Doing a 3-year strategic plan involves:

1. Stating a strategic vision for your company.
2. Establishing objectives for EPS, ROE, credit rating, image rating, and stock price appreciation each of the next three years.
3. Declaring what competitive strategy your company intends to pursue.
4. Preparing a “pro forma” income statement for the each of the next three years based on your projections of unit sales, revenues, costs, and profits in each of the four geographic regions during each year of the plan period.

The purpose of the 3-year plan is to force the company’s co-managers to think ahead and consider what prices, sales volumes, and market shares it will take to meet or beat the targeted levels of performance that shareholders are expecting (and that are built into the Investor Expectations scoring standard). The planning process prompts you to think about likely market conditions in the years ahead, to worry about what competitors on average are likely to be doing, and to project what specific prices, sales volumes, market shares, per pair costs, and profit margins it will probably take to achieve the target strategic and financial objectives. Doing a 3-year plan, thus, pushes you to think strategically about your company's present position and future prospects, to do some industry and competitive analysis (as discussed in the text chapters), and to wrestle with any strategy changes that may need to be considered.

Stating a Strategic Vision for Your Company

In the indicated space on the strategic plan, you should develop a 2-4 sentence statement of the long-term direction and strategic path that management intends to follow. The statement should clearly articulate your answer to “where we are headed” and why the direction in which you intend to point the company makes good business sense. Your strategic vision statement should describe the kind of athletic footwear company that management is trying to create and the market position you are trying to stake out.

Ideally, you should try to capture the essence of your strategic vision in a catchy phrase or slogan.

For more details of what a strategic vision is all about and the characteristics of a good vision statement, consult your textbook.

Establishing Objectives

As you know, the company’s board of directors has charged you and your co-managers with achieving five performance objectives:

1. Growing earnings per share at least 7% annually through Year 15 and at least 5% annually thereafter.
2. Maintaining a return on average equity investment (ROE) of 15% or more annually.
3. Maintaining a B+ or higher credit rating.
4. Achieving and maintaining an “image rating” of 70 or higher.
5. Achieving stock price gains averaging about 7% annually through Year 15 and about 5% annually thereafter.

In the space provided on the 3-year strategic plan, indicate what your performance targets are for each of the upcoming three years. As a rule, the targets established by the board should be the minimum performance levels that you intend to achieve during each year of the plan period (the targeted values for EPS and stock price that the Board and investors expect each year are shown on each year of the Footwear Industry Report). The only time that it is justifiable to develop a 3-year plan where the objectives you set are below the annual targets established by the Board and expected by investors is when your company is in dire straits and you do not think it is reasonable or realistic to get things turned around such that the expected performance levels can be achieved.

However, company co-managers should really set stretch objectives higher than the minimums expected by the board and by investors—especially if achieving higher-than-expected performance levels will be necessary to keep the company in the ranks of the industry leaders and in contention for industry leadership. Moreover, setting and achieving stretch objectives will result in a higher performance score on your strategic planning effort.

How the Caliber of Your Strategic Plan Will Be Evaluated. A strategic planning efforts that is predicated on setting stretch objectives and then meeting or beating these objectives merits greater applause from board members and investors than a 3-year plan that contains bare minimum performance objectives which company managers are then able to easily meet or beat. Hence, the procedure for determining the caliber of your company’s 3-year strategic plan is not based on just the words and financial projections in the plan but on the level of performance that the plan delivers.

Your company’s “performance score” on the plan is based on the following point system. Your company’s management team will receive:

• 14 points for setting any one target below the Investor Expectation Standard and then meeting or beating the target — a maximum score of 70 points (or C–) if applied to all 5 performance measures for each year of the plan. Underachievement of a particular target results in a point reduction proportional to the underachievement, subject to a minimum “consolation prize” score of 10 points on the targets set for EPS, ROE, and stock price. Under no circumstances will any points be awarded for setting a credit rating target below B or an image rating target below 50. Moreover, the points awarded to companies struggling to reach "rock-bottom" performances of $1.00 for EPS, 10% ROE, and a $20 stock price are a function of how close their targets are to these "rock bottom” levels — such companies will normally have difficulty earning 70 points but can score 50 or higher with a plan that incorporates a successful turnaround strategy and that delivers upward trending results (albeit with a low overall performance level).
• 16 points for setting EPS, ROE, Stock Price, and Image Rating targets equal to the Investor Expectation Standard (or above the I.E. Standard but less than 10% above the actual performance for the year prior to the plan) and setting the Credit Rating target to B+, and then meeting or beating the target (80 points max if applied to all five targets for each year of the plan). Thus, if all 5 performance targets are set at the level expected by investors and if these targets are subsequently achieved, then a company’s 3-year plan score will come out to be an 80. If a target is only partially met, a proportional number of points is awarded (achieving an EPS of $2.63 when the Investor Expectations Standard is $3.50 results in an award of 12 points). If the Investor Expectations Standard is an EPS of $3.75 and actual EPS turns out to be just $1.25 (33% of the targeted level), then the automatic minimum 10-point consolation score is awarded for EPS.
• 18 points for setting a stretch-objective for any one performance measure that is "one notch" above the applicable performance level outlined below and then meeting or beating the target (a maximum of 90 points if applied to all five performance measures). "One-notch" stretch-objectives are defined as:
  • EPS (depending on whether or not a company has already exceeded the Investor Expectation level for EPS)
    • 10% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • 10% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
  • Stock Price (depending on whether or not a company has already exceeded the Investor Expectation level for stock price)
    • 10% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • 10% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
  • ROE (depending on whether or not a company has already exceeded the Investor Expectation level for ROE)
    • 10% above the company’s prior-year ROE for EACH of the 3 upcoming years if the company's ROE was above the Investor Expectation level for the prior-year.
    • 10% above the Investor Expectation for EACH of the 3 upcoming years if the company’s ROE was at or below the Investor Expectation level for the prior year.
  • Credit Rating – Setting and achieving a target credit rating of A–
  • Image Rating – 10% above the Investor Expectation for EACH of the 3 upcoming years
• 19 points for setting a stretch-objective for any one performance measure that is "two notches" above the applicable performance level outlined below and then meeting or beating the target (a maximum of 95 points if applied to all five performance measures). "Two-notch" stretch-objectives are defined as:
  • EPS (depending on whether or not a company has already exceeded the Investor Expectation level for EPS)
    • 20% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • 20% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
  • Stock Price (depending on whether or not a company has already exceeded the Investor Expectation level for stock price)
    • 20% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • 20% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
  • ROE (depending on whether or not a company has already exceeded the Investor Expectation level for ROE)
    • 20% above the company’s prior-year ROE for EACH of the 3 upcoming years if the company's ROE was above the Investor Expectation level for the prior-year.
    • 20% above the Investor Expectation for EACH of the 3 upcoming years if the company’s ROE was at or below the Investor Expectation level for the prior year.
  • Credit Rating – Setting and achieving a target credit rating of A
  • Image Rating – 20% above the Investor Expectation for EACH of the 3 upcoming years
• 20 points for setting a stretch-objective for any one performance measure that is "three notches" above the applicable performance level outlined below and then meeting or beating the target (a maximum of 100 points if applied to all five performance measures). "Three-notch" stretch-objectives are defined as:
  • EPS (depending on whether or not a company has already exceeded the Investor Expectation level for EPS)
    • 30% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • 30% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
  • Stock Price (depending on whether or not a company has already exceeded the Investor Expectation level for stock price)
    • 30% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • 30% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
  • ROE (depending on whether or not a company has already exceeded the Investor Expectation level for ROE)
    • 30% above the company’s prior-year ROE for EACH of the 3 upcoming years if the company's ROE was above the Investor Expectation level for the prior-year.
    • 30% above the Investor Expectation for EACH of the 3 upcoming years if the company’s ROE was at or below the Investor Expectation level for the prior year.
  • Credit Rating – Setting and achieving a target credit rating of A+
  • Image Rating – 30% above the Investor Expectation for Years 14 and 15, and an Image Rating of 100 for years 16-20.

• 14 points for setting any one target below the Investor Expectation Standard and then meeting or beating the target (70 points max. if applied to all 5 targets for each year of the plan). Thus, setting and achieving sub-par objectives results in a maximum performance score of 70 or a C−. Underachievement of a particular target results in a point reduction proportional to the underachievement, subject to a minimum “consolation prize” score of 10 points on the targets set for EPS, ROE, and stock price. Under no circumstances will any points be awarded for setting and achieving a target below a B credit rating or an image rating of 50. Moreover, the points awarded to struggling companies that will have a hard time even reaching "rock-bottom" performances of $1.00 per share, a 10% ROE, and a $20 stock price are a function of how close their targets are to the "rock bottom levels" of $1.00 per share, a 10% ROE, and a $20 stock price rather than to the investor expectation minimum — such companies will normally have a hard time earning 70 points but can nonetheless get scores of 50 or higher with a plan that incorporates a successful turnaround strategy and that delivers upward trending results (albeit from a low level of overall performance).
• 16 points for setting any one target equal to the applicable performance level (which is either the Investor Expectation or, for EPS and Stock Price, the performance in the year prior to the plan, whichever is higher) and then meeting or beating the target (80 points max if applied to all five targets for each year of the plan). Thus, if all 5 performance targets are set at the level expected by investors and if these targets are subsequently achieved, then a company’s 3-year plan score will come out to be an 80. If a target is only partially met, a proportional number of points is awarded (thus achieving an EPS of $2.63 when the Investor Expectations Standard is $3.50 results in an award of 12 points). If the Investor Expectations Standard is an EPS of $3.75 and actual EPS turns out to be just $1.25 (33% of the targeted level), then your company will be awarded the automatic minimum 10-point consolation score for EPS.
  The performance targets expected by investors are:
  • Annual EPS growth equal to 7% in Years 11-15 and 5% in Years 16-20 (the actual values for these targets for each year are shown on page 2 of the Footwear Industry Report)
  • Annual stock price appreciation equal to 7% in Years 11-15 and 5% in Years 16-20 (the actual values for these targets for each year are shown on page 3 of the Footwear Industry Report)
  • 15% ROE
  • Credit rating of B+
  • Image rating of 70
• 18 points for setting a stretch target on any one performance measure that is "one notch" above the applicable performance level outlined below and then meeting or beating the stretch target (90 points max. if applied to all five performance measures)
  
  "One notch" stretch targets are defined as:
  • EPS – depending on whether or not a company has already exceeded the Investor Expectation level for EPS, then:
    • - 10% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • - 10% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's EPS.
  • Stock Price - depending on whether or not a company has already exceeded the Investor Expectation level for Stock Price, then:
    • - 10% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • - 10% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's Stock Price.
  • 16.5% ROE (10% higher than the 15% norm)
  • Credit rating of A-
  • Image rating of 77 or more (10% higher than the norm of 70)
• 19 points for setting a stretch target on any one performance measure that is "two notches" above the applicable performance level outlined below and then meeting or beating the stretch target (95 points max. per year if done for all five performance measures)
  
  "Two notch" stretch targets are defined as:
  • EPS – depending on whether or not a company has already exceeded the Investor Expectation level for EPS, then:
    • - 20% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • - 20% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's EPS.
  • Stock Price - depending on whether or not a company has already exceeded the Investor Expectation level for Stock Price, then:
    • - 20% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • - 20% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's Stock Price.
  • 18% ROE (20% higher than the norm of 15%)
  • Credit rating of A
  • Image rating of 84 (20% higher than the norm of 70)
• 20 points for setting a stretch target on any one performance measure that is "three notches" above the applicable performance level outlined below and then meeting or beating the stretch target (100 points max. per year if done for all five performance measures)
  
  "Three notch" stretch targets are defined as:
  • EPS – depending on whether or not a company has already exceeded the Investor Expectation level for EPS, then:
    • - 30% above the company’s prior-year EPS for EACH of the 3 upcoming years if the company's EPS was above the Investor Expectation level for the prior-year.
    • - 30% above the Investor Expectation for EACH of the 3 upcoming years if the company’s EPS was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's EPS.
  • Stock Price - depending on whether or not a company has already exceeded the Investor Expectation level for Stock Price, then:
    • - 30% above the company’s prior-year Stock Price for EACH of the 3 upcoming years if the company's Stock Price was above the Investor Expectation level for the prior-year.
    • - 30% above the Investor Expectation for EACH of the 3 upcoming years if the company’s Stock Price was at or below the Investor Expectation level for the prior year.
    Awarded points will be based on the condition above that applies to the company's Stock Price.
  • 19.5% ROE (30% higher than the 15% norm)
  • Credit rating of A+
  • Image rating of 91 or more (30% higher than the norm of 70)

Different degrees of stretch objectives (one-notch versus two-notch versus three-notch) can be set for different performance measures. If company co-managers see fit, you can have an A+ credit rating objective (a three-notch stretch), an image rating objective of 75 (a one-notch stretch), a 20% ROE objective (a two-notch stretch), an EPS objective equal to the normal expectation, and a stock price objective that is below the investor expectation level.

A company’s overall performance score on the 3-year plan is the average of the performance scores earned for each of the 3 years of the plan period. The scores earned on the 3-year plan are reported on the 3-Year Strategic Plan link that appears on the top of your Corporate Lobby screen—as the results for each year of the plan become available, just click on the link and the scores will be shown at the top of the screen.

Observe that this point system contains built-in rewards for setting stretch objectives and achieving them, but as you will see as you get deeper into the plan, it is quite unwise to develop a “pie-in-the-sky” type of strategic plan with unrealistically high stretch objectives that entail “fairy-tale” prices, sales volumes, market shares, costs and profit margins in order to achieve them. The pro forma income statement projections that are an integral part of your strategic plan need to have close connection to competitive and financial reality.

Declaring What Competitive Strategy Your Company Intends to Pursue

The third section of the plan entails indicating what competitive strategy you intend to pursue.

Once you check one of the competitive strategy alternatives, you will be asked to provide evidence that your company is on track to implement and execute this strategy successfully. The evidence you will be asked to provide can be found in either or both of the following:

• The Competitive Intelligence Reports for the just completed year (data from all four geographic regions may be needed).
• The benchmarking data presented on page 6 of the most recent issue of the Footwear Industry Report.

Developing the 3-Year Operating Projections, by Geographic Region

This section is the hardest part of the 3-year plan and requires some serious thinking on your part about the company’s future sales volumes, prices, and operating costs for both branded and private-label footwear in each of the four geographic regions.

You should utilize the three years of historical data shown on the screen to come up with “what if” or “planned” sales volumes, prices, and operating costs for each of the three upcoming years. Once you make these entries, the software is programmed to generate income statement projections.

The EPS projections flow directly from the net income projections and the number of shares you projected to have outstanding (based on new stock issues and share repurchases).

At this point, you definitely need to check to see how the EPS projections compare against your annual EPS objectives. If the EPS projections in the income statements are below the EPS targets you established, then your planned levels of sales, prices, and operating costs are not likely to produce the profits needed to achieve the EPS target you set. Any time such is the case, the plan needs to be revised—either by lowering the EPS targets to levels that your plan indicates can be achieved OR revising the sales volumes, prices, and operating cost projections (in ways that you believe are realistic and achievable within the context of the strategy you have declared that you intend to pursue!) so as to reach the EPS performance target. Failing that, you may find you have to change to a different strategy to realize the performance targets (assuming you are leery of entering “fantasy” numbers for projected sales volumes, prices, and operating costs to generate the pro forma income statement). We think you should certainly be leery of fudging the projected sales volumes, prices, and operating cost estimates if you are trying to build a credible strategic plan to achieve the performance targets you have set.)

Should your EPS projections be higher than the EPS objectives you set in step 2 above and assuming you believe the planned sales volumes, prices and operating costs are realistic and achievable with your strategy, then the EPS targets may need to be raised one or two notches to incorporate more stretch (unless they are already at the three-notch stretch level).

As a general rule, we recommend that your projected EPS values always be comfortably above the targeted EPS levels for each of the three planning years, so as to allow some room on the downside in case you fall short of the planned sales volumes in one or more areas or in case you are forced to lower your prices for footwear due to tougher than anticipated competitive conditions or in case costs end up being higher than you projected. Bear in mind that it is easier to plan or anticipate market conditions one year ahead as compared to two or three years ahead—the further out the planning horizon the greater the risk and uncertainty that conditions will differ from what you are projecting. So it is generally a good idea for your projected sales volumes, prices, and operating costs to be tilted more to the pessimistic or conservative side than to the optimistic or bullish side.