Complete Guide to Business Strategy Design

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 Sub-Issues What is the organisations vision and mission? What are the organisations long term goals? What values does the organisation stand for?

1. What does the organisation want to achieve?

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business strategy? 3. How can the organisation effectively compete? 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?

2. Where should the organisation compete?

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?

4. How can the strategy be delivered?

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?

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

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. Situation Diagnosis

2.1 Define Market / Segment

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3. Strategy Levers 3.1 Review Competitive Options 3.2. Make Strategy Choices 3.3. Document Strategy How to compete?

2.2 Assess Segment Attractivenes s

2.3 Assess Segment Competitive Position

Where to compete?

4. Action Plan

4.1 Ensure Communication / Buy-in

4.2. Assign Initiatives & Projects

4.3. Set Targets & Monitor Progress

How to deliver?

1. Corporate Goals Developing an organisations mission, vision and values and identifying key stakeholders are required when setting corporate goals
Corporate Goals Issue Tree
Key Question Issue Sub-Issues What is the overriding purpose of the organisation as a whole? What is its reason for being?

1. What is the organisations mission?

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to achieve?

2. What values does the organisation represent?

What should every employee of the organisation value and represent? What distinguishes the organisation from others?

3. What is the organisations 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 organisations 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?

1. Corporate Goals

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

The mission, vision and values of an organisation have different time horizons
1.1 Agree Mission, Vision & Values

What is it? Mission The overarching purpose an organisation - Will never be outgrown The future the organisation aims to deliver - Achievable in a CEOs 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) Wal-Mart (1990): Become a $125 billion company by the year 2000" Honda: "We will crush, squash, and slaughter

Vision

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behaviour Day-to-day 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"

1. Corporate Goals

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

Different methods of communication may be required for each stakeholder group

1.3 Communicate Goals Sample High Level Communication Plan
ILLUSTRATIVE

Stakeholder Group / Level Group Wide

Business Sponsorship GMD Level

Business Sponsor Person A Person B

Mode of Communication GMD Email Division Email

Frequency
Quarterly Monthly

Internal

Town Hall Presentation One per Division This is only a partial view of the Person full presentation. For further details and download D please goto: www.straticx.com/store.html BU-specific presentation One per BU Person E BU Level BU Leads Person F
Person G Flyer Customers GMD Level Person A Website article Website announcement Shareholders GMD Level Person A Analyst Briefing Approx X Updated as required As needed As needed Newsletter Weekly

Division Level

MD Level

Person C

External

2. Situation Diagnosis Understanding the market and the organisations current competitive position will influence the decision on where to compete
Situation Diagnosis Issue Tree
Key Question Issue 1. In which market(s) does the organisation compete? Sub-Issues Which markets does the organisation compete in? How has the organisations involvement changed over time? (e.g. duration of participation, markets entered / exited)

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to compete?

2. How has the organisation performed?

How has the organisation performed? (current and historical) Financial Customer Product 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

3. What are the key market characteristics?

4. What is the organisations competitive position?

Who are the key players in the market(s)? (number, share, performance) How has the organisations position changed over time? What are the organisations competitive advantages? (assets / capabilities / competencies that can be leveraged, brand strength, etc)

2. Situation Diagnosis The Situation Diagnosis phase seeks to develop understanding of the profit impact of segment attractiveness and competitive position
Situation Diagnosis Key Questions
1. What are our returns from each segment?
Strong/ Attractive

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

High Segment Attractiveness

2. How attractive is the profit potential of the segment vs. others?

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Returns - customer price sensitive, competitor concentration and rivalry
Moderate/ Unattractive

3. What are the basis for economic advantages over competitors and how do we rate?

manning
Quality on-time delivery service

Low Weak Strong Our Competitive Position

2. Situation Diagnosis 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
Contribution $m p.a.
5 6 7

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

EXAMPLE

Contribution on Selected Assets % p.a.

A 35 B C

Unallocated Costs

Total EBIT = $15m

(3)

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30 20 A B C

Average

20

20

Total ROA = 15%

Selected Assets $m

10

Total Assets = $100m

Segments
A B C Unallocated Assets

2. Situation Diagnosis Segment Attractiveness The situation diagnosis involves an assessment of the underlying attractiveness of each segment relative to others
2.2 Assess Segment Attractiveness

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

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

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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

2. Situation Diagnosis Each segment should be contrasted in terms of the factors driving underlying attractiveness
2.2 Assess Segment Attractiveness Impact of Segment Characteristics (1 of 2)

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

Segment Characteristic 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 Height of Barriers to new entrants Initial capital investment required

Possible Measure Ratio of highest cost producer to lowest cost Ratio of highest priced to lowest priced

Impact on Attractiveness +

+ Size of initial unit of investment required to be a player

This is only a partial view of the full presentation. For further details and download Switching costs faced by buyers and Cost to buyers or distributors of re-training + please goto: www.straticx.com/store.html distributors their staff, re-equipping
Risk/consequence of retaliation by incumbents Extent of past retaliation to entry (e.g. price cuts vs. buy-out) % market share held by top 2 or 3 firms vs. owner operators Growth in demand Size of capacity increments Proportion of fixed costs Height of exit barriers % fixed costs to total costs Costs of exit in terms of retrenchment, plant write offs vs. resale/use + Level of concentration Rate of demand growth vs. capacity

Competitive Intensity

+ + -

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2. Situation Diagnosis Cost advantages stem from sustainable differences in factor costs, scale and experience - and to a lesser extent from operating choices
2.2 Assess Segment Attractiveness Sources of Cost Advantage

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

Source

Description Preferred access to low cost Natural resources Labour Capital Technology Customer information Larger relative volumes

Threats to Sustainability

Factor Costs

Change in access to factors

This is only a partial view fixed of the presentation. For further details download Diseconomies of scaleand / complexity Amortise costs full in manufacturing set-ups Provide access to lower cost processing Scale Decreasing minimum scale / please goto: www.straticx.com/store.html technologies
Provide greater purchasing power with suppliers 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

increasing variety and flexibility

Experience

Leakage of proprietary experience (catch up) New technologies (leapfrog)

Other Operational Decisions

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

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2. Situation Diagnosis The final step in the diagnosis requires an assessment of the organisations relative competitive position for each segment
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 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

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

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

Ouris position vs. This only a partial view of the full presentation. For further details and download competitors Draw together volumes, Estimate competitors / prices, costs and please goto: www.straticx.com/store.html
new entrants costs and assets assets for competitors / new entrants, factoring in future plans

Draw out key basis for advantage Identify our relative position

Determine key target segments

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2. Situation Diagnosis Estimating competitors relative cost and asset positions requires identifying and measuring drivers
2.3 Assess Segment Competitive Position Estimating Relative Cost and Asset Position
Drivers
1.Identify cost and asset drivers from our own economics

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

EXAMPLE

Costs and Assets Fleet and manning utilisation

Longhaul and PUD, R&M, fuel, fixed assets

Network configuration and density

Fleet type / age / utilisation

$ / driver Manning levels Transport, warehouse, DP

Distinguish Fixed Variable Marginal cash

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Creditor policies

2.Measure where competitors and potential new entrants stand on the drivers

Measure

Drivers
Competitor A Competitor B

.
3.Estimate competitors / new entrants costs and assets

Measure x $ / measure = $

Data from interviews with suppliers, customers, exemployees, competitors direct (e.g. site visits)

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Contents

Page Context 1

Business Strategy Development

1. 2. Corporate Goals Situation Diagnosis 5 11

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3. Strategy Levers

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

Understanding strategy levers will help answer the question how to compete?
Strategy Levers

3.1 Competitive Options

3.2. Strategy Choices

3.3. Document Strategy

How to compete?

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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

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

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

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3. Strategy Levers Strengthening a competitive position in attractive segments can be done by raising relative performance or creating new sources of advantage
Generic Strategy 1: Strengthening Competitive Position in Attractive Segments

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

ILLUSTRATIVE

Raise relative performance Improvements in costs or differentiation are not enough only strengthening relative position raises performance

Create new sources of advantage

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

Relative unit cost performance

Example: better exploit existing basis for advantage

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Competitor C Take share Price Unit Cost Scale
A B

Uncover latent service needs

Competitor B Competitor A Time

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3. Strategy Levers An organisation can raise the attractiveness of segments in which it has or could have strong positions
Generic Strategy 3: Increasing Segment Attractiveness

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

ILLUSTRATIVE

Price
Reduce Pressure from Substitutes e.g. Lower price / raise performance relativities Increase switching costs / lock-in Reduce Level of Rivalry e.g. Promote signalling Initiate co-operation Raise Entry Barriers e.g. Demonstrate harsh retaliation on new entrants Lobby governments on protection standards

Engage in tit-for-tat

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Reduce Power of Buyers / Suppliers Encourage fragmentation / new entry Oppose consolidation

Unit Costs

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3. Strategy Levers To be implementable, strategies must be aligned with existing organisation structures and operating policies
3.2 Strategy Choices Alignment of Structure & Strategy

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

Strategy

Organisation = HR Plan

Operating Policies Sales and Marketing: Production: Customer account management approaches and pricing policies Plant operation and maintenance policies

Structure Strengthen competitive position: cost / differentiation Shift segment mix Raise segment attractiveness

Purchasing: management and This is only a partial view of the full presentation. For furtherSupplier details and download negotiation approaches please goto: www.straticx.com/store.html R & D: Approach to developing/trialling

Staffing Levels

Skills

new product and process technologies Assets: IT: Major investment projects and asset management Information systems for planning and control

Monitoring and Reward Systems

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3. Strategy Levers Asset plans need to identify the major projects and asset management policies required to support the strategy
3.2 Strategy Choices Asset Plans

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

Major Capital Projects

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Asset Management Policies 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)

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)

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Contents

Page Context 1

Business Strategy Development

1. 2. Corporate Goals Situation Diagnosis 5 11

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4. Action Plan The action plan ensures that the strategy can be practically delivered and tracked
Action Plan

1.1 2.1 3.1 4.1

1.2 2.2 3.2 4.2

1.3 2.3 3.3 4.3

4.1 Ensure Communication / Buy-in

4.2. Assign Initiatives & Projects

4.3. Set Targets & Monitor Progress

How to deliver?

Stakeholders clearly Individual initiatives Targets for each initiative This is only a partial presentation. For further and download identified view internal of and the full to support each established in details terms of external please goto: strategy developed timing, progress to drivers www.straticx.com/store.html Communication method / collateral appropriate to each group is available Communications plan developed and executed Awareness and support achieved from stakeholder groups Project template completed for each initiative Economic model linked to align bottom up initiative economics with strategies and overall goals 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

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4. Action Plan Future state goals will reveal key strategic initiatives / themes; projects should be created to deliver strategic initiatives
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 ABCs activities What Do We Need To Focus On? Strategic Initiatives / Themes 1. Branding

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

ILLUSTRATIVE

How Do We Make This Happen? Strategic Projects 1.1 Branding Project 1 1.2 Branding Project 2 1.3 Branding Project 3 2.1 Marketing Project 1 2.2 Distribution Project 1 2.3 Distribution Project 2

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Growth 3.3 Growth Project 2 3.4 Growth Project 3

2. Marketing & Distribution

4. Product Quality

4.1 Product Project 1 4.2 Product Project 2 4.3 Product Project 3 5.1 Bus Arch Project 1 5.2 Bus Arch Project 2 5.3 Bus Arch Project 3

5. Business Architecture Developed in Section 3: Strategy Levers

Developed in Section 1: Corporate Goals

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4. Action Plan Strategic projects should be prioritised based on impact and ability to implement
4.2. Assign Initiatives & Projects Project Prioritisation

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

ILLUSTRATIVE

High Priority Projects 3.1 Growth Project 1

High
5.1 Bus Arch Project 1

3.4 Growth Project 3

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

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1.2 Branding Project 2

Profit

Medium

3.3 Growth Project 2

Low

2.3 Distribution Project 2

Hard
Ability to Implement

Easy

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4. Action Plan Owners should be assigned to each project and a delivery timeline should be agreed upon
4.3. Set Targets & Monitor Progress
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 Marketing Director Marketing Director Marketing Director Year 2 Year 3 Year 4

1.1 2.1

1.2 2.2

1.3 2.3

3.1
4.1

3.2
4.2

3.3
4.3

ILLUSTRATIVE

Year 5

H1

H2

H1

H2

H1

H2

H1

H2

H1

H2

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Operations Manager Operations Manager Project Manager Technology Manager Technology Manager Technology Manager

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