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CONFIDENTIAL,BUStrategicPlanBasics,Trainingmaterials8June2001,Thisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinseyitisnotacompleterecordofthediscussion.,JimAyalaPHOMelissaGilPHOReginaManzanoPHOSureshMustaphaPHOSteveShawHKOShellyYehPHOChoon-GinTanSIO,1,DESCRIPTIONOFMATERIALS,ThisdocumentwasdevelopedasatrainingpresentationforthenewlyappointedBusinessUnitCEOsofanAsianFamily-ownedconglomerate.ThepurposeofthisdocumentistoguidenewCEOsthroughthebasicelementsofdevelopingaBU-levelstrategicplan.Thispresentationiscomplementedbyacompaniondocumentthe“BUStrategicPlanTemplateBook”whichprovidescompletenessandconsistencyofBUstrategicplansubmissions.ThesetemplatesarenotintendedtoreplaceorconstrainBUstrategicthinkingandshouldbeadaptedtoreflectaparticularBUssectoralcontextasrequired,2,WHATISABUSTRATEGY?,Astrongbusinessconceptthatdrivesanintegratedsetofactionsthatcreatesvalueby:Creatingproducts/serviceswhosevalueexceedsthecostofprovidingthemCapturingvaluefromcompetitors,customers,distributors,suppliers,andproducersofsubstituteproductsandservices,3,RATIONALEFORPROPOSEDDEFINITION,Astrongbusinessconceptthatdrivesanintegratedsetofactionsthatcreatesvalueby:Creatingproducts/serviceswhosevalueexceedsthecostofprovidingthemCapturingvaluefromcompetitors,customers,distributors,suppliers,andproducersofsubstituteproductsandservices,4,COMMONELEMENTSOFREAL-LIFESTRATEGIES,Vision,Where?,Strongbusinessconceptconsistingof,Howtocompete?,DevelopedhighqualitystandardsandexcellentoperationalproceduresFocusondevelopingcriticalmassofstoresandestablishingmarketdominance,McDonaldsexperiencedphenomenalsuccessinglobalizationdueto:SuccessfullyscreeningfranchiseesandadedicationtointenseinitialandongoingtrainingConsistentdeliveryofhigh-qualityfoodandservicearoundtheworldHugeeconomiesofscaleandpowerfulsupplierleverageCapitalizedon“American”appealofMcDonaldsSuccessintailoringassortmentmixtomeetlocalneeds,“Wewanttobetheworldsbestquick-servicerestaurantexperience”,Wewillofferidenticalexcellentqualityacrosstheworld,Targetingabroadsetoftheurbanpopulation,increasinglyofferingabundledproduct(i.e.,meals)atalowpriceinmajorcitiesaroundtheworld,McDONALDSEXAMPLE,5,BUSTRATEGYREVIEWINTERACTIONS,Highlyinteractivedebatedrivenbyfact-basedunderstandingofenvironmentandinternalcapabilities,HowdoyouexpectCompetitorAtoreact?,Howsustainableisyourbusinessmodel?Canitbeeasilyduplicated?,Howrobustareyourcontingencyplans?,Howquicklycanyoushiftyourbusinessemphasistocaptureindustryopportunities?,BU-CEO,6,BUSTRATEGICPLANDEVELOPMENT,Industrydynamicsandimplications,Environmentalandinternalassessment,Competitiveassessment,Internalassessment,Whatarethemajorchangesinindustrydynamicsandresultingopportunitiesandrisks?,Whatareyourcompetitivestrengthsandweaknesses?,Howdoesyourcurrentbusinessemphasisfitwithindustryopportunityandcompetitivelandscape?,Strategyarticulation,Strategicdefinitionandimplications,Strategicinitiatives,Financialprojections,WhatstrategywillyourBUpursueoverthenext3years?,Whatwillbetheimpactofmajorstrategicinitiatives?,Whataretheexpectedfinancialreturnsofyourstrategy?,+,+,+,+,Risk/contingen-ciesminimalopportunityformajorproductdifferentiationGrowthoflaserandinkjetprintermarketsstablebutdependentonPCsalesanddegreeofreplacementEconomicsofsupplyHPholdslionsshareofprintermarketIndustrycapacityexceedsmarketdemandPresenceofcounterfeitandrecycledproductsupplyespeciallyinconsumablesHighexitbarriersduetoassetintensityIndustrychaineconomicsBargainingpowerofsupplierslowBargainingpowerofdistributorshighLittleintegration(forwardorbackward),MarketingManufacturerscompetingmainlyonpriceRetaildominantdistributionchannelAggressivedevelopmentandreleaseofnewproductsMovestoincreasebrandawarenessviamarketingcampaignsCreativefinancingpackagesInternalefficiencyRelentlessdrivetolowcostmanufacturingContinuouseffortstocreatemorespecializedfeaturesand/orfunctionsOthersEntryofPCandperipheralsplayersClampdownoncounterfeitandrecycledconsumablessuppliers,FinancePricecompetitiononprinterhardwaredrivesmarginsdownandforcesplayerstorelyonprofitsfromconsumableproducts(goodmargins)andhighvolumecaptureonhardware,S,Externalshocks,Feedback,tructure,C,onduct,P,erformance,13,RESULTINGOPPORTUNITIESANDRISKSFORLEXMARK,Opportunities,Risks,Becomethefirstmoverinprintersforportable,handheld,wirelesscomputermarketGrowdemandbaseviauseofcreative,non-traditionalchannelsandalternativefinancing/paymentmethodsGrowdemandforconsumablesviaprogramstoincreaseprintingusageBethesupplierofprintersforPC/peripheralplayershopingtotheexpandintoprintermarketExpandleadershipincorporateinstitutionalaccounts,IncreasingdemandforcustomizationmayincreasecostsanderodemarginsAnydeclineinPCsalesmaysignificantlybringdownrevenuesMarketsharemaybeerodedascompetitionintensifiesBranding/marketingpushfromestablishedplayersPricingpushfromlow-costmanufacturersMarginsatriskifprintingusagedeclineswithpushforpaperlesssociety,NOTEXHAUSTIVE,14,COMPETITIVEASSESSMENT,Privilegedassetsthatcreatecompetitiveadvantage,e.g.physicalassets,location/”space”,distribution/salesnetworkDistinctiveskills/competenciesthatcreatecompetitiveadvantage,e.g.innovation,talentdevelopment,Whatareyourcompetitivestrengthsandweaknesses?,Whatarethecapabilitiesrequiredtosucceedinthisindustry?,Howdoyoucompareagainstthesenecessarycapabilities?,Strengthsandweaknessesofyourcompetitivepositionvs.necessarycapabilitiesBenchmarkperformanceagainsttheindustrysrelevantkeyperformanceindicators(KPIs),withmarginandmarketshareastherequiredminimum,Keyquestion,Sub-questions,Issuestobeconsidered,*KPIsareahandfulofleversthatdrivethevalueoftheindustry/business,15,CAPABILITYPLATFORM:ASSESSMENTOFSOURCESOFCOMPETITIVEADVANTAGE(1/2),PhysicalassetLocation/spaceDistribution/salesnetworkBrand/reputationPatentRelationshipwithlicenseallocator,BHPslow-costminesTelecomm/mediacompanywithrightsradiospectrumAvonsrepresentativesCoca-ColaPharmaceuticalcompanywithawonderdrug”Favorednationstatuswithakeyministerinliberalizingeconomy,InnovationCross-functionalcoordinationMarketpositioningCost/efficiencymanagementTalentdevelopment,3MwithnewproductsMcDonaldswithQSCcustomerrelationshipsinheritedfromIBM,Well-establishedretaildistribution/dealernetwork,Knownforqualityspecializedproductsandnetworksoftware,Best-knownbrand,Knownforproductquality,Quicktomarketwithnewtechnologies,Awardedleaderinimplementa-tionofnecessaryproductfeatures,Leaderinprintquality,Cross-functionalcoordinationdeliverssuperiorproductdesignandcustomerservice,Marketpositioning,Cross-functionalcoordination,Ownershipoftechnologyallowslow-cost,in-housemanufactureofcriticalcomponents,20,BENCHMARKPERFORMANCEAGAINSTRELEVANTINDUSTRYKPIs,KPIs(examples),FinancialindicatorsMarginNetincomeROCEOperatingindicatorsAdvertisingeffectivenessUtilizationrateStrategicindicatorsMarketsharePercentofrevenuefromnewproductsWorkingcapitaltrendExternalindicatorsMarketpricesofrawmaterials,BU,CompetitorA,CompetitorB,CompetitorC,21,KPIs,FinancialindicatorsOperatingincomeMarginsROCEOperatingindicatorsDistributionreachCycletimeStrategicindicatorsMarketshareBrandawareness,Lexmark,HP,Epson,BENCHMARKINGAPPLIEDTOLEXMARK,StrongMediumWeak,*Includesotherinformationequipment(e.g.scanners,projectors),$457million12%29%,$1,573million*9%*11%*,$583million*6%*N/A*,12%,47%,17%,22,INTERNALASSESSMENT,RelevantBUsegments(basedoncustomer,product,geography,distributionchannel)Operatingcontributionestimatesforeachsegment,Howdoesyourcurrentbusinessemphasisfitwiththeindustryopportunitiesandthecompetitivelandscape?,Whichsegmentsofthebusinessareprovidingthehighestreturns?*,WhathavebeentheperformancetrendsalongmajorBUKPIs?,KPIperformancetrendsoverthelast3-5years,e.g.returnoncapitalemployed(ROCE)*,operatingincome,margins,capitalemployedAssessmentofunderlyingtrenddriversExpectedevolution,Keyquestion,Sub-questions,Issuestobeconsidered,Whichintangibleassetscouldbenear-termsourcesofvalue?,Identificationofin-houseintellectualproperty,talent,networks,brand/imageConversionintosourcesofvalue,*Basedonlatestavailable,1-2yearhistoricalfinancialstatements*ROCE=Operatingincomex(1-taxrate)Allinterestbearingdebt(shortandlong)+minorityinterest+stockholdersequity,23,SEGMENTANALYSIS,RevenueGrossprofitOperatingprofitAssetsemployedPeopleemployed,OperatingprofitmarginGrossprofitmarginROCE,Step1:IdentifytherelevantsegmentsStep2:Provideasegmentanalysisbasedonthefollowingminimumfinancialmetrics:revenue,grossprofitandmargin,operatingprofitandmarginStep3:Totheextentassetsandpeoplecanbedisaggregatedbysegment,deploymentofassetsagainstreturnscanbeanalyzed,%,PhP,%oftotal,Segment1,PhP,%oftotal,Segment2,PhP,%oftotal,Segment3,PhP,%oftotal,Segment4,PhP,%oftotal,Total,%,%,%,%,Segment1,Segment2,Segment3,Segment4,Total,24,SEGMENTANALYSISAPPLIEDTOLEXMARK,Printersandsuppliers,Otherofficeimaging,Keyboardsandother,Restofworld,Europe,US,ProductPercent,GeographyPercentoftotalrevenues,1995,100%=USD3,807million,25,TRENDANALYSISRETURNONCAPITALEMPLOYED(ROCE),TheROCEtreecanbedisaggregatedtoshowtheotherrelevantKPIsofaBU,ROCEPercent,Operatingincomex(1-taxrate)PhPmillion,CapitalemployedPhPmillion,RevenuePhPmillion,OperatingmarginPercent,x,(1-taxrate)Percent,x,MarketsharePercent,IndustrysalesPhPmillion,x,ILLUSTRATIVE,26,TRENDANALYSISCASH,ThecashflowtreecanbedisaggregatedtoshowtheotherrelevantKPIsofaBU,CashflowgeneratedPhPmillion,OperatingcashflowPhPmillion,InvestingcashflowPhPmillion,+,NetincomePhPmillion,Non-cashexpensesPhPmillion,+,ChangeinworkingcapitalPhPmillion,+,FinancingcashflowPhPmillion,+,NOTEXHAUSTIVE,27,TRENDANALYSISAPPLIEDTOLEXMARK,ROCEPercent,Operatingincomex(1-taxrate)USDM,CapitalemployedUSDM,RevenueUSDM,OperatingmarginPercent,x,(1-taxrate)Percent,x,MarketsharePercent,IndustrysalesUSDM,x,NOTEXHAUSTIVE,28,INTANGIBLEASSETCHECKLIST,Intangibleassets,Waystoextractnear-termvalue,TalentHighlymotivatedandcompetentworkforceleveragingspecificskillsetstoGenerategrowthImprove/increasecompanyintangibles,IntellectualpropertyPatentsgeneratinglicensingfeesUnderstandingofcustomerbehaviorRiskmanagementSoftware,NetworkInterconnectedwebsofpartiesNon-exclusiveAdditionalmemberlowerscosts,increasesbenefits,Brand/imageInherentimageorbrandbuiltuponexcellentserviceandproductofferingsLowersearchcostsforcustomers,29,TechnologyforproductsNetworkingsoftware,INTANGIBLEASSETASSESSMENTAPPLIEDTOLEXMARK,Intangibleassets,Waystoextractnear-termvalue,CustomizetosuitindustrysegmentscurrentlynotservedDeveloprelatedproductsthatmayusenetworkingsoftwarein-houseorviapartnership,Salesforceengineers,Developthebestproducttosuitidentifiedcustomerneeds,Talent,Relationshipwithsuppliers,Goodworkingrelationshipallowsbettercaptureofproductionefficienciesthatimproveproductcycletimeandcostefficiency,Network,Intellectualproperty,NOTEXHAUSTIVE,30,STRATEGYARTICULATION,Whereareyougoingtocompetealongthesedimensionsandwhy:TargetmarketDistributionchannelsProduct(breadthanddepth)Geographicscope,TargetcustomerdefinitionBenefitsthatyouwillofferthecustomersProductpricingPositionagainstcompetitionvis-visthebenefitsprovidedandthepricecharged,Deliveryandcommunicationofcustomervalueproposition(valuedeliverysystem)Competitiveadvantageindeliveringthesebenefitstothecustomer,Wheretocompete?,Whatisyourcustomervaluepropositionforthedifferentsegmentsyouaregoingtoserve?,Whatisyourbusinessmodel?,WhatstrategywillyourBUpursueoverthenext3years?,Keyquestion,Sub-questions,Issuestobeconsidered,IndustryattractivenessandimplicationreviewAlignmentofchosenstrategyandenvironmentalrealities,Howdoesyourchosenstrategyexploittheindustryopportunitiesandaddresstheindustry/competitivethreats?,31,WHERETOCOMPETE?,Customers,Channels,Products,Geographicmarkets,TargetcustomersandsegmentsWhichcustomersareyoutryingtotargetorattract?Whichareyouwillingtoserve,butwillnotspendresourcestoattract?Whichwouldyouprefernottoserve?,HowdoestheentityreachitstargetcustomersWhichdistributionchannelswillyouuse?Whatcustomersegmentscantheyreach?,GeographicalscopeofbusinessactivitiesGeographiclimitstothebusiness?Local,regional,multi-local,national,international,orglobalplayer?Iflocal,whichlocalities?,QualityandbreadthoftheproductlineBreadthoftheproductline?Qualityoftheproductline?Productbundlesoraseriesofunrelatedproducts?,32,WHERETOCOMPETE?,LEXMARKEXAMPLE,Stagedexpansion:national,theninternational,Fortune1000companiesinbanking,insurance,retail/pharmacyindustriesforlaserprintersHaveuniquenetworkprintingneedsLargeprinterusersValue(notprice)orientedsegmentsConsumermassmarketforinkjetprinters,UsedbroadestrangeofchannelsforcustomerfreedomTraditionalretailchannels(i.e.,dealernetwork,value-addedresellers,about5,000retailoutlets)Ownaccountmarketingteamstoselldirecttocustomers,LaserprintersColorinkjetprintersAssociatedconsumablesuppliesMarkVisioncompleteprintermanagementsystem,Customers,Channels,Products,Geographicmarkets,33,VALUEPROPOSITION,AcompanysspecificpromisetoitstargetcustomersofthebenefitsitwillprovideatanexplicitpriceItanswerthefollowingquestions:Whoisyourtargetcustomer?Whataretheexplicitbenefitsyouprovidetoyourcustomer?Whatperceivedvaluedoyouprovidetothecustomerbetterthancompetition?Howmuchvaluedoyourcustomersattachtothebenefitsyouprovide?,34,“Wewillservethefast-growingsegmentsofthenetworkprintermarketwithhighquality,technologically-advancedproductstargetedtocustomerneedsatamoderatelyhigherpricethanundifferentiatedlaserprinters”.,LEXMARKSVALUEPROPOSITIONFORLASERPRINTERS,35,FlashmemoryallowinginstantaneousprintingandupdatingofformsinmultiplelocationsDuplexprintingabilitytoprintonbothsidesofpaperPapertraystohandlethreeormoresizesofpaperandformsTechnicalservicesupporttohelpwithsystemsdesignandproductproblems,TargetedtosegmentneedsHighqualityTechnologicallyadvancedCompetitiveprice,Slightpremium,Banking,Price,Benefits,WhychooseLexmark?,Slightpremium,Pharmacy,TAILORVALUEPROPOSITIONTOVARIOUSCUSTOMERSEGMENTS,Abilitytoprintprescriptionlabelswithoutjamming(duetospacingofrollers)Technicalservicesupporttohelpwithsystemdesignandproductproblems,LEXMARKEXAMPLE,Segment,36,BUSINESSMODEL,Understandvaluedesires,Selecttarget,Choosethevalue,Valueproposition,Designproduct/process,Procure,manu-facture,Distri-bute,Providethevalue,Service,Price,Definebenefits/price,Salesmessage,Communicatethevalue,Businessmodel:Integratedsetofactionstoprovideandcommunicatethevaluepropositiontocustomers,Segmentation,Valueproposition,Adver-tising,Promo-tional/PR,Valuedeliverysystem(VDS),EachBUmustaddressthese2issuestodefinetheirbusinessmodelIllustrationofhowthevaluepropositionwillbeprovidedandcommunicatedIdentificationofexistingstrengthsthatcanbeleveragedandrequiredcapabilitiesthatneedtobebuilttobedistinctiveinchosenvaluedeliverysystem,1,2,37,LEXMARKLINKEDVALUEPROPOSITIONTOCHANGESINBUSINESSSYSTEM,ProductDesignProcess,Procurement,Manu-facturing,Distribution,Marketing&Sales,After-SaleService,ProvidetheValue,CommunicatetheValue,Highly-customizedtocustomersegments12monthdesigncycleFullycross-functionalLimitedtospecifictargetsegments,In-housecontrolofcriticaltechnologiesOutsourcedonlynon-criticalcomponentsUtilizedpreferredsuppliers,Kepthighvalueaddedprocessesin-houseImprovedflexibilityandreducedproductcycletimeMinimizedchangesinproductionfornewproducts,MultiplechannelsSmallchannelsalesforceProvidedincentivestoretailersviahighermarginsPartnershipswithkeymanufacturersfor“privatelabel”brands,LargesalesforcetargetedatendusersinspecificindustriesSophisticatedorderfulfillmentsystemMonthlycustomerindexrankingpersalesteamRetrainingtoallowmoreend-usersalesapproach,DedicatedtechnicalpeopleperindustrysalesgroupRapidcustomerresponse(3hrs)Multiplechannelse.g.phone,internet,etc.LexExpressovernightexchangeifrepaircannotbedone,Strengthstoleverage,Capabilitiestobuild,Relationshipsoftheaccountteamswithend-usersR&Dtalent,Relationshipswithsuppliers,Productionknow-how,RelationshipsinheritedfromIBM,Brandstrength,Bettersystemstoallowanevensmootherflowofinformation,38,STRATEGICINITIATIVES,FinancialimpactfromeachstrategicinitiativeExpectedfinancialoutlayforeachinitiative,Howmuchvaluewillbecreatedfromeachstrategicinitiative?,ResourcesrequiredAvailabilityofresourcesintheorganizationPlanforfillingresourcegaps,Whatresourceswilleachstrategicinitiativerequire?,Whatwillbetheimpactofmajorstrategicinitiatives?,Keyquestion,Sub-questions,Issuestobeconsidered,Possiblestrategicinitiativeslist,Whatmajorstrategicinitiativesarerequiredtosuccessfullyimplementyourselectedbusinessmodel?,Sourcesofvaluefromeachstrategicinitiative(e.g.,EBIT,capitalemployed),Whatarethesourcesofvaluecreatedfromeachstrategicinitiative?,39,STRATEGICINITIATIVES:SOURCESOFVALUE,ILLUSTRATIVE,Initiatives(examples),1.Capturegreatermarketshare,Volumeincrease,EBITimpactvia,Priceincrease,Costreduction,Other,Invest-ment,Capitalemployedimpactvia,Divest-ment,Capitalefficiency*,Other,2.Costreduction(e.g.,effectivechannelmanagement),3.Obtainhigherprices,4.Createnewmarketdemand,5.Formstrategicalliances/partnerships,*E.g.improvedworkingcapitalemployment,increasedassetutilization,changestoassetownership,Sub-initiatives,40,STRATEGICINITIATIVES:VALUEQUANTIFICATION,ILLUSTRATIVE,Estimateoftotalongoingoperatingincomeandcapitalemployedimpactfromsuccessfulimplementationofstrategicinitiatives,Operatingincomeongoingimpact2001-2004PhPmillions,Capitalemployedongoingimpact2001-2004PhPbillions,Presentoperatingincome,Volumeincrease,Priceincrease,Costreductionbenefit,Additionalcosts,Totalongoingoperatingincome,Presentcapitalemployed,Improvedcapitalefficiency,Divestments,Acquisitions,Totalongoingcapitalemployed,one-timeoperatingincomeimpact=one-timecosts=,+,+,