Strategic Thinking - the ten big ideas

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

3. 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”

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

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

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

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

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

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

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

11. 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+

12. AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default The More Assets U have the better you Bond Ratings • As your debt-to-assets ratio increases… Your short term interest rate increases… • Foreach additional .5% increase in interest -Youdrop one category

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

14. Most Basic Principle Guiding Your Decisions: • will itIncrease Demandfor Product • Decrease Cost • of Mfgg Product

15. Increase Product DemandDriven 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

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

17. Increase Demand • Driven by Effective Mgt of 4 P’s

18. 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

19. Consequences:Improving a product… PRO’s: • Should increase sales & market share • 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…

20. 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

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

22. In final analysis– You Could decide to Kill

23. Questions need to answer if plan onKilling 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?

24. 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….

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

26. 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.

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

28. 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

29. Round 3- Forecastnature, 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/ 2new= increased competition 6 4 9 6 7

30. -Given Round 3 Scenario-How should adjust your production capacities?

31. Optimal levels of capacity?

32. Optimal levels of automation?

33. Once have optimal levels of capacity– Need to have optimal levels of production costs

34. How to optimize 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! ?

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

36. 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?

37. 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 When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride-only has to pay labor premium…

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

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

40. 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%

41. 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

42. Fine tuning your Promo, Sales & Pricing…

43. Promo Budget

44. Sales BudgetTime 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)

45. 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.

46. End Game Strategy

47. 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%+

48. 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

49. 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

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