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1 Washington, D.C. London New Delhi Chicago San Francisco Scottsdale West Chester Sydney The Corporate Executive Board: What the Best Companies Do Toolbox.com is a wholly owned subsidiary of the Corporate Executive Board. To find out if your organization is a member of the Corporate Executive Board, please visit or call to learn more about the research and services provided by an annual membership. The Corporate Executive Board is where the world s best companies turn for guidance. We help executives and business professionals work smarter, faster, and more effectively in their role within their company. Fueled by our global network, we find out what executives need to know and do next. Our Membership Proposition All-inclusive for one annual contribution Ongoing guidance and support by an account management team Backed by a service guarantee All-Inclusive, Unlimited Access to a Comprehensive Suite of Services Dynamically Delivered Through Multiple Channels High-Quality Insight Intelligent Networking Execution Support Research and Analysis Executive Forums Implementation Tools and Diagnostics Identify Proven Solutions Best Practices Quantitative Analysis Daily News Highlights Frame Thoughts and Stimulate Ideas Senior Executive Retreats Member-Hosted Forums Leadership Briefings Save Time and Reduce Risk Implementation Toolkits Emerging Issue Resource Centers Department Performance Assessment Benchmarking and Data Peer-to-Peer Networking Online Resources Make Better-Informed Decisions Budget and Spend Benchmarks Emerging Issue Surveys Vendor Fee Database Get Answers Quickly Practitioner Teleconferences Online Executive Directory Discussion Groups Execute Faster Decision Support Centers Presentation Template Library E-Learning and CPE Credits Strategy, Procurement, and Finance Membership Programs Audit Director Roundtable CFO Executive Board Controllers Leadership Roundtable Corporate Strategy Board Division Finance Forum Government Finance Roundtable Investor Relations Roundtable Procurement Strategy Council Real Estate Executive Board Risk Integration Strategy Council Tax Director Roundtable Treasury Leadership Roundtable CFO1AOT7M Corporate Executive Board. All Rights Reserved.

2 26 Setting Strategic Priorities Strategy Development Activity Addressed: Challenging and Stress-Testing Assumptions Overview Pre-mortem strategic analysis uses hypothetical descriptions of company successes and failures several years into the future to stress-test assumptions about the current strategy and business environment. By forcing participants to reverse-engineer strategic actions that would lead to these (often radical) endstates, the tool challenges participants beliefs about current strategy and broadens understanding of future possibilities. Key Features Compelling Scenarios Hypothetical descriptions detailing embarrassing company failures or stunning company successes jolt participants out of traditional thinking and spur animated debates. Strategy Comparison Framework Side-by-side comparison of which activities to start doing, keep doing or stop doing to reach potential endstates reveals strengths and weaknesses of current strategy. Articulation of Strategy Priorities Participants are forced to explicitly state long-term strategic priorities across a full range of business elements. Principal Applications Because managers tend to place a high level of confidence in strategies they craft, it is advisable to employ a tool such as pre-mortem strategic analysis, which uses provocative and unexpected visions of the future to challenge assumptions and sensitize managers to potential strategy flaws. Pre-mortem strategic analysis offers time-constrained senior executives a relatively quick way to test assumptions and challenge mental models by focusing their time on scenario analysis (rather than scenario development). The effectiveness of the tool rests less on detailed analysis than on the compelling presentation of alternative scenarios that can quickly engage senior executives. Source of Further Information, Proceeding in Daylight, 1999, pp Featured case study Foodmaker, Inc.

3 27 Resource Requirements Stage Preparatory Activities Research and craft hypothetical descriptions of company success and/or failure several years into the future Tool Use Analyze and discuss hypothetical future state(s) in context of current company strategy Follow-Up Activities Make strategy recommendations based on analysis Recommended Participants Strategy staff or external consultant Team of 10 to 20 senior executives, preferably representing a variety of company functions and businesses Team of 10 to 20 senior executives, preferably representing a variety of company functions and businesses Time Requirements Up to three days Up to one day Up to one day Preparatory Activities Strategy staff or external consultant is tasked with writing provocative hypothetical descriptions of company successes and/or failures years into the future. Descriptions serve as briefing materials for participants. Provocative Image of Company Failure Down & Out Bankruptcy at End of THE WALL STREET JOURNAL DECEMBER 3, 2006 Imagine it is Our company is in big trouble falling sales, declining margins, disgruntled and shrinking customer base, disillusioned employees. Everything that could go wrong, has gone wrong. Long Battle for Survival Down & Out Bankruptcy at End of Long Battle for Survival

4 28 Setting Strategic Priorities Tool Use Exploring Causes of Failure Component #1: Event Reverse-Engineering Participants consider various factors internal and external that could have led to the hypothetical future state. Looking Back to the Present from the Future Questions to address: 2001 What did we do to get here? What happened externally to 2006 put us here? Same-store sales growth of 5 percent year-overyear Customer service rated above average for retailers Employee turnover just under 30 percent Detailed Strategy Analysis Same-store sales down 8 percent year-over-year Customer service rated worst in the industry Employee turnover exceeds 50 percent Component #2: Strategy Dissection At a granular level, participants examine current strategy by answering, What should we start doing, stop doing, keep doing to avoid/reach this future state? Tool provides broad framework of elements to consider, ensuring comprehensive analysis of possible causes of failure or success ENVIRONMENT External Legislation Litigation Pending Community Involvement Industry Leadership Internal Innovation Values Alignment Teamwork FINANCE Stock Price Return on Assets Debt/Equity Ratio P/E Ratio Systems OPERATIONS Structure Number of Restaurants Market Quality Systems Safety Systems Information Systems START DOING STOP DOING KEEP DOING ADAPTABILITY New Products New Market New Customers Resource Allocation Organizational Structure Technology MARKET Customer Satisfaction Market Share Customer Retention Competitors PEOPLE Key Capabilities Satisfaction Ratings Turnover of Key Contributors/Strong Performers Source of Talent Buy Build Borrow Bind Bury Leadership Style Internal Learning Career Development START DOING STOP DOING KEEP DOING Invest in high-tech store equipment Curtail overseas expansion Improve speed of service Maintain friendly image Focus on retaining key technology people

5 29 Follow-Up Activities Once participants have used hypothetical endstates to identify potential adjustments to current strategy, they break into subteams to detail an action plan for implementing priority strategic activities. Action Plan Resulting from Pre-Mortem Analysis Based on the pre-mortem analysis, participants develop recommendations for immediate action and future strategic focus Action Plan Action 1. Design Customer First ad campaign Owner SVP, Marketing Team Members Time Frame 3 Months Next Steps 2. Emphasize in-store service COO 6 Months 3. Launch IT personnel retention strategy VP, HR 6 Months 4. Focus on domestic expansion VP, Business Dev. 1 Year 5. Update store technology CIO 2.5 Years