Strategic Thinking- the ten big ideas Simulation proffers you opportunity to experience every key aspect of strategic thinking developed in past 100 years Strategic Thinking- the ten big ideas

Looking back & ahead… “For years, corporate planners have based strategic choices on some combo of 3 beliefs: the validity of their intuition the wisdom of their peers the robustness of last's year's strategy”

Looking back & ahead Recent Exception: “The promising attempts to apply scientific method to strategy formulation, ---notably the profit impact of market strategy (PIMS) research”

Profit Impact of Market Strategy (PIMS) 1st significant attempt to study correlation betw: strategic position & financial performance

Profit Impact of Market Strategy (PIMS) Suggests: specific characteristics of an industry less important than shared strategic attributes, such as market share, quality & investment intensity

KEY QUESTION: How effective & aggressive are you going to be in building your Company’s asset base ??????

DON”T BE CHEAP ! It takes $$ to Make $$

“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

Key Demand Consideration: Key Capacity Consideration: Overall market growing @ ~ 14%/yr “Average” company should/could double - sales in 6 years

How effective will u b in building your Co’s asset base? At outset should be spending ~$10-25M / round on plant improvement By end should expand asset base to min $140M to $160M+

“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

Most Basic Principle Guiding Your Decisions: will it Increase Demand for Product Decrease Cost of Mfgg Product

Increase Product Demand Driven by Effective Mgt of 4 P’s Product Mgt. Introducing new brands, Repositioning / killing old brands Promotional Mgt. Optimizing Segment & Media Vehicle budget allocations Distribution Mgt. Optimizing Outside & Inside Sales-force size & segment allocations & Manufacturer-Rep support / Distributor relationship building allocations Pricing- Competitive pricing & Fine-tune A/R

Decrease Mfgg Costs People Plant Investments in HR,TQM & PI Effective Mgt of two other P’s: People Investments in HR,TQM & PI Plant Investments in automation & capacity mgt.

Increase Demand Driven by Effective Mgt of 4 P’s

Improve it- to increase demand in current segment Product Mgt. Options For every product you market-you have 3 options- Improve it- to increase demand in current segment Reposition it – to compete in another segment Kill it- sell off capacity- reinvest recovered capital Reposition Improve Kill

Consequences: Improving a product… PRO’s: Should increase sales & market share Rightsizing capacity- if too high-frees capital for investment If too low- forestalls stockouts Con’s: Proffering a better- price, design and/or higher awareness- accessibility- costs $$$ High Tech segments can take 2+ years- Increases SG&A budgets & thus squeezes margins…

Questions need to answer if plan on improving a product… What are your limits -How much can you cut price? Increase R&D… Promotion… Sales Budget? Competitor moves- improving existing brands in seg. and/or introducing new brands in seg.

Variation on Improving… Can Reposition Can allow product to age gracefully and ride the life cycle Can redirect trajectory of brand position into adjacent segment

Questions need to answer if plan on repositioning a product… How long will it take? Material & labor cost implications? Impact on products in segment entering? Leaving?

In final analysis– You Could decide to Kill

Questions need to answer if plan on Killing a product… How many products do you plan to have overall? Going to add a replacement in this or another segment? Kill immediately-or phase out? Other options- Improve? Reposition? How will competitors react?

Consequences: Killing a product… 1) Makes it difficult maintain Overall Market Share Even if Niche strategy-should increase share in selected niche(s) to offset loss in abandoned segments… Investors-like to see Co. maintain overall starting share….

Consequences: Killing a product… If not replaced: 2) Hands over Market Share to competitors 3) Removes strategic opportunity for distribution $$ efficiencies….

Segment Consequences: Killing a product… LOW TECH Segments: Kill the Cash Cow In opening years 2/3’s volume & profit from Low & traditional sectors HIGH TECH Segments: Difficult to re-enter, could take up to 3 years to launch new prdt.

Your & Your Competitors Product Mgt. Decisions Impact nature, magnitude & arena of Competition Must monitor & anticipate what, where & when… products repositioned, killed, introduced

Let’s assume…… LOW END: 0-1 product killed.. 0-1 repositioned or introduced TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3

Round 3- Forecast nature, magnitude & arena of Competition LOW END: 6 products=rivalry unchanged TRADITIONAL: 9 products, w/ 3 repositioned= increased competition SIZE: 7 products, w/ 2 new= increased competition PERFORMANCE: 4 products, w/ 1 new= reduced competition HIGH: 6 products, w/ 2 new= increased competition 6 4 9 6 7

-Given Round 3 Scenario- How should adjust your production capacities? Round 0-1st shift Capacity Round 3-Unit Demand Traditional 1800 1068 Low End 1400 2081 High End 900 668 Performance 600 823 Size 469

Optimal levels of capacity?

Optimal levels of automation?

Once have optimal levels of capacity– Need to have most efficient levels of production costs

How to have most efficient levels of production costs Reduce Material costs Proffer minimal/optimal level MTBF TQM/Sustainability Initiatives Process Management Initiatives Reduce Labor costs TQM & PI Initiatives Increase automation Invest in employee recruitment & training Utilize 2nd shift Increases length R&D on product line-–makes re-positioning take longer Incur employee separation costs w/ maximum expenditures can realize 18% improvement in productivity in 6 years! ?

Why run 2nd shift –when labor costs 50% higher?

Why run 2nd shift –when labor costs 50% higher? Answer by using your proformas: 1- On production spreadsheet build at capacity- if have 1000 units – build 1000 units 2-On Marketing display- FORECAST 1000 UNITS 3.-ON Proforma Income statement- note NET MARGIN – THE BIQ Q: If we double sales will we double our net margin?– Will we make less because labor costs are 50% higher for 2nd shift?

Why run 2nd shift –when labor costs 50% higher? Answer by using your proformas: 1- On production spreadsheet double output-run full 2nd shift 2-On Marketing display- double forecast 3.-ON Proforma Income statement- NET MARGIN –will more than double THE BIQ Ar: When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride-only has to pay lbor premium…

Now that that you are producing-- in the most efficient manner-- a “perfectly designed” product need to make sure “maximum #” consumers are aware of it & can “easily” buy it…

Moving Product Message Weight & Media Planning Breadth, Depth & Heft of Distribution Network Optimal Pricing & Credit Terms

Advertising/Promo Budget Drives Awareness Promotion efforts are subject to diminishing returns. 1st $1 million- reaches ~ 26% of customers A $2 million- reaches an additional 18%, A $3 million budget only another 5% Have 33% decay/yr-Need $1.4 million just to maintain… When new products are invented, considered newsworthy events. Awareness is created w/ PR campaign. At launch you automatically are charged a $250 thousand fee for marketing rollout and public relations. This fee earns a new product a starting awareness of 50%

Sales Budget Drives Access As w/ awareness- sales budgets experience diminishing returns at $3M. However overall diminishing return is not reached until budgets total $4.5M Achieving 100% accessibility is difficult-- need 2 products inside segment Once you do reach 100% accessibility, you can scale back your total Sales Budget to around $4M and maintain your accessibility. thus access maintenance - ~$2M/product

Fine tuning your Promo, Sales & Pricing…

Promo Budget

Sales Budget Time Allocations Decide on how many salespeople & Mfr Reps will have: How much effort will be focused on market segments: OUTSIDE sales-meet face-to-face (cost $120K/each) INSIDE sales-works leads & operates website & customer support systems (cost $50K/each) Distributors: push product (cost $100K/each)

Pricing / Credit terms A/R Lag: (in days) is the time between customers receiving products & when they are expected to pay for ‘em No credit - demand falls to~ 65% of normal. At 30 days - demand is 92%. At 60 days - demand is 98.5% At 120 days - demand is 100%. The longer the lag, the more your cash is tied up in receivables.

End Game Strategy

If Company well managed- no need to take drastic actions Balance Sheet Current ratio= 2-2.5 Leverage= 1.5-2.5 Sales/Current assets= 3-5 Income Statement Contribution Margin= 30%+ ROS=5%+ Production #’s Plant Utilization=150%+ Inventories= 1-90 days Income Statement Customer satisfaction=40+ Awareness=80% Accessibility=80%+

End-Game Moves of a Poorly Performing Company Large dividends & Stock buy-backs Products killed & large sell off of capacity R&D, Ad & sales budgets slashed No plant investments

End gaming is indicative of BAD MGT- Can only occur if Co. has unproductive assets… Eliminate unproductive assets early & will have no rational for madness

Current ratio 2+ indicates no idle assets Plant Utililization 150%+ - no plant to liquidate Great products (w/ Cust. Survey Scores 40+) never Killed

Rounds 6,7,8- should be most profitable Things you can do w/ your $$$ Which most often selected but least preferable to do? Pay off Debt Invest in growth Buy-back stock Pay dividends

Reducing Leverage Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments” More debt eliminated the greater target you become for a takeover.. No reason not to maintain Co. Financial Structure that got you to position of high profitability…

Issue Dividends Good Dividend Policy Net profit can only be allocated in one of two directions: It is either paid out to owners in dividends or it is Retained Earnings - to grow the company For Example: Ideal Investment/ round = $10-25M ( let take $20M) if profits=$30M & Shares = 2M… you have EPS= $15/share If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings… Could/should issue $10 Dividend

Begin Practice Round 1 decision making….