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- 1. CONFIDENTIALBU Strategic Plan BasicsTraining materials 8 June 2001This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.Jim Ayala – PHO Melissa Gil – PHO Regina Manzano – PHO Suresh Mustapha – PHO Steve Shaw – HKO Shelly Yeh – PHO Choon-Gin Tan – SIO
- 2. DESCRIPTION OF MATERIALSThis document was developed as a training presentation for the newly appointed Business Unit CEOs of an Asian Family-owned conglomerate. The purpose of this document is to guide new CEOs through the basic elements of developing a BU-level strategic plan. This presentation is complemented by a companion document the “BU Strategic Plan Template Book” which provides completeness and consistency of BU strategic plan submissions. These templates are not intended to replace or constrain BU strategic thinking and should be adapted to reflect a particular BU’s sectoral context as required 1
- 3. WHAT IS A BU STRATEGY?A strong business concept that drives an integrated set of actions that creates value by: Creating products/services whose value exceeds the cost of providing them Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services2
- 4. RATIONALE FOR PROPOSED DEFINITIONA strong business concept that drives an integrated set of actions that creates value by: Creating products/services whose value exceeds the cost of providing them Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services1. Recognize dual role of creating and capturing value in all elements of business system2. Forces choices6. Competitive7. Externally oriented, customer driven4. Recognizes importance of cost as competitive tool5. Considers tradeoffs between benefit provided to customers and costs they incur3. Gives consideration to all elements of the business system3
- 5. COMMON ELEMENTS OF REAL-LIFE STRATEGIESVisionWhere?Strong business concept consisting ofHow to compete?Integrated set of actionsDeveloped high quality standards and excellent operational procedures Focus on developing critical mass of stores and establishing market dominanceMcDonald’s experienced phenomenal success in globalization due to: Successfully screening franchisees and a dedication to intense initial and ongoing training Consistent delivery of high-quality food and service around the world Huge economies of scale and powerful supplier leverage Capitalized on “American” appeal of McDonald’s Success in tailoring assortment mix to meet local needs“We want to be the world’s best quick-service restaurant experience”"We will offer identical excellent quality across the world"Targeting a broad set of the urban population, increasingly offering a bundled product (i.e., meals) at a low price in major cities around the worldMcDONALD’S EXAMPLE4
- 6. BU STRATEGY REVIEW INTERACTIONSHighly interactive debate driven by fact-based understanding of environment and internal capabilitiesHow do you expect Competitor A to react?How sustainable is your business model? Can it be easily duplicated?How robust are your contingency plans?How quickly can you shift your business emphasis to capture industry opportunities?BU-CEO5
- 7. BU STRATEGIC PLAN DEVELOPMENTIndustry dynamics and implicationsEnvironmental and internal assessmentCompetitive assessmentInternal assessmentWhat are the major changes in industry dynamics and resulting opportunities and risks?What are your competitive strengths and weaknesses?How does your current business emphasis fit with industry opportunity and competitive landscape?Strategy articulationStrategic definition and implicationsStrategic initiativesFinancial projectionsWhat strategy will your BU pursue over the next 3 years?What will be the impact of major strategic initiatives?What are the expected financial returns of your strategy?++++Risk/contingen-cies & strategic alternativesWhat strategic alternatives have you considered?+6
- 8. INDUSTRY DYNAMICS AND IMPLICATIONSEconomics of demand By segment Substitutes, ability to differentiate Volatility, cyclicality Economics of supply Producer concentration and diversity Import competition Capacity utilization Entry/exit barriers Cost structure (fixed and variable) Industry chain economics Customer and supplier bargaining powerWhat are the major changes in industry dynamics and the resulting opportunities and risks?How is industry structure changing with respect to demand, supply, and industry chain economics? What are the resulting opportunities and risks?What is the expected competitor conduct? What are the resulting opportunities and risks?What are the present and future external factors that could present new opportunities and risks?Major industry competitor moves Marketing initiatives Industry capacity changes M&As, divestitures Vertical integration/disaggregation Alliances and partnerships Cost control and efficiency improvementsImpact and likelihood of major industry discontinuities Changes in regulation/government policy Technological breakthroughsKey questionSub-questionsIssues to be considered* * May or may not be applicable to all BUsWhat industry are you competing in? What are the various segments in the industry?Industry definition Industry segmentation Definition Sizing7
- 9. SEGMENT ANALYSISILLUSTRATIVEIndustry boundariesSegmentsIndustry segmentsRelatively distinct sub-groupings within the industry Market is relatively similar within the segment but different across segments Different industry dynamics may vary in importance in different segments8
- 10. ProducersIndustrySTechnology breakthroughs Changes in government policy/regulations Domestic InternationalEconomics of demand Availability of substitutes Differentiability of products Rate of growth Volatility/cyclicality Economics of supply Concentration of producers Import competition Diversity of producers Fixed/variable cost structure Capacity utilization Entry/exit barriers Industry chain economics Bargaining power of input suppliers Bargaining power of customersMarketing Pricing Volume Advertising/promotion New products/R&D Distribution Capacity change Expansion/contraction Entry/exit Acquisition/merger/ divestiture Vertical integration Forward/backward integration Vertical joint ventures Long-term contracts Internal efficiency Cost control Logistics Process R&D Organization effectivenessFinance Profitability Value creation Technological progress Employment objectivesExternal shocksFeedbacktructureConductPerformanceSTRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL9
- 11. 1. Determinants of supplier power Differentiation of inputs Switching costs of suppliers and firms in the industry Presence of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threat of forward integration relative to threat of backward integration by firms in the industry2. Determinants of barriers to entry Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Proprietary learning curve Access to necessary inputs Proprietary, low-cost product design Government policy Expected retaliation5. Rivalry determinants Industry growth Fixed (or storage) cost/value added Intermittent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers3. Determinants of buying power Bargaining leverage Buyer concentration vs. firm concentration Buyer volume Buyer switching costs relative to firm switching costs Buyer information Ability to backward integrate Substitute products Pull-through4. Determinants of substitution threat Relative price performance of substitutes Switching costs Buyer propensity to substitute2. New entrants3. Buyers4. SubstitutesIntensity of rivalry1. SuppliersPrice sensitivity Price/total purchases Product differences Brand Identity Impact on quality perception Buyer profits Decision makers' incentives5. Industry competitors"FORCES AT WORK" FRAMEWORK10
- 12. Opportunities/Threats How are demand and supply expected to evolve? How do you expect the industry chain economics to evolve? What are the potential major industry discontinuities? What competitor actions do you expect?YOUR BUSWOT ANALYSISCONVERT OPPORTUNITIESBUILD ON STRENGTHSNEUTRALIZE THREATSADDRESS WEAK-NESSESStrengths/ Weaknesses What are your BU’s assets/competencies that solidify your competitive position? What are your BU’s assets/competencies that weaken your competitive position? Can be used as a thought starter for competitive analysis and internal assessmentSurfaces potential opportunities/threats arising from factors external to the BU11
- 13. SCP APPLIED TO LEXMARKRapidly changing technology, e.g., birth of portable, handheld, wireless computers Rapidly changing customer preferences Possibility of a paperless society given increasing environmental concern and rise of the internetEconomics of demand Inkjet printers replacing laser in non-network environment High price sensitivity; minimal opportunity for major product differentiation Growth of laser and inkjet printer markets stable but dependent on PC sales and degree of replacement Economics of supply HP holds lion’s share of printer market Industry capacity exceeds market demand Presence of counterfeit and recycled product supply especially in consumables High exit barriers due to asset intensity Industry chain economics Bargaining power of suppliers low Bargaining power of distributors high Little integration (forward or backward)Marketing Manufacturers competing mainly on price Retail dominant distribution channel Aggressive development and release of new products Moves to increase brand awareness via marketing campaigns Creative financing packages Internal efficiency Relentless drive to low cost manufacturing Continuous efforts to create more specialized features and/or functions Others Entry of PC and peripherals players Clamp down on counterfeit and recycled consumables suppliersFinance Price competition on printer hardware drives margins down and forces players to rely on profits from consumable products (good margins) and high volume capture on hardwareSExternal shocksFeedbacktructureConductPerformance12
- 14. RESULTING OPPORTUNITIES AND RISKS FOR LEXMARKOpportunitiesRisksBecome the first mover in printers for portable, handheld, wireless computer market Grow demand base via use of creative, non-traditional channels and alternative financing/payment methods Grow demand for consumables via programs to increase printing usage Be the supplier of printers for PC/peripheral players hoping to the expand into printer market Expand leadership in corporate’ institutional accountsIncreasing demand for customization may increase costs and erode margins Any decline in PC sales may significantly bring down revenues Market share may be eroded as competition intensifies Branding/marketing push from established players Pricing push from low-cost manufacturers Margins at risk if printing usage declines with push for paperless societyNOT EXHAUSTIVE13
- 15. COMPETITIVE ASSESSMENTPrivileged assets that create competitive advantage, e.g. physical assets, location/”space”, distribution/sales network Distinctive skills/competencies that create competitive advantage, e.g. innovation, talent developmentWhat are your competitive strengths and weaknesses?What are the capabilities required to succeed in this industry?How do you compare against these necessary capabilities?Strengths and weaknesses of your competitive position vs. necessary capabilities Benchmark performance against the industry’s relevant key performance indicators (KPIs), with margin and market share as the required minimumKey questionSub-questionsIssues to be considered * KPIs are a handful of levers that drive the value of the industry/business14
- 16. CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE (1/2)Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocatorBHP’s low-cost mines Telecomm/media company with rights radio spectrum Avon’s representatives Coca-Cola Pharmaceutical company with a "wonder drug” "Favored nation" status with a key minister in liberalizing economyInnovation Cross-functional coordination Market positioning Cost/efficiency management Talent development3M with new products McDonald’s with QSC&V J&J with branded consumer health products Emerson Electric’s Best Cost Producer program P&G brand management programPrivileged assetsDistinctive competenciesNecessary capabilities in order to succeed in the industryExample15
- 17. Step 1: Ensure that these are the capabilities required to succeed in the industry. Use this list as a thought starter, add and delete as you see appropriateBU OverallSegmentsABCStep 2: Assess your overall position relative to the capabilities required to succeed in the industry. Also, determine if these capabilities are relevant to the segments you servePhysical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocatorInnovation Cross-functional coordination Market positioning Cost/efficiency management Talent developmentPrivileged assetsDistinctive competenciesNecessary capabilities in order to succeed in the industryCAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE BY SEGMENT (2/2)ILLUSTRATIVE Extremely relevant Somewhat relevant Irrelevant16
- 18. BU OverallCompetitorsABCStep 3: Compare the strengths and weaknesses of your competitive position vs. the necessary skillsPhysical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocatorInnovation Cross-functional coordination Market positioning Cost/efficiency management Talent developmentPrivileged assetsDistinctive competenciesNecessary capabilities in order to succeed in the industryCOMPETITOR CAPABILITY COMPARISONILLUSTRATIVE 17
- 19. Necessary capabili-ties in order to succeed in the industryPrivileged assetsDistinctive competen-ciesCAPABILITY PLATFORM APPLIED TO LEXMARKDistribution/sales networkBrand/reputationInnovationCross-functional coordinationMarket positioningCost/efficiency managementLaserInkjet(Sales network)(Distribution)(Reputation)(Brand)SegmentsExtremely relevant Somewhat relevant Irrelevant18
- 20. Necessary capabilities in order to succeed in the industryPrivileged assetsDistinctive competenciesCOMPETITOR CAPABILITY COMPARISON APPLIED TO LEXMARKDistribution/sales networkBrand/reputationInnovationCost/efficiency managementLexmarkHPEpson Formed own account teams; customer relationships inherited from IBMWell-established retail distribution/ dealer networkKnown for quality specialized products and network softwareBest-known brandKnown for product qualityQuick to market with new technologiesAwarded leader in implementa-tion of necessary product featuresLeader in print qualityCross-functional coordination delivers superior product design and customer serviceMarket positioningCross-functional coordinationOwnership of technology allows low-cost, in-house manufacture of critical components 19
- 21. BENCHMARK PERFORMANCE AGAINST RELEVANT INDUSTRY KPIsKPIs (examples)Financial indicators Margin Net income ROCE Operating indicators Advertising effectiveness Utilization rate Strategic indicators Market share Percent of revenue from new products Working capital trend External indicators Market prices of raw materials BUCompetitor ACompetitor BCompetitor C20
- 22. KPIsFinancial indicators Operating income Margins ROCE Operating indicators Distribution reach Cycle time Strategic indicators Market share Brand awarenessLexmarkHPEpsonBENCHMARKING APPLIED TO LEXMARKStrong Medium Weak * Includes other information equipment (e.g. scanners, projectors) $457 million 12% 29% $1,573 million* 9%* 11%* $583 million* 6%* N/A*12%47%17%21
- 23. INTERNAL ASSESSMENTRelevant BU segments (based on customer, product, geography, distribution channel) Operating contribution estimates for each segmentHow does your current business emphasis fit with the industry opportunities and the competitive landscape?Which segments of the business are providing the highest returns?*What have been the performance trends along major BU KPIs?KPI performance trends over the last 3-5 years, e.g. return on capital employed (ROCE)**, operating income, margins, capital employed Assessment of underlying trend drivers Expected evolutionKey questionSub-questionsIssues to be consideredWhich intangible assets could be near-term sources of value?Identification of in-house intellectual property, talent, networks, brand/image Conversion into sources of value * Based on latest available, 1-2 year historical financial statements ** ROCE = Operating income x (1-tax rate) All interest bearing debt (short and long) + minority interest + stockholders’ equity22
- 24. SEGMENT ANALYSISRevenue Gross profit Operating profit Assets employed People employedOperating profit margin Gross profit margin ROCEStep 1: Identify the relevant segments Step 2: Provide a segment analysis based on the following minimum financial metrics: revenue, gross profit and margin, operating profit and margin Step 3: To the extent assets and people can be disaggregated by segment, deployment of assets against returns can be analyzed %PhP% of totalSegment 1PhP% of totalSegment 2PhP% of totalSegment 3PhP% of totalSegment 4PhP% of totalTotal % % % %Segment 1Segment 2Segment 3Segment 4Total23
- 25. SEGMENT ANALYSIS APPLIED TO LEXMARKPrinters and suppliersOther office imagingKeyboards and otherRest of worldEuropeUSProduct PercentGeography Percent of total revenues, 1995100% = USD 3,807 million100%= $2494 m100%=$895 m11414864846100%= $3021 m100%= $1024 m14355184646100%= $3452 m100%= $1031 m1428584060100%= $3807 m100%= $1164 m9236832671Gross profitRev1992Gross profitRev1993Gross profitRev1994Gross profitRev1995024
- 26. TREND ANALYSIS – RETURN ON CAPITAL EMPLOYED (ROCE)The ROCE tree can be disaggregated to show the other relevant KPIs of a BUROCE PercentOperating income x (1 - tax rate) PhP millionCapital employed PhP million÷Revenue PhP millionOperating margin Percentx(1 - tax rate) PercentxMarket share PercentIndustry sales PhP millionxILLUSTRATIVE 25
- 27. TREND ANALYSIS – CASHThe cash flow tree can be disaggregated to show the other relevant KPIs of a BUCash flow generated PhP millionOperating cash flow PhP millionInvesting cash flow PhP million+Net income PhP millionNon-cash expenses PhP million+Change in working capital PhP million+Financing cash flow PhP million+NOT EXHAUSTIVE26
- 28. TREND ANALYSIS APPLIED TO LEXMARKROCE PercentOperating income x (1 - tax rate) USD MCapital employed USD M÷Revenue USD MOperating margin Percentx(1 - tax rate) PercentxMarket share PercentIndustry sales USD MxNOT EXHAUSTIVE 27
- 29. INTANGIBLE ASSET CHECKLISTIntangible assetsWays to extract near-term valueTalent Highly motivated and competent workforce leveraging specific skill sets to Generate growth Improve/increase company intangibles Intellectual property Patents generating licensing fees Understanding of customer behavior Risk management Software Network Interconnected webs of parties Non-exclusive Additional member lowers costs, increases benefits Brand/image Inherent image or brand built upon excellent service and product offerings Lower search costs for customers 28
- 30. Technology for products Networking softwareINTANGIBLE ASSET ASSESSMENT APPLIED TO LEXMARKIntangible assetsWays to extract near-term valueCustomize to suit industry segments currently not served Develop related products that may use networking software in-house or via partnershipSales force engineersDevelop the best product to suit identified customer needsTalentRelationship with suppliersGood working relationship allows better capture of production efficiencies that improve product cycle time and cost efficiencyNetworkIntellectual propertyNOT EXHAUSTIVE 29
- 31. STRATEGY ARTICULATIONWhere are you going to compete along these dimensions and why: Target market Distribution channels Product (breadth and depth) Geographic scopeTarget customer definition Benefits that you will offer the customers Product pricing Position against competition vis-à-vis the benefits provided and the price chargedDelivery and communication of customer value proposition (value delivery system) Competitive advantage in delivering these benefits to the customerWhere to compete?What is your customer value proposition for the different segments you are going to serve?What is your business model?What strategy will your BU pursue over the next 3 years?Key questionSub-questionsIssues to be consideredIndustry attractiveness and implication review Alignment of chosen strategy and environmental realitiesHow does your chosen strategy exploit the industry opportunities and address the industry/competitive threats?30
- 32. WHERE TO COMPETE?CustomersChannelsProductsGeographic marketsTarget customers and segments Which customers are you trying to target or attract? Which are you willing to serve, but will not spend resources to attract? Which would you prefer not to serve?How does the entity reach its target customers Which distribution channels will you use? What customer segments can they reach?Geographical scope of business activities Geographic limits to the business? Local, regional, multi-local, national, international, or global player? If local, which localities?Quality and breadth of the product line Breadth of the product line? Quality of the product line? Product bundles or a series of unrelated products?31
- 33. WHERE TO COMPETE?LEXMARK EXAMPLE Staged expansion: national, then internationalFortune 1000 companies in banking, insurance, retail/pharmacy industries for laser printers Have unique network printing needs Large printer users Value (not price) oriented segments Consumer mass market for inkjet printersUsed broadest range of channels for customer freedom Traditional retail channels (i.e., dealer network, value-added resellers, about 5,000 retail outlets) Own account marketing teams to sell direct to customers Laser printers Color inkjet printers Associated consumable supplies MarkVision complete printer management systemCustomersChannelsProductsGeographic markets32
- 34. VALUE PROPOSITIONA company’s specific promise to its target customers of the benefits it will provide at an explicit price It answer the following questions: Who is your target customer? What are the explicit benefits you provide to your customer? What perceived value do you provide to the customer better than competition? How much value do your customers attach to the benefits you provide?33
- 35. “We will serve the fast-growing segments of the network printer market with high quality, technologically-advanced products targeted to customer needs at a moderately higher price than undifferentiated laser printers”.LEXMARK'S VALUE PROPOSITION FOR LASER PRINTERS34
- 36. Flash memory allowing instantaneous printing and updating of forms in multiple locations Duplex printing – ability to print on both sides of paper Paper trays to handle three or more sizes of paper and forms Technical service support to help with systems design and product problemsTargeted to segment needs High quality Technologically advanced Competitive priceSlight premiumBankingPriceBenefitsWhy choose Lexmark?Slight premiumPharmacyTAILOR VALUE PROPOSITION TO VARIOUS CUSTOMER SEGMENTSAbility to print prescription labels without jamming (due to spacing of rollers) Technical service support to help with system design and product problemsLEXMARK EXAMPLE Segment35
- 37. BUSINESS MODELUnderstand value desiresSelect target Choose the value Value propositionDesign product/ processProcure, manu- facture Distri- buteProvide the value ServicePriceDefine benefits/ price Sales messageCommunicate the value Business model: Integrated set of actions to provide and communicate the value proposition to customersSegmentationValue propositionAdver- tisingPromo- tional/PRValue delivery system (VDS)Each BU must address these 2 issues to define their business model Illustration of how the value proposition will be provided and communicated Identification of existing strengths that can be leveraged and required capabilities that need to be built to be distinctive in chosen value delivery system1236
- 38. LEXMARK LINKED VALUE PROPOSITION TO CHANGES IN BUSINESS SYSTEM Product Design Process Procurement Manu-facturingDistributionMarketing & SalesAfter-Sale ServiceProvide the ValueCommunicate the ValueHighly-customized to customer segments 12 month design cycle Fully cross-functional Limited to specific target segmentsIn-house control of critical technologies Outsourced only non-critical components Utilized preferred suppliersKept high value added processes in-house Improved flexibility and reduced product cycle time Minimized changes in production for new productsMultiple channels Small channel sales force Provided incentives to retailers via higher margins Partnerships with key manufacturers for “private label” brandsLarge sales force targeted at end users in specific industries Sophisticated order fulfillment system Monthly customer index ranking per sales team Retraining to allow more end-user sales approachDedicated technical people per industry sales group Rapid customer response (<3 hrs) Multiple channels e.g. phone, internet, etc. LexExpress overnight exchange if repair cannot be doneStrengths to leverageCapabilities to buildRelationships of the account teams with end-users R&D talentRelationships with suppliersProduction know-howRelationships inherited from IBMBrand strengthBetter systems to allow an even smoother flow of information37
- 39. STRATEGIC INITIATIVESFinancial impact from each strategic initiative Expected financial outlay for each initiativeHow much value will be created from each strategic initiative?Resources required Availability of resources in the organization Plan for filling resource gapsWhat resources will each strategic initiative require?What will be the impact of major strategic initiatives?Key questionSub-questionsIssues to be consideredPossible strategic initiatives listWhat major strategic initiatives are required to successfully implement your selected business model?Sources of value from each strategic initiative (e.g., EBIT, capital employed)What are the sources of value created from each strategic initiative?38
- 40. STRATEGIC INITIATIVES: SOURCES OF VALUEILLUSTRATIVE Initiatives (examples)1. Capture greater market shareVolume increaseEBIT impact viaPrice increaseCost reductionOtherInvest-mentCapital employed impact viaDivest-mentCapital efficiency*Otherü2. Cost reduction (e.g., effective channel management)3. Obtain higher prices4. Create new market demand5. Form strategic alliances/ partnershipsüüüüüüüüüüü * E.g. improved working capital employment, increased asset utilization, changes to asset ownershipSub- initiatives39
- 41. STRATEGIC INITIATIVES: VALUE QUANTIFICATIONILLUSTRATIVE Estimate of total ongoing operating income and capital employed impact from successful implementation of strategic initiativesOperating income ongoing impact 2001-2004 PhP millionsCapital employed ongoing impact 2001-2004 PhP billionsPresent operating incomeVolume increasePrice increaseCost reduction benefitAdditional costsTotal ongoing operating incomePresent capital employedImproved capital efficiencyDivestmentsAcquisitionsTotal ongoing capital employedone-time operating income impact = one-time costs = +++–=––+=40
- 42. InitiativesSub-initiativesPeople/skillsResource requirementsFundingEx-Com involvement1. Capture greater market share2. Cost reduction3. Achieve higher prices4. Create new market demand5. Form strategic alliances/partner-shipsILLUSTRATIVE STRATEGIC INITIATIVES: RESOURCING REQUIREMENTS41
- 43. FINANCIAL PROJECTIONSKey questionSub-questionsIssues to be consideredIncome statement forecastCash flow forecastWhat are the key assumptions?What is your projected net income growth in the next few years?What is your expected cash generation ability over the medium term?What is your expected capital productivity?What are the expected financial returns of your strategy?Balance sheet forecast ROCE computationProfit and loss (e.g. revenue, cost, margin) Balance sheet Corporate center directives Corporate center assumptions42
- 44. FINANCIAL PROJECTIONS (1/4)ILLUSTRATIVEBusiness unit assumptionsRevenues•Market size•Market share•PriceCosts•Input costs•Production costs•Other costs(e.g. SG&A)Margins•Gross margin•OperatingmarginCapital•Plannedinvestments/divestments•Changes inworking capitalYear 1KEY FORECAST ASSUMPTIONSYear 2Year 3Growth rateCorporate center assumptionsYear 1Year 2Year 3Key economicindicators•GDP growth•Consumerprice index•Exchange rate(PhP/USD)•91-day T-billrateCorporate taxrate43
- 45. FINANCIAL PROJECTIONS (2/4)ILLUSTRATIVEHistoricalSalesCost of goods soldGross profitOperating expensesOperating profitOther expensesTaxesNet profit1999FORECASTED INCOME STATEMENT2000In PhP millionBudget2001Forecast2001200220032004CAGR1999-2004Growth analysisSales (%)Gross profit (%)Operating profit (%)Net profit (%)Margin analysisGross margin (%)Operating margin (%)Net margin (%)*Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiativeson the revenues and costs should be established clearly with additional attachments if required44
- 46. FINANCIAL PROJECTIONS (3/4)ILLUSTRATIVEOperating profitDepreciation and amortizationOther non-cash operatingexpensesNet operating cash flowIncrease/(decrease) in workingcapitalOther operating cash flowTotal operating cash flowFORECASTED CASH FLOW STATEMENTHistorical19992000Budget2001Forecast2001200220032004CAGR1999-2004*Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiativeson the fixed and working capital investments should be established clearly with additional attachments if requiredCapital expenditureOther investing cash flow itemsTotal investing cash flowIncrease/(decrease) in debtDividendsOther financing cash flowTotal financing cash flowIn PhP million45
- 47. FINANCIAL PROJECTIONS (4/4)CashAccounts receivablesInventoriesOther current assetsTotal current assetsNet fixed assetsOther assetsTotal assetsAccounts payableOther current liabilitiesTotal current liabilitiesShort-term loansLong-term loansOther interest-bearing obligationsOther liabilitiesTotal liabilitiesMinority interestTotal stockholders’ equityCapital employedROCETotal liabilities and stockholders’ equityILLUSTRATIVEFORECASTED BALANCE SHEETHistorical19992000Budget2001Forecast2001200220032004CAGR1999-2004In PhP millionRatio analysisWorking capital turnoverDebt-equity ratio46
- 48. RISK/CONTINGENCIES AND STRATEGIC ALTERNATIVESKey questionSub-questionsIssues to be consideredWhat are the associated risks to your chosen strategy?Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chosen strategy?Beyond the 3-year time frame, what breakthrough strategic options may be possible? chosen strategy?What strategic alternatives have you considered?Identification of significant potential risks and plans to mitigateWhere to compete? Value proposition Business model Alignment with external realities“Out-of-the-box” ideas47
- 49. 2. New entrants3. Buyers4. SubstitutesIntensity of rivalry1. Suppliers5. Industry competitorsSTRATEGIC ALTERNATIVESRe-examining industry opportunities and industry/competitive threats, what alternatives exist to your chose strategy?48
- 50. DEFINITION OF RISKSDefinitionRisk of loss due to changes in industry and competitive environment, as well as shifts in customer preferences Business riskRisk due to changes in regulatory environment (e.g. deregulation)Regulatory riskRisk due to major changes in technologyTechnology riskRisk of failures due to business processes and operations or people’s behavior, either intentional (e.g. fraud) or unintentional (e.g. errors)Integrity riskRisk of loss due to changes in the political, social, or economic environmentsMacroeconomic risk49
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