competitive position vs. necessary
these necessary capabilities
capabilities? • Benchmark performance against the
industry’s relevant key performance
indicators (KPIs), with margin and market
share as the required minimum

* KPIs are a handful of levers that drive the value of the industry/business 14
CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF
COMPETITIVE ADVANTAGE (1/2)
Example

Physical asset • BHP’s low-cost mines

Location/"space" • Telecomm/media company with rights

radio spectrum
Privileged assets
Distribution/sales network • Avon’s representatives

Brand/reputation • Coca-Cola

Patent • Pharmaceutical company with a "wonder

Necessary drug”
capabilities
in order to Relationship with "license" • "Favored nation" status with a key minister in
succeed in allocator liberalizing economy
the industry

Innovation • 3M with new products

Distinctive Cross-functional coordination • McDonald’s with QSC&V

competencies
Market positioning • J&J with branded consumer health products

Cost/efficiency management • Emerson Electric’s Best Cost Producer program

Talent development • P&G brand management program

15
 Extremely relevant
CAPABILITY PLATFORM: ASSESSMENT OF
Somewhat relevant
SOURCES OF COMPETITIVE ADVANTAGE BYILLUSTRATIVE Irrelevant
SEGMENT (2/2)
Segments
BU Overall A B C
Physical asset

Location/"space"
Privileged
assets Distribution/sales network

Brand/reputation
Necessary
Patent
capabilities
in order to
Relationship with "license" allocator
succeed in
the industry
Innovation

Cross-functional coordination
Distinctive
competencies Market positioning

Cost/efficiency management

Talent development

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
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
16
COMPETITOR CAPABILITY COMPARISON ILLUSTRATIVE

Competitors
BU Overall A B C
Physical asset •
•
Location/"space"
Privileged
Distribution/sales network •
assets •
Brand/reputation
Necessary
Patent
capabilities
in order to
Relationship with "license" allocator
succeed in
the industry
Innovation

Cross-functional coordination
Distinctive
competencies Market positioning

Cost/efficiency management

Talent development

Step 3: Compare the strengths and weaknesses of

your competitive position vs. the necessary skills

17
 Extremely relevant
CAPABILITY PLATFORM APPLIED TO LEXMARK Somewhat relevant
Irrelevant

Segments
Laser Inkjet

Privileged Distribution/sales network (Sales network) (Distribution)

assets Brand/reputation (Reputation) (Brand)

Necessary
capabili-
ties in
order to
succeed Innovation
in the Distinctive
Cross-functional coordination
industry competen-
cies Market positioning
Cost/efficiency management

18
COMPETITOR CAPABILITY COMPARISON APPLIED TO LEXMARK

Lexmark HP Epson

Distribution/sales  Formed own account  Well-established

network teams; customer retail distribution/
Privileged relationships inherited dealer network
assets from IBM

Brand/reputation  Known for quality  Best-known  Known for

specialized products brand product
and network software quality
Necessary
capabilities
in order to
succeed in
the industry
Innovation  Quick to market with
new technologies

Cross-functional  Awarded leader  Leader in

Distinctive coordination in implementa- print quality
competencies tion of
necessary
product features
Market positioning  Cross-functional
coordination delivers
superior product design
and customer service

Cost/efficiency  Ownership of technology

management allows low-cost, in-house
manufacture of critical
components
19
BENCHMARK PERFORMANCE AGAINST RELEVANT INDUSTRY KPIs

KPIs (examples) BU Competitor A Competitor B Competitor C

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

20
BENCHMARKING APPLIED TO LEXMARK Strong
Medium
Weak

KPIs Lexmark HP Epson

Financial indicators
• Operating income $457 million $1,573 million* $583 million*
• Margins 12% 9%* 6%*
• ROCE 29% 11%* N/A*

Operating indicators
• Distribution reach
• Cycle time

Strategic indicators
• Market share 12% 47% 17%
• Brand awareness

* Includes other information equipment (e.g. scanners, projectors)

21
INTERNAL ASSESSMENT

Key question Sub-questions Issues to be considered

• Relevant BU segments (based on customer,

Which segments of the product, geography, distribution channel)
business are providing • Operating contribution estimates for each
the highest returns?* segment

How does your

current business
emphasis fit with
the industry
opportunities and
the competitive
landscape?
What have been the
performance trends
along major BU KPIs?
• KPI performance trends over the last 3-5 years,
e.g. return on capital employed (ROCE)**,
operating income, margins, capital employed
• Assessment of underlying trend drivers
• Expected evolution

• Identification of in-house intellectual property,

Which intangible talent, networks, brand/image
assets could be near- • Conversion into sources of value
term 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
22
SEGMENT ANALYSIS
Segment 1 Segment 2 Segment 3 Segment 4 Total
% of % of % of % of % of
PhP total PhP total PhP total PhP total PhP total Step 1: Identify the
relevant segments
Revenue

Gross profit
Step 2: Provide a
segment analysis
Operating based on the
profit following minimum
Assets
financial metrics:
employed revenue, gross
profit and margin,
People operating profit and
employed
margin

Segment 1 Segment 2 Segment 3 Segment 4 Total Step 3: To the

extent assets and
% % % % % people can be
Operating disaggregated by
profit margin segment,
Gross profit
deployment of
margin assets against
returns can be
ROCE analyzed
23
SEGMENT ANALYSIS APPLIED TO LEXMARK

Product Geography
Percent 100%=
Percent of total revenues, 1995
$3807 m

100%=
100%= $3452 m 9
100% = USD 3,807 million
$2494 m
100%=
$3021 m 14 Rest of world
Keyboards 11
and other 14
23
7

Other 28
office
imaging 41 35
Europe 34
100%=
$1164 m
59
US
100%= 1
100%= 100%=
$895 m
$1024 m $1031 m 68 32
Printers and 6 0
8
suppliers 48 51 40
48 46
58 67
46 46 60

Rev Gross Rev Gross Rev Gross Rev Gross

profit profit profit profit

1992 1993 1994 1995

24
TREND ANALYSIS – RETURN ON CAPITAL ILLUSTRATIVE
EMPLOYED (ROCE) Market share
Percent
15
10
Revenue 5
Operating income x (1
PhP million 0
- tax rate)
1,500 '96 '97 '98 '99 '00
PhP million
1,000
60 500
x
40 0 Industry sales
ROCE 20 '96 '97 '98 '99 '00
0
PhP million
Percent x 15,000
'96 '97 '98 '99 '00
20 10,000
Operating margin 5,000
10
Percent 0
0 16 '96 '97 '98 '99 '00
'96 '97 '98 '99 '00
14
÷
12
'96 '97 '98 '99 '00

x
(1 - tax rate)
Percent
34
33
32
31
'96 '97 '98 '99 '00

Capital employed
PhP million
600
The ROCE tree can be
400
200
disaggregated to show the
0 other relevant KPIs of a BU
'96 '97 '98 '99 '00

25
TREND ANALYSIS – CASH NOT EXHAUSTIVE

Net income
Operating cash flow PhP million
1,500
PhP million
1,000
60
500
40
0
20
0 '96 '97 '98 '99 '00
'96 '97 '98 '99 '00 +
Non-cash expenses
PhP million
Cash flow generated 60
PhP million + 40
600 20
400 0
200 '96 '97 '98 '99 '00
0
'96 '97 '98 '99 '00 +
Change in working capital
Investing cash flow PhP million
PhP million 34
60
33
40
32
20
31
0
'96 '97 '98 '99 '00
'96 '97 '98 '99 '00

Financing cash flow The cash flow tree can be

PhP million
60 disaggregated to show the
40
20
other relevant KPIs of a BU
0
'96 '97 '98 '99 '00

26
TREND ANALYSIS APPLIED TO LEXMARK NOT EXHAUSTIVE

Revenue Market share

USD M Percent
4,000 15 12
3,000 10 9
10 8
2,000
1,000 5
0 0
'92 '93 '94 '95 '92 '93 '94 '95
x x
Operating income x
Operating margin Industry sales
(1 - tax rate)
Percent USD M
USD M 15 13 14
400 11 12
10 50,000
300 40,000
200 5 30,000
100 20,000
0 10,000
0 0
'92 '93 '94 '95
ROCE '92 '93 '94 '95 '92 '93 '94 '95
Percent x
40
÷
30 34
30 27 29 (1 - tax rate)
20 Percent
71
10
0
Capital employed 70
'92 '93 '94 '95
USD M
1,500 69
1,000 '92 '93 '94 '95
500
0
'92 '93 '94 '95
27
INTANGIBLE ASSET CHECKLIST
Intangible assets Ways to extract near-term value

Intellectual property
• Patents generating licensing fees • •
• Understanding of customer behavior • •
• Risk management
• Software
•

Talent
• Highly motivated and competent workforce • •
leveraging specific skill sets to • •
– Generate growth
– Improve/increase company intangibles
•

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
•
28
INTANGIBLE ASSET ASSESSMENT APPLIED TO LEXMARK
NOT EXHAUSTIVE

Intangible assets Ways to extract near-term value

Intellectual • Technology for • Customize to suit industry segments

property products currently not served
• Networking • Develop related products that may use
software networking software in-house or via
partnership

Talent • Sales force • Develop the best product to suit

engineers identified customer needs

• Relationship with • Good working relationship allows better

Network suppliers capture of production efficiencies that
improve product cycle time and cost
efficiency

29
STRATEGY ARTICULATION
Key question Sub-questions Issues to be considered

• Where are you going to compete along these dimensions and

why:
Where to compete?
– Target market
– Distribution channels
– Product (breadth and depth)
– Geographic scope

• Target customer definition

What is your customer
• Benefits that you will offer the customers
value proposition for the
• Product pricing
different segments you
• Position against competition vis-à-vis the benefits provided
are going to serve?
What strategy and the price charged
will your BU
pursue over the
next 3 years? • Delivery and communication of customer value proposition
What is your (value delivery system)
business model? • Competitive advantage in delivering these benefits to the
customer

How does your chosen • Industry attractiveness and implication review

strategy exploit the • Alignment of chosen strategy and environmental realities
industry opportunities
and address the
industry/competitive
threats?
30
WHERE TO COMPETE?
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?

Customers

Geographical scope of
business activities How does the entity
• Geographic limits to reach its target
the business? Geographic customers
Channels
• Local, regional, markets • Which distribution
multi-local, national, channels will you use?
international, or • What customer
global player? segments can they
• If local, which Products reach?
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?
31
WHERE TO COMPETE? LEXMARK EXAMPLE

• 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

Customers
• Used broadest range of
channels for customer
freedom
• Staged expansion: –Traditional retail
national, then Geographic channels (i.e., dealer
Channels
international markets network, value-added
resellers, about 5,000
retail outlets)
–Own account marketing
Products teams to sell direct to
customers
• Laser printers
• Color inkjet printers
• Associated consumable supplies
• MarkVision complete printer
management system
32
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?

33
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”.

34
TAILOR VALUE PROPOSITION TO VARIOUS CUSTOMER
SEGMENTS LEXMARK EXAMPLE

Why choose
Segment Price Benefits Lexmark?

Banking Slight • Flash memory allowing instantaneous

premium printing and updating of forms in multiple
locations
• Duplex printing – ability to print on both
sides of paper • Targeted to
• Paper trays to handle three or more segment needs
sizes of paper and forms • High quality
• Technical service support to help with • Technologically
systems design and product problems advanced
• Competitive price
Pharmacy Slight • Ability to print prescription labels without
premium jamming (due to spacing of rollers)
• Technical service support to help with
system design and product problems

35
BUSINESS MODEL
Value proposition Value delivery system (VDS)

Choose the value Provide the value Communicate the value

Understand Define Design Procure,

Select Distri- Sales Adver- Promo-
value benefits/ product/ manu- Service Price
target bute message tising tional/PR
desires price process facture

Segmentation Value Business model:

proposition
• Integrated set of actions to provide and communicate
the value proposition to customers

Each BU must address these 2 issues to define their

business model

1 Illustration of how the value proposition will be provided

and communicated

2 Identification of existing strengths that can be leveraged

and required capabilities that need to be built to be
distinctive in chosen value delivery system

36
LEXMARK LINKED VALUE PROPOSITION TO
CHANGES IN BUSINESS SYSTEM
Provide the Value Communicate the Value
Product
Manu- Marketing After-Sale
Design Procurement Distribution
facturing & Sales Service
Process
• Highly- • In-house • Kept high • Multiple • Large sales • Dedicated
customized control of value added channels force targeted technical people
to customer critical processes • Small channel at end users in per industry
segments technologies in-house sales force specific sales group
• 12 month • Outsourced • Improved • Provided industries • Rapid customer
design cycle only non- flexibility and incentives to • Sophisticated response
• Fully cross- critical reduced retailers via order fulfillment (<3 hrs)
functional components product cycle higher system • Multiple
• Limited to • Utilized time margins • Monthly channels e.g.
specific preferred • Minimized • Partnerships customer index phone, internet,
target suppliers changes in with key ranking per etc.
segments production for manufacturers sales team • LexExpress
new products for “private • Retraining to overnight
label” brands allow more exchange if
end-user sales repair cannot be
approach done

Strengths • Relationships of • Relationships • Production • Relationships

to leverage the account teams with suppliers know-how inherited from
with end-users IBM
• R&D talent

Capabilities • Better systems to • Brand strength

to build allow an even
smoother flow of
information
37
STRATEGIC INITIATIVES

Key question Sub-questions Issues to be considered

What major strategic • Possible strategic initiatives list

initiatives are required to
successfully implement
your selected business
model?

What are the sources • Sources of value from each strategic

of value created from initiative (e.g., EBIT, capital employed)
each strategic
What will be the initiative?
impact of major
strategic
initiatives? How much value will • Financial impact from each strategic
be created from initiative
each strategic • Expected financial outlay for each initiative
initiative?

What resources will • Resources required

each strategic • Availability of resources in the organization
initiative require? • Plan for filling resource gaps

38
STRATEGIC INITIATIVES: SOURCES OF VALUE ILLUSTRATIVE

EBIT impact via Capital employed impact via

Initiatives Sub- Volume Price Cost Invest- Divest- Capital
(examples) initiatives increase increase reduction Other ment ment efficiency* Other

1. Capture
greater market
•  
•
share

2. Cost reduction
(e.g., effective •  
channel •
management)
•
3. Obtain higher
prices • 

4. Create new
market
•   
•
demand

5. Form strategic
alliances/ •    
partnerships •

* E.g. improved working capital employment, increased asset utilization, changes to asset ownership
39
STRATEGIC INITIATIVES: VALUE QUANTIFICATION ILLUSTRATIVE

Estimate of total
ongoing operating income and
capital employed impact from
Operating income ongoing impact 2001-2004
successful implementation of
PhP millions
strategic initiatives
+ + + – =

one-time operating
income impact =

one-time costs =
Present Volume Price Cost Additional Total ongoing
operating increase increase reduction costs operating
income benefit income

Capital employed ongoing impact 2001-2004

PhP billions
– – + =

Present capital Improved capital Divestments Acquisitions Total ongoing

employed efficiency capital employed

40
STRATEGIC INITIATIVES: RESOURCING REQUIREMENTS
ILLUSTRATIVE

Resource requirements
Initiatives Sub-initiatives People/skills 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 •

41
FINANCIAL PROJECTIONS

Key question Sub-questions Issues to be considered

• Profit and loss (e.g. revenue, cost, margin)

• Balance sheet
What are the key
• Corporate center directives
assumptions?
• Corporate center assumptions

What is your • Income statement forecast

projected net income
growth in the next few
What are the
years?
expected financial
returns of your
strategy? What is your expected • Cash flow forecast
cash generation
ability over the
medium term?

• Balance sheet forecast

What is your expected • ROCE computation
capital productivity?

42
FINANCIAL PROJECTIONS (1/4)

KEY FORECAST ASSUMPTIONS ILLUSTRATIVE

Business unit assumptions Corporate center assumptions

Year 1 Year 2 Year 3 Growth rate Year 1 Year 2 Year 3

Revenues Key economic

• Market size indicators
• Market share • GDP growth
• Price • Consumer
price index
Costs • Exchange rate
• Input costs (PhP/USD)
• Production costs • 91-day T-bill
• Other costs rate
(e.g. SG&A)
Corporate tax
Margins rate
• Gross margin
• Operating
margin

Capital
• Planned
investments/
divestments
• Changes in
working capital

43
FINANCIAL PROJECTIONS (2/4)

FORECASTED INCOME STATEMENT ILLUSTRATIVE

In PhP million

Historical Budget Forecast

CAGR
1999 2000 2001 2001 2002 2003 2004 1999-2004

Sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expenses
Taxes
Net profit

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

44
FINANCIAL PROJECTIONS (3/4)

FORECASTED CASH FLOW STATEMENT ILLUSTRATIVE

In PhP million
Historical Budget Forecast
CAGR
1999 2000 2001 2001 2002 2003 2004 1999-2004

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

Capital expenditure
Other investing cash flow items
Total investing cash flow

Increase/(decrease) in debt
Dividends
Other financing cash flow
Total financing cash flow

* 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

45
FINANCIAL PROJECTIONS (4/4)

FORECASTED BALANCE SHEET ILLUSTRATIVE

In PhP million
Historical Budget Forecast
CAGR
1999 2000 2001 2001 2002 2003 2004 1999-2004

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

Total liabilities and

stockholders’ equity

Ratio analysis
Working capital turnover
Debt-equity ratio

Capital employed
ROCE

46
RISK/CONTINGENCIES AND STRATEGIC ALTERNATIVES

Key question Sub-questions Issues to be considered

• Identification of significant potential risks

What are the and plans to mitigate
associated risks to
your chosen
strategy?

Re-examining • Where to compete?

What strategic industry opportunities • Value proposition
alternatives have and • Business model
you considered? industry/competitive • Alignment with external realities
threats, what
alternatives exist to
your chosen strategy?

Beyond the 3-year • “Out-of-the-box” ideas

time frame, what
breakthrough
strategic options may
be possible?
chosen strategy?

47
STRATEGIC ALTERNATIVES

Re-examining industry
opportunities and
industry/competitive
threats, what
alternatives exist to
your chose strategy?

2. New entrants

5. Industry competitors

1. Suppliers
3. Buyers
Intensity of rivalry

4. Substitutes

48
DEFINITION OF RISKS

Definition

• Risk of loss due to changes in industry and competitive

Business risk environment, as well as shifts in customer preferences

• Risk due to changes in regulatory environment (e.g.

Regulatory risk deregulation)

• Risk due to major changes in technology

Technology risk

• Risk of failures due to business processes and operations or

Integrity risk people’s behavior, either intentional (e.g. fraud) or
unintentional (e.g. errors)

• Risk of loss due to changes in the political, social, or

Macroeconomic risk economic environments

49