Complete guide to Business Strategy Design

Complete Guide to Business Strategy Design

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A business strategy specifies what an organisation wants to achieve, where and how it should compete and how the strategy can be delivered

What is the organisation’s

business strategy?

1. What does the organisation want to achieve?

• What is the organisation’s vision and mission?• What are the organisation’s long term goals?• What values does the organisation stand for?

• 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?

• 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?

2. Where should the organisation compete?

4. How can the strategy be delivered?

Context

Business Strategy Development – Issue Tree

Sub-IssuesIssueKey Question

• 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?

3. How can the organisation effectively compete?

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3

There are typically 12 elements in business strategy formulation – checking the health of each element gives a good audit of the business strategy

Context

2.1 Define Market / Segment

2.2 Assess Segment Attractiveness

2.3 Assess Segment Competitive Position

2. Situation Diagnosis

3.1 Review Competitive Options

3.2. Make Strategy Choices

3.3. Document Strategy

3. Strategy Levers

Business Strategy - Elements

4.1 Ensure Communication / Buy-in

4.2. Assign Initiatives & Projects

4. Action Plan 4.3. Set Targets & Monitor Progress

Where to compete?

How to compete?

How to deliver?

1.1 Agree Mission / Vision / Values

1.2 Set 3-5 Year Goals

1.3 Communicate Goals

1. Corporate Goals What do we

want to achieve?


4

Developing an organisation’s mission, vision and values and identifying key stakeholders are required when setting corporate goals

What does the organisation want

to achieve?

1. What is the organisation’s mission?

• What is the overriding purpose of the organisation as a whole?• What is its ‘reason for being’?

• What should every employee of the organisation value and represent?

• What distinguishes the organisation from others?

• 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?

2. What values does the organisation represent?

4. Who are the organisation’s key stakeholders?

1. Corporate Goals

Corporate Goals – Issue Tree

• 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)

3. What is the organisation’s long-term vision and goals?



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The mission, vision and values of an organisation have different time horizons

1.1 Agree Mission, Vision & Values

What is it? Time Horizon Examples

Mission The overarching purpose an organisation- Will never be outgrown Indefinite

3M: "To solve unsolved problems innovatively"

Walt Disney: "To make people happy."

Vision The future the organisation aims to deliver- Achievable in a CEO’s time horizon 10 years

(goals are typically 3-5 years)

Wal-Mart (1990): ”Become a $125 billion company by the year 2000"

Honda: "We will crush, squash, and slaughter Yamaha"

Values The principles that guide day to day behaviour

Day-to-day

Walt Disney:• 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 Goals1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Different methods of communication may be required for each stakeholder group

1.3 Communicate Goals – Sample High Level Communication Plan

1. Corporate Goals

Stakeholder Group / Level

Business Sponsorship

Business Sponsor

Mode of Communication Frequency

Group Wide GMD Level Person A GMD Email Quarterly

Division Level MD Level

Person B

Person C

Person D

Division Email Monthly

‘Town Hall’ Presentation One per Division

BU Level BU Leads

Person E

Person F

Person G

BU-specific presentation

One per BU

Newsletter Weekly

Customers GMD Level Person AFlyer Approx X

Website article Updated as required

Shareholders GMD Level Person AWebsite announcement As needed

Analyst Briefing As needed

ILLUSTRATIVE

Internal

External

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Understanding the market and the organisation’s current competitive position will influence the decision on where to compete

Where do we want to compete?

1. In which market(s) does the organisation compete?

• Which markets does the organisation compete in?• How has the organisation’s involvement changed over time? (e.g.

duration of participation, markets entered / exited)

• 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

• Who are the key players in the market(s)? (number, share, performance)

• How has the organisation’s position changed over time?• What are the organisation’s competitive advantages? (assets /

capabilities / competencies that can be leveraged, brand strength, etc)

3. What are the key market characteristics?

4. What is the organisation’s competitive position?


Situation Diagnosis – Issue Tree

2. How has the organisation performed?

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



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The Situation Diagnosis phase seeks to develop understanding of the profit impact of segment attractiveness and competitive position


Situation Diagnosis – Key Questions

High

Low

Weak Strong

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

• Growth - customer needs, substitutes

• Returns - customer price sensitive, competitor concentration and rivalry

Segment Attractiveness

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

• Cost… fleet, DP, technology, utilisation, manning

• Quality… on-time delivery service

Our Competitive Position

Our Returns

Low

High

1. What are our returns from each segment?

Moderate/ Unattractive

Strong/ Attractive

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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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

Total EBIT = $15m

Total Assets = $100m

Contribution$m p.a.

Selected Assets$m

Contribution on Selected Assets% p.a.

56

7

(3)

40

30

20

10

13

20 20

35

Average Total ROA = 15%

A B C

A B C

Unallocated Costs

Unallocated Assets

A B C

Segments


EXAMPLE

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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The situation diagnosis involves an assessment of the underlying attractiveness of each segment relative to others

2. Situation Diagnosis – Segment Attractiveness1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

2.2 Assess Segment Attractiveness

A. Estimate current segment size and past growth

• 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

B. Explain current profit by segment in terms of underlying attractiveness

• 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

C. Estimate future growth and trends in segment attractiveness

• 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 This is only a partial view of the full presentation. For further details and download

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Each segment should be contrasted in terms of the factors driving underlying attractiveness

Segment Characteristic Possible Measure Impact on Attractiveness

Strength of Basis for Advantage between competitors (see Step 1.3)

Cost advantages from differences in factor costs, scale, experience

Ratio of highest cost producer to lowest cost+

Differentiation advantages from unique differences in customer value in product features/quality, service or branding

Ratio of highest priced to lowest priced+

Height of Barriers to new entrants

Initial capital investment required Size of initial unit of investment required to be a ‘player’ +

Switching costs faced by buyers and distributors

Cost to buyers or distributors of re-training their staff, re-equipping +

Risk/consequence of retaliation by incumbents

Extent of past retaliation to entry (e.g. price cuts vs. buy-out) +

Competitive Intensity Level of concentration % market share held by top 2 or 3 firms… vs. owner operators

+-

Rate of demand growth vs. capacity Growth in demand

Size of capacity increments

+

-

Proportion of fixed costs % fixed costs to total costs -

Height of exit barriers Costs of exit in terms of retrenchment, plant write offs vs. resale/use -

2.2 Assess Segment Attractiveness – Impact of Segment Characteristics (1 of 2)

2. Situation Diagnosis1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Cost advantages stem from sustainable differences in factor costs, scale and experience - and to a lesser extent from operating choices

Source Description Threats to Sustainability

Factor Costs

Preferred access to low cost• Natural resources• Labour• Capital• Technology• Customer information

• Change in access to factors

Scale

Larger relative volumes…• Amortise fixed costs in manufacturing set-ups• Provide access to lower cost processing

technologies• Provide greater purchasing power with suppliers

• Diseconomies of scale / complexity

• Decreasing minimum scale / increasing variety and flexibility

Experience

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

• Leakage of proprietary experience (catch up)

• New technologies (leapfrog)

Other Operational Decisions

Costs are also driven by choice of technology / plant, decisions on maintain / manage vs replace, firm specific work practices…

• …but such choices are often easily matched

2.2 Assess Segment Attractiveness – Sources of Cost Advantage


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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The final step in the diagnosis requires an assessment of the organisation’s relative competitive position for each segment

For each segment and for each competitor:• Volume shares in terms

of throughput and capacity

• Price realisation (lists, salesforce)

B. Estimate competitors’ shares and price realisation

• Identify criteria (price vs. other feature tradeoffs)

• Assess weighting of criteria

• Our position vs. competitors

• Identify cost and asset drivers from our economics

• Measure where competitors and potential new entrants stand on drivers

• Estimate competitor’s / new entrant’s costs and assets

• Identify competitors value proposition

• Identify our internal assets / capabilities and competencies that can be leveraged

• Draw together volumes, prices, costs and assets for competitors / new entrants, factoring in future plans

• Draw out key basis for advantage

• Identify our relative position

A. Identify customers’ selection criteria and competitor ranking

C. Estimate competitors’ relative cost and asset positions

D. Identify the basis for advantage and our relative position


Determine key target segments

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

2.3 Assess Segment Competitive Position


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Estimating competitors’ relative cost and asset positions requires identifying and measuring drivers

Drivers Costs and Assets

• Network configuration and density

Fleet and manning utilisation

• Fleet type / age / utilisation Longhaul and PUD, R&M, fuel, fixed assets

• Manning levels Transport, warehouse, DP admin

• Stocking, Debtor, and Creditor policies

Working Capital

$ / driver

DriversMeasure

Competitor A Competitor B

…

….

…

• • •

• • •

1.Identify cost and asset drivers from our own economics

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

Measure x $ / measure = $3.Estimate competitors / new

entrants costs and assets

Distinguish• Fixed• Variable• Marginal cash

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

EXAMPLE2.3 Assess Segment Competitive Position – Estimating Relative Cost and Asset Position


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Contents

Page

Context 1

Business Strategy Development

1. Corporate Goals 5

2. Situation Diagnosis 11

3. Strategy Levers 28

4. Action Plan 40


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Understanding strategy levers will help answer the question “how to compete?”

3. Strategy Levers

• 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

Strategy Levers

3.1 Competitive Options

3.2. Strategy Choices

3.3. Document Strategy

How to compete?

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Strengthening a competitive position in attractive segments can be done by raising relative performance or creating new sources of advantage

A B

Generic Strategy 1: Strengthening Competitive Position in Attractive Segments

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

UnitCosts

Time

Competitor C

Competitor B

Competitor A

Unit Costs

Scale

Take share

Example: better exploit existing basis for advantage

Relative unit cost performance

Unit Cost

Price

Uncover latent service needs

3. Strategy Levers1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

ILLUSTRATIVE


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An organisation can raise the attractiveness of segments in which it has or could have strong positions

Generic Strategy 3: Increasing Segment Attractiveness

Unit Costs

Reduce Level of Rivalry e.g.

• Promote signalling

• Initiate co-operation

• Engage in tit-for-tat

Raise Entry Barriers e.g.

• Demonstrate harsh retaliation on new entrants

• Lobby governments on “protection” standards

Reduce Pressure from Substitutes e.g.

• Lower price / raise performance relativities

• Increase switching costs / lock-in

Reduce Power of Buyers / Suppliers

• Encourage fragmentation / new entry

• Oppose consolidation

Price


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

ILLUSTRATIVE


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To be implementable, strategies must be aligned with existing organisation structures and operating policies

Strategy

• Strengthen competitive position: cost / differentiation

• Shift segment mix

• Raise segment attractiveness

Organisation = HR Plan

• Structure

• Staffing Levels

• Skills

• Monitoring and Reward Systems

3.2 Strategy Choices – Alignment of Structure & Strategy

Operating Policies

• Sales and Marketing:

Customer account management approaches and pricing policies

• Production: Plant operation and maintenance policies

• Purchasing: Supplier management and negotiation approaches

• R & D: Approach to developing/trialling new product and process technologies

• Assets: Major investment projects and asset management

• IT: Information systems for planning and control


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Asset plans need to identify the major projects and asset management policies required to support the strategy

3. Strategy Levers

Major Capital Projects

Asset Management

Policies

• 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)

• 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)

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

3.2 Strategy Choices – Asset Plans


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Contents

Page

Context 1

Business Strategy Development

1. Corporate Goals 5

2. Situation Diagnosis 11

3. Strategy Levers 28

4. Action Plan 40


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The action plan ensures that the strategy can be practically delivered and tracked

4. Action Plan

Action Plan

• Stakeholders clearly identified – internal and external

• Communication method / collateral appropriate to each group is available

• Communications plan developed and executed

• Awareness and support achieved from stakeholder groups

• Targets for each initiative established in terms of timing, progress to drivers 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

4.1 Ensure Communication / Buy-in


4.3. Set Targets & Monitor Progress

How to deliver?

• Individual initiatives to support each strategy developed

• Project template completed for each initiative

• Economic model linked to align bottom up initiative economics with strategies and overall goals

1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3


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Future state goals will reveal key strategic initiatives / themes; projects should be created to deliver strategic initiatives

4. Action Plan1.1 1.2 1.3

2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

1. Branding

2. Marketing &

Distribution

3. Profitable Growth

1.1 Branding Project 11.2 Branding Project 21.3 Branding Project 3

4. Product Quality

“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 ABC’s activities

Future State Goals Strategic Initiatives / Themes

Strategic Projects

3.1 Growth Project 13.3 Growth Project 23.4 Growth Project 3

2.1 Marketing Project 12.2 Distribution Project 12.3 Distribution Project 2

4.1 Product Project 14.2 Product Project 24.3 Product Project 3

5. Business Architecture

5.1 Bus Arch Project 15.2 Bus Arch Project 25.3 Bus Arch Project 3


Developed in Section 1: Corporate Goals Developed in Section 3: Strategy Levers

‘Where Do We Want To Be?’ ‘What Do We Need To Focus On?’ ‘How Do We Make This Happen?’

ILLUSTRATIVE


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Strategic projects should be prioritised based on impact and ability to implement


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

4.2. Assign Initiatives & Projects – Project Prioritisation

Profit Impact

Ability to Implement

Hard Easy

Low

Medium

High

ILLUSTRATIVE

1.2 Branding Project 2



2.1 Marketing Project 12.2 Distribution Project 1

2.3 Distribution Project 2

3.1 Growth Project 1



4.1 Product Project 1



5.1 Bus Arch Project 1



High Priority Projects


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Owners should be assigned to each project and a delivery timeline should be agreed upon


2.1 2.2 2.3

3.1 3.2 3.3

4.1 4.2 4.3

4.3. Set Targets & Monitor Progress

Year 1 Year 2 Year 3 Year 4 Year 5

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2Owner

Marketing Director

Marketing Director

Project Manager

Marketing Director

Marketing Director

Marketing Director

Finance Director

CEO

MD

Operations Manager

Operations Manager

Project Manager

Technology Manager

Technology Manager

Technology Manager

1. Branding




2. Marketing & Distribution

2.1 Marketing Project 1



3. Profitable Growth




4. Quality Products




5. Business Architecture




ILLUSTRATIVE

