Complete Guide to Business Strategy Design

Complete Guide to Business
Strategy Design

An effective strategy framework should feature a series of logically-
linked strategy elements…
3
‘White
Space’
Initiatives
Strategy Development Model
Strategy Element Description
Vision Statement • Point of view about future industry
context
• Long-term organisational goal
• ‘’ What does it look like when we are
there?”
Corporate Strategy • Major ‘stepping stones’ to Vision
• Implications for investment and
resource allocation
• Strategic risks identified and
responses developed
BU & Functional
Strategic Plans
• Medium term business objectives
• Key initiatives and accountabilities
identified
• Broad financial outcomes defined
BU & Functional
Operational Plans
• Planned actions and supporting
rationale
• Detailed financials including
investments and outcomes
‘White Space’
Initiatives
• Portfolio of development initiatives
outside current lines of business (eg.
new technology, new commodities,
new businesses)
Performance
Management
• Performance against strategic and
financial objectives monitored
1 year 10 – 20 years
Timeframe
Precise
Detail and
Specificity
‘Fuzzy’
Vision/
Mission
Corporat
e
Strategy
Functional
Operating
Plans
Performance
Management
BU
Operating
Plans
Functional
Strategic
Plans
BU
Strategic
Plans
Logically linked and internally
consistent
Focus of this document
Context
ILLUSTRATIVE
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Developing an organisation’s mission, vision and values and identifying
key stakeholders are required when setting corporate goals
6
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?
Sub-IssuesIssueKey Question

The focus of corporate goals spans across financial targets, clients,
employees and community initiatives
9
1.2 Set 3 – 5 Year Goals – Client Example
1. Corporate Goals
• Financial – deliver financial growth to 2014:
– 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
Where do we want to be?
“Become the leading Australian provider of XYZ services”
Sample Outputs
Year 1 Year 5
Revenue Target
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Profit Target
Optimistic
Satisfactory
Pessimistic
Attract Clients
Deliver
Quality
Services
Ensure Client
Success
Customer
Segment 1
Customer
Segment 2
• Required focus areas
/ activities
/ activities
/ activities
/ activities
• Required focus
areas / activities
• Required focus
areas / activities
Value Chain
Structure & Skills Required
Community Initiatives
Group
BU 1
Division
BU 2
Support Key Skills &
Competencies
Required
BU 3
?
Fit with Organisation
• Research
• Other?
• Health
• Education
Focus of Community Initiatives
?
Fit with Organisation
• Research
• Other?
• Health
• Education
Focus of Community Initiatives
ILLUSTRATIVE
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3

Understanding the market and the organisation’s current competitive
position will influence the decision on where to compete
12
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?
2. Situation Diagnosis
Situation Diagnosis – Issue Tree
2. How has the
organisation
performed?
• How has the organisation performed? (current and historical)
– Financial
– Customer
– Product
Sub-IssuesIssueKey Question

Segments should be clearly defined and performance in each should be
quantified
15
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3
2.1 Define Market / Segment
A. Define Segments
• Determine appropriate overall market definition
• Define segments / profit pools within that market
– Products
– Location
– Customers
– Applications
• Mutually exclusive (no overlaps) and complete
(nothing left out)
• On the basis of strategic significance – i.e.
differences across segment boundaries in profits
(Step 2.1), attractiveness (Step 2.2), competitive
position (Step 2.3) … and iterate where required
B. Quantify Our Performance by Segment
• Select representative time period and normalise
performance
• Financial KPIs allocated to segment
– Share / growth
– Profitability / ROA
- Revenues and Direct Costs… go back to
invoices, line items or customer accounts
- Indirect Costs and Assets… select which to
allocate – define allocation mechanism
– Volatility
• Customer KPIs
– Satisfaction
– Churn
• Product KPIsThis document is a partial preview. Full document download can be found on Flevy:

The situation diagnosis involves an assessment of the underlying
attractiveness of each segment relative to others
18
2. Situation Diagnosis – Segment Attractiveness
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3
2.2 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

Segment Characteristic Possible Measure
Impact on
Attractiveness
Pressure from Substitutes Price-to-performance proximity Ratio of price-to-performance for product vs.
substitute -
Bargaining Power of
Buyers
Differentiation of producers See above
+
Concentration of buyers Ratio of % market share by top 3 buyers vs.
top 3 producers -
Importance of product to buyers % product cost to all buyer’s costs
Impact of product on buyer’s output quality
-
+
Threat of vertical integration Current level of forward integration
+
Bargaining Power of
Suppliers
As per Buyer Power, but… … replace
• ‘Producer’ with ‘Supplier’
• ‘Buyer’ with ‘Producer’
… and change
+ to -
21
2.2 Assess Segment Attractiveness – Impact of Segment Characteristics (2 of 2)
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3
Each segment should be contrasted in terms of the factors driving
underlying attractiveness

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)
24
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

27
The organisation’s competitive position should be assessed in every
segment
2.3 Assess Segment Competitive Position – Relative Unit Cost Position
$ per unit Basis for
Advantage
Our Position
Price
Service features /
quality, branding
Weak
Cost
Factor costs,
scale, experience
Weak / moderate
A B Our Organisation D
Unit Assets X X X X
ROA X X X X
Factor in future plans for
new products, cost
reductions, capacity
additions
Give detailed
explanation
Quantify
magnitude of
disadvantage
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3

Understanding strategy levers will help answer the question “how to compete?”
30
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

An organisation can shift its segment mix towards more attractive
segments where it currently has or could have strong positions
33
Generic Strategy 2: Shifting Mix Towards More Attractive Segments
3. Strategy Levers
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3
ILLUSTRATIVE
Attractive
Segment
Unattractive
Segment
Current Future
Outcome
Gain share without collapsing prices
• Easier in growing market
• “Sleepy” competitor
• Pre-emptive capacity addition
• Specialisation advantages
A
B
Time
Profit
per Unit
Low Entry
Barriers
A B
High Entry
Barriers
A B
A B A B
Segment by
product, location
customer
group/application

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
36
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
3. Strategy Levers
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3

The overall strategy should be clearly documented at an appropriate
level of detail
39
Section Details
1. Executive Overview • Summarise the major challenges, initiatives and outcomes
2. Diagnosis • Draws out fact-based insights on our profit by segment, attractiveness and
competitive position
• Clarify our offerings in each segment / value proposition
• Clarify our basis of advantage – cost / scale, differentiation, innovation,
customer intimacy
3. Mission and Strategic Goal • Mission: a statement of purpose
• Overall strategic goal e.g. attain X position in Y segments by time T
4. Strategy Rationale • Outline preferred strategy and rational for discarding alternatives
• Describe timing and contingency plans
5. Operational Changes • Identify the supporting actions / timing required to implement the operational
changes identified - HR, Sales, Assets, etc
6. Targets • Document the 5 year financial and other key performance outcomes expected
from the plan
3. Strategy Levers
3.3 Document Strategy – Example Strategic Plan Format
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3

The action plan ensures that the strategy can be practically delivered and
tracked
42
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
4.2. Assign
Initiatives &
Projects
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

A project template can be useful for capturing important project
information
45
4. Action Plan
1.1 1.2 1.3
2.1 2.2 2.3
3.1 3.2 3.3
4.1 4.2 4.3
Project Plan
Action / Milestone By Month Done
Agree next course of action DONE
Execute course of action IN PROGRESS
Update risk assessment
Write changed provision to EBIT
Sign Off
Role Name Status
Responsible Person A
Project Leader Person B
Financial Impact Person C
Financial Snapshot
Total Spend • $M p.a.
• $M total
Benefit range • $M p.a. over X years
Benefit date
range
• Commencement date
Probability of
Delivery
• Risk-adjusted delivery probability
EBIT Impact • EBIT opportunity
ILLUSTRATIVE4.2. Assign Initiatives & Projects – Individual Project Template
Project Details
Description
Executive Sponsor
Likely BU Impacts
Strategic Alignment
Group Strategy Alignment H / M / L Reasons
Strategic Initiative / Theme
BU Alignment H / M / L Reasons

Owners should be assigned to each project and a delivery timeline
should be agreed upon
48
4. Action Plan
1.1 1.2 1.3
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
1.1 Branding Project 1
2. Marketing & Distribution
2.1 Marketing Project 1
3. Profitable Growth
3.1 Growth Project 1
4. Quality Products
1.1 Product Project 1
5. Business Architecture
2.1 Bus Arch Project 1
ILLUSTRATIVE

1
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Complete Guide to Business Strategy Design