Scenario-Based
Strategic Planning:
Renal Division Case Study
Global Benchmarking Council
August 10, 2000
Michelle Robinette-Das
Baxter Healthcare
Overview
Baxter's Renal Division with over $1.5
billion in revenues, faced a number of strategic
growth alternatives. Through scenario-based
strategic planning, the senior management team
evaluated alternatives and invested in a new
growth trajectory. This presentation will provide a
real-world example of the strengths and
weaknesses of scenario-based strategic planning as
a decision tool.
Outline
I. Renal’s Strategic Position and Competitive Issues
II. Strategic Plan Framework at Renal
III. Process for Developing Strategic Profiles of Baxter’s Renal
Business and Competitors/Simulation Model
IV. Product Development and HD Business Unit Examples
V. Benefits and Issues from Scenarios and Simulations
Renal Division Highlights

Worldwide leader with sales of greater than $1
billion

Global portfolio - 75% of sales outside U.S.

Technology innovator

Strong cash flow and EVA
Renal Treatment Options
HD - 85% of Market



3x/week, in-center
4 hours per session
High fixed costs
PD - 15% of Market



4 exchanges/day
Patient administered
High quality of life
Transplant



30,000 world wide
Organ availability
Best quality of life
Global Renal Markets
$4.0B
HD
PRODUCTS
$1.3B
PD
PRODUCTS
$4.7B
TESTS/
DRUGS
$13.0B
PROVIDER
$23 Billion (1995)
Changing Environment Driving
Slower Growth
 Market consolidation
(customer, competitor)
 Major new, verticallyintegrated competitor: FMC
 Dialysis market growth
slowing
 New products alone  top line
growth
Renal Division In Transition
PHASE I: Explosive
PD Growth
1980-1993
 PD growth -- new
therapy
 New products =
higher prices and
growth
 Competition:
fragmented, productbased
PHASE II:
Consolidate/Broaden
into Services
1994-1997
 PD growth flat
 New products = higher
prices but not growth
 Competition:
consolidating, vertically
integrating
 HD market
consolidating
PHASE III:
Accelerated Growth
1998-2000
 Services expanding
(RTS/RMS)
 PD growth restarted
(private market,
patient education)
 HD: alliance
Renal U.S. was Facing
a New Competitor
New data on a
fully-integrated
competitor
What information is
relevant for
decision-making?

Multibillion dollar
merger of Fresenius's
kidney dialysis
equipment division with
the No. 1 operator of
dialysis clinics in the
U.S., the National
Medical Care Inc. unit
of W.R. Grace & Co.
WSJ, March
19,1996
Strategic Planning Process
Mission
Market
Competition
Alternative
Scenarios
Strategy
Tactical
Responses
SelfAssessment
Re-assess
Where we are
Where we
want to be
How will we
get there?
Pulling It All Together:
Strategic Alternatives/Scenarios
Scenarios based upon:
• historical trends
• fundamental changes
• other factors
OPPORTUNITIES &
THREATS
• Market
• Competition
• Environmental
Scenarios
• Vision
• Values
• Policies
Issues
and
Options
Scenarios
• Expectations/Risks
• Aspirations
• Gaps
RESOURCES
• Strengths
• Weaknesses
• Core Competencies
Game Theory
 “Many
people view games egocentrically -- that
is, they focus on their own position. The primary
insight of game theory is the importance of
focusing on others - namely, allocentrism.
 To look forward and reason backward,
you have to put yourself in the shoes
-- even the heads -- of other players.”
Source: HBR, The Right Game, Use Game Theory to Shape Strategy; July/August 1995
What Information is Needed to Understand
the Need for Strategy and Change?




Most organizations have tons of
data.
Strategic Decisions require new
types of data and help to “Question
and challenge a company’s strategy”
“What is important is not the tools.
It is the concepts behind them.”
New capability …for rethinking
strategy.
...Peter Drucker, Managing in a Time of
Great Change, 1995
Process To Build Shared Understanding of
Facts for Better Decisions





Step 1 - Draw your
competitive space
Step 2 - Visualize and research
your relative
competitive position
Step 3 - Outline your strategic
options and projects
Step 4 - Use Simulation to
focus action and
additional information
gathering
STEP 5 - Continue to Refine
the above for different
scenarios
Source: Bill Hass, Teamwork Technologies
Step 1 - Draw Your Competitive Space and
Served Market Trends -- on a Blank Sheet

Estimate historic served
market shares and trends

Describe current and
potential competitor
personalities and issues
IMPORTANT!!! To Get Early Buy-In
-- START WITH A BLANK SHEET--
Source: Bill Hass, Teamwork Technologies
Step 2 - Research Your Relative Competitive Position


Estimate Relative Competitive
Position and Key Issues For
Key Competitors
Examples:







Market Share
Relative Quality
Relative Labor Cost
Relative Material Cost
Relative Investment
New Products / Value-Added
Competitive Personality
Source: Bill Hass, Teamwork Technologies

Visualize Future
Directions and Potential
Changes
Use a Framework to Build a Fact Base
Develop “Fact-based” Scenarios and Reality Check with a Research Basis … StratLab uses
research from the Profit Impact on Market Strategy program and continuing research on stock
price valuation relative to strategy as a basis for testing and exploring strategy
Market
Structure
Strategy
and
Tactics
Competitive
Position
Source: Bill Hass, Teamwork Technologies
Results
Gather Data along Multiple Strategic Dimensions
Market Structure
-Market Growth
-Niches
-Investment Intensity
Competitive Position
Strategy & Tactics
-Pricing
-R & D Spending
-New Products
-Quality Innovations
-Relative Quality
-Marketing Expense
-Relative Share
-Productivity
-Relative Cost
-Cost Reduction
-Value Adding
Source: Bill Hass, Teamwork Technologies
Results
-Profitability
-ROS
-ROI
-Growth
-Cash Flow
-Value Creation
Step 3 - Outline Your Strategic
Options by Action


StratLab Action Category:
Examples:








Pricing
Productivity
Marketing
R & D Spending
New Product Investment
Value-Adding Investment
Cost Reduction Investment
Etc.
Source: Bill Hass, Teamwork Technologies

Our Specific Initiatives
and Options:
Step 4 - Use Simulation to Aid Decision
Making, Action & New Data Gathering Efforts
Let’s try another
 Take Action
and
Gather Information on
Areas with Greatest
Strategic Impact for
Your Competitive
Position
You don’t learn to throw darts in a seminar
Source: Bill Hass, Teamwork Technologies
Define Objectives, Themes and Challenges

Basic Objectives:



Theme Possibilities:





Develop Common Language for Strategic Discussions/Thinking
Develop Leader’s Business Model
War
Business Development Activities
Test New Directions
Strategic Leadership Training
Challenge Possibilities:



Achieve Global Leadership
Survival
Increase Business Value
Source: Bill Hass, Teamwork Technologies
Building the Fact Base: Competitive Characteristics:
We looked at over 40 variables
Relative variety within product lines
Baxter’s product line has:
Competitor
FRES.
GAMBRO
TERUMO
More variety than
About the same as
Less variety than
Relative purchase prices
YEAR 1
Baxter purchase prices compared to Fresenius
Baxter purchase prices compared to Gambro
Baxter purchase prices compared to Terumo
Source: Bill Hass, Teamwork Technologies
YEAR 2
YEAR 3
YEAR 4
YEAR 5
Forcing Executives to Get Inside Their
Competitors Heads…
StratLab: Starting Positions and Targets
(Apple Computer Example)
TARGETS
START - 1996
Q1
MARKET POSITION
Apple
60%
IBM
18%
Noname
12%
Compaq
7%
All Others
3%
RELATIVE PROD. QUALITY
Apple
40
IBM
30
Noname
-5
Compaq
15
RELATIVE PRICE
Apple
110%
IBM
100%
Noname
90%
Compaq
100%
1997
Q4 Q1
Q2
Q3
70%
35%
12%
25%
70%
35%
12%
25%
70%
35%
12%
25%
60
45
10
30
60
45
10
30
60
45
10
30
Source: Bill Hass, Teamwork Technologies
1998
Q4 Q1
Q2
Q3
70%
35%
12%
25%
70%
35%
12%
25%
70%
35%
12%
25%
70%
35%
12%
25%
60
45
10
30
60
45
10
30
60
45
10
30
60
45
10
30
Q2
Q3
Q4
70%
35%
12%
25%
70%
35%
12%
25%
70%
35%
12%
25%
70%
35%
12%
25%
60
45
10
30
60
45
10
30
60
45
10
30
60
45
10
30
Competitive Response Modeling:
Gambro (Example)
 Gambro
responds to failure to achieve their targets in
the following ways. When Gambro:

fails to achieve their Relative Quality target, they respond
. . .(in up to 12 ways)

fails to achieve Market Share targets, they respond. . .

fails to achieve its ROI targets, they respond. . .

faces competition from smaller players, they respond . . .
Source: Bill Hass, Teamwork Technologies
Competitive Response Modeling:
Fresenius (Example)



Fresenius adjusts their strategy to their own performance.
When Fresenius:
 fails to achieve its target Market Share, they respond . . . (in up to 12
ways)
 fails to achieve Relative Quality targets, they respond . . .
 fails to achieve ROI targets, they respond . . .
 fails to achieve Sales Growth (%) targets, they respond . . .
 fails to achieve Capacity Utilization (%) targets, they respond . . .
Fresenius is following Gambro in the following areas . . .
Fresenius is influenced by other competitors in the following areas . . .
Source: Bill Hass, Teamwork Technologies
Comparing Scenarios --- Key
Dimensions of Simulation Output:
Environment
Year 2000
Most Likely
Market Share
Relative Quality
Relative Price
Productivity
ROMC
Avg. Price Change
Source: Bill Hass, Teamwork Technologies
Friendly
Tough
Scenario Formulation:
Strategic Options vs. Competitive Environments
Environment
Strategy
Most Likely
Momentum
Quality
Cost Emphasis
Total Return Max.
Cash Flow Max.
Source: Bill Hass, Teamwork Technologies
Friendly
Tough
Graphical Trends with “Total Return” and Risk Help
Bring Discussions of Strategic Alternatives to Life
(Apple Computer Example)
TR
DNCF
CG
5
11/03/96 17:15
5
11/03/96 17:15
5
11/03/96 17:15
5
11/03/96 17:15
1,295,291
187,805
1,107,486
477,118
223,751
261,234
1,295,291
187,805
1,107,486
477,118
223,751
261,234
1,295,291
187,805
1,107,486
477,118
223,751
261,234
1,295,291
187,805
1,107,486
477,118
223,751
261,234
Scen
Momentum
Market Share
Vbl
70.0%
Momentum
Return On Investment
Momentum
Relative Product Quality
90.0%
45
80.0%
40
Momentum
Relative Price
120.0%
1
2
60.0%
70.0%
3
60.0%
40.0%
100.0%
30
50.0%
4
35
25
50.0%
20
40.0%
15
80.0%
60.0%
30.0%
30.0%
20.0%
0.0%
40.0%
5
20.0%
10.0%
10
10.0%
0.0%
Source: Bill Hass, Teamwork Technologies
0
20.0%
(5)
(10)
0.0%
Strategic Positioning: HD Scenarios
“Market leaders excel in one and
are competent in the other two”
Operational
Excellence/Low-Cost
(Abbott)
Product
Leadership
(Medtronic)
Core
business
focus to . . .

nurture ideas
translate them into
products
market them skillfully



acts in an ad hoc way
is loosely knit
is ever-changing

reward individual’s
innovative capacity
reward new product
success

maintain standard
operating procedures

measure the cost of
providing service and of
maintaining customer
loyalty
experiments
thinks “out-of-the-box”


acts predictably
believes “one size fits all”


is flexible
thinks “have it your way”





Structure
that . . .
Management
systems
that . . .
Culture
that . . .




improve distribution
systems
provide no-hassle service
Customer Intimacy/
Niche Focus
(Terumo)
has strong, central
authority
has finite level of
empowerment


provide solutions
help customers run their
business

pushes empowerment close
to customer contact
The Discipline of Market Leaders, by T. Treacy & F. Wiersma
Momentum
Focus
Scope
Products
Headcount
Home
In-Center
LA/Asia
US/Europe
Niche
Full Line
Base +
Sales/TS
Total Investment Low
High
Base Plus
Focus
Scope
Products
Headcount
Home HD
In-Center
LA/Asia
US/Europe
Niche
Full Line
Base +
Sales/TS
Total Investment Low
High
Full Throttle
Focus
Scope
Products
Headcount
Home HD
In-Center
LA/Asia
US/Europe
Niche
Full Line
Base +
Sales/TS
Total Investment Low
High
Global Product Portfolio
Scenario Alternative #1: Something for Everyone
 Either
new solution, new connectology, new
machine, or significant upgrade
 Every region
 Every two years
Global Product Portfolio
Scenario Alternative #2: Bimodal Distribution
 High
end products developed for Japan and
Europe
 Low end products developed for Latin
America and Asia
 US gets either upgraded Intercontinental
products or stripped down
European/Japanese products
Global Product Portfolio
Scenario Alternative #3: Solutions R US
 Absolute
solution leadership in both PD and
HD
 Machines and connectology are secondary
Global Product Portfolio
Scenario Alternative #4: Home Run, Singles, Doubles
 One
Breakthrough product
and
 One new product or upgrade for every
region, every three years
Global Product Portfolio
Scenario Alternative #5: Therapy Leadership
 Fund
only products that support
the goals of:


improving adequacy
decreasing peritonitis
Lessons Learned From Scenario Simulation

Balancing executive insight and empirical experience in a bayesian
way promotes discipline

Creative thinking and teamwork is fostered by promoting discussion
and trial-and-error, with fast feedback

“System overview” of the competitive situation
and their words helps deal with the complexity

Both quantitative and qualitative data must
be built in for realism

IT TAKES TIME
Simulation Helps Building Realistic Scenarios
Using Competitor Data:

Helps understand complex and unfamiliar
situations

Helps identify what you really need to know about
a particular competitor by letting you discover
what aspects make a significant difference

Measures the impact of what you have learned
about a competitor

Helps explore widely different scenarios

Helps you to find a counterstrategy
Issues with Scenario Planning
 Senior
Level Focus/Culture
 Time to Really Work Through Alternatives
 Translating Back to P&L, Budgets
Scenarios Promote Decision Making






Permits learning by trial and error
Encourages input from all functions
Permits evaluation of strategic
moves in a low-risk environment
Encourages innovation by forcing
the team to consider out-of-the-box
moves
Provides an ongoing framework for
organizing strategic thoughts and
competitive intelligence
Forces thinking in a higher-level
strategic language
Summary
 Scenario
 Need
 Must
planning is a great tool
to involve senior management
balance complexity/computer simulation team
involvement with “business knowledge” of senior
management
Questions and Answers
Appendix
Additional References:
http://members.aol.com/theteamtec
PIMS Principles,Buzzell and Gale(1987 Free Press)
Intellectual Capital,Edvinsson and Malone(1997, HarperCollins)
Learning from the Future, Competitive Foresight Scenarios, Liam Fahey