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Complete Guide to Business Strategy Design

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This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go …

This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
http://flevy.com/browse/business-document/the-complete-guide-to-business-strategy-development-375

Summary: This document provides a framework to design your business strategy.

A key question that every business needs to able to answer is "What is our strategy?"

'Strategy' is part of everyday business language and is often used in the wrong context ( 'Operational Excellence' is not strategy).

The core of any strategy is about making choices of where to play and how to win, supplemented with a 'why' (the mission) and the 'how' (doing it).

This document cover these topics in three main sections:

1. What an organisation wants to achieve (Mission, Vision, etc)
2. Where and how it should compete (making choices - the heart of strategy)
3. How the strategy can be delivered (execution and implementation)

There are typically 12 elements in business strategy formulation and this powerpoint provides a powerful and effective strategy framework for any business to check the health of each element to give a good audit of the business strategy.

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  • 1. The Complete Guide to Business Strategy Development
  • 2. Context A business strategy specifies what an organisation wants to achieve, where and how it should compete and how the strategy can be delivered Business Strategy Development – Issue Tree Key Question Issue 1. What does the organisation want to achieve? 2. Where should the organisation compete? What is the organisation‟s business strategy? 3. How can the organisation effectively compete? 4. How can the strategy be delivered? Sub-Issues • What is the organisation‟s vision and mission? • What are the organisation‟s long term goals? • What values does the organisation stand for? • What is the structure of the industry in which the organisation competes? • In which markets / segments can the organisation compete? • Which markets are the most attractive? • What are best practice strategies for competing? • What are the most economically sensible options to compete in the chosen markets? • What is the likely competitor response to these options? • Who are the key stakeholders and are they supportive of the overall strategy? • What are the strategic initiatives underpinning the overall strategy? • What projects are required to deliver each initiative? • What is the timeline, target and accountability measure for each project? 2
  • 3. Context There are typically 12 elements in business strategy formulation – checking the health of each element gives a good audit of the business strategy Business Strategy - Elements 1. Corporate Goals 2. Situation Diagnosis 3. Strategy Levers 4. Action Plan 1.1 Agree Mission / Vision / Values 1.2 Set 3-5 Year Goals 1.3 Communicat e Goals What do we want to achieve? 2.1 Define Market / Segment 2.2 Assess Segment Attractivenes s 2.3 Assess Segment Competitive Position Where to compete? 3.1 Review Competitive Options 3.2. Make Strategy Choices 3.3. Document Strategy How to compete? 4.1 Ensure Communication / Buy-in 4.2. Assign Initiatives & Projects 4.3. Set Targets & Monitor Progress How to deliver? 4
  • 4. 1. Corporate Goals Developing an organisation‟s mission, vision and values and identifying key stakeholders are required when setting corporate goals Corporate Goals – Issue Tree Key Question Issue Sub-Issues 1. What is the organisation‟s mission? 2. What values does the organisation represent? What does the organisation want to achieve? • What is the overriding purpose of the organisation as a whole? • What is its „reason for being‟? • What should every employee of the organisation value and represent? • What distinguishes the organisation from others? 3. What is the organisation‟s longterm vision and goals? • What does the organisation want to achieve in the next 10 years? (vision) • What specific goals does the organisation want to achieve in the next 3 – 5 years? (financial, customers, employees, community goals) 4. Who are the organisation‟s key stakeholders? • What are the main groups of stakeholders? (eg customers, employees, suppliers) • What is the most practical and effective method of communicating to each stakeholder group? 6
  • 5. 1.1 1.2 1.3 2.1 1. Corporate Goals 2.2 2.3 3.1 3.2 3.3 4.1 4.2 4.3 The mission, vision and values of an organisation have different time horizons 1.1 Agree Mission, Vision & Values What is it? Mission Vision Values The overarching purpose an organisation - Will never be outgrown The future the organisation aims to deliver - Achievable in a CEO‟s time horizon Time Horizon Examples 3M: "To solve unsolved problems innovatively" Indefinite Walt Disney: "To make people happy." 10 years (goals are typically 35 years) The principles that guide day to day behaviour Day-to-day Wal-Mart (1990): ”Become a $125 billion company by the year 2000" Honda: "We will crush, squash, and slaughter Yamaha" Walt Disney: • No cynicism • Nurturing and promulgation of "wholesome American values" • Creativity, dreams and imagination • Fanatical attention to consistency and detail • Preservation and control of the Disney "magic" 8
  • 6. 1.1 1.2 1.3 2.1 1. Corporate Goals 2.2 2.3 3.1 3.2 3.3 4.1 4.2 4.3 Different methods of communication may be required for each stakeholder group 1.3 Communicate Goals – Sample High Level Communication Plan Stakeholder Group / Level Business Sponsorship Business Sponsor Mode of Communication ILLUSTRATIVE Frequency Quarterly Division Email Monthly „Town Hall‟ Presentation One per Division BU-specific presentation One per BU Person F Newsletter Weekly Flyer Approx X Website article Updated as required Website announcement MD Level Internal GMD Email Person E Division Level GMD Level Person A Person B Group Wide As needed Analyst Briefing As needed Person C Person D BU Level BU Leads Person G Customers GMD Level Person A Shareholders GMD Level Person A External 10
  • 7. 2. Situation Diagnosis Understanding the market and the organisation‟s current competitive position will influence the decision on where to compete Situation Diagnosis – Issue Tree Key Question Issue Sub-Issues 1. In which market(s) does the organisation compete? • Which markets does the organisation compete in? • How has the organisation‟s involvement changed over time? (e.g. duration of participation, markets entered / exited) 2. How has the organisation performed? • How has the organisation performed? (current and historical) – Financial – Customer – Product Where do we want to compete? 3. What are the key market characteristics? 4. What is the organisation‟s competitive position? • What are the key characteristics of the market(s)? – Segments / profit pools within the market – Customer profile • What is the attractiveness of the market? (by segment) – Size, growth, profitability – Industry structure – Risk / volatility • Who are the key players in the market(s)? (number, share, performance) • How has the organisation‟s position changed over time? • What are the organisation‟s competitive advantages? (assets / capabilities / competencies that can be leveraged, brand strength, etc) 12
  • 8. 1.1 1.2 1.3 2.1 2. Situation Diagnosis 2.2 2.3 3.1 The Situation Diagnosis phase seeks to develop understanding of the profit impact of segment attractiveness and competitive position 3.2 3.3 4.1 4.2 4.3 Situation Diagnosis – Key Questions 1. What are our returns from each segment? High Segment Attractiveness Strong/ Attractive 2. How attractive is the profit potential of the segment vs. others? 3. What are the basis for economic advantages over competitors and how do we rate? • Growth - customer needs, substitutes • Returns - customer price sensitive, competitor concentration and rivalry • Cost… fleet, DP, technology, utilisation, manning Moderate/ Unattractive • Quality… on-time delivery service Low Weak Strong Our Competitive Position 14
  • 9. 1.1 1.2 1.3 2.1 2. Situation Diagnosis 2.2 2.3 3.1 The output from the measurement of profitability by segment should show differences in the overall magnitude of returns… 2.1 Define Market / Segment – Returns by Segment 5 6 Unallocated Costs A B Total EBIT = $15m C 35 (3) 20 13 4.3 7 Contribution on Selected Assets % p.a. 20 3.3 4.2 EXAMPLE Contribution $m p.a. Average 3.2 4.1 Total ROA = 15% Selected Assets $m 40 30 20 A B C 10 Total Assets = $100m Segments A B C Unallocated Assets 16
  • 10. 1.1 1.2 2.1 2. Situation Diagnosis – Segment Attractiveness 2.2 1.3 2.3 3.1 The situation diagnosis involves an assessment of the underlying attractiveness of each segment relative to others 3.2 3.3 4.1 4.2 4.3 2.2 Assess Segment Attractiveness A. Estimate current segment size and past growth B. Explain current profit by segment in terms of underlying attractiveness C. Estimate future growth and trends in segment attractiveness • Current size by segment: volume and revenue • Past demand growth rate by segment over a number of years • Identify key drivers of demand by segment, e.g. population growth vs. per caps • Strength of basis for advantage – Cost advantage – Differentiation advantages • Height of entry barriers • Competitive intensity / level of rivalry / industry structure • Pressure from substitutes • Bargaining power of buyers / suppliers • Profitability • Risk / volatility • Future demand growth: changes in drivers of growth, customer needs, substitutes • Future growth in supply capacity: ours vs. competitor plans • Other trends in segment profitability: changes in drivers of attractiveness 18
  • 11. 1.1 1.2 2.1 2. Situation Diagnosis 2.2 1.3 2.3 3.1 Each segment should be contrasted in terms of the factors driving underlying attractiveness 3.2 3.3 4.1 4.2 4.3 2.2 Assess Segment Attractiveness – Impact of Segment Characteristics (1 of 2) Segment Characteristic Possible Measure Impact on Attractiveness Strength of Basis for Cost advantages from differences in Advantage between factor costs, scale, experience competitors (see Step 1.3) Differentiation advantages from unique differences in customer value in product features/quality, service or branding Ratio of highest cost producer to lowest cost Height of Barriers to new entrants Initial capital investment required Size of initial unit of investment required to be a „player‟ + Switching costs faced by buyers and distributors Cost to buyers or distributors of re-training their staff, re-equipping + Risk/consequence of retaliation by incumbents Extent of past retaliation to entry (e.g. price cuts vs. buy-out) + Level of concentration % market share held by top 2 or 3 firms… vs. owner operators + - Rate of demand growth vs. capacity Growth in demand + Size of capacity increments - Proportion of fixed costs % fixed costs to total costs - Height of exit barriers Costs of exit in terms of retrenchment, plant write offs vs. resale/use - Competitive Intensity + Ratio of highest priced to lowest priced + 20
  • 12. 1.1 2. Situation Diagnosis 2.1 1.2 2.2 1.3 2.3 3.1 Cost advantages stem from sustainable differences in factor costs, scale and experience - and to a lesser extent from operating choices 3.2 3.3 4.1 4.2 4.3 2.2 Assess Segment Attractiveness – Sources of Cost Advantage Source Description Factor Costs Preferred access to low cost • Natural resources • Labour • Capital • Technology • Customer information Scale Larger relative volumes… • Amortise fixed costs in manufacturing set-ups • Provide access to lower cost processing technologies • Provide greater purchasing power with suppliers Experience Improve know how from larger cumulative output over time helps drive cost-reduction process and product improvements • Reduced wastage and rework • Less duplication • Fewer parts • Tighter tolerances Other Operational Decisions Threats to Sustainability • Change in access to factors • Diseconomies of scale / complexity • Decreasing minimum scale / increasing variety and flexibility • Leakage of proprietary experience (catch up) • New technologies (leapfrog) Costs are also driven by choice of technology / plant, • …but such choices are often easily decisions on maintain / manage vs replace, firm specific matched work practices… 22
  • 13. 1.1 1.2 2.1 2. Situation Diagnosis 2.2 1.3 2.3 3.1 The final step in the diagnosis requires an assessment of the organisation‟s relative competitive position for each segment 3.2 3.3 4.1 4.2 4.3 2.3 Assess Segment Competitive Position A. Identify customers‟ selection criteria and competitor ranking • Identify criteria (price vs. other feature tradeoffs) • Assess weighting of criteria • Our position vs. competitors B. Estimate competitors‟ shares and price realisation For each segment and for each competitor: • Volume shares in terms of throughput and capacity • Price realisation (lists, salesforce) C. Estimate competitors‟ relative cost and asset positions • Identify cost and asset drivers from our economics • Measure where competitors and potential new entrants stand on drivers • Estimate competitor‟s / new entrant‟s costs and assets D. Identify the basis for advantage and our relative position • Identify competitors value proposition • Identify our internal assets / capabilities and competencies that can be leveraged • Draw together volumes, prices, costs and assets for competitors / new entrants, factoring in future plans • Draw out key basis for advantage • Identify our relative position Determine key target segments 24
  • 14. 1.1 1.2 2.1 2. Situation Diagnosis 2.2 1.3 2.3 3.1 4.1 Estimating competitors‟ relative cost and asset positions requires identifying and measuring drivers 3.2 3.3 4.2 4.3 2.3 Assess Segment Competitive Position – Estimating Relative Cost and Asset Position Drivers 1.Identify cost and asset drivers from our own economics Costs and Assets • Network configuration and density Fleet and manning utilisation • Fleet type / age / utilisation Longhaul and PUD, R&M, fuel, fixed assets $ / driver • Manning levels Working Capital Measure Drivers Competitor A Competitor B … • • …. • • … 3.Estimate competitors / new entrants costs and assets Distinguish • Fixed • Variable • Marginal cash Transport, warehouse, DP admin • Stocking, Debtor, and Creditor policies 2.Measure where competitors and potential new entrants stand on the drivers EXAMPLE • • Data from interviews with suppliers, customers, exemployees, competitors direct (e.g. site visits) Measure x $ / measure = $ 26
  • 15. Contents Page Context 1 Business Strategy Development 1. Corporate Goals 5 2. Situation Diagnosis 11 3. Strategy Levers 28 4. Action Plan 40 28
  • 16. 1.1 1.2 1.3 2.1 3. Strategy Levers 2.2 2.3 3.1 3.2 3.3 4.1 4.2 4.3 Understanding strategy levers will help answer the question “how to compete?” Strategy Levers 3.1 Competitive Options • Generate strategic options for competition in chosen segments, e.g. – Strengthen our competitive position – Shift our mix to more attractive segments – Improve attractiveness of key segments • Incorporate international trends and best practice 3.2. Strategy Choices • Evaluate and make choices on “how to compete” on the basis of risks and returns – Economics / modelling – Competitor response • Determine strategies required to deliver (the 5 to 7 big things) • Develop clearly linked economics to overall targets • Determine internal organisational changes required • Determine position sustainability 3.3. Document Strategy How to compete? • Document overall strategic goal and high level targets • Clarify our offering in each segment / value proposition • Clarify our basis of advantage - cost / scale, differentiation, innovation, customer intimacy 30
  • 17. 1.1 3. Strategy Levers 2.1 1.2 2.2 1.3 2.3 3.1 Generic Strategy 1: Strengthening Competitive Position in Attractive Segments • Improvements in costs or differentiation are not enough – only strengthening relative position raises performance Unit Costs Example: better exploit existing basis for advantage Unit Costs Take share • Overturning strong positions is difficult, but discontinuities provide opportunities • Examples of discontinuities include: – Product service or process innovation – Change in customer needs – New distribution techniques/channels – Changes in supply/ factor markets – Altered government regulation Uncover latent service needs Price Unit Cost Competitor A Time 4.3 ILLUSTRATIVE Competitor C Competitor B 4.2 Create new sources of advantage Raise relative performance Relative unit cost performance 3.3 4.1 Strengthening a competitive position in attractive segments can be done by raising relative performance or creating new sources of advantage 3.2 Scale A B 32
  • 18. 1.1 1.2 2.1 3. Strategy Levers 2.2 1.3 2.3 3.1 An organisation can raise the attractiveness of segments in which it has or could have strong positions 3.2 3.3 4.1 4.2 4.3 Generic Strategy 3: Increasing Segment Attractiveness ILLUSTRATIVE Price Reduce Pressure from Substitutes e.g. • • Reduce Level of Rivalry e.g. • Promote signalling Lower price / raise performance relativities • Initiate co-operation • Engage in tit-for-tat Increase switching costs / lock-in Raise Entry Barriers e.g. • Demonstrate harsh retaliation on new entrants • Lobby governments on “protection” standards Reduce Power of Buyers / Suppliers • Encourage fragmentation / new entry • Oppose consolidation Unit Costs 34
  • 19. 1.1 3. Strategy Levers 2.1 1.2 2.2 1.3 2.3 3.1 3.3 4.1 To be implementable, strategies must be aligned with existing organisation structures and operating policies 3.2 4.2 4.3 3.2 Strategy Choices – Alignment of Structure & Strategy Strategy Organisation = HR Plan • Structure • Strengthen competitive position: cost / differentiation • Staffing Levels • Shift segment mix • Skills • Raise segment attractiveness • Monitoring and Reward Systems Operating Policies • Sales and Marketing: Customer account management approaches and pricing policies • Production: Plant operation and maintenance policies • Purchasing: Supplier management and negotiation approaches • R & D: Approach to developing/trialling new product and process technologies • Assets: Major investment projects and asset management • IT: Information systems for planning and control 36
  • 20. 1.1 3. Strategy Levers 2.1 1.2 2.2 1.3 2.3 3.1 Asset plans need to identify the major projects and asset management policies required to support the strategy 3.2 3.3 4.1 4.2 4.3 3.2 Strategy Choices – Asset Plans Major Capital Projects Asset Management Policies • Identify major capital projects based on strategic analysis – Analyse current performance of key plant assets comparing one unit to another - Across time and versus competitors to identify improvement opportunities - e.g. age and technology type, availability and utilisation, yield and wastage, maintenance costs, manning levels, location / transport costs, output quality – Develop broad options for the portfolio of key plant (e.g. replace / change technology, maintain, expand / close, relocate) – Select preferred plant option by analysing the economic impact on segment attractiveness (e.g. overcapacity, entry barriers, price disciplines) and competitive position (e.g. cost and quality) • Develop asset management policies for – Streamlining repetitive / predictable plant capex – Managing support assets (cars, fitouts, communications, computers) and rationalising idle assets (e.g. underutilised property) – Setting project hurdle rates specific to business project risks – Valuing assets for performance measurement vs accounting (e.g. written down replacement vs cash flow valuation vs alternative use) 38
  • 21. Contents Page Context 1 Business Strategy Development 1. Corporate Goals 5 2. Situation Diagnosis 11 3. Strategy Levers 28 4. Action Plan 40 40
  • 22. 1.1 1.2 1.3 2.1 4. Action Plan 2.2 2.3 3.1 The action plan ensures that the strategy can be practically delivered and tracked 3.2 3.3 4.1 4.2 4.3 Action Plan 4.1 Ensure Communication / Buy-in • Stakeholders clearly identified – internal and external • Communication method / collateral appropriate to each group is available • Communications plan developed and executed • Awareness and support achieved from stakeholder groups 4.2. Assign Initiatives & Projects • Individual initiatives to support each strategy developed • Project template completed for each initiative • Economic model linked to align bottom up initiative economics with strategies and overall goals 4.3. Set Targets & Monitor Progress How to deliver? • Targets for each initiative established in terms of timing, progress to drivers and progress to economic goals • Clear single point accountability established for each initiative • Tracking system established and regularly monitored showing progress of each initiative and gap to overall goals 42
  • 23. 1.1 1.2 2.1 4. Action Plan 2.2 1.3 2.3 3.1 Future state goals will reveal key strategic initiatives / themes; projects should be created to deliver strategic initiatives 3.2 3.3 4.1 4.2 4.3 4.2. Assign Initiatives & Projects „Where Do We Want To Be?‟ Future State Goals • • • • “Become the leading Australian provider of XYZ services” Financial – EVA: 25% – Revenue: ~25%, greater relative contribution from Division A and Division B – NOPAT: 37% – Measure performance across the entire value chain via Balanced Scorecard and KRAs Clients - Target individuals and corporates to position Client ABC as a lifetime provider of XYZ services Employees – Minimise duplication across business units and increase value added by building functional support to delivery units; Staff will be respected professionals in their area of expertise Community – Support community initiatives that align with Client ABC‟s activities Developed in Section 1: Corporate Goals ILLUSTRATIVE „What Do We Need To Focus On?‟ Strategic Initiatives / Themes „How Do We Make This Happen?‟ Strategic Projects 1. Branding 1.1 Branding Project 1 1.2 Branding Project 2 1.3 Branding Project 3 2. Marketing & Distribution 2.1 Marketing Project 1 2.2 Distribution Project 1 2.3 Distribution Project 2 3. Profitable Growth 3.1 Growth Project 1 3.3 Growth Project 2 3.4 Growth Project 3 4. Product Quality 4.1 Product Project 1 4.2 Product Project 2 4.3 Product Project 3 5. Business Architecture 5.1 Bus Arch Project 1 5.2 Bus Arch Project 2 5.3 Bus Arch Project 3 Developed in Section 3: Strategy Levers 44
  • 24. 1.1 1.2 2.1 4. Action Plan 2.2 1.3 2.3 3.1 Strategic projects should be prioritised based on impact and ability to implement 4.2. Assign Initiatives & Projects – Project Prioritisation 3.2 3.3 4.1 4.2 4.3 ILLUSTRATIVE High Priority Projects 3.1 Growth Project 1 High 3.4 Growth Project 3 5.1 Bus Arch Project 1 5.2 Bus Arch Project 2 4.3 Product Project 3 1.1 Branding Project 1 4.2 Product Project 2 1.1 Branding Project 1 Profit Impact Medium 3.3 Growth Project 2 5.3 Bus Arch Project 3 4.1 Product Project 1 2.2 Distribution Project 1 2.1 Marketing Project 1 1.2 Branding Project 2 Low 2.3 Distribution Project 2 Hard Easy Ability to Implement 46
  • 25. 1.1 1.2 2.1 4. Action Plan 1.3 2.2 2.3 3.1 4.1 Owners should be assigned to each project and a delivery timeline should be agreed upon 3.2 3.3 4.2 4.3 4.3. Set Targets & Monitor Progress ILLUSTRATIVE Year 1 1. Branding 1.1 Branding Project 1 1.2 Branding Project 2 1.3 Branding Project 3 2. Marketing & Distribution 2.1 Marketing Project 1 2.2 Marketing Project 2 2.3 Marketing Project 3 3. Profitable Growth 3.1 Growth Project 1 3.2 Growth Project 2 3.3 Growth Project 3 4. Quality Products 1.1 Product Project 1 1.2 Product Project 2 1.3 Product Project 3 5. Business Architecture 2.1 Bus Arch Project 1 2.2 Bus Arch Project 2 2.3 Bus Arch Project 3 Owner Marketing Director Marketing Director Project Manager H1 H2 Year 2 H1 H2 Year 3 H1 H2 Year 4 H1 H2 Year 5 H1 H2 Marketing Director Marketing Director Marketing Director Finance Director CEO MD Operations Manager Operations Manager Project Manager Technology Manager Technology Manager Technology Manager 48

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