STRATEGIC PLANNING AND BUDGETING Part 1: Business Model and Strategy

Case Study, Concepts and Debatable Ideas

Kenny Ong CNI Holdings Berhad

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Intro: CNI
1. 20 years old 2. Core Business: MLM 3. Others: Contract Manufacturing, Export/Trading, eCommerce 4. Malaysia, Singapore, Brunei, Indonesia, India, China, Hong Kong, Philippines, Italy, Taiwan, Oman, United States, Vietnam 5. Staff force: 500 6. Distributors: 200,000 7. Products: Consumer Goods and Services
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History of Strategic Planning and Budgeting

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Planning in the old days

1. Budget top down no questions asked 2. Only two budget goals revenue, expenses 3. The only planning we needed to do was do better than last year 4. Planning was bottom up - compilation of plans within set budget 5. No one knew what the other was planning 6. Accountings role was only to compile budget for approval 7. KPIs were not used 8. Sales was resource priority, everything else not important 9. Assumed no major changes in market 10. R&D was bottom up
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Problems from the start

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Problems from the start (1/2)

1. 2. 3. 4. 5. 6. 7. No money Split Objectives: Sales? Share Price? Image? Independent entities Accounts controlling schedule S&M always running over budget Compounding activities BOD expectations too high without proper explanation nor justification 8. Lack of Market research 9. Expenses not spent gets punished
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Problems from the start (2/2)

10. Budgeting for known, consistent, and predictable business conditions 11. Never learn from past mistakes, usually in under-budgeting (e.g. staff and PCs) 12. Wrong Business Model blame Budgeting & Planning. Having a good planning process cannot correct a bad business model 13. Focusing on the Process (KPIs), instead of Business 14. Planning & budgeting treated as separate processes by businesses/functions
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Todays Agenda

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Summary: Planning & Budgeting Long-term Plans Objectives Strategies Enablers Resources

Also known as L.O.S.E.R.

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Summary: Todays presentation

1. Business Model
2. Strategy 3. Alignment 4. Resources

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Assumptions 1: Audience

1. Business 2. Government 3. Non-profit

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Assumptions 2: Starting Point

1. Wanting to start proper planning & budgeting process, or 2. Wanting to improve planning & budgeting process

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1. Get the right Business Model first

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1. Wrong Business Model

How to fail without trying

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The Roadmap to Failure

Fred Wiersema and Mike Treacy

Downpresure of Unclear Strategy

The Moment of Truth

Performance

X
Todays performance Doom Projections Performance Freefall

Tomorrows actual performance

Clear Sailing
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Denial & Defense

Overdue Failure Time

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Denial and Defense

Its not really good value our competitor is offering, because it doesnt include a lot of our features. - ABC vs Air Asia Its good value but not in our preferred customer market. - ABC vs Toyota Sure theyre hurting us, but with their unfair advantage, what can we do? ABC vs MILO The rules we are playing by have always worked before AMEX vs VISA

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The Roadmap to Failure

Fred Wiersema and Mike Treacy

Downpresure of Unclear Strategy

The Moment of Truth

Performance

X
Todays performance Doom Projections Performance Freefall

Tomorrows actual performance

Clear Sailing
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Denial & Defense

Overdue Failure Time

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Ad Hoc Tactics
Selectively hold discounts to hold business that has started to go elsewhere Introduce new promotions, terms, conditions, and offers to confuse and cloud the market Beef up customer service by adding people to fix messups and quicken delayed shipments Delay capital investments and adjust accounting methods to portray quarterly financial results more favorably Introduce new and improved products that are new in form, but not in substantive ways that are of consequence to purchasers Introduce Balanced Scorecards and Performance Management Systems
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The Roadmap to Failure

Fred Wiersema and Mike Treacy

Downpresure of Unclear Strategy

The Moment of Truth

Performance

X
Todays performance Doom Projections Performance Freefall

Tomorrows actual performance

Clear Sailing
www.myCNI.com.my

Denial & Defense

Overdue Failure Time

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What is the moral of the story?

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What is the Business Model?

USP

Profit Model

Market Discipline

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Intro: Market Discipline

Mamak stall

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Intro: Market Discipline

Product Leadership

"They are the most innovative" "Constantly renewing and creative" "Always on the leading edge"
Customer Intimacy "Exactly what I need" Customized products Personalized communications "They're very responsive" Preferential service and flexibility Recommends what I need "I'm very loyal to them" Helps us to be a success

"A great deal!"

Operational Excellence

Excellent/attractive price Minimal acquisition cost and hassle Lowest overall cost of ownership "A no-hassles firm" Convenience and speed

Reliable product and service www.myCNI.com.my

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Strategy: Value Disciplines

Product Leadership (best product)

Operational Excellence (low cost producer)

Customer Intimacy (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995 www.myCNI.com.my

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Strategy: Value Disciplines

Operational Excellence Competitive price Error free, reliable Fast (on demand) Simple Responsive Consistent information for all Transactional 'Once and Done'
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Product Leadership New, state of the art products or services Risk takers Meet volatile customer needs

Customer Intimacy Management by Fact Easy to do business with Have it your way (customization)

Fast concept-tocounter
Never satisfied obsolete own and competitors' products Learning organization

Market segments of one

Proactive, flexible Relationship and consultative selling Cross selling
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The McPlaybook*
Make it easy to eat 50% drive-thru Meals held in one hand Make it easy to prepare High Turnover Tasks simple to learn & repeat

Make it quick Make what customers want Fast Food Prowls market for new products Tests new products for Cooking Times Monitored field tests
*Adapted from: Businessweek , Februrary 5th 2007
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Strategy: Value Disciplines

Product Leadership (best product)

Operational Excellence (low cost producer)

Customer Intimacy (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995 www.myCNI.com.my

www.OOBEY.com

Strategy: Value Disciplines

Product Leadership (best product)

Operational Excellence (low cost producer)

Customer Intimacy (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995 www.myCNI.com.my

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Intro: Market Discipline

Product/Service Attributes

Relationship

Image

* Treacy & Wiersema, The Discipline of Market Leaders, 1995 www.myCNI.com.my

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Intro: Market Discipline

Operational Excellence: Quality and selection in key categories with unbeatable prices

Product/Service Attributes Price Quality Time Selection

Relationship

Image Smart Shopper

* Treacy & Wiersema, The Discipline of Market Leaders, 1995 www.myCNI.com.my

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Intro: Market Discipline

Product Leadership: Unique products and services that push the standards

Product/Service Attributes

Relationship

Image Best Product

Time Brand Function

* Treacy & Wiersema, The Discipline of Market Leaders, 1995 www.myCNI.com.my

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Intro: Market Discipline

Customer Intimacy: Personal service tailored to produce results for customer and build long-term relationships
Product/Service Attributes

Relationship
Service Relations

Image Trusted Brand

* Treacy & Wiersema, The Discipline of Market Leaders, 1995 www.myCNI.com.my

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Strategy: Disciplines
Product Leadership (best product)

Operational Excellence (low cost producer)

Customer Intimacy (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995 www.myCNI.com.my

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Summary: Todays presentation

1. Business Model Done

2. Strategy 3. Alignment 4. Resources

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2. Set the Strategies

Hope is not a strategy

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What is Strategic Planning?

Variables:
Research Growth

Strategic

Output:
Plans Priorities

Risks
Stakeholders Constraints SWOT Misc.
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Planning

KPIs

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Before we start

Which comes first? 1. Strategies -> KPI? 2. KPI -> Strategies?

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Step 1: Analysis
1. SWOT 2. PESTEL 3. Scenario Analysis

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SWOT: Opportunities & Threats

Opportunities = Taking advantage of Trends Threats = Strategic Risk Management

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Downturn Trends?

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Downturn Trends?

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Downturn Trends?

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Downturn Trends?

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SWOT: General Strategic Risks

1. Industry
1. 2. 3. 4. 5. 6. Margin Squeeze Rising R&D/CAPEX Overcapacity Commoditization Deregulation Increased power among suppliers 7. Extreme business-cycle volatility

4. Competitor
1. Emerging global rivals 2. Gradual market-share gainer 3. One-of-a-kind competitor

5. Customer
1. Customer priority shift 2. Increasing customer power 3. Over reliance on a few customers

2. Technology
1. Shift in technology 2. Patent expiration 3. Process becomes obsolete

6. Project
1. 2. 3. 4. R&D failure IT failure Business development failure Merger or acquisition failure

3. Brand
1. Erosion 2. Collapse
Adrian J. Slywotzky and John Drzik

7. Stagnation
1. Flat or declining volume 2. Volume up, price down 3. Weak pipeline
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PESTEL and Scenarios

Scenario 1 Political Scenario 2 Scenario 3

Economic Social
Technology Environment Legal

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Business Situation vs. Focus

Upturn
Fight Complacency Sharpen Edge Keep Momentum Conquer Change mgmt Reduce Fat Continuity Everyone Happy
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Flat
Innovation Acquire Profits Build momentum Talent Mgmt Innovation/R&D Early wins Slow Down HR Costs

Downturn
Sales Cash Flow

Top Talent focus Sales, Sales, Sales Increase attrition

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Business Situations vs. Focus Upturn

Fight Complacency Sharpen Edge

Flat
Innovation Acquire

Downturn
Sales Cash Flow

Many times, you need a different Profits Conquer Build momentum CEO/Leader/Management Team Change mgmt Top Talent focus for eachTalent Mgmt business situation
Keep Momentum Reduce Fat Continuity Everyone Happy
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Stack R&D Early wins Slow Down HR Costs

Stack Sales Increase attrition

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Step 2: What is your Goal?

1. Cost Reduction 2. Growth

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Strategies for Growth

Double-Digit Growth, Michael Treacy

1.Base Retention 5.New Business

GROWTH

2.Share Gain

4.Adjacent Market
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3.Positioning
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Growth
Expansion Transformative

1.Consolidate
2.Geographic

1.Portfolio refocus 2.Diversification

3.Distribution
4.Compensate Easier
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Tougher
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Growth thru Expansion

Expansion 1. Gain Scale to compete 2. Integrated Solutions 3. Financial Growth 4. Supply (security, mix) 5. Developing markets 6. High cost of Extra Capacity 7. Private Equity 8. Expanding Sovereign Funds
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1. Consolidate
2. Geographic 3. Distribution 4. Compensate

Growth thru Expansion

Expansion 9. De-regularization

1. Consolidate
2. Geographic 3. Distribution 4. Compensate

10.Demand outstrip supply

11.Revenue Mix Tax optimization 12.Talent 13.New, Low-cost Entrants

14.Undervalued Big Players

15.Newer Assets
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Transformative Growth
Transformative
1. New Business Lines 2. Selling/Spin-off non-core 3. Increase product line 4. New customers

1. Portfolio refocus
2. Diversification

5. New technologies*
6. Complementary Business 7. Up-down Supply Chain 8. Patent 9. Convergence anticipation
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Cross Sector Transformation

Traditional

Incremental

Alternative

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Cross Sector Transformation

Example: Energy Sector
Traditional Utility Oil, Gas, Electricity, Coal

Incremental Technology New Delivery, New Sources, Existing Resources

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Alternative Energy Biomass, Nuclear, Ethanol, Wind, Solar

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Step 3: Strategy
Double-Digit Growth, Michael Treacy

1.Base Retention 5.New Business

GROWTH

2.Share Gain

4.Adjacent Market
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3.Positioning
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How Markets determine Growth Strategies (1)

Growth Rate Growth Strategy Rate Fast 1. Market Positioning 2. Share Gain 3. Base Retention Flat 1. Base Retention 2. Share Gain (Acquisitions)
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Why? Maintain market share in strategic segments Prepare for market decline Competitors focus too much on getting new customers Lose customers slower than competitors Create scale economics, squeeze costs
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How Markets determine Growth Strategies (2)

Churn Rate
Churn Rate Low Strategy 1. Share Gain (Acquisitions) 2. Adjacent Markets 1. Base Retention 2. Share Gain 3. Adjacent Market Why? Buying customer base is cheaper than own efforts New products, old customers strategy Lose customers slower than competitors Customers are always open to the best value and offer Desperate to gain revenue
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High

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How Markets determine Growth Strategies (3)

Example: XYZ Sector

Fast Growth, 1.Market Positioning Low Churn 2.Share Gain (M&A) 3.Base Retention 4.Adjacent Markets (M&A)

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Strategy 2: Share Gain

Create better Value proposition Neutralize competitor advantages

Buy Market Share outright

Price Premium Operating Model Integration

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Buying Market Share: Acquisition strategy

Price Premium
Net Cost per Customer < Direct Acquire

Buying Market Share Operating Integration Model

One Kingdom
Pre-integration Blueprint Slow Trigger, Fast Bullet
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No evidence of previous company

Buying Market Share: Side notes on Funding

Preferable 1. Cash from Earnings 2. Cash from Borrowings OK, but not preferred 1. Cash from Stock sale 2. Issue more stock

*Adapted from Warren Buffets acquisition strategies

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Strategy 4: Invade Adjacent Markets Adjacent Market = Important Similarities and Large Differences in: 1. Cost Structure 2. Competitors 3. Customers 4. Critical Capabilities

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Strategy 4: Invade Adjacent Markets

Traditional

Incremental

Alternative

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Strategy 4: Invade Adjacent Markets

Example: Energy Sector

Traditional Utility

Incremental Technology

Alternative Energy

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Strategy 4: Invade Adjacent Markets

Upstream Raw Mat

Midstream Conversion Vendors/Services

Downstream Distribution

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Strategy 4: Invade Adjacent Markets Is it a promising market?

Best when market is new and not stable You must time your entry carefully Entrenched companies usually delay embracing new technology or process

Can you win in this market?

Must be built on advantages that are tangible, practical and easily implemented
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Strategy 4: Invade Adjacent Markets Can you match the Standards of Competition in this Market?
You do have to meet the quality level that is common in the market Three Standards:- Technology, Relationships, Business-model You must have 80 percent of the capabilities you need to match competitors Standards

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Strategy 4: Invade Adjacent Markets Make or Buy?

1. It is easier to meet the standards of competition if you buy an existing player 2. Adjacent acquisitions must remain as a separate enterprise 3. Integrate Management Control (systems, technology) 4. Inter-transfer of management talent, knowledge and capability are important

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Strategy 5: Acquire new Business No core advantage to bring in Investors mind-set vs. Managers mind-set Value unlocking via operational improvements Invest in Management/Leadership Premium = Combined value > stand alone

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Thank You.
soft copy of slides: www.totallyunrelatedrandomanddebatable. blogspot.com