PowerPoint Points: Strategic Planning Using Your Balanced Scorecard (Worst-Case Sales) vs. (Best-Case Production) > Forecasting Bonus Point: The Analyst Report

Begin Strategic Plan

NEXT STEP Company Consumers Competitors Conditions Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment NEXT STEP Growth & Competitive Strategies Finance HR Production R&D Marketing Functional Integration Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap Company Consumers Competitors Conditions PEST

3 Levels of Strategic MGT Corporate-Level : In what business should we compete? Corporation Business-Level : How should we compete? Sensors Unit Cons.Elec. Unit Nano-Tech Unit Functional-Level : How do we coordinate? Finance HR / R&D Production Marketing

Level 1-Corporate Strategy In which businesses do we compete? Corporation Consumer Security Services Sensors Unit Nano-Tech Unit ?

Decide what business(es) want to be in … what Products to compete with… What Markets to compete in… Growth Strategy

Growth Strategies Present Products New Products Market Penetration- Increase share among existing customers. Product Development Create new products for present markets Present Markets Market Development Attract new customers to existing products New Markets Diversification new products… new markets… new alliances

Next Level of Strategic MGT Corporate-Level : In what business should we compete? Corporation Business-Level : How should we compete? Sensors Unit Cons.Elec. Unit Nano-Tech Unit Functional-Level : How do we coordinate? Finance HR / R&D Production Marketing

Business Unit Strategy: How do we Compete? STRATEGIC BUSINESS UNIT COMPETITOR A B C MARKET Focus? Quality? Price?

What Advantage can we create & sustain against our competitors? & w/in which Market Segments should we compete?

Strategic Thinking- the ten big ideas 6. Resource allocation models – Porter: strategic choices are set of basic generic strategies (low cost, differentiation, market focus)

“If you don’t know where you are going Porter “What is Strategy” “If you don’t know where you are going any road will get you there.” Lewis Carroll, -- Chapter 6, Alice in Wonderland

Design, produce, market more efficiently than competitors You can Formulate Strategy based on what Competitive advantage you focus on: Cost: Design, produce, market more efficiently than competitors Differentiation: Deliver unique & superior value in terms of product quality, features, service

You can also Formulate Strategy by: Competitive Scope/ MARKET FOCUS Number & Nature of segments compete w/in-

& You can also Formulate Strategy by-Riding a Products Life Cycle Adjust Marketing Mix according to natural Drift of products w/in segments-

Competitive Strategy Matrix Number & nature of segments compete w/in Ride Product LifeCycle #2 #3 Compete on: Broad Market Niche Mrkt Evolving Mrkt Cost Competitive Strategy Matrix #1 Product Quality

Competitive Strategy Matrix Broad Mrkt Niche Mrkt Evolving Mrkt Compete on: Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi Differentiator- Differentiator Hi- End Focus Differentiator- PLC Cost Product Quality

Strategic Choice: Cost Leadership Overriding goal = increased efficiency & lower costs relative to rivals Minimize costs (Marketing, R&D & Production..) Advantages A cost leader able to charge lower prices Even at same price- greater profitability

Strategic Choice: Differentiation Create a product that customers perceive as distinct/unique & offer superior quality/service Advantage Customers expect & willing to pay premium prices

Strategic Choice: Differentiation Will have significant expenditures in R&D & production…. want/need to make high quality/highly desirable product Significant expenditures in marketing… develop greater brand equity —thru increased awareness of product quality Greater Equity = Greater loyalty = Less price sensitivity

3rd Level of Strategy Functional Strategy Marketing Corporate Level Business unit Level Functional Strategy Information systems Research & development Manufacturing Finance Marketing Human resources

Situation/SWOT Analysis Performance Assessment The Big Picture Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment Company Consumers Competitors Conditions PEST Marketing Growth & Competitive Strategies Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap R&D Production HR Finance

INTERNAL STRATEGIC ALIGNMENT FINANCE Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm PRODUCTION MARKETING

Examples of Strategic Alignment NOTES:

Distinctive Competencies Distinctive Competencies When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… Distinctive Competencies Distinctive Competencies

Distinct competencies needed to achieve selected competitive strategy Advantage* Distinctive Competencies *Achieved when you sustain profits above Industry Average

Areas in which you can develop “Distinct Competencies” MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training

Achieving Competitive Advantage thru Cost-Focused Strategy Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments… Functional Alignment Production / HR Automation - pursued early & aggressively/ relatively less expenditure on HR Marketing Spend moderately on promotion & sales R&D Spend minimally on R&D

Differentiator Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Functional Alignment Production / HR Less likely to invest in increased automation or production capacity / relatively higher expenditure on HR Marketing Spend heavy on advertising & sales to create maximum awareness & accessibility Prices tend to be higher R&D High R&D spending - keep products fresh

Select one of the Six Basic Strategies

“Money isn’t Everything” - I knew we were in trouble As soon as he said- “Money isn’t Everything” - I knew we were in trouble

It is important to focus on the means used to achieve the ends … … It is important to focus on the means used to achieve the ends … …..not just on the ends themselves… To only focus on traditional financial accounting measures (such as ROI, ROE, EPS…) …..does not give mgt the whole picture….

Performance needs to be judged thru mix of: financial measures…. & - non-financial measures …which drive financial outcomes Will Make $$$ - if sell product Will sell product if meets consumer Determinant Attributes………. knows about & can get it To achieve “above’ everyone must effectively do their job To effectively do job must know what to do

Strategic Thinking- the ten big ideas 9 9. Metrics that matter Balanced score card- a system that attempts to balance financial performance w/ consideration of: customer's perspective learning & growth perspective & internal business processes perspective

What is measured gets noticed What is noticed gets acted on What is acted on gets improved Today … Vast majority Fortune 1,000 Companies utilize a Balanced Scorecard to help manage performance— because…..

Southwest Airlines – BalancedScorecard- Strategy Map Strategic Theme: Operations Excellence Objectives Measures Targets Initiatives Strategic Theme: Operating Efficiency Profits and RONA Financial Profitability Grow Revenues Fewer planes 30% +/yr 20% 5% Grow Revenues Fewer planes Attract & Retain More Customers More Customers Flight is on -time Lowest prices # Customers FAA On Time Arrival Rating Market Survey 12% growth Ranked #1 Customer loyalty program Quality management Customer On-time Service Lowest prices Internal Fast ground turnaround On Ground Time On-Time Departure 30 Minutes 90% Cycle time optimization Fast ground turnaround Ground crew alignment % Ground crew trained % Ground crew stockholders yr. 1 70% yr. 3 90% yr. 5 100% Ground crew training ESOP Learning Ground crew alignment 17

Capstone's Balanced Scorecard

  Video How to use The Capstone Balanced Scorecard

Most Basic Principle Guiding Your Decisions-- will it: Increase Demand for Product Decrease Cost of Making & Marketing Product

Made all the Right Decisions --product design, pricing, positioning, promotion, distribution… credit terms… production line capacity, automation, hiring training, TQM & PI…

IF Then Your Competitors produce a better product &/or You produce too much of your “great” product IF You’ll be left w/less revenue than anticipated PLUS production & inventory carrying costs that must be paid.. Then

You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs.... IF Then Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment

Maintain Adequate working capital & cash reserves In order to: Need to: Avoid “Big AL” & a Liquidity Crisis- Maintain Adequate working capital & cash reserves Have realistic/ accurate sales forecasts

Quick N’ Dirty Consumer Pref’s Best vs. Worst Case Projections

Estimate Your EARNED SHARE: 2 Q’s: What will the average product sell in the segment next round? To what degree is your product above or below average- on consumers'’ buying criteria?

1 2 3 4 EARNED Share - Sales Forecast Look-up next round Industry Demand … Estimate # products that will be in segment. Divide total industry demand by the number of products= FAIR SHARE Your product’s EARNED demand can be ½ to 2X the average product’s demand… Compare your product with competing products. Factors include design, awareness, accessibility, and planned mid-year revisions. Examine industry capacities & capacities of the “best” products. Can products meet the demand they generate?

Quick N’ Dirty Consumer Pref’s Best vs. Worst Case Projections

Forecast off Customer Survey Scores

Baker 43 1758 units Able 40 1598 Fast 36 1560 Eat 1492 Cake 42 Daze 26 R#1 Dec Survey score % of 223 Predicted sales R#2 Actual Sales R#2 Baker 43 19% 1827 units 1758 units Able 40 18% 1731 1598 Fast 36 16% 1339 1560 Eat 1539 1492 Cake 42 1827 Daze 26 12% 1154 1045 Total=223

R#2 R#1 Survey score 43 40 36 42 26 2 1

For Example-in Traditional segment everyone begins w/ 13% market share Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.) Initial round demand can vary +/- 25% Later rounds best case/worst case vary ~~~~ 10-15% For Example-in Traditional segment everyone begins w/ 13% market share

After 1st Year/Round- Can see demand spread

CASE CASE

BIG INVENTORY- Little Ca$h Worst Case: BIG INVENTORY- Little Ca$h Best Case: Lots of CA$H - Little Inventory

Enter WORSE case- in “your sales forecast” on marketing spreadsheet Enter BEST case- in “production schedule” on production spreadsheet Spread show up as inventory on proforma BALANCE SHEET

need to drive cash position to the black… In WORSE CASE: You have lots of Inventory & little or no Cash. need to drive cash position to the black… $0.00

To adjust your cash position -- If you are cash poor, issue Stock /Bonds - or consider a short term loan If you are cash rich, pay dividends and/or buy back stock.

Important Considerations re: BEST-WORST Scenario Analyses By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL

Important Considerations re: BEST-WORST Scenario Analyses By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs Fixed costs (marketing, R&D, interest or depreciation) already covered Thus, any additional sales would only incur variable (production) costs

For example: If annual sales $120M, = $10M/mo. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin. You’r taxed at ~35%, so your opportunity cost is ~$2M in profit.

BIG INVENTORY/ no cash– risk seeing Big Al How Big is your Slinky? Worst Case: BIG INVENTORY/ no cash– risk seeing Big Al Best case: Lots of CASH / no Inventory -you risk stockout

Determining A Reasonable Spread Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario Should be able to sell excess inventory in ~betw. 6 & 16 weeks w/ 8<9 =

Take your total inventory costs How to measure your slinky slack-- Take your total inventory costs $23,900M

Risk ~9weeks of Inventory to avoid stockout & Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 Risk ~9weeks of Inventory to avoid stockout

Additional Tools/Techniques for Managing & Assessing Your Performance: Marketing-Evaluation Checklist Round Analysis Analyst Report

Round analysis -example

Simulation Scoring System

Virtually all tactical mistakes that are made when implementing strategy are a consequence of the lack of synchronization of decisions made in at least two functional areas

R&D and Production breakdown You develop a new product but forget to buy plant & equipment for it…the year before it is to be launched… R&D and Production breakdown

Marketing, Production & Finance out of sync The company takes an emergency loan because inventory levels increase… Marketing, Production & Finance out of sync

Marketing, R&D, and Production out of sync You reposition a product from the High End to the Traditional segment, but do not address their material & labor costs… Marketing, R&D, and Production out of sync

Everybody is out of sync! Financial decisions are made before knowing the budget demands of all R&D, Marketing and Production decisions… Everybody is out of sync!

Diff Strategies Play into Different Success Measures Cost Strategy = higher leverage/more investment/ more assets/more debt/ less equity Focused Strategies should operate more effectively & have overall less sales Profit MS SP & MC ROE pf/e ROS pf/s AT s/a ROA pf/a BCL L=2-3 X Cost- Niche & PLC B-Diff L=1.5-2 Niche-PLCDiff All Segments= more sales & thus enable greater Cum. profit & overall market share Differentiation Strategy =lower leverage/less investment/ less assets