STRATEGIC PLANNING AND BUDGETING Part 1: Business Model and Strategy Case Study, Concepts and Debatable Ideas Kenny Ong CNI Holdings Berhad

Intro: CNI 20 years old Core Business: MLM Others: Contract Manufacturing, Export/Trading, eCommerce Malaysia, Singapore, Brunei, Indonesia, India, China, Hong Kong, Philippines, Italy, Taiwan, Oman, United States, Vietnam Staff force: ± 500 Distributors: 200,000 Products: Consumer Goods and Services

20 years old

Core Business: MLM

Others: Contract Manufacturing, Export/Trading, eCommerce

Malaysia, Singapore, Brunei, Indonesia, India, China, Hong Kong, Philippines, Italy, Taiwan, Oman, United States, Vietnam

Staff force: ± 500

Distributors: 200,000

Products: Consumer Goods and Services

History of Strategic Planning and Budgeting

Planning in the “old” days Budget ‘top down’ – no questions asked Only two budget goals – revenue, expenses The only planning we needed to do was “do better than last year” Planning was ‘bottom up’ - compilation of plans within set budget No one knew what the other was planning Accounting’s role was only to compile budget for approval KPIs were not used Sales was resource priority, everything else not important Assumed no major changes in market R&D was ‘bottom up’

Budget ‘top down’ – no questions asked

Only two budget goals – revenue, expenses

The only planning we needed to do was “do better than last year”

Planning was ‘bottom up’ - compilation of plans within set budget

No one knew what the other was planning

Accounting’s role was only to compile budget for approval

KPIs were not used

Sales was resource priority, everything else not important

Assumed no major changes in market

R&D was ‘bottom up’

Problems from the start

Problems from the start (1/2) No money Split Objectives: Sales? Share Price? Image? Independent entities Accounts controlling schedule S&M always running over budget Compounding activities BOD expectations too high without proper explanation nor justification Lack of Market research Expenses not spent gets punished

No money

Split Objectives: Sales? Share Price? Image?

Independent entities

Accounts controlling schedule

S&M always running over budget

Compounding activities

BOD expectations too high without proper explanation nor justification

Lack of Market research

Expenses not spent gets punished

Problems from the start (2/2) Budgeting for known, consistent, and predictable business conditions Never learn from past mistakes, usually in under-budgeting (e.g. staff and PCs) Wrong Business Model – blame Budgeting & Planning. Having a good planning process cannot correct a bad business model Focusing on the Process (KPIs), instead of “Business” Planning & budgeting treated as separate processes by businesses/functions

Budgeting for known, consistent, and predictable business conditions

Never learn from past mistakes, usually in under-budgeting (e.g. staff and PCs)

Wrong Business Model – blame Budgeting & Planning. Having a good planning process cannot correct a bad business model

Focusing on the Process (KPIs), instead of “Business”

Planning & budgeting treated as separate processes by businesses/functions

Today’s Agenda

Summary: Planning & Budgeting L ong-term Plans O bjectives S trategies E nablers R esources Also known as L.O.S.E.R.

L ong-term Plans

O bjectives

S trategies

E nablers

R esources

Summary: Today’s presentation 1. Business Model 2. Strategy 3. Alignment 4. Resources

Assumptions 1: Audience Business Government Non-profit

Business

Government

Non-profit

Assumptions 2: Starting Point Wanting to start proper planning & budgeting process, or Wanting to improve planning & budgeting process

Wanting to start proper planning & budgeting process, or

Wanting to improve planning & budgeting process

1. Get the right Business Model first

How to fail without trying 1. Wrong Business Model

How to fail without trying

The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time Clear Sailing Today’s performance Ad-hoc Tactics Denial & Defense Doom Projections Overdue Failure The Moment of Truth X Performance Freefall Tomorrow’s actual performance Downpresure of Unclear Strategy

Denial and Defense “ It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia “ It’s good value but not in our preferred customer market.” - ABC vs Toyota “ Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO “ The rules we are playing by have always worked before” – AMEX vs VISA

“ It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia

“ It’s good value but not in our preferred customer market.” - ABC vs Toyota

“ Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO

“ The rules we are playing by have always worked before” – AMEX vs VISA

The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time Clear Sailing Today’s performance Ad-hoc Tactics Denial & Defense Doom Projections Overdue Failure The Moment of Truth X Performance Freefall Tomorrow’s actual performance Downpresure of Unclear Strategy

Ad Hoc Tactics Selectively hold discounts to hold business that has started to go elsewhere Introduce new promotions, terms, conditions, and offers to confuse and cloud the market Beef up customer service by adding people to fix mess-ups and quicken delayed shipments Delay capital investments and adjust accounting methods to portray quarterly financial results more favorably Introduce “new and improved” products that are new in form, but not in substantive ways that are of consequence to purchasers Introduce Balanced Scorecards and Performance Management Systems

Selectively hold discounts to hold business that has started to go elsewhere

Introduce new promotions, terms, conditions, and offers to confuse and cloud the market

Beef up customer service by adding people to fix mess-ups and quicken delayed shipments

Delay capital investments and adjust accounting methods to portray quarterly financial results more favorably

Introduce “new and improved” products that are new in form, but not in substantive ways that are of consequence to purchasers

Introduce Balanced Scorecards and Performance Management Systems

The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time Clear Sailing Today’s performance Ad-hoc Tactics Denial & Defense Doom Projections Overdue Failure The Moment of Truth X Performance Freefall Tomorrow’s actual performance Downpresure of Unclear Strategy

“ What is the moral of the story?”

“ What is the moral of the story?”

What is the Business Model? USP Market Discipline Profit Model

Intro: Market Discipline Mamak stall

Mamak stall

Intro: Market Discipline "Exactly what I need" Customized products Personalized communications "They're very responsive" Preferential service and flexibility Recommends what I need "I'm very loyal to them" Helps us to be a success "They are the most innovative" "Constantly renewing and creative" "Always on the leading edge" "A great deal!" Excellent/attractive price Minimal acquisition cost and hassle Lowest overall cost of ownership "A no-hassles firm" Convenience and speed Reliable product and service Product Leadership Operational Excellence Customer Intimacy

"Exactly what I need"

Customized products

Personalized communications

"They're very responsive"

Preferential service and flexibility

Recommends what I need

"I'm very loyal to them"

Helps us to be a success

Strategy: Value Disciplines Operational Excellence (low cost producer) Ref: The Discipline of Market Leaders , Michael Treacy & Fred Wiersema; 1995 Product Leadership (best product) Customer Intimacy (best total solution) www.myCNI.com.my www.OOBEY.com

Product Leadership New, state of the art products or services Risk takers Meet volatile customer needs Fast concept-to- counter Never satisfied - obsolete own and competitors' products Learning organization Strategy: Value Disciplines Operational Excellence Competitive price Error free, reliable Fast (on demand) Simple Responsive Consistent information for all Transactional 'Once and Done' Customer Intimacy Management by Fact Easy to do business with Have it your way (customization) Market segments of one Proactive, flexible Relationship and consultative selling Cross selling www.myCNI.com.my www.OOBEY.com

Product Leadership

New, state of the art products or services

Risk takers

Meet volatile customer needs

Fast concept-to- counter

Never satisfied - obsolete own and competitors' products

Learning organization

Operational Excellence

Competitive price

Error free, reliable

Fast (on demand)

Simple

Responsive

Consistent information for all

Transactional

'Once and Done'

Customer Intimacy

Management by Fact

Easy to do business with

Have it your way (customization)

Market segments of one

Proactive, flexible

Relationship and consultative selling

Cross selling

The McPlaybook* Make it easy to eat 50% drive-thru Meals held in one hand Make it easy to prepare High Turnover Tasks simple to learn & repeat Make it quick “ Fast Food” Tests new products for Cooking Times Make what customers want Prowls market for new products Monitored field tests *Adapted from: Businessweek , Februrary 5 th 2007 www.myCNI.com.my www.OOBEY.com

Make it easy to eat

50% drive-thru

Meals held in one hand

Make it easy to prepare

High Turnover

Tasks simple to learn & repeat

Make it quick

“ Fast Food”

Tests new products for Cooking Times

Make what customers want

Prowls market for new products

Monitored field tests

Strategy: Value Disciplines Operational Excellence (low cost producer) Ref: The Discipline of Market Leaders , Michael Treacy & Fred Wiersema; 1995 Product Leadership (best product) Customer Intimacy (best total solution) www.myCNI.com.my www.OOBEY.com

Strategy: Value Disciplines Operational Excellence (low cost producer) Ref: The Discipline of Market Leaders , Michael Treacy & Fred Wiersema; 1995 Product Leadership (best product) Customer Intimacy (best total solution) www.myCNI.com.my www.OOBEY.com

Intro: Market Discipline * Treacy & Wiersema, The Discipline of Market Leaders , 1995 Product/Service Attributes Relationship Image

Intro: Market Discipline * Treacy & Wiersema, The Discipline of Market Leaders , 1995 Product/Service Attributes Price Quality Time Selection √ √ Smart Shopper Relationship Image Operational Excellence : Quality and selection in key categories with unbeatable prices

Intro: Market Discipline * Treacy & Wiersema, The Discipline of Market Leaders , 1995 Product/Service Attributes √ Brand Time Function √ √ Best Product Relationship Image Product Leadership: Unique products and services that push the standards

Intro: Market Discipline * Treacy & Wiersema, The Discipline of Market Leaders , 1995 Product/Service Attributes √ √ √ √ Service Trusted Brand Relationship Image Customer Intimacy: Personal service tailored to produce results for customer and build long-term relationships Relations

Strategy: Disciplines Operational Excellence (low cost producer) Ref: The Discipline of Market Leaders , Michael Treacy & Fred Wiersema; 1995 Product Leadership (best product) Customer Intimacy (best total solution)

Summary: Today’s presentation 1. Business Model  Done 2. Strategy 3. Alignment 4. Resources

2. Set the Strategies ‘Hope’ is not a strategy

What is Strategic Planning? Strategic Planning Variables: Research Growth Risks Stakeholders Constraints SWOT Misc. Output: Plans Priorities KPIs

Before we start… Which comes first? Strategies -> KPI? KPI -> Strategies?

Which comes first?

Strategies -> KPI?

KPI -> Strategies?

Step 1: Analysis SWOT PESTEL Scenario Analysis

SWOT

PESTEL

Scenario Analysis

SWOT: Opportunities & Threats Opportunities = Taking advantage of ‘Trends’ Threats = Strategic Risk Management

Opportunities

=

Taking advantage of ‘Trends’

Downturn Trends?

Downturn Trends?

Downturn Trends?

Downturn Trends?

SWOT: General Strategic Risks Industry Margin Squeeze Rising R&D/CAPEX Overcapacity Commoditization Deregulation Increased power among suppliers Extreme business-cycle volatility Technology Shift in technology Patent expiration Process becomes obsolete Brand Erosion Collapse Competitor Emerging global rivals Gradual market-share gainer One-of-a-kind competitor Customer Customer priority shift Increasing customer power Over reliance on a few customers Project R&D failure IT failure Business development failure Merger or acquisition failure Stagnation Flat or declining volume Volume up, price down Weak pipeline Adrian J. Slywotzky and John Drzik

Industry

Margin Squeeze

Rising R&D/CAPEX

Overcapacity

Commoditization

Deregulation

Increased power among suppliers

Extreme business-cycle volatility

Technology

Shift in technology

Patent expiration

Process becomes obsolete

Brand

Erosion

Collapse

Competitor

Emerging global rivals

Gradual market-share gainer

One-of-a-kind competitor

Customer

Customer priority shift

Increasing customer power

Over reliance on a few customers

Project

R&D failure

IT failure

Business development failure

Merger or acquisition failure

Stagnation

Flat or declining volume

Volume up, price down

Weak pipeline

PESTEL and Scenarios Legal Environment Technology Social Economic Political Scenario 3 Scenario 2 Scenario 1

Business Situation vs. Focus Upturn Flat Downturn Fight Complacency Sharpen Edge Keep Momentum Conquer ‘ Change’ mgmt Reduce Fat Continuity Everyone Happy Innovation Acquire Profits Build momentum Sales Cash Flow Talent Mgmt Innovation/R&D Early wins Slow Down HR Costs Top Talent focus Sales, Sales, Sales Increase attrition www.myCNI.com.my www.OOBEY.com

Business Situations vs. Focus Upturn Flat Downturn Fight Complacency Sharpen Edge Keep Momentum Conquer ‘ Change’ mgmt Reduce Fat Continuity Everyone Happy Innovation Acquire Profits Build momentum Sales Cash Flow Talent Mgmt Stack R&D Early wins Slow Down HR Costs Top Talent focus Stack Sales Increase attrition Many times, you need a different CEO/Leader/Management Team for each business situation www.myCNI.com.my www.OOBEY.com

Step 2: What is your Goal? Cost Reduction Growth

Cost Reduction

Growth

Strategies for Growth “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Positioning Adjacent Market New Business GROWTH

Base Retention

Share Gain

Positioning

Adjacent Market

New Business

Growth Expansion Consolidate Geographic Distribution Compensate Transformative Portfolio refocus Diversification Easier Tougher www.myCNI.com.my www.OOBEY.com

Expansion

Consolidate

Geographic

Distribution

Compensate

Transformative

Portfolio refocus

Diversification

Growth thru Expansion Expansion Consolidate Geographic Distribution Compensate Gain Scale to compete Integrated Solutions Financial Growth Supply (security, mix) Developing markets High cost of Extra Capacity Private Equity Expanding Sovereign Funds www.myCNI.com.my www.OOBEY.com

Expansion

Consolidate

Geographic

Distribution

Compensate

Gain Scale to compete

Integrated Solutions

Financial Growth

Supply (security, mix)

Developing markets

High cost of Extra Capacity

Private Equity

Expanding Sovereign Funds

Growth thru Expansion Expansion Consolidate Geographic Distribution Compensate De-regularization Demand outstrip supply Revenue Mix – Tax optimization Talent New, Low-cost Entrants Undervalued Big Players Newer Assets www.myCNI.com.my www.OOBEY.com

Expansion

Consolidate

Geographic

Distribution

Compensate

De-regularization

Demand outstrip supply

Revenue Mix – Tax optimization

Talent

New, Low-cost Entrants

Undervalued Big Players

Newer Assets

Transformative Growth Transformative Portfolio refocus Diversification New Business Lines Selling/Spin-off non-core Increase product line New customers New technologies* Complementary Business Up-down Supply Chain Patent Convergence anticipation www.myCNI.com.my www.OOBEY.com

Transformative

Portfolio refocus

Diversification

New Business Lines

Selling/Spin-off non-core

Increase product line

New customers

New technologies*

Complementary Business

Up-down Supply Chain

Patent

Convergence anticipation

Cross Sector Transformation www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

Cross Sector Transformation New Delivery, New Sources, Existing Resources Oil, Gas, Electricity, Coal Biomass, Nuclear, Ethanol, Wind, Solar www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

Step 3: Strategy “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Positioning Adjacent Market New Business GROWTH

Base Retention

Share Gain

Positioning

Adjacent Market

New Business

How Markets determine Growth Strategies (1) Growth Rate www.myCNI.com.my www.OOBEY.com Base Retention Share Gain (Acquisitions) Market Positioning Share Gain Base Retention Strategy Lose customers slower than competitors Create scale economics, squeeze costs Maintain market share in strategic segments Prepare for market decline Competitors focus too much on getting new customers Why? Flat Fast Growth Rate

Growth Rate

Base Retention

Share Gain (Acquisitions)

Market Positioning

Share Gain

Base Retention

Lose customers slower than competitors

Create scale economics, squeeze costs

Maintain market share in strategic segments

Prepare for market decline

Competitors focus too much on getting new customers

Churn Rate How Markets determine Growth Strategies (2) www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Adjacent Market Share Gain (Acquisitions) Adjacent Markets Strategy Lose customers slower than competitors Customers are always open to the best value and offer Desperate to gain revenue Buying customer base is cheaper than own efforts New products, old customers strategy Why? High Low Churn Rate

Churn Rate

Base Retention

Share Gain

Adjacent Market

Share Gain (Acquisitions)

Adjacent Markets

Lose customers slower than competitors

Customers are always open to the best value and offer

Desperate to gain revenue

Buying customer base is cheaper than own efforts

New products, old customers strategy

How Markets determine Growth Strategies (3) Example: XYZ Sector www.myCNI.com.my www.OOBEY.com Market Positioning Share Gain (M&A) Base Retention Adjacent Markets (M&A) Fast Growth, Low Churn

Example: XYZ Sector

Market Positioning

Share Gain (M&A)

Base Retention

Adjacent Markets (M&A)

Create better ‘Value’ proposition Neutralize competitor advantages Buy Market Share outright Price Premium Operating Model Integration Strategy 2: Share Gain www.myCNI.com.my www.OOBEY.com

Create better ‘Value’ proposition

Neutralize competitor advantages

Buy Market Share outright

Price Premium

Operating Model

Integration

Buying Market Share: Acquisition strategy No evidence of previous company One Kingdom Pre-integration Blueprint Slow Trigger, Fast Bullet www.myCNI.com.my www.OOBEY.com Integration Operating Model Price Premium Buying Market Share Net Cost per Customer < Direct Acquire

Buying Market Share: Side notes on Funding www.myCNI.com.my www.OOBEY.com *Adapted from Warren Buffet’s acquisition strategies Cash from Stock sale Issue more stock Cash from Earnings Cash from Borrowings OK, but not preferred Preferable

Cash from Stock sale

Issue more stock

Cash from Earnings

Cash from Borrowings

Strategy 4: Invade Adjacent Markets Adjacent Market = Important Similarities and Large Differences in: Cost Structure Competitors Customers Critical Capabilities www.myCNI.com.my www.OOBEY.com

Adjacent Market = Important Similarities and Large Differences in:

Cost Structure

Competitors

Customers

Critical Capabilities

Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

Strategy 4: Invade Adjacent Markets Upstream Midstream Downstream Distribution Conversion Raw Mat Vendors/Services www.myCNI.com.my www.OOBEY.com

Is it a promising market? Best when market is new and not stable You must time your entry carefully Entrenched companies usually delay embracing new technology or process Can you win in this market? Must be built on advantages that are tangible, practical and easily implemented Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

Is it a promising market?

Best when market is new and not stable

You must time your entry carefully

Entrenched companies usually delay embracing new technology or process

Can you win in this market?

Must be built on advantages that are tangible, practical and easily implemented

Can you match the Standards of Competition in this Market? You do have to meet the quality level that is common in the market Three Standards:- Technology , Relationships , Business-model You must have 80 percent of the capabilities you need to match competitor’s Standards Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

Can you match the Standards of Competition in this Market?

You do have to meet the quality level that is common in the market

Three Standards:- Technology , Relationships , Business-model

You must have 80 percent of the capabilities you need to match competitor’s Standards

Make or Buy? It is easier to meet the standards of competition if you buy an existing player Adjacent acquisitions must remain as a separate enterprise Integrate Management Control (systems, technology) Inter-transfer of management talent, knowledge and capability are important Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

Make or Buy?

It is easier to meet the standards of competition if you buy an existing player

Adjacent acquisitions must remain as a separate enterprise

Integrate Management Control (systems, technology)

Inter-transfer of management talent, knowledge and capability are important

Strategy 5: Acquire new Business No core advantage to bring in Investors mind-set vs. Managers mind-set Value unlocking via operational improvements Invest in Management/Leadership Premium = Combined value > stand alone www.myCNI.com.my www.OOBEY.com

No core advantage to bring in

Investors mind-set vs. Managers mind-set

Value unlocking via operational improvements

Invest in Management/Leadership

Premium = Combined value > stand alone

Thank You. soft copy of slides: www.totallyunrelatedrandomanddebatable.blogspot.com