Strategic Thinking - the ten big ideas

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M A R K E T I N G M G T.

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Strategic Thinking- the ten big - the ten big ideasideas

Strategic Thinking- the ten big - the ten big ideasideas

Simulation proffers you opportunity to experience every key aspect of strategic thinking developed in past 100 years

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Looking back & ahead…

“For years, corporate planners have based strategic choices on some combo of 3 beliefs:

1.the validity of their intuition

2.the wisdom of their peers

3.the robustness of last's year's strategy”

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Looking back & ahead

Recent Exception: “The promising

attempts to apply scientific method to strategy formulation, ---notably the profit impact of market strategy (PIMS) research”

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Profit Impact of Market Strategy (PIMS)

• 1st significant attempt to study correlation betw: strategic position & financial performance

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Profit Impact of Market Strategy (PIMS)

Suggests: –specific characteristics of an

industry less important than– shared strategic attributes,

such as market share, quality & investment intensity

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

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It takes $$ to Make $$

DON”T BE CHEAP !

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M A R K E T I N G M G T.“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

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Key Demand Consideration:

• Overall market growing @ ~ 14%/yr

• “Average” company should/could double - sales in 6 years

Key Capacity Consideration:Key Capacity Consideration:

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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+

0

10000

20000

30000

40000

50000

60000

70000

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

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M A R K E T I N G M G T.“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

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M A R K E T I N G M G T. Most Basic Principle Guiding Your Decisions:

• will it Increase Demand for Product

• Decrease Cost of Mfgg Product

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M A R K E T I N G M G T. Increase Product Demand Driven 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

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Decrease Mfgg Costs

Effective Mgt of two other P’s:

• People– Investments in HR,TQM & PI

• Plant– Investments in automation &

capacity mgt.

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Increase Demand

• Driven by Effective Mgt of 4 P’s

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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

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

Kill

Rep

ositio

n

Imp

rove

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Consequences:Improving a product…

PRO’s:• Should increase

sales & market share

• Rightsizing capacity-– if too high-frees capital

for investment– If too low- forestalls

stockouts

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…

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M A R K E T I N G M G T. Questions need to answer if plan on improving a product…

1. What are your limits -How much can you cut price? Increase R&D… Promotion… Sales Budget?

2. Competitor moves- improving existing brands in seg. and/or introducing new brands in seg.

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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

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M A R K E T I N G M G T. Questions need to answer if plan on repositioning a product…

1. How long will it take?

2. Material & labor cost implications?

3. Impact on products in segment entering? Leaving?

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In final analysis– You Could decide to Kill

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Questions need to answer if plan on Killing a product…

1. How many products do you plan to have overall?

2. Going to add a replacement in this or another segment?

3. Kill immediately-or phase out?

4. Other options- Improve? Reposition?

5. How will competitors react?

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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….

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Consequences:Killing a product…

If not replaced:

2) Hands over Market Share to competitors

3) Removes strategic opportunity for distribution $$ efficiencies….

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M A R K E T I N G M G T. 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.

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M A R K E T I N G M G T. Your & Your Competitors Product Mgt. Decisions

Impact nature, magnitude & arena of Competition

Must monitor & anticipate what, where & when… products repositioned, killed, introduced

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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

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M A R K E T I N G M G T. Round 3- Forecast nature, 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/ 2 new= increased competition

66

99

77

44

66

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

Round 0-1st shift Capacity

Round 3-Unit Demand

Traditional 1800 1068

Low End 1400 2081

High End 900 668

Performance 600 823

Size 600 469

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Optimal levels of capacity?

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Optimal levels of automation?

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Once have optimal levels of capacity–

Need to have most efficient levels of production costs

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How to have most efficient levels of 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

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!?

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

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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 –


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?

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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


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

THE BIQ Ar: When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride-only has to pay lbor premium…

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Now that that you are producing-- in the most efficient manner-- a “perfectly designed” product

• need to make sure “maximum #” consumers are aware of it & can “easily” buy it…

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Moving Product

Message Weight & Media Planning

Breadth, Depth & Heft of Distribution Network

Optimal Pricing & Credit Terms

Message Weight & Media Planning

Breadth, Depth & Heft of Distribution Network

Optimal Pricing & Credit Terms

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Advertising/Promo Budget Drives Awareness

Promotion efforts are subject todiminishing 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…

Promotion efforts are subject todiminishing 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%

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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

• 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

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Fine tuning your Promo,

Sales & Pricing…

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Promo Budget

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Sales Budget Time Allocations

• 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)

Decide on how many salespeople & Mfr Reps will have:

How much effort will be focused on market

segments:

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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.

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M A R K E T I N G M G T.End Game Strategy

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M A R K E T I N G M G T. 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%+

• 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%+

•Production #’s–Plant Utilization=150%+–Inventories= 1-90 days

•Income Statement–Customer satisfaction=40+–Awareness=80% –Accessibility=80%+

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M A R K E T I N G M G T. 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

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M A R K E T I N G M G T. 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

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• Current ratio 2+ indicates no idle assets

• Plant Utililization 150%+ - no plant to liquidate

• Great products (w/ Cust. Survey Scores 40+) never Killed

• Current ratio 2+ indicates no idle assets

• Plant Utililization 150%+ - no plant to liquidate

• Great products (w/ Cust. Survey Scores 40+) never Killed

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Rounds 6,7,8- should be most profitable

Pay off DebtInvest in growthBuy-back stockPay dividends

Pay off DebtInvest in growthBuy-back stockPay dividends

Things you can do w/ your $$$ Which most

often selected but least

preferable to do?

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Reducing Leverage

• Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments”– More debt eliminated the greater

target you become for a takeover..

• No reason not to maintain Co. Financial Structure that got you to position of high profitability…

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Issue DividendsGood Dividend Policy

Net profit can only be allocated in one of two directions:

• It is either paid out to owners in dividends

• or it is Retained Earnings - to grow the company

Net profit can only be allocated in one of two directions:

• It is either paid out to owners in dividends

• or it is Retained Earnings - to grow the company

For Example:

• Ideal Investment/ round = $10-25M ( let take $20M)

• if profits=$30M & Shares = 2M… you have EPS= $15/share

• If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings…

• Could/should issue $10 Dividend

For Example:

• Ideal Investment/ round = $10-25M ( let take $20M)

• if profits=$30M & Shares = 2M… you have EPS= $15/share

• If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings…

• Could/should issue $10 Dividend

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Begin Practice Round 1 decision making….

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Strategic Thinking - the ten big ideas