BU Strategic Plan Template Book

1. CONFIDENTIAL BU Strategic Plan Template Book Jim Ayala – PHO Melissa Gil – PHO Regina Manzano – PHO Suresh Mustapha – PHO Steve Shaw – HKO Shelly Yeh – PHO Choon-Gin Tan – SIO Training materials 8 June 2001 This 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.

2. STRATEGY PLANNING INSTRUCTIONS • The objective of these templates is to provide 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 • Each section begins with a summary that is based on a synthesis of questions and analyses that follow. The suggested approach would be to first complete the relevant back-up analyses and then work towards the overall synthesis

3. TABLE OF CONTENTS • I. Executive summary • II. Environmental and internal assessment A. Industry dynamics and its implications B. Competitive assessment C. Internal assessment • III. Strategic definition and implications A. Strategy articulation B. Strategic initiatives C. Financial projection D. Risks/contingencies and strategic alternatives • IV. Exhibits

4. BU STRATEGIC PLAN DEVELOPMENT • Environmental and internal assessment • Strategic definition and implications • What are the major changes in industry dynamics and resulting opportunities and risks? • What strategy will your BU pursue over the next 3 years? Industry dynamics and implications Strategy articulation + + • What are your competitive strengths and weaknesses? • What will be the impact of major strategic initiatives? Competitive assessment Strategic initiatives + + Internal assessment Financial projections • How does your current business emphasis fit with industry opportunity and competitive landscape? • What are the expected financial returns of your strategy? + Risk/contingen-cies & strategic alternatives • What strategic alternatives have you considered?

5. I. EXECUTIVE SUMMARY Instructions: The Executive Summaryprovides a synthesis of theEnvironmental and InternalAssessments and theresultant BU Strategic Plans

6. II. ENVIRONMENTAL AND INTERNAL ASSESSMENT

7. IIA. INDUSTRY DYNAMICS AND IMPLICATIONS – SUMMARY • A. What are the major changes in industry dynamics and the resulting opportunities and risks? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings A.1 What industry are you competing in? What are the various segments in the industry? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings A.2 How is industry structure changing (demand, supply, and industry chain economics)? What are the resulting opportunities and risks? A.3 What is the expected competitor conduct? What are the resulting opportunities and risks? A.4 What are the present and future external factors that could present new opportunities and risks?

8. IIA. INDUSTRY DYNAMICS AND IMPLICATIONS – BACK-UP 1 A.1 What industry are you competing in? What are the various segments in the industry? • Industry definition • Industry segmentation • Definition • Sizing Instructions:Exhibit 1 could providea useful framework foranswering this question • Industry definition: • Industry segmentation:

9. IIA. INDUSTRY DYNAMICS AND IMPLICATIONS – BACK-UP 2 A.2 How is industry structure changing with respect to demand, supply, and industry chain economics? What are the resulting opportunities and risks? • Economics 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 power Instructions:Exhibit 2,3 or 4 could providea useful framework foranswering this question

10. IIA. INDUSTRY DYNAMICS AND IMPLICATIONS – BACK-UP 3 A.3 What is the expected competitor conduct? What are the resulting 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 improvements Instructions:Exhibit 2,3 or 4 could providea useful framework foranswering this question

11. IIA. INDUSTRY DYNAMICS AND IMPLICATIONS – BACK-UP 4 A.4 What are the present and future external factors that could present new opportunities and risks? • Impact and likelihood of major industry discontinuities • Changes in regulation/government policy • Technological breakthroughs Instructions:Exhibit 2,3 or 4 could providea useful framework foranswering this question

12. IIB. COMPETITIVE ASSESSMENT – SUMMARY • B. What are your competitive strengths and weaknesses? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings B.1 What are the capabilities required to succeed in this industry? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings B.2 How do you compare against these necessary capabilities?

13. IIB. COMPETITIVE ASSESSMENT – BACK-UP 1 B.1 What are the capabilities required to succeed in this industry? • Privileged assets that create competitive advantage, e.g. physical assets, location/”space”, distribution/sales network, intangible assets (intellectual capital, network, brands, talents) • Distinctive skills/competencies that create competitive advantage, e.g.innovation, talent development Instructions:Exhibit 5 could providea useful framework foranswering this question

14. IIB. COMPETITIVE ASSESSMENT – BACK-UP 2 B.2 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 minimum • Strengths and weaknesses of your competitive position vs. necessary capabilities: Instructions:Exhibits 6 and 7 couldprovide a useful frameworkfor answering this question • Benchmark performance against the relevant industry’s KPIs: Instructions:Exhibit 8 could providea useful framework foranswering this question * KPIs are a handful of levers that drive the value of the industry/business

15. IIC. INTERNAL ASSESSMENT – SUMMARY • C. How does your current business emphasis fit with the industry opportunities and the competitive landscape? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings C.1 Which segments of the business are providing the highest returns? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings C.2 What have been the performance trends along major BU KPIs? C.3 Which intangible assets* could be near-term potential sources of value? * Please refer to Exhibit 12 for further description

16. IIC. INTERNAL ASSESSMENT – BACK-UP 1 C.1 Which segments of the business are providing the highest returns?* • Relevant BU segments (based on customer, product, geography, channel) • Operating contribution estimates for each segment Instructions:Exhibit 9 could providea useful framework foranswering this question * Based on latest available, 1-2 year historical financial statements

17. IIC. INTERNAL ASSESSMENT – BACK-UP 2 C.2 What have been 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 evolution ROCE = Operating income x (1- tax rate) All interest bearing debt (short and long) + minority interest + stockholders’ equity Instructions:Exhibits 10 and 11 couldprovide a useful frameworkfor answering this question

18. IIC. INTERNAL ASSESSMENT – BACK-UP 3 C.3 Which intangible assets could be near-term potential sources of value? • Identification of in-house intellectual property, talent, networks, brand/image • Conversion into sources of value Instructions:Exhibit 12 could providea useful framework foranswering this question

19. III. STRATEGIC DEFINITION AND IMPLICATIONS

20. IIIA. STRATEGY ARTICULATION – SUMMARY • A. What strategy will your BU pursue over the next 3 years? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings A.1 Where to compete? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings A.2 What is your customer value proposition for the different segments you are going to serve? A.3 What is your business model? A.4 How does your chosen strategy exploit industry opportunities and address industry/competitive threats?

21. IIIA. STRATEGY ARTICULATION – BACK-UP 1 A.1 Where to compete? • Where are you going to compete along these dimensions and why: • Target market • Distribution channels • Product (breadth and depth) • Geographic scope Instructions:Exhibit 13 could providea useful framework foranswering this question

22. IIIA. STRATEGY ARTICULATION – BACK-UP 2 A.2 What is your customer value proposition for the different segments you are going to serve? • Target customer definition • Benefits that you will offer the customers • Product pricing • Position against competition vis-à-vis the benefits provided and the price charged • Who is your target customer? • What are the explicit benefits you provide to your customers? • What perceived value do you provide to the customer better than competition? • How much value do your customers attach to the benefits you provide?

23. IIIA. STRATEGY ARTICULATION – BACK-UP 3 A.3 What is your business model? • Delivery and communication of customer value proposition (value delivery system) • Competitive advantage in delivering these benefits to the customer Instructions:Exhibit 15 could providea useful framework foranswering this question • How will the value proposition be provided and communicated? • Which of your BU’s existing strengths can be leveraged? What skills/capabilities do you need to build?

24. Instructions:A review of the section on Industry Dynamics and Implications, together with the frameworks used (Exhibit 2,3 or 4) is useful for answering this question IIIA. STRATEGY ARTICULATION – BACK-UP 4 A.4 How does your chosen strategy exploit the industry opportunities and address the industry/competitive threats? • Industry attractiveness and implication review • Alignment of strategy and environmental realities

25. IIIB. STRATEGIC INITIATIVES – SUMMARY • B. What will be the impact of major strategic initiatives? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings B1. What major strategic initiatives are required to successfully implement your selected business model? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings B2. What are the sources of value created from each strategic initiative? B3. How much value will be created from each strategic initiative? B4. What resources willeach strategic initiativerequire?

26. IIIB. STRATEGIC INITIATIVES – BACK-UP 1 B.1 What major strategic initiatives are required to successfully imple-ment your selected business model? • Possible strategic initiatives list

27. IIIB. STRATEGIC INITIATIVES – BACK-UP 2 B.2 What are the sources of value created from each strategic initiative? • Sources of value from each strategic initiative (e.g., EBIT, capital employed) • EBIT impact via • Capital employed impact via • Category • of initiatives • Specific actionable initiatives • Volume increase • Price increase • Cost reduction • Invest-ment • Divest-ment • Capitalefficiency* • Other • Other * E.g. improved working capital employment, increased asset utilization, changes to asset ownership

28. Operating income ongoing impact 2001-2004 • PhP millions • Present operating income • Volume increase • Price increase • Cost reduction benefit • Additional costs • Total ongoing operating income • Capital employed ongoing impact 2001-2004 • PhP billions • Present capital employed • Improved capital efficiency • Divestments • Investments (capex and acquisitions) • Total ongoing capital employed IIIB. STRATEGIC INITIATIVES – BACK-UP 3 B.3 How much value will be created from each strategic initiative? • Financial impact from each strategic initiative • Expected financial outlay for each initiative – + = + + • one-time EBIT impact = • one-time costs = – – + =

29. IIIB. STRATEGIC INITIATIVES – BACK-UP 4 B.4 What resources will each strategic initiative require? • Resources required to make strategy work • Availability of resources in the organization • Plan for filling resource gaps • Resource requirements • Specific actionable initiatives • Ex-Com involvement • Categories of initiatives • People/skills • Funding

30. IIIC. FINANCIAL PROJECTIONS – SUMMARY • C. What are the expected financial returns of your strategy? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings C.1 What are the key assumptions? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings C.2 What is your projected net income in the next few years? C.3 What is your expected cash generation ability over the medium term? C.4 What is your expected capital productivity?

31. KEY FORECAST ASSUMPTIONS BASE CASE Business unit assumptions Corporate center assumptions 2002 2003 2004 Growth rate 2002 2003 2004 Revenues Key economic • Market size indicators • • Market share GDP growth • • Price Consumer price index • Costs Exchange rate • Input costs ( PhP / USD ) • • Production costs 91-day T-bill • Other costs rate ( e.g. SG&A) Corporate tax Margins rate • Gross margin • Operating margin Capital • Planned investments/ divestments • Changes in working capital IIIC. FINANCIAL PROJECTIONS – BACK-UP 1 C.1 What are the key assumptions? • Profit and loss (e.g. revenues, costs, margin) • Balance sheet • Corporate center directives • Corporate center assumptions Instructions:These are the minimum required assumptions. Feel free to add other assumptions relevant to your BU

32. FORECASTED INCOME STATEMENT BASE CASE In PhP million Historical Forecast CAGR 1999 2000 2001** 2002 2003 2004 1999-2004 Sales Cost of goods sold Gross profit Operating expenses Operating profit Other expenses Taxes Net profit Growth analysis Sales (%) Gross profit (%) Operating profit (%) Net profit (%) Margin analysis Gross margin (%) Operating margin (%) Net margin (%) Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives on the revenues and costs should be established clearly with additional attachments if required Best estimates on possible actual results * ** IIIC. FINANCIAL PROJECTIONS – BACK-UP 2 C.2 What is your projected net income in the next few years? • Income statement forecast Instructions:These are the minimum required income statement accounts and analyses. Feel free to add other accounts and analyses relevant to your BU

33. FORECASTED CASH FLOW STATEMENT BASE CASE In PhP million Historical Forecast CAGR 1999 2000 2001** 2002 2003 2004 1999-2004 Operating profit Depreciation and amortization Other non-cash operating expenses Net operating cash flow Increase/(decrease) in working capital Other operating cash flow Total operating cash flow Capital expenditure Other investing cash flow items Total investing cash flow Increase/(decrease) in debt Dividends Other financing cash flow Total financing cash flow Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives on the fixed and working capital investments should be established clearly with additional attachments if required Best estimates on possible actual results * ** IIIC. FINANCIAL PROJECTIONS – BACK-UP 3 C.3 What is your expected cash generation ability over the medium term? • Cash flow forecast Instructions:These are the minimum required cash flow statement accounts. Feel free to add other accounts relevant to your BU

34. FORECASTED BALANCE SHEET BASE CASE In PhP million Historical Forecast CAGR 1999 2000 2001* 2002 2003 2004 1999-2004 Cash Accounts receivables Inventories Other current assets Total current assets Net fixed assets Other assets Total assets Accounts payable Other current liabilities Total current liabilities Short-term loans Long-term loans Other liabilities Total liabilities Minority interest Total stockholders’ equity Total liab. & stockholders’ equity Ratio analysis Working capital turnover Debt-equity ratio Capital employed ROCE Best estimates on possible actual results * IIIC. FINANCIAL PROJECTIONS – BACK-UP 4 C.4 What is your expected capital productivity? • Balance sheet forecast • ROCE computation ROCE = Operating income x (1- tax rate) All interest bearing debt (short and long) + minority interest + stockholders’ equity Instructions:These are the minimum required balance sheet accounts and analyses. Feel free to add other accounts and analyses relevant to your BU

35. IIID. RISKS/CONTINGENCIES & STRATEGIC ALTERNATIVES– SUMMARY • D. What strategic alternatives have you considered? Instructions:The answer to thisoverarching questionrequires a recapitulationof the section’s mainfindings D.1 What are the associated risks to your chosen strategy? Instructions:These subsectionscontain a 1-2 sentencesummary of the relevantfindings D.2 Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chosen strategy? D.3 Beyond the 3-year time frame, what breakthrough strategic options may be possible?

36. IIID. RISKS/CONTINGENCIES & STRATEGIC ALTERNATIVES – BACK-UP 1 D.1 What are the associated risks to your chosen strategy? • Identification of significant potential risks and plans to mitigate • Sensitivity/scenario financial analysis • Potential risks • Impact • Likelihood • Contingency • Business risk • Regulatory risk • Technology risk • Integrity risk • Macroeconomic risk • Other

37. Instructions:Based on a review of the section on Environmental and Internal Assessment, Strategy Articulation, and the frameworks used (Exhibit 2-4, 13-15), determine other potential strategic alternatives IIID. RISKS/CONTINGENCIES & STRATEGIC ALTERNATIVES – BACK-UP 2 D.2 Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chosen strategy? • Where to compete? • Value proposition • Business model • Alignment with external realities • Where to compete?: • Alternative value proposition: • Alternative business model: • Alignment with external realities:

38. IIID. RISKS/CONTINGENCIES & STRATEGIC ALTERNATIVES – BACK-UP 3 D.3 Beyond the 3-year time frame, what breakthrough strategic options may be possible? • “Out-of-the-box” ideas • Instructions:Think radical! Think out-of-the-box!

39. Instructions:Please include all relevant supporting documentation in this section IV. EXHIBITS

40. Exhibit 1 SEGMENT ANALYSIS • ILLUSTRATIVE • Industry segments • Industry • boundaries • Segments • Relatively 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 segments

41. Exhibit 2 STRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL Industry Producers S C P External shocks tructure onduct erformance Feedback • Technology breakthroughs • Changes in government policy/regulations • Domestic • International • Economics 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 customers • Marketing • 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 effectiveness • Finance • Profitability • Value creation • Technological progress • Employment objectives

42. Exhibit 3 "FORCES AT WORK" FRAMEWORK • 2. 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 retaliation • 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 industry 2. New entrants 5. Industry competitors 1. Suppliers 3. Buyers Intensity of rivalry • 3. 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-through • 5. 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 barriers 4. Substitutes • 4. Determinants of substitution threat • Relative price performance of substitutes • Switching costs • Buyer propensity to substitute • Price sensitivity • Price/total purchases • Product differences • Brand Identity • Impact on quality perception • Buyer profits • Decision makers' incentives

43. Surfaces potential opportunities/threats arising from factors external to the BU Exhibit 4 SWOT ANALYSIS • 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? • NEUTRALIZE THREATS • BUILD ON STRENGTHS • CONVERTOPPORTUNITIES YOUR BU • Strengths/ • 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? • ADDRESS • WEAK-NESSES • Can be used as a thought starter for competitive analysis and internal assessment

44. Exhibit 5 CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE (1/2) Example Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator • BHP’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 economy Privileged assets Necessary capabilities in order to succeed in the industry Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development • 3M 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 program Distinctive competencies

45. Exhibit 6 CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE (2/2) Extremely relevant Somewhat relevant Irrelevant • ILLUSTRATIVE Segments BU Overall A B C Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator Privileged assets Necessary capabilities in order to succeed in the industry Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development Distinctive competencies 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 appropriate Step 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 serve

46. Exhibit 7 COMPETITOR CAPABILITY COMPARISON • ILLUSTRATIVE Competitors BU Overall A B C Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator Privileged assets Necessary capabilities in order to succeed in the industry Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development Distinctive competencies Step 3: Compare the strengths and weaknesses of your competitive position vs. the necessary skills

47. Exhibit 8 BENCHMARK PERFORMANCE AGAINST RELEVANT INDUSTRY KPIs • ILLUSTRATIVE • KPIs (examples) • BU • Competitor A • Competitor B • Competitor C • 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

48. Exhibit 9 SEGMENT ANALYSIS • Segment 1 • Segment 2 • Segment 3 • Segment 4 • Total • % of total • % of total • % of total • % of total • % of total • PhP • PhP • PhP • PhP • PhP • Step 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 • Revenue • Gross profit • Operating profit • Assets employed • People employed • % • % • % • % • % • Segment 1 • Segment 2 • Segment 3 • Segment 4 • Total • Operatingprofit margin • Gross profitmargin • ROCE

49. Exhibit 10 TREND ANALYSIS – RETURN ON CAPITAL EMPLOYED (ROCE) • NOT EXHAUSTIVE • Market share • Percent • Revenue • PhP million • Operating income x (1 - tax rate) • PhP million x • Industry sales • PhP million • ROCE • Percent x • Operating margin • Percent ÷ x • (1 - tax rate) • Percent • Capital employed • PhP million • The ROCE tree can be disaggregated to show the other relevant KPIs of a BU

50. Exhibit 11 TREND ANALYSIS – CASH • NOT EXHAUSTIVE • Net income • PhP million • Operating cash flow • PhP million + • Non-cash expenses • PhP million • Cash flow generated • PhP million + + • Change in working capital • PhP million • Investing cash flow • PhP million + • The cash flow tree can be disaggregated to show the other relevant KPIs of a BU • Financing cash flow • PhP million