The Strategic Planning Imperative

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The strategic planning imperative

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How tech companies can increase shareholder returns through effective business alignment

In response to these threats, business leaders attempt to deploy new corporate strategies to remain competitive and address long-term growth aspirations. The majority of these strategic attempts end up failing, because the organization’s corporate decision model is not appropriate for the new strategy.

Unfortunately, technology companies are trying to achieve tomorrow’s goals with today’s operations strategy. A simple example observed is when a company’s business strategy shifts from stand-alone products to integrated solution offerings, but internal operations and external partners are disjointed and not tightly integrated.

We observe that when most technology companies continue to operate similarly while forming new strategies, this results in investment dollars being spent inefficiently or not aligned with a new strategy. From there, we see the expected outcomes on financial results and Return on Investment Capital (ROIC) typically do not materialize for them.

More than ever, strategic planning plays a critical role in how companies prepare for the future. When done effectively, business leaders can efficiently deploy capital resources and maximize the effectiveness of the corporate strategy.

While the tactical steps within strategic planning are generally agreed upon, most research does not acknowledge that planning may need to be approached differently depending on:

— Where a company is in its life cycle (e.g., new product introduction verses mature markets)

— What level of strategic change an organization is required to undertake.

Successful changes to strategies must be addressed by the board of directors, CEO, COO, and CFO early on in the planning process rather than “downstream” in the organization in order to improve expected outcomes. In the technology industry, where markets shift more rapidly by the day, addressing these upfront changes first becomes even more critical.

KPMG LLP’s (KPMG) experience working with FORTUNE 500 technology companies has found:

— There are three main corporate strategies for technology companies: (1) innovate, (2) integrate, and (3) operate.

— Each corporate strategy has a natural grouping with one of four corporate decision models: (1) portfolio holding, (2) strategic guidance (e.g., business strategy, business structure or operating structure), (3) integrated management, and (4) actively controlled.

— A company’s corporate strategy and corporate model must align to maximize the speed and effectiveness of investment returns.

Mature technology companies face constant pressures from new market entrants and industry disruptions.

“It’s unreasonable to believe you can reinvent your strategy without changing the way your organization looks and governs. To stay relevant in the market, technology companies need to constantly evolve the way they run their business and deploy their capital to maintain an agile and effective business.”

– Richard Hanley, KPMG Technology Sector Leader

1The strategic planning imperative

Consider your new corporate strategy In an industry of rapid change and innovation like that found in tech, it is increasingly important for organizations to be prepared to develop and deploy new strategies to spur growth. This generally occurs through some form of strategic planning in which market scenarios are developed, strategic alternatives are prioritized, and investment choices are made to achieve strategic objectives.

While each company has a mix of strategic pursuits, the core vision for how value may be created in the market and with shareholders can be categorized into three distinct options:

Operation

Innovation

Differentiated and focused market positions(mature companies can have more than one focus area)

1. Create new markets

2. Redefine existing markets

3. Set new standards

Integration

Integrated technologies and offerings into an ecosystem, solution, or platform

1. Drive user engagement across the platform2. Provide value through solutions versus products3. Drive high switching costs

Scale and operational excellence

1. Expand the channel

2. Compete on price to protect market share

3. Meet short-term earnings goals

Corporate strategy Description

KPMG’s research analysis and experience with the top 100 publically traded tech companies over the last 10 years has shown that companies that focus on differentiated products, “innovators,” and integrated solutions have outpaced the S&P 500, while tech companies that focused their investments on scale and operational effectiveness were challenged to increase stock price and distribute dividends.


Top 100 publically traded tech stock performance(2006–2015)

25%

15%

20%

10%

5%

0Operator

1%

Integrator

12%

Innovator

21%

S&P 7%

Performance indicators

Innovator Integrator Operator

P/E ratio (5-year avg.)

45x 30x 27x

Operating margin(5-year avg.)

17% 20% 9%

Revenue CAGR(5-year)

21% 13% 1%

— Innovators and integrators consistently outperform operators in both growth and earnings.

— Integrators spend similarly to operators on Research and Development (R&D) proportionally to revenue but appear to get a significantly better return on their investment.

Source: CapIQ

— Innovate differentiated products or services. Optimally secure niche portions of the market in a semi-monopolistic position led by holding companies to 21% growth and 17% margins. Target an increase of 14% in stock performance to surpass the S&P 500 10 year average of 7%.

— Integrate adjacencies. Expand offerings to become a solutions provider with 13% growth and 20% operating margins. Target a minimum increase of 5% in stock performance to surpass the S&P 500 10 year average of 7%.

— Operate, consolidate, or secure cost competitive market positions. Reinvigorate and innovate to exceed growth of 1% and 9% operating margins. Target a minimum increase of 5% in stock performance to reach the S&P 500 10 year average of 7%.

Innovation and integration strategies provide the highest returns for technology shareholders.

Our perspective on aligning corporate strategy Investors are observing the technology index and asking for larger returns on their investment from boards and executive teams. In the event the executive leadership team has a desire to provide returns outside its current “value stock” position, many executives are faced with complex operating models that lack agility, diverse product portfolios that operate in silos, and demanding shareholders expecting near-term earnings performance.

The question boards of directors and executive leadership in these companies are asking is: “How do we reinvigorate our innovation and growth strategy?”

Although companies frequently devise new strategies to address this and attempt to execute these strategies through strategic planning, they come up short time and time again—not understanding the reasons behind their failures.

KPMG’s experience in working with some of the top tech firms in the world has found that companies fail to maximize the value of their strategic planning efforts for a number of reasons.

While most challenges are well understood, the importance of tight alignment between corporate strategy and the corporate decision model is a less discussed but vital part of strategic planning.

Our experience has shown that companies with a mismatch between their corporate strategy and decision model attempt to deploy new strategies without applying the necessary rigor to internal analysis that is required to be successful.

Technology companies’ strategic planning challenges

Corporate decision model

— Organizations attempt to achieve tomorrow’s objectives with today’s company. — Misaligning future strategy and enabling corporate structure hinders value creation.

— Large organizations often lose focus and are unclear for which products investments have been committed to.

— Diluted investments result in inefficient deployment of capital and human resources.

Investment focus

— Many investment decisions are based on historical spend assumptions.

— Lack of investment approach rigor may lead to subscale or ineffective funding.

Decision making and trade-offs

— Often, performance management is narrowly focused on achieving Profit and Loss (P&L) targets.

— Lack of attention on strategic investments leads to short-sighted results.

Postinvestment performance mgmt.

— Most (if not all) companies have functional or geographic organizational barriers.

— Stakeholder disconnects lead to suboptimized solutions and slower execution.

Coordination across stakeholders

Strategic planning challenges Description

Significant issue associated with achieving investment returns


The principal error these organizations make is attempting to achieve tomorrow’s objectives with today’s company.

Executives must realize that the role of the corporate leadership team does not stop at developing the appropriate strategic vision. It must also include the leadership and coordination of internal stakeholders (and investors) to align the appropriate investments, budgets, and activities that reinforces the corporate strategy. Corporate decision models define the roles and interaction between corporate and business groups in the following way:

Once the executive team aligns on a corporate strategy, it is critical to shift to the complementary corporate decision model to enable strategy deployment before addressing downstream changes related to strategy execution. A shift in strategy may require a shift in corporate decisions. Each corporate strategy has a complementary corporate decision model to reinforce success:

Portfolioholding

Strategicguidance

Integratedmanagement

Activelycontrolled

Narrow specialty –Drives focuseddifferentiation

Innovators

Corporate oversighthinders innovation

Too many layers ofmanagement

Business is toocomplex (multiplespecialties)

Business is too simple(single specialty)

Light corporate guidance isn’t enough to force collaboration across groups

Business groups are differentiated enough to require some autonomy

Business too complex to actively manage with a reasonable corporate layer

Business too complex to actively manage with a reasonable corporate layer

Lean G&A structure for cost competitiveness

Drives integration across desperate capabilities

Multiple specialties –Reinforces need for tailored investment approaches

Integration across products/services requires corporateto tie business together

Business groups require a greater level of corporate oversight

Integrators

Operators

Portfolioholding

Strategicguidance

Integratedmanagement

Activelycontrolled

Description and philosophy

— Investment company— Decisions are primarily

focused on financial returns and portfolio balancing

— Strategic leadership of collection of loosely related entities

— Management and strategic leadership of tightly linked entities

— High degree of synergies across investments

— Relatively low complexity— Flat organizational structure

Corporate role

— Unified operating model designed by corporate

— Enforce structuredmodel management.

— Provide KPIs/financial objectives to BU GMs

— Provide strategic vision and guidance to business

— Coordinate with BUs to set financial and strategic objectives

— Set strategic vision and provide set of priorities/ objectives to BUs

— Considered GMs of the business groups

— Set and execute priorities/ objectives

Business unit (BU) role

— GMs prescribe to KPIs with no oversight from corporate

— Limited synergies across BUs

— Drive strategic vision for BUs

— Execute current projects/ products

— Execute current projects/ products

— Monitor and control performance

Corporate decision models


Changing strategies and shifting structural gearsIn recent years, some high-profile tech companies have publicly acknowledged their challenges of managing investments under a misaligned corporate decision model.

While their growth strategies are still unfolding, top executives from a FORTUNE 100 technology conglomerate and a FORTUNE 50 IT provider have provided positive feedback that their choices to better align their corporate governance to the strategic vision of their companies.

The case for rearranging a holding company model structure:A FORTUNE 100 technology conglomerate shifted to a more relevant holding company model to better manage its complex portfolio of innovative products.

— The company is a leading Internet innovator. Their product was superior to initial competition, enabling it to capture a leading position in the market and reap incredible growth and profits.

— As the search business matured, the company realized the need to continue innovating. They began undertaking a series of bets using a 70/20/10 rule (70% focus on core, 20% on adjacency, 10% “moonshot”).

— As these adjacencies and moonshots developed, the company’s business became larger and more complex. Leadership discovered that the “20/10” began distracting them from the core business.

— They shifted the corporate model to a holding company to successfully provide operating divisions more leeway in making their own decisions and keep the businesses more nimble.

”Structurally, this gives us the ability to focus on the various ‘other bet’ entities, to be a catalyst and a magnet for great entrepreneurs, in a way that may have been more difficult under one umbrella.” — CFO, FORTUNE 100 technology conglomerate, Foreign Affairs Magazine, 2016

Case study #1: Innovator

The case for splitting up a global technology organization into two:

Over the years, a FORTUNE 50 IT provider found itself in a complex operator strategy and split the business to improve focus on integrated solutions and new innovations.

— The company built itself into a massive global technology organization with offerings spanning across hardware, software, and services, serving both businesses and consumers.

— As many of its markets became commoditized, significant changes were required within the organization in order to remain agile and thrive in the competitive, rapidly changing technology market.

— On the consumer side, the company wanted to innovate on the enterprise side. There were restructuring needs and a desire to become an integrated solution provider.

— Recognizing the difficulty in driving this scope of change through such a complex organization, the company decided to split the company in two.

— This enabled each company to choose a corporate model to fit their unique strategic needs and enhance trade-off focus.

“We’re starting to see now the real benefits of focus.... What the split has allowed us to do is to accelerate the turnaround…and focus on a smaller number of things.”—CEO, FORTUNE 50 IT provider, Bloomberg Interview, March 2016


Case study #2: Operator to integrator transformation

Establishing the right operating structure for your business strategySo, the primary question is: How can large, complex technology organizations successfully deploy new strategies to reinvigorate growth and innovation and maximize returns to shareholders? KPMG has identified two overarching methods for companies facing significant business direction and strategy, structural, or operational divergence:

1. Focus on the enabling structural changes first. Prior to deploying detailed strategy action plans, reorient the corporate decision model as a first step (and may be required in complex strategy shifts).

2. Orient the leadership team to a new way of operating in parallel to detailed strategy planning (for faster deployment of strategy).

Corporate decision model framework

Performance management

Roles and responsibilities

Information flowsand interaction

Systems

Organization and financial design

Corporate decisions

Effective corporate decision-making, which includes an organization’s business strategy, business structure, or operating structure, occurs through alignment across five key elements:

— Organization and financial design – Structure the organization in a way consistent with strategic and financial goals.

— Roles and responsibilities – Clearly define ownership and accountability of decisions. Structure a hierarchy of decision rights.

— Information flows and interaction – Design the way groups and functions interact with each other. Define the information that is required. Develop the right operating model and interaction cadence.

— Performance management – Identify appropriate metrics to manage investment decisions. Turn transparency into performance. Establish a formal review process cadence. Standardize the process for any budget plan changes.

— Systems – Structure how systems will enable workflows and information capture. Design interaction among systems.

This is not a “design by consensus” effort. There will be winners and losers in the new design; a well-respected executive who can balance the pros and cons should be the single-point authority on final decisions.

Organizational design and alignment can be complex. A good practice is to set up a focused program office to drive change.

Depending on the size of your business and degree of change, these efforts take time. Given the importance of business alignment to the strategy, the executive team needs to reinforce the importance in the face of competing priorities.

Communicating the vision and objectives of the effort broadly has shown positive results to improve coordination and speed of achieving desired goals.

Implementation lessons learned

Single executive champion

Run it like a program

Stay focused

Communicate often

Steps to establish a new corporate decision model

Choose theright team

— Design by consensus is not efficient.

— Future leadership team may be different than today.

Key actions

Set milestones

Description

Develop design alternatives

Define newoperating rhythm

— Define timeliness and set accountability.

— Address variances quickly and effectively.

— Align strategy to corporate governance (e.g., an organization's business strategy, business structure, or operating structure) options.

— Identify role and capability requirements.

— Architect day-to-day information flows and interfaces.

— Develop system requirements.

Organization and financial design

Roles and responsibilities

Information flowsand interaction

Performance management

Systems

1

2

3

4

Elements addressed


Conclusion: Reinvent or risk losingThe technology industry is constantly changing—and rapidly. Its largest companies got to where they are by creating innovative new technologies that created or redefined markets. Companies typically can create strategies and align investments to these strategies.

However, as these markets have matured, these companies have struggled to keep pace with a new crop of innovators. Execution typically fails because the decision model does not change to reflect the company’s new strategy. If they cannot reinvent themselves, their businesses will continue to slowly erode into obsolescence.

It is important to keep in mind:

— Aligning decision models at C-level will drive change throughout organization.

— Decision models should focus on organizational design, roles and responsibilities, Key Performance Indicators (KPIs), and systems.

— The level of change required to make this transition may fundamentally change the way an organization looks, and stakeholders with vested interests in the status quo will resist the change. Roles and responsibilities may need to change.

— The scope of change to be successful spans the entire organization and a piecemeal approach will fail.

— For publicly traded companies, shareholder focus on short-term earnings may inhibit the time and investment requirement needed.

Next stepsWith the right strategic planning approach, innovation, growth, and maximized return to shareholders are within reach of your organization’s future endeavors.

Here are some immediate next steps in taking your assessment:

— Determine if you are shifting your corporate strategy and if the corporate decision model aligns with it.

— Discuss, determine and communicate the integral roles of your executive team members as it relates to strategy and hold them accountable.

— Assess spend and resources related to each one of your strategic initiatives.

— Assess the ROI for the historic (and current) capital deployments in R&D, sales, marketing, and acquisitions.

About the authors

Samir P. AjmeraPrincipal, KPMG in the U.S.

Samir is a Principal in KPMG’s Strategy Practice focusing on the Technology, Media and Telecommunications sector. Samir has nearly 15 years of experience advising technology clients with strategic initiatives that range from corporate growth strategy and business model transformation to operating model design and cost optimization.

Christopher M. MaynardManaging Director, KPMG in the U.S.

Christopher is a Managing Director in KPMG’s Strategy Practice focusing on the Technology, Media and Telecommunications sector. Christopher’s specialziation is positioned at the intersection between growth strategy and operations, providing operational solutions to client strategic objectives. His work includes market sizing, commercial and operational due diligence, strategic business planning, operating model design, and cost optimization.

Rakesh BhatiaDirector, KPMG in the U.S.

Rakesh supports KPMG’s Technology, Media and Telecommunications practice with more than 10 years of experience in technology industry. His client experience includes operations strategy, growth strategy, and due diligence (operational and commercial).

Brian MaySenior Associate, KPMG in the U.S.

Brian is a Senior Associate in KPMG’s Strategy Practice focusing on the Technology, Media and Telecommunications industry. He has a breadth of experience, advising clients on both growth strategy and operations. His work includes Research and Development portfolio optimization, Mergers & Acquisitions strategy, strategic business planning, and cost optimization.


Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.The information contained herein is of a general nature and is not intended to address the circumstance of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 602588

Contact us

Samir P. AjmeraPrincipalTechnology, Media, and Telecommunications U.S. KPMG StrategyT: 408-367-7620 E: [email protected]

Christopher M. MaynardManaging DirectorTechnology, Media, and Telecommunications U.S. KPMG StrategyT: 310-892-4133 E: chistophermaynardtkpmg.com

Rakesh BhatiaDirectorTechnology, Media, and Telecommunications U.S. KPMG StrategyT: 765-409-3510 E: [email protected]

Brian MaySenior AssociateTechnology, Media, and Telecommunications U.S. KPMG StrategyT: 408-367-6076 E: [email protected]

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The Strategic Planning Imperative