Strategy Toolkit


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This booklet has been put together to support you in structuring and communicating your thoughts on business problems. It contains 50 widely accepted strategy tools (including major framework, methodology, approach, technique, and tools)that can be applied in analyzing many business situations. Each tool includes a description, application, process, example output, and tricks and tips for using the tool. This booklet is intended to be your back-pocket guide to do strategy work for your company or client.

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Strategy Toolkit

  1. 1. Strategy Toolkit
  2. 2. 100% bars 100% bars work effectively for many purposes, such as: i tit ithi i d t k t b The 100% bar is a powerful and flexible presentation tool for highlighting the relative proportion of elements within a fixed total. Typical application Description - comparing competitors within an industry or market by sales, market share, geography, product type etc. - costs that go into the manufacture of a particular product; - key elements that comprise a company’s revenue streams - addressing changes over time etc. Thi bl l t il i th l ti i t f application This enables people to easily recognize the relative impact of different factors that go into a process or trend. In particular, placing a series of 100% bars in order can highlight changing patterns in relative terms, over time, region or any other segmentation. 100% bars do not reflect changes in the absolute size of the category in questionsize of the category in question. Excel has an option to create 100% bars as part of its Chart Wizard, so they are easy to create. Typical process Gather the data appropriate to the particular application you are using the 100% bars for, from expert interviews, analyst and brokers’ reports and, if necessary, client interviews. Ensure that you are happy with the data you have gathered and that, if you are creating a series of bars, the information refers to the same type of data. Annotate the chart and draw conclusions from it. Unless you are dealing with many categories, it is best to put the absolute size of each item at the end of the bar. For comparisons between bars over time, clearly mark the CAGR for each of the key elements of the bar. 4 This document is a partial preview. Full document download can be found on Flevy:
  3. 3. Example output High-level activity map for fixed line telecoms: Now and Future VoiceFilms/ Programming Music Video conference Rich Media News Interactive E-mailInformation TransactionsGames Media/ Publishing Corporate CommunicationsAdvertising Content Production Publishing Exhibition Programming conferenceMediaProduction Content Provision Portal Internet Access Provision BrowsersE-comm. tools Search engines App’n hosting tools User Applications Enterprise app’ns Content- specific apps Strm’g media Cach’gNetw’k mgmt Metr’g Middleware BIlling “Walled Garden” Open Portal “Walled Garden” Open Mobile Portal Fixed ASP ISP Fixed ISP Mobile Hosting Web sites W-ASP ASP tomermanagement ASPETraditional offline media Local Access Backbone Network Local Equipment ISP ISP Intern’l Backbone Bandw’th Trading National Backbone Coloc’n/ Hotelling Network Provision Switching/ routing Co-ax CopperFibre Switches and Routers Network Equipment and Infrastructure Rights of Way Sat. PSTN/ ISDNDial-up Cable Fixed Network Services Co-ax 2.5G Mobile 3G2G Mobile Handsets PDAsFixed Handsets TVs Devices Specialist Devices Operating Systems Specialist Local Apps Application s Local Middleware Set top box Multiplexers Fixed Netw’k Eqpm’t Infrastructure xDSL Radio Fibre Cust M’wave HSI GPRSData Tricks and tips Note: the above example is not to scale (was originally the size of a powerpoint slide). To present this much data in a client situation, ensure that all boxes are clear and well spaced. Source: TMC example HandsetsHandsets Devices Systems Local AppsMiddlewarebox Current area of activity Key areas of future activity - owned or as part of an alliance You can shade boxes according to competency or desired competency if you wish to draw out key messages. Overlaying current with desired activities helps clarify key conclusions in advance of alliance, M&A activities, etc. Consider adding rows for parameters which fall outside the value chain, but which can help distinguish competitors, e.g. geography, customers. Contact 7 This document is a partial preview. Full document download can be found on Flevy:
  4. 4. Asset extension modelling Asset extension modelling is a simple too (or technique) for identifying new business opportunities, based upon a company’s existing strategic assets. It is all too common in the new economy to define potential Description y p business opportunities which are simply not realisable given the starting position of a particular company. This techniques avoids those pitfalls by isolating core, near and far opportunities based on the structuring of existing assets such as brand, market reach, capital, IP, etc. By defining the “distance” of a business opportunity it is much more likely that you will identify the likelihood of achieving stretch opportunities without straying into the realms of fantasy. Typical applications for asset extension modeling might include: - e-commerce brainstorming; Typical application g; - identifying regeneration targets; - skills gap analysis; - re-engineering; and - portfolio investment planning and divestment analysis Complete a skills audit, ensuring that all asset classes are captured pp Typical p , g p (from soft assets through to hard assets). Typical asset classes might include: free cash, debt availability, skills, scale of workforce, IP (knowledge, patents), customer base, products, brand, access to industry influences, etc. Rank the strength of each assets, and then cluster into 2-6 groups. process g g p One or two teams members should then develop an asset extension map, which can then be tested internally with the rest of the project team. Run this past the primary client contact and incorporate his or her feedback. Plan and organize a workshop, paying specific attention to the “stretch questions” you will ask. During the workshop, treat the exercise like a brainstorming session, but keep drawing the threads back to the defining assets. Conclude the workshop by gaining agreement on which opportunities are most likely to be successful. 10 This document is a partial preview. Full document download can be found on Flevy:
  5. 5. Use this to draw out implications regarding which businesses can be: - stand alone or unified; - leveraged off each other’s distribution or cost base; and - better “cross-sold” between sets of customers. Example output 100% Single business (with niche potential) Business Definition Framework tsharing 50% Single business Distinct business (with cost leadership potential) Cost Distinct businesses Single business (with substitution potential) Distinct businesses (with channel sharing potential) Source: Example Customer sharing 100%0% 0% 50% Read examples of how new entrants have managed to get a foothold in new industries, and determine what elements of their existing business they have leveraged. For example, Virgin’s brand extension activities, or Japanese cost sharing in the motorcycle and engine manufacturing business). Tricks and tips Contact Assignments of this sort can be helped greatly by Global Corporate Finance’s knowledge of “best owners” for discrete businesses. Don’t assume your client is the best owner of its existing business portfolio. Clare H. Harding 13 This document is a partial preview. Full document download can be found on Flevy:
  6. 6. Competitor analysis template Wherever a rigorous comparison between market players has to A template which aids direct comparison between industry competitors, based around strategically important differentiating factors. This template is not uniform, but is typically structured. Typical Description Wherever a rigorous comparison between market players has to be made. To address a company’s structure, strategic conduct and performance. There is no “magic” to this particular template but something application There is no magic to this particular template, but something similar should be employe in order to avoid uncomparative or non- focused analysis. Review the hypothesis for your current client assignment and agree the key parameters which capture the behaviours of each competitor related to your specific issue Typical process competitor related to your specific issue. Try the template on one or two competitors. Then simplify and modify it on the back of the experiences you find. Feed the information into the strategic decision making steps in the assignment.the assignment. If you cannot fit all of your summary onto a single page you have not understood the issue or the competitor well enough. Revise. Tricks and tips 16 This document is a partial preview. Full document download can be found on Flevy:
  7. 7. Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions. Clients can take different messages from the results of this analysis. Example output They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their stronger performance is recognized. 100% % of population Conversion waterfall, combine harvesters, 2001 70% 80% 90% 100% New Holland Competitor 30% 40% 50% 60% Source: TMC Project March 2001 0% 10% 20% Awareness Knowledge Liking Preference Tested Purchase Tricks and tips It is possible to show a repurchase column, representing the number of customers that return. This is a key output of customer satisfaction as customer acquisition costs in some industry sectors are enormous, so assessment of repurchase across segments is critical to d di d i Source: TMC Project, March 2001 understanding customer dynamics. Make sure you identify customer segments and then target your interview programme at the most important segments. It is very important to get the segmentation process right first, as otherwise valuable differences may be obscured during averaging. Contact 19 This document is a partial preview. Full document download can be found on Flevy:
  8. 8. Customer segmentation The key to operating successfully in a competitive market is understanding customers needs, values and behaviours and being able to take action. Segmentation identifies groups of customers with homogeneous needs, who can be served by a tailored proposition. Description From what you know about the client’s customer database, industry analysis, client or expert interviews, and focus groups, begin by developing a number of hypotheses about likely segmentation schema. Segmentation seeks to group customers according to similar Typical process g g p g purchase behaviours, attitudes and profiles. The outputs of a segmentation schema must be: - identifiable/recognizable: you must be able to identify which segment a customer is likely to be in so that marketing programmes can be actioned; - actionable: you must present strategic options for eachy p g p segment which are achievable; - measurable: it must be possible to measure segments by key dimensions and assess them for market potential; and - stable: there must be an assessment of a segments short, medium and long term viability. Segments rarely remain the same over time When you are happy with your hypotheses develop a questionnaire to test them/validate them. Keep the questioning as short as possible and only focus on the things you really need to know. “Pilot” the questionnaire with a small group of customers to test that it works. The sample size for the actual programme should be a minimum of 50 to be useful, or 30 per customer segment identified. This can be a large task and it may be more economical to subcontract the work out. Analyze your results. Perform factor analysis to group customers andy y y g p identify trends and similar responses, and be prepared to re- formulate your hypotheses if necessary. Look at the groups to identify the characteristics that can be used to describe them and their purchasing criteria, remembering the objective is to identify a MINIMAL number of groupings.j y g g Draw out the implications of your findings as they may require the client to readdress its marketing strategy and/or business model. 22 This document is a partial preview. Full document download can be found on Flevy:
  9. 9. Example output Ultimately, this should allow you to develop a performance measurement programme. This should assess ROI and be flexible enough to adjust over time as market conditions change. Loyalty Segmentation for US Bank 95output 4.8% 80 85 90 95 Retention (%) Lifetime NPV £100m Retired savers Mid- Affluent Customer annual contribution ($) 70 75 100 150 200 250 300 350 400 450 Young Wealthy Mid- Wealthy Young Affluent Students Tricks and tips The most important thing for segmentation analysis is ensuring that the categories you define are meaningful for the exercise you are participating in. The easiest segments to identify - age, region, and so on - are often the least indicative ways of dividing a group of Source: Example people for a company hoping to achieve a particular objective. Base all segmentation on hard, data-based analysis, not gut-feelings. One of the most difficult lessons of customer segmentation, particularly for the client, can be finding out which customers not to sell to. Types of segmentation and their applications • Economic value Identify customer needs Prioritize targets Develop CVP Create market position Reach Segment by: • Demographics • Purchase behaviours • Usage behaviours • Channel • Attitude low relevance high relevance 25 This document is a partial preview. Full document download can be found on Flevy:
  10. 10. Economies of scale Drawing a scale curve shows the benefits of scale in the production of a particular product or component. Economies of scale can help to explain differences in cost between different producers. Typical application Description p Economies of scale are most likely to be found in industries with large fixed costs of production such as chemicals, petroleum, steel and automobile manufacture, etc. They are a significant barrier to entry if fixed costs are high. application Economies of scale do not just apply to manufacturing businesses, however. There can also be economies of advertising, promotion and marketing. Begin by gathering the relevant data on cost per unit from your client (e.g. get exact capacity and cost per tonne for client in four plants). Typical process ( g g p y p p ) Research your client’s competitors’ costs through desk based or direct research. If necessary, with project partner approval, you can also interview competitors. For missing data, try and use your ingenuity (e.g. by how much would your cost per unit drop if the size of organisation doubled).g ) Organise your results in a table showing output and the effect of a change in output on cost input. Use the Excel scatter function to create your chart, and the r2 function to determine whether there is a strong correlation. 28 This document is a partial preview. Full document download can be found on Flevy:
  11. 11. Example Finally, when constructing the dashboard panel (in HTML, Visual Basic,Excel), always include an indication of which measures are improving or worsening (often via traffic lights or coloured arrows). output Source: TMC proposal, May 2001 Remember: the function of the executive dashboard is to move clients from vague performance measures to sharp, quantified performance indicators. An example might be moving from a general awareness of the need to monitor product mix to a specific commitment to keep to only two branded products per sales Tricks and tips commitment to keep to only two branded products per sales category. “We can’t measure that” is not a good enough answer. There is always a way to capture critical measures, even if the manual costs are high. Ask a web page designer to help with the presentation it will lookAsk a web page designer to help with the presentation – it will look clearer than your effort. Help by keeping it simple. If you don’t have a dashboard, get out of the car. Contact This document is a partial preview. Full document download can be found on Flevy:
  12. 12. Free cashflow diagram The free cashflow diagram is an excellent format for displaying the results of a cash flow analysis over time. Its strength lies in the fact that it displays all of the key business indicators looked for by a senior executive. These include: sources of value; fixed and variable investment costs; break-even; net and cumulative cash Description position; net present value. Free cashflow represents the net cash flow that a firm or project expects to generate. Unlike a cashflow statement, which attempts to reconcile sources/uses of cash with starting/ending cash (accounting perspective), free cash flow focuses on the key strategic component of the generating/financing equation Typical application component of the generating/financing equation. Given this, the free cashflow diagram can be used in almost all circumstances where you need to display the commercial outcome of any strategic business investment. It is one of the most frequently used tools in the strategy consultants armoury. The diagram should be drawn from an earlier Excel spreadsheet analysis. The following steps outline the main features: - Identify main sources of cash in and cash spend. (Be aware that more than 5-6 sources makes the chart look cluttered and detracts from the key messages. Consider grouping small and non critical sources together as ‘other’ ) Typical process non-critical sources together as other .) - Put cash flow on the x-axis, time on the y-axis. - Create column chart chart, showing cash above the line (use +ve numbers) and cash costs below the line (use -ve numbers) - Hand draw the net cashflow and cumulative cashflow lines. - Highlight the breakeven point and the point of maximum exposure (highest negative cashflow)exposure (highest negative cashflow). - Name cashflow sources. - Insert figures for net cashflow for the year and cumulative year on year cashflow figures. This should lead to break even analysis and an analysis of profitability. - The key ratio for analysis is that of risk exposure - the difference between maximum risk exposed point (worst NPV)difference between maximum risk exposed point (worst NPV) and best possible NPV. There is a clear link between the cash flow diagram and the sources of value waterfall. Both show the individual components of an overall financial flow. Draw this picture early (in combination with your sources of valuey ( y waterfall diagram). It can form the bedrock of common sense decisions and is a very useful communication tool with your team and the client 34 This document is a partial preview. Full document download can be found on Flevy:
  13. 13. Example output Project Proposal Gantt Chart29 30 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28‘KickStart’ • Pressure test vision • Gather information • Develop hypothesis • Scope & workplan Project Proposal Gantt Chart ClientsMarket&Competitors • Agree key drivers of client segmentation/templates • Develop client needs • Client interviews • Form segments & CVP • Agree framework • Develop European competitor models • Develop US competitor models and market trends • Augment European value propositions • UBS relative product & ‘as is’ client /products Consolidation UBS relative product & channel review • Form segments & CVP as is client /p oducts • Consolidate into strategic client segments • Develop likely winning CVP for each segment • Identify channel implications and unserved customers groups • Identify and scale sources of value to UBS Source:Banking project; March 2001 Meetings Hypothesis meeting Interim meeting Consolidation meeting Final meeting • Pre-wire • Prepare board presentation Use colours and dotted bars to improve clarity. Gannt charts should be living documents - project plans should change as more information becomes available during the course of the project. Tricks and tips p j Use real dates as column headings, rather than (say) Week 1, Week 2 etc. Gannt charts can be very complex, particularly on large projects. Make sure you have an up-to-date summary Gannt chart that fits on one page so that you don’t lose track of the big picture. Contact Any manager p g y g p 37 This document is a partial preview. Full document download can be found on Flevy:
  14. 14. Growth spread matrix The growth spread matrix plots a company or division’s ability to create value, relative to its growth. The resulting chart can be split into four quadrants: - destroying value and growing quickly (top left); - destroying value and growing slowly/shrinking (bottom left); Description y g g g y g ( ); - creating value and growing slowly/shrinking (bottom right); and - creating value and growing (top right) The ideal position for a business unit, sector or companies is in the top right corner. Companies classically tend to move around in anp g p y anti-clockwise direction from top left to top right. A business unit which is performing badly will have its underperforming parts cut out or sold, leaving a healthy base which can grow and create value. A growth spread matrix is used to show the relative performance of a portfolio of business units or companies within a sector. Typical application p p Define the context for your assessment - it could be an industry, sector, market or company - and the sub-elements which comprise it. Obtain the last three to five years’ financial results for each element. Define the net assets of each. In the case of comparing companies Typical process pp p g p across an industry or market, you would take this information from the balance sheet. Inside a company, the information can be derived from the management accounts. Calculate the growth of net assets for each element over the period of examination. Calculate the “spread”, or value generated by each element, typically as the cashflow return on investment less the cost of capital. Plot a bubble for each element in a matrix with growth on the vertical and “spread” on the horizontal axis. The size of the bubble isp indicative of the size of the business unit. Use annotation and shading to draw out the key conclusions indicated by the matrix. 40 This document is a partial preview. Full document download can be found on Flevy:
  15. 15. Do not forget to set the minimum and maximum for the vertical axis to the range offered to the customers in the interview process (say, from 1 to 10, not 0 to 10). Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions. Clients can take different messages from the results of this analysis. They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their Example output stronger performance is recognised. 9 10 Score (1 to 10) Key purchase criteria (KPC) comb, Industry X, Germany, 1999 Criteria Comp 1 Comp 2 Comp 3 Client 3 4 5 6 7 8 (1 to 10) Tricks and Source: Example 1 2 Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Key purchasing criteria Tricks and tips Customers can be segmented according to purchasing criteria. This is a useful technique used by retailers FMCG companies. FMCG companies will develop a portfolio of products targeted at different consumer segments (based on purchase criteria). A retailer’s category will include a range of products which target all (relevant) customers (segments) to the store. Contact 43 This document is a partial preview. Full document download can be found on Flevy:
  16. 16. Market definition A market is a place, either conceptually or physically, where a series of different products compete against each other. However, it is not always easy to determine which products compete significantly enough to be considered to be within the same market. Description Markets are characterised by the sale and purchase of specific goods or services that have a certain purpose or meet a certain need. Because needs (and purposes) are subjective and difficult to define, however, we have to abstract a little to arrive at a workable ‘test’ for what a market is not, rather than a neat, definition. Successful market analysis requires a robustly defined market. An incorrectly defined market will lead to inaccurate assessments of market growth, competition and customers. Typical application Typical Begin by creating a realistic definition of the market based on your current knowledge. Based on your hypothesis, define the boundaries of your market by listing ways in which customers can be segmented; and by ways in which it can be differentiated from contiguous markets. Typical process y g Consider whether the market needs to be subdivided to account for differences between, for example: - Geography: the UK apple market is different to and distinct from the Australian market; or - Time: the market for morning newspapers is different fromg p p the market for evening newspapers Identify a close product or supplier - one you think is in the market or on the market boundary. A strict test to define a market rigorously includes principles ofg y p p substitution. Two companies are in the same market if a change in one company’s pricing of its product leads to a significant switch of customer to the other company. A ‘significant’ switch is one that materially impacts a company’s profit margin (use expert advice if necessary). Repeat this process for each potential competitor until the switch proves to be insignificant. 46 This document is a partial preview. Full document download can be found on Flevy:
  17. 17. This should enable you to form and robustly defend a view of: - the degree of industry vulnerability to new entrants; - the sustainability of the current competitive structure; - the drivers of current costs and margins; and - the existing profitability structure and how it may change Example output The most attractive segment- few new companies can enter and poorly performing players can exit easily When both entry and exit barriers are high, profit potential is high, but is usually accompanied by more risk. Although entry is deterred unsuccessful High players can exit easily deterred, unsuccessful companies will stay and fight The case of low entry and exit barriers is Here entry is relatively easy and will be attracted by upturns in economic conditions or other temporary EntryBarriers Source: Example uncommon windfalls. However capacity will not leave the industry when conditions deteriorate Exit Barriers Low Low High Barriers to entry are either structural (a result of differences in the structure between companies under consideration - incumbents and new) or behavioral (a result of expected changes in competitive behaviour of the incumbents that run counter to the interests of the new entrant). Tricks and tips Major types of barriers to ENTRY Major types of barriers to EXIT • Economies of scale • Product differentiation • Capital requirements • Switching costs • Access to distribution channels / property rights • Cost disadvantages independent of • Specialised assets • low liquidation values or high transfer / conversion costs • Fixed costs of exit • labour agreements • spare part capability • Strategic interrelationships Contact • Cost disadvantages independent of scale, e.g. • favourable location • proprietary technology • access to raw materials • Government policy, e.g. licensing • Strategic interrelationships • image • financial markets • shared facilities, etc. • Emotional barriers • Government / social restrictions 49 This document is a partial preview. Full document download can be found on Flevy:
  18. 18. Model front panel Every financial (Excel) model should have a control panel as its first page. This panel should display all the key variables (inputs) and all the key results (outputs) from the model calculations. The model front panel plays a number of important functions:Typical Description The model front panel plays a number of important functions: - facilitates identification of key parameters and their influence on the critical outputs - allows you to ask “what if” questions when the model is “pressure tested” by your manager/partner or client - allows ‘live’ sensitivity analysis and interaction acts as a communication tool Typical application - acts as a communication tool - facilitates buy-in from the client and other audiences when presenting a model Typical process Typically, two types components constitute a model front panel. They are as follows: - controls: features such as scroll bars, check boxes and option buttons in Excel. These are created by using the "Forms" toolbar. Hover the mouse pointer over the buttons contained on the Forms toolbar in order to determine the control that each one defines. - gauges: Excel charts or simple tables A third element that is sometimes introduced into a front panel isA third element that is sometimes introduced into a front panel is ‘model scenarios’, where lower, base and upper-case parameters and their impacts are displayed. The process for constructing a front panel is more common sense than technique. However, a few pointers may be useful: - understand business need for model how and by whom the model is going to be used. - before going anywhere near a computer, structure the model and panel on paper. - work out “the answer” on the back of an envelope. This is critical, both as a common sense check and as a very powerful demonstration to the client that you understand the key drivers ll li d/ / id if lik l k l- poll client and/or manager/partner to identify likely key controls and gauges and scenarios that should be modeled. - develop heart of model, and front panel prototype. Play with the model – get the feel of it. - revisit each of the stakeholders, demonstrating prototype front end and explain intended functions. fi th fi i th h t th j t- refine - then refine again throughout the project. 52 This document is a partial preview. Full document download can be found on Flevy:
  19. 19. Example output 16 18 £m CAGR (%) (1992-96) Industry X sales, 1992-1996 6 8 10 12 14 6.1% 7.4% -9.8% 213% D C B A 0 2 4 1992 1993 1994 1995 1996 -0.8%E Source: Example Tricks and tips Ensure you are assessing the market in ‘real’ terms (meaning that you are compensating for inflation). To do this, obtain indexed inflation rates (usually available from government resources), and divide your figures by the indexed inflation rate - you may need to rebase your figures if the index year is not the year in which your statistics begin. Once a market estimate has been published by a reputable source, it is often drawn on widely. Always check the source of your data to see how carefully the researcher has assessed the marketplace and whether multiple sources of data have been employed. Take care to trace sources and evaluate their reliability. If you are uncertain about the reliability of a source trace the analyst and ask them how thethe reliability of a source, trace the analyst and ask them how the estimate was made. When inferring market growth from contiguous industries, try and make reasonable inferences based on shared characteristics. For example, demand for car rental might be inferred from demand for business trips However always take care to specifically state yourbusiness trips. However, always take care to specifically state your inferences and the limitations they may have (see forecasting techniques tools). Use annotation and/or commentary to bring out the key messages of a particular chart in advance of discussion or presentation to the client. This will allow you to clarify your view on the behaviour of the market. 55 This will allow you to clarify your view on the behaviour of the market. Use shading to pull out key messages you wish to present to your client. Contact This document is a partial preview. Full document download can be found on Flevy:
  20. 20. PEST analysis PEST is an acronym for Political, Economic, Sociocultural and Technological. The tool is an aide memoir to ensure you cover all the external forces/risks that may have an impact on the company, market or industry under consideration. PEST analysis should be performed early on in an project as it helps identify and prioritse research efforts. Description PEST analysis is a simple framework to structure an informal analysis of the EXTERNAL forces acting on a market. It is universally applicable and simple and can provide insight early on in a project y p j p y p PEST i ti ll f k t i t thi ki d h th i Typical application Typical PEST is essentially a framework to assist thinking and as such there is no process to work through. Below is a categorised list of the issues, that may be relevant to each case. From the long list of issues prioritise the most important by size of impact on the client and probability of occurrence. (Consider both current and emerging issues). Assessing the size of the impact and Typical process g g ) g p probability of occurrence will relate to the type of risk identified. Political Factors The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as: th t bilit f th liti l i t- the stability of the political environment - will government policy influence laws that regulate or tax your business (Employment/Health & Safety/Environmental/Industry specific legislation)? - potential changes in Government/Government policy Economic Factors You will need to consider the state of a trading economy in the short and long-terms. This is especially true when performing analysis for clients with an international focus. You need to look at: Interest rates - the level of inflation - employment/income/asset holding level per capitap y g p p - long-term prospects for the economy: GDP per capita etc. Sociocultural Factors The social and cultural influences on business vary by geography and must be accounted for. Factors include: - attitudes to foreign products and services changing consumer tastes/preferences/fashions- changing consumer tastes/preferences/fashions - how much time consumers have for leisure? - socio-demographic profile of the customer base and its dynamics 58 This document is a partial preview. Full document download can be found on Flevy:
  21. 21. Threat of new entrants Porter’s Five Forces Map The behaviour and market strategies of competitors. Factors include industry The potential for new entrants and the likely Example output Bargaining power of customers Bargaining power of suppliers Rivalry among competitors Factors include industry growth, product and brand distinctiveness, and barriers to exit entrants and the likely level of disruption caused by their arrival Threat of substitution competitors The changing preferences and bargaining power of The bargaining power and pressures on suppliers - this category also includes g g p customers or buyers: the impact of volume, choice, information availability on behaviour How products and technologies may replace current ones and the impact of this - how easy this will be, including the cost of changing product g y questions over the ease of changing suppliers, the availability of substitute products and any economies of scale Two limitations to Porter’s model are often encountered: - regulation can be a very real sixth force not explicitly addressed Source: Example cost of changing product or technology Tricks and tips - the model is static and takes little account of the changes occurring in a industry Bear in mind that the model is extremely widely known, and will not impress a client by itself. This is just a starting point to strategic thinking. Keep a good balance between words and data, but try to provide numerical indicators where possible (e.g. “CAGR =14%” is far more informative than “growth is strong”) Contact 61 This document is a partial preview. Full document download can be found on Flevy:
  22. 22. RACI analysis RACI stands for Responsible-Accountable-Consulted-Informed. RACI analysis is a clear and simple way of mapping and assigning functions between departments or individuals to ensure all activities are managed optimally. f Description The four distinct roles are constructed on a grid allowing you to determine exactly who should be influencing and taking responsibility for each key step in a process – with no conflicting or unaccounted activities RACI analysis often forms part of business process reengineeringTypical (BPR) or organisational change engagements. However, it can be used very effectively within capability gap assessment exercises, process mapping etc. (or even in constructing assignment roles). The starting point for this analysis is typically a clearly defined set of processes for the business application Typical process of processes for the business. Form a value chain or process map. In discussion with the client, ensure your value chain is MECE and at a sufficient level to determine activities that may be separable in terms of people skills, technology, physical outputs etc. List each activity along one axis (either vertical or horizontal) process List each activity along one axis (either vertical or horizontal) Against the other axis list the personnel (or department) who are may be directly related to the process. You should consider existing staff, potentially new staff, and/or outsource agencies. It is also important at this stage to be aware of other processes that may share skills – so don’t look at each process in isolation. It is helpful to place the most senior people on the left, proceeding to the most junior on the right. This will facilitate grouping of activities in the next step. Taking each activity in turn, determine in discussion with your client which individual (only one) should take responsibility for each activity, which individuals are accountable for the deliverables, which should be consulted and which need to be informed. Place the relevant letter in the relevant box. Use the resulting grid to identify clusters of activities, duplication of roles, lack of roles etc. In particular you should be looking for: simple demarcation; one person accountable for an activity; 64 simple demarcation; one person accountable for an activity; limited consulting; limited informing Derive recommendations for your client. This document is a partial preview. Full document download can be found on Flevy:
  23. 23. Example output Labour 20 Materials Labour Materials 15 10 Cost Per Unit (? Activity 3 Activity 2 Competitor Product Competitor Technology Competitor Factor Costs Competitor Scale ate a s Labour Materials 5 0 Client Costs Competitor Product Design Our Technology Our Factor Costs Our Scale Competitor Product Competitor Technology Our Factor Costs Our Scale Competitor Product Competitor Technology Competitor Factor Costs Our Scale Activity 1 Tricks and tips If the product is simple, with relatively few inputs, then reverse costing may work (e.g. cardboard boxes), if the process is complex (e.g. car) then think about trying another tool. Competitor Scale Source: Example Reverse costing relies to some extent on guesswork. Make sure you document how you arrive at the final figures and what assumptions you make. Industry experts will have insights into cost structure, activity chains and cost allocation guidelines. In addition, carry out sensitivity analysis on your data so that you know the range of likely competitor costs.competitor costs. Contact 67 This document is a partial preview. Full document download can be found on Flevy:
  24. 24. RONA chart In exploring a company’s strategies, it is important to see how they used their asset base in making profits. The RONA chart expands basic profitability/opportunity cost analysis and shows the various business models adopted by different Description p y companies in a segment. Some opt for high return on sales, typically on low relative sales volumes, whilst others concentrate on high volumes and a relatively low return on sales. This does, however, vary by industry and market. The RONA chart’s two axes show the constituent parts of the returnp on net assets equation shown below: return on sales (how profitable a business is) multiplied by sales/asset turnover (how efficiently a business uses its assets). Return on sales (Profit/Sales) Asset turnover (Sales/net assets) r = Return on net assets (Profit/net assets) Return on net assets (RONA) is a technique to explore how businesses make money from their asset base. Particularly if they are used in conjunction with sector charts, they can be used to assess the apparent strategies of competitors. Typical application (Profit/Sales) (Sales/net assets) (Profit/net assets) pp g p Begin with the usual data gathering process. Identify your market or industry, list the companies or business within this, and obtain company annual reports and any other relevant data over a minimum three year period. Typical process Check the definition of net assets, profits and sales to be used. If in doubt, get expert advice. For profits and sales, check for unusual or non-recurring items like disposal of investments or write downs. For net assets, check for unusual or non-recurring items such as acquisitions or treatment ofg q goodwill. Create a spreadsheet table with sales, profits and net assets over the selected timescale. 70 This document is a partial preview. Full document download can be found on Flevy:
  25. 25. ROS/RMS analysis ROS/RMS analysis demonstrates the strength of relationship between relative size of companies in an industry and their profitability. It is a quick and visually clear way of demonstrating the significance or otherwise of scale economies. Description The ROS/RMS chart itself plots average return on sales against relative market share for each competitor in the industry. The result shows whether there is any competitive advantage to be gained from economies of scale, and - more importantly - how significant those economies of scale are. ROS/RMS charts are a useful tool to employ in any market analysis exercise, and relatively easy to create. Begin by defining the industry you are examining and listing all the players. Check the definition of profits and sales you will be using for consistency. Typical application y Obtain annual reports for the last three to five years for each of the competitors you have identified. Strip down competitor sales to the relevant segments and estimate comparative profitability. Make sure you are comparing like with like: watch out for profits on Typical process y p g p sale of investments, extraordinary write-offs or other unusual items. Create a spreadsheet in Excel with sales and profits over time for each competitor. Plot the table as a bubble chart with the relative market share (at the p ( end of the period of analysis, relative to the largest player) on the horizontal axis and the return on sales on the vertical. Use a log scale for the relative market share (small market shares should be towards the left. You can use the bubbles to represent the size of company. 73 This document is a partial preview. Full document download can be found on Flevy:
  26. 26. Example output • High technology state control • Universal surveillance • Global media giants • Control of all content/ formats • Increasingly Power becomes more centralised Non-individual focus surveillance • Police states/blocks • Increasingly politically and economically guided Big brother Tomorrow never dies Technology becomes less popular Virtual communities Technophobia Technology becomes more popular Today Technology push Technology pull • Technological rejection through possible technology failure • Spiritual • Geographical boundaries become less relevant • Change from “haves/ have nots” to “wants/ ’ ” Power becomes less centralised Individual focus This is a very interactive process but every client interaction should be well prepared. Typically this means approaching each interaction ith tl i d b t t i b k k t Source: Halo Group Tricks and tips Renaissance don’t want” with an overtly open mind, but a straw-man in your back pocket. Remember, this is not about predicting the future, it’s about being better prepared than anyone else to anticipate and react to change. Help stretch your thinking further by applying parallel tools e.g: b id h d i t i l i ti tbridgehead mapping, ecosystem mapping, value migration, asset extension modeling, BCG growth-share matrix etc. Contact 76 This document is a partial preview. Full document download can be found on Flevy:
  27. 27. Sensitivity charts Commercial models used to guide strategic decisions nearly always depend upon assumption - about the market, our client’s ability to capture share, the ability to implement etc. A sensitivity chart is a clear mechanism for displaying the impact of assumptions in your model It achieves this through varying the most critical assumptions Description model. It achieves this through varying the most critical assumptions and then recording the change to the key outputs. Sensitivity analysis is a fundamental part of the construction of any business model. It allows you to determine and communicate the key assumptions in your model in terms of the impact they have on the Typical application assumptions in your model in terms of the impact they have on the bottom line of the business. Sensitivity analysis can also indicate any flaws in the functioning of the model - keep your eye out when conducting sensitivity analysis for erratic or unusual changes due to minor alterations in inputs. T i l Based upon your growing understanding of the issue, build an Excel model. As the model develops be aware of which factors are having most impact on your critical outputs, and question heavily the nature and scale of the assumptions you are making about these factors. Ensure all key assumptions are isolated (typically 5-15), and ensure the model updates assumptions in real time Typical process the model updates assumptions in real time. Taking each key assumption in turn alter the value by +/- five percent. (For example, an assumption of 50% CAGR would become 52.5% CAGR NOT 55.0%). The sign of the alteration should be chosen to give a positive change in the observed output. Note the new values and calculate the percentage change in theNote the new values and calculate the percentage change in the observed output. Reset the assumption then repeat the process. Continue until you have tested all key assumptions. Rank assumptions in terms of significance to the observed output and plot. It is advisable to place the most sensitive assumptions in the ‘control panel’ on the front page of your model, so the client can change the values during interactive sessions. Look carefully at the most sensitive values and make sure you are particularly confident of them in advance of presenting the model Significant time should be spent on this activity.. This will allow you to focus your time on those issues which are most 79 pertinent (and potentially most contentious) for the client. This document is a partial preview. Full document download can be found on Flevy:
  28. 28. SVA is used both as a tool to aid in one-time major decisions (such as acquisitions, large capital investments or division breakup values) and to guide everyday decision-making throughout the organisation. When used as an everyday tool by line managers, SVA can be applied in many ways to: - Assess the performance of the business or portfolio of businesses. Since SVA accounts for the cost of capital used to invest in businesses and the cash flows generated by the businesses, it provides a clear understanding of value creation or degradation over time within each business unit. This information also can be linked to management compensation plans. - Test the hypotheses behind business plans. By understanding the fundamental drivers of value in each business, management can test assumptions used in the business plans. This provides a common framework to discuss the commercial viability of each plan. - Determine priorities to meet each business's full potential. This analysis illustrates which options have the greatest impact on value creation, relative to the investments and risks associated with each option. With these options clearly understood and priorities set, management has a foundation for developing a practical plan to implement change. Before embarking on shareholder value analysis, bear in mind that it requires a thorough understanding of the business in question in order to determine the amount of investment required and the expected cash flows that investments will yield in an accurate manner. Typical process Begin by determining the actual costs of all investments in a given business, discounted to the present at the appropriate cost of capital for that business. You will need to agree this rate with the client. After you have done this, estimate the economic value of your client’s b i b di i h d h fl h hbusiness by discounting the expected cash flows to the present at the weighted average cost of capital. The economic value added can then be worked out as the difference between the net present value of the investments and cash flows. Contact 82 This document is a partial preview. Full document download can be found on Flevy:
  29. 29. Sources of value waterfall The sources of value waterfall is used to identify and highlight individual sources of value within a company. Value waterfalls often add value to the client by presenting data in a simplified way. The process forces you to identify key areas of Typical application Description p y p y y y value creation and/or destruction and thus focus on the big issues that determine a client’s competitive position. These could include: - reasons for change in revenue or profitability; - sources of cost savings; application g ; - sources of capital expenditure spend or savings; - description of full potential sources of value; and - aspirational description of what is achievable Two sources of value waterfalls next to each other can be used to show comparative performance over time - such as between twop p departments, products or competitors. Begin by obtaining the necessary data from financial statements, accounts, or market research. If data is not available, use estimates or proxy data. Typical process Decide what measure you wish to have on the vertical axis, but remember that this axis always describes the value being created or destroyed. This could be any financial or non-financial measure (such as ROI, capex, working capital, headcount, number of customers). Then decide on the elements of the horizontal axis. These represent the disaggregated categories which are causing the change. Such categories could also be time or some other incremental measure. Ensure you choose the right categories to reflect all sources ofy g g value creation and/or destruction. Where value is destroyed, stack the boxes in a downwards direction. When creating the chart in Excel, you will need to use “invisible”g y boxes to get the output to line up correctly. Annotate your chart, including explanatory notes, and detail of key assumptions, outputs and sensitivities. 85 This document is a partial preview. Full document download can be found on Flevy:
  30. 30. Example The results of your information should be organised in a pyramid structure. The information should be clear, and organised so as to prove the conclusions you have reached through the course of the interview programme. Example output Vision To be a profitable manufacturer of branded, core, low-risk investment products for pre-eminent intermediaries in chosen advice-led retail markets Necessary competitive advantages Winning the hearts and minds of Establishing company as top 10 UK provider Employing best customer relationship Implementing leading-edge management Developing the capability for faultless History and pedigree which may have the potential to be leveraged in intermediary retail markets Leading asset manager, leveraging economies of scale to provide out-performance to clients, and share value with intermediaries World- class, proven research and investment processes, core to differentiate d products Ability to build and access leading intermediaries in the retail market Battlegrounds Key initiatives Develop high quality management information on minds of intermediaries and end- customers on the use of the advanced active product as a component of a balanced portfolio 10 UK provider of retail investment products, while retaining profitable offshore business, rapidly followed by entry into European markets relationship managers and best managers of customer relationship management systems to sell proposition management information systems which facilitate understanding and management of the drivers of profitability at customer and product levels for faultless administration to meet intermediaries’ requirements and manage the risks to which BGI is exposed by the new business Create operational infrastructure to support retail business, Design and implement sales and customer Develop a brand and marketing strategy to Rationalise product set by reviewing profitability and Focus product development capability on controlled product innovation aimed at Develop a channel strategy for customer Source: client project, June 2001 information on customer profitability, sales effectiveness, etc. Underway business, including automated service offering customer service processes and infrastructure strategy to build retail and active reputation profitability and mapping to needs of target customer segments innovation aimed at meeting intermediaries’ demand for new retail products customer acquisition During interviews, make sure you push to the logical end of any line of questioning, even if that involves asking hard questions. Not asking enough is worse than asking too much - provided you are polite and have a clear and well reasoned logic to your argument. Tricks and tips g y g Always be prepared to defend your assertions to the CEO. Contact Vince Colvince Co 88 This document is a partial preview. Full document download can be found on Flevy:
  31. 31. Traffic light charts Traffic light charts are simple mechanism for capturing and displaying performance against a number of different criteria. Frequently used alternative names for traffic light charts are “Harvey ball charts” or Moon charts. Description y They consist of a grid, where performance against key criteria are demonstrated as high/medium/low - displayed as colours (red, green, yellow) or shaded as new/half/full moon images. Overall performance is usually summarised across all criteria, butp y , other strategic conclusions can be drawn from the clustering of criteria. Traffic light charts are a very versatile tool, and can be useful wherever a rigorous comparison between market players has to be made. Typical application They are often used to summarise business opportunities or competitor behaviour. Do not begin to construct your traffic light chart until you are sure that you have agreement on the key criteria under assessment. Typical process y g y Also, be sure to define the criteria very clearly. Next, set up a template for each criteria which captures the sub- elements and commentary that will eventually lie behind each colored circle. p Complete the templates “in detail” and make sure you have tracked and logged all of your logic. Summarise all thinking into the final traffic light chart. Sanity check the answers coming out: is this sensible overall, noty g just as a summation of individual elements. Look at the shape, shading, and patterns that may lie in the chart. Use these observations to draw strategic assessments. 91 This document is a partial preview. Full document download can be found on Flevy:
  32. 32. Completing this process in a structured manner gives you a clear picture of: - the linkages between suppliers and customers; - where the value resides in the value chain; - the degree of vertical integration in the industry; Example output - where threats of substitution may lie; - where barriers to entry and exit are located; and - the drivers of key costs and profit margins Concentration and vertical integration by value added of players in a value chain p Suppliers Manu- facturers Distrib- utors Wholesalers Retailers ecreated 80 100 Player 6 Player 7 Player 9 Player 10 Player 9 Player 10 Player 11 Player 12 %shareoftotalvalue 40 60 Player 2 Player 3 Player 5 6 Player 7 Player 8 Player 7 Player 8 y Player 10 Player 10 Player 11 0 20 0 20 40 60 80 100 Player 1 Player 5 Player 6 Player 4 Player 5 Player 7 Player 7 Player 10 % share of total value created in Industry Analysis of share of value generated is very time consuming and resource intensive. The tool should only be used where the market structure is such that it will yield insight. Typically, these will be industries with high degrees of vertical integration or where competition, Tricks and tips Source: Example g g g p or lack of it, in one segment of the value chain affects preceding or subsequent segments. Contact 94 This document is a partial preview. Full document download can be found on Flevy:
  33. 33. Weighted column chart The weighted column chart is a bar chart in which the width of the columns shows a second dimension. It helps display, for example, competitor profitability and competitor share. The weighted column chart has many uses, the most common ofTypical Description g y , which is to analyse the profit performance of competitors or book value and value generated relative to their market share. If the data is available, the chart can equally be used to examine: - business units within a company; or - departments within a particular business unit yp application Begin by carefully defining the market you are looking at. List the competitors to be included in your assessment, and obtain data reports for each. The weighted column chart always takes the same format, and there is an Excel-based tool to automate its creation. Create an Typical process Excel table for last year’s sales and the profits for the last three years, and plot the results on the chart. Place the share of market along the horizontal axis and the return on sales on the vertical. Annotate competitors carefully if there is incomplete and/or misleading data. This might be due to:g g - less than three years of financial figures; - year of sales is not last year’s; - data does not compare like with like; or - figures include activities not directly related to the market you are looking at 97 This document is a partial preview. Full document download can be found on Flevy:
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