Transcript Issues and problems from strategic planning experiences

Presentation of Strategic Planning Process
to
The Management of EGAT Public Company Limited
November 22, 2005
Background
 Banpu has implemented the new strategic planning process,
which is part of the Value Based Management (VBM) concept
since 1999
 Management wants to achieve:
 Plan’s effectiveness, which is about the end results of the plan
and direction of plan
 Plan’s efficiency, which is about the implementation of such plan
as well as the monitoring and reporting process
 Effective risk management scheme to deal with uncertainties.
2
The objective of the presentation is to provide an overview of the
strategic planning processes currently used at Banpu
The intention of this presentation is:
 To build the same understanding of VBM and the strategic
planning concept
 To illustrate the current practices and processes
 To share the views and encourage discussion at the end of the
session
3
Agenda
 VBM Framework
 Overall Planning Process
 Process and Schedule
 Overall Input and output
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
4
Why do we plan?
 Why do we do planning?
 How do we do it?
 How does planning create competitive advantage and value?
 What do we do after we plan?
 How do we measure our plan’s success?
5
The VBM management cycle. A value-based culture is developed and
sustained by continuously applying a value focus across all stages of the
management cycle
Planning to achieve
highest value
Strategic
Planning
Interpreting and
sending market
signals
Investor
Communications
Reward and incentive
around delivering value
creating plans
Allocating capital
and human
resources on
basis of highest
value strategy
Resource
Allocation
Value Focus
Performance
Measurement and
Evaluation
Incentive
Compensation
6
Setting and
monitoring
performance to
deliver plan
What is VBM? And why we use it?
 VBM aims to align management’s interest with that of the
shareholders
 VBM is not about valuation; valuation is part of VBM
 It’s about identifying strategic and operating issues and
coming up with strategies to overcome these to sustain/create
the company’s competitive advantage
 It’s also about setting goals and measuring the performance in
order to change behaviour by rewarding employees with the
right incentives to build shareholder value
 VBM entails balancing long- and short-term perspectives
7
To create value, management must choose strategies that effectively
balance the needs of all stakeholders in the long run
“Cash Flow Based”
Community
Share Price vs.
Quarterly Operating Cashflow
(1996 - 2000)
Staff
160
R2 = 0.6
120
Regulators
Shareholder
Value
Environment
Share
Price
(Bt.) 80
40
Customers
Suppliers
0
0
200
400
600
Operating Cash Flow (Bt. Million)
8
800
Steps 1 and 2 of VBM: Strategic Planning and Resource Allocation
Strategic Planning and Resource Allocation
Planning to
achieve highest
value
Strategic
Planning
Interpreting
and sending
market signals
Investor
Communications
Allocating capital
and human
resources on basis
of highest value
strategy
Resource
Allocation
Value Focus
Incentive
Reward and
Compensation
incentive around
delivering value
and creating plans
Performance
Measurement and
Evaluation

Credible strategic plans with sound
cash flow projections

Determine value of each Business Unit

Use value creation to choose between
alternative strategies

Identify key value drivers for each
operation

Set performance targets for each
business in terms of value drivers
Setting and
monitoring
performance to
deliver plan
Expected Output






9
Value drivers
Strategic options
Strategy valuations
Maximum value strategy
Optimal capital structure
Allocations of resources
among competing demands
Shareholders’ value is impacted by a number of factors both internal and
external, a carefully crafted strategy is needed to ensure success in the
future
Social,
political,
regulatory
and
community
factors
Competitive
conditions
and industry
attractiveness
Company’s Strategic Situation
Resource
strengths,
capabilities, and
weaknesses
Source: CSP
 External Factors
Company’s
market
opportunities
and external
threats
Determine
relevance of
internal and
external
factors
Management’s
aspiration, shared
value, and culture
Craft
the
strategy
An integrated set of
options designed
to create a
sustainable
advantage
over competitors
 Internal Factors
10
To do this we must be able to answer the following questions... A value-based
management strategic planning process ensures that both the corporate objectives and
each of the business units is capable of answering the following critical questions
 Where is value today and why?
 What is our business model? Should we change our model?
 Where is value planned to be created?
 What is driving planned value creation?
 Where are the sensitive and key assumptions?
 How aggressive are the assumptions?
 Where are value risks/opportunities?
 Where should management focus to create and sustain value?
 Where should capital be allocated and which projects should have
priority?
 How will we know if we are on track in delivering the plan and in
achieving operating excellence?
11
Which business model(s) do we employ?
Model
Logic
Advantage
Sustained by
Key Assumptions
Managerial
Application
Example
Economies of
Scale
Increased scale enables
spreading of fixed costs
over larger volume, leads
to lower costs
Investments in large
production and
distribution channels
Large fixed costs that
can be shared over
greater volume of same
product
Invest heavily in large
scale production, avoid
diversification
Siam
Cement
Economies of
Scope
Increased number of
related products will
enables spreading of
fixed costs over greater
volume, leads to lower
costs
Investments in large
production and
distribution channels
Cost can be shared
across the related
products
Standardise inputs into
production, make a range
of products that share
costs
CP Group
Economies of
Focus
Lower costs can be
achieved by serving only
one segment of a market
Firms serving broader
market unwilling to
relinquish investment in
broader customer base
Efficiencies can be
gained by focusing on
one segment, needs of
different segments vary
greatly
Focus on niche where
firm can achieve lower
costs than firm serving
broader market
BMW
Experience
Curve
Cost per unit declines
with cumulative
experience (output X
time)
Inability of competitors
to match experience
Competitors will not
attempt the same volume
enhancing strategies;
economies of experience
are automatic
Reduce price of advertise
to increase volume, seek
lessons from experience,
transfer experience
through firm
PTT-EP
Unocal
Value Chain/
Differentiation
Create value by
reorganising activities to
increase the value added
to the customer
Entry barriers within the
industry (reputations,
brand names, customer
loyalty prevent imitation)
Customer are the most
important stakeholder,
firm can adapt to needs
Understand customer
needs and value chain,
configure organisation
appropriately
Tesco
Makro
Competitor
Analysis
Can predict competitor
behaviour from past
actions, alter own
strategy accordingly
Competitor blindspots
Rational firm’s strategy
is influenced by past
strategy and resources
Examine competitors to
predict behaviour and
react accordingly
Thai
Beverages
(Beer Chang)
12
In planning our strategies, we need to understand key value
drivers (KVDs) of the business
Financial parameters
Operating parameters
Net selling price
Revenue
Sales volume
Recovery %
Conveyor
operating costs
NPV
Cash flow
Cost
Contractor cost
Production
operating costs
Supporting costs
Discount rate
Overhead costs
Capital
expenditure
Working capital
Fixed capital
13
Contractor
charge rate
Waste stripped
(stripping ratio)
By finding the right Key Value Drivers (KVDs), we can
prioritise our efforts to focus on the right areas
Value driver matrix
High
Monitor
Critically manage
Low priority
Manage / hedge
Management
influence
Low
Low
Value
impact
High
14
Prioritised KVDs
Value of each strategic alternative is compared to arrive at
the most value-creating solution
ASSEMBLE FACT BASE / UNDERTAKE ANALYSES
Assess
AssessStrategic
Strategic
Position
Position
Identify
IdentifyKVDs
KVDs
and
andKSFs
KSFs
Construct
Construct
Detailed
Detailed
Economic
Economic
Model
Model
OPTION EVALUATION / CASH FLOW ANALYSIS
2001
2001
Cash
CashFlow
Flow
Strategic
Strategic
Alternative
Alternative11
Strategic
Strategic
Alternative
Alternative22
Strategic
Strategic
Alternative
Alternative33
1 Year
+
2002
2002
Cash
CashFlow
Flow
2 Years
2003
2003
Cash
CashFlow
Flow
3 Years
Present
PresentValue
Value
Residual
ResidualValue
Value
Investments
Investments
2004
2004
Cash
CashFlow
Flow
4 Years
2005
2005
Cash
CashFlow
Flow
5 Years
2006+
2006+
Cash
CashFlow
Flow
Present
PresentValue
Valueof
of
Cash
Flows
Cash Flows
Minority
MinorityInterests
Interests
=
Value
Valueof
ofeach
each
alternative
alternative
6+ Years
15
Evaluate
Evaluate
strategic
strategic
options
options
This involves an annual estimate of value creation based on
a Business Unit’s strategic plan
Value Creation for
Shareholders
=
Value Creation in a
business unit
=
=
-
Required Return
PV [Free Cash Flow (FCF)]
-
Invested capital
Return generated by free cash flow
-
Dividends
+
Stock Price
1,174
1,200
105
1,000
$ Millions
(PV)
Required Return @ WACC
Value
Created
$248
(139)
959
925
800
600
400
200
0
1999
Value
Required
return
(11%)
1999
Actual
Cash Flow
16
2000
Required
Value
2000
Value
Capital allocation
High
Capital Allocation Framework
2nd PRIORITY
PROJECTS
TOP PRIORITY
PROJECTS
IGNORE
(for now)
2ND PRIROTY
PROJECTS
Value
Creation
Potential
Low
Low
High
Corporate Priority
17
Steps 3 and 4: Performance measures, goals and compensation must
be linked to key value drivers
Planning to
achieve highest
value
Allocating capital
and human
resources on basis
of highest value
strategy
Strategic
Planning
Interpreting and
sending market
signals
Investor
Communications
Reward and
incentive around
delivering value
and creating plans
Performance management
Resource
Allocation
Value Focus
Incentive
Compensation
Performance
Measurement and
Evaluation

Annual value creation/value
destruction

Set key value drivers based on:
- impact on value
- controllability
- measurability

Select key performance indicators to
be used as a basis for incentive targets
Setting and
monitoring
performance to
deliver plan
Expected Output



18
Business Unit & Group
value creation summary
Performance targets
Performance monitoring
We need to monitor KVDs of the business and initiatives
throughout the year in order to ensure value generation
Value driver matrix
High
Monitor
Critically manage
Low priority
Manage / hedge
Management
influence
Low
Low
Value
impact
High
19
Prioritised KVDs
Actual performance should be tracked regularly at the right level of details
because it is possible for the same overall performance to be achieved from
significantly different changes in key drivers
Met Performance Targets on
Controllable Drivers
Failed to Meet Performance Targets on
Controllable Drivers
30
30
25
Millions
of Dollars
25
20
20
15
15
10
10
5
5
0
0
Value destruction occurred because the
price dropped even though volume
forecasts were exceeded and costs reduced
20
Value was created but volume forecasts
were not met
Incomplete and inaccurate input creates gaps and blur
procedures create incomplete output
QUALITY OF INPUTS
GARBAGE IN
GARBAGE OUT
Process
QUALITY OF COORDINATION
Input
Process
21
Output
Role of Strategic Planning Function
Broad Roles
Implication on Strategic Planning Function
 Strategic Leadership




 Capital
 Allocate capital across sectors and BUs
 Minimise cost of capital
 Perform treasury planning
 Control





 Capabilities
 Encourage external perspective and use of benchmarks
 Share best practices across group entities
 Help in organization capability development pertinent to the needs and priority
 Identity
 Formulate a shared vision and set of values and create the most favourable
and strongest corporate identity possible
 Governance
 Enforce corporate governance requirements
Develop corporate strategy
Develop sector strategies
Provides guidance to BU strategy formulation
Develop alliances / JVs
Exercise strategy control on behalf of the shareholders
Establish group-wide performance measurement system (together with HR)
Monitor sector and BU performance
Resolve conflicts arising from planning and monitoring
Analyse/manage strategic and financial risks
22
Core beliefs
 Total shareholder return relative to peers is the best measure for assessing
corporate performance
 Shareholder value is determined by expected future cash flows discounted at
the cost of capital
 Understanding market economics and competitive position is essential to
identifying sources of value creation
 Shareholder value is created when business units create better than expected,
or Superior Shareholder Value Added
 Evaluating and selecting alternative growth strategies -- both internal and
external -- applying a fact-based and forward looking cash-flow approach, and
key management processes
 Aligning value maximizing strategies with key management strengths is a
critical success factor
 No single performance measure is best at all levels of an organization or in
every situation. However, performance measures must be transparent and
consistent
23
Agenda
 VBM Framework
 Overall Planning Process
 Process and Schedule
 Overall Input and output
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
24
The 3 key stages of VBM can be viewed by activities – SPA, Planning
and Implementation
SPA
PLANNING
Strategic Positioning
Assessment

Market assessment







Competitive
assessment




review
position
drivers
Financial Performance



needs
segmentation
size
growth
structure
trends
historical
forecast
Strategic Options
Formulation
Strategic Options
Evaluation & Selection
IMPLEMENT
Strategy
Documentation &
Implementation
Planning

Market and segment
initiatives

Financial and value
impact of options

Corporate/portfolio
strategy

Product/service
offering initiatives

Potential competitor
responses

Resource allocation


Price initiatives

Risk assessment

Cost initiatives

Strategy selection

Asset initiatives

Implementation &
Monitoring

Data capture

Measurement of
KPIs
Final financial
consolidation

Monthly
performance reports

Document strategy

Periodic strategy
reviews
Fit with capabilities

Key actions

Sensitivity analysis

Key targets and
milestones

Contingency options

Responsibility areas

Future strategic
options

Performance
commitments
Key challenges and
opportunities

Review portfolio
impacts
25
A number of functions are involved in the planning process; each with a
common goal of supporting the BUs
Key Supporting Dept.’s
Finance
 Address capital requirements of total business
portfolio
 Interact with capital markets
 Acquire/divest assets
 Manage cash flow
 Portfolio focus
 develop corporate strategy
Strategic
Planning
Legal




Verification of each BU strategic plan
Drive VBM/strategic planning process
New business opportunities
Set stretch targets
 Provide strategic, forward looking perspective
on legal issues
Business
Development
 Business development issues relating to the
larger corporate entity - works closely with
Strategic Planning (or is part of it)
IR / Corp
Communications
 External communications with investors and
analysts
 Internal communications
 Assist with roadshows and capital raising
HR
 Capability requirement
 Implement incentive compensation
All supporting activities should be in alignment
and should be supportive of the BU plans
26
Agenda
 VBM Framework
 Overall Planning Process
 Process and Schedule
 Overall Input and output
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Q&A
27
Inputs required are from several sources – both external and
internal...but most important of all we need opinions from our people
 Previous year’s performance information – revenue, cost,
asset changes
 External data on industry trends and forecasts
 Opinion inputs from our teams – marketing and operations
 Brainstorm of ideas to identify and solve issues
 Conclude solution and recommend
 Assign who is to do what
28
Contents of a strategic plan should include the
followings
1.
HISTORICAL REVIEW
Last year Plan Value
Management Actions
Cash Deliveries and Capital Investment
Key Strategic and Operational Issues, Initiatives and Milestones
2.
MARKET OVERVIEW
Segmentation Analyses
Supply and Demand Conditions and Projections
Competitive and Customer Analyses
Business Unit Cost and Differential Position
Investment Opportunity Identification
3.
STRATEGIC OPTIONS
Strategic Issues and Challenges
Strategic Option Identifications
"Scope-down" Framework
Strategic Options Evaluations
4.
STRATEGIC PLAN
Plan Value
Free Cash Flow and Capital Expenditure Forecast Profiles
Key Assumptions & Risks
Performance Commitment & Resource Request
5.
IMPLEMENTATION & ACTION PLAN
29
Agenda
 VBM Framework
 Overall Planning Process
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
30
SPA generates strategic insights and alternatives
SPA
Strategic Analysis
PLANNING
Insights and Alternatives
Financial Analysis
Financial Forecasts
Industry Structure
Operating Value
Business Plan
Proposed
Business Strategy
Profit & Loss
Balance Sheet
Business Strategy
Key Initiatives
Key Value Drivers
Resource Request
Competitive Position
Issues and
Alternatives
Cash Flow
Cost of Capital
31
Financial and
Strategic Performance
Commitments
Management devises business unit strategies based on an externally validated
understanding of industry attractiveness and competitive position by asking the
followings:

What are the volume and price implications of key industry trends?

How will competitors respond to your major decisions?

How do your costs compare with competitors?

What are customers key purchase attributes? How do your products and services
compare with the competition?

Is your business more or less capital intensive than competitors? Why?

Does business unit management describe alternative strategies to address major
opportunities and threats?

Does management collect and validate external data to confirm key assumptions?

Does management compare the value implications of the current strategy and
alternatives on a periodic basis?

Are financial forecasts credible?

Does management post-audit the change in the business unit value based upon the
preferred strategy?
32
A view on the attractiveness of each structural factor should, in turn, be
built up from a view about the key components of each factor
Structural forces
Factors to analyse
Examples of measurement
variables
Intensity of competition
Product standardisation
Number / concentration of
competitors
Variability of costs
Growth
Maturity of market
Price and discounting
behaviour
Market share variability
Customer power
Customer concentration
Switching costs
Price elasticity
Pressure groups
Number of customers /
competitors
Top 10 customers as % of
total volume
Threat of entry
Economies of scale
Brand identity
Capital requirements
Distribution access
Supply access
Customer switching
costs
Government regulation
New entrants in last three
years
New entrants following
regulatory change
Threat of substitutes
Supply of substitutes
Substitute distribution
Substitute market
economics
Revenue growth versus
substitutes
Supplier power
Supplier concentration
Supplier switching costs
Regulation
Importance of volume
Number of suppliers /
competitors
Top three suppliers as % of
total supply
Regulatory influence
Environmental
Regulations
- land reclamation
- air pollution
Investment
allowances/subsidies
Hydrocarbon output
33
A strategic position assessment can be derived by forming a view about
the drivers of market attractiveness and relative competitive position
Strategic Position
Market
Growth
High
Intensity of Direct
Competition
Competitive
Erosion
Value
Creation
Market
Attractiveness
or Potential
for Value
Creation
Customer
Pressure
Industry
Erosion
Value
Destruction
Threat of
Substitutes
Market
Returns
Threat of
Entry
Low
Disadvantaged
Advantaged
Competitive
Position
Supplier
Pressure
Differentiation
Position
Regulatory
Pressure
34
Relative Cost /
Asset Position
There are two sources of competitive advantage
e
g
a
t
n
a
v
d
A
n
o
i
t
a
i
t
n
e
r
e
f
f
i
D
Differentiation Advantage
e
c
i
r
P
 Perceived superiority of offering
 Key indicator: ability to premium
price and maintain market share
 Examples
t
i
f
o
r
P
$
t
s
o
c
t
i
n
U
 product quality
 consistency of supply
d
e
g
a
t
n
a
v
d
dA
e
g
a
t
n
a
v
d
a
s
i
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e
g
a
t
n
a
v
d
A
t
s
o
C
Cost Advantage
e
c
i
r
P
 Lower operating cost per unit
 Lower capital cost per unit
 Examples:
t
i
f
o
r
P
$
 scale / scope advantages
 low cost process technology
 capacity utilisation
t
s
o
c
t
i
n
U
d
e
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a
t
n
a
v
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dA
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a
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a
s
i
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35
A view on the attractiveness of each competitive position factor can, in
turn, be built up from a view about the key components
Differentiated Position
Cost / Asset Position
 Operating costs
 Product quality
 Development costs
 durability
 patents
 precision
 land rights
 Product type
 Marketing and distribution
costs
 specifications
 use (eg thermal,
metallurgical)
 advertising costs
 method (eg rail, conveyor)
 distance from market
 Marketing and
distribution
 Overhead costs
 size of fixed asset investment
 delivery time
 size of administrative offices
and staff
 Customer service
 Assets
 advice
 amount of overburden
 credit terms
 size of reserve
 capital costs
36
Implicit in your plan are assumptions about Market
Attractiveness and Relative Cost Position
Current
Future
Attractive
Market
Attractivenes
s
Unattractive
Disadvantaged
Advantaged
Disadvantaged
Relative Competitive Position
Advantaged
Relative Competitive Position
37
A company’s market attractiveness and competitive
position implies certain strategic options
High
 Specialise
 Seek niches
Market Attractiveness
 Consider acquisitions
 Evaluate potential for
leadership via
segmentation
 Identify weakness
 Grow
 Seek dominance
 Maximise investment
 Build strengths
 Identify growth
segments
 Identify growth
segments
 Specialise
 Invest strongly
 Invest selectively
 Maintain position
 Trust leaders
statesmanship
 Prune lines
 Maintain overall
position
 Minimise investment
 Seek cash flow
 Time exit and divest
 Position to divest
 Invest at maintenance
levels
 Specialise
Moderate
 Seek niches
 Consider exit
Low
Weak
Moderate
Competitive Position
38
Strong
However, it is common to find a poor linkage between the "strategy"
component of a plan and the "financial" forecasts
Financial Position
Assessment
Strategic Position Assessment
250
Attractive
200
1
150
1
2
4
Market
Attractivenes
s
Value
3
100
50
2
3
0
5
(50)
Unattractive
Disadvantaged
Advantaged
(100)
Relative Competitive Position
39
4
5
Agenda
 VBM Framework
 Overall Planning Process
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
40
In summary, Corporate Strategic Planning serves a number
of objectives for the company
 The objectives of CSP are to:
 Correct current weaknesses and map out the future
 Set vision for the company and set targets/elaborate on the
measures
 Consolidate financials
 Evaluate the strengths and weaknesses of the portfolio
 Future opportunities – evaluate country risks
 Outline implementation steps
 Monitor current operations for improvements
41
Agenda
 VBM Framework
 Overall Planning Process
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
42
Enterprise-wide Risk Management : Corporate & Business
Process Levels
Corporate
Risk
Management
Process
Business Process
/ Projects


Corporate levels risk – risks that have a strategic impact
Project/Process level risk – risks that have an operational impact
43
Risk Management Implementation in Opportunity or Asset
Development
Effective
risk
Management

The ability to
minimize the
downside and
maximize the
upside
Linkage to Corporate
Plan
Success!
The risk management framework is designed to help the
organization achieve its business objectives through the alignment
of vision, mission and strategies with day-to-day activities
HOW?
44
Here Is How Risk Management Could Be Integrated?
Vision
Stakeholders
Mission
Strategic Business Objectives
Operations/
Business
Financial
processes
Employees/
Partners
Business Processes/Departments/Business Units
Day-to-day operations and decision-making
Processes
Projects
45
Risk Process
Identify
Assess
Act/Mitigate
Monitor/Repor
t
Here Is How Risk Management Could Be Integrated?
 Vision and mission


EGAT will evaluate its mission and vision and the risk process
will be an important component of this evaluation.
Risks will be identified and assessed for the company to
consider in determining the nature and direction of its business
strategy.
 Strategic Objectives


Corporate objectives, business objectives, and performance
targets will be set.
The risks that might prevent the achievement of each objective
should be identified, assessed, and prioritised.
46
Here Is How Risk Management Could Be Integrated?
 Business units and departments


Business plans should be developed to include the risk
mitigation actions.
Performance measurement of the business plan should integrate
risk and the risk responses into consideration of the operational
objective setting.
47
Here Is How Risk Management Could Be Integrated?
 Day-to-day operations



Risk management framework should be used at this stage to
identify and assess operational risks that may prevent EGAT’s
staff to achieve the operational objectives.
Risk responses and the risks of delivering the support to EGAT’s
vision and mission should be taken into the prioritisation of the
staff activities.
Staff have the responsibility to identify, assess, and respond to
risks within their direct areas of responsibility and to identify
risks that require an escalation to individual with specific risk
management responsibilities, (e.g. risk manager, risk
coordinators, the executive team).
48
Agenda
 VBM Framework
 Overall Planning Process
 Strategic Positioning Assessment (SPA)
 Corporate Strategic Planning
 Risk Management
 Q&A
49
Thank you for your attention